This reminds me of Goodhart's law: "When a measure becomes a target, it ceases to be a good measure."
Even if betting markets can accurately forecast whether a hypothetical policy would increase welfare, that would last right up until they actually affect policy. After all, there are plenty of people with vested interests in policy and stupid amounts of money to manipulate the market with.
The 2013 paper linked does address the issue:
> What do noise traders have to do with manipulators? Manipulators, who trade hoping to distort prices, are noise traders, since they trade for reasons other than asset value info. Thus adding manipulators to speculative markets doesn’t reduce average price accuracy. This has been verified in theory,[xxxvii] in laboratory experiments,[xxxviii] and in the field.[xxxix]
However, I took a quick look at the "in the field" citations and am not terribly impressed. One of them involved making individual large bets on horse races and seeing how they affected the odds, then canceling them before the race was actually run. The other was an overview that briefly mentions two other studies, broadly similar. None of them seemed like good models of manipulation under futarchy that would be (a) much longer term and (b) much better funded.
Attempts to manipulate the outcome actually make a prediction market more accurate. Every wrong bet creates a prize for others to come and put the price where it belongs.
It is important to compare futarchy against existing alternatives, instead of some imaginary ideal.
Democracy is easy to manipulate.
Each voter has little incentive to become an informed voter, and the cost to becoming informed is high.
And once informed, each voter has little incentive to vote for what is best. (the personal benefit of a good election result) * (probability that their vote mattered) is practically zero.
In this situation, people are vulnerable to bribery and propaganda.
> Democracy is easy to manipulate. Each voter has little incentive to become an informed voter, and the cost to becoming informed is high.
But that feature is retained in futarchy, since the whole system relies on an elected legislature engaged in an even more abstract and difficult for a voter to concretely evaluate task than passing policy legislation directly, and that legislature remains a major target for manipulation.
> Even if betting markets can accurately forecast whether a hypothetical policy would increase welfare, that would last right up until they actually affect policy.
Or until there was enough money at stake that corrupting those involved in outcome measurement was deemed worthwhile given the probability and consequences of being caught and punished for that.
The more policy is at stake, the greater incentive to try to distort market price; the more money is at stake, the greater the incentive to manipulate the measures the determine settlement.
Plus, once you think you’ve detected someone manipulating settlement, sure, you could report your concerns to law enforcement. OTOH, you would perhaps be better off to not do so, and instead factor their interests into your own market participation.
I'm generally pro-markets, but I don't think they're a panacea. They mostly seem to concentrate rather than decentralise wealth. If you're poor, you can't enter the market at all. If you're middle class, you can make some bets in the market: maybe you win, and maybe you lose, and if you lose enough then you become poor and are knocked out of the market for good. But if you're rich, you can afford to hedge and diversify your bets, staking out positions along the whole of the efficient frontier, hiring analysts to figure out exactly where that is, and perhaps paying for a bit of regulatory capture so that you can tilt the market in your favour. Of course even the rich can still lose money on the market by being complete idiots -- but that's basically the only way they can lose money.
So, anyhow: betting markets centralise money.
Now let's say that society votes on a value: "we want to decrease inequality". So they create a futures market which rewards policies that decrease the society's Gini index.
The market responds with a variety of policies. Some work, some don't. The policies that work increase the wealth of the people who bet on them. Per the above, none of those bets will come from the poor; some of them will come from the middle-class, and a disproportionate share of them will come from the rich.
Hence, in this system, a policy which reduces wealth inequality is one that makes the rich richer. Seems like a variant of the Liar's paradox.
A potential solution would be for everyone in society to be given a basic income that was only usable for betting in the future's market; this would keep the poor in the game. Moreover, you'd need a cap on the amount of total assets one could have in the market (say, 4x or 10x the UBI), to eliminate incentives to game the market via regulatory capture etc.
Perhaps UBI could be implemented as UBA (Universal Basic Assets) in that each citizen owns a piece of the betting market.
There could be a tax to place a bet that is then distributed evenly to all citizens so even if one goes bust they still get chips to play.
I’d be curious if there is a way to implement this in a small community as a test.
Perhaps we could run an annual festival by this method and experiment with it.
I’d be happy to offer up http://Majagual.org (the island for those who are wise and of good will) as a resting ground for this or other forms of alternative goverernance.
> The market responds with a variety of policies. Some work, some don't. The policies that work increase the wealth of the people who bet on them.
There's incidentally no way that actually works in practice; different policies have different shapes of effects over time, multiple policies exist simultaneously, and there's no way to isolate the effects of one policies on the outcome at any given time.
Prediction markets are for helping communities of people make decisions that benefit the community.
Whether or not they cause wealth inequality is another question entirely.
As long as they help communities come to good decisions, then futarchy is a success.
Peanut butter is for tasting good.
Even if peanut butter was causing wealth inequality, it would still achieve its goal of tasting good.
> Instead, much of the difference seems to be that the poor nations (many of which are democracies) are those that more often adopted dumb policies, policies which hurt most everyone in the nation. And even rich nations frequently adopt such policies.
Ok, if we ignore the effects of wars, colonialism, IMF structural adjustment, and other generally malicious acts that make up most of real history. With no mention of those things, this essay is written for an entirely theoretical world and not the real one.
Good economic policies make up for a multitude of mistakes and bad ones squander the best history, infrastructure and previous policies. Singapore is much wealthier than Malaysia, which is much wealthier than Indonesia. The differences in natural resources and infrastructure there do not account for the differences in wealth, policy does.
In 1954 Ghana was far richer than South Korea, which was a bombed out hellscape that had been the scene of a conflict between superpowers after WWII. Ghana is no longer richer than South Korea, to put it mildly.
Botswana and Equatorial Guinea are both blessed with abundant mineral resources, diamonds for the former, oil for the latter. Botswana is a prosperous middle income country; Equatorial Guinea’s people live in wretched poverty while the president and his cronies live in luxury.
If we look at Botswana’s neighbour, Zimbabwe, we can see what bad policy can do, turning the breadbasket of Africa into a basket case and a food importer. Or compare Venezuela and Colombia. Their colonial experiences were similar, they were once one country and Venezuela had the advantage of massive oil reserves. None of it matters if your policies are bad enough. Price controls, seizure of private property and general thuggish incompetence have turned Venezuela into a disaster.
Enough of the soft bigotry of low expectations; some countries have done much better than any plausible comparator because of good policy. We should praise those who did and decry those who didn’t. Ethiopia and Tanzania both started stupid campaigns of collectivisation leading to mass famine. Tanzania stopped, Ethiopia kept going. If we see idiocy we should call it out, good policy we should praise it.
Note: there is genuine uncertainty around what good economic policies are. For example, South Korea became rich by blatantly ignoring advices by world economists. Back then, everyone recommended ISI(import substitution industrialization), but South Korea tried ELI(export led industrialization) and succeeded.
Another example is land reform. US was against South Korea land reform because it reminded of communism, but recent research suggests land reform dismantling landowner class was critical to South Korea's success.
There’s uncertainty on the details of good economic policy. Hong Kong grew rich with a policy of unilateral free trade and no government growth or industrialisation policy to speak of. What isn’t in dispute is that secure private property and a functioning legal system work better than the alternatives. There’s no point in investing in anything if the government will be along shortly to take everything. Even where the government are less rapacious they can mess things up, see India’s Licence Raj, and the increase in growth rates after the repeal of most of the government controls of industry.
There is a lot of disagreement on the best economic policy, there’s very little on good economic policy, and that’s 80 or 90% of the way to the best.
Hong Kong is a super special exception that does not generalize. Approximately everyone became rich by using industrial policy: read Kicking Away the Ladder for detailed historical research. Our understanding of growth economics is not very good, so history is better guide than theory.
Experience of China and South Korea shows you can be very flexible about secure private property and functioning legal system. Or market capitalism and democracy for that matter. South Korea freely used eminent domain to build infrastructures like highway. It also declared everyone should trash all their electronics so that country can upgrade transmission voltage from 110V to 220V to reduce loss. Both decisions are considered good in retrospective.
What seems to be essential is investment in infrastructures like water, electricity, and transportation. You mentioned Ethiopia. It stopped stupid collectivization and is doing rather well recently. It's kind of mystifying why World Bank and like are against projects like Grand Ethiopian Renaissance Dam. World Bank was also against South Korea's Soyang Dam, so it had to borrow from Japan. (Ethiopia is borrowing from China.)
> Approximately everyone became rich by using industrial policy: read Kicking Away the Ladder for detailed historical research.
You're confusing correlation with causality. The reason why many countries became rich while pursuing industrial policy is that in the past almost every country pursued industrial policy in some way. There are just as many cases where industrial policy has gone terribly wrong, for example Argentina.
Many economists argue that countries like Japan or Korea have become rich despite industrial policies. Compared to other countries, however, they had much lower import barriers at the time, and they could have been even more successful if they had not had them[1]. It is also worth mentioning that import restrictions mainly affect the poorest[2], both in rich and poor countries.
> Our understanding of growth economics is not very good, so history is better guide than theory.
You always need both theory and empirics, otherwise you cannot gain any insights.
I see no reason why Hong Kong wouldn’t generalise or why I should dismiss growth theory. History shows that there are many different ways to successfully industrialise. It also shows us that some ways are terrible.
Your point on the legal system, especially regarding China, is well taken but I fail to see how eminent domain is against anything I’ve said. I’m not aware of a legal system without eminent domain though the circumstances under which the government can take your stuff and the compensation available for it vary markedly.
Changing voltage from 110 to 220 may have been a good decision but industrial policy has resulted in many disasters, from the backyard steel furnaces of Mao’s Great Leap Forward to Ghanaian cocoa farmer’s pulling up their crops because the price the state controlled cocoa board gave them for it made farming it not worth the labour. Industrial policy increases the variance of economic growth as bureaucrats make decisions for an entire country. Sometimes it works, sometimes it doesn’t.
Regarding investment in infrastructure I never said anything against it though the experience of the Soviet bloc and other communist countries does not lead me to believe it’s sufficient for good outcomes.
I do not believe democracy is necessary but I don’t see how market capitalism isn’t. Nothing else works anywhere near as well. Communism on the Soviet model seems sufficient to get to middle income and market socialism on Yugoslav lines might be superior but nothing approached capitalism’s record at lifting people out of poverty.
>Price controls, seizure of private property and general thuggish incompetence have turned Venezuela into a disaster.
Price controls were used extensively by Truman to regulate steel in the postwar period with decent effect. Seizure of private property was also used extensively by China and Korea, both prosperous. Finally Venezuela also suffers from extensive targeted sanctions in the period of its greatest strife (complete with Trump threatening an invasion). I dont mean to suggest policy has no effect, but the outcomes are not simple, they are complex, and external factors matter a lot to the success of individual countries. See: 1997 in Asia.
The unforunate part of this idea is that both conditions will have to be tested in order to determine which of the two were better, meaning we'd have to try slavery, genocide, rape, or pretty much anything really. This system doesn't work because there are some things we know are wrong without having to attempt them at least once.
"Elected representatives would formally define and manage an after-the-fact measurement of national welfare."
Sounds doable, but it's essentially impossible. If you could reliably measure the outcomes of policies (after the fact, nevermind using speculators to predict the future), quite a lot of "rational" decision making methods would be possible.
The problem is that it's not possible.
It's not even possible on a much smaller scale, like a mid-sized company.
Just have goals that are easily measured.
We can easily measure the relative prices of things in the market.
If your company's goal is to increase the stock price above some target, that is a metric that is easily measured. So we can make futarchy markets to help your company make decisions to achieve your goal.
If people's actual goals were easily measured, that would be great, but they aren't, and basing a system of government on the idea that you can pretend they are is silly.
Just because we can't predict the future doesn't mean we shouldn't try to estimate things. If we wanted 100% certainty, we'd have to throw away pretty much all science and human knowledge.
Let me start by saying Hanson is brilliant and this idea is well worth thinking about as a thought experiment, even if not a serious policy suggestion.
However, there is a profitable manipulation of this mechanism. A manipulator with deep pockets can bet heavily that some policies will have terrible outcomes. These policies are never selected, so the manipulator is never harmed by this misinformation.
I guess Hanson would reply that the rest of the market hopefully has deeper pockets than the manipulator and might be able to make money by correcting the predictions, but that sounds a bit fragile to me. An example research paper on the issue (pdf): http://yiling.seas.harvard.edu/wp-content/uploads/DM_full_ve...
If we consider a more concrete example, you will see that this attack can't happen.
We can either elect Trump, or not-Trump as president.
Everyone agrees that we want the price of beans to be cheaper.
So there are 4 possibilities:
1) expensive beans + Trump president
2) expensive beans - Trump
3) cheap beans + Trump
4) cheap beans - Trump
An attacker doing what you describe would buy up many shares of (3) and (2). To try and convince us all that if trump wins, beans will be cheap. The attacker will need to keep buying up (3) and (2) to keep them more expensive than the alternatives. So the attacker is betting like $100 for every $50 others are betting.
Assuming the attacker has more money than everyone else who is willing to participate in this market put together, then the attacker could cause us to think that Trump will make beans cheap.
But, there is still the possibility that beans will be expensive, even though Trump won.
If that is the case, then the attacker will lose all their money, and will not be able to afford to do attacks like this again.
Attacking a market like this necessarily means paying more for something than it is worth, which necessarily means that on average, you are losing a big chunk of the money that you use for manipulations. And everyone who bets against you, on average they are taking your money.
Two responses. First, I'm thinking the manipulator has an outside incentive. If trump wins, they get a million dollar kickback. So losing 500k on bets is acceptable to them.
Second, I'm thinking of the following attack that actually loses nothing (if it works). The attacker doesn't bet at all in the market conditioned on trump being elected. She only bets in the other market. But she bets really heavily that beans will be expensive in that case. So we elect Trump. All trades in that other market are cancelled and the attacker gets all her money back. And she isn't even exposed to any risk on the bean price on this timeline, so to speak.
Too bad not to get a response from the above poster; I'm not wrong, and I hope my explanation makes sense. The issue is addressed for example in the academic paper I linked to above.
I fantasize about a two-level system, societal and local, which works summarily like this: A societal association only decides about its members and the group it represents. A local association organizes the location it is in charge of. This association has a two-cameral structure: residents and associations that have residents in the location are mandatory members.
Nation states and citizenship are abolished and replaced by membership in this two-level system. All residents are citizens both of the location where they live and of the social group they feel they belong to.
And now, I could imagine that these associations are organized as futarchies.
Minorities are already fucked under current "vote values and beliefs" system. "Vote values, but bet beliefs" is a strict improvement, since betting is superior institution to obtain correct beliefs compared to voting.
So, literally, whoever pays the most gets the policy they want, plus, if whatever aggregate indicator the legislature sent increases after the policy is adopted (regardless of the actual impact of the particular policy, which can't be isolated) you not only get a full refund of the cost of buying the policy but at least some extra cash, too.
And unless you've magically solved the influence of money on election campaigns, the legislators have an deep interest in setting metrics that favor the policies preferred by the already rich.
(Ignoring that given multiple simultaneous policies and the inability to measure isolated effects the actual payoff of bets is is going to be extremely noisy compared to the actual isolated impacts of the policies.)
So, it looks to me like an unnecessarily complicated version of extreme plutocracy.
That's not a difference compared to straight buying policy, since you lose the purchase price unconditionally for that. The difference is that you have a chance of getting a refund of some size for buying the policy, depending on some aggregate welfare measure (but not actually particularly on the specific effect of the policy you bought.)
So you're saying futarchy is flawed because the metric measured will be gamed? How is it different from the present system, where legislative power has all the same incentives to only implement laws favouring the wealthy? IMO, futarchy is strictly not worse than the state of art. No one is claiming it's flawless.
> So you're saying futarchy is flawed because the metric measured will be gamed?
No. I'm saying that it is flawed because it introduced additional avenues for the influence of wealth to work (both “legitimately” and corruptly), makes the decisions for which decision-makers are accountable to the public less capable of being effectively overseen and evaluated by the electorate, because the kind of evaluation of policy it calls for is impossible (not merely impractical, though parts of it are that), that any revision to make it possible and practical adds a whole new set of problems (not least is likely to be a strong new incentives for ignoring long-term effects), and that it doesn't even begin to solve any actual, real problem.
> How is it different from the present system
That's kind of addressed above, but even if it wasn't, the idea of futarchy is it is better than the present system, not a layer of complication and indirection which retains the flaws of the present system.
Orthogonal to my other top-level comment (and this may not be my last; there's a lot of separate problems puzzled densely into this proposal):
A key thing this relies on is having the elected legislature having the (apparently, sole) function of establishing and maintaining a giant formula that maps every relevant measurable aspect of the material universe into a unidimensional utility score that will be used to judge the success of every policy, and it expects the citizenry to be better able to understand and oversee that than they are with legislators with concrete positions on concrete policies.
We use futarchy to make decisions for our own community as well.
If you want to learn more about futarchy, or do some experiments on a live futarchy system, then join us on telegram or discord.
this idea is bad because some actors can potentially earn more money from the manipulation towards a bad policy than they will lose as a result of that policy being bad.
the whole reason corruption exists is that the punishment and loss potential from corruption is too small compared to the huge benefit that comes from affecting policy makers.
the worst policies will have the highest bets because they will always be a small price compared to the benefits from those policies.
all the companies will vote for obvious bad policies which will reduce their competition to zero, because they can afford to throw that money in the trash to keep their monopolies in place
Lets consider a game.
A coin will be flipped, and we can bet as much money as we want that either heads or tails will win.
You will win $100 if the price in this market stays >75% chance of heads for 7 days continuously.
So you keep buying up shares of heads, moving the price from 50 -> 60 -> 70 -> 80.
by the end you are betting $4 for the chance to win $1.
I know that the result is 50-50, so if I bet $1 against you, and have the chance to win $4, then that means my expected profit of taking this bet is %200.
Which makes this one of the best investments available on earth.
Which means many people will want to participate.
Every bet you make at the price 80-20 costs you $1, but is only worth $0.40. you are losing 60% of however much money you bet.
So if you bet $200, then your expected loss would be $120. which is even bigger than the $100 you could potentially win by manipulating the market.
It doesn't matter if I bribe a manipulator with $100, or with $1 billion. The same logic holds.
Having a vested interest in the outcome of a decision does not give you any ability to manipulate us into making that decision.
For one, the same people that rig policy today, by the same basic means. Slipping carefully deisgned but innocuous seeming provisions into policy legislation just gets replaced with slipping carefully designed but innocuous factors into the grand utility function that he legislature is maintaining instead of policy legislation.
There's also the people measuring outcomes that become prime corruption targets. Corrupting the official measurement of, say, the unemployment rate has minimal value to anyone now, but if the value is a key input to the grand utility function, and the value on a particular date this influences the settlement of policy contracts someone has a large stake in, it becomes a lot higher value corruption target.
Everyone - I think proponents of futarchy consider rigging not existing, a/k/a part of the system design. Like Mises's argument for encouraging insider trading, whatever helps information spread is beneficial.
Even if betting markets can accurately forecast whether a hypothetical policy would increase welfare, that would last right up until they actually affect policy. After all, there are plenty of people with vested interests in policy and stupid amounts of money to manipulate the market with.
The 2013 paper linked does address the issue:
> What do noise traders have to do with manipulators? Manipulators, who trade hoping to distort prices, are noise traders, since they trade for reasons other than asset value info. Thus adding manipulators to speculative markets doesn’t reduce average price accuracy. This has been verified in theory,[xxxvii] in laboratory experiments,[xxxviii] and in the field.[xxxix]
However, I took a quick look at the "in the field" citations and am not terribly impressed. One of them involved making individual large bets on horse races and seeing how they affected the odds, then canceling them before the race was actually run. The other was an overview that briefly mentions two other studies, broadly similar. None of them seemed like good models of manipulation under futarchy that would be (a) much longer term and (b) much better funded.