Robin Hanson at George Mason University is a strong proponent of using prediction markets as part of government – what he calls “futarchy”. We have frequently discussed at Catallaxy the use of the betting market to inform the outcome of elections, such as Centrebet. But Hanson’s idea goes much further and embeds into significant decisions by government the evidence of the prediction market.
For example, we could use the prediction market to decide whether to have a carbon tax: it would be sophisticated enough to provide the most compelling evidence on whether a carbon tax would achieve its objectives. It could be used to decide whether or not (and where to place) a second airport for Sydney. And so on.
On 11 November 1947, Winston Churchill addressed the House of Commons and said:
Democracy is the worst form of government, except for all those other forms that have been tried from time to time
Should we try futarchy? Is there a natural experiment in an alternative form of government that is waiting to be tried? Could government be selected based on a betting market rather than through elections?
Personally I think that a step too far, and I think Churchill’s maxim continues to apply – democracy is superior to futarchy. Nonetheless, there is scope for the additional use of prediction markets to aid the governments of democracies.
There are two key reasons that democracy succeeds where other forms of government fail.
First, it puts a lower bound on how bad or evil or incompetent a leader can be. We have had some bad prime ministers (including the most recent two), but there are many that would be far worse (Philip Adams, Bob Brown, Christine Milne etc). And the voters have the opportunity to kick them out at a relatively early opportunity.
But second, and most importantly, democracy provides a focal point or Schelling point (after Thomas Schelling) – it may not provide the best leader*, but it provides a person who is clearly the leader. There are no legitimacy squabbles in a democracy.
This is a crucial point – throughout history many civil wars have been caused by legitimacy (and succession) struggles as one group (or individual) tries to seize government.
Democracy avoids these struggles. When George W. Bush won the 2000 Presidential election, there was a dispute about counting in Florida. Yet bloodshed was avoided and the people accepted Bush’s legitimacy even if they didn’t like him or his policies. That incident (and an earlier one involving John Quincy Adams) are about as close as the US got to a crisis of legitimacy.
So too in Australia. Minority governments cause a good deal of problems, but no one (including Kevin Rudd) denies that Julia Gillard is presently the Prime Minister of Australia. She may well not be Prime Minister come December, but whoever is then Prime Minister will be accepted as legitimately the incumbent Prime Minister of Australia.
* And what is the ‘best leader’ anyway? The most intelligent, self-effacing, honourable, and impeccably honest individual may well not be the best leader. Once in office, hubris can quickly come into play and such a person could well become a tyrant.