Futarchy

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.

About Samuel J

Samuel J has an economics background and is a part-time consultant
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13 Responses to Futarchy

  1. Bruce

    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.

    Samuel – The carbon tax is already an example of this dumb idea. The climate models predict our eyeballs will fry in their sockets and some nice idiot in DCCEE or CSIRO said, well, we must save the world. Then they ladled a financial model over the top of the climate model and thus we have this stupid tax.

    It also illustrates just why futarchy is crap of the worst sort. Models are opaque and easy to manipulate (I do large models and know this very well). Hence anything can be justified by them. The temptation to screw with the inputs will be so strong you will never have one which isn’t ideological and the chance of them actually reflecting the future will be random. Their output will be completely ideological, ie like Treasury modelling in the last few years.

    Totalitarianism in a beige box.

  2. Joe

    No, Only sortition guarantees every citizen an equal chance at exercising power. Democracy only elects the electable – i.e. those who can bribe the most of the populace to vote for them.

  3. .

    I like sortition.

    I also like rounds of approval voting and vetting.

    Elections ought to be like the hunger games.

    Betting markets won’t get up simply because some people can’t handle the cold logic. The US had PAM, and people whinged about it being “insensitive” or some other rubbish.

  4. .

    http://en.wikipedia.org/wiki/Policy_Analysis_Market

    Opposition

    At a July 28, 2003 press conference, Senators Byron L. Dorgan (D-ND) and Ron Wyden (D-OR) claimed that PAM would allow trading in such events as coups d’état, assassinations, and terrorist attacks, due to such events appearing on interface pictures on the project website.[4]
    They denounced the idea, with Wyden stating, “The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it’s grotesque,” while Dorgan called it “useless, offensive and unbelievably stupid”.[5] Other critics offered similar outrage. Almost immediately afterwards (within less than a day) the Pentagon announced the cancellation of PAM, and by the end of the week John Poindexter, head of the DARPA unit responsible for developing it, had offered his resignation

    Whingers screw everything up, from military intelligence to legally drinking a tax free glass of sugary drink.

  5. Samuel J

    Bruce – that’s not futarchy. To be a proper market, the proponents and opponents of the proposition would be betting their own money. Currently it is the taxpayer is paying the way of the proponents.

  6. Samuel J

    Sortition would be an interesting option too.

  7. Louis Hissink

    Samuel,

    I live in the other market – so what are you waffling on about.

  8. Chris M

    Well she isn’t a legitimate prime minister in my eyes not having won the peoples vote.

    Yeah, democracy is good but would be a lot better with a couple of simple rules such as governments forbidden to borrow money and minister must take a degree of personal and financial responsibility for their decisions. I would pay them very well but then take their house and pension if they made Rudd-like decisions for example.

  9. 2dogs

    “it provides a person who is clearly the leader”

    As a panarchist, I count this as a negative. This addiction to contrived forms of legitimacy is the main source of statism.

    “throughout history many civil wars have been caused by legitimacy (and succession) struggles as one group (or individual) tries to seize government.”

    This view ignores the many conflicts that have been resolved (and possibly countless others avoided) by drawing borders.

  10. Tel

    Hmmm, you have people betting on horses — fair enough, but with this “futarchy” idea, the punters get to decide which horse they nobble.

    There a whiff of positive feedback coming through here.

  11. Bruce

    that’s not futarchy. To be a proper market, the proponents and opponents of the proposition would be betting their own money.

    Samuel – I know what you mean but you didn’t get what I was saying. Perhaps I should have said it better.

    The problem is computer based systems so centralise such markets that they are opaque and easily controlled. Can you really expect a betting organisation will have pristine computer mediated markets? It takes just a simple bit of code hidden within a million lines to multiply one side of the odds by 1.1, and skew the outcome.

    The same goes with elections. It is always easier to fix an election at the central election computer.

    Stockmarkets are getting into difficulties now, through HFT algorithms, such that the dark pools are being increasingly favoured – not only to hide transactions but also to get away from the distortions and system gaming which HFT and other AI trading software introduces.

    Betting companies are relatively safe at the moment because their revenue rides on their good names. There is no power or ideology component of their businesses (or not much), so it does not make sense for anyone to rig their systems. This will not be the case if politics becomes involved.

    In theory Dr Hanson could be right, but the inherent opacity of the platform means there can never be a pure example. And if not pure it becomes useless. If you do not believe me just ask the LNP why they refuse to use Treasury for costings.

  12. Crossie

    I also like rounds of approval voting and vetting.

    John Naisbitt in his 1980s book Megatrends predicted that we would go one further. He maintained that technology would change the face of politics, that the use of personal computers would enable the electorate to participate in the formation of every piece of legislation by voting Yay or Nay.

  13. Crossie @ 8:20am

    And the Yay button redirects you to Paypal…

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