Now, we are going onto the second part of the mini-series on prediction markets. I am going to explore one of the usages of prediction markets in politics. Much of this is based on Robin Hanson’s thoughts on this topic. The idea is to create a political system that can resolve policy disputes, with the help of prediction markets. Policy disputes arise all the time, at all scales and contexts of governance. They can arise in firms, non-profits, clubs, nations, and even alliances of nations. Policy disputes can regard both the means and the ends of policy.

Most disputes arise from conflicting ends, but there are some important disputes that arise from differing beliefs on how to achieve shared ends. In Sweden, an example is the shared belief among the political parties that health care needs to be prioritized. Yet, in many cases it has been shown that governments often choose policies that are inefficient. Inefficient in the sense that most everyone could expect to gain from other feasible policies.

If these inferior policies could have been identified before adoption, then the problem of inefficient policies is a problem of poor information institutions. Hanson calls these institutions; “info” institutions. Info institutions are those within we induce, express, and evaluate the acquiring and sharing of info. Examples of such institutions are pr-teams, news media, journals, think tanks, forums, and state agencies. Inferior policies come out of a failure of info institutions to induce people to acquire and share relevant info with properly motivated decision makers.

How do we create better info institutions? Well, one possibility would be markets. According to many studies, källor, the ability of speculative markets to capture information is superior to many other alternatives. With the implementation of prediction markets into politics we could augment national politics into an entirely different process. A process in which we vote on values but bet on beliefs. That way we can continue to vote to specify what we want and use prediction markets to say how we want it.

We would vote to get some representatives into office, whom would define some national goals and national visions. Then, an agenda process, such as Riksdagen, propose specific policy measures designed to meet the proposed goals and visions. Each of these proposals would be evaluated by market speculators, they would evaluate by the expected efficiency of the proposal of meeting the goals and visions. The basic rule of government would then be: if the markets clearly estimate that a proposed policy would be efficient in meeting the goals and visions of government, then the policy would be adopted. If markets do not deem the proposal being efficient enough, then the policy would not be adopted.

Of course, there are some apparent problems which makes this proposal tough to implement. Especially regarding the stated visions and goals of the elected representatives. They must be possible to objectively measure and compare to some status quo alternative. The “best” measure of national welfare that we have currently is GDP, far from an adequate measure. Instead we would want some measure which could incorporate more parts of welfare other than just production. One possibility could be to incorporate prediction markets only in special cases, where Riksdagen deems it hard to decide which policy to adopt.

Anyways, I find it an interesting idea to incorporate into politics. Even though it might be hard to manage, it might be worth a try. I’m sympathetic toward efforts to reduce inefficiencies.

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