August 3, 2003 Opinion

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This week: What You Believe In Might Be The Invisible Hand?

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This has been a most curious week. I suppose everyone has followed what hit the news last Monday (7/28). The news came out that DARPA (the Defense Advanced Research Projects Agency at the Pentagon) was setting up a futures market, the Policy Analysis Market. Here is MSNBCs overview:

The conventional wisdom holds that financial markets combine the collective wisdom of the millions of investors who participate in them. So what if you could use that market force to help predict political upheaval in volatile places like the Middle East? That's exactly what a Defense Department project is trying to do - despite Senate critics who say the effort is nothing more than state-sponsored "gambling on terrorism."

The project is modeled on "futures" exchanges like the Iowa Electronic Markets, a popular Web-based market that lets political junkies place bets - with real money - on the outcome of political elections.

The Policy Analysis Market, which is set to begin signing up "investors" on Friday, is designed to let Middle East experts place bets on political and economic events in the Middle East, according to Charles Polk, president of Net Exchange, a small San Diego, California company hired to set up the market. "This isn't really a terrorism market," he said. "What we're trying to do is look forward a year into the future and try to glean some insight into political and economic and military currents in the Middle East.

During the initial test phase, the site will be limited to 100 "traders," chosen from Middle East experts at universities and think tanks, who will get $100 each to buy and sell futures contracts based on events in eight Middle East countries. The online trading system could eventually be scaled up to include 10,000 traders.

The DARPA folks at the Pentagon dropped the whole thing the next morning. Bad PR, and folks are still queasy about the guy who was going to run it, John Poindexter, the convicted felon the Bush folks brought to DARPA to work on our national security. Oh well.

Quick aside: Poindexter was convicted of five counts of lying to congress regarding his testimony on the Iran-Contra matter, just like Oliver North. The convictions were overturned in some deal making. Poindexter last year was appointed to DARPA to help us with terrorism. He will, according to the press, resign in a few days. Oliver North now writes a syndicated column appearing in NewsMax and other conservative news services, and is a regular on Fox News with his War Stories show.

But what was this all about? The idea that the unregulated marketplace is God underlies this all. The whole thing is so... Republican?

A friend wrote me this:

Or maybe ... Democrat? Think of it this way: It could be argued (and I have) that Republicans are not true believers in Democracies, but instead tend to favor Republics. The difference between the two? In democracies, power is vested in "the people," i.e., "everybody", while in Republics, power is vested in that elite group of "the people" worthy to be "eligible voters," who are themselves presumed to be smarter than the aggregate huddled masses.

Businesses and governments are filled with "smarter" people, but they apparently don't have the track record to match the accuracy of predicting stuff that you get when you let any and all into the decision making process.

Power to "the people"? Maybe the congressional democrats were too quick to shoot this thing down.

Well, perhaps. I see what he was getting at. Shall we pull out the Federalist Papers and discuss how Alexander Hamilton inspired Bush? Well, maybe not.

It does seem to me that the early nineteenth century federalists - the "republican" folks - had a different sort of idea of who the elite who run the country should be. That would be male land/property owners who had an economic stake in the success of the nation.

Today's Republican/right/conservative folks seems to be claiming the elite is defined by their moral purity, not sex or property - thus women, and poor, angry, white propane salesmen from Alabama, have a place in this elite who should control the nation. As long as you believe in a protestant God of vengeance, think gay folks are evil (or at best sinners as the president said in his news conference this week), that centralized government taking care of those down on their luck is evil, that compromise is for sissies and books are for pointed-headed intellectuals from New York, then you are a wrapped-in-the-flag member of this elite. Otherwise? Ann Coulter will tell you. You're a treasonous bastard.

Perhaps the idea that a free unregulated market will fix any problem probably doesn't appeal to me because I've lived in California for more than twenty years. Out here we went to a "free market" model for dealing with energy, and Ken Lay and the rest of the Enron boys made their money and we got left holding the bag. But "buyer beware" - we should have known better. And Gray Davis will pay.

Curiously, the next day in the Washington Post, Steven Pearlstein had this to say about the market issue...

The plan is also the latest and loopiest manifestation of a near-religious belief within the Bush administration in the power of markets to solve all problems -- or at least those that can't be cured by tax cuts.

You'll recall Vice President Cheney's stubborn defense of deregulated electric markets in the face of overwhelming evidence that his pals at Enron and other energy companies were manipulating prices in California.

And since then, we've been told that only private markets are capable of cleaning up the environment, reforming education, saving Social Security, bringing Medicare costs under control and keeping Rupert Murdoch from abusing his media monopoly.

Don't get me wrong: It's often a good idea to bring competition and market discipline to public policy. But the Bushies invariably take things too far, embracing questionable theories about efficient markets and rational expectations while downplaying the role of government, even when it actually does things well.

But was the DARPA futures market a bad idea? My friend argued this way -

It's something called "Decision Markets" and is based on a theory similar to the "Who Wants To Marry A Millionaire" concept of "lifelines": Of the three lifelines, "calling a friend" and "asking for a 50-50" will not, on average, hold a candle to "polling the audience." In fact, I'm not sure but I think some economics professor got a Nobel (or maybe some other kind of) Prize last year for formulating a theory of price-points that said a preponderance of opinions tend to cluster around a correct final answer.

I first heard about it in The New Yorker Magazine issue of March 24. It's on page 33, James Surowiecki's "The Financial Page" column, this one entitled "Decisions, Decisions." The kicker paragraph of the article is that the DOD was about to experiment with decision markets in this "FutureMAP program".

Surowiecki mentions at least one website, NewsFutures.Com, where they are doing this stuff already, and have been for some time. In the article, 79% of the money said Saddam Hussein would be gone by the end of April. When I went there just now, the smart money is slightly predicting that Bush will not be reelected in 2004.

Another of these markets, the Iowa Electronics Markets (IEM), founded in 1988 and takes bets on how candidates will do in elections, "routinely outperforms major national polls," with an average error in the last four election-eves of 1.37 percent.

In fact, NewsFutures.com has a contract on whether Poindexter will be fired. I'd think next they'll take money on his committing suicide, something he tried to do after Iran-Contra.

Daniel Gross in SLATE Magazine adds this:

...the prospect of such an exchange raised several troubling questions. Set aside for a moment the cognitive dissonance of a conservative, faith-based administration using government-sponsored gambling to set policy. And forget that the market represented an effort to meld two secretive cultures that have been discredited for their recent catastrophic failures - Wall Street securities analysis and Washington intelligence analysis.

More important, a havoc market wouldn't benefit from the rationality that regular financial markets require. By and large, markets for futures as well as stocks and bonds are presumed to be efficient and rational, Internet bubble notwithstanding. This collective rationality is precisely what the Pentagon was hoping to harness by creating a market for geopolitical events.

But in the Middle East, many of the figures who would have driven the pricing of PAM securities are not what international relations types refer to as "rational actors." Suicide bombers almost by definition are irrational, or at least not governed by a rationality with which we are familiar. We routinely refer to the main players with terms that place them beyond the field of reason - Saddam Hussein is "the Butcher of Baghdad," Osama Bin Laden is a "madman."

Oddly, the hope of the PAM might have been the ignorance of investors, rather than their intelligence. Policy market day-traders who don't speak Arabic or have access to classified information wouldn't necessarily make worse bets than the professionals who spend their days sifting through Al Hayat and humintel reports. This is a seeming paradox called the "dumb agent" theory. Walk up to a traveler waiting in an airport, ask how many minutes late the plane will take off, and you're likely to get a wrong, uninformed answer. Ask 75 more of your fellow passengers the same question, and you'll get 75 more similarly wrong, uninformed answers. But throw them all together and take the mean, and you're likely to get something pretty close to the right answer.

Well, this may be true. But I remain skeptical.

And I am troubled by the blind faith in the marketplace as always making everything work out for the best. I have quoted John Maynard Keynes here before: "Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all." This DARPA futures market idea works on that principle.

Well, I am also troubled by the administration's reliance on religious faith. Could it be that the United States actually is the nation chosen by God to liberate the world and make everyone be what they should be, or, if they dont agree to be that, kill them, their children and the children's children, in God's name, as a just act merely making things in this world the way things should be?

I think not. But I could be wrong. And if so, I'm in real trouble.

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				Just Above Sunset Archives *August 3, 2003 Opinion*



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