concrete uses for prediction markets in parecon
simulating commodity futures and venture capital
In an earlier post I suggested that prediction markets could be useful under a wide variety of socialisms. Here I want to suggest two particular injections of prediction markets into participatory economics: in the development of indicative prices and in predictions about whether workers’ councils will meet their production targets. These respectively simulate the useful functions of futures markets and venture capital, and weaken the potential bureaucratic power of the Iteration Facilitation Board and industry-wide councils. (However, it would still be possible to keep the IFB and industrial councils as counterweights to power exercisable through markets.)
betting on indicative prices
The basic PE planning procedure relies on an Iteration Facilitation Board to announce initial indicative prices for goods when workers’ and consumers’ councils meet; these indicative prices are iteratively renegotiated through the planning process.
In the simplest use of prediction markets for this process, predictors would simply bid on the ultimate prices which the councils ultimately arrive at. These bets would pay off (or not) when prices fell within (or not) the predicted range. Similar predictions could be made on the equilibrium prices of consumer goods.
To further exploit these commodities-futures-like prices, prediction markets could predict the indicative and consumer prices of various goods extending out for any number of years - prices which could then guide participants in the planning process.
betting on failure
Under the default participatory economics scenario, the decision to fund new ventures is within the authority of industry-wide federations, who evaluate the proposals of prospective workers’ councils for their likelihood to use scarce resources efficiently.
A simple bet, however, could be placed as to whether the prospective workers’ council will achieve its projected targets. Obviously, the decision to fund a council need not be based on whether it most likely will or most likely won’t achieve such targets; instead, federations could consider:
risk-reward of projects that are unlikely to work, but have a potentially big payoff if they do,
the likelihood of positive spillovers from “worthwhile failures,” and
with slightly more complicated bets, whether the risk of failure is correlated or anti-correlated with failure across the rest of the industry (a sort of diversification)
Some of these effects on the broader environment could themselves be subject to conditional predictions. For instance, especially in the case of a large venture producing an important intermediary good, bets could be placed on the future indicative price of that good in both the scenario where the venture is funded and in which it is not.
Either way, this mechanism encourages prospective councils to submit realistic proposals for what they will produce with the social resources they have been entrusted with. Those that promise the moon will have to be honest about their status as moonshots.
betting on concrete investments
This is adjacent to both of the above. Rather than betting on whether a particular council will succeed, this asks about the effects of a significant technical or physical investment (modernizing a port, upgrading an internet network, building a space elevator, building a geothermal borehole, &c.) What will expected effects be? Estimates of marginal effects can be made by setting up predictions in two separate universes, one in which the investment takes place and one in which it doesn’t, and measuring the difference between them.
In particular, we can make many classes of investment comparable with each other by:
setting up prediction markets for the marginal effect (on GDP or some other measurable social welfare proxy, possibly even just a poll of life satisfaction) of an increase of some broad class of commodity or resource - a schedule of expected production (holding all other resources constant) on welfare,
predicting the marginal effect of new investments on the class of expansion which they expect to effectuate.
Overall, mechanisms like this can mobilize tacit knowledge without the delegation of sovereignty.
Its my impression that a public body would provide the financing capital to businesses and speculators would make future contracts on these goods. And the decision on whether to finance a business would be based on its private and public benefits. The government determines investment while the commodity market determines prices.
Yet it seems self-defeating. Any underpriced commodity caused by favorable government finance (and underpriced due to its spillovers) would be bought up by commodity traders and sold for a profit; the product would reflect the market price rather than the public price. Financiers already do 1 and 3, but the private commodity market will undercut 2.
Why not use direct subsidies to do 2? Public choice theorists would not buy that the government body would only do 1,2 and 3. Insiders and speculators have a clear incentive to game the system.