Friday, November 25, 2005

Using Idea Futures to Advance Global Economic Development

Just as people are rightly realizing that prizes are
an effective means to stimulate projects and research,
soon they will realize that information markets are
the most effective tool for aggregating information.
As such there is a generic sense in which "ideas
futures" is a tool with as many diverse applications
as "prizes." At some point literally thousands of
people will propose thousands of such markets for
innumerable specific claims.

The really big pay-off of a futures market in ideas
would be as a replacement for the
tenure/publication/peer review system in those
empirical fields for which crucial experiments are not
possible. Gradually as observers - including the
media, business community, funders, parents, etc. -
discovered large discrepancies between market
evaluations vs. the self-appraised evaluation of
certain professors, departments and disciplines,
respect and resources would shift away from the more
dysfunctional individuals and institutions.

Instead of headlines on health issues ("Broccoli
reduces cancer risk"), media sources would report
changes in market evaluations more than the results of
"academic research" (though speculators would read the
academic research and factor it into their bets with
appropriate discount factors based on their estimates
of the reliability of the source). All of humanity
would receive more accurate information more quickly;
all would benefit.

Peer review and tenure might vanish altogether; new
individuals and institutions that were more reliable
would establish reputations for truth-discovery based
on proprietary techniques that made them very wealthy.
Institutions would arise which would then teach such
techniques. Both Peter Drucker and Warren Buffett
have mentioned intellectual integrity as a key virtue
for success in the marketplace. Idea futures could
thus provide a much stronger incentive for
intellectual integrity than has ever been seen before.

Much more modestly, below is a specific sketch for a
futures market in those institutions on which economic
freedom depends but which are most accurately
understood locally. Note how the proposal below could
be integrated well both with Mark Frazier's Open World
project and with James Tooley's global network of
private schools in the developing world:

Douglass North, in his recent book Understanding the
Process of Economic Change, acknowledges that we just
don’t know understand the process of economic change.
At the same time, he acknowledges that we have made
some substantial progress. Part of the progress that
we have made is that we know that institutions
matter, but that those institutions are not merely
formal institutions such as banking laws and tariffs,
but that those institutions include “soft
institutions” such as social norms and cognitive
styles. It might well turn out to be the case that
successful economic development depends on several
necessary but not sufficient conditions. Insofar as
judicial independence and even property rights
enforcement may, at the local level, depend on such
soft institutions, it may be very difficult to
implement or evaluate the effectiveness of both formal
and informal institutions from the outside.

Markets are the most effective means of aggregating
dispersed knowledge that we have. It might be that
the best means of accelerating economic development in
poor regions is to create on-line information markets
that allow local speculators to engage in small-scale
bets concerning their nation’s core economic
institutions, including soft institutions such as
trust, entrepreneurial spirit, corruption, etc.

Marshall Stocker has shown that nations that are
increasing economic freedom according to the Fraser
Institute Economic Freedom Index average double digit
rates of return (11%). This seems to be a fairly
robust empirical finding that is entirely consistent
with the expectations of many economists. Insofar as
this empirical finding holds, capital would flow to
those nations in which there is an expectation of
increased economic freedom exists.

Basically, increased measures of economic freedom
correlate with a nation becoming more “capital
friendly” in both a qualitative and quantitative
sense. Nations which are more capital friendly than
other nations will experience greater growth than
other nations due to increased investment combined
with an increased return to that investment (i.e.
real, rewarded investment as opposed to the spurious
“investments” in poor nations made by NGOs and

But how to determine whether or not a nation is making
progress towards greater economic freedom, and how to
encourage such progress? At present, savvy investors
may do research on various nations to determine
whether or not such progress is likely. Supporters of
economic freedom and advocates of economic growth in
poor nations might try to persuade political leaders
or other elites to support policy changes towards
greater economic freedom.

But information markets can do better, both by way of
offering information and by way of accelerating the
process. The cost of broadband connectivity, laptops,
and even portable electricity generation is all coming
down rapidly. Global connectivity will allow for
increasing numbers of individuals in undeveloped
nations to participate in the global economy, learn
about entrepreneurship and the formal and informal
institutions required to support it, and to report on
local advances in those institutions.

The best way for them to “report on” local advances in
the formal and informal institutions required for
entrepreneurship would be to participate in a futures
market in which they could be on changes in certain
institutional features. The Fraser Institute Economic
Freedom Index is made up thirty-eight distinct
sub-categories of analysis. Some of them, such as
security of property rights and the extent of
corruption, may be difficult to determine accurately
from the outside (although they are currently rated by
external evaluators). But local individuals, many of
whom may be small scale entrepreneurs themselves,
would have far more accurate and detailed information
concerning progress (or the lack thereof) within the

Because external investors would have an incentive to
obtain good information regarding local conditions in
order to safeguard their investment, they would be
interested in a futures market in local expectations
regarding such key issues. Externally-based
entrepreneurs, corporations, and professional
investors would all be interested in obtaining the
very best possible information regarding local
circumstances. They would also be interested in
helping to provide on-line instruction that would
educate local entrepreneurs and speculators (some of
whom might be savvy children or unemployed older
people) on those aspects of the local culture,
society, political trends, and legal system
developments that were most relevant to capital

The Fraser Institute measures are based on those
institutions for which external estimates are
possible. Over time, changes in important but more
finely-grained local cultural features (respect for
women, entrepreneurial spirit, time horizons, norms of
punctuality, interpersonal trust, etc.) might be
factored in by means of various creative empirical

Thus an on-line futures market in local knowledge on
economic freedom could provide a means whereby local
agents are, in effect, paid to learn what makes their
economy more effective. Better yet, although some
might remain merely as information gathers, it would
be in the interest of outside investors to train local
talent to be successful speculators in the futures
market. Independent local speculators, who could
quite possibly get rich (although starting with very
little capital) by means of providing more accurate
predictions would face very sharp incentives for
discovering the best information on economic freedom.
But why stop at discovery? Why not "be the change"?

Indeed, if such local entrepreneurs were numerous, an
entire social movement could be developed based on
working together to create those conditions that would
result in an increase in economic freedom. It may
take several iterations of trial and error to obtain
the right scale and definition of such markets to
produce optimal results; laboratory experiments in
advance would be desirable to minimize mistakes. But
a society in which many thousands of small scale
speculators were positioned to obtain significant
market returns if and only if economic freedom
increased would be a society with a grass-roots
movement towards supporting those institutions
supportive of economic freedom, economic growth,
prosperity, and the transition to modernity.