Overpopulation on Mars is a Problem Today

This blog is somewhat concerned about machine superintelligence and promotes the idea that we should be researching how to fix the AI goal alignment problem now.

A few years ago, Brian Ng compared concerns about machine superintelligence to worrying about overpopulation on Mars:

If we colonize Mars, there could be too many people there, which would be a serious pressing issue. But there’s no point working on it right now, and that’s why I can’t productively work on not turning AI evil.

I don’t know how seriously anyone took this quote, as it seems like most people would quickly point out that the conditional statement is already almost true; there is no “if” in colonizing Mars, there are people trying to figure out how to get there right now. But the generic version I’ve heard is that worrying about AI is like worrying about overpopulation on Mars, as if overpopulation on Mars would look like overpopulation on Earth. But I don’t see any reason for this to be the case.

Mars isn’t overpopulated at this moment, but we have the technology to send a person to Mars right now. The Falcon Heavy rocket launched a car into near-Martian orbit in February. NASA has already sent a car-sized payload and landed it on Mars in 2012. So why haven’t we sent a human to Mars? Because if there was a human on Mars, Mars would immediately become overpopulated. A person wouldn’t have food or shelter or water if they just showed up on Mars today. A lot of the work being done to set up any kind of human mission to Mars is to solve the problems you think of when you think of overpopulation, like food and shelter.

Of course, that’s simply a critique of a poor analogy, not a response to underlying point. However, the response is just as compelling a point: just because there is a belief that machine superintelligence is far off, it does not follow that there is nothing to be done now. On the contrary, solving the AI Alignment problem must occur prior to the development of Artificial General Intelligence, or there could be very dangerous consequences.  Researching how we might be able to convey to an intelligent agent the complex set of values that cover human beliefs is a daunting task. Working on it now seems like the least that we can do if there is even a small chance of existential risk.

Presidential Power Should Be A Top Election Issue

The midterm elections are a month away, and while I have expressed my feelings on voting and the electoral system generally, I have also made several posts trying to boost specific policy ideas that should be more discussed.  In the same vein, I’ve been thinking about which issues are top priority in this election, and whether any of them are actually as high impact as their popularity warrants.

The recent Brett Kavanaugh confirmation process, which I think everyone agrees was pretty circus-like from start to finish regardless of political inclination, seems to have sparked more voter enthusiasm in the midterms. And while I’ll grant that Supreme Court nominations have grown in importance, it doesn’t follow that SCOTUS nominations should be a major issue in this election. The oldest justices are left-leaning, and so unlikely to retire in the next two years. Perhaps if there is a fear that Justices Ginsberg or Breyer (aged 85 and 80 respectively) will be forced into retirement due to medical problems, then this election would matter. But the chances of that seem less than 50%.

There are other issues, like immigration, that are highly impactful and also well discussed. If there was a decisive turnover from Republicans to Democrats in Congress, we’d expect some of that to be realized in immigration policy, but unfortunately not that much. Even if Democrats took both houses, this election is still largely being discussed in terms of being pro-Trump or anti-Trump.

This is a problem. Only one party can control the Presidency. Moreover, there are competing ideologies within parties, with many fiscal conservatives frustrated with George W. Bush, many neoconservatives frustrated with Trump, and yes, even some liberals frustrated with Obama on foreign policy. So really it should be said that only one ideology gets to control the White House as well. If the Presidency controls so much about policy, then this is disastrous for representative democracy. Depending on how ideological or political people are, the majority of people will not feel represented by the President, even if the President wins a majority of votes (something that has only happened 3 times in the last 8 presidential elections, going back 30 years).

The solution is clear, but we have no incentive to achieve it: Congress should be the most powerful branch of government. Its membership is large so as to draw from a wide range of views and geographical areas. When it acts, it must find compromises and alignments of interests, unlike the President which acts as a single unit. That was the design in the original constitution, and technically, if Congress worked to assert its control, it could retake such a position in government. However, congressmen have little incentive to do so; going on the record for votes and standing on specific principles is politically dangerous. Better instead to move questions of policy to the executive branch, and leave Congress to simply grandstand politically, never having to be tied down to specific votes.

For example: Barack Obama unilaterally decided to grant legal status and eligibility for federal benefits to millions of illegal immigrants in the United States. I happen to think this was a good policy idea, but if the President can decide what laws to enforce and make his own laws with executive orders, then Congress is vestigial. President Trump actually took a pretty constitutional position and decided to end the DACA program and told Congress to pass the DREAM Act (would have crystallized the DACA program into law). He gave them six months, and they did not make the deadline, despite such action being pretty popular. This is unbelievable. Maybe too many people were playing politics. Maybe Donald Trump is incompetent in getting the legislation passed (he torpedoed a bipartisan bill), but that shouldn’t matter. Congress should be able to pass a bill that a majority of legislators agree with, but the will didn’t exist. No one wanted to be on the wrong side of the political divide of the Trump era, and so no bipartisanship could materialize, guaranteeing further partisanship in the future.

This cycle also delegitimizes Congress, making people look more often to the Presidency and to the courts. Congress is fundamentally tied to winning elections, so if people see Congress as unhelpful or unpopular, Senators and Representatives have even less incentive to do anything that might frustrate voters. That in turn also makes the courts increasingly important, which likely fuels additional democratic frustration, as the courts are still fairly removed from direct democratic influence. But if they are viewed as partisan extensions of the presidency, that just makes even more things rely on a single election where only a single ideology can win every four years.

I think there may be a way out of this mess if political parties made the midterms about Congressional vs Presidential Authority. It’s not always been true that Congress can only define itself in relation to the President, but it may be a useful way to couch constitutional authority in political terms. Reducing presidential power would be a concrete way to oppose Donald Trump, and perhaps even reach alleged small-government conservatives.

The Cato Institute lays out a platform for a resurgent Congress to run on: requiring votes on executive rule changes that will impose costs of $100 million on the economy (already introduced as the REINS Act), updating the Administrative Procedures Act to require courts to interpret administrative authority de novo or independent of the agency’s claimed interpretation (I’m horrified this isn’t already done), and require all fees and penalties collected by the government to be appropriated and spent by the Congress (right now, fees and profits are then spent by the collecting agency, with little oversight).

We don’t have to limit this approach to libertarian wishlist items. Kevin Kosar in Politico details additional approaches (and adds many more words in National Affairs), including an improvement to the robustness of congressional staffing; the executive has armies of bureaucrats working to provide the best information (and sometimes self-aggrandizing propaganda) to the branch (the Executive Office of the President alone includes some 4000 people). Congress has seen shrinking staffing for its oversight and accountability offices like the GAO. Congress should be the most powerful branch and so it should have access to the data and expert information on how best to oversee the actual implementation of policy the executive branch undertakes. Instead what we often have is Congressional staffers directly trying to research regulatory agencies, who are providing their own oversight information to non-expert politicians who often defer to the self-interested agencies. Kosar’s suggestion of a Congressional Regulation Office is also intriguing.

However, just because there is a way to do this, there is no reason to believe Democrats ever had an intention to follow this path during this midterm election. Nor does it mean Republicans will consider it in 2022 if the tables are reversed. Neither have an incentive to discuss constitutional authority when culture war issues are more likely to encourage their base to turn out. Understanding these public choice incentives doesn’t mean we have to live with them though. There is a nebulous role for real ideas in democracy, and it starts with having a discussion about the state of our politics.

Insider Trading and Crime

I recently rediscovered a short piece I had written about insider trading. It’s not particularly relevant to anything happening today, but insider trading continues to be a crime prosecuted by authorities and here I offer a couple of reasons it should not be.

The standard libertarian counterpoint to insider trading being a crime is to ask who the victim of insider trading is when, for example, an insider sells their stock before it is announced that a publicly traded company has gone bankrupt. The intuitive answer should be the people who bought the stocks from the person with insider information.

But this doesn’t hold up very well. Those people could have bought the stock the day before from someone else. They could have even been indifferent to when they bought the stock. If that’s true, then how could one person selling it be moral and another person selling it be immoral? The people who bought the stock the day before are just as screwed. The people who bought it the day before would be screwed even if there was no insider trading, since the company is bankrupt anyway in this example.

Someone dumping the stock adds information to the market. If insider trading was legal, you’d have investigatory firms that spend lots of money infiltrating into companies, and you’d probably find out about a company having trouble way before they file for bankruptcy. In the long run fewer people might be screwed over.

Yet don’t we prosecute other similar “insider” situations, like a scam where someone sells a lemon car to an unwitting customer?

This seems different. There is a clear victim if someone lies about their car before selling it. The victim of insider trading is hard to find. It’s not the person who bought the stock, since they put in an order without knowing about who was selling or not that day. They could have bought it from anyone, since stocks are commodified. The victim is all stockholders, collectively. Yet the vast majority of the cost borne by stockholders is due to the actual company being bankrupt. In fact, had the insider trading not occurred, everyone who bought stocks that day would have had to pay a bit extra for their stock, losing even more money. Thus, there’s an argument that insider trading is actually beneficial to the theoretical “victims”, a very odd criminal justice situation.

However, a better argument is if the insider trader bought a ton of “put” options at high price from a market maker. The people holding the other end of the options would be screwed and clearly identifiable. I think it would make more sense to punish people who do those trades than public stock trading.

Also, it’s worth noting that there is a similar situation for “lemons”, referring to cars with manufacturing defects. This is an information asymmetry problem regardless of whether selling them is immoral. Even if you’re a nice person and tell everyone who inquires all the problems with your car, they may think you are still hiding something, since everyone has to assume any car may be a lemon. Thus, we need other ways around this market failure. Government is one method, but it’s got its own issues, as it’s not very agile, subject to political graft, etc. A better one is cheap inspections offered by local mechanics, which help fix the problem. Another is companies like CarMax, which have a national corporate reputation that would be damaged if they sold lemons.

The point being that long-run, as I mentioned before, allowing insider trading might actually be beneficial, as information leaks more freely when there are clear incentives to leak it. Going back to the put option example, the holder of the option knows they are exposed, so they are incentivized to sell some underlying stock as soon as they make the deal with the (unknown to them) insider. It’s one level removed from the insider directly trading on the stock price, but there’s still an incentive to reflect the insider knowledge in the stock price. Moreover, options can be traded as well as stocks, so a put option seller could be selling to both insider and non-insiders at any time; that again creates the situation that the “victim” would have likely had very similar things happening to them regardless of the insider trading (assuming a pretty liquid market). Again, the seller of the options is actually better off in the hypothetical world where there is an insider trader if you assume they would be selling these options regardless. The insider drives the price of the options up the more he buys them.

Information is valuable, and I don’t think it’s practical to expect everyone to have perfect information all the time (this is a consequentialist argument). If someone sells you their old crappy car, it doesn’t feel like he’s an outstanding person, but on the other hand, when someone lists something for too cheap on craigslist, it doesn’t seem like buyers should be required to tell them the item has been undervalued. Maybe they know that, but are moving this week, maybe they have two of something and the second one just isn’t worth the effort to talk to lots of buyers. And shouldn’t anyone selling know not to take the first offer?

In some sense, every agent in a trade has access to information the other person doesn’t have; this is the source of consumer surplus. You can buy cold medicine for cheap at a local pharmacy because the pharmacy has no way to price discriminate between rich people who are feeling terrible with a cold and would pay $200 for Sudafed, and someone who is cheap and only buying it just in case for $10. This results in huge consumer surpluses on almost every good, yet no one would seriously argue pharmacies or grocery stores are getting ripped off because they can’t tell how much you’d be willing to pay for every item. Some renters may be ready to do all sorts of bad things to an apartment, while some will leave it in perfect condition. Is this unfair that the landlord doesn’t know what kind of renter their tenant will be? I don’t think so. So then what makes insider trading economically special?

The real question is whether the decriminalization of insider trading creates perverse incentives to waste resources on finding out information. We already spend way too many societal resources on stock trading in my opinion. Reducing the clearing of stock market trades to once a second or once a minute would have minimal impact on long-term knowledge gathering about company performance, yet it would stop incentivizing millions of dollars spent on fractional-second computerized trading. Insider trading means firms could get a new edge by hiring infiltrators and detectives to get information on a company, or even just their financial data. Even though I believe strongly that the information usage of insider trading to make money on the market does not create victims and thus isn’t worth prosecuting, there is a risk that actual actions that insider trading incentivizes are negative.

Companies are free to run their organizations as desired, but as Matt Yglesias points out, right now they outsource enforcement of insider leaking to federal authorities. It might prove cheaper to have the Feds enforce information security than to have each company do so. CEOs might also be incentivized to trade on their knowledge, paying off others, securing information and funneling money through intermediaries, which is all wasteful. Of course, companies would want to avoid this, and so they might come up with good systems to thwart any approaches. However, interests external to the firm, like investment bankers or private equity, would have incentives to buy insider information from detective agencies, leading to an industry that wastes time tracking down these now legal information leakages.

Matt Yglesias notes this would lead to elements of a low-trust environment. I think there is some truth to that, but I think it’s also clear that jail time for insider trading is not a good use of societal resources. I think high fines and attaching names to guilty verdicts should be effective enough. Sending people to jail doesn’t protect anyone since there are no victims. Disincentivizing behavior monetarily and through public shaming should be enough, and I think it’s worth trying. Of course, this isn’t a a vital immediate criminal justice reform needed, but rather should be done as part of a larger rethinking of the criminal justice system as a whole.

Things Mars Can Export

Imagine an economy on Mars or the Moon. Some people move there, excited about the chance to live on the new frontier of human development. They set up shop and start providing services and goods to each other. They’ll need jobs like metallurgist, construction worker, physicist, farmer, material scientist, physician, etc. The technician with the 3D printer will trade with the computer repairwoman who will trade with the doctor who will trade with the solar panel producer. Certainly very early colonies won’t do much trading and work more as a cohesive unit, with specific team members and job duties, running as a ship’s crew or military base more than a small town. But eventually once the outpost becomes big enough, trade will occur.

What will they use for money? Well, it’s not the point of this post, but I’d like to take a moment for speculation anyway. It’s possible that the centralized group that creates the space colony will see this problem ahead of time and establish their own currency. But it wouldn’t take much for someone to introduce a simple Bitcoin fork to create their own blockchain. Such a currency would only require an application running on a computer, something the colony would likely have lots of. I’ve written before that Bitcoin isn’t that great of a currency at present, but it does have benefits if your local currency is already pretty bad, see Venezuela. On Earth it functions as a floor beneath which local currencies can no longer do worse than. However, on Mars, the local currency would have a lot of uncertainty surrounding it. Maybe a bank has been set up, but why would people trust the bank? It doesn’t have a long history of trustworthy monetary policy like some Earth central banks do.

Suppose SpaceX sets up a Martian colony and creates a bank to hold everyone’s dollars. It’s too long to wait to ping back to Earth (average message/reply round trip is 6-40 minutes) to transfer Earth currency, so you’re left with trusting SpaceX’s bank that they won’t mismanage the currency, even though SpaceX doesn’t have any experience managing currency. Well, what if some enterprising people come over with a “MarsCoin” clone of Bitcoin, running a blockchain on Mars? You can send the code to Earth for audit, then run the code yourself on a local network of servers. If the block time is lower than it takes for a return ping to Earth (almost always true even if you’re using the 10 minute blocks of Bitcoin, which could be shortened), then you have a decentralized, trusted currency that’s much simpler than relying on distant Earth institutions or unproven Martian ones. Of course, then you need a special interplanetary blockchain to move currency between Earth and Mars with a very slow block speed, but we’re getting off on a tangent.

We have established that there will be a way to trade on Mars and between Mars and Earth. Mars will obviously have things it needs to buy from Earth, like difficult to manufacture parts, engineering and consulting services, and likely entertainment. But what will they be able to export to Earth? A country that can only import goods probably can’t sustain itself, unless there was positive immigration. We can thus treat reasons to immigrate to Mars as part of the answer to what Mars can export. I have compiled a list of possible ways the Martian economy can maintain a stable exchange rate with Earth.

Science

Science is the clear primary export of Mars today. As Robert Zubrin states in this excellent video, we believe Mars had liquid water on its surface for a long time, perhaps a billion years. On Earth, life showed up much sooner than a billion years after liquid water appeared. If we go to Mars and find evidence of life, that would help prove that the development of life is pretty common in the universe. On the other hand, if we don’t find much evidence of life, that could help point out that life isn’t very common on in the universe. Evidence of current or past life, could also help us determine whether all life is similar to that of life on Earth, using DNA to create amino acids and so on. These questions are “…real science. This is fundamental questions that thinking men and women have wondered about for thousands of years.”

From an economic standpoint, it’s clear that scientists on Earth are willing to pay billions of dollars for this data. They might send their own scientists to Mars, which would count as positive immigration, or they might hire Martians to conduct the science for them, but it’s clear that scientific interest in Mars is worth billions. It’s also worth mentioning that other celestial bodies would also have this benefit, the Moon likely less so than Mars, and Jupiter’s moons perhaps similarly valuable.

Tourism

Space tourism also seems like an important industry for a space colony, although perhaps not Mars. Andy Weir’s Artemis takes place on the Moon and space tourism is an important export industry. Tourists visit the Apollo 11 landing site and jump around at 1/6 Earth gravity. It seems likely that similar tourism might function on Mars, although there are serious limits. For example, the trip to Mars takes months, would occur in essentially zero-g, and usually is only done one way every two years. Large rooms with windows would seem both vital for any tourism industry and highly impractical without radiation shielding. Vacationing for a week on Mars wouldn’t be practical, unlike taking a week or two week vacation to the Moon. Perhaps a two year long sabbatical would appeal to some people, but probably not most. A more efficient transportation system, such as an ion drive ship between the planets might reduce the travel time or allow for interplanetary travel even when the planets are not close in their orbits. But until then, tourism is likely to be very limited.

Martian Souvenirs

If tourism is limited, perhaps actual Martian rocks will be more highly valued. Those might be much simpler to ship to a mass audience on Earth. Given the monopoly Martians would have on this industry, they could theoretically charge a hefty markup. This is, of course, in addition to the scientific relevance the rocks would have. On the less positive side, there may be regulatory issues for bringing alien rocks to Earth. Fears of alien bacteria that could kill everyone on Earth might cause prohibitions. Such a threat seems unlikely, but import bans are often irrational.

Reduced Launch Costs

Of all the rocky places in the solar system to launch a rocket, the surface of Venus with its Earth-like gravity, sulfuric acid rain, and insane heat, is probably the worst one. But Earth is a close second. Rocket launches must accelerate out of the “gravity well” of wherever their launch site is and then expend the energy needed to get to their target transfer orbit. Escaping the gravity well is very difficult on Earth’s surface. The Apollo program required very little fuel to get off the Moon’s surface because the gravity was so reduced (and the Moon has no atmosphere). Thus, the energy needed to get off of other rocky surfaces in the solar system is much less than Earth. Mars also orbits further out from the sun, which means you also need less energy to get to a transfer orbit to the asteroid belt or outer solar system. Thus, one economic benefit would be to offer Mars as a cheaper launching point for outer solar system exploration.

However, if you need to first bring an entire rocket and fuel to Mars before departing for your eventual target, you’re better off just leaving from Earth directly without dipping into the shallower, but still significant Martian gravity well. For this to be valuable, you’d need to be able to build the rocket on Mars, which seems much further off than the other ideas discussed here, or you’d have to create the fuel on Mars. This may be possible; SpaceX’ plan is to use the carbon dioxide in the Martian atmosphere and water ice on or near the surface to produce methane and oxygen as rocket fuel. One might also be able to find an asteroid or comet with water ice, carbon dioxide, or even methane, and bring it into orbit around Mars or the Moon, avoiding having to accelerate it into and out of Earth’s gravity well. Rocket manufacturing could then use a combination of terrestrial, martian, or lunar parts and fuel, supplemented by materials already in orbit, or even manufacturing plants in orbit. This could be sustainable in the long term. Asteroid mining would be extremely lucrative, with perhaps tens of billions of dollars in potential profit. If an asteroid mining company believed Mars, or the Moon could save them launch costs, they would likely purchase property, bring equipment and employees, and thus improve the Martian trade balance.

Natural Resources

Mars also has an abundance of natural resources in various compounds where they may be more common than on Earth. These include halogens, organic compounds, and deuterium. The extent and speed at which these will become useful to export from Mars are unclear, but they may eventually be useful as a source closer to the outer solar system than Earth, due to the reduced launch costs. Editing note: I decided to add this as separate category later after discussing this post.

On-Site Entertainment Production

This is another odd case, but it may be more immediately plausible than launching exploratory rockets from Mars. The low gravity of Mars or the Moon would allow for a different type of videography, with actors that actually weigh less able to jump large distances. This could be literal as for science fiction films that need to take place in low gravity, or perhaps more creative and unusual projects that endeavor to take advantage of this location in ways we have not yet conceived of. Again, however, the Moon may be a more accessible location than Mars, given the length and difficulty of travel.

Medicine

From what we know about the human body in lower gravity environments, the health effects are largely negative. There may be the possibility that osteoarthritis would be improved by living in a low-g environment, but anyone who has that problem would likely be old and might suffer from other problems. However, the severity of injuries from falls would likely be much less in low-g environments, and perhaps high blood pressure would be less of an issue. Nonetheless osteoporosis is known to get worse in zero-g, and so astronauts are forced to do weightlifting regimens in space to try and maintain their bone density. It’s possible that if the osteoporosis could be combated, people who suffer from osteoarthritis might live more comfortable retirements on Mars or the Moon. They could likely never return to Earth though, as their heart and muscles would have become significantly weaker and would likely give out upon return to Earth. We need more research on the human body under low-gravity conditions to see what the long term medical effects are.

Law and Society

This is much more likely to be a reason for positive immigration than for exports. People who currently live under legal systems on Earth may be interested in moving to a different legal system not currently available on Earth. They may even want to start their own society. That is not currently possible on Earth, as states claim almost all land on Earth. Moving to Mars due to its nonexistent or only slightly existent legal system would bring with it a variety or related goals and ideas, such as chance to shape the cultural future of Mars. One can see the related desires of immigrants who moved to the Americas from Europe in the 18th and 19th centuries (and earlier, I suppose). This would also include people who wanted to live on the edge of human exploration or contribute to the project of humanity reaching other celestial bodies, and perhaps eventually other stars.

There are of course limits here as well. Any existing Martian colony would have its own law and rules that might be just as restrictive as Earth, especially given the harsh conditions and lack of natural resources on Mars. To create a legal system and society on Mars, any group would require a massive amount of resources, equipment, and specialized knowledge, essentially creating a whole new colony. Could such a move possibly be cheaper than simply establishing a place on Earth? It’s hard to say. The problem on Earth is not just money and resources, but confronting states who have access to military power.

Capital Flows

It should be pointed out for completeness’ sake that of course Mars could potentially export nothing, but still expand their economy as Martians did productive work for each other. Then could borrow money from Earth, invest it, and Earthers would see a positive return. This would counter the negative pressure on the Martian exchange rate from exports. If Martian investments were failing though, then Martian currency would likely become pretty worthless to Earthers, and they’d likely stop selling goods to Mars. We should thus note a financial crisis could be quite problematic!

Conclusion

Mars has a variety of goods it can export, although the only immediately available ones are likely Science, Society, and perhaps space rock souvenirs. Others may eventually become economically useful, but will likely take some time.

Picture: Public Domain Image, Global mosaic of 102 Viking 1 Orbiter images of Mars taken on orbit 1,334, 22 February 1980. NASA 

Netflix, Entrepreneurship, and the Case for Economic Freedom

How would you go about convincing a free market skeptic of the benefits of economic freedom, as opposed to a tightly regulated or even a command economy? A common approach is to discuss productivity gains from free market systems, which reward higher efficiency production as consumers purchase the best and least expensive products. Competition between firms pushes companies to find efficiencies and new production methods.

One might also point out that it’s possible to divide the question of taxation and distribution from that of free market pricing and competition; in other words, if the market skeptic is concerned about the effects of a free market on the unskilled or the handicapped, it’s possible to have a robust safety net and tax system that is built on the most efficient taxes and welfare payments (land value tax, consumption tax, and direct cash grants).

However, today I want to focus on a more amorphous part of the free market, entrepreneurship. The Library of Economics and Liberty has an excellent encyclopedia style article on entrepreneurship written by Russel S. Sobel. He defines an entrepreneur as

…someone who organizes, manages, and assumes the risks of a business or enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering new ways of combining resources. When the market value generated by this new combination of resources is greater than the market value these resources can generate elsewhere individually or in some other combination, the entrepreneur makes a profit.

Sobel also discusses the approaches of economists Joseph Schumpeter and Israel Kirzner in describing entrepreneurs. Schumpeter is famous for his theory of “creative destruction”, where entrepreneurs are the primary agents of disruption, upending the status quo and altering the market, leaving competitors behind. Kirzner focuses on the aspects of discovery that entrepreneurs perform, as they seek new markets, new processes, and new business models.

We should note that entrepreneurs don’t assume all risks. If their projects fail and the business operates at a loss, they lose their investments. However, if worker jobs are lost not due to performance but poor management, workers might be laid off, which is a risk workers assume, not the entrepreneur. Nonetheless, entrepreneurs likely take on more cumulatively, risking their job and also capital investment. Entrepreneurs are usually thought of in terms of small business owners or startups, but I’d argue many of the roles of an entrepreneur can be undertaken by larger companies. Maybe a publicly traded company cannot, by definition, have an entrepreneur, but if there are still market discovery and disruption operations that the company undertakes due to the search for untapped profit, that’s good enough for our purposes today.

So far, we’ve discussed that entrepreneurs search for market opportunities, new ways of doing business, and undertake risks, but what does this have to do with economic freedom? The benefits of entrepreneurship can be difficult to notice. Sobel uses the examples of Bill Gates and Microsoft which at the very least took over virtually (ha!) the entire personal computer market, and I’d argue created a large new market that hadn’t existed before. However, we don’t know what tomorrow’s entrepreneurs will come up with, and that’s the most vital point. Someone has to envision the new product or service, develop it into something that can be sold, create an organization capable of producing it, and then execute on those plans before the market reacts. If it was well known what needed to be done, it wouldn’t be innovative, and it would already be happening. Entrepreneurs need the freedom to operate, to create new ventures, and to attempt new processes and approaches.

Contrasting with state-run economies or state-owned enterprises, the benefits entrepreneurs bring to a free market economy are pretty straightforward; government enterprises aren’t going to be as profit focused because they don’t reap the benefits of any increase in efficiency. Command economies or highly regulated industries may have price controls imposed on them, and so innovation does not occur because there is no opportunity to do so. Political incentives might also overrule efficiency improvements, and since the state has a hard time going bankrupt, poor rules can hamstring organizations for years. My local DMV still refuses to accept credit cards.

Other forms of economic freedom are more subtle; regulation is a broad form of curtailing economic behavior, although certainly not always for bad purposes. Nonetheless, many well intentioned rules reduce the benefits of innovation or were in fact written with the help of powerful actors looking to keep out competition. Licensing can be especially destructive to innovation; Uber controversially solved this by ignoring licensing laws in many cities until they were too popular to be outlawed (results pending). Taxi licensing had allowed the taxi industry to remain relatively complacent, with poor service, product quality, and ease of use. Uber saw an opportunity to exploit the market with new technology and transformed the industry.

Finally, it’s worth mentioning that a strong defense of property rights is vital for the entrepreneurial process to occur; people will not take risks on new ventures if their asset can be seized at will by the government, or if the currency that transactions are conducted in could lose it’s value overnight (looking at you cryptocurrencies).

Now I’d like to walk through an example of the benefits of entrepreneurship. Netflix was established in 1997 to take advantage of the brand new DVD format for movies. The DVD format was introduced on March 21, 1997, and Netflix was formed by August. That’s an impressively quick turn around. At the time, the most common ways to see entertainment at home was to watch TV shows as they aired, watch movies that had been cut up for TV with commercials when a cable station played them, rent movies from Blockbuster if they had it in stock, or buy the VHS tape of a film.

DVDs had a lot of benefits over VHS when they came out, such as skipping directly to certain scenes, no rewinding, and often better durability than VHS tapes. But Netflix saw that DVDs offered something else: no prior storage format was small enough to be cheaply mailed and large enough to hold an entire film.  They foresaw a new method of home rental, and indeed, once DVD players became cheaper in 2001, Netflix took off. They dominated the mail subscription movie rental space, essentially creating a market where none had existed. Unlike movie rental stores, Netflix had a larger catalog and no late fees. Blockbuster was probably in the best position to take advantage of the new DVD technology; they had a pre-existing distribution network for their stores, and they had a customer base interested in movies. Yet Blockbuster peaked in the mid-2000s and filed for bankruptcy in 2010, a victim of Netflix’ creative destruction.

It’s worth mentioning a couple things about Blockbuster. In 2004, they attempted a hostile takeover of competitor Hollywood Video. They abandoned the deal in 2005 citing the FTC would probably block it. Yet both companies were either gone or bankrupt by 2010! The myopia of seeing a merger of Blockbuster and Hollywood Video as threatening to consumers when both companies would be essentially gone in five years underscores the points made here about the value of innovation and entrepreneurship. The state couldn’t look ahead and see that the industry consolidation they were concerned about would have shorter lifespans than many currently airing TV shows. Blockbuster’s competitors were actually Netflix, Redbox, and streaming video–even YouTube, which was founded in 2005 as well. Blockbuster itself made poor management decisions, opting for short term profitability over long term investment for a new industry. They eventually did create an online DVD rental subscription business similar to Netflix, but it was so poorly run, it either lost money or was too expensive to attract customers.

Yet customers did not suffer from this poor management! The entrepreneurship of Netflix filled the void before it even appeared. Netflix leveraged its online presence to profile its users with data, creating personalized recommendations in the mid-2000s, years before Facebook even started running ads. Netflix also saw that the future was streaming video, and noting the success of YouTube, they began including a streaming service with their DVD subscription in 2007. At the time, virtually no one had the bandwidth to watch movies in high quality on their computers, and essentially no technology existed to stream it to TVs. Yet, by 2011, Ars Technica was reporting that Netflix was responsible for about 30% of all North America peak internet traffic.

Netflix had accumulated many streaming titles, but was aware that as the importance of streaming grew, many publishers would be unwilling to renew their contracts, or raise prices. They might even face new streaming competition from content owners (like Hulu).  Consequently, Netflix started to invest in original content in 2011, something essentially unheard of for rental/streaming company, by buying the rights to make House of Cards, a political drama, for $100 million. In 2013, it premiered and went on to obtain 5 Primetime Emmy nominations for Outstanding Drama Series from 2013-2017. Other shows, such as Orange is the New Black, the various MCU Defenders series, Bojack Horseman, and Narcos have all been fairly successful. By this year, Netflix’ original programming pieces are in the hundreds if we count all seasons, original films, documentaries, comedy specials, and more. The Economist reports that Netflix will make more TV content than any television network this year, and release 80 movies, more than any Hollywood studio. Warner Brothers, the largest studio, will release just 26, admittedly most with much larger budgets. The critique that Hollywood doesn’t have original ideas is only true if you forget that Netflix is the largest player in Hollywood.

The foresight here for Netflix to to see and invest in the benefits of DVDs in providing by-mail home entertainment, to see streaming as the next iteration of entertainment consumption, and to see that any streaming service will require original content, when none of those markets had yet existed, is the foundation of entrepreneurial benefits. The ability to see where the market will be and adapt your organization to meet those needs in pursuit of profit is the dynamism of the market economy. Other companies’ failures are immediate market feedback on their inability to adapt. It’s not to say that a free market automatically takes advantage of all opportunities that present themselves; sometimes technology has made a new concept viable but no one is able to take advantage of it for some time because of lack of creativity. I also don’t intend to state that large corporations love competition and innovation; on the contrary, they are often trying to remove any competition through any means necessary. Out-competing another company results in better products for consumers; constructing barriers to entry so that consumers don’t have a choice does not.

Finally, given the benefits of entrepreneurship, we should note that it has been declining in the US. Why? It could be due to better economies of scale due to technology, it could be increased regulation has made it harder to form new businesses, it could be reduced labor force participation, or several other theories. Tyler Cowen has discussed this phenomenon in his 2017 book, The Complacent Class. He views it as a possible response to risk avoidance that accompanies increased wealth. Regardless, the questions of why entrepreneurship is declining, and what tradeoffs are involved in the level of dynamism of the economy are the important questions to ask. Dynamic markets are valuable tools to create ideas and innovation that cannot be predicted. Yet lack of clear future benefits should not be counted against the value of economic freedom.

 

The Broken Electoral System: 2018 Edition

This blog voices a lot of frustrations with the American electoral system, and with election season coming up, it’s worth talking about again. The United States is a republic, but voters tend to significantly overestimate the importance and impact of their votes.

To reiterate some of what I said in 2016, your vote in November is unlikely to matter. Most Congressional elections are not close. There may be uncertainty in other, less well polled elections for lower offices, but there’s also a much higher cost to finding out who the candidates are and what they stand for. I consider myself pretty interested in the political process as I write about it often. Nonetheless, I know almost nothing about my state representative and state senator. I can (and will) look them up, and see where they stood on votes, as I can with my Congressional representatives, but this will also require looking up which state votes were important to the topics I care about, something which I may not be able to find out easily and which I’m sure other people do not have the time to do. Moreover, it’s pretty common at the federal level for legislators to try and avoid going on the record and opt instead for voice votes, and I suspect similar incentives dominate at the state level.

If I can find good information on their voting record which reflecting beliefs I find objectionable, it is not clear that I can find information on their electoral opponents. Party affiliation does help, but not every candidate from a party holds all party positions.

Additionally, even close elections that you can find information on do not necessarily map well onto issues you care about. I care about promoting free trade, liberalizing immigration and/or worker visas, ending the war on drugs, and addressing issues in the criminal justice system. Many politicians only side with me on some issues but not others, yet I only have two options for any election that is actually competitive (and again, most are not).

Moreover, most politicians not only don’t share all my positions on important issues, they have really terrible positions on other issues that weren’t even on my radar. Now I have to worry about Republican politicians looking to deport immigrants through abusive crackdowns of civil liberties. I’m also now concerned about Democratic promises to vastly expand Medicare, already the largest entitlement in the federal budget and contributor to runaway healthcare spending. I freely admit that many people do not feel this way; they feel that the “progressive” or “conservative” positions pair well on a wide range of issues, and they can identify with many others who share an overlapping set of beliefs. In this view, the inability for libertarians to find someone who shares their core issues is a function of libertarians having bad or unpopular ideas and that’s why they have no support.

I disagree for several reasons: one is that many people do not vote at all. They may not think much about politics, or if they do, perhaps they realize, as is my thesis here, that there is very little benefit to voting. It seems quite plausible that they hold ideas that differ from party orthodoxy and don’t see a reason to vote when you can only choose between party orthodoxy. Another is that a plurality of registered voters do not have a party affiliation, something that has only been true in the last ~20 years or so. It’s also true that when surveyed, many Americans express rather moderate views on a variety of issues. Finally, it’s worth noting that there is obvious intra-party tension and factionalism. There are serious groups of Republicans who do not like Trump. There are libertarian critics like Justin Amash and Mark Sanford, neoconservatives like Lindsey Graham and John McCain, as well as just stalwart conservatives like everyone at National Review. It also seems to me that there is some strong disagreement in the Democratic Party between neoliberals and progressives, and so it seems absurd that the political system only allows two parties when there is so much diversity of opinion and no way to express it electorally.

Worse still, our current two-headed system promotes partisanship and tribal extremism instead of nuance. I know several people that, when pressed, don’t really believe that the government would do a great job if we had a Medicare-for-all system or had government paid college. Yet these same people feel that if they don’t embrace these left-wing ideas, their only alternative is to be a fan of Trump, whom they reasonably despise. I’ve also experienced the reverse: conservatives that didn’t like Trump, but clearly preferred his tax policy to Hillary Clinton’s and figured Trump might not be so bad. Many now are so concerned at what they perceive as a “Trump Derangement Syndrome” takeover of the Democratic Party, they have nowhere to go but to embrace Trump. If we had a system that promoted the creation of several different groups and smaller parties, we’d have a much easier time finding a diversity of opinions and ideas.

Unfortunately, our current system also takes issues that many people generally agree are bad and just ignores them. There are policy positions I would consider to be completely disqualifying for any public servant, such as approval of a vast warrantless domestic spying program costing tens of billions of dollars a year or the murder of children through drone strikes by the president with no authorization of war from Congress. Nonetheless, there is no point to disqualify candidates from my support due to these issues because they have been widely ignored by all candidates in the major parties. Complaining about the two party system is the classic archetype of the crazy libertarian going off the rails again, but I hope others are genuinely saddened that our electoral system doesn’t offer a way to utilize our vote to oppose the murder of children by our government.

And for non-competitive elections, there may be competitive primaries, which aren’t really great systems either, as I’ve discussed before. If the primary is deciding the eventual winner of the election, it doesn’t make sense that a plurality of voters of a single party should determine the winner of a general election seat in a primary election where 90% of possible voters didn’t vote at all. For example, in the notable dethroning of high ranking Democrat Joe Crowley in NY-14, Alexandria Ocasio-Cortez won with less than 16,000 votes, in a district where some 690,000 people live, presumably with some 300,000 possible voters. PredictIt currently gives the Democrat a ~85% chance to win, although the market isn’t very liquid.

In less democratic countries, there is overt voter fraud and intimidation. The United States doesn’t really have that problem. It nonetheless does have odd echoes of a “rigged” electoral system like one you would find in low-trust corrupt authoritarian countries with poor rule of law. For example, having one side consistently win a landslide, non-competitive election (like most congressional seats) seems like something you’d find in a “fake” democracy. Having a “competitive” election between two candidates you didn’t pick and you don’t know well which doesn’t allow you to express dissatisfaction with important government programs sounds like a “fake” democracy too.

I should admit that I don’t love the idea of hyper direct democracy either. Even if voters had a reason to learn about the political system, I’m unsure if they would promote good ideas. In all honesty, I probably side with political elites over average voters on a lot of issues. That doesn’t mean I believe there is no room for reform. I’ve discussed many different possible ways to improve our system, and in fact a few weeks ago I mentioned the important opportunity Approval Voting is getting this year. Yet none of those ideas will be seriously discussed this election season.

To summarize, our election system has a variety of important and fundamental flaws. Candidates are picked in nonrepresentative primaries, many elections are noncompetitive, voter information is scarce, while voter choices are limited to two candidates who do not represent the broader electorate’s views on many issues. Other important issues are just broadly ignored while the system promotes discord and extremism. Yet there will be a significant amount of discussion about how important it is to vote in November. With these flaws I’ve outlined, I apologize in advance if I’m unimpressed by such claims.

If you believe that you see a large difference in a particular race for office that you think might be competitive, that’s great, and feel free to vote. But don’t feel bad if you believe voting is a waste of time. Maybe you don’t like Trump, but you also wish all the Democratic candidates weren’t just talking about deficit busting economic policies with poor fiscal outlooks. That’s fine because there are ways to engage politically that are more important than voting. That includes addressing our broken electoral system and raising awareness about how this doesn’t have to be the way things operate; approval voting offers a real alternative that’s being attempted right now. It’s also worth mentioning that Congress’ decline in power relative to the President means that partisan politics is now more infectious; only one of a very few competing ideologies can control the White House and the immense power it has been ceded. Meanwhile, a powerful Congress is made up of hundreds of individuals, allowing for diversity of opinion, broad coalitions, and compromise. Congress should be taking back power it has ceded to the executive branch; I would hope readers would want to make this the major election talking point it should be, instead of the libertarian-rant-footnote it is now.

In conclusion, civic engagement is important; political awareness is vital to a thriving democracy. Nonetheless our electoral system is broken in such a way that voting is not the vital civic duty it is often claimed to be. If you are concerned about the partisanship that created Trump, if you feel like a world where facts don’t matter ought to be changed, then voting isn’t enough to change these trends. That does not mean there is nothing to be done; on the contrary, reforms are needed on a more fundamental level, including changes to our voting system, primary system, and party system. Discussing and promoting those ideas is the best way forward.

Prediction Markets: What are they and why are they useful?

Given the importance of the topic to this blog, I thought it best to create a discussion of prediction markets here that I can refer back to. In the process of researching this topic, I found some other resources of varying quality which I will be referring out to as necessary. The best analysis is Paul Sztorc’s Prediction Market Sequence, which is unfortunately kind of buried under a subsection of the Bitcoin Hivemind website, and is also a combined ~75 pages (!). I would definitely recommend it to anyone who wants more details, but if you only want to read 3000 words, this blog post will cover a lot of the main ideas.

What is a prediction market?

Prediction markets are exchanges where you can buy and sell “derivatives”  (also referred to as shares, contracts, options, depending on context) on whether a given event will occur. They can be simple yes or no questions, or they can be more complicated, which we will cover later. The market price reflects what people believe to be the probability of the event occurring. A simple example would be a prediction market on whether Donald Trump will win the 2020 election. Suppose each contract resolves to $1. If you buy a “yes” option at 40% or 40¢ and then Trump wins, you’d be able to redeem it after the event at 100% or $1. If he loses, the share value would be 0% or $0. Other prediction markets can use any pricing scheme reflecting 0-100%.

PredictIt.org, a well known prediction market site, uses shares that resolve to $1 or $0 with trading occurring in between those prices until the event occurs. A 70¢ price would indicate a market belief of 70% in the event occurring. This is similar to betting markets on external events (like betting on the outcome of sports events) and also futures markets, where additional contracts can be created as long as there is interest in trading them, unlike stocks or bonds which are issued by an organization in limited quantities.

For more info, check out the first three sections of Paul Sztorc’s first PM paper.

What’s the point of a prediction market, is it just a way to gamble?

They can be used for gambling, but that is not their most interesting use case. Prediction markets aggregate information, and so they are sometimes called information markets. They offer a profit incentive for someone to share information publicly or for you to investigate something to try and uncover information. For example, in 2016, there wasn’t a great deal of presidential election polling in Wisconsin and other Midwest states. You might have been able to leverage information you found out about Trump’s support among Obama voters in those areas to place bets on Trump doing better in the electoral college. While talking heads on TV get paid for giving opinions, they don’t get paid for correct ones; prediction markets change that, allowing for a direct reward mechanism for correct predictions. Prediction markets thus improve the quality of predictions while simultaneously cutting through the self aggrandizing opinionators who have nothing on the line.

Aggregation of information is a concept so broadly applicable, it’s hard to convey the potential impact of its widespread use. At the very least, we would have a significant improvement in forecasting due to the profit incentive of those with useful information as well as those who can find out information and profit off its discovery. In the best case, we can aggregate all human knowledge into singular probabilistic forecasts about the future, providing real world application and feedback of empirical methods for everyone’s benefit.

If prediction markets are so great, why aren’t they being used already?

They are being used in limited ways, although they face many challenges. One is legal; the US has made it illegal to gamble on the internet. That means no large scale prediction markets can function in the US. PredictIt.org, a well known politics prediction market, has limitations on the amounts individuals can stake in a market as well as the number of individuals allowed in a single market. This limits the liquidity and financial interest in prediction markets. There is also the fact that knowledge about them isn’t widely dispersed; it’s a niche topic for obscure blog posts and academic papers.

Even if banned publicly, private organizations have an incentive to use prediction markets to improve their forecasting. Why haven’t more done so?

Prediction markets don’t necessarily mesh well with human organizations; managers may not be optimizing for the best information, but rather the decision making policies that make them look good. Dan Ariely writes how resistant companies are to conduct experiments that would actually give them better information; experimenting on customers is seen as immoral even if that results in a company never improving the products it provides for fear of trying new things.  In addition, as Bryan Caplan points out, markets themselves aren’t very popular generally, and the Senate shut down a Defense Department experiment on prediction markets because Ron Wyden found it “grotesque”, despite the obvious national security incentives to learn as much information about security threats as possible.  Paul Sztorc discusses similar challenges prediction markets face in his first paper, linked earlier. Prediction markets challenge the status quo and conventional wisdom and thus may never be adopted in organizations with established hierarchies.

I believe that in addition to the points Sztorc makes, prediction markets are simply expensive to set up. You need a market infrastructure (likely a digital platform, secure database architectures, etc) but also a mechanism for resolution, a decision structure for what markets will be created, and of course money to seed the market (If you’d like to learn more about market seeding, this blog post dives into Hanson’s logarithmic market scoring rule). You also need people to know to go to your market to make predictions; if no one is going to make predictions or buy shares on your market, other people won’t be incentivized to either. This is a network effect that may be hard to overcome.

So why are we talking about them if they can’t exist in real life?

One reason is to increase the awareness of the potential of prediction market to the readers of this blog. But the big reason I’m talking about prediction markets right now (as well as Paul Sztorc) is because of the rise of cryptocurrencies. Many of the social challenges to prediction markets can be overcome by instituting prediction markets on decentralized platforms and trading the contracts in cryptocurrencies. If you need more background on cryptocurrencies, I have some previous blog posts.

Prediction market projects on distributed blockchains, like Bitcoin Hivemind and the recently launched Augur, cannot be blocked by traditional legal prohibitions.  They also don’t need permission from the established experts in a field in order to make predictions. They are, however, more expensive than prediction markets like PredictIt or Betfair; they may require additional money to transact and specific cryptocurrency expertise to enter, and they risk uncertainty in how dispute resolution will occur in this new space. Nonetheless, many of these risks and costs may decrease over time as this technology becomes more familiar. Their location on a blockchain of course also means they are not just censorship-resistant, but effectively immortal.

Furthermore, prediction markets can do much more than the simple binary option market we discussed before.

What else can prediction markets do?

Ok, it starts to get complicated here. I’m mostly pulling from Paul Sztorc’s second paper on prediction markets (Unlocking the Power of Prediction Markets). Prediction markets can also create scaled markets instead of simple Yes/No binary markets. This is like trading a stock. You can buy Apple at 100 and sell at 200. The only difference is that the prediction market ceases after the event occurs, so instead of buying Trump at 40¢, you could buy Trump at 250 electoral votes in August 2016 and your share would mature at 304, since that is the total number he received when the electoral votes were counted in December. On such a trade, you’d receive a profit for guessing that Trump would receive more than 250, and the total profit would relate to how much more the ultimate “price” or quantity beat the price you paid.

The more interesting addition is the use of multiple dimensions. For example, you could create a market with 4 outcomes trading across two dimensions: Unemployment up year over year and whether Trump adds tariffs to Chinese imports. The resulting percentages should yield a relationship in how the world views these events; it’d be likely additional tariffs would increase the expected unemployment, but the prediction market would tell us if the expected effect were certain or uncertain. If we used a scaled dimension, we could even see the magnitude.

This is pretty powerful. I highly recommend Sztorc’s paper on this, as even more complex markets could tell us more detailed info (and he has nice illustrations). However, we should note that more complex markets require more complex contracts embedded into the blockchain. Blockchains don’t scale well (so far), so complex contracts may result in expensive transaction fees, and the multiple bets you can place may mean overall liquidity is low. If liquidity is low, people may not feel like betting is worth their time, since large bets might not be possible, reducing the incentive to research hidden information.

What are some examples of prediction markets?

The simplest prediction markets are already in existence at places like Betfair and PredictIt. For those betting markets to be useful to us, those websites have to share our interest in betting on things. And while this is generally true for broad markets (like prediction markets for president or senate seats), there are very few places you can easily place a bet on something other than company or commodity stock prices, political races, or sports. Moreover, current prediction markets have various problems, like legality and limitations on bets.

So there are simple prediction markets, like binary options on whether an event will occur, that could be useful to those who are curious about the world. Examples might include current events, like North Korean nuclear tests before the end of next year. North Korea might even buy shares anonymously (especially if this is a cryptocurrency market) which could actually directly convey information from inside North Korea in a way we never have before, albeit by directly financing a dictatorship. We will talk more about the criminal uses of prediction markets later.

Paul Sztorc points out in “Extra-Predictive Applications of Prediction Markets” that prediction markets could offer an easier way to bet on company stocks. You wouldn’t need a brokerage account with a bank, just access to a cryptocurrency. Perhaps this is more difficult for less tech savvy users to get than a bank account, but perhaps not. Many foreigners or people without good access to banking might not be able to trade in stocks. This would allow them to have a portfolio. It’s Finance 101 that you should diversify your assets to save for the future and hedge against risk, yet many people without access to banking and financial markets have no way to diversify their assets. With a prediction market tied to the S&P 500 price, you could simply buy a contract and you’d immediately have an asset that tracks the general stock market. In fact, you could use something similar to track any publicly known stock or ETF.

This would also allow for insider trading similar to the North Korean nuclear weapons market. Interestingly, this is a strength of the market, causing any insider knowledge to be quickly dispersed to the outside world. That’s actually another fascinating application Sztorc discusses: whistleblowers.

Whistleblowers risk lawsuits, job loss, prison time, and their lives, and yet they are guaranteed nothing in return, even if successful. Can we do better?

Sztorc goes on to point out that whistleblowers could collect money for their knowledge, providing more of a safe haven for coming forward sooner.

There are other fascinating applications for public construction, which would allow public betting on whether a project would complete on time.  This could be used to keep public officials who awarded the contracts accountable and called out directly when making corrupt deals. You could also make markets estimating what the expected level of depreciation are for various new models of cars to assist people in buying cars that will retain their value. Nominal GDP futures markets are an idea that has been discussed on this blog as a useful tool in monetary policy, providing feedback for setting interest rates.

Prediction markets don’t even have to be used just for information gathering, as Sztorc points out. They can be used as insurance as well. There could be a market for natural disasters which allows people to place bets on events that they don’t have any additional knowledge on, but simply want to be insured against poor outcomes. They can then collect the winnings of the bet as their insurance claim.

The possibilities for simple single event prediction markets are countless. But there are even more interesting examples when we get more complicated markets.

How can we get more complicated than North Korea using insider trading to make money off of their own weapons program through online cryptocurrency betting markets?

It’s time to explore multidimensional prediction markets and in particular conditional prediction markets. Robin Hanson has suggested conditional prediction markets for publicly traded companies. One dimension would be the company’s stock price and the other would be whether they fire their CEO. It would provide immediate input from the market on whether people believe the CEO is actually useful and adding value to a company. If the projected company value was similar to or higher if the CEO was fired, that would provide good justification for getting a new CEO.

I also like the idea of a conditional prediction market for candidate policies, conditional on them getting elected. This would provide feedback on whether anyone actually believed the candidates’ promises to deliver on various policies. One can imagine cultural norms arising where candidates had to provide proof that they had purchased significant amounts of shares that they would carry out the policy if elected. Political campaigns might then be more substantial, focusing on policies candidates had demonstrated they were actually committed to.

Robin Hanson has also suggested the idea of Futarchy, where prediction markets are created to predict the outcome of various policies, conditional on their implementation. He proposes the concept of “voting values, but betting beliefs”, where legislative bodies would vote on what we would want as an outcome of some policy, and then commit to implementing whatever policy is favored by prediction markets. It’s an interesting idea although it mostly moves the debate in legislatures from “what policy should be undertaken?” to “what policy indicator are we trying to maximize?”. That may be a better debate, but if poorly chosen, the indicator could maximize something to the detriment of the polity. It’s probably still worth investigating on a narrower scale, and certainly the existence of the markets themselves could only improve the information available to policymakers.

Paul Sztorc also discusses some complex applications of multidimensional prediction markets in the Bitcoin space. Unless you are really interested in Bitcoin, they probably won’t catch your eye, so I’ll just mention them briefly, as they are technically impressive. The first is a way to allow Bitcoin investors to gain more information about possible hard forks (changes in the network and blockchain) and insure against them occurring or not occurring. Hard forks are turbulent times in a blockchain, but current discussion is just theoretical arguments of what might happen. Network effects could mean people like the idea but don’t switch to a new fork, but a prediction market could give immediate feedback and allow people to purchase shares of post-fork-Bitcoin while insured against the possibility the fork does not go through.

Also discussed is the idea of “stable” coins which would be futures markets on the exchange rate between Bitcoin and the US dollar, as well as issuing stock through a prediction market. The most interesting to me was the idea of efficiently funding public goods. The basic concept is that you create a prediction market asking whether a public good will be provided (like a lighthouse) and then people who want the public good buy shares of “no”. They won’t lose any money unless someone builds the lighthouse. People intending to build the lighthouse can buy lots of shares of yes, and, when it’s built, the lighthouse builders would reap the benefits of the shares, and those who wanted the public good would pay for it, only if it existed. You can also create lots of different possible “yes” shares, based on publicly available information, like “what letter will be painted on the side of the lighthouse?”, which would allow different teams to compete. For the full write up, check out the paper.

Sztorc concludes with generalizing this idea to “smart contracts” based on prediction markets. This is built on top of the idea that prediction markets are a robust way to determine not only the future, but how the future eventually resolves (i.e. there is a mechanism that ultimately is used to determine what happened in the 2016 election to determine whose shares are paid).

What about insider trading you were talking about earlier? Can you use prediction markets to do other illegal things too?

Mostly likely yes. Just like Bitcoin and other cryptocurrencies, prediction markets can be used for illegal transactions since they aren’t tracked well by the state, and they can be used to bet on unsavory things or incentivize criminal behavior. Insider trading is one of those activities. However, I tend to buy the libertarian argument against the illegal prohibition of insider trading. Crimes require a victim, and insider trading provides information, while its prohibition does little to stem the flow of information to those who have little concern for the law anyway.

However, stranger markets exist as well. Sztorc devotes most of his final paper to discussing prediction markets in deaths, which could be manipulated by assassins. Sztorc is skeptical this could work, as any markets that believe someone is highly unlikely to die are automatically creating an incentive for an assassin and so the market would self regulate back to equilibrium where the predicted death is both more likely and less profitable. I’m still somewhat concerned. The bottom line is that death markets provide an avenue for assassins to reward themselves that does not exist today. Perhaps such incentives would be small compared to the difficulty and bodily harm risked by assassins, but it’s unquestionable that not everything about prediction markets is purely good. That’s expected though; information is powerful and does not always lead to to purely good outcomes.

Conclusion

The benefits and potential of prediction markets to improve the world is vast. As Sztorc states: “Their greatest benefit lies in their unlimited ability to scale”. Conversations are one to one, classes are at best a few lecturers and a few hundred in the audience, while prediction markets can take input from everyone in the entire globe and condense that into comparable and understandable probabilities. Being able to retrieve the world’s knowledge by doing something as simple as checking prices online is nothing short of a revolution in information. With the advent of decentralized blockchains, prediction markets are here to stay; we should embrace their power and potential.

 

Links 2018-07-09

My new series focusing on policy summaries made me realize that while the political world and Twittersphere may not discuss policy much, there are groups of people who research policy professionally and have probably covered some of what I want to do with my “Policies in 500 Words or Less” series.  So after looking around, I found that the Cato Institute has an excellent page called the Cato Handbook for Policymakers. It contains a ridiculous 80 entries of policy discussions including a top agenda of important items, a focus on legal and government reforms, fiscal, health, entitlement, regulation, and foreign policies. I will definitely be pulling some ideas from that page for future policy summaries.

I recently found the YouTube channel of Isaac Arthur, who makes high quality, well researched, and lengthy videos on futurism topics, including space exploration. I’d like to take a moment to highlight the benefits of a free and decentralized market in the internet age. Adam Smith’s division of labor is incredibly specialized with the extent of our market. Arthur has a successful Patreon with weekly videos on bizarre and niche topics that regularly get hundreds of thousands of views (24 million total for his channel), and they are available completely free, no studio backing necessary. Such an informative career could not have existed even 10 years ago.

The 80000 Hours Podcast, which was recently mentioned in our top podcasts post, had Dr. Anders Sandberg on (broken into two episodes) to discuss a variety of related topics: existential risk, solutions to the Fermi Paradox, and how to colonize the galaxy. Sandberg is a very interesting person and I found the discussion enlightening, even if it didn’t focus much on how to change your career to have large impacts, like 80000 Hours usually does.

Reason magazine’s July issue is titled “Burn After Reading”. It contains various discussions and instructional articles on how to do things that are on the border between legal and illegal, such as how to build a handgun or how to make good pot brownies or how to hack your own DNA with CRISPR kits. It’s an impressive demonstration of the power of free speech, but also important to the cyberpunk ideal that information is powerful and can’t be contained.

George Will writes in support of Bill Weld’s apparent aim to become the 2020 Libertarian Party nominee. I admit I wasn’t hugely impressed with Weld’s libertarian bona fide’s when he was running in 2016, but I thought his campaigning and demeanor was easily better than Gary Johnson’s, who was already the LP’s best candidate in years, maybe ever. I think a better libertarian basis paired with Weld’s political skills would be an excellent presidential candidate for the LP.

Related: last week was the 2018 Libertarian Party National Convention. I don’t know if it’s worth discussing or whether it’s actually going to matter, but I have seen some good coverage from Matt Welch at Reason and Shawn Levasseur.

I read this very long piece by Democratic Senator (and likely Presidential hopeful) Cory Booker at Brookings. It was a pretty sad look at current issues of employment, worker treatment, and stagnant wages. There was a compelling case that firms are getting better at figuring out ways to force labor to compete through sub-contracting out labor to avoid paying employee benefits. This leads to monopsony labor purchasing by large firms, squeezing workers who don’t have the same amount of market bargaining power. He also mentions non-compete clauses and growing differences between CEO pay and average pay for workers. I don’t have good answers to these points, although his suggestion of a federal jobs guarantee seems very expensive and likely wasteful. His proposed rules about stock buybacks also seem to miss the point. Maybe stricter reviews of mergers would work, but perhaps larger firms are more efficient in today’s high tech economy, it’s hard to know. Definitely a solid piece from a source I disagree with, which is always valuable.

Somewhat related: Scott Alexander’s post from a couple months ago on why a jobs guarantee isn’t that great, especially compared to a basic income guarantee. Also worth reading, Scott’s fictional post on the Gattaca sequels.

Uber might have suspended testing of self driving automobiles, but Waymo is going full steam ahead. They recently ordered over 80,000 new cars to outfit with their autonomous driving equipment, in preparation for rolling out a taxi service in Phoenix. Timothy B. Lee at Ars Technica has a very interesting piece, arguing the setbacks for autonomous vehicles only exist if you ignore the strides Waymo has made.

Augur, a decentralized prediction market platform similar to Paul Sztorc’s Hivemind (which I’ve discussed before), is launching on the Ethereum mainnet today. Ethereum has its own scaling problems, although I’d hope at some point sharding will actually be a real thing. But for now, transactions on Augur may be pretty expensive, and complex prediction markets may remain illiquid. That may mean the only competitive advantage Augur will offer is the ability to create markets of questionable legality.  Exactly what that will be remains to be seen, but this is an exciting development in the continuing development of prediction markets.

 

Policies in 500 Words or Less

This is the next post in the “Policies We Should Be Talking About” series. For more information see the introduction (and other policies) here, but briefly, this series is about explaining policies that might be unpopular, unknown, or simply undeveloped that could still have large positive impacts. Some face specific political obstacles, and some may be too radical to gain enough momentum in the near term, but all deserve to have their signal boosted.

Approval Voting

The United States and many other nations use the worst voting system in the world: First Past the Post or FPTP. This forces voters to think strategically, voting for candidates they think will win rather than candidates they actually like. Combined with the “package deal” problem we’ve discussed before, voters have at best tangential input into the political system.  FPTP leads to a variety of bad outcomes, including static two party systems, wasted votes, ease of gerrymandering, minority rule, spoiler effects (where a third party causes the preferred major party to lose despite popularity, i.e. Nader voters preferred Gore, but didn’t vote for him and Bush won), and more.

The most common alternative discussed in the United States is Ranked Choice / Instant Runoff Voting, which is being used in Maine today. This allows voters to rank all candidates they like, supporting multiple candidates. If no candidate wins an initial majority, votes are redistributed from the least popular candidates based on voter rankings. The first candidate to accumulate a majority wins. However, this system still trends towards strategic voting and two parties, since voters’ second choices are only counted if their first choice is eliminated. If a smaller party is redistributed first, voters second and third choices may be ignored, with the winner being a candidate that fewer voters had as a second choice. There are other more mathematical objections, such as the lack of a Condorcet winner. It is nonetheless objectively better than FPTP.

An even better procedure is called Approval Voting. It is incredibly simple: voters vote for as many candidates as they like, and the candidate with the most votes wins. Voters can support the candidates they really like as well as the ones they think will win. In all likelihood, this will trend towards two parties, but the difference is that third parties can spring up and build support over time without voters fearing the spoiler effects. This incentivizes new parties with fresh ideas. Main parties may co-opt those ideas as they get popular, but that’s good news for voters anyways, as good ideas can bubble up outside of the two party system and nonetheless achieve mainstream success.

The main difficulty is that almost all politicians will not support a new electoral system if they know they have already won using the old system. To get around this, the Center for Election Science recommends ballot initiatives to bring this idea directly to popular vote rather than fighting politicians who want to stay in power. They are doing just that, starting small in Fargo, ND with a ballot measure this year. If successful, it can be pointed to as a real life implementation of a good idea and can be built upon in other polities.

Additional information:

Bail Reform

When someone is accused of a crime, they are charged and given a set of restrictions to ensure they show up for trial. In the United States, this usually includes a money bond that is deposited and then returned at trial. If the defendant does not show up, the property is forfeit. However, other common law nations, including Canada and the United Kingdom, usually do not require actual money, just restrictions on movement or activities (i.e. drinking).

In the US, this has given rise to bail bondsman, who will post your bail for a flat nonrefundable percentage of your bond, often 10-15%. If you fail to appear in court, they have authorization in most states to bring you to the court’s jurisdiction to recover their bond, which is known as bounty hunting, essentially legalized kidnapping. Even if bondsman were banned (and several states have done so) this system remains terrible. If you cannot afford the bail bond, you have a strong incentive to plead guilty. Sitting in jail until trial is not an option for someone in poverty who needs to be working and earning enough for their family. Combined with other criminal justice issues like overcriminalization and policing for profit, nonviolent poor offenders are trapped by a system where they never get a chance for a fair trial due to a lack of cash. Justice should be based on guilt or innocence, not wealth.

There are better ways; the Bronx Freedom Fund realized there was an excellent opportunity to help alleviate this problem. They bail out accused persons and help them make their court date, recovering a large percentage of their posted bonds. Poor defendants are thus able to contest their charges with a fair trial, and many charges are dismissed instead of forcing the accused to plead guilty or sit in jail unproductively. They’ve been so successful they are launching a nationwide project to establish charitable bail funds around the country. John Oliver has also talked about federal courts, where pretrial services assess if the accused is a flight risk. Many are not, and so are released without bail payment at all. Those who the services determine should be assessed a bond are never given one that cannot be paid by the defendant, and in fact in federal cases and the District of Colombia, there are virtually no people awaiting trial because they cannot afford bail, compared to the 450,000 state defendants.

What political challenges are there? The bondsman business has a strong interest in opposing any bail reform, and each state has to update their rules. There are good ideas though: Rand Paul and Kamala Harris introduced a bill that will provide federal grants to states who reform their bail system, although it will likely die in committee. It nonetheless lays the blueprint for how we might tackle this problem from a nationwide perspective in the future.

Additional information:

Organ Markets

Organ markets are extremely unlikely to be implemented soon. Nonetheless, organ market legalization would have by far the most concrete and immediate benefit to the world today, and black market organ markets already exist. Every year over 4000 people die awaiting a kidney in the US, and Medicare spends $89,000 per person on dialysis every year (that’s $34B/year for Medicare, $42B including private spending). The kidney supply is dwindling as cars get safer (many organs are donated by deceased car accident victims), but the vast majority of people do not need both kidneys while alive, and so could sell their kidney to another person with relatively low risk, given compensation. By far the most likely to sell their kidney would be people of lower income, and this is widely touted as a negative for this policy. It is not: blocking the poor from this avenue of income available to them, while simultaneously allowing people in need of kidney transplants to die, is morally wrong.

There is always concern when a transaction occurs between people of different wealth levels. Poor people may not be “forced” into the transaction, but if they have no good alternatives, it seems apparent there is a lack of choice. This is the difference between transactions that are “voluntary” and those that Michael Munger calls “euvoluntary“. Nonetheless, preventing the poor from participating in “voluntary” transactions that others would categorize as “exploitative” does not solve the poverty problem, and in fact makes it worse than letting them participate in the transaction.

Despite this argument, there is a simpler answer to legalizing organ markets: don’t legalize every possible transaction. Law can preclude people below a certain wealth level from selling their kidneys, enforce waiting periods for sellers, create delayed payments, or set prices via formula instead of the market. Yes, these restrictions will severely reduce the benefits that could accrue to the poor who want to sell their kidneys, but anything is better than the total ban we have now. Regulated organ markets could significantly increase the supply of kidneys available, while reducing demand on black markets.

On the demand side, regulation could leave in place the current waitlist structure and avoid rich people jumping the line entirely. This would require the compensation on the supply side to be fully government funded (would still likely save money given Medicare spending on dialysis). A market price on the demand side would have better systemwide benefits, as there would be incentives to improve the market, find efficiencies, etc. However, the potential gains are so large that even a heavily regulated market is worth creating, and relevant legislation already exists.

The political obstacles are clear. Organ markets could be exploitative, while transactions involving human body parts “diminish human dignity” according to the National Kidney Foundation (does death diminish human dignity?). Despite this opposition, there are significant gains to be had from an organ market that cannot be overlooked.

Additional information:

 

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Picture credit: Martin Falbisoner,  US Capitol at dusk as seen from the eastern side, licensed under CC BY-SA 3.0

Podcast Recommendations June 2018

A while ago I had an idea to try and catalog everything I could about the libertarian ideas on the internet, what organizations exist, which writers are interesting, whose podcasts discuss what, and compile it into a giant document. It was ambitious, but I figured over time I could add to it until it had tons of useful information.

When the 2016 election happened, a bunch of people and organizations I had considered pretty libertarian and conservative free marketers suddenly embraced a populist with no understanding of free trade or individual liberty. Not every conservative I had listed became someone I didn’t want to recommend, and I didn’t particularly want to politicize the list based on Trump, yet I couldn’t leave many recommendations out there. There was way too much to update, and so I abandoned the project. I’ve kept the blogs list in the sidebar, but I figured it was time to revisit some podcast recommendations.

Podcasts have become an excellent demonstration of the wonders of an unfettered free market. There are podcasts on virtually any topic you might be interested in, because they are just audio files, they can be distributed in a variety of methods and platforms in a decentralized way, and many are profitable on advertising alone. This decentralization also means that there aren’t specific places you might go to find out about new podcasts, and I have personally learned about most podcasts through other people. Consequently, I wanted to pass on some of the ones I listen to. If you have some good recommendations, leave a comment here or on reddit, or tweet @postlibertarian. I’m always looking for new podcasts.

EconTalk – A great podcast covering all sorts of economic issues, this is probably my favorite libertarian/economics podcast. Hosted by Russ Roberts, Hoover Institute Fellow, and free market leaning economist, Russ does an excellent job interviewing people he agrees and disagrees with, offering skepticism, even of his own biases, and investigating claims along the way.  It’s part of the Library of Economics and Liberty which also hosts EconLog, linked in the sidebar. It used to be about an hour, although nowadays he’s letting it go a bit longer.

Reason Podcast – This is podcast put out by Reason Magazine, which includes a Monday roundtable of all the senior editors at the magazine, including Katherine Mangu-Ward, Nick Gillespie, Matt Welch, and Peter Suderman, with occasional substitutions. I really enjoy it, and I recommend following them on Twitter as well. During the week, there are additional interviews, usually by Nick Gillespie, which I sometimes listen to. Also on the podcast is the audio for the monthly Soho Forum Debates, which are really interesting always debating topics of interest to libertarians.

The Fifth Column – An excellent libertarian news and analysis podcast with Matt Welch, Editor of Reason magazine, Kmele Foster, an entrepreneur and libertarian talking head, and Michael Moynahan, a libertarian-leaning columnist.  It’s more news focused than EconTalk, and more crude, but I find it is entertaining and provocative.

Security Now – If you are interested in cryptography and information security, this is the weekly podcast that covers security news. It’s on the TWiT (This Week in Tech) Network, hosted by Steve Gibson and Leo Laporte. You can get a lot of the information by just reading through the show notes or the transcripts which are there on the website linked, and I’d recommend that as the podcast is pretty long. I just find there’s so much security news I don’t ever want to miss this podcast.

Rationally Speaking – Hosted by Julia Galef, this interview podcast covers a broad range of topics, but often centers around epistemology, science, and knowledge. Galef is a good interviewer and is able to engage with an eclectic and wide-ranging series of guests. I’m not sure how best to place this podcast besides in the “rationalist/LessWrong community”, but it’s absolutely not necessary to have any other interaction with that community to enjoy the podcast.

The 80000 Hours Podcast – 80000 Hours is an Effective Altruist organization focusing on how people can spend their career best benefiting humanity. The podcast, hosted by Rob Wiblin, explores various effective altruist interest areas, such as artificial intelligence, pandemic risk, animal welfare, or international development. It is worth listening to even if you aren’t interested in a career change, as they tend to go pretty in depth with each guest on exactly how an organization or person can have a large impact on the world.

The Economist Editor’s Picks – Sometimes I’m looking for a more international view of world affairs and The Economist is a lot better than many mainstream news sources. Of course, they publish way too much to read every week, so the editor’s picks podcast selects four top articles to check out. They’re usually pretty short so they’re easy to consume.

This post may end up becoming its own page, as I’ll certainly be able to update a page just for podcast recommendations.