You are currently browsing the monthly archive for January 2008.

In a comment on my article on Professional Voting, Robin Hanson questions how well the Election Council in a Professional Voting system would work

The obvious question is how well can ordinary voters monitor whether the Electoral Council members are choosing neutral fair test questions.

I have thought about how low levels of monitoring by ordinary voters (due to rational ignorance) would affect the effectiveness of the Electoral Council, and I have concluded that low monitoring levels would not affect Electoral Council effectiveness very much at all. To a large extent, voters do not need to monitor the Electoral Council members in order to give them incentives to do their job well because those incentives are inherent to the job.

Essentially, the only non-monetary rewards more readily available to Electoral Council members than to other people would be small level fame and the ability to pursue sociotropic goals (ideological or otherwise) for example, getting  the minimum wage raised. Electoral Council members would have little opportunity to be corrupt or wield direct power, because the Electoral Council would not control very much public money nor control powerful government functions.  Because Electoral Council positions have a comparative compensation advantage in providing the opportunity to persue sociotropic goals and because sociotropic motivation is quite strong for some people, sociotropic motivation would be especially strong among Electoral Council members because they would self select for being highly sociotropically motivated (I discuss this logic here). Therefore, we should expect Electoral Council members to act mostly to maximize the monetary rewards of being reelected as well as maximize how much they advance some set of sociotropic goals.

The only way to pursue sociotropic goals as an Electoral Council member, however, would be to influence the arguments and facts that voters learn by influencing the questions that appear on the political knowledge test that the Electoral Council would administer. For a Council member to advance their set of sociotropic goals as much as possible, they must ensure that the questions on the test cover the most convincing arguments and facts supporting their sociotropic goals, and to ensure that those questions measure how much individual knows about such arguments as accurately as possible. Luckly, this is exactly the job of the Electoral Council.

Working to include biased questions on the test would not further the influence of individual Electoral Council members because biased questions are very easy to work around. For example, including the question “Are you a Democrat?”, on the political knowledge test would not help Democrats, because non-Democrats can easily claim to be Democrats. Furthermore, even if such biased questions did help the factions which included them, other factions would strongly resist such questions because they would be percieved as unfair. Attempts to include questions biased in favor of specific demographics would be almost totally muted by the weighting of the final voting result by the demographic survey.

One potential problem would occur if the primary cause of disagreement between electoral council members is differences in values and not about what arguments and facts are most true. In this case, Electoral Council members, may devote significant energy towards preventing questions focusing on strong arguments supporting policies which they oppose from appearing on political knowledge test, instead of towards including questions focusing on strong arguments supporting policies which they support. This would obviously be a bad outcome.

This is an interesting potential problem because it means that we should actually prefer Electoral Council members to be be relatively biased towards believing arguments and facts that support what they support and against believing arguments and facts which do not support what they support. However, monitoring of Electoral Council members by ordinary voters (however little of it there is) and Electoral Council members valuation of honesty in general should reduce Electoral Council member’s efforts to keep legitimate arguments that opposing factions support from being covered by the political knowledge test. Additionally, this would not be a potential problem for Professional Voting as a corporate governance institution, because Electoral Council members would value profit almost exclusively and homogeneously, so disagreements would only exist about which arguments are persuasive.

Intrade is apparently starting to include contracts on the future of aggregate economic measures (e.g. GDP growth rate or unemployment rate changes) conditional on political outcomes (e.g. Hillary gets elected) at the suggestion of a research initiative of the Westminster Business School; such conditional prediction market contracts are central to Futarchy. Now, perhaps, we will be able to see if prediction markets can make good predictions about these topics, though they may be too thin to reveal much information.

Looking at the contract prices and volumes on Intrade (Markets->Politics->Impact of Next Pres.) right now, the markets look pretty thin, but perhaps eventually they will have significant impacts on elections.

A month or two ago, I was talking to Chris, and he brought up the idea of a government based on prediction markets. At the time, I dismissed the idea as unworkable, but now I have come across Robin Hanson’s more in depth development of the idea, which he calls ‘Futarchy,’ so I have given the idea some more thought. Hanson summarizes his idea,

In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be:

When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Futarchy is intended to be ideologically neutral; it could result in anything from an extreme socialism to an extreme minarchy, depending on what voters say they want, and on what speculators think would get it for them.

Subsidized betting markets would trade idea futures to determine what the results of certain policies will be. I envision the political body used to define the overall measure of welfare as a lot like the Electoral Council I have discussed for Professional Voting, a proportionally elected body which relies on logrolling to make create efficient outcomes. Proportional elections are important in both Futarchy and Professional Voting because the values and perspective of the median voter are unlikely to be the same values and perspective generated by logrolling between parties representing all voters.

I have not finished reading and digesting Hanson’s in-depth paper on Futarchy, but I wanted to offer my initial thoughts. While, I should first say that I am probably biased against this idea because, the way Hanson proposes it, it would be a substitute for my own idea for making democracy produce better outcomes, Professional Voting.

Here are my initial concerns with Futarchy:

  1. Some goals are procedural, and therefore not measurable, i.e. the Rule of Law.
  2. I suspect that it would be very difficult to create an overall measure of welfare that includes basically everything that people care about, no doubt there could be good numerical measures of a lot of what people care about but not everything or close to everything that people care about.
  3. Even though my own values are utilitarian, I strongly doubt that most peoples values are; I suspect that most people’s values are based on ‘fairness’ and other process based concepts, and policies which try to maximize an overall measure of welfare (which would presumably be a state function) would not be very good at furthering those values.

Ideas futures seem most promising to me as an aid to Professional Voting; good policy-futures markets would provide a lot of valuable information to professional voters and elected officials responsible to them about which policies are most likely to further specific goals. Such information could improve the decision making process tremendously, even if the decision of which policies to implement and how were left up to the discretion of the professionally elected legislative body. But perhaps this is just my bias for favoring my own idea.

Still, I would like to see both Futarchy and Professional Voting tried in experimental and small scale governance settings. I think Futarchy, in particular, would work well for making corporate governance decisions because there is essentially one dimension (stock price) on which to evaluate the quality of decisions. I think Futarchy could largely solve principal-agent problems corporate governance experience due to rationally ignorant stock holders. Internal corporate ideas futures could ask, for example, whether replacing the current CEO would boost the stock price, which would give the CEO a very strong incentive to be a good agent for stock holders.

Such experiments would let us evaluate whether and under what circumstances Professional Voting and Futarchy generate better outcomes that more traditional democracy.

David Park at The Monkey Cage points to an article by Maria Petrova on a model of democracy where the rich bribe the media into misinforming The Poor about the costs and benefits of redistribution so that The Poor favor less redistribution than they would otherwise (link to paper). Petrova’s theory is seriously flawed because she inappropriately uses self-interest as a group motivation. Petrova writes (italics mine):

Unequal societies may have a low level of redistribution because the median voter may misperceive her self-interest as a result of an information campaign by the rich. Higher inequality in the economy implies more incentive for the rich to manipulate the preferences of voters and to use the power of the media to advocate a lower level of taxation. The influence of the rich on the media is one reason why income inequality leads to political inequality, and why policy outcomes are more responsive to the preferences of the rich than to those of the poor.

Petrova abuses the word ‘incentive’ here. The word ‘incentive’ is generally used to refer to individual incentives, or at least incentives for social units that act largely as single entities such as individual corporations, and to use it to mean something else at best poor word choice. ‘The Rich’ is a class of people, not an individual person, and to assume that The Rich act as a cohesive unit, without at least attempting to provide an explanation for why this would be so or providing solid evidence that it is so, is appallingly bad social science; the theory of groups demolishes any presumption of such solidarity, especially when, as Petrova explicitly assumes, group action requires that people bear real costs. This assumption on page 7, for example, cries out for an explanation

The rich can offer a bribe to the newspaper [the media in her model]. I assume that the members of the high-income group divide expenditures on this bribe equally. (p. 7)

Petrova never discusses how The Rich are able to coordinate their bribe or how they are able to enforce cost sharing, and it seems unlikely that they would be able to do so.
The only place where Petrova seems aware of fact that The Rich is a set of individuals with their own calculus is in her conclusion when she notes ways in which her model might be extended:

Then, not all the rich can be organized as a group attempting to influence the media; some of them might stand aside.

But this seems more like splitting The Rich into two cohesive units than recognizing that The Rich have individual incentives.

I do not mean to say that effects which encourage collective action cannot not exist; they could; perhaps institutional arrangements or human psychology encourage the Rich to act in their collective self-interest (I would actually be extremely interested in explanations focusing on psychology, especially those grounded in empirics), but such explanations are essential to her theory and would clearly be controversial, so neglecting to discuss them is a serious oversight.

I will probably be posting about the overuse of ‘self interest’ in positive theories about politics more frequently in the future.

Lately, I have been more aggressive about managing my finances. One tool I think would be useful for doing so is to get historical data from my bank of my account balances, deposits, withdrawals and other similar information in a format easy to paste into Excel. That way I could graph trends in my spending, income and total wealth and calculate other aggregate variables.

Such data could help me make better decisions in a number of ways. For example, if I always had a lot of money in my checking account (which pays lower interest than my savings account), graphing my average checking account balance would be useful because I could save money by making sure to keep more money in my savings account instead of my checking account. It would also be quite useful to be able to easily put fairly precise dollar amounts on my total income and total spending, and the ability to monitor trends in my spending on fuel could help me make decisions about my future car decisions.

I was somewhat surprise and disappointed to learn  that my bank does not provide a way to get such data. I doubt creating the feature would be very difficult, and I doubt that I would be the only person who would find such data useful. I am not sure why they don’t offer it.

Lee Siegleman at The Monkey Cage notes some research which indicates that the best predictors of which graduate economics students finish their dissertation are a student’s level of math preparation and a student’s research motivation (abstract link). I have stated that I am considering perusing an economics graduate degree, so I will self-servingly note that I have both a high level of math under my belt (from engineering) and strong motivation to do research.

Michael Munger gives an intro to the theory of the firm, which answers the question “If markets are so great, why are there firms?”

This is a topic I’ve been interested in exploring for a whole, but I am not sure what the best resource is. The Nature of the Firm seems like a relatively good resource, but it appears to be largely a collection of essays by Coase and others. I am suspicious of primary sources as resources for learning. It seems doubtful that even after quite a long time and significant  theoretical developments the original essays would be the best at explaining the concepts. I would prefer a book which has more synthesis and empirical evaluation of the different theories of the firm.

The Coyote Blog via CopyOwner points to this CRM Buyer article about “gray market piracy.” “Gray market piracy” is where companies in poor places, where copyright using products are sold cheaply, export the copyright using products back into rich countries to profit from the price differential. Both Coyote and CopyOwner bemoan the fact that the article calls these exporters “pirates.” CopyOwner is right to point out that gray market exporters are not legally pirates, the article says as much, but that does not mean it would be a bad idea to make reimportation of copyright using products illegal or restricted. The net effect of such a law would be to give copyright holders an improved ability to discriminate geographically, and I want to present what I think is a strong argument for why better geographic price discrimination would be good.

I should mention that I do not blindly advocate stronger copyrights; Chris and I both agree that current copyright term lengths seem far too long. Chris has noted some work by Rufus Pollock which calculated the socially optimum copyright term length to be 14 years, which is far shorter that the current term length of 70 years after the death of the author. Copyrights, and intellectual property in general, should be a means to induce the production of socially valuable ideas and not an end in themselves. But production of socially valuable ideas is not enough, in order to improve human welfare, they must be used a lot, and that is why we should consider how improved geographic price discrimination by copyright holders may harm or improve general welfare.

Improved price discrimination could be welfare improving by increasing the quantity of copyright using products consumed by the public. When monopolies, like copyright holders, cannot price discriminate perfectly, they price their goods socially suboptimally, because maximizing their profits involves high prices and limited supply. Better price discrimination allows monopolistic firms to make more money by selling to more people.

Some copyright holders do currently have some ability to discriminate geographically, charging high prices in rich regions and lower prices in poorer regions. For example, DVD region codes make DVDs work in some countries (I am not clear on how the use of region codes is enforced for DVD players, perhaps the patent holder of some critical DVD technology requires the use of region codes as a precondition for using DVD reading technology in DVD players). This allows DVD manufacturers to sell their products for different prices in different regions. In the case of DVDs, this price ability might disappear, because region codes have come under legal attack.

Improved geographic price discrimination abilities for copyright holders would allow them to sell copyright using products to people in poorer countries at lower prices without damaging their profit from selling in rich countries, creating an incentive for copyright holders to sell more copyright using products in poor countries. Reduced geographic price discrimination abilities for copyright holders, due to technological change or legal change (in the case of region codes), would mean that selling copyright using products to people in poorer countries at lower prices than in rich countries would reduce their net profit because of price arbitrage, creating an incentive for copyright holders to sell fewer copyright using products in poor countries. Copyright using products are generally free of negative externalities, so virtually any increase in the quantity consumed should be regarded as a welfare improvement and reductions in the quantity consumed should be regarded as welfare reductions, so allowing greater price discrimination should be welfare improving since more copyright using products would be consumed.

Although my libertarian sensibilities biases me against it, I think there is a strong argument to be made for restricting the reimportation of copyright using products, but more study of the welfare effects would definitely be a good idea.

Illya Somin argues that the rational ignorance of voters gives relatives of former successful politicians an advantage stemming from better name recognition.

Because voters know very little about the details of candidates’ ideology and issue positions, they use a candidate’s family affiliation with a popular political leader as an information shortcut. Voters could instead analyze each candidates’ qualifications and ideology in detail (though, as Bhutto noted, that may be impossible for those who are illiterate or poorly educated). However, rational ignorance ensures that most of them have neither the time nor the incentive to do so. Bhutto herself, of course, rose to power in Pakistan in large part because voters associated her with her father, a popular politician who had been executed by a military dictator in 1979.

He also argues that this advantage also means they will be less competent on average then other politicians, presumably because there is a smaller population of politicians with familial name recognition. This also suggests that in elections where the electorate is more uninformed, familial name recognition should be more of an advantage. I would be interested to see a study try to support this empirically.

Update: Discussion in the comments.