On the poor man’s futachy

The main idea: conditional consols are a cheap and easy way to implement futarchy today.

0. Posts on this blog are ranked in decreasing order of likeability to myself. This entry was originally posted on 02.12.2022, and the current version may have been updated several times from its original form.

1.1 Robin Hanson’s futarchy proposes we give prediction markets some role in governing nations or other organisations, in the former case by having people vote on beliefs but bet on results.

1.2 A grave issue with this otherwise interesting proposal is the lack of a quantifiable goal (the “belief” part) that can be fed to the markets, this being AFAIK one of the vectors by which Moldbug attacked the idea.

1.3 But fear not, for whilst true futarchy may be a highly speculative proposal today, there’s a much simpler iteration available to us right now, and which delivers much of the promise but requires less of the suspension of disbelief. A poor man’s version of futarchy, if you will. I even dare say that Moldbug himself would be intrigued.

1.4 Taking Moldi’s word that the true operational goal of a regime is the survival of the regime itself, we can easily hone in on the quantifiable goal that we seek. I realise this is not quite the complex utility function that Hanson may be after, but it works, its true, and its here, and there even may be some correlation between stable regimes and a population’s wellbeing.

1.5 No need to set up a prediction market on whether the “regime” will survive by 2050, for we have quite the tool at hand to allow the market to opine on the question, my beloved consols (bonds that pay back interest forever and never mature). All else being equal, a regime in whose longevity the market trusts will be able to sell these at quite the premium.

1.6 Again, I know of lots of other factors that chime in to determine the rate at which a consol trades for, key among which time preferences and money creation, but in this poor man’s version we are happy with correlations.

1.7 For the final touch that will make consols a true futarchic setup, issue conditional consols that kick of only if an event happens, with the sum being returned if it doesn’t. This consol will pay 5 bucks a week forever if Blue forms government, and this other consol will do the same if Red forms government. Buy now, they go quickly!

1.71 The actual design would be a pair of consols issued in strictly equal number at any time prior to an event which start paying interest right away. Once the event happens, the consol tied to the branch that didn't eventuate is canceled with principal returned, whilst the consol tied to the branch that did happen gives to the holders a one-off option to either continue on or return all funds, which ensures that the latter is strictly superior to the former even in the event that the holders prefer the principal over the payments by the time the event is settled (ex. due to time preference shifts since then). As long as the events covered are such as to sum up to a 100% probability and the quantities issued are strictly the same for all branches, the market wouldn't overprice the instruments.

1.711 Now, allowing people to just get their money back when the event happens is the greatest deviation of this scheme from the standard decision market design, and could be argued to make market manipulation easier that it need be. Not by much though as, even requiring the winning consol to continue would still allow the holder to sell it as a normal consol in the market, to pretty much the same effect. 

1.72 A point I'm not satisfied with is whether these would function best if issued in the currency the country can print or a foreign currency it cannot (ex. Swiss Francs). The former is more credible but entangles the signal being sent by the market between ruin and inflation. 

1.8 Anyway, once issued, watch the price and voila, a fully functional poor man’s futarchy using cutting edge 19^th century tech. Once the event happens these become normal consols (if the holders so wish), whose fluctuations still carry some information, albeit this information being much harder to disentangle from time preference shifts and other factors. Obviously, the greatest information content is transferred just prior to the event triggering.

1.9 Note how the setup elegantly deals with the challenge of determining what a “regime” is or when it ends: if at some point your bonds stop being honoured, you have a new regime.  

1.10 Now, for a real-world application. Imagine you are a small nation fighting for you survival against a much larger foe, and you issue these and rely on the price signal to determine some of your strategic decisions. This consol pays 5 bucks a week forever if I attack in spring, this other consol pays the same if I attack in winter. If you are able to sell these covertly so that the enemy cannot see the very same signal you are, all the better. (Maybe the enemy would try to short-circuit this by promising he’d continue to pay these even in victory, but how credible is a commitment to pay your vanquished foe’s debts forever and ever?)

1.11 Same with firms of course, acquisition / no acquisition etc. A peculiarity of firms though is that conditional shares (well, rights to shares to be precise) are now a competing option with conditional consols if issued along the same lines ("losing" shares are repurchased, "winning" shares give a one-time option to be repurchased). Along the same lines of 1.72, I don't know which is better, a consol or a share. I suspect the former since I have elsewhere gone to some lengths to satisfy my suspicion of share prices. Of course, conditional shares are standard futarchy.

1.12 All in all, the above is maybe not quite the government by steam Carlyle and Moldbug lambast, but worth considering nevertheless.