Risk Markets And Politics

Tuesday, August 16, 2005

Red Ink

Almost exclusively, this blog contains speculation on the future of markets and their impact on politics. I consider the trends I am describing as evolutionary inevitabilities. Of course, in the short run, they will come under heavy resistance. Legislators especially, feeling the role of the nation-state slide further into the background, will probably be uncooperative. They will devise all sorts of creative labels to undermine such markets, as that is what they excel in: talking. Clearly they will use the "gambling" card and its vague immoral undertones. Eventually, someone will declare that LLFMs (Legislation-linked Futures Markets) aim to "hijack" the apparatus of the state and subvert "legitimate" democratic processes. Never mind that the legitimacy of the nation-state itself is largely a product of force. The near-religious designation of its securities as "risk-free" can be seen as an implicit recognition that they are ultimately underwritten by force - from ICBMs to the bayonets of special-ops soldiers. It is difficult to go bankrupt by borrowing in order to maintain the world's most powerful military. Instead, the technology of the printing press will be used to confiscate real purchasing power.

Perhaps this acrimony is premature. Maybe the government will welcome legislation-linked markets as a means to focus on more philosophically interesting political problems, leaving fiscal matters, the (re)-distribution of money, more completely to the private sector. Such a trend would certainly be attractive to many on the economic Right at least. In any case, the general economic sophistication of the world's population will be a more decisive factor in the development of such markets. There is no reason to believe that this sophistication will decrease with time, and thus there is no reason to believe that the scope of peer-to-peer insurance markets (that is, the super-set of legislation-linked markets) will not grow with time. In the long run, they will not be stopped by politicians' framing and name-calling, by their disingenuous negative marketing; these changes will wash over governments regardless of the words that come-out of their mouths. The plurality of governments, the fledgling market of nation-states, will help to ensure this.

In the short run, specific governments may attempt to impose special taxes on LLFM profits or outlaw them entirely. LLFMs could also be impeded if bills are framed in such a way that the probability of their passage is very likely from the start. In that case, the "longshot effect" combined with the demand imbalance of the potential hedgers would make it very difficult for the specific market to materialize. Of course, the yet-ongoing Clintonian epoch of centrism (i.e. political Hotelling) makes this route unlikely. LLFMs will work best where the aggregate perceived probability of bill passage lies near 50%, which is precisely what you tend to get under political Hotelling, especially when two parties are trying to capture the same Center.

Evolution. At some point, a certain percentage of political fiscal decisions will be outsourced to private individuals by way of the latter's peer-to-peer insurance activities (i.e, by their trading in legislation-linked futures). This percentage will tend to be inversely proportional to the one-sidedness (I will resist using the word "extremism") of the residing government. I hope the tone of this post hasn't turned-off any of our readers. Even though it is, in a sense, revolutionary, its content is very reasonable and actually hyper-American.


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