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– Ralph Merkle

Futarchy, proposed by Robin Hanson, is a proposal to govern by prediction markets. The proposal seems like an excellent approach for improving upon existing democratic forms of governance.

The general concept:

  1. To aggregate knowledge from across a community of people, using a method that’s known to be effective: prediction markets.
  2. Use that aggregation method to directly select
    the actions taken by government.

The goals (the “national welfare” to use Hanson’s terminology) are still chosen by voting in futarchy. We discuss later how to eliminate voting entirely.

Governments take action by selecting among bills that are presented to a legislative body for passage.

In Futarchy, the bills to be passed are selected by the prediction market, rather than by votes cast by the legislature or the population as a whole. Technically speaking, prediction markets predict rather than select. The first question we have to answer is “what are the prediction markets predicting?” In futarchy, as proposed by Hanson, the prediction markets predict the “national welfare”, as defined by the legislature:

While national welfare could be anything the legislatures chooses, it helps to see that reasonable options exist to choose from. For example, a reasonable initial definition of national welfare could augment current measures of national consumption or product (i.e., GDP) with simple measures of health, leisure, happiness, and the environment.

We choose to be more specific about the definition of what we shall call the “collective welfare”, for the very simple reason that “voting on values” retains the dubious voting mechanism as a core component of futarchy.

If this is to be a democracy, and if all citizens are to be equal, then all citizens must have an equal say in determining the collective welfare. It is difficult to see how we could choose otherwise. Shall some citizens receive a greater weight than others? That hardly seems like a democracy. Shall each citizen’s welfare be evaluated in a manner that the citizen cannot control? Who, or what, can claim greater right than the citizen to evaluate their own welfare?

We define the procedure for measuring democratic collective welfare below, and leave the rather philosophical question of what this democratic collective welfare “really means” for others. We shall simply observe that it clearly treats all citizens equally, and clearly gives each citizen the ability to influence the democratic collective welfare either positively or negatively.

If we are to have a collective welfare, that is, if we are to select a single number to assess the state of our entire society, and if we are to have a democracy in which each citizen’s individual welfare has equal weight with that of all other citizens, and if we agree that each citizen should have the right to determine their own contribution to that collective welfare, that leaves us with little room to vary how we compute the democratic collective welfare.