| Unlicensed Economics |
4 August 2003
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Terror Futures Market Killed Off
The Pentagon's Defense Advanced Research Projects Agency (DARPA) saw a project killed by Congressional Democrats last week when they objected to the Futures Markets Applied to Prediction (FutureMAP) idea. The Democrats objected to the morality of it. DARPA itself should have dropped the idea long ago because it just wouldn't work. The foolishness of the idea, and the embarrassment that it brought, is what comes from practicing economics without a license.
The DARPA idea was to create a futures market to allow trading (or betting if one prefers accuracy) on the likelihood of certain terrorist acts. The Defense Department justified the idea by stating on 28 July 2003, "Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information." This is wrong, and it betrays an ignorance of what a market is and what it does.
Markets are not efficient. Every bankruptcy and day of involuntary unemployment are proof that the market has misallocated resources, by definition a waste. The aggregation of information occurs, but whether the information is correct is another matter; historically, trading floors are rumor mills that have little contact with geopolitical reality. Moreover, markets are terribly susceptible to manipulation (e.g. ImClone), not exactly the sort of weak reed on which one would pin national security comfortably.
Unfortunately, there is a religious quality that the word "market" has taken on since Ronald Reagan and Margaret Thatcher implemented the teachings of F.A. Hayek and his followers. An entire generation of economists have grown up thinking that the market solves all problems, that market forces are God's will, that government regulation is the Devil's work.
Markets are effective in allocating resources the way people want them allocated, but people cannot see into the future with any accuracy. It would be foolish to think that markets could. One prefers to base foreign policy on the intelligence gleaned from reliable sources with access to sensitive information and modern decryption devices to the machinations of a hedge fund needing a place to pick up a few points of quarterly yield or the market "wisdom" of a 35 year-old day-trader who lives in his parents' basement.