Intrade is a betting pool, which uses a market model to “predict” political and other sorts of events. However, it misses many essential features of market which make it less reliable as a device for optimization than one would imagine. Intrade came up in a discussion this morning and the reflections below are the result.

Marxism caricatures the market with a vision of workers slaving away “making stuff” and the “owners” fat catting it up reaping the profits which they fail to share with the blue collar set. However, a casual inspection of actual business in the real world demonstrates a number of important errors in this model (and as well in the Intrade model of market).

The free market works not just because of flexible financing methods like the stock markets, but because there are optimizations in a lot of places. The “workers” at the blue collar level work. But the rest of the business/management is not just “an owner”  collecting due proceeds. There are engineers, maintenance, and developers working on developing new ways of either getting their product out the door with less cost or higher productivity and developing new products. There are sales and advertising people working to find new ways to bring what is made to market. 3M for example, when their engineering people came up with a glue that “failed” … because it didn’t dry some bright people realized that a non-drying glue could be useful … and now post-its are everywhere. A market and demand for a new product was “created” by engineering errors and smart product development people. These people would likely be placed as  “owners” not “workers” in the Marxian caricature of industry. Additionally, management or “owners” do work hard as well. A lot of market development and sales and corporate strategic alliances are developed which cut the deals necessary to get the raw materials and financing necessary to keep a business afloat. Just as working on an assembly line is “work”, so is management. It just requires a different skill set. The point is that a great deal of free market efficiency comes from a lot of people hunting for better ways of doing very many things at the same time. It doesn’t come from market structure, i.e., stock market and particular banking methods. It comes from people being motivated by their best interests (making money and staying in business) to think and work hard to do things the best way. A lot of local optimizations making for fast global optimization.

The Intrade problem is that the majority of market efficiency and innovation is tied up in mangement (those alliances and financing and other engineering/product development) noted above … but this facet is lacking in the Intrade mode. “Placing bets” in a market framework might be a good polling mechanism … but it is basically parimutual betting which doesn’t insure optimal results.

Related posts:

  1. Free Market Update
  2. Thinking About Work
  3. An Uncomprehending Look at the Far Left
  4. Lessons in "The Market"
  5. The New Deal Didn’t Work (And Won’t Work Again)

Filed under: Government • Mark O.

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