This system suffers from the same political economy problems that democracies have. For example, if I am a corn producer in the USA, I have a strong incentive to spend lots of money lobbying and contributing to political campaigns to ensure a strong protectionist policy for sugar. It ensures that my corn is purchased and used for corn syrup, and that Brazilian sugar cane doesn't destroy my market.
The good from this policy is concentrated on the corn producers, and the harm is spread diffusely across all people who consume sweets. If I am an average consumer of sweets, I see little benefit fighting this policy today, since it will only change the price of a soda by a few cents.
Under a "Futarchy", the corn lobby can spend lots of money to "predict" that a sugar tariff will make the country better. They might even believe it, but I will have little incentive to vote with my wallet against such a policy, since the harm will be diffuse and extremely difficult to conclusively pick out from the noise using econometric techniques. Result: a strong tariff, which almost all economists agree is a bad policy. [1]
Just because Futarchy is vulnerable to some of the same problems as democracy as practiced in the USA doesn't mean it is a bad system, but I fail to see how it is functionally different than a plutocracy. [2]
The problem with prediction markets is that they are only accurate in so much as one's incentive to "waste" money producing an incorrect prediction is smaller than the amount of money to be made by having that incorrect prediction.
Hanging all law off of the results of prediction markets creates HUGE incentives for me to game the prediction markets, then extract rents elsewhere in the economy to more than recoup my investment.
But you're ignoring speculators. In a system like futarchy it's easy to imagine organizations whose sole purpose is to make money on information asymmetry. Wouldn't Goldman Sachs hop in to massively outbid the corn industry and make a lot of money in the process?
That's one of the most frustrating elements of the paper: the actual speculating mechanism is too imprecisely defined to assess whether speculators actually have any interest in opposing policies which are marginally negative overall but massively enrich one group. From the rather vague description on page 22, a speculator who thought Policy X would reduce the MagicIndex effectively "shorts" the policy by placing a "conditional" bet that comes into play only if the policy is passed, in which the speculator earns money if the MagicIndex then falls.
Frustratingly, it doesn't specify what happens to outstanding "conditional" bets if the policy isn't passed, but a reasonable guess is that it's returned less transaction costs, which means that every time Goldman Sachs does the public the service of vetoing a bad policy it loses money. Even if speculators' transaction costs are zero it's irrational for them to bet against a market actor that will take a profit (from selling corn) even if they pay more than the market price to for their long position. Assuming the corn industry is really committed to supporting tariffs and that the tariffs won't harm speculators' ability to earn from other markets, the Nash equilibrium strategy for speculators is not to bet.
You are talking about the issue of manipulating prices via trades. We have lots of evidence that this isn't much of a problem. Read my papers for details.
And even if that was the case - define smart. Smart in the interest of Goldman Sachs is to make more money. Smart in the interest of humanity, society or a community can be (and often is) something entirely different. Who are we creating policy for?
Eventually it does. Manipulating markets == handing your money to someone else, so the rich manipulators will exponentially [1] lose money as the smart speculators take it.
In this case, it's "smart in the interests of predicting which policies achieve the democratically selected objective function". For example, smart in predicting whether Obamacare will bend the cost curve (assuming that's the goal of obamacare).
[1] Assume 50/50 bets. The speculator bets $1, and takes $1 from the rich man. Next bet, he bets $2, takes $2 from the rich. Next bet he bets $4. The rate of growth doesn't have to be ln(2), but it is exponential.
Under a "Futarchy", the corn lobby can spend lots of money to "predict" that a sugar tariff will make the country better.
To do that they would have to bet a lot of money that the tariff will make the country better (by an objective metric which is decided upon by the voters), and if that turned out wrong, they would lose a lot of money.
The good from this policy is concentrated on the corn producers, and the harm is spread diffusely across all people who consume sweets. If I am an average consumer of sweets, I see little benefit fighting this policy today, since it will only change the price of a soda by a few cents.
Under a "Futarchy", the corn lobby can spend lots of money to "predict" that a sugar tariff will make the country better. They might even believe it, but I will have little incentive to vote with my wallet against such a policy, since the harm will be diffuse and extremely difficult to conclusively pick out from the noise using econometric techniques. Result: a strong tariff, which almost all economists agree is a bad policy. [1]
Just because Futarchy is vulnerable to some of the same problems as democracy as practiced in the USA doesn't mean it is a bad system, but I fail to see how it is functionally different than a plutocracy. [2]
The problem with prediction markets is that they are only accurate in so much as one's incentive to "waste" money producing an incorrect prediction is smaller than the amount of money to be made by having that incorrect prediction.
Hanging all law off of the results of prediction markets creates HUGE incentives for me to game the prediction markets, then extract rents elsewhere in the economy to more than recoup my investment.
[1] https://en.wikipedia.org/wiki/Tariff
[2] https://en.wikipedia.org/wiki/Plutocracy
(Edited for grammar, citations).