Peter Levin’s Rethinking Markets

January 23, 2007

information futures markets

Filed under: Daily — Peter @ 1:10 pm

I’m possibly getting involved with someone doing some research on information markets. This is just a sounding board.

The main piece against which I should start is the Wisdom of Crowds. Do we even know the criteria to judge how to make these markets? Does it matter that they work experimentally even though there is no theory of why or how they work behind them - or vice versa, if there is a demonstrable benefit to information markets, who cares what the theory says. If they tap into the energy of the universe, does it really matter so long as they do a good job?

Anyhow, to task. There are three main problems that aggregation is meant to solve: (1) cognitive problems, where there is a solution, absolute or optimal; (2) coordination problems, getting disparate actors on the same page; and (3) cooperation problems, getting people with opposed interests to act in concert. Surowiecki’s independent variables are independence, diversity, and decentralization.

Beyond that, the theoretical justification for prices as more valuable sources of information than experts, individuals, or planning boards, is Hayak, and the “Use of Knowledge in Society” more specifically. Hayak is writing against the impulse towards central planning of economies, as opposed to using the price mechanism of markets. He argues that bits of knowledge “of the particular circumstances of time and place” are spread across a wide group of people, spatially separated, without much interaction (521). Those with good specific knowledge act in the marketplace when there is, in his example, a shortage of tin or some other commodity. When the tin prices go up, say because of a shortage or a new use for it in some industrial process, it does not matter than only a few people know about it. The knowledge is spread across the whole economic system via the price of tin. As he notes, “in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people” (526).

What is Hayak saying and not saying here. He hedges a bit about scientific knowledge, at one point sidestepping the question of whether scientific knowledge can be ‘priced.’ At the same time he suggests that entrusting authority to a body of experts shifts the problem of knowledge to the choice of experts but does not make that knowledge more efficient. So he seems for the most part to be arguing pretty close to his case, for a market mechanism against planned economies.

The question I have, then, is whether other kinds of information markets, as opposed to price mechanisms in commodity markets, is as much a ‘metaphor’ as an actual marketplace. For my money, this is the central theoretical problem to be answered.

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