A pet peeve

Also, a pet peeve of mine: the media always says that 'the markets demand this or that'. Markets don't demand anything. Markets only predict.

This use of language where markets are said to 'demand' things causes various problems. First, it implies that maybe the 'demands' of 'the markets' could be taken into account when making decisions. What the market 'wants' is not a good way to determine which political decision should be made (because, again, markets don't 'want' anything. They only predict). Now, perhaps some market-like mechanism for decision-making could be imagined (see below), but present-day financial markets are not it.

A second problem is that people get annoyed at 'the markets' for being so 'demanding'. Then they try to regulate the markets to make them less 'demanding'. You cannot make the markets less demanding, because they already aren't demanding anything at all. The most you can do is make them less good at predicting things, which is silly because that's what they're good for.

Decision-making markets

If markets are good at predicting, then we can use them for decision-making by asking them to predict the answer to the question "Which alternative is best?". The key is that we need an objective way to measure 'best' after the fact.

You'd also have so guard against moral hazard, not only in the objective measurement, but in terms of making sure that no interested party can sway the decision by accumulating market power.

Decision-making markets for politics

A friend of mine (friend, can i put your name here?) once suggested that one could have a number of countries trying out different sets of policies, with some sort of objective criterion, as a way of finding the best policies.

If you had an objective criterion of after-the-fact success, and if you could overcome the moral hazard above, you could also use decision-making markets to select policies.

One objective criterion could be a survey of happiness. You'd have to worry about people lying on the survey in the direction to increase the value of their investments, however. Bayesian truth serum, anyone?

Preventing interested parties from achieving market power might be very hard in this case.

Democratic decision-making markets

Perhaps instead of allowing the 'capital' of each participant to be their actual financial capital, one could set it at a fixed proportion of their reported wealth. One could allow capital to be arbitrarily invested in fund managers (e.g. transitive proxy voting), but regulated so as to try to uncover conspiracies to obtain market power, and also with size caps on each fund.

The government would force each citizen via taxes to maintain a keep a set proportion of their wealth in the decision-making market fund. When they made proportionally more money in the fund than outside of it, they would get a payout. When they lost money in the fund, they would get taxed to replenish it.

The government could reweight the capital when actually making the decision so that each person has an equal influence (or perhaps, starts with an equal influence at age 18, but after that their influence grows if they were right in the past, that is, if they made money). So, it's not the case that the rich have to have more votes in this system. The reason for keeping the capital proportional to wealth is just to incentivize each individual to care about making the right prediction.

The tricky part is, how to measure the value of the alternatives that were not chosen? The only way i can see it is the way my friend suggested, where the government is split into different parts which take different decisions. This is, of course, tricky.

Also, if the market predicts that this outcome is better than that, then the proportion of the total would tries the better outcomes should at least be proportional to these predictions, and perhaps overweighted in favor of the better outcomes.