The Cost of Ignorance

Wednesday, February 23, 2011

An interesting John Stossel column on government interference in prediction markets has me pondering the vast damage done by other government programs that keep us ignorant (or prevent us from applying our knowledge) in various ways.

The Hollywood Stock Exchange allows people to bet on which movies, actors, directors, etc. will take home Academy Awards. You can also bet on how much money a movie might make. It's called a prediction market ... except unlike other prediction markets, bettors can't use real money.

What fun is that? It's not only less fun, it's also makes the prediction market less accurate. People are more careful when they have real money on the line, and the chance of losing money weeds out the frivolous guessers. Prediction markets are valuable for predicting all kinds of things because the prospect of making money attracts people with knowledge, judgment and a good sense of the future. More information is better than less. The people most confident in their information bet the most. That's why speculation is a sound market institution. [bold added]
Stossel goes on to note that Intrade, which is based in Ireland and allows bets, predicts a Best Picture win for The King's Speech.

The stated motivation behind laws against the non-crimes of gambling and "insider trading" is concern for people who might lose large sums of money as a consequence of such transactions. It is worth considering what gets forgotten or evaded whenever the spirit of such goody-two-shoes meddling overtakes those who say they are looking out for "the little guy."

For one thing, such laws represent yet another way we are prevented from deciding how to use our own money. That is, they violate our property rights. So long as such laws remain on the books, they are also precedents for the government to do even more of the same.

Furthermore, in focusing on the plight of those who lose money in this way, supporters gloss over its cause: that the "victims" permitted themselves, through carelessness or ignorance, to lose large sums of money. In doing so, they also distract attention from the actual victims of their proposals, those who can make money through their expertise, either by backing an investment they have good reason to consider sound, or even by simply offering their expertise (for a price) in a prediction market. Sound investments are discouraged or stopped altogether, and everyone, from the would-be investor to anyone he would have traded with, loses.

As many others have noted before, information is what drives an economy. The above is just one particularly blatant example of how government interference in the economy impedes the flow of information, preventing people from applying their knowledge to the problem-solving they need to do in order to live. The economist George Reisman once noted how sweeping in scope this problem actually is:
The overwhelming majority of people have not realized that all the thinking and planning about their economic activities that they perform in their capacity as individuals actually is economic planning. By the same token, the term "planning" has been reserved for the feeble efforts of a comparative handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions, and to call that planning. (as quoted in Andrew Bernstein's Capitalist Manifesto, p. 345) [bold added]
Again, the restriction on information flow is excused by professed concern for those who look, comparatively, like "losers" in a market economy, at the expense of the potential winners -- which really means that we all pay.

-- CAV

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