Free Market Politics
“All of us are smarter than any of us.”
That phrase is the informal slogan of Global Business Network (GBN), the organization that sponsored the forum I attended last week. To elaborate on its importance in the matter of forecasting possible futures and set the stage for the next few days of discussions, they invited James Surowiecki, the financial columnist for the New Yorker and author of The Wisdom of Crowds, which explores the phenomenon of collective intelligence, to speak on the event’s opening night. Surowiecki demonstrated his basic thesis by placing a large jar of jelly beans in the foyer of the meeting hall and inviting participants to guess how many beans it contained. As he predicted, the average of the group’s estimate proved to be closer to the actual amount than all but one person’s individual guess. This is apparently the case more often than not, explaining, among other things, how odds at the horse track are almost infallibly predictive of race results, how market index funds nearly always outperform managed mutual funds, and why the Iowa Political Futures Market is often a better indicator of the outcome of Presidential campaigns than systematic polling.
The idea is that averaging and aggregation of results tend to cancel out errors in either direction, distilling wisdom like a crucible removing impurities from base metals. I must admit that the mechanisms of cause-and-effect strike me as a bit on the mystical side. However, Surowiecki has obviously identified a genuine phenomenon with implications that affect decision-making in a number of dimensions.
One important observation from the work of Surowiecki and others is that the intelligence of experts comes at a price – bias – that can negate the value of their expertise. People with a vested interest in a specific outcome or methodology often allow their prejudice to blind them to simple facts. This is apparently precisely the kind of error that the “wisdom of crowds” excels at eliminating. Take a broad enough sample of independent observers, regardless of their expertise and methodological approaches (or lack thereof), and you are more likely to get an accurate forecast.
This relates to the free market theory of classical economics in that markets serve as the ideal forum for the aggregation of collective wisdom. Markets provide financial incentives for accurate forecasting and accurate assessments of complex conditions, and because they are open, they allow for the participation of a broad (though self-selected) cross-section of the population. Though it is by no means clear how the opinions of the ill-informed, gamblers, rumor-mongers and bandwagon-followers contribute to collective wisdom, Surowiecki claims that their involvement is critical to producing the best results.
On one hand, the “wisdom of crowds” is an affirmation of conservative principles of free markets. On the other, it vindicates the classical liberal tendency toward universal participation and democracy. It is an indictment of both big-government technocracy and the kind of closed, faith-based decision-making process of the current Administration, which is apparently indifferent of any intelligence that does not match the ideological and instinctive opinions of the President and his close advisors.
However, extending the idea of collective wisdom to the current politics of the United States is not quite so straightforward. As Adam Smith will tell you, the informational output of markets (e.g., price, as determined by the intersection of supply and demand) depends on two assumptions: self-interested actors and good information. Unless you have buyers and sellers acting in accordance with the profit motive (buy low, sell high) and some degree of accurate information about the pricing behavior of others in the market, the supply-demand dynamic will be distorted.
Knowledge-markets seem to me to be susceptible to the same kinds of distortions of intangible motivation and poor information. For example, Boston fans are some of the most knowledgeable and astute observers of baseball in the United States. Under normal circumstances, the collective wisdom of this crowd would probably provide an extremely accurate forecast of the outcome of games, performance of players, and the winner of series. However, I suspect that this week, you could not get one fan in ten to bet against the Red Sox at any odds, despite the promise of financial reward and the presence of intelligence. Intangible motivation – in this case, extreme sentimental investment in a Red Sox victory – has distorted the otherwise-dependable dynamics of the market, likely creating an outcome that reflects collective bias rather than collective wisdom.
Poor information can also lead to this result. By this, I don’t mean a few ill-informed participants in a larger sample, since this apparently helps rather than hurts the whole crowd-wisdom formula. But imagine an environment characterized by the deliberate and systematic dissemination of disinformation: for example, if the Cardinals were withholding and denying that Albert Pujols, their key player, was playing with a fractured wrist. If no one in the “crowd” has access to this important information – or, worse, is deliberately led to believe the opposite – then it seems to me that the market can’t produce an accurate forecast. As programmers like to say, “garbage in, garbage out.”
In a more visible and less hypothetical example, let’s say a large company systematically misreported its financial results, fooling a large number of investors into thinking it was much more successful than it actually was. Disinformation of this sort, which is self-serving for the company, can have disastrous systemic effects on the market as a whole, which is why financial markets are so strictly regulated and depend on exacting auditing procedures to validate reported claims. Markets need truth like fires need oxygen. Believers in markets understand this better than anyone, and protect their markets by punishing liars and self-dealers through legal, not just economic, means.
In nine days, the US will engage in its quadrennial exercise in collective wisdom, the Presidential election. On one hand, I am reassured by Surowieki’s theory that any outcome from this large a sample will, by definition, be for the best, even if it doesn’t seem that way. On the other hand, there is enormous evidence of both conflict-of-interest and pervasive poverty of information in the particularly-critical knowledge market called the US electorate.
Recent studies have shown that Bush’s supporters simply don’t understand or accurately perceive Bush’s positions on most issues. This is likely the result of systematic propaganda and constricted media channels (e.g., Fox News and talk radio) compounding the existing biases and ignorance of sheltered segments of the electorate. Naturally, it is to be expected, and a certain (though measurably lesser) amount exists on the other side as well. This is plain-obvious from a political perspective, as distortion benefits Bush in any number of ways. However, by information-market theory, it also provides another strong reason for principled conservatives to deny Bush their support.
Basically, if you believe in the wisdom of markets – not to mention to validity of democracy – you need to embrace the idea of “information ecology” as a guiding principle. Otherwise, the output of markets is biased and useless, an aggregation of bias and ignorance rather than the best judgment of a large and diverse group. Bush and his cohorts clearly do not trust the market to render a favorable judgment based on self-interest and correct information, so their campaign has been all about “hot button issues” (designed to inflame the emotions and distort native wisdom, much as home-team boosterism biases the views of Red Sox fans) and misleading propaganda deliberately designed to create a false impression of where Bush actually stands on the issues. The results of polling indicate these tactics have succeeded with a large number of Bush supporters.
While this is not illegitimate in the context of contemporary politics, it significantly compromises the principle of collective wisdom embodied in free markets. Obviously, as has been apparent for the past year, for many so-called conservatives, victory is more important than principle, even one as central to conservative ideology as the Market.
11:56:19 AM 
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