Friday, January 15, 2016

What if the Titanic had been a market?

Reply to thread: Semi-Socialist Corporations

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The Titanic was steered in the really wrong direction.  What percentage of the people aboard the Titanic were responsible for steering it?  I'm pretty sure that it was a really small percentage.  Certainly small enough that we can easily think of the Titanic as a dictatorship.  The problem with dictatorships, benevolent or otherwise, is that they completely ignore Linus's Law... "given enough eyeballs, all bugs are shallow".

But what if the Titanic had been a democracy?  Then everybody would have been able to vote on the ship's direction.  Everybody would have had an equal say in deciding whether or not to avoid the iceberg.

There's a problem with giving everybody an equal say though.  Imagine if you were on the Titanic and you were extremely certain that the Titanic would sink if it hit an iceberg.  Despite being extremely certain... your influence on the ship's direction would have been exactly the same as the influence of somebody who had absolutely no opinion on the matter.  Even if you were an expert on the matter of ships vs icebergs... even if you had written countless books on the topic... your say on the ship's direction would have been equal to the say of somebody who was entirely ignorant on the subject.  Even if you were willing to bet your life that you were right... your influence on the ship's direction would have been equal to the influence of somebody who wouldn't even have been willing to bet a penny that they were right.  This is the problem with the idea of "one person, one vote".

So if not dictatorships... or democracies... then... what?  Then markets.  Markets give people the opportunity to put their money where their information is.

Here's how my favorite living economist, Alex Tabarrok, put it...

Overall, I am for betting because I am against bullshit. Bullshit is polluting our discourse and drowning the facts. A bet costs the bullshitter more than the non-bullshitter so the willingness to bet signals honest belief. A bet is a tax on bullshit; and it is a just tax, tribute paid by the bullshitters to those with genuine knowledge.

If the Titanic had been a market, then people would have been able to use their bets/money to steer the ship.  This wouldn't have guaranteed that the Titanic would have avoided the iceberg... but it would have guaranteed that the ship's direction reflected everybody's information weighted according to their confidence in it.  Essentially... a much better informed decision would have been made.  This would have greatly decreased the chance that the Titanic would have hit the iceberg.

The "minor" detail is that I'm not exactly sure how people on a ship or in a company could use their money to steer.  Clearly employees can buy their company's stock if they are confident in their company's direction... and they can sell their stock if they aren't confident in their company's direction.  But I'm not quite sure how they could use their money to help steer their company in the most valuable direction.

Let's say that we're employees of this forum.  Somebody proposes that this forum display advertisements.  Displaying advertisements would take this "company" in a different direction.  How would we as employees use our cash to communicate our confidence-weighted information?  How could individuals be rewarded for gambling on the right direction and punished for gambling on the wrong direction?

If you prefer theorizing using a real world example...  "Traitorous eight".

Here's a relevant quote from Peter Thiel...

We are biased toward the democratic/republican side of the spectrum. That’s what we’re used to from civics classes. But the truth is that startups and founders lean toward the dictatorial side because that structure works better for startups. It is more tyrant than mob because it should be. In some sense, startups can’t be democracies because none are. None are because it doesn’t work. If you try to submit everything to voting processes when you’re trying to do something new, you end up with bad, lowest common denominator type results. — Peter Thiel, Girard in Silicon Valley

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