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Announcement | Audio | Transcript Transcript

Entrepreneurial Economics for Fun, Profit and a Better, Freer World
May 3, 2002
Alexander T. Tabarrok

Contents

Alex Tabarrok

What I’m going to do today is talk about some of the ideas in Entrepreneurial Economics: Bright Ideas from the Dismal Science. The book is edited by myself and published by Oxford University Press with the Independent Institute. You can find out more about the book at EntrepreneurialEconomics.org or at Independent.org, the Web site of the Independent Institute, and, of course, it’s available at better bookstores everywhere.

How an Economist Proposed Incentives That Saved Lives

I can perhaps best explain what the book is all about by telling you a little about Edwin Chadwick. (This name may be familiar to a few of you, perhaps from some of Dwight Lee’s columns in Ideas on Liberty.) Chadwick was a 19th century British lawyer and a self-trained economist. He was a friend to the great utilitarian Jeremy Bentham, and also to John Stuart Mill. And Chadwick was very active in all of the political questions of his day. One of those questions was what to do about the sorry state of British convicts, who were then regularly being transported to Australia. The conditions on the ships that transported these convicts were so bad that it was a quite regular occurrence for half or sometimes more of these convicts to die en route.

And despite the fact that these were convicts, this was considered a humanitarian issue, especially to the British upper classes. This was a thorn in their side. And so a number of commissions were established to look into this problem. And as commissions are wont to do, they issued all kinds of reports and recommendations. They said, “Well, you have to carry so much water, and so many lemons”—you know, the Limeys—“and you’ve got to do this, you’ve got to do that.” And they issued all of these decisions, and yet nothing seemed to change. Year after year, these convicts would be sent to Australia, and many thousands of them would die en route. And this is where Chadwick came in.

Chadwick began to investigate this issue, and very early on he found that it was a government policy of the time to pay the captains of the ships who were transporting these criminals, to pay them for every convict that got on board the ship. [Laughter] And realizing this, Chadwick had an inspiration. He knew how to solve the problem! Can any of you tell me?

Audience Member

Pay them when they get off!

Alexander Tabarrok

Exactly. So, instead of paying the captains for the number of convicts who got on board the ship, Chadwick recommended that henceforth they pay only for the number of convicts who got off the ship—under their own power—in Australia.

And indeed, the government instituted this policy, and very quickly after that, the survival rate went up from something like 50% to over 90%. So Chadwick was able to solve this problem. And his remarkable success is one of the inspirations for this book, Entrepreneurial Economics.

The theme of the book is creating new markets and institutions that harness Adam Smith’s “invisible hand” in a simple but effective manner in order to make society better off. Take advantage of markets, harness the invisible hand, and make society better off. That’s what the book is all about. It contains 13 chapters, on everything from health care to urban transit, that illustrate this theme, and I’d like to tell you today just about a few of those ideas, two in particular.

How Markets Aggregate Information

Now, the first idea. I imagine that most people here are quite familiar with the virtues of markets, but what I hope to do in the first section of this talk is to explain how markets can be used in new ways—not to buy and sell goods per se, but rather to generate information. To understand the logic of what I’m going to call “information markets,” it’s useful to review just a little bit of Hayek’s 1945 paper, The Use of Knowledge in Society. And again, I imagine this will be review for a number of you, but it won’t take too long.

Hayek in that paper pointed out that market prices aggregate and communicate information. So, consider: suppose that a valuable new use for copper has been discovered. What’s going to happen? Well, the new users of copper will begin to bid up the price. And as they do so, this will induce other copper users to begin to substitute. Some copper users will find substitution easy, some more difficult. Plumbers, for example, may begin to switch from copper tubing to plastic tubing. Electricians may continue to use copper in wiring, but they may switch to fiber optics in communications. And as they do so, this frees up copper for the new uses.

Suppliers of copper will be induced to supply more, perhaps by drilling deeper copper mines or by spending more on exploration. Copper scrap will become more valuable, making recycling more economical and more common. And as each copper user and supplier responds to the new prices, a subtle and quite complex process of reallocation occurs, with copper flowing from the less valuable uses to the more valuable uses. And, amazingly, this process is spontaneous—that is, it occurs without any central direction, even without anybody’s knowledge.

And of course as you know, Hayek and Mises argued that this unplanned market process is the only method that can reallocate resources to their economically highest valued use. No economic czar could understand, let alone gather or efficiently employ, all the information about copper’s many uses, its substitutes, its sources, its methods of extraction and distribution, and so forth.

And yet, even though no one could comprehend all this information, all of the relevant information about copper is indeed out there. But it’s out there in the heads of the millions of people who use copper. Through their buying and selling, and their abstention from buying and selling, these millions of people create a single observable and useful number: the market price.

Without markets, this information in prices wouldn’t even exist. But when markets are unfettered and they’re open to entry and exit, information can in fact be extracted from prices and used in all kinds of novel ways. For example, this is an example from one of my favorite textbooks, Paul Heyne’s The Economic Way of Thinking. Here’s how you can use information in prices.

Heyne points out that in December of 1991 the United Nations Food and Agricultural Organization and the Worldwatch Institute held a joint press conference at which they predicted an increased scarcity of grain, particularly of wheat, in the coming year. Now, other than waiting to see what happens, what would be a good way of evaluating this forecast?

Audience Member

Look at statistics on the weather.

Alex Tabarrok

Yes, you could look at weather patterns. What else?

Audience Member

Futures markets.

Alex Tabarrok

You could look at the futures markets, right. You could look for a price, look at a futures price. That is the price that people set today for a trade in the future. And on the day of the U.N. forecast, Paul Heyne did exactly this.

He looked in the newspaper—it’s not like this information is hard to find. He looked in the newspaper, and he found that No. 2 hard Kansas wheat, which is a standard major grade of wheat, on that day was selling for $4.05 a bushel. The 1992 March futures price—this was in December—the March futures price was $3.87. The May price $3.64, July $3.33, September $3.31, and December, a year in the future, was $3.51.

So, contrary to the United Nations and to the Worldwatch Institute, the market price was predicting, if anything, less scarcity of grain in the future.

Now, so here we have these two forecasts. In whose forecast would you have more confidence?

Audience Member

[Laughter] The speculators! All right, a harder question. Why? Suppose we have more confidence in the market price. Why?

Audience Member

Speculators have money on the line.

Alex Tabarrok

Right, OK. That is definitely one major reason. If the wheat speculators are wrong, they’ve put their money where their mouth is. They have real incentives to be right, and they face real costs when they’re wrong.

In addition, the wheat speculators, and people involved in the wheat market, this is what they do for a living. They’re involved in wheat every day, and each of them has some specialized knowledge. They have some special information. And this wheat market involves thousands and thousands of these traders, each with some specialized knowledge. And so what is created? The price, which is created, can be thought of as an informed consensus.

Now, economists in fact have actually come to rely on this sort of reasoning quite heavily and have tested and made use of this theory in a number of interesting ways. Economist Richard Roll of UCLA, for example, discovered – I love this – he discovered that the information in the futures prices for oranges in Florida could be used to improve the predictions of weather from the National Weather Bureau. [Laughter]

One of my favorite papers, written by a political scientist, used stock prices to help understand the power of seniority in Washington. This political scientist looked at what happened to the stock price of Boeing on the day that the senior senator from Washington State died unexpectedly of a heart attack, and what he found was that on that day, the price of Boeing stock jumped down quite unusually. So he was able to conclude, or able to suggest, that having a senator in Washington—this senator was known as the senator from Boeing—really pays off for special interests. And he was able to put a number on how much this was worth to Boeing to have that senator in their pocket.

So in the past 20 years or so, economists have become accustomed to extracting forecasts and other information from raw market data. But even more recently, economists have begun to create markets specifically in order to generate information. And this is what Chapter 5 of Entrepreneurial Economics, written by Robin Hansen, is all about.

The Iowa Political Stock Market: Better than Gallup Polls

The best known of these so-called information or prediction markets is the Iowa Political Stock Market (http://www.biz.uiowa.edu/iem/). The Iowa Market lets traders use real money to buy and sell “shares” of political candidates. And the way it works is, a share in George W. Bush, for example, would pay $1.00 if President Bush wins the next election and nothing otherwise. So if the market price for a Bush share is 75, this suggests that market participants think that President Bush has a 75% chance of winning the next election. Anybody can participate in these markets, by the way. You can go on the Web, and you can start buying and selling shares today, if you want, if you’re not already gambling enough.

Now, why would anyone care? Why would anyone care what market participants think about election probabilities? The reason is that in nearly 14 years of experience with predicting U.S. and foreign elections, primaries, and other political events, the Iowa Market has proven to be more accurate than Gallup polls or other polls.

Indeed, prices have another advantage. They’re available 24 hours a day, and it turns out that these prices jump around a lot less than do the polls. The polls are gyrating wildly but prices from the Iowa Market are much more stable.

Indeed, the Iowa Markets have themselves passed the market test, because in tight elections, professional bond traders—who often have millions of dollars, sometimes even billions of dollars, riding on post-election economic policies—they’ve been known to monitor the Iowa Market for clues about what’s going to happen.

Creating Information Markets the HP Way

Now, industry has also not been oblivious to the predictive power of markets. Hewlett-Packard, for example, believed that its sales force collectively knew quite a bit about how strong hardware sales were going to be in the next six months. So it created an information market to try to tap this knowledge.

Now Hewlett-Packard had long tried to get at this knowledge using the standard methods—questionnaires and surveys and so forth. But they believed that these methods were not adequately conveying the collective thinking of the sales force, and certainly they were not conveying this thinking in a digestible, manager-friendly format. The sales force often relied on hunches and intuition, and it’s hard to get that into a survey, it’s hard to put that down on a questionnaire. So what did HP do? Well, in HP’s information market, the employees could buy and sell shares that paid dividends based upon the future sales of one of its products.

So, for example, a typical security would pay out $1.00 if future sales were between, say, 10,000 and 15,000 units. It would pay nothing otherwise. There were 10 of these securities, so there were enough to cover all of the reasonable sales expectations. So there was a security for “sales will be between 10,000 and 15,000 units.” There was a security for “sales between 15,001 and 20,000 units,” and so forth.

Now, let’s think about what prices in these markets represent. Suppose that you thought that there was a 50% probability that sales were going to be between 10,000 and 15,000 units in the future. What’s the most you’d be willing to pay for a security that pays out $1.00 if that actually happens, if sales actually are between 10,000 and 15,000 units, and you think there’s a 50% probability. What are you going to be willing to pay?

Audience Member

Fifty cents.

Alex Tabarrok

Fifty cents, right. What if you think there’s only a 25% probability that this event is going to happen? How much would you then be willing to pay?

Audience Member

Twenty-five cents.

Alex Tabarrok

Twenty-five cents, exactly. Now, think about graphing the prices in these markets. Put sales on the X-axis: 5,000 to 10,000 units, 10,000 to 15,000 units, 15,000 to 20,000 units, and so forth. And put prices on the Y-axis. What are you going to get?

You’re going to get a curve. It could be a Bell curve, a normal curve, some kind of distribution. And using this distribution, HP could do powerful stuff. It could find, for example, the probability that its sales force put on sales falling anywhere, say, below 10,000 units. Or it could put a probability on the eventuality that sales were anywhere above 25,000 units, or anywhere in between. So the information from this market was much more nuanced, much more flexible, than is available from a questionnaire.

Note, by the way, that this distribution, this curve, is itself created by aggregation. No one among the sales force had this distribution in his head. So this is how markets create information: they gather it together, they aggregate information.

Well, the question, then, is how did it do? How did this market do?

To test the market, HP compared the average forecast of its information market, with its official forecast, which was generated using the old methods—surveys and questionnaires. And what it found was that in 15 out of 16 trials, the mean market prediction was significantly closer to the actual sales figure than was the official prediction, and in the one remaining case, the mean market prediction and the official prediction were equally close.

So, encouraged by these results, HP created its own experimental laboratory. So you can see here how a firm is using markets internally. This is not about buying and selling; it’s about generating information using the marvelous powers of markets to aggregate and communicate information in really entirely new ways.

The Hollywood Stock Exchange: Trading in Tinseltown

Another example of this, an interesting one, is the Hollywood Stock Exchange (www.HSX.com). This is on the Web. Some of you may have played it. What the Hollywood Stock Exchange does is to let traders buy and sell shares and options in movies, in music, in Oscar contenders. And trading on this market is conducted in “Hollywood Dollars”—fake dollars, not real money. But it seems that the lack of real money has not discouraged some 800,000 people in participating in this market. They trade for fun. They try to guess which movies are going to be successful, which ones are going to generate future sales and dividends on their shares are based upon actual sales figures.

Now, this is fun for the traders. It’s an interesting game. But the purpose of the Hollywood Stock Exchange is to make money. And the way they make money is to gather this information from their traders and sell it to movie studios, which are trying to better guess which films are going to be successful and which are not. And, indeed, studies of this market have shown that it does predict actual sales figures very well, even though it’s done with fake money.

A Modest Proposal for Evaluating Legislation

In the book, Entrepreneurial Economics, economist Robin Hansen of George Mason University explains an even further broadening of this idea. He suggests that information markets could be used to answer questions of public policy. Instead of using markets to predict election results or box office receipts, these markets, which would be open to everyone, would predict the results of a new legislation. So information markets could potentially offer much more accurate predictions about the effects of controversial legislation, such as free trade pacts or handgun right-to-carry laws, than we get today from pundits and from politicians.

Indeed, if markets showed the same accuracy in judging political issues that they have shown in other areas, voters might even begin to rely on these markets to cast their votes, to guide their votes. And in time, political information markets could replace the less accurate information-gathering mechanisms that we use to make political decisions today.

So, I think that everyone here knows that markets are an important institution of a well-run society. But until recently, few people thought of markets as something that might be used internally to run a business, or to help answer an important question. And yet, the very virtues that Mises and Hayek pointed out—the uncanny ability of markets to usefully aggregate and quantify large amounts of dispersed information, information which is out there in the heads of millions of people—this virtue, which Hayek and Mises first pointed out in the 1920s, also applies to information markets. And these information markets could be used for everything from the prediction of election returns and the weather, to the forecasting of uncertain consumer preferences, and in the future, we might even rely on the information-processing power of markets to help us decide some of these contentious political questions.

Now I want to talk about another idea in the book, kind of to give you an idea, as I said, what the book is really all about.

Solving the Human Donor Organ Shortage

As many of you know, every year, thousands of people die while waiting for an organ transplant. There are now some 80,000 people on a waiting list to get an organ. And it’s estimated that half of these people will die while they’re waiting to get a new organ. As with the problem that Chadwick dealt with, every year there are reports, commissions, and studies, and yet every year this problem seems to go on and on and on. It seems to be unsolvable.

You get spokespeople like Michael Jordan trying to get people to sign their organ donor card, and yet, thousands and thousands of people die every year because organs are not available. The problem is actually getting worse, because medical progress is expanding the number of people who could benefit from an organ while the supply of organs has actually remained flat or even fallen.

There are two papers in Entrepreneurial Economics that deal with this terrible tragedy. The first idea many of you are probably familiar with is, Why is there a shortage of organs? What’s the explanation for a shortage?

Audience Member

Lack of incentives.

Alex Tabarrok

Little incentive, OK. Even more generally?

Audience Member

It’s the price.

Alex Tabarrok

It’s a price control, right? It is currently illegal to buy and sell an organ. The price is controlled at zero. And what do we know about price controls? We know rent controls create a shortage of apartments. Controls on gasoline, such as we had in the 1970s, they created long lines for gasoline, a shortage of gasoline. Similarly, a price control on organs, a price set at zero, means the demand is going to exceed the supply. It’s exactly the same.

Indeed, this analysis of the organ shortage is actually so common among economists that some textbooks use the organ shortage as an illustration of price controls more generally. It used to be that the illustration was the gasoline crisis, but students today don’t remember that, they have no idea what you’re talking about. “There were gasoline lines?” They don’t know. So the modern example is the organ shortage.

Now, the first paper in Entrepreneurial Economics suggests that we remove the government controls on the buying and selling of organs—perhaps even allow a futures market in organs, in which I can sell the right to my organ today in the event that I die unexpectedly when my organ is still useful. I hope that doesn’t happen. I hope my liver is not useful—I try and make use of it as much as possible! [Laughter]

Now, economists have discussed this idea for some time, and in fact, one Nobel Prize winner, Gary Becker, has endorsed this idea publicly. And the paper in Entrepreneurial Economics does a very good job explaining this proposal and dealing with objections. And indeed, this is a very interesting time to be discussing this, because it seems like we are making a little bit of progress on this issue.

At its recent meeting in December of 2001, the American Medical Association debated a proposal to remove their objections to the concept of offering payments to organ donors, or to their surviving family members. The proposal at that time was tabled, but they’re going to bring it up again in the next meeting, which is in June 2002, and it may pass.

Similarly, earlier this week the American Society of Transplant Surgeons also endorsed a plan to remove the objection. They no longer object to at least offering to recoup, to compensate organ donors for funeral expenses, the families of organ donors for funeral expenses. So, it’s an interesting time. It seems we are making a little bit of progress. This is also going to be brought up at the International Meeting of Transplant Surgeons in Miami in September.

However, I don’t think it’s going to happen. I think it’s unlikely. It’s hard enough to convince politicians to support laissez-faire in steel, let alone in the market for human organs. [Laughter] If we can’t convince them about steel, it’s going to be a hard sell, right? And, like it or not, many people do find the idea of buying or selling a human organ to be morally repugnant.

Now, libertarians and others, we may try to convince others of the virtues of markets, even in this case. But it’s also our responsibility to take into account people’s moral convictions when we try to design new institutions. This brings me to the second paper in Entrepreneurial Economics on organ markets.

The second paper, which is written by myself, suggests another way of understanding this problem. What I suggest is that the problem of organ shortages is not necessarily a price control problem, but is, rather, a tragedy of the commons. The tragedy of the commons is the tendency for any resource that is owned in common, to become overused, under stocked and worn out. If fishing rights, for example, are owned in common, there’s a tendency for over fishing, and even for complete depletion of a fishery. And the reason is that when fishing rights are held in common, an individual fisherman gains nothing by restricting his catch. All that happens is that he makes it easier for others to catch more fish.

And what’s wrong with the current policy on human organs is that available organs are treated exactly like a commons. UNOS, the United Network for Organ Sharing, in fact, is rather proud of this. They say that transplantable human organs are a national resource, a collective resource. So any citizen who meets certain conditions is allowed access to this national resource, regardless of whether or not he or she contributed to the upkeep. Organs are treated just like fish in a lake, which is owned in common, and thus we have an organ shortage for the same reasons that we have over fishing. There’s little reason to give when anyone can take.

Now, what’s the solution to a Tragedy of the Commons problem? What’s the solution to these sorts of problems?

Audience Member

Privatization.

Alex Tabarrok

Privatization, right! Property rights. Enclosure. When a lake, for example, is owned privately, the owner knows that if he restricts his catch today, more will be available for him; thus private property creates the necessary conditions to create a sustainable fishery. The same thing is true for organs. But who should get ownership rights over transplantable human organs?

I propose that organ transplants should be restricted to those people who have previously agreed to be organ donors; in short, a “no-give, no-take” rule. If you are not willing to sign your organ donor card, that’s fine. But then you do not have the right to an organ should you need one in the future.

The no-give no-take rule has the advantage of being supported by strong moral intuition, I think, to a large extent. But the second, and more important virtue is that if we make getting an organ conditional on willingness to give up an organ, we will greatly expand the supply of organs, and we’ll alleviate the crisis. In other words, if the only way to get an organ is to have previously signed an organ donor card, then many more people will sign their organ donor cards, and the shortage will be alleviated.

Now, there are plenty more details on implementation that can be discussed, or are discussed, in the book, and I’m sure a number of you have questions. I’ll be happy to take those in just a minute.

I’ll conclude with this thought. We have a lot of marketeers and P. T. Barnum types in politics, but not very many true entrepreneurs, not many people who think carefully and deeply about institutions and incentives, who will build products of lasting value. We all know about the great role of the entrepreneur in the American economy. But we also need entrepreneurs in public policy, and this is what Entrepreneurial Economics is all about. So, thank you.

[Applause]

Questions and Answers

Alex Tabarrok

So, I’m happy to take questions, either on information markets, or on organ markets, and we’ll just go until when we have to go.

Audience Member

Regarding information markets: you made a point that they quite often provide very accurate information. Back in 1999 when the NASDAQ was trading at 5,000 or whatever it was, what information was this providing, and how accurate was it?

Alex Tabarrok

Yes. This is a very good point. The question is the counterexample: We saw NASDAQ reach huge heights and it looked quite plausibly like a bubble, so doesn’t this show that information markets have some problems? Indeed, I think it does. I think that it is certainly possible for markets to become involved in manias when people buy on the expectation or the hope that other people are going to buy. It’s like a Ponzi game, or I should say, it’s like Social Security. [Laughter] But it’s like a Ponzi game, so people will buy thinking that, well, if only the price goes up I’ll have a chance to sell. I think that’s possible. I think sometimes that happens. No institution is perfect, even markets, especially when you’re dealing with human beings.

The interesting thing about information markets is that it may be possible to design them to actually reduce this possibility. There are things that you can do in information markets. For example, you can give more weight to the people who have been very accurate in their own predictions in the past. You can design it so that you simply don’t have to take the raw price, but you could use aspects, other parts of information in that market, to even improve these predictions.

Remember that markets are designed for trade, for exchange. They haven’t actually been designed for creating information. That’s a byproduct of markets. They’re actually created for trade and exchange, and the information part is just a useful byproduct. Once we start focusing on information, we might actually be able to design markets that are even better instruments. Other questions?

Audience Member

This reminded me of about six months ago when a Forbes columnist wrote a whole column on how we ought to do away with the phrase “foreseeable future,” because it’s a ridiculous phrase. And it just occurred to me that you just found a way to better foresee the future than any individual possibly could.

Alex Tabarrok

Right, that is exactly the key. And you see this time and time again. If you look at individual forecasts, they tend to be very poor. If you look at the market forecast, the consensus forecast of many individuals, this tends to be much better than any single individual’s forecast.

Audience Member

Some folks may disagree, but I’m not sure that the market was wrong in its high valuation of the NASDAQ, in the sense that there was one more player who had too much power, and you could not read his mind. And that was Alan Greenspan. In a sense it was a jury-rigged market forecast.

Alex Tabarrok

That’s a good point. It’s very difficult to say what could have happened to the NASDAQ in an alternative reality. There are other things that could have happened, it’s true.

Audience Member

I’m just going to finish your point about the NASDAQ. The reasons I think NASDAQ and those markets forces move to such extremes are that there’s no fixed end date and there’s always hope. But if I’m betting and I’m watching the Redskins, at the end of the game I could win or lose. And if the Redskins are losing by wider margin and being aggressive, I’m not going to hope that they’re going to come back after realizing the game’s over. Whereas with NASDAQ, if you bet on Microsoft or Cisco or whatever, since there is no fixed ending, you always think, oh, my side is going to bounce back and I’ll win. So I think it’s a psychological factor.

Alex Tabarrok

That’s a good point.

Audience Member

Well, about your idea for organs, have an organ club sort of thing. I don’t see how your solution follows, because all the fisherman wanted to say, “OK, I’m part of the club.” Then they can all fish, and you’re back where you were before.

Alex Tabarrok

Right, but what I stress is that to get into the club, you’ve got to sign your organ donor card. The problem is that not enough people are signing their organ donor cards. And why should they? They get an organ whether they sign it or not.

So anyone can fish, whether or not they helped stock the lake. So the analogy is that signing your organ donor card is like stocking the lake, that’s like contributing to the pool of fish, so that’s why it’s a tragedy of the commons problem.

Audience Member

I mean, you’re talking about lakes, but we might extend this to coastal fisheries. There’s considerable evidence that such clubs do exist. The Japanese fishery for many years was organized around a rule stating the number of days that fishermen in that area had rights to fish out to a certain distance out to sea. So these were clubs, and they enforced, with some very great success, a kind of shunning of anybody who exceeded his authorized amount of fish. So the clubs did exist.

Alex Tabarrok

Yes, that’s absolutely right.

Audience Member

I’m not quite sure how to phrase the question. Would you comment on efficiency of markets and what the criteria are? As we go forward and people start developing entrepreneurial ideas for developing markets to create information, what should the criteria be for industries?

Alex Tabarrok

Well, in a regular market the typical criterion for efficiency is, does it exhaust the gains from trade? Do we maximize total surplus to gain from trade? But in an information market the criteria for efficiency, I think, are: Does it predict well? Do prices jump all over the place, or do they quickly stabilize, with the market reaching a consensus? This is what you see whether it’s the Hollywood Stock Exchange or these election markets. Prices do predict well and they’re not all over the map. They often do come to an equilibrium point. Other questions?

Audience Member

I was taught to think the Iowa markets were illegal.

Alex Tabarrok

Yes. It’s interesting. Setting up these information markets, especially for ones open to the public, is actually quite difficult because you have to go through the government. You’ve got to get permission. So often these markets are illegal because they’re thought of as betting markets.

The Iowa Stock Exchange got special permission from the Commodity Futures Trading Commission. That’s one thing that is holding these markets back: they need government permission. Now, that’s probably not true for these internal markets, right? If HP wants to run its own internal market, there’s no problem. But for a market to open to the public, there are some government constraints.

Now I think an interesting question is, do you need real money? The Hollywood Stock Exchange is probably the best case for something that people find interesting. It’s like a trivia game. And there are lots of people with enough incentive there to predict carefully in order to increase their Hollywood Dollars, and that market does seem to be pretty accurate. In other cases, you may need real money.

Audience Member

I think your suggestion about your insurance or donate-an-organ-to-get-an-organ is still a kind of price. It’s not a money price, but it’s still a price. It’s a morally acceptable price.

Alex Tabarrok

Sure. Exactly. That’s kind of the key difference. At least in my experience, people who are not willing to say, “You should be able to buy and sell organs” are willing to say ”‘No-give, no-take’ seems fair because this is open to the poor just as well as the rich.” So it’s a non-pecuniary price, and it’s one that is more equally distributed. Yes?

Audience Member

I don’t want to know the price.

Alex Tabarrok

Yes, well. [Laughter] It’s something everyone knows they can afford, right?

Audience Member

From what I’ve heard and understand about organ compensation, many object—probably the left, but I’m not sure—saying, “Well, it’s not fair that somebody can afford to buy a new kidney, and somebody who also needs it just as badly can’t.” How do you answer that? Is that the same thing that you’re talking about?

Alex Tabarrok

Yes. Under my suggestion—“No give, no take”—the fairness issue doesn’t come up because anybody can sign their organ donor card. It’s not hard. You don’t have to be rich to do that. It’s no problem.

I think that objection can be also answered if you’re willing to use prices as well, and as I said, the paper in the book does a pretty good job, I think, at trying to answer that, but some people are not going to be convinced.

Audience Member

Charity organizations and patient organizations, cancer associations, diabetes associations—they would likely buy into these markets so they could offer organs to their members. And so, on this basis, organs would also be available for the poor.

Alex Tabarrok

Yes, that’s quite possible. We don’t know what a market for organs would look like. It could be that the price is really low, right? And if the price is really low, there’s no problem covering the poor. We know that markets have all kinds of ways of innovating and reducing prices over time and covering poor individuals through charity, and so forth.

If we actually did it, it might work out well. The difficulty is to get people over the hump, to get people to try it out. I mean, it’s taken years and years—tens of thousands, hundreds of thousands of people have died—and only now is the American Medical Association saying, “Well, maybe it’s OK to give a few hundred for funeral expenses.” That’s the difficulty that we run up against. Sir?

Audience Member: Just a thought, I don’t know. If you allow people to buy and sell their organs, wouldn’t you raise their incentive to take care of themselves, so you’d lower your medical costs? [Laughter]

Alex Tabarrok

That’s thinking like an economist! [Laughter] Yes. Go ahead.

Audience Member

How do you account for somebody using alcohol. Would their liver not be as valuable? It wouldn’t have much value. How would you account for something like that if somebody’s organs are not worth as much? What about people who sign their organ donor card the day before they need an organ?

Alex Tabarrok

Yes. The way I would implement this is: I think most people would sign their organ donor card when they got their driver’s license. So most people would be enrolled pretty early on in their life. For the rest, you would have, say, a one-year waiting period. And after that, the issue you’re raising of organ quality I think is a real one. But I think that if we got rid of the major problem—which is getting people to sign their organ donor cards—then we can let the problem that some people don’t take care of their livers, we can let that problem slide. And maybe their other organs are good, right? So if we get rid of the major problem, we can live with some of the imperfections.

Audience Member

If there would be an information market for legislation, do you see a potential problem in that market? There would be lobbyists whose interests would not be getting returns on stock, but rather furthering their cause trying to manipulate the market?

Alex Tabarrok

Right, that’s the question of cornering the market. But especially when the market is liquid, when a lot of people are involved, it turns out to be very difficult to corner the market. I mean, after all, people try and do this all the time, and most often they’re unsuccessful.

There were markets in German elections, and in fact, some people tried to do this in Germany, and we were able to tell that they tried to do this, but they failed. It turns out that, in practice, in 14 years of working on these political stock markets, it turns out that cornering has never successfully occurred.

OK, I’ll be here if somebody else wants to talk to me. Thank you.

[Applause]

END



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