>Someone in the prediction market might agree that free higher education reduces inequality but might also think that it will increase the government’s cost of financing its spending. The latter is what usually gives politicians trouble with financial markets. How would a prediction market resolve this issue?
One approach would be to have multiple markets, that track endpoints like inequality and interest rates separately for any given candidate policy.
In the best case, prediction markets could give you accurate forecasts on a large number of candidate policies, and you could select a policy that the market thinks does a pretty good job according to lots of relevant endpoints. (My hunch is that our current system is bad at searching for such win/win policies, preferring instead the drama that comes from clashing over win/lose policies. For example, you mention free higher education, but how much does the average college grad really use or remember from their degree? I'd argue there is a lot of territory in apprenticeships that is currently unexplored, and smart policy could facilitate this -- especially if we start with small-scale experimentation.)
You're absolutely correct that the market can't help with moral questions such as how much government spending is justifiable in pursuit of reduced inequality. Robin Hanson proposes eventually moving to a system where the job of elected officials is to manage metrics related to what voters want out of government policies, and markets decide the rest. In slogan form: "Vote on values, bet on beliefs." https://mason.gmu.edu/~rhanson/futarchy.html
I think the reason I'm excited about prediction markets in particular is because I think the average voter, justifiably, does not have the time necessary to familiarize themselves with all the details of a proposed policy and related research on its likely economic ramifications.
I see the kind of in-depth analysis of financial assets that hedge funds currently do as being somewhat wasteful. I would prefer that they switch to policy analysis in the public interest, by betting on which policies will deliver for voters.
Based on the abstract, I think the essential argument is that a market manipulator acts as "dumb money", attracting "smart money" who are happy to profit by bringing the market back in line with reality.
This might sound crazy... but if the UK is already de facto ruled by financial markets, in the sense that the PM has to step down if the markets don't like what they're doing, maybe it's time to try prediction market-based governance for real?
What would've happened if instead of simply announcing the proposal, Truss had described the proposal and the government had sponsored a conditional prediction market on the economic effects?
She could've run prediction markets for dozens of proposals, and selected a policy that was popular with both the markets and the public.
(Lest this idea be seen as overly capitalist: there's no reason not to run a prediction market for "degree to which this policy will reduce inequality", and incorporate the result into decisionmaking as well. Imagine the irony: a bunch of rich hedge funds trying to figure out the best way to reduce inequality!)