BBC Focus #206, p.21 August 2009.

OPEN-SOURCE GOVERNMENT: How can we fix our political system?

Has the recent MP expenses scandal soured the idea of democracy for you? Good, because a vast space of possible forms of government remains unexplored, and it is high time we explored it. Yes, democracy beats a dictatorship, but there might be better systems.

First, let's be clear on the main problem, and it isn't politicians lying, exploiting the expense system, or selling us out. Far worse is that politicians approve bad policies - policies that the available information suggests just won't work. We waste billions on wars, tariffs, and schemes that experts expect will fail.

This happens not because politicians can't consult the best experts, but because we, the voters, tie their hands. We believe democracy's flattering lie that each voter's opinion is just as valid as anyone else's. But, in fact, most voters' opinions about what works are usually awful.

Of course, we don't want a dictator, even a well-informed one. While they might pick policies that work, they'd work toward their ends, not ours. So the key question is: can citizens retain control over the big priorities - the national ends - while relying on better information on what works to achieve those ends?

The answer is yes, if after implementing the policy we can decide how well it's worked. Imagine a national welfare statistic, like GDP, but including more of what we care about like leisure, health, and environmental quality. Using this index rich, happy nations would rate high, while poor, miserable ones would rate low.

Under what I've called `futarchy', we could continue to use democracy to say what we want, but use speculative markets, similar to the stock market, to decide on the best way to get it. Our elected representatives could formally define and manage an after-the-fact measurement of national welfare, an augmented GDP, while market speculators show us which policies will best help us to achieve improvements in it.

Anyone willing to pay a deposit could put forward a proposal to become policy. Two betting markets then open - one predicting welfare if we adopt the proposal and the other predicting welfare if we don't. The basic rule would then be: a day after market prices clearly estimate national welfare to be higher given the proposal than without it, that proposal is adopted. If it is adopted, the deposit is refunded 10 times over and investments pay off years later, after national welfare is measured. Speculators can of course sell their entitlement to a share of any pay-off in the future and those who buy low and sell high are rewarded for improving the prediction.

But why speculative markets? Because they are an exemplary way to collect and summarise information, at least when we eventually learn the outcome. In head-to-head comparisons of the accuracy of the information produced, speculative markets consistently tie or beat everything from surveys to elite committees. To have a say in a speculative market, you put your money where your mouth is. Those who know they are not experts shut up, and those who do not know this lose money, and then shut up.

I'm not proposing anyone immediately implement this system - it instead deserves support and legal permission for a series of trials. For example, the concept can be used to decide whether to fire a firm's CEO. The system could be used to approve anything depending on what voters think will improve the national welfare and what policies the experts - or speculators - think would help them achieve that improvement. Either way, we win.