Futarchy is a system of government first proposed by Professor Robin Hanson whereby prediction markets become central to policy-making. Under futarchy, prediction markets would issue a series of conditional prediction markets regarding proposed policies. For example, suppose a government is considering passing a certain infrastructure bill. The market would then issue markets such as “conditional on the infrastructure bill passing, what will the GDP growth rate be” or “conditional on the infrastructure bill not passing, what will the GDP growth rate be”. They can also add similar markets using different indicators as well that policymakers might care about. After pre-registering the values that the policymakers care about, they would then enact the policy that performs best on the conditional prediction markets.

Proponents argue that futarchy would result in superior policy. If one believes that prediction markets are superior at forecasting outcomes than politicians (and there are strong empirical reasons to believe this is true), then politicians could only enact policies that the wisdom of the markets believes will result in better outcomes. While prediction markets might struggle to quantify some non-pecuniary benefits of a proposed policy, proponents argue the benefits of strictly quantifying the costs and benefits of a bill and holding politicians accountable to specific benchmarks outweighs the downside of excluding harder-to-quantify metrics. In some regards, it is similar to using key performance indicators (KPIs) to evaluate corporate executives. While KPIs necessarily lose some nuance, they are necessary to hold leaders accountable and prevent them from cherry-picking whichever metric makes them look best.

Opponents wield several arguments against futarchy. They argue that it is undemocratic, as policies are enacted on the basis of pay-to-play prediction markets instead of voting. It might also be highly difficult to generate enough liquidity on all of the policies that a government might consider to generate meaningful predictions. If liquidity is not deep enough, then market manipulation might also become a major risk.

For now, futarchy remains mostly hypothetical. The government is not likely to delegate its discretion to enact policies to the wisdom of a prediction market. Major constitutional, regulatory and political changes would have to occur before futarchy could be enacted.