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C. Gopinath

IT WOULD probably go down as the shortest-lived idea in the US. Within 24 hours of its being made public, everyone important in both the political parties was scrambling to announce that it was `ghoulish' and the proposal was buried. The irony is that it has to do with free markets, in a society that is the biggest cheerleader for the notion of free markets.

I am talking about the proposal for a `Policy Analysis Market' that would use economic market forces to predict future events in West Asia. The proposal was to have about 10,000 investors `buy' one-year futures contracts if they believed an event was likely and `sell' if they believed it was not.

Topics would involve economic, civil, and military futures relating to Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey and the impact of the US involvement with each. Events could be issues such as the stability of the monarchy in Jordan, or the possibility of a bio-terrorist attack on Israel. Since people with specialised information and specialised analytical ability will be playing to profit, the movement of the bets will serve as an early warning system of an impending event.

Anyone can trade provided they register and open a trading account. The idea was to attract people with specialists of West Asia who would benefit by the attraction of making a profit. Meanwhile, the Pentagon (that is, the US Defence establishment) would study the data to gleam intelligence but won't have access to traders' identities or funds. Only the group organising the market would have that information.

The public first became aware of this scheme when a report of a news conference by Senators Roy Wyden and Byron Dorgan appeared in the newspapers on July 29, 2003. The senators who objected to it said that $750,000 (Rs 3.5 crore) had already been spent as start-up costs and the Pentagon had requested further funding of about $8 million (Rs 37.6 crore) over the next two years.

Reaction to the revelation was swift and the administration representatives were running for cover. The Deputy Defence Secretary, Mr Paul Wolfowitz, when he appeared before the Foreign Relations Committee that same day ducked the storm by saying that he learned about it only when he read the papers that morning. Even Mr Wolfowitz, a staunch supporter of the administration's radical ideas of `unilateralism' in foreign policy, `pre-emptive strikes' around the world, and `regime change' wanted to distance himself from this one. By the end of day, an announcement was made that the project was dead.

The objections were based on the grounds that the idea of people profiting on such information was `distasteful', and at an extreme, the market may be a way for terrorists themselves to profit from their actions.

Yet, it is a bit scary to think that if the two Democratic senators did not disclose this to the public and raise a storm about it, the Pentagon was to begin registering investors and commence trading on August 1. In a Defence department budget of over $350 billion (Rs 16,45,000 crore), the requested amount would have been buried in the decimal places if not for the public outcry.

Actually, from an academic point of view, I must confess that it is a neat idea! A futures market, in general, attracts experts or specialists in a field and works as a way of aggregating opinions across several people into a focused assessment. Futures on commodities' price movements are well known. Actually, some of them already take into account the kind of information that is being ferreted here. For instance, the cocoa futures market is quite sensitive to the possibility of a revolution in a cocoa growing country. Successful futures' markets in the US already operate on topics such as election results and even weather patterns.

The market for terrorism idea was developed by a group calling itself Net Exchange comprised of (who else) academics from the California Institute of Technology in collaboration with the Economist Intelligence Unit, a research arm of The Economist magazine. There is already a different kind of market for such information. Currently, getting intelligence information rests both on patriotism and the absence of it. Thus, a `patriotic' US operative in Saudi Arabia would report (usually for a salary) on how strong the opposition is growing to the monarchy, or a `traitorous' Saudi would reveal (in return for cash) inside information about the infighting amongst the monarchy.

Economists will tell you that at some point, the price is right and the market clears. The man who revealed the location where Uday and Qusay, sons of Saddam Hussein, were hiding, leading to a US attack and their killing, did it for a price of $15 million (Rs 70.5 crore) per head. The federal government has acknowledged the payment of $30 million (Rs 141 crore). The price for information about Saddam Hussein's whereabouts is $25 million (Rs 117.5 crore). Any takers?

In the case of futures, this is taken a step further by bringing into the loop a whole host of people who have bits of information and wager accordingly on the probability of an event occurring. For instance, papers report that the price for Iraqis to turn informants ranges from $20 (Rs 940) to $1,500 (Rs 70,500). But the problem is that some might provide disinformation to settle their own feuds and grudges with the help of the soldiers. But in a futures market too, a terrorist group might place wagers in order to mislead.

Actually, the agency funding the project was the Defence Advance Research Projects Agency (DARPA) which is not your average wooden government agency but one which has an enviable reputation for being clever and innovative. It is famous for being the agency that first funded the idea of setting up an electronic mail network between universities that later on grew to become the Internet. However, the shady beginnings of the terrorism market idea can be traced to another Pentagon office called the Information Awareness Office, headed by Admiral Poindexter. As an official under former President Reagan, he was convicted of lying to the US Congress (that is, Parliament) during the infamous Iran-Contra affair when the US government violated its own rules and sold arms to Iran to raise money to fund rebellion in Nicaragua. The conviction was later reversed on the grounds that he had been given immunity for the testimony. More recently, after being rehabilitated in the present Bush administration, he came under criticism for proposing a way of electronically spying on Americans in order to detect terrorist plots. After this current flare-up, apparently he has been forced to resign.

The whole episode serves as a lesson, among others, on the limits to extending the idea of markets. While it may make sense from an economic theory point of view, economics will have to work with politics, morality, and society. Some theoretical ideas are best left in the textbooks, especially when they deal with a subject that still grates the nerves, like terrorism. While the idea may be innovative and worth a try, it must also pass the test of emotion and public acceptability. After all, a free market does not exist in marijuana either, although you can come across several theoreticians who can prove that it will reduce crime.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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