The Commodity Futures Trading Commission (CFTC) issued an order against a request by KalshiEX LLC to intermediate a betting market on who will control Congress. You would think, wouldn’t you, that betting on politics as politicians bet on your future (just consider the federal debt, which increases by trillions of dollars every year) would just be a matter of economic freedom and free speech. You would think, at the very least, that information produced by prediction markets, often more reliable than simple opinion polls with no skin in the game, would be welcome. But the CFTC determined that
the contracts involve gaming and activity that is unlawful under state law and are contrary to the public interest, and therefore … the contracts are prohibited and cannot be listed or made available for clearing or trading on or through Kalshi.
The question is, What is the public interest the CFTC invokes? We read in the law (7 U.S. Code § 7a–2) that:
… the Commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve—
(I) activity that is unlawful under any Federal or State law;
(II) terrorism;
(III) assassination;
(IV) war;
(V) gaming;
(VI) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.
In other words, besides a list of actions deemed to be contrary to the public interest, the public interest includes any agreements, contracts, transactions, or activities “determined by the Commission, by rule or regulation, to be contrary to the public interest.”
This circular definition is not surprising given that there is no way to define the public interest if equal weight is to be given to the preferences of all citizens. The demonstration has been developed by economists over the past 250 years and finally, closer to us, by welfare economics and Kenneth Arrow’s Impossibility Theorem (see my Independent Review article on “The Impossibility of Populism“). Only the more modest hope of defining a common interest appears realistic as implied by the work of Friedrich Hayek* and that of James Buchanan, two Nobel economists.
Even in a short post, we can go a bit farther. The CFTC’s concept of the public interest illustrates what Anthony the Jasay wrote about attempts to define something like the public interest, that is, social welfare, by comparing the benefits of certain individuals against the costs imposed on others:
The long and short of it is that objective and procedurally defined interpersonal comparisons of utility … are merely a roundabout route all the way back to the irreducible arbitrariness to be exercised by authority… [T]he two statements “the state found that increasing group P’s utility and decreasing that of group R would result in a net increase of utility,” and “the state chose to favor group P over group R” are descriptions of the same reality.
In short, the “public interest” is nothing else than what the state arbitrarily decides it is because it serves the purposes of politicians and bureaucrats—here, their interest in the control and surveillance of finance and political predictions.
Hayek and Buchanan did not go as far as de Jasay, but their theories also represent a fundamental challenge to the simplistic public-interest conception illustrated by the CFTC. It is surprising how many people use the expression “public interest” like an incantation, without reflecting on what it means, if it means anything, and how it can fit in a liberal social order.
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* I provide an introduction to Friedrich Hayek’s social and legal thought in my separate reviews of the three volumes of his trilogy Law, Legislation, and Liberty: Volume 1, Rules and Order; Volume 2, The Mirage of Social Justice; and Volume 3, The Political Order of a Free People.
READER COMMENTS
Thomas L Hutcheson
Oct 1 2023 at 7:54am
I’d still like policy makers to show their work. Show me who make up P and R, why the are the relevant groups for this decision, and how (according to a specific physical-economic-social theory) the decision increases P’s utility at the expense of R. I want to see the arbitrariness at a more granular scale. The judge’s decision in a tort case is, in Jasay’s terms arbitrary, but it is still a good thing, I believe, to have rules of evidence to constrain the Judge’s arbitrariness.
Pierre Lemieux
Oct 1 2023 at 11:48am
Thomas: To “show their work” and “see the arbitrariness at a more granular scale” is (I once thought) the only use of cost-benefit analysis (I now think that experience shows that they don’t do it because they have little incentive to do it). Have you ever seen a government press release say something like “We submitted our Pet Project to a cost-benefit analysis using a Marshall-type theory of interpersonal comparison of utility. The conclusion was that the costs of Pet Project were higher than its benefits. Your government has therefore cancelled Pet Project.”
But the most important part of your comment may be your claim that “the judge’s decision in a tort case is, in Jasay’s terms arbitrary.” It depends what sort of “judge” and what sort of law. It would not apply to the common-law judge à la Hayek. Tort law was a creation of the common law, not of statute law. Like all liberal or libertarian anarchists, de Jasay did not have anything against the common law and common-law judges. I understand that the common law of nuisance is another example of law developed without state interference until it was replaced by state statutes in the past century or so. This does not solve all problems but, I suggest, defangs your statement.
Thomas L Hutcheson
Oct 1 2023 at 9:55pm
However created, if I claim your cow damaged my corn, the tort law judge has to make an estimate of the damage and arbitrarily order you to transfer some purchasing power to me.
Even if the don’t cancel Pet Project, I’d like to see the calculations to know where the arbitrary assumptions are. Wouldn’t you like to know that about the CFTC decision? Wouldn’t it make your post better, more persuasive to the audience that you write for?
Mactoul
Oct 1 2023 at 10:02pm
So one man making up the law a la common law is good but a hundred men making up statute law is bad?
Why isn’t the common law judge not part of the state apparatus? He is coercive like any other judge.
I don’t think anarchist writers like David Friedman or Bryan Caplan prefer to avail themselves of this unprincipled exception by which you can drive entire politico-legal order without the inconvenience of calling it so.
Pierre Lemieux
Oct 2 2023 at 11:12am
Mactoul: See vol. 1 of Law, Legislation, and Liberty, linked to above.
Mactoul
Oct 1 2023 at 9:49pm
It is not unlikely that a majority of the people in the Western countries prefer less immigration and more capital punishment.
Yet their preference don’t seem to count. Why?
Public interest isn’t to be defined by weighing up individual preferences but by an continuous contest of individual visions of what public interest is. It is essentially an elite occupation.
Non-elite, defined (in liberal order) as the people who rule themselves out by refusing to participate in this contest, do not count.
This is methodological individualism with a vengeance since no reference is made to mysterious entities like State Or government.
Jon Murphy
Oct 2 2023 at 7:26am
It’s possible, but the evidence overwhelmingly suggests that Western countries (at least the United States) prefer more immigration. So, to your question, why are their preferences ignored?
Of course, the glorious thing about classical liberalism and a liberalized immigration policy is both sets of preferences can get satisfied.
nobody.really
Oct 2 2023 at 3:56am
So Congress gave the Commission authority to find that gaming is contrary to the public interest, and in this case the Commission found that this betting market is contrary to the public interest. We can dispute Congress’s wisdom in granting this kind of discretion but, at first glance, this seems like a reasonably straightforward application of the statute.
Jon Murphy
Oct 2 2023 at 8:11am
Betting markets aren’t gaming.
Craig
Oct 4 2023 at 11:14am
“So Congress gave the Commission authority to find that gaming is contrary to the public interest”
I’m thinking this is the Commodity Futures Trading Commission. They aren’t selling wheat futures, right? The statute is essentially saying that ‘gaming’ doesn’t qualify as a form of commodity futures contracts though the contracts can contemplate things other than physical commodities. But it doesn’t actually say just ‘gaming’ the Commission also noted: “unlawful under state law”
People might note that sports betting is lawful, but gambling is a weird creature under federalism and bottom line is Nevada didn’t allow it. I think, and I strongly equivocate on this one, that if Nevada, or really any other state, allowed betting on political outcomes that this would actually go through, at least in some limited extent, ie I know in NJ there is online gambling where you have to be a resident of NJ and nowhere else to play (that could have changed since I left)
Craig
Oct 4 2023 at 11:29am
Just to expound a bit further here, a quick perusal around the internet shows that one can place bets on American political outcomes on UK betting sites for instance, but these websites specifically will not take bets from people living in the US. Couple that with the fact that no websites based in Las Vegas or Atlantic City, or anywhere else in the US for that matter seems to accept bets on political outcomes it does seem that betting on political outcomes is not permitted by any US states. If it were legal, they’d do it and they wouldn’t bother with this. I would suggest that this company thought is might be able to shoehorn this in as a ‘commodities futures’ contract and bypass state prohibitions on betting on political outcomes. Ultimately the federal government and this Commission weren’t buying it. If the states DID allow this, and I believe they can much in the same way that they permit sports betting now, then these companies would just go ahead and do that rather than even bother with this Commission at all.
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