A Derivative
Market on Terrorism
by
William Krehm
Carl Hulse in The New York Times (29/07/03, “Pentagon Prepares a Future Market of Terror Attacks”) brings us great tidings:
“Washington – The Pentagon office that proposed spying electronically on Americans to monitor potential terrorists has a new experiment: a futures trading market on which speculators would bet on terrorist attacks, assassination and coups. Traders bullish on a biological attack on Israel or bearish on the chances of a North Korean missile strike would have the opportunity to place their bets on such events on a new Internet site established by the Defense Advanced Projects Agency.
“The Pentagon called its latest idea a new way of predicting events and part of its search for the ‘broadest possible set of new ways to prevent terrorist attacks.’
[However], “two Democratic senators who reported the plan called it morally repugnant and grotesque. The program fell under the control of Admiral John M. Poindexter, President Ronald Regan’s national security adviser. Senator Byron L. Dorgan of N. Dakota, said the idea seemed so preposterous that he had trouble persuading people it was not a hoax. What if another country set up a betting parlor – sponsored by the government itself – for betting on the assassination of an American political figure?’”
No Bets on Abe Lincoln’s Assassination!
Imagine the backward Americans of the day letting Lincoln’s assassination pass without using it to enhance their personal fortunes and the national GNP!
Perhaps it should not be so surprising when lurid stories of billions of profits contrived by proactive speculators are still pouring out of sundry commissions of enquiry. At this rate the tale of Wall St.’s liabilities kept under the table, or entered on the books as assets, will become the dominant folklore of the land, filmed and set to music, and icons of East-coast culture to provide symmetry with the more staid epics of the Wild West. The heroes will be the Accountants who designed the scams, while the largest banks of the land laboured to find the credit to keep fictitious energy trades going. In such a setting, what would prevent a patriotic gambler, massaging the market for a decent profit, from organizing an assassination or two, going long instead of short on mayhem and murder, because it was the smart thing to do? The market, that can never be wrong, after all, is much of the time a spectral thing. Too many over-achievers with an itch in some part of their anatomy make their own market and then modestly step back to hide the fact.
Such concerns seem to have trickled into the skulls of some high Republicans. The New York Times piece reports, “The decision to cancel government support for the efforts was announced by the Senate Armed Services Committee Chairman John Warner, a Virginia Republican. This followed a conversation with Tony Tether, head of the Department of Defense Advanced Research Agency, or Darpa, which was in charge of the project. Poindexter was fired within a few days.
“The project was a twist on a concept that has gained popularity in recent years. An April report by Credit Suisse Boston said that what are known as ‘decision markets’ had been ‘proven to be uncannily accurate’ in predicting every thing from election outcomes to Hollywood blockbusters. The key to their success, the market found, is that the markets’ ‘aggregate information across traders, allowing them to solve hard problems more effectively, than any individual can.’”
Undoubtedly that would include Florida electoral recounts.
“Still, Deputy Defense Secretary Paul Wolfowitz got an earful about the project when he showed up at the Senate yesterday. ‘Darpa is brilliantly imaginative,’ he said, ‘in places where we want them to be imaginative. It sounds like maybe they got too imaginative in this area.’” That too, of course, could lend itself to a variety of interpretations. The criterion in distinguishing too much imagination from just the right amount is whether you can or can’t get away with it.
We might in defence of the bizarre effort point out that this is only an extension of the basic official credo by which the economy has been run for at least three decades. “The market” is proclaimed all wise, rational, and better than anything else at solving society’s problems. If the continents are beset with epidemics that were considered conquered, if pollution is changing the atmosphere we breathe into noxious fumes, or whatever, then all you need do is put a price on the problem, and those in eternal quest of bigger bucks will automatically come up with the solution.
Further growth, it doesn’t seem to matter of what – profits, GDP, market share, or toe-nails – is the ultimate solution.
It is generally agreed by mathematicians and linguists that abstracting the concept of number from something concrete being counted – marked an enormous advance in human thinking. Before that, man’s handling of numbers had been hobbled by his inability to achieve abstraction. Evidence of that is embedded in our language. Even the name of digital as in digital technology is a reminder that our ancestors at one time counted on their fingers and toes. Likewise expressions like two-score, four-score, or quatre-vingt in French. But if you passed from twenty (as in fingers plus toes) to larger numbers, there would probably have been be a switch from fingers to horses, or cows. But there was a limit to that, too: a point would be reached where the imaginary horses or cows necessary to support the concrete number would automatically introduce alien concerns – e.g., vast amount of pasture, and water to prevent the imaginary horses and sheep dying of famine or thirst as their numbers grew. That is why freeing the concept of number from its concrete physical embodiments was of such vast importance. You could count beyond 30 or 40 without being distracted by the problem of where the fodder to support them would come from. Otherwise your calculations would collapse.
But that gift for abstraction did not stop there. A capitalist economy itself is based on a not entirely dissimilar calculation. Karl Marx in his day pointed out that the concepts of interest or profit are eventually transformed from a clearly social arrangement and regarded as inherent traits of money itself. Interest and profit came to be seen as a derivative of money, an inherent attribute of it. And in our days such derivatives of useful products – their cost, their price, the increase of their price, the interest paid to finance the operation, or what could be gotten from lending out the proceeds of their sale – began living lives of their own. Precisely because it is an abstraction, and dealt with a rate of increase of something basic that really exists, this allowed you to vastly leverage up the scale of your speculation – say by two or three digits. If you won, you won big. And there were ways of ducking your responsibilities if you lost. That rate of growth of interest, itself was a “derivative” of the productive process. And in good time the increase in the rate of its growth becomes the important thing – the second derivative of profit. These value of these successive derivatives projected into the indefinite future are than discounted for their present value and incorporated into the prices of the stock market. Eventually it becomes more and more growth in the abstract, The more removed it is from its concrete social function – producing commodities that people really need – the more uninhibited its growth and the acceleration of the rate of growth.
But all that was not invented by Poindexter or Wolfowitz. It was directly copied from the economic model by which society has been run increasingly for the past three or more decades, and has given us the biggest speculative bubble and what might be the biggest bust on record. The Democratic senators who scotched the project on moral grounds, must not only be applauded but encouraged to pass on to a search for the roots of the Pentagon’s inspiration.