One of Hayek's best ideas is that market are great epistemic discovery engines, especially when the relevant information is dispersed and it is valuable to agents (see here and here). A creative, philosophically trained economist, Robin Hanson, saw that prediction/betting markets (so-called Policy Analysis Markets (or PAM)) could fill a role prior to policy making by inducing people to reveal potentially valuable information to policy-makers at a price. I heard Hanson speak about it a decade ago, and I was admittedly intrigued. Modeled on Iowa betting markets, the first PAM blew up spectacularly amidst political controversy that it would create additional financial incentive for terrorists. (No doubt the involvement of John Poindexter made matters worse.) Reflection on Hanson's case (and others in which philosophical-scientists/experts have their ideas applied in the real world), influenced my development of the "Socratic Problem" concept; that is, philosophers that enter the public sphere -- Heidegger, Mill, Socrates, Adam Smith, Rousseau, etc -- can expect that people will be interested in more than just their arguments, but also how those arguments relate to their public activity. This scrutiny and the authority it may have in philosophy is the "Socratic Problem" (recall here, here, here, and; a concept I sometimes deploy in my research (on, say, the Chicago Boys in Chile under Pinochet [here's the published version]) (which I have also explored in reception of Newtonian natural theology).)
Despite the demise of Darpa's initial PAM, the concept and its application have not gone away: policy-makers (in corporate world and government) know that sometimes they don't know all the relevant information. Moreover, sometimes they need to make forecasts so why not use the wisdom of crowds or people's willingness to bet on an outcome? Now, recently Erik Snowberg, Justin Wolfers, and Eric Zitzewitz circulated a NBER working paper that was mostly favorable to the idea, but also included some criticism. [I have been following Wolfers' work since 2007, when I tried to organize a conference in which I would bring economists and philosophers together--alas my grant proposal was never funded.] The NBER is as close to the exitence of an economics establishment, by the way. But Snowberg et al are also critical of betting markets and in the end are quite deflationary about the uses of these markets (the nub: PAMs are mostly useful for scientific modeling, not policy-making), and their criticism was taken up by The Economist no less. I am sympathetic to Hanson's response, but he overplays his hand.
At one point Hanson argues as follows:
"Snowberg, Wolfers, & Zitzewitz also err in saying that sometimes there is “no” info:
An extreme form of information not being widely dispersed is when there is no information at all to aggregate. For example, prediction markets on whether weapons of mass destruction (WMDs) would be found in Iraq predicted they would very likely be found. The false confidence that could be inspired by such an estimate ignores the fact that there was no information being aggregated by these markets. That is to say, it was unlikely that anyone in Iraq, who might actually have some information (perhaps based on rumors, past experience, or informal discussions with friends and relatives in the government) about whether Iraq’s WMD program was likely to exist or not, was trading in these markets.
Yes particular info, such as direct personal observations of WMD efforts, existed out there somewhere, but was prohibitively expensive to supply. That is, the price to buy info offered by the Intrade markets was too low to induce folks with such info to supply it. But that hardly meant there was no info available on the subject! There were a great many cheap but relevant clues available for making rough guesses on the subject, and I’m pretty sure that a lot of trading in that market was based on such clues.
When you offer to pay a certain price for info, an efficient info exchange mechanism will typically induce some supply of that info, but only up to the point where the marginal cost of supplying info reaches the price you have offered to pay. It is no failure of an exchange mechanism when buyers cannot always buy everything they want at as low a price as they want."
Hanson's point is non-trivial. Like all institutions PAMs are imperfect. They cannot always deliver the goods the designers of the PAM wish to possess. Moreover -- and this is a more subtle point -- sometimes the information is contained in the prices, but neither the other betters nor the people tracking the market can extract the relevant information from the price-formation/evolution taking place in the market. This is a non-trivial problem and it plagues all attempts to simulate markets. (Recall my remarks on Oskar Lange.)
Even so, I think Hanson is systematically blind to a Hayekian point that Wolfers and his co-author are struggling to make. Sometimes (i) we do not know what the right question to ask is; or (ii) we mistakenly assume that our questions are well-posed (iii); or we mistakenly assume that absent-betting markets (or not) the world is determinate (recall my most recent post on uncertainty). In all three instances (sometimes they are combined, of course) the answers of betting markets may well provide false security or encourage over-confidence to their users. This is why the NBER authors may be wise to restrict its use to aiding in the important work of understanding models (which may be a tool of policy down the road, of course) rather than potentially elusive reality.