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December 18, 2011

World Peace – Finance 101

The purpose of this post is to propose a market solution to inter-group conflict whether it is tribal, religious, ethnic, or nationalistic in nature. For the market solution you need a reliable measure of well-being for the groups in conflict. For example, average income might be an appropriate metric. Then you need a futures market in the ratio of these measures of well-being. Continuing with the same example, you would need to create a market in the increase in average income of one group divided by the increase in average income of another group. These conditions are sufficient to produce world peace. Why would these conditions produce world peace? Well, this is the story to be told in this post.

First, inter-group conflict exists primarily because one group feels that it is being put upon by another group, and as a result, its prospects are not as good as the prospects of the other group. Usually, the same feelings go the other way too. ¬†Ordinarily, the greater one’s prejudice against a group, the greater is one’s certainty that that group will outperform your group. Let’s call such people extreme pessimists.

Now suppose that a neutral third party creates a futures market for the change in average income of group A divided by the change in average income of group B. What will these extreme pessimists do? Well, the group B pessimists will go long in this futures market. That is, they believe that the ratio will increase as the A group will do better than the B group. The A group pessimists will go short in the futures market because they believe that the B group will outperform their group. Going long means that you make money if the index increases and going short means that you make money if the index falls. The more extreme the pessimist, the greater the futures market position he or she will take.

What does all this have to do with peace? As soon as the pessimists have taken a financial position in the welfare of the other group, their entire mindset changes. They are conflicted with regard to any hostile or discriminatory behavior that might have been their tendency in the absence of their futures market transaction. It is possible that some positive thoughts may even enter their heads regarding the opposite group . . . because they directly benefit from the success of the opposite group.

There is a problem with this proposal. You cannot allow A’s to go long or B’s to go short. Why? Because they might double down and be more antagonistic toward the other group. This would increase conflict.

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