Futarchy As Meta Governance

While anyone can buy stock in public firms, private firms are instead held by a more concentrated and exclusive set of owners. Such firms tend to make higher returns than public firms, and are more responsive to investment opportunities. They tend to be taken public when they reach a stable situation where managers can just “milk the cow”, while public firms tend to be taken private when they start to face many big new decisions.

The basic idea is this: when CEOs of public firms make substantial and uncertain investments, they face the immediate judgment of market speculators, expressed in the firm’s stock price. And without a good inside view of particular investments, speculators have to rely on the average return of such public firm investments, which tends to be bad. So the firm stock price falls, after which the CEO may not last long enough to see if their investments actually pay off.

Thus CEOs of public firms tend to invest only when they can show speculators enough to convince them of their investments’ unusual value. So they tend to make investments that are clearly much like successful prior projects, and so can be judged on the track records of such projects.

In contrast, CEOs of private firms typically hold far larger personal fractions of the firm’s stock, and so consider their investments more carefully. They can invest using info that they can’t effectively communicate to market speculators, and so they can make novel investments, different from what they and others have done before.

Thus private firms seem to be a superior form of firm governance. Why then are there any public firms? Because there are only a limited number of skilled CEOs and trusted partners rich enough to take firms private. Over the decades, we have been creating more such people, and a larger fraction of business firms have been converted to private equity. And until the public can more easily invest in private firms, their money will have to go somewhere.

All this could be see as a critique of futarchy, since futarchy picks actions using the info that is available to market speculators. Without access to the extra info typically available to private firm CEOs, such speculators must make the sorts of judgments that public firm speculators typically do about possible firm investments. Thus, for max profits, it seems better to take a firm private than to have it run either by a CEO responsive to a public stock price, or by futarchy speculators who advise particular decisions.

Futarchy might be able to advise a public firm on whether to go private, but that decision seems to be well made by a simple auction. If private investors are willing to pay more for the firm than public investors, it should go private. But alas we typically block this sort of solution via poison pills, and maybe people would be more willing to listen to futarchy advice on this key decision.

Futarchy seems to have a better chance of advising public firms on key decisions where we suspect the CEO might be biased. Such on whether to replace the CEO, or on how much more money to raise from investors, when, and at what price. But while this is a reasonable hope, it is far from a sure thing.

The best case for futarchy seems to be in cases where we are just not sure that max profits, even if expertly executed, is the outcome we want. Then we can use a futarchy tied to some other outcomes that we better trust, and ask futarchy either re specific decisions, or whether to hand off decisions to something else, like a private firm. Or whether to later change back from a private allocation.

Competing private firms seem to be our best known institution for getting the most profits from some area of life. And we economists do have good reasons to expect that this is often the best way for everyone to get the more of what they want. But we economists also know of many plausible exceptions, and many others have stronger doubts than economists about for-profit ventures.

So there’s a place for an institution that makes reliable, unbiased judgements about the effects of key decisions on other outcomes, judgements that are quite well informed compared to most other institutions, even if not as well informed as private choices. We can plausibly best trust this institution for our most meta decisions, on which other institutions to use when and where.

The main more meta decision that remains is: what are the ex-post measurable outcomes for futarchy to use when making these decisions?