Corporate goals don't have to conflict with society's goals

Some people don't like the idea of using market incentives to solve social problems. The motivation for such opposition might be patch protection, or a more general suspicion of any radical new approach. But some of it centres on the apparent conflict between the values of the market and a vision of social justice.

These arguments need to be addressed. The fact is that markets have been abused, and that the 'markets' and their efficiencies have been used to justify ludicrous accumulations of wealth for activities of little or negative social merit, at the expense of ordinary people.

It’s true that corporations are self-interested; further, their interests are very narrowly defined, largely by the accountancy profession. Corporations are less interested in free markets, and more interested in doing whatever is necessary to ensure their survival. If that is at the expense of free markets, or most of a corporation's employees, or the environment, or society in general, then that is not the corporation's concern. Cleaning up after a corporation's rampage is something that is done by governments, if at all. Corporations, as they grow bigger, will do what they can to corrupt and undermine markets and manipulate the regulatory environment in their favour - all to the cost of wider society. The reckless activities of the financial institutions who siphoned off the financial benefits of their activities and socialized the enormous costs are only the most spectacular example of this anti-social behaviour. So people are right to be cynical about the benefits of so-called markets. 

But self-interest can do good things, and if we re-jig the incentives we can channel it into the public good. In economic theory, and on all the evidence, markets are the best way of allocating society’s scarce resources. It is unfortunate that, largely for historical reasons, we leave the achievement of social goals to the sort of command-and-control mechanism that is often inefficient (and can also be abused).

A Social Policy Bond regime would probably see some enrichment of corporations, new or existing, but only as a side-effect of their achieving society's agreed social and environmental goals. It could lead to the creation of entirely new organizations, dedicated to finding and implementing the most efficient solutions to our social problems. The bonds are all about building a coalition of motivated investors whose self-interest would be exactly congruent with those of society. If these investors fail to achieve society's goals, their bonds will lose value and they will receive nothing. If they achieve society's goals efficiently they will benefit. Much of this benefit will take the form of salaries for employees of these corporations. It is very like paying people to be teachers: in some societies this would be seen as sacrilegious, but we recognise today that, however idealistic they or their employers might be, teachers need to earn a salary.

 

A Social Policy Bond regime represents a new departure: rewarding people for achieving society’s long-term goals, and doing so in a way that encourages efficiency and effectiveness and punishes incompetence. Sadly, this has never been tried before. In the long run, the existence of this unambiguously socially beneficial way of accumulating wealth could make it easier to raise the tax rates on other profitable, but less edifying activities.

Aligning self-interest with social justice could generate huge benefits, and it would be a shame if these were to be denied to the people who need them most for reasons of ideology or because market forces in general, rather than their abuse and manipulation, have been discredited in the eyes of well-intentioned policy makers. 

Ingenuity is not in short supply

What stimulates human ingenuity of this sort?

Like casino designers' spatial strategies, their ambient strategies treat affect not as something passive or static, but as an active and dynamic capacity that can be harnessed and guided in lucrative directions. A study titled Effects of ambient odors on slot-machine usage in a Las Vegas casino found that slot revenue rose by a full 45 percent in a gambling area where machines had been subtly treated with a certain pleasing odor while remaining static in another area that had been treated with a different but equally pleasing odor. The author speculated that certain aromas produce an 'affective congruence with the situational context," encouraging longer play... Source: Addiction by Design: Machine Gambling in Las Vegas, Natasha Dow Schull, August 2012

Or this:

In thousands of labs across the planet, medical researchers are trying to find the cause of, and cure for, obesity. They examine genes, chemical exposures and metabolic pathways. They experiment with amphetamines, anticonvulsants, probiotics. Some of this research is funded by the companies that make and sell the food that makes us fat. In thousands of other labs across the planet, food scientists and marketers are working on ways to make you eat more. They employ highly sophisticated psychological and physiological research to this end; they examine the effects of colour, unit size, price, texture, packaging and advertising on human desire. Look around you: who is winning? Fat City, Karen Hitchcock, 'The Monthly', March

Human ingenuity can be channelled in all sorts of ways; the two examples above show how significant quantities of high-quality mental resources are channelled into producing goods and services that generate short-term, financial, benefits for corporations, while imposing heavy costs not only on wider society but also on the targeted individual consumers.

The people who do this targeting aren't evil. They raise families, take out mortgages, pay taxes and no doubt volunteer at school sports days. They are simply part of a system that rewards, more than anything else, activities that benefit a corporation in ways that can be calculated by the accountancy profession. 

It's a crazy system. Of course, we don't want a society that tells corporations what to do, and there will always be a role for regulating their activities. But couldn't we give incentives for people and corporations to generate long-term benefits for wider society? Why must society be largely driven by those transactions that are captured by corporations' trading accounts or balance sheets?

A Social Policy Bond regime would instead target society's long-term goals. It would lead to the setting up of corporations whose goals would be entirely congruent with those of society. Instead of paying people to spend their working lives implanting odours into slot machines, we could redirect their ingenuity into solving some of our social and environmental problems. We don't suffer from a shortage of ingenuity; we suffer, and some of us suffer grievously, from a system of perverse incentives, which  directs our ingenuity into activities that have little social merit. Social Policy Bonds could re-orientate those incentives: the implications of building a motivated coalition of people who, necessarily, will want to achieve society's wider goals and whose rewards will depend on how well they do so, are immense. 

Yes, outcomes are relevant, aren't they?

The current Economist writes:

More than perhaps any government in the world, America’s pays doctors to do stuff, rather than keep people well. That has to change.

Yes, quite. Outcomes matter. It's a shame it's taken so long for people to realize that. For a short piece on how the Social Policy Bond principle can be applied to health, see here.

Think: meaningful outcomes

In our large and complex societies policymakers are, inevitably, using numerical indicators in an effort to target well-being. But these indicators are often deeply flawed. My previous post pointed out some of the flaws in the use of GDP per capita as a measure of social well-being. But there is also a proliferation of useless micro-targets, as this excerpt from the UK's Daily Mail makes clear: 

How offences can vanish 

High-profile and politically sensitive crimes, such as robbery and burglary, are reclassified. For example, a robbery may be transformed into ‘other theft’ or a burglary called criminal damage. Shockingly [sic], some offences are recorded as ‘no crime’ because there is no direct evidence. A mobile phone owner may not be able to prove it was stolen so it is written down as ‘lost’. Frontline police representatives suspect many victims do not bother to report crimes because their local police station is closed. Others no longer insure household goods and therefore do not report losses. Daily Mail, 16 May

A Social Policy Bond regime would require us to be clear about what we actually want to achieve. We would formulate policy in terms of meaningful, verifiable outcomes, rather than vague, vapid sentiment, or, as in this example, targets that can easily be gamed or manipulated. This would be inherent in the way the bond regime operates. The benefits of expressing policy goals in such terms would be equally clear: more transparency, stability, efficiency, public participation and, therefore, public buy-in.

Economic growth is not a valid goal

In April the British Government's new Chief Scientific Adviser, Sir Mark Walport, set out his priorities his first major public speech since taking office. His 'five key themes' for scientific advice in government are:

1. Ensuring that scientific knowledge translates to economic growth;
2. Strengthening infrastructure resilience for the engineered world of transport, energy, the built environment and telecommunications and also the natural world;
3. Underpinning policy with evidence;
4. Harnessing science for emergencies; and
5. Providing advocacy and leadership for science. Source

It's the first that causes me most concern (as it does George Monbiot). It reflects and amplifies the widespread view that economic growth is an end in itself. But economic growth, especially as measured by Gross Domestic Product (or GDP per capita), is not an end in itself. It is an indicator of economic activity. As a measure of well-being it is deeply flawed. It does not distinguish between helpful and harmful economic activity. It puts no value on any activity that bypasses the monetary economy. So it ignores leisure time, the environment, crime, health, and other things that are meaningful to natural persons. Crucially too, it ignores how the economic output it purports to measure is distributed within society.

The more than minimal fraud is in measuring social progress all but exclusively by the volume of producer-influenced production, the increase in GDP. J K Galbraith, 'The Economics of Innocent Fraud', Penguin Books, 2004.

This identification of societal well-being has permeated the thinking of our politicians, officials and now, it seems, our top scientists. We are just not in the habit of formulating policy goals in terms of outcomes that are meaningful to ordinary people. So, by default (or by conscious fraud), GDP per capita has become the de facto indicator of social well-being. We need to think urgently about changing this.
 

The dog's breakfast that is Kyoto

George Monbiot laments our failure to cut back greenhouse gas emissions:

The European Emissions Trading Scheme, which was supposed to have capped our consumption, is now, for practical purposes, dead. International climate talks have stalled; governments such as ours now seem quietly to be unpicking their domestic commitments. Practical measures to prevent the growth of global emissions are, by comparison to the scale of the challenge, almost non-existent. Via dolorosa, George Monbiot, 10 May

Attempts to cut back greenhouse gas emissions were always doomed to fail. And, in the form that they have taken, they deserve to. Why? Several reasons:

The causal relationship between emissions and climate is too obscure, scientifically and (largely) hence politically. Nobody's going to take serious action when the relationship between cause and effect is so difficult to pin down. All the costs of emission cutbacks are upfront. All the supposed benefits are uncertain and, if they ever do arise, it won't be until decades into future. At a time when our scientific knowledge of the existence, causes and effects of climate change is expanding rapidly, Kyoto and the attendant nonsensical emission trading schemes rely on science that was fossilized in the 1990s. Perhaps it was all an elaborate conspiracy designed specifically to do distract us while allowing the continued exploration for and exploitation of fossil fuels. A few windmills and higher electricity bills notwithstanding, that's basically the sum achievement of Kyoto and the millions bureaucrat-days that have been spent on the climate change issue.

A Climate Stability Bond regime would have been different. For a start, it would not assume that climate change is happening; it would not assume that if it is happening it's caused my man; and it would not have as its goal the cutting back greenhouse gas emissions. Instead it would start by specifying what exactly are our climate-related goals, all of which would have to be achieved before taxpayers lose a penny. Our climate goals would include physical, biological and financial measures of the world's climate and its impacts, all of which would have to fit into specified ranges in, say, the years 2030, 2040 and 2075, before the bonds would be redeemed. The bonds would stimulate diverse, adaptive approaches, that would stimulate and continuously respond to our rapidly growing knowledge of the climate. Despite the very long term goals of a bond regime, people would still be rewarded along the way, by doing what they can to achieve our climate goals and so benefiting from the consequent increase in the market value of their bonds.

Incentives matter. The incentives under the current system are, as Mr Monbiot has discovered, to misdirect the public and scour the planet for fossil fuels. Climate Stability Bonds would instead reward people for doing whatever we can to prevent climate change and its depredations. Because the targeted outcomes of a bond regime would be meaningful to ordinary people, they would generate participation in, and buy-in to, the approaches adopted by investors in the bonds.

The contrast with the current dog's breakfast of failed regimes is total.

Cyprus

James Meek reporting, from Cyprus, quotes Panikos Demetriou, holder of an account at a Cypriot Bank:

'We have 56 MPs,’ he said. ‘Forty of them are solicitors. Everything that goes on in Cyprus is with their consent. If they didn’t want the tax dodgers and the laundered money, they would have done something about it years ago. I’ve been here seven years and I’ve yet to see a tax dodger or anyone from the stock exchange come up before a judge so we can say: “This is the man, he’s behind bars.” Not one person. Nobody gets punished in Cyprus. Nobody gets punished and the same thing is going to happen this time round. At the end of the day they punish the ordinary person.’James Meek, the Depositor Haircut, 'London Review of Books', 9 May

It's for the best that lawyers engaged in legal proceedings should be pre-occupied with process, rather than outcomes. But making policy is - or should be - different from conducting legal cases or making laws. Perhaps because outcomes play only a rhetorical role in our policymaking, lawyers typically make up a large proportion of policymakers, and debate about policy revolves around things that matter to lawyers: process, structures, funding arrangements.

...Or precedent; a process that was satirised by Francis Cornford in Cambridge a century ago in Microcosmographia Academica: 

The Principle of the Dangerous Precedent is that you should not now do an admittedly right action for fear you, or your equally timid successors, should not have the courage to do right in some future case, which, ex hypothesi, is essentially different, but superficially resembles the present one.  Every public action which is not customary, either is wrong, or, if it is right, is a dangerous precedent. It follows that nothing should ever be done for the first time. (Quoted here, in relation to Oxford University, by John Kay.)

Tried, tested and failed will win every time under these circumstances. Ticking boxes becomes a substitute for innovation, adaptation and diverse approaches.

Social Policy Bonds could re-orientate policymaking so that outcomes would play the central role: outcomes that are meaningful to ordinary people, so that we could, if we wished, participate in the policymaking process. Or, at least, we could understand it, so that it could not be hijacked, Cyprus-style, to serve the interests of a corruptible elite.

Policymaking and journalism: it doesn't matter if you're wrong.

John R MacArthur writes:

What’s the use of being right, in journalism or politics? I gave a lot of thought to this question during the tenth anniversary of the American–British invasion of Iraq, and I’ve come to the conclusion that being right is not much use at all, at least as far as career advancement goes. No reward for being right on Iraq, John R MacArthur, 'Harper's Magazine, 18 April

Incentives are important, and they needn't be monetary. Unfortunately, our current political system, beset as it is by its own complexities as well as those of society, does not reward success or punish failure consistently enough to filter out stupid policies. Mr MacArthur quotes Scott Ritter: "Everybody who lied about the [Iraq] war got rewarded because they played the game." Exactly so. When it comes to looking back at evaluating policies - something that's rarely done - few people are rewarded in their lifetime for being right. Amongst politicians loyalty counts for far more.

Social Policy Bonds would change that. They reward people not for who they are, what they say or for whom they support, but for achieving society's explicit goals. Society's limited resources would be channelled into the achievement of these goals, transparently and impartially. Politicians couldn't get away with insane, disastrous policies; instead they would, under a bond regime, be limited to what they do best: articulating society's goals and raising the revenue for their achievement. Efficient approaches would be rewarded by the way the market for the bonds works. Inefficient approaches would receive little funding and be terminated - something that rarely happens under current policymaking systems. Under a bond regime, successful achievement of society's goals is the top priority. Under the current system it hardly features at all, as Mr MacArthur's poignant article makes very clear.

Obesity is like poverty or climate change: there's no obvious cause

Everyone thinks he or she understands obesity. Believe it or not, this is one of the harder medical conditions to comprehend. Why? Obesity is a combination of several factors: physics, biochemistry, endocrinology, neuroscience, psychology, sociology, and environmental health, all rolled up into one problem. Robert H Lustig, Fat chance, December 2012

Obesity is much like any social or environmental problem. There's very little point in government picking a particular theory or approach and backing it with taxpayers' funds. There's no obvious causal relationship. The best government, or any interest group can do, is to stimulate diverse approaches that adapt over time to changing circumstances and our expanding scientific knowledge.

It wasn't always like that. In health care it's now widely accepted and has been clearly shown that, for example, decent sanitation is essential for good physical health. Society and the environment were, generally, less complex in those days. But there is a lot more complexity now. Government would do better, when dealing with very complex concerns, to target outcomes, rather than the supposed means of achieving them.

Social Policy Bonds allow government to do this in ways that channel market forces into socially useful directions. When it comes to obesity, government should think clearly about what it wants to achieve, then reward those approaches that most efficiently achieve it. It might be that obesity itself is not a problem, but rather a marker of other health problems, as Dr Lustig says in his book. In that case, government should directly target those health problems for solution.

A Social Policy Bond regime would not prejudge the ways of tackling complex health problems. It would focus entirely on society's health goals and put in place a system of cascading incentives rewarding those who achieve them in the most cost-effective ways. For more information, check out my book or other papers, which can be freely downloaded from my Social Policy Bonds website.

It's all too complicated

Our financial system has become as complicated as our social and physical environments. All are too complicated and too rapidly changing for ordinary people ever to understand fully so, by default, hugely important policy decisions are made by people who are at best, under-informed or, at worst heavily influenced by the campaign funding contributions of vested interest groups. We aren't going to see a reduction in complexity; not in our social and physical environments. There are just too many variables and time-lags, combined with rapidly changing circumstances and growing knowledge of scientific relationships. Politicians can readily escape or deflect censure even for their worst policies, because the relationships between cause and effect are too delayed or obscure to identify unambiguously. The incentive to get long-term policy  right is correspondingly diluted.


Social Policy Bonds don't require a prior knowledge of cause and effect. Instead, they start from broad, desirable social and environmental outcomes. Say we want to increase society's physical well being, defined as some agreed, weighted combination of objective indicators, such as longevity, Quality Adjusted Life Years, etc. It would not then be up to policymakers to establish, rule on (or obscure), say, the relationship between burning coal and lung disease, or between a new drug and its net benefit; instead our politicians would, in effect, contract out the achievement of society's health goal to a motivated coalition of investors, with powerful incentives to reward the most efficient ways of improving society's health and, crucially, to terminate the least efficient.

Health, like a robust financial system and a benign physical and social environment, is too complicated for anybody to understand. But, rather than resign ourselves to cynicism and despair, we could adopt some or all of the most salient features of a Social Policy Bond regime: a focus on desirable outcomes in the form of broad, quantifiable, goals; and the channelling of market incentives into their achievement.