New procurement in Barcelona and Philadelphia

Christopher Swope writes about changes in procurement in the cities of Barcelona and Philadelphia: 

Typically when cities buy goods or services, they spell out in strict detail exactly what it is they want to buy. But that level of specificity stifles innovation, because it restrains the inventiveness of companies who might bid on the work. It also limits the pool of bidders to established companies familiar with the sort of solution the tender asks for. Barcelona’s less proscriptive approach turns the old system on its head. Rather than laying out exactly what it wants to buy (say, bike lockers), Barcelona is laying out six problems it wants to fix (such as reducing bike theft). How Barcelona and Philadelphia Are Turning Procurement Upside Down, citylab, 18 July

Anyone familiar with Social Policy Bonds will see the similarity: specify outcomes, rather than the supposed means of achieving them: 

Responses could involve buying things, but they might also suggest new services, regulatory changes or any other means of accomplishing the goal.

Excellent - as far as it goes. This procurement system will stimulate diverse, innovative solutions. The difference, and it's a big one, between this mechanism and Social Policy Bonds, lies in how these various possible solutions are decided upon and rewarded.

It appears that after gathering together various diverse possible approaches, a selection is made, presumably of those approaches deemed (I'm not clear by whom) to be the most promising. And the reward?

Anyone around the world with a creative idea, including startup companies or even individuals, has a shot at a contract and all the market legitimacy that comes with that.

It's an improvement over the current system, but in comparison with Social Policy Bonds, I think it has weaknesses:

• The selection of the most promising approaches might be open to favouritism, image, or corruption - in short, qualities that have little to do with efficiency. More seriously, it's a one-off selection, made under circumstances that will be very likely to change so as to make the selection sub-optimal. 

• Once the selected approaches are made and implemented, there seems to be no further discipline: the team working on the selected approaches has little incentive to be or remain efficient. They've won the contract; there's every incentive to sit back and relax. 

Things would be different under a Social Policy Bond regime, whereby bondholders, that is those who are charged with implementing solutions, can continue to reap the rewards of doing so only if, in the eyes of motivated competitors, they are the most cost-effective provider of solutions. There is a continuous incentive on bondholders to be efficient. If they are seen to be inefficient, their bonds will be worth more to operators who think they can be more efficient, who will then buy them.

Also, under a bond regime, taxpayers (or whoever else backs the bonds) lose nothing if the specified goal isn't achieved. And if the goal is achieved, rewards will tend to be distributed to bondholders according to the contribution they make to achieving it, and their efficiency in doing so. All this makes a Social Policy Bond regime more versatile than this new procurement initiative, and one more capable of achieving larger, more remote goals, for which a single, unvarying, combination of operators is unlikely to remain at all times the team best placed to achieve society's goals efficiently.

War and peace, and GDP

Readers interested in a meta-solution to the conflicts in the Middle East could do worse than read my short piece on Peace Bonds. Defining peace in terms robust enough for our purposes might not be easy, but the necessary thinking will help clarify exactly what we want to achieve. As in many other policy areas, there are plenty of statistics already being gathered and with some verification and supplementation a combination of them could be targeted by a Peace Bond regime. See, for instance, this site, for some indicators that we could target. 

On another note, David Pilling asks: has GDP outgrown its use? As I have repeatedly posted (here, for instance), the answer is an unqualified yes.

Er ... we meant wind-powered cars

The Economist urges cuts in greenhouse gas emissions with this compelling argument:

Moreover, high temperatures do not affect only outdoor workers. [A] study found that a week’s worth of outside temperatures over 32°C cuts production in car plants by 8%. The costs of doing nothing, Economist, dated 28 June

Wow, this climate change business is serious: we must cut back on greenhouse gas emissions - and quickly - or we could see big falls in the numbers of cars being produced!

Biodiversity

How much biodiversity do we want? It's unfortunate that we even have to ask this question, but until we answer it we're likely to see more and more extinctions, along the lines described by Elizabeth Kolbert. Biodiversity is difficult to measure but, again unfortunately, unless we do, and somehow set quantifiable targets, we shall lose it at a high rate as habitat loss and other mankind-induced environmental changes continue apace. Biodiversity, along with other unquantified but crucial contributions to quality of life is something else that is being be sacrificed by default in pursuit of an ever-higher Gross World Product; our de facto over-arching target.

How would a Social Policy Bond regime address biodiversity? We could target it quite directly, using a combination of proxies such indicator species, and areas (and contiguity) of land and sea set aside for conservation.We could also target for reduction the negative impacts of loss of biodiversity.


Myself, I'm no expert in these matters. But there are experts who, if we were motivated, could be brought into a discussion, culminating in biodiversity goals and priorities in ways that maximize society's well-being per dollar spent.

It's not being done, partly because our policymaking is stuck with a system that doesn't allow governments to set goals unless they also achieve them - something that, when it comes to complex, long-term, goals, requiring adaptive, diverse approaches, they cannot do well.

The Social Policy Bond principle is different. Under a bond regime governments - or any wealthy group of people, corporations, or non-governmental organizations - could set goals as lofty and long-term as a world of maximum biodiversity (however it's defined), and reward the people who achieve these goals. We need now, more than ever, diverse, adapative approaches to challenges such as biodiversity loss or, for that matter, violent political conflict; huge threats, but ones that are largely ignored in pursuit of goals whose only virtue is that they can be measured by accountants.

Foundations of bone and sand

Twenty-five years after the world first moved to protect the ozone layer, British scientists have found three new potentially damaging gases in the atmosphere. While they do not expect the gases to do much damage to the ozone layer, think they may add to global warming. Threat from new gases found in air, Alex Kirby, 4 June

For years now I've been railing against building policy on fossilised foundations. To put it briefly, government does not know how best to achieve society's goals. When it looks at climate change it relies on science done in the 1990s; its policy is to cut back on greenhouse gas emissions - or rather, those gases identified as greenhouse gases more than 15 years ago. But what if, as I've been asking for not quite15 years, the science is wrong? Or outdated? The policymakers, true to form, have no answer except to continue building on crumbling foundations.

When society is changing so rapidly, when our scientific knowledge is expanding at an ever-increasing rate, then policy should target outcomes, rather than the supposed means of reaching them. A Social Policy Bond regime would do this. It would encourage diverse, adaptive approaches to whatever it identifies as the problems arising from, in this example, climate change. Our current policymaking system cannot adapt. It puts the interests of current organizations, be they public or private sector, first, and if it does build new organizations, it does so on ossified foundations.

Targeting human devastation

I've posted before about the flawed nature of what has become, by default, society's de facto indicators of success: Gross Domestic Product (or GDP per capita) and its rate of growth. In the absence of any targets that are actually correlated with societal well-being, GDP has been enshrined as the target, par excellence, by which our governments measure their progress. It's highly misleading at best, for reasons I've outlined previously, so it comes as no great surprise that on 22 May:

Istat, Italy’s statistical body ... will from October ..include drug trafficking, prostitution, and alcohol-and-tobacco smuggling in its economic-output numbers.... In fact, then as now, Italy was merely one of the first countries to announce its compliance with international accounting standards. Reporting illegal economically productive activity in which all parties take part voluntarily is required under EU rules known as the European System of Accounts.... Sex, drugs and GDP, 'the Economist', 31 May

Well why not? It's no more illogical than doing what we have been doing for decades: assuming that economic activity generates societal well-being - an assumption that is increasingly at odds with reality. 

We urgently need to target explicitly things that we actually want to achieve: universal literacy, for instance, world peace, or even the survival of the human race. In the absence of such targets, the vaccuum is filled by that grotesque proxy for success: Gross Domestic Product. It's a shambles.

The moral case for tax avoidance

George Monbiot writes about Scotland's deer-stalking estates and grouse moors:

Though the estates pay next to nothing to the exchequer, and though they practise little that resembles farming, they receive millions in farm subsidies. The new basic payments system the Scottish government is introducing could worsen this injustice. [Andy] Wightman calculates that the ruler of Dubai could receive £439,000 for the estate in Wester Ross he owns; the Duke of Westminster could find himself enriched by £764,000 a year; and the Duke of Roxburgh by £950,000. I'd vote yes to rid Scotland of its feudal landowners, George Monbiot, 'the Guardian', 19 May

It's not so much the wastefulness of such subsidies, nor the environmental devastation they wreak, nor even the lunacy of taking money from ordinary people to subsidise wealthy aristocrats and monarchs. Rather, the issue is the persistence of such stupid, corrupt policies, which have hardly changed in the several decades since they were first exposed and their impacts quantified. We have no systems in place to act on the voluminous evidence of their disastrous (for more than 99 percent of the population) effects. This is one big disadvantage of making policy as if outcomes are irrelevant: nobody has incentives to terminate failed policies. Instead, the beneficiaries of lucrative-but-stupid policies, have every incentive to oppose their withdrawal, and the means by which to do so.

Mr Monbiot goes on to describe the visual impacts:

The hills in many parts look as if they have been camouflaged against military attack, as they have been burned in patches for grouse shooting. It is astonishing, in the 21st century, that people are still allowed to burn mountainsides – destroying their vegetation, roasting their wildlife, vaporising their carbon, creating a telluric eczema of sepia and grey blotches – for any purpose, let alone blasting highland chickens out of the air. Where the hills aren't burnt for grouse they are grazed to the roots by overstocked deer, maintained at vast densities to give the bankers waddling over the moors in tweed pantaloons a chance of shooting one.

Eradicating war without blueprints

Richard English writes:

[T]o pursue the eradication of war would be as naïve as to pursue human or moral perfection; the effective curtailment of particular wars, or specific war-time brutality, almost certainly depends instead on recognizing our appalling capacity for (and even our historical tendency towards) justifying and practising violent atrocity. ...

For the prospect of establishing human behaviour along lines guided too closely by idealized blueprints probably exaggerates human capacity for improvement. Modern War, Richard English, 2013

I don't agree with the first clause; 'naive' implies that eradicating war will be impossible to achieve. I do agree that being 'guided too closely by idealized blueprints' will, in itself, not be sufficient to eradicate war, though it might be one necessary approach. This is where the Social Policy Bond principle enters the picture: we aim to eradicate war; we raise funding to achieve that goal, but we do not ourselves draw up blueprints as to how to achieve our goal, nor do we try identify who might best achieve it. Instead we issue Conflict Reduction Bonds (or Middle East Peace Bonds, or World Peace Bonds). These are no idealized blueprints: they are means by which motivate people to solve mankind's most grievous social problem.

Much that is good in this world has come about almost randomly, often as a by-product of some persons' pursuit of short-term financial gain. Or only after calamitous experience and exhaustion. I think we can do better: we can supply incentives for people to achieve social goals and let the market - the best way of allocating resources ever discovered - decide which approaches are best and which should be terminated. Idealized blueprints won't always work and, as Mr English also says, "most of our attempts to set out prophylactic measures and structures against modern war have seemed (and continue to appear) frequently doomed to blood-spattered failure." But sometimes, some of these approaches and institutions do actually work. A bond regime would encourage people to persist in those circumstances, and to explore, and refine other approaches too. I don't think that's naive.

Subsidising planetary destruction: et tu, Australia?

Divabat on metafilter summarises Australia's 2014-15 budget:

Amongst the casualties: television, young people (and the organisations that help them) and old people, tech startups, postgraduate students, people with disabilities and anyone seeking medical care, foreign aid, Indigenous people, the arts, renewable energy, and the environment. However, if you are in defence, mining, or Indonesian immigration, you should be fine.

Yes, the fuel tax credit scheme for heavy diesel vehicles will continue. This is worth about US$2bn in taxpayer subsidy to big mining corporations.

Social goals: neither barmy nor simplistic

Yves Smith does us all a service in exhuming and refuting Milton Friedman's claim that "corporations exist to maximise shareholder value". Friedman wrote, in 1970:

That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.... The Social Responsibility of Business is to Increase its Profits, 'The New York Times Magazine', 13 September 1970

Perhaps that was believable back in 1970. Since then, it's become clear that the basic rules of society are there to be manipulated or ignored in pursuit of corporate earnings. As Mr Smith reminds us, corporations pursue corporate goals, rather than those of shareholders. Nevertheless, Mr Smith concludes:

Friedman’s simplistic, barmy idea found fertile ground. And it became self-reinforcing as executives learned to use it to line their wallets. The long-lived, difficult to displace but not lavishly paid corporate chieftain was over time supplanted by wildly overpaid straight-from-central-casting CEOs. Why worry overmuch about longevity if you can rake it in a 3 to 5 year tenure? ....  So again, repeat after me: “maximizing shareholder value” is an idea made up and promoted by economists, starting with Milton Friedman and his Chicago School cronies. And like many ideas that came out of the Chicago School, the public as large has suffered from treating a soundbite like a serious policy proposal.

All true and important. But perhaps the deeper and broader problem is the mismatch between metrics that become targets, and the well-being of society.

My hypothesis is this: In an older, less complicated, world the correlation between an accountant's view of a corporation and that corporation's success would be strong. So too would be the correlation between the success of a corporation and its contribution to social well-being. Since those days, as population has grown, as society has become more complex, and as our more basic needs have been more satisfied (largely thanks to the activities of these corporations), the correlations have become weaker. A corporation's success can have negative, non-market, impacts on the environment about which we feel more strongly. Its activities and products or services can contribute very little to social well-being, or even detract from it.

All this is not to deny that there are a lot of positive externalities arising from corporate activity. My point is that we have no systemic means of encouraging corporations to, in Friedman's words, conform to the  basic rules of society. If a corporation creates havoc in the social or physical environment, then we rely on government to put a stop to it: but often this is too little, too late, partly because of inevitable time lags, partly because government relies on corporate taxes, and partly because big business and government are just too close and corporations find it easy to subvert or ignore those basic rules.

Accountants' measures of success are less and less reliable indicators of social well-being. And the single over-arching accountancy-derived metric is that of Gross Domestic Product (or GDP per capita) which is explicitly or implicitly targeted by almost all governments (except, probably, that of Bhutan).

We need new targets; targets that correlate strongly with society's real aspirations. Targets that reinforce conformity with existing and enhanced basic rules; that countervail current incentives to subvert or ignore them.

That's where Social Policy Bonds could enter the arena. The bonds would act as a meta-system, into which corporate activity would fall. They would target broad social and environmental goals and reward people for achieving them. They would reduce the incentives for corporations, and their friends in government, to aim for goals that satisfy accountants as distinct from, or against, society and the environment. It's time we moved on from identifying the narrow, short-term goals of big business with those of ordinary members of society. They aren't identical; they can conflict, and they might even be diverging.