2005

It hasn’t been a great year, either for Social Policy Bonds or for policies that are subordinated to outcomes.

Nobody has issued Social Policy Bonds, as far as I am aware, during 2005, nor has there been much professional interest. I have been updating the text of my book Injecting incentives into the achievement of social goals: Social Policy Bonds, to reflect my view that the private sector is more likely to issue Social Policy Bonds than government agencies. I expect to have the text completed during the first quarter of 2006. I haven’t begun looking for a publisher yet. Anybody who has purchased any of my books can email me for an electronic version of the new book, free of charge, at any time. There has been no media coverage of Social Policy Bonds apart from a couple of articles in New Zealand newspapers, in which I offered Climate Stability Bonds as an improvement over the wildly expensive, moribund, Kyoto process.

As regards policy: there has been some delinking of subsidy from production levels in EU agriculture, but absurd tariffs and other import barriers remain as a serious impediment to would-be food exporting developing countries and a continuing threat to the global trading system. Other perverse subsidies, including those to oil extraction and consumption, continue.

Despite this lack of progress, I continue to work on refining and publicising the Social Policy Bond principle. Any suggestions as to how to advance it would be most welcome. I wish all my readers a happy, healthy 2006.

Climate change: subordinate policy to outcomes not process

Dealing with climate change as if it’s just another problem is going to be disastrous. Governments, especially at the supranational level, subordinate all policy to process. Their only concern is that they comply with the rules – or rather, that they are not seen to have failed to comply with them. To politicians and officials, outcomes are irrelevant. This is especially the case with climate change, where they can easily escape or deflect censure because of all the scientific uncertainties and because their failures will not be directly attributable to them.

What’s prompted this diatribe? Researchers in the UK have found that warmer temperatures have stimulated microbial activity in 6000 soil borings across Britain. This means that much of the carbon that used to be stored in the soil is now being released into the atmosphere. “The quantities were large enough to negate all the work that Britain had done to switch away from coal to reduce carbon in the atmosphere.”

This is one of several scary feedback findings published recently. How will Kyoto absorb them into its mechanisms? How will policymakers respond? Answers: it won’t, and they won’t, respectively. That’s because Kyoto is a typical government conceit: it assumes government knew the scale of the climate change problem, the cause of the problem, and the best way of solving it in the 1990s. Kyoto cannot respond to our rapidly expanding knowledge.

Instead of Kyoto we urgently need an adaptive policy, that rewards people for preventing or mitigating climate change, however they do so. My suggestion is that we ditch Kyoto and governments, along with concerned non-governmental organisations and philanthropists issue Climate Stability Bonds instead. Even if the entire premise for Kyoto eventually turns out to be false – the climate is not changing, in other words – Climate Stability Bonds, because they are priced by the market, would still be the lowest-cost policy.

The middle-class housing crisis

In 1970, about 50 per cent of all families could afford a median-priced home; by 1990 this number had dropped below 25 per cent. The next American metropolis, Peter Calthorpe

This quote, refers to the US, but could equally apply to New Zealand and the UK.

How has it come about? The authors of Suburban Nation, point out that one factor is the way that planners and developers design our cities. In most residential developments it’s now almost impossible for any adult to function without a car. The cheapest cars (in the US) cost around US$6000 a year to run, which at typical mortgage rates equates to US$60 000 in home-purchasing power. For two adults, the impact on housing affordability is obvious.

Another crucial point, which I’m pleased the authors make:

The atomization of our society into suburban clusters was the result of specific government and industry policies rather than of some popular mandate.

It’s not markets, in other words, that have led to urban sprawl, but government subsidies, notably for oil extraction, consumption, and for highway construction, along with disastrous single-use zoning laws.

Government favours industry concentration

A recent report by the ETC Group, Oligopoly, Inc. 2005 points out, inter alia, that in the past two years alone:

• the world's top 10 seed companies have increased their control from one-third to one-half of the global seed trade;
• the top 10 biotech enterprises have raised their share from just over half to nearly three-quarters of world biotech sales; and
• the market share of the top 10 pesticide manufacturers rose modestly, from 80 to 84%, but industry analysts predict that only three companies will survive the next decade.

I think government intervention tends to favour oligopolies, in that it favours big business at the expense of small businesses and natural persons. Government identifies big business with economic success, and most corporate welfare programmes go to the largest companies. Agricultural subsidies, for instance, are claimed to be for 'family farms', but they mainly go to wealthy landowners and large agribusiness corporates. (Import barriers for food, as well as hurting the third world, also transfer cash from poor (western) consumers to wealthy farmers.) Big business can manipulate the regulatory environment, eg regarding health and safety, to make it very difficult for small businesses. The result is increasing concentration in industries like agriculture, where government intervention is dominant and sustained.

Markets and 'markets', continued

For all the grandiloquence, however, there is no hiding that last week’s meeting did little to promote free trade. The Economist

You'd almost always be safe, if you've fallen asleep at a meeting and woken up to find yourself being looked at expectantly, to say something like there are arguments on both sides, or it's not black or white, it's a continuum. But when it comes to agricultural subsidies these statements would be wrong. There is only one side, and it is black not grey: agricultural subsidies are economic nonsense, and socially inequitable, and environmentally catastrophic. We knew this 30 years ago, but the subsidies continue. Right now, they are threatening to undermine, yet again, the international trading system. Still their proponents - step forward France - keep them going. They continue to put up high barriers to imports from food-rich developing countries, raising food prices for their own consumers and making it impossible for people in the poorer countries to prosper. The main beneficiaries of these absurd policies are wealthy landowners, large agribusiness corporates, the bureaucrats who administer them, and their political friends.

For those who preach 'markets' but are anti-market in everything except rhetoric, the interests of these wealthy, selfish bodies outweigh the millions of ordinary people, some of them desperately poor, who would benefit from the removal of barriers to agricultural trade.

Social Policy Bonds and developing countries

I’m often asked whether Social Policy Bonds could be applied to developing countries. The answer is yes. They could be issued by interested, wealthy outsiders, concerned, for instance, about female literacy in Pakistan (click here for a pdf file on how philanthropists could issue Female Literacy Bonds).

Of course, developing country governments could issue their own Social Policy Bonds. Their public sector is not so well documented as in the rich countries. This makes discussion of their policymaking more difficult, but it should not inhibit the transition to a Social Policy Bond regime for several reasons:

• Public sectors are growing even faster in developing countries than in the developed world from, of course, a smaller base. There is the opportunity therefore to avoid the mistakes that developed countries made when their public sectors grew.

• While public sectors in the developing countries are growing rapidly, they are still not big enough to cope with their very severe social problems and the enormous social changes that are occurring. Developing countries are urbanising rapidly, with all the social dislocation this entails. Crime rates are high, and there is a great deal of urban poverty and unemployment. Many children are outside the educational system altogether and standards in state systems, while variable, are generally very low. Environmental problems are especially severe in developing countries.

• Public sector employees in developing countries are generally not well paid, and are more susceptible to corruption than in most developed countries. This lowers their motivation to act in the public interest. So, even more than in developed countries, there is often little relationship between government spending and desirable outcomes. One pointer: an International Monetary Fund (IMF) survey of 50 developing countries concluded that ‘there is little empirical evidence to support the claim that public spending improves education and health indicators’. (Source: Anjeev Gupta, Marijn Verhoeven and Erwin Tiongson, Does higher government spending buy better results in education and health care?, IMF Working Paper WP/99/21, February 1999.)

Markets and ‘markets’

Talking about Social Policy Bonds I find that some people are initially put off by the concept’s reliance on markets. They associate markets with big business and its largely successful efforts to manipulate the social and political agenda in its own interests. So let me quote Chomsky:

Only economists talk about markets. Business can’t tolerate markets. They don’t want markets in which informed consumers make rational choices. What they want is deluded consumers who will make irrational choices. That’s what hundreds of billions of dollars in advertising are spent on. You don’t get any information about the product.

There is a huge difference between big business and government on the one hand, and small businesses and natural persons (as distinct from corporate bodies) on the other. Big business and government are suspicious of markets, which depend for their vitality on numerous decisions made by people and firms acting diversely and responsively within ethical and legislative bounds. They don’t fully trust markets because they cannot fully control them. But they do try:

Large companies are less and less about making something for a specific market and increasingly about manipulating the arrangements behind such makings. Harvey Molotch, Where stuff comes from, Routledge, 2003 (page 204)

When they are not corrupted or distorted, markets are the best way of allocating our scarce resources: all the evidence of history as well as economic theory supports this.

Markets do get a bad press, because they are often corrupted and distorted. But Social Policy Bonds offer a way in which market forces can be channelled directly into achieving social and environmental goals.

● An article about Climate Stability Bonds appeared in yesterday's Dominion Post (Wellington).

Stabilisation wedges

The current issue of The Economist has a feature about climate change. In it, there is talk of ‘stabilisation wedges’ invented by Rob Socolow. Essentially, this is a way of decomposing ‘a heroic challenge (eliminating the emissions [above the trend line]) into a limited set of merely monumental tasks.’ Dr Socolow lists six such tasks: greater efficiency, decarbonised fuels, decarbonised electricity, fuel displacement by low-carbon electricity, methane management, and natural carbon sinks. Each of these can be further broken down. For example, decarbonised electricity can imply nuclear power, renewable energy etc.

This way of looking at climate change is encouraging in that it’s about diverse approaches solutions to broad, defined, problem.
My reservations about it are:

• That the defined problem is taken to be anthropogenic greenhouse gas emissions, not climate change nor the negative effects of climate change;
  
• That it is still too prescriptive in that it doesn’t do much to encourage the exploration of as-yet-unknown possible solutions;
  
• That it lacks market incentives, so would not maximise cost-effectiveness as that Climate Stability Bonds would, and would shift the burden of failed or inefficient technologies on those – presumably taxpayers – who would be financing, upfront, the entire enterprise.

Click here to read a published article about Climate Stability Bonds. Details of how to order my book on Climate Stability Bonds can be found here.

Politics without outcomes

If you’re a politician and you don’t target outcomes, anything goes. If you’re not in the government you can attack the government for spending too much on this, or not enough on that. If you are in the government you can blame all the bad news on what the opposition did when it was in power. Relationships between cause and effect are nebulous and accountability can always be fudged. So it’s all a lot of fun for politicians: all they really need a research team who can mine data and bring up a few favourable soundbites: there’s no shortage of data. And if you’ve done so badly that even that is unconvincing, well you can always attack the personal history of your opponent. So Gordon Brown, UK Chancellor (Minister of Finance) yesterday was reduced to pointing out that the chief defect of his new Tory opponent is that he was an Old Etonian.

Politicians should be allowed to have their fun, but not at the expense of the rest of us. We really need to get them to target explicit social and environmental outcomes. We need to join with them in articulating our goals and costing them.

More subsidies for the rich

The British Government, like many others, has become dependent on maintaining high property values. So it’s doing it’s best to prop them up. Yesterday it announced that it (ie the taxpayer) will subsidise the purchases of couples who can afford only 75 per cent of the purchase price of a new house. Anyone with basic economics will know that this will merely bid up the price of all houses. Perhaps that is the Government’s real purpose. If it wanted to do something about poverty or homelessness it would tackle them directly. Instead it shovels taxpayer funds into the property market. Its appears that the Chancellor’s priority is to keep consumer spending high – at least for the duration of his political career – by inflating property values.

A Social Policy Bond regime would do away with this sort of nonsense from the outset. It would first identify the desired outcome and then let bondholders, not government, decide on how best to achieve it. It’s possible that a government issuing bonds would say that its purpose was to boost property values so that consumers would spend more. But it’s hard to imagine such a use of taxpayer funds being admitted, let alone approved. The current policymaking regime depends absolutely on fudge, obfuscation and deception. It allows government to favour its own alleged ways of achieving vague, unspecified or conflicting goals. Very often the actual result, as here, is to subsidise wealthy individuals or corporations at the expense of small businesses or the disadvantaged.

Rewarding outcomes, not effort

“But the public seems to be losing patience with airy-fairy ideological crusades—and growing ever hungrier for down-to-earth pragmatism.” So says Lexington in a column headed ‘The End of Ideology’ in the latest (3 December) issue of The Economist. And it’s true America’s 1993 Government Performance and Results Act ‘seeks to improve the management of federal programs by shifting the focus of decision-making from staffing and activity levels to the results of federal programs’.

What has been the result?

As I argue in my forthcoming book, existing institutional structures constrain a truly outcome-based policy. In the US, there has been an emphasis on rewarding effort whatever the result. But for efficiency it is not the quantity of effort that should be rewarded, but its quality, as measured by its effectiveness in achieving outcomes. It is crucial, in short, that outcomes be rewarded, however they are achieved. The risk and consequences of underachievement should be borne by the institutions themselves, not by ordinary members of the public. Outcome measures for bodies engaged in long-term activities, for example, research and development, should be subsumed into broader strategic goals. It should not be up to the government or a government agency to monitor how efficient agencies are in achieving sub-objectives. More crucially, the resource allocation should not be on an agency basis. Resources, ideally, would shift in and out of different activities depending on how efficient each activity is in contributing to the achievement of the strategic goals.

There is no question that the GPRA does represent a big step forward for outcome-orientated government. But, in my view, progress is being impeded on two fronts: existing government agencies have too much say in both the choice of long-term goals to be targeted, and in how resources aimed at achieving these outcomes are to be allocated.

Achieving social goals requires imagination, not selection

Even if you could get more RAM for your brain, the extra storage probably wouldn't make it easier for you to find where you left your car keys. What may help … is a better bouncer – as in the type of bouncer who manages crowd control for nightclubs. Source

This research measured the brain activity of people asked to remember arrays of colored squares or rectangles. In one experiment, researchers told subjects to hold in mind two red rectangles and ignore two blue ones. Those considered to be ‘high-capacity’ individuals excelled at dismissing blue, but low-capacity individuals held all of the rectangles in mind. The researcher said that:

People differed systematically, and dramatically, in their ability to keep irrelevant items out of awareness. This doesn't mean people with low capacity are cognitively impaired. There may be advantages to having a lot of seemingly irrelevant information coming to mind. Being a bit scattered tends to be a trait of highly imaginative people.

There are many ways to interpret these results, (published in full in Nature, 24 November). From the Social Policy Bond point of view, I would make these points:

• Today’s society defines ‘high capacity’ individuals as those who can be most selective in the choice of information they consider; and

• Policymakers – politicians, government officials, corporate bosses – are overwhelmingly drawn from the ranks of those considered to have high capacity.

Excluding extraneous information may be desirable, and even necessary when looking at defined tasks where success will be measured in terms of one-dimensional units such as sales, market share, profits, or numbers of people on waiting lists, etc.

But aggregating such uni-dimensional targets, whether corporate or government, will not optimise society’s well being. For this, we need to target broader social and environmental outcomes. These could, and should, include quality of life indicators; the provision of a tight safety net that maximises rates of basic literacy, health and housing; baseline environmental indicators; and the maintenance of law and order.

A government could define such broad social and environmental goals, but it should not prejudge how best to achieve them. Such achievement requires an awareness of a huge number of variables and a responsiveness that policymakers do not have: all the evidence bears this out, and the research mentioned above explains it. Excluding information is necessary for articulating society’s wants and raising funds – which governments do quite well. But when it comes to actually achieving our goals, we need a different sort of intelligence; one that is comprehensive, imaginative, pluralist and highly adaptable. Markets, in the service of social goals, are the answer. Social Policy Bonds are a means through which government and markets could each do what they are best at.

Fraud, dammed fraud, and the CAP

The BBC reports that fraud costs the average UK household £650 a year.  They mean, of course, illegal fraud. The other sort of fraud is even more costly. Research commissioned by Open Europe estimates that ditching the Common Agricultural Policy would be worth £1500 a year to the typical UK household.

Eradicating small businesses: all join in

Government and big business seem to run a cartel with a single aim: to eradicate small businesses. In this they are aided by all sorts of organisations. This, from today’s (UK) Daily Telegraph:

The misery women go through all over the world queuing for public lavatories would be eased under new principles proposed by the World Toilet Organisation. Guidelines issued at the weekend by the National Environment Agency in Singapore, where the WTO is based, would mean women have at least equal facilities to men.

The code requires medium-sized restaurants, bars and nightclubs to have as many female cubicles as they have male cubicles and urinals. Larger venues, and those such as theatres and cinemas where usage is confined to peak periods, would have to favour women's facilities by a ratio of 14:10.

“It's very important where there are a lot of people,” said Elisabeth Maria-Huba, a German social scientist. “Women need longer. And in a lot of cases women have to arrange themselves to go out again.”

The World Toilet Organisation does exist.

Subsidising our oil addiction

Reading Jane Jacobs' new book Dark Age Ahead, published in May, I’m reminded that the western world’s dependence on cars, highways and fossil fuels is not a market-driven outcome. Rather it’s a product of government-subsidised road building programmes, government-backed corporate welfare for oil companies, a government-funded military to secure oil supplies and guard their routes; and (in the US) sales of tramways to General Motors that breached anti-trust laws. I have had spirited arguments with people who claim that public transport is heavily subsidised; true, but let’s not forget that not only was our private transport infrastructure subsidised, but the external costs that it continues to impose are effectively underwritten by the taxpayer. These include the grievous accident and environmental costs, the unquantifiable but large losses of community, and the direct and indirect costs that arise from our dependence on oil imports.

Kyoto is dead ...still

This article was published in today’s New Zealand Herald

‘The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge.’ Tony Blair, speaking at the G8 Climate Change Conference on 2 November, confirms what many of us suspected: the Kyoto agreement to cut back on greenhouse gas emissions is dead. It is unworkable, hugely expensive, politically divisive and most important, ineffectual. Unlike many who oppose Kyoto I do not think all its supporters are insincere or motivated purely by a wish to secure funding for their research programmes. The evidence that the climate is changing is strong and getting stronger, and there is no question that it could have catastrophic effects on large numbers of people.

It also seems likely that anthropogenic greenhouse gas emissions are a cause. But that doesn’t mean that cutting back on these emissions is the best way of preventing or mitigating climate change. In their efforts to get the absurdly unworkable Kyoto agreement off the ground, its proponents have squandered precious political capital, and set back the cause of those looking for realistic alternatives.

Perhaps some of them, including some in the New Zealand Government, knew Kyoto would never fly, so could support it safely. They’d thereby be demonstrating their immense care and compassion for humanity, knowing all along that Kyoto would come to nothing and they wouldn’t actually have to sacrifice anything themselves. This certainly seems to apply to the European Union: the EU had pledged to reduce its total greenhouse gas emissions to 8 per cent below 1990s levels by 2008-2012, but by 2002 they had dropped only 2.9 per cent – and carbon dioxide emissions had risen slightly. Only four EU countries are on track to achieve their individual targets. And the EU is economically stagnating: any significant growth would probably end its chances of meeting the Kyoto targets.

Given the dimensions of the climate change problem, we should not spend too much time allocating blame for failed policies. Rather we should be looking for practical ways of preventing climate change and mitigating its effects.

Kyoto suffers from the same flaw as many of our other environmental and social policies: it assumes that government knows the best way of achieving our goals. Kyoto if focussed entirely on reducing net greenhouse gas emissions. But with climate change the biological and physical relationships involved are many and complex. Even specialists in climatology disagree about the degree to which the multitude of biological and physical variables cause climate change.

The best way of addressing climate change would not embody the assumption that it knows exactly how the Earth’s climate is changing, what is causing it to change, and what is the best way of dealing with any change. It would not ignore a potentially catastrophic problem, but it would try to be as cost-effective as possible, especially because of the colossal expenditures involved. An ideal policy would stimulate the investigation and adoption of promising new technologies, and be responsive to our fast-increasing knowledge about the causes and effects of climate change. It would most probably seek to mitigate the negative effects of climate change, while doing little to discourage positive effects. Ideally too, it would use markets, the best way yet devised of allocating society’s scarce resources, to channel people’s self-interest into achieving climate stability.

If such a solution could be found, it would be certain to attract more support than Kyoto both from decision makers and ordinary people. Widespread support is essential, because stabilising the climate is going to entail enormous costs and sacrifices.

We need to recognise explicitly that we don’t know all the answers. Achieving a stable climate will mean investigating a wide range of diverse approaches that don’t have anything to do with greenhouse gas emissions - but Kyoto will do nothing to encourage such research. Reducing greenhouse gas emissions or sequestering carbon might turn out to be helpful and cost-effective. But what if new science tells us either that greenhouse gases are not as important as originally thought, or that there are far more cost-effective ways of achieving climate stability? Kyoto would grind on, with its expensive and futile controls on greenhouse gas emissions.

Our problem, of course, is not greenhouse gases; it is climate change. So our objective should not be to cut back on greenhouse gas emissions, but to achieve climate stability. A successful policy would encourage those who help stabilise the climate, however they do it.

My own suggestion is that governments collectively issue Climate Stability Bonds. These would be sold by auction, and redeemed for a fixed sum only when the climate has achieved an agreed and sustained level of stability. In this way there is no need for the targeting mechanism to make assumptions as to how to stabilise the world climate - that is left to bondholders. Climate Stability Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that climate stability is achieved quickly.

Once issued, the bonds will be freely tradeable on the free market. As the climate became more stable, so the bond price would rise. Bondholders have incentives to cooperate with each other to do what they can to achieve climate stability, then to sell their Bonds at a higher price. Governments decide only on the degree of climate stability they want - not on how to achieve it. That is left up to investors in the Bonds, who have every incentive to maximise the taxpayer’s benefit per unit outlay. So, in contrast to Kyoto, a Climate Stability Bond regime would stimulate research into finding ever more cost-effective ways of achieving climate stability.

Kyoto is flawed because its focus is entirely on net greenhouse gas emissions. We need instead to look at solutions, such as Climate Stability Bonds, that have as their goal the achievement of climate stability. There is too much at stake to rely on the fossilised science that underpins Kyoto.

Prince Albert of Monaco receives 300 000 euros from CAP

Prince Albert II of Monaco, whose fortune is estimated at 2 billion euros (£1.4 billion), received 287 308 euros in subsidies from the CAP last year. According to a report from Paris-based economics think-tank Groupe d'Economie Mondiale de Sciences Po, less than one per cent of French farmers - the largest ones - receive more in subsidies than the bottom 40 per cent of farmers.

Kyoto is dead

'The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge', said UK Prime Minister Tony Blair recently. He’s right, and some of us have been working on practical alternatives to the absurd Kyoto Protocol.

For people whose priority is dealing with climate change, rather than merely demonstrating their concern for humanity without actually doing anything, I suggest Climate Stability Bonds. These would be backed by governments or the private sector, and auctioned to the highest bidders. They would be redeemable for a fixed sum only when some meaningful climate stability target had been achieved and sustained. Bondholders would have incentives to do whatever is most cost-effective. They might opt to reduce greenhouse gas emissions, but they might well find that sending mirrors into Earth orbit, or developing new species of cyanobacteria (that can soak up atmospheric carbon dioxide and convert it into a raw material for biodegradable plastic), or researching into many other possibilities would be far more efficient. Click here for a short published article on Climate Stability Bonds .

Riots in Paris

As far as I can tell nobody else has traced the current riots in Paris back to what I think is one of their main causes: French protectionism and the Common Agricultural Policy. So here goes. By blocking imports of farm products (and textiles and clothing) France, consistently and with great success over the past few decades has:

• Kept more people in farming than otherwise, leading to shortages of labour in manufacturing and services sectors; and


• Blighted the prospects of economic development in poor countries, particularly in Africa.

The result has been reluctant immigration – the worst sort – into France, by people with no other chance of providing decently for themselves and their families. French protectionism has directly led to the violence on the streets of Paris. The tragedy is that the French have so manipulated the European Union that it is not just France that will suffer.

Small government: not an end in itself

Small government, despite what some thinktanks believe, is not an end in itself. I think the real issue is not so much the overall size of the state, but the distance between it and the voters. The rich countries in some ways have the worst of both worlds: big government that does (a) the wrong things and (b) some of the right things, badly. So the UK Government (for instance) maintains extravagant corporate welfare schemes, social engineering experiments, and high food prices, because that's what the French want. But it’s failing to do things like ensure safe streets and decent rates of basic literacy. If government were efficient, responsive and doing things that improved the welfare of real persons (rather than favoured corporations and lobby groups) and enjoyed popular support then I shouldn't see anything wrong with a big state. In other words, the issue is not the size of the state but what it does with the power and resources we give it. It all comes down to outcomes in the end. Small government may be a means towards that end, but it’s not an end in itself.

Humility

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Extension transference

I’ve just started reading Beyond culture, by Edward T Hall, an anthropologist. The book is largely about ‘extension transference’; the process by which people misapply or are led by their ‘extensions’, which include language, tools and institutions. Bureaucracy, as I think Hall will point out later in the book, is another of these extensions. There are, I think, parallels between the way our minds not only use language, but are in important senses controlled by it; and the way our society is governed by institutions that no longer have objectives congruent with those of society. In both cases, the tool (or ‘extension’) has become overly influential, primarily concerned with its own survival, and dangerously controlling.

On a different note: my geocities mirror seems to be down, so to access the Social Policy Bonds site now and in the future, please change your bookmarks to http://SocialGoals.com.  

Bangkok's new airport

Bangkok’s new airport, at Suvarnabhumi, is scheduled to open next year. The around the airport will be designated Thailand’s 77th province. The current Thai Government intends it to rival Singapore as an Asian air hub.

Bangkok though already has a perfectly good airport at Don Muang, with two runways and a highly developed infrastructure. Surely there are more pressing priorities for this developing country than building a massive new airport, much further away from the city?

The new airport’s province will be called Suvarnabhumi Maha Nakhon: Suvarnabhumi the Great City. It will become ‘a modern economic centre’. Local landowners can expect a huge rise in the value of their land.

Actually the names of major land owners in the vicinity of the airport were revealed recently by the press. Most of the owners are known to have close relations with the ruling Thai Rak Thai party.

Source: How will Thailand compete with Singapore? ThaiDay, published with today’s ‘International Herald Tribune’.

Shock News: CAP rips off Europeans

Overall, the average UK household of four could be around £1,450 (€2,175; $2,600) per year better off in ten years’ time, compared to £1,360 (€2,020; $2,436) across the EU on average, if all global trade were liberalised, including removal of the C[ommon] A[gricultural] P[olicy], and the government and EU monies devoted to the CAP were spent instead on R&D. Source: Open Europe

The CAP diverts funds from the poor to wealthy landowners and trans-national agribusiness corporates, so getting rid of the CAP would benefit the poor disproportionately.

Perverse subsidies: a continuing story

Perverse subsidies are subsidies that are economically irrational, environmentally destructive and socially inequitable. Apart from agriculture (which is fairly well documented and quantified, especially by OECD), other recipients are the road transport and energy sectors. Subsidies to private road transport include the hidden costs of providing road users with roads, space and complementary traffic services such as highway patrols, traffic management, and paramedics. For the years 1991 and 1989, two different studies estimated the net subsidies to road transport in the US at $55 billion and $174 billion, respectively, or 1 and 3 per cent respectively of that country’s GDP. (The wide range reflects the different estimates for parking subsidies and for providing complementary traffic services.) Questionable on many grounds road funding — as well as funding for public transport schemes — would appear to be another example of middle-class welfare. Most of the benefits of these works go overwhelmingly to those who have more money to spend on travel, and more time in which to do so.

In the mid 1990s it was estimated that subsidies for energy in OECD countries were running at between $70 billion and $80 billion; their main purpose being to support energy production. Coal is most heavily subsidised, followed by nuclear energy and oil.

Estimates are bound to be imprecise, but it would be reasonable to put the total sums wasted on perverse subsidies in the developed countries at about 3 per cent of their combined GDP — this is equivalent to about 8 per cent of their governments’ total spending.

My case for Social Policy Bonds, or rather, against existing ways of spending on social and environmental goals, relies heavily on perverse subsidies. They, and all the other forms of corporate welfare, are significant in themselves, but their size and persistence also cast a heavy shadow over other government interventions. This is not an argument about big against small government; it is more about the distance between government and the people it is supposed to represent. However, big government does seem to be remote government, and remote government also seems to be unresponsive government.

And that’s how a few agribusiness corporates, pretending to represent family farmers, have done so much to destroy the landscape and social fabric of rural Europe, the US and Japan, have siphoned off billions that could have been spent on hospitals and schools and people in genuine need, and are even now threatening to derail the global trading system.

Causes: interesting but irrelevant

Everyone agrees that Africans are desperately poor and typically endure governments that are, to varying degrees, corrupt and capricious. The dispute is about causes and consequences. One group--call it the poverty-first camp--believes African governments are so lousy precisely because their countries are so poor. The other group--the governance-first camp--holds that Africans are impoverished because their rulers keep them that way. The argument may seem pedantic, but there are billions of dollars at stake, and millions of lives. The fundamental question is whether those who are well-off can salve a continent's suffering, or if, for all our good intentions, Africans are really on their own. Why is Africa still poor?, Andrew Rice, The Nation, 24 Oct 2005

I disagree: I don't think looking for causes is necessary when it comes to devising policies that will eradicate poverty. Doing so might even be a distraction. In this, I share common ground with Tolstoy who, when writing about conflict, wrote:

The deeper we delve in search of these causes the more of them we discover, and each single cause or series of causes appears to us equally valid in itself, and equally false by its insignificance compared to the magnitude of the event. 'War and peace', Signet Classic, 1968 (page 730)

Life is so rich and varied that anybody can ascribe anything they don't like to a racial group, set of persons, ideas or sequence of events they don't like. This is the stuff of demonology, ideologues and party politics. Tyrants in some African countries seize any chance they can to blame colonisers for the problems they themselves inflict on their subjects.

I don't think it's necessary for any single person, ideology, government or international agency to try to explain why Africa is poor. Rather, the challenge is to set up a system that will subordinate all activity, policies and programmes to the desired outcome: the eradication of poverty. This is what Social Policy Bonds would do. We could issue Social Policy Bonds that would not be redeemed until poverty had been at a low level for a sustained period. We would, in effect, be contracting out the eradication of poverty to whoever will be most efficient at achieving that targeted outcome. Whoever buys the bonds might well spend some time trying to analyse causes of poverty, but they will be rewarded only if that is a necessary and efficient way of eradicating it. More likely, the people who buy bonds will just get on with the job. Looking for causes is probably best left to ideologues and academics.

Numerical indicators

In a tragic sort of way, inferior prenatal care could actually boost average life expectancy while lowering health care costs. Adequedate prenatal care may reduce the incidence of miscarriage, especially in the second half of pregnancy. Had my wife's perinatologist not detected her dilating cervix in the 22nd week of pregnancy, we would probably have lost our daughter. And she would have been a miscarriage statistic, not an infant mortality statistic.Source

This highlights the need to specify very carefully the sort of indicators that are targeted, whether under the current regime, or using Social Policy Bonds.

Incentives for development

After 43 years and $568 billion (in 2003 dollars) in foreign aid to the continent, Africa remains trapped in economic stagnation. Moreover, after $568 billion, donor officials apparently still have not gotten around to furnishing those 12-cent medicines to children to prevent half of all malaria deaths. With all the political and popular support for such ambitious programs, why then do comprehensive packages almost always fail to accomplish much good...?....

The biggest problem is that the rich people paying the bills do not share the same goals as the poor people they are trying to help. The wealthy have weak incentives to get the right amount of the right thing to those who need it; the poor are in no position to complain if they don’t. William Easterly, The Utopian Nightmare, Foreign Policy, Sept/Oct 2005

Exactly. I have been seen saying for years that our social and environmental problems are caused by perverse incentives. The big financial rewards in today's world are for those who can cater to the whims of the rich, by which I mean those who constitute much of the population of the developed countries and a tiny minority of those in the poor countries. One example: only 1 percent of all new medicines brought to market by multinational pharmaceutical companies between 1975 and 1997 were designed specifically to treat the tropical diseases plaguing the third world. In numbers, that means thirteen out of 1,223 medications. This is not a problem of lack of ingenuity or even compassion. It is a problem of incentives.

Social Policy Bonds would rejig the incentives on offer. Not blindly, so as to favour one set of people over the others, but in accordance with the wishes of those who put up the funds to redeem the bonds. The current mismatch has more to do with lack of transparency and deliberate deception than the wishes of those who put up the cash. Governments pay out hundreds of billions of dollars annually in explicit and indirect subsidies to (for instance) large agribusiness corporates, multinational energy companies, and arms manufacturers. If consumers and taxpayers were told explicitly that they were subsidising these bodies they would, I am certain, do so with less enthusiasm. Under the current system, this whole system of corporate welfare is fudged. Under a Social Policy Bond regime, the first thing taxpayers and government would decide would be: what are our goals? All spending decisions, all programmes, projects and initiatives, all institutional establishments and structures, would be subordinated to these goals.

A mirror image, in other words, of the current setup.

Environmentally harmful subsidies

In my current work, I'm citing the existence and persistence of environmentally harmful subsidies - similar to perverse subsidies - as solid evidence that government is inefficient. Though anecdotes abound, it's difficult sometimes to get an idea of just how inefficient, on a global scale, government is. But a workshop given by the OECD attempted to quantify environmentally harmful subsidies. The sums are staggering:

Subsidies probably total over $1 trillion per year. Around two thirds of the subsidies occur in OECD countries. Those OECD subsidies are heavily concentrated in agriculture, mining, road transport and manufacturing. Non-OECD countries mainly subsidise energy, water, fisheries and some agriculture. Relative to GDP, subsidies are twice as large in non-OECD countries. As a percentage of world GDP, global subsidies account for a staggering 4 per cent. Perhaps most notable of all, agricultural subsidies in OECD countries account for over 30% of all subsidies.

The workshop was done in 2002, but the dollars referred to are in 1994-98. It's not just the financial sums that matter: these are environmentally harmful subsidies, most generally paid to increase production. In agriculture this means switching to intensive production techniques and expanding production onto marginal lands and environmentally valuable areas such as woodlands, ponds and hedgerows.

Apart from OECD work, another useful source is Earth Track.

On the commons

A good post on Peter Barnes's blog from OnTheCommons.org makes these points:

Common wealth, as we’ve seen, is immensely valuable. Common illth — the shadow side of private wealth — is likewise vast. But while mainstream economists acknowledge the existence of common wealth and illth, they don’t bother to measure them or include them in their models. They assume the commons side of the ledger is trivial, or ignore it because dollar signs are hard to attach. This is tantamount to professional malpractice. ... They count America's sales (a.k.a. GDP), but not our expenses (the negative ex­ternalities of those sales). They keep track of private income and wealth, but not common wealth or illth. As a result, they miss at least half the story.

I agree with the thrust of this post, though (as I posted in a comment), I think most economists don't necessarily assume the negatives arising from economic development are zero, but rather that they are less than or equal to the positive externalities. The point being that there are positive externalities of wealth generation beyond those that appear in company accounts and GDP. These could be the positives, important to society, of employing people, such as a reduced crime rate, and a reduced poverty rate - which itself has important positive spin-offs for the commons. My point, in other words is that just as almost all the negative externalities of economic development are ignored, so too are some of the positives.

Social Policy Bonds are one way of dealing with the negative externalities of our way of life. Because they do not prejudge how a particular negative externality shall be eliminated, they would reward the most efficient way of solving the problems they cause. If we take climate change as an example, reducing anthropogenic greenhouse gas emissions a la Kyoto, may be necessary but, on the other hand, there may be far more cost-effective solutions that deserve investigation. Efficiency, not ideology, would be the sole criterion.

Goals for a bond regime

Social Policy Bonds are versatile in that they could deal with any quantifiable social or environmental goal. That said, broad objectives would be ideal. To see this take, as an example of a narrow goal, that of reducing burglaries in a small locality. Bondholders could solve this problem merely by laying on taxis to transport burglars to areas outside the scope of the bond regime. Or they could offer courses that would upskill burglars so that they could become white-collar criminals instead. Either way, the bondholders would achieve their objective and cash in. But society's broader goals would not be helped. It would be far better to issue bonds targeting all crime in as large an area as is feasible.

Similarly with other goals. It would be better to target all forms of pollution simultaneously than a single pollutant. It would be better to target a broad definition of poverty than a narrow definition.

That said, if a Social Policy Bond regime is to get off the ground, it is most likely to be by social entrepreneurs or philanthropists with fewer resources than government, who will issue their own bonds to achieve a specific goal with which they identify closely. Careful specification of the goal will be crucial. Any readers interested in issuing their own Social Policy Bonds could first visit the Social Policy Bond website. Then feel free to contact me directly.

Social Policy Bonds - an overview

(This is a first draft of an article intended to introduce Social Policy Bonds to a wider audience.)


Outcomes: a better policy driver than ideology

Most policy issues are now so complex, so voluminously documented that each side of any argument can be certain to find a very large quantity of supporting evidence. Whether it is war in Iraq, smoking in bars, capital punishment, gun control, or provision of day-car facilities for three-year olds; there are so many facts and seemingly valid interpretations of facts, that ‘there are arguments on both sides’ is about the only useful thing to say.

Those who are involved, those who have a position, are predisposed to select only the information that suits their ideology, or the bottom line of the institution that pays their bills. It is not just on matters like the Arab-Israeli conflict. Even scientific issues, which should be more amenable to objective analysis, are controversial and inconclusive to those who try to follow the propositions made by Bjorn Lomborg in The skeptical environmentalist and the rebuttals, counter-rebuttals, and counter-counter- rebuttals that have ensued. Rather than one’s position being in the middle of a Bell-curve, it is more like that at the centre of a dumbbell with hefty but equal weights at each end: a new fact favouring one side can tip the balance markedly.

War, terrorism, climate change: our most urgent problems are too complex for any except specialists fully to comprehend. There are so many relationships, so many variables, and such large distances of time and space between cause and effect, that to disinterested observers, there are good cases to be made on both sides of such concerns as the Kyoto Protocol or conflict in the Middle East.

Should we, as ordinary members of the public, and voters, therefore give up trying to work out what is the best line to take, when even the highly qualified experts disagree with each other? Or should we take the lazy way out and choose one political faction – left, right, conservative or socialist – and look to them to do the thinking for us? Or should we turn away from policy issues altogether and become cynical or despairing? We do all these things, with and the result is that policy is decided less by engaged members of the public, more by special interests, including the politicians, corporates and media. If this sounds far-fetched, look at the figures for election turnout.

Rather than wait till such scientific arguments are resolved, or to pursue some abstract notions of justice in matters of human conflict, we might do better on efficiency grounds, to subordinate all our activities to our intended outcomes: climate stability, for example, or conflict reduction. This would take the form of rewarding all actions – and only those actions – that lead to achievement of the desired outcome.

Currently, governments that are supposedly interested in a particular goal finance institutions, or people, or activities that have as their stated objective the solution of these problems. But another, much simpler but also much rarer, is to reward people for actually solving the problems. That’s what they used to do in the Wild West when they wanted to eliminate problems caused by particularly nasty individuals. They put together a cash reward, printed some ‘Wanted - Dead or Alive’ posters, and let the private sector do the rest. It is the targeted outcome – the killing or capture of the public enemy – that determines who shall be rewarded not current institutional structures or activities. The same principle, more or less, underlies an innovative new financial instrument that can channel the market’s incentives and efficiencies into the achievement of social and environmental goals.
Social Policy Bonds

Social Policy Bonds would reward people only when they actually achieve targeted social or environmental goals. A fixed number of Social Policy Bonds (‘bonds’) would be issued. The bonds could be issued and backed by local or national government, or by non-governmental organisations (NGOs), or by private individuals. They would initially be auctioned to the highest bidders. The bonds’ backers would undertake to redeem these bonds for a fixed sum only when a specified social objective has been achieved. The bonds would not bear interest. They would be freely tradeable after issue, and their market value would rise and fall. Social Policy Bonds would therefore differ from conventional bonds in that they would have an uncertain redemption date which, in combination with a fixed redemption value, implies an uncertain yield: holders would raise their bonds’ yield by achieving the targeted objective quickly. Once the targeted outcome had been achieved, whoever backed the bonds would redeem them.

How would Social Policy Bonds work? They would create an interest group — bondholders — who have powerful incentives to achieve the targeted social objective efficiently and quickly, or to pay others to do so. Consider an example. Assume that an urban authority is prepared to spend a maximum of say $10 million to reduce the crime rate within its borders by 50 per cent. It issues one million bonds that become worth $10 when the crime rate falls below 50 per cent of current levels for a sustained period — say one year. Because the market would see this objective as unlikely to be achieved in the near future, it would put a low value on the bonds when they are floated. Assume successful bidders pay as little as $1 for each of the bonds. (This sum would be held by the issuing authority partially to offset the cost of redemption of the bonds.) Now, they hold an asset that could appreciate in value by 900 per cent if a sustained halving of the crime rate were achieved. This provides the motivation for bondholders to do what they can to reduce the crime rate.

Social Policy Bonds could in principle, be used to solve any social or environmental problem that can be reliably defined and quantified. Key criteria for policy areas within which Social Policy Bonds would show the most marked improvement over current programmes are:

• existing policies have objectives that are unstated, uncosted, obscure or conflicting;
  
  
• financial rewards to those involved in achieving objectives are uncorrelated to their effectiveness in doing so;
  
  
• a wide array of diverse approaches may be necessary; and
  
  
• our knowledge of the problem, its causes and solutions, is scanty and improving all the time.

That is the approach taken by Social Policy Bonds. Without presupposing whether climate change is happening, what is causing it, or how best to stop it, Climate Stability Bonds can be issued that would encourage people to stabilise the climate. Similarly, Conflict Reduction Bonds that focus on, say, the Arab-Israeli conflict could aim to reduce the numbers of people killed, injured or made homeless in that conflict. People’s need and wish for peace is more important than trying to bridge the gaps between the ideologues, the historians, the militarists and those in authority. A bond regime could bypass, co-opt or undermine those who stand in the way of peace.

Targeting specified outcomes that are meaningful to natural persons, as the US Results Act begins to do, is a necessary first step, but it is not sufficient. The other necessary step is to ensure that resources are allocated in ways that can most cost-effectively achieve these outcomes. This is where market incentives come into the picture.

A symptom of this malaise is the disengagement of many from the political process. Even the United Kingdom’s Labour Party’s ‘landslide’ majority in the British House of Commons is not what it seems. Labour received just over 40 per cent of the vote in 2002, with a 60 per cent turnout. So only 24 per cent of the electorate actually voted for Tony Blair’s party. In the US President George W Bush received votes from fewer than a quarter of the voting age population. It is the same in most other western democracies. We have begun to accept that whichever party receives 25 per cent of the popular vote has ‘won’ the election. In most countries, this represents a dramatic decline in popular engagement with politics over the past few decades.[i]

Perhaps one reason for this is that people are sceptical about the ability of the different political parties to deliver. In the absence of any great ideological divide, most parties have approximately the same manifesto at election time, and seem equally (in)capable of achieving results that are meaningful to electors. If such voter apathy co-existed with satisfaction or optimism about the political environment it would not be a worry. But unfortunately it goes hand-in-hand with deepening dissatisfaction, cynicism and even despair, at the ability of our politicians to deal with urgent domestic and global concerns.


[i] Democracy disconnected from the electorate, Ralph Dahrendorf, Project Syndicate, 2004.

New Public Management

'The state is denoted primarily by its monopoly of power, force, and coercion on one side and its orientation towards the public good, the commonweal or the ben commune, on the other; the business world legitimately focuses on profit maximization. N[ew] P[ublic] M[anagement], however, as it has been said, "harvests" the public; it sees no difference between public and private interest. The use of business techniques within the public sphere thus confuses the most basic requirements of any state, particularly of a Democracy, with a liability: regularity, transparency, and due process are simply much more important than low costs and speed.' Wolfgang Drechsler, The Rise and Demise of the New Public Management post-autistic economics review, issue no. 33, 14 September 2005

There is much of interest in the article. At first sight, Social Policy Bonds would appear to suffer from the problems Drechler correctly identifies as afflicting conventional attempts to replicate in the public sector the profit maximisation imperative of the business world: a narrow definition of efficiency isolated from context; and, on all the evidence, failure to deliver on its promises. 'Contracting-out has proven to be excessively expensive and often infringing on core competences of the state as well as on the most basic standards of equity.'

Since Social Policy Bonds embody the contracting out principle, how would they square up against Drechsler's, in my view, legitimate strictures against New Public Management?

The most important consideration is that a bond regime would be entirely subordinated to 'transparency and due process'. Indeed, the agreement on explict, transparent, outcomes would be the starting point of a Social Policy Bond issue. Formulating policy in terms of outcomes, (rather than, as at present, inputs, outputs, activities and institutions) would draw more people into the policymaking process. Outcomes would have to be meaningful to real people to attract consensus and support, rather than government agencies or corporate bodies. A government-backed Social Policy Bond regime would therefore aim to achieve broad social goals. Profit maximisation fails when, as in NPM, it tackles narrow objectives, where non-quantifiable social and environmental externalities can be safely offloaded onto wider society.

A Social Policy Bond could explicitly tackle some of the social and environmental problems created by profit-maximising private entities. Instead of targeting the ever-proliferating array of micro-objectives that characterise New Public Management, it could target meaningful societal goals, like better basic health and literacy outcomes, reduced crime, and a cleaner environment.

NPM fails, I believe, because of the narrowness of its vision; itself a result of its ideological origins. Social Policy Bonds, on the other hand, would be compatible with a large state, a small state or anything in between. Governments would articulate society's wishes about what people want to see done; they would issue Social Policy Bonds as a way of making sure not only that social goals would be achieved efficiently, but that they would be genuine goals defined and agreed upon by all.

Price stability is not a goal

Much confusion in, for example, the UK Government about price stability, in this case the price of petrol. One of the first benefits of a Social Policy Bond regime is that it would clarify what are ends and what are means to ends. Price stability is not, or should not be, a goal of government policy. Market prices are signals that allocate resources efficiently. They embody masses of information that cannot be assessed by planners. If the price of some essential commodity is too high for some people, then government should give financial assistance to those people to enable them to make their own decisions about how much of the commodity to buy. Today's agricultural subsisidies should be a lesson to all politicians: like a drug habit, they are easy to start and hell to give up.

Memo to Government: make sure my milk is fresh

This letter appeared in today's International Herald Tribune in response to the story published yesterday (see below):

As a French-American who opened a retail store in Rome four years ago, I read with interest your report "Rules, rules, rules: Germans fed up" (Sept. 7). ...

Special milk containers required by law are meant to protect consumers from spoiled milk. Haven't you ever had a restaurant serve you milk with your coffee only to find that it was spoiled after pouring it into your cup?

Is this what we expect of government? It's ok to destroy our physical and social environment, just so long as it makes sure the milk is fresh?

The EU: 'Regulations R Us', continued

The European Union's main priority is not prosperity but planning. A small restaurant owner in Germany speaks:

It is not allowed to serve a small jug of milk with the coffee. You are supposed to serve these awful tiny plastic containers of milk because you can see the expiry date. I refuse to do that. Source: International Herald Tribune

Maintaining the status quo

In the aftermath of Hurricane Katrina it's worth stating that maintaining the status quo - avoiding loss of life, keeping cities functioning, etc - are goals that can be targeted by Social Policy Bonds. The expensive way of dealing with a natural disaster like Katrina may, or may not, be to cut back on anthropogenic emissions of greenhouse gases. The way I advocate is to contract out the maintenance of the status quo to the private sector, via a Social Policy Bond issue. The value of such bonds, if issued by, say, the state of Louisiana, would have collapsed at exactly the same time as the levees were breached. There would have been a powerful, unambiguous and direct incentive on bondholders to maintain the levees.

We see now the unedifying alternative: spin-doctoring and the real underlying motivation of many senior officials the world over: doing everything possible to avoid being publicly identified as incompetent. Financial incentives, inextricably correlated with performance via Social Policy Bonds would, I suggest, be more effective.

Issue your own

If you are feeling rich and altruistic, you might think about issuing your own Social Policy Bonds. Say you wish to see crime fall in your part of your city. You don't think more policing is either forthcoming or the answer, but you still don't know what the answer is. Rather than accept the situation or moving away, you could issue Crime Reduction Bonds for your area. These bonds would be redeemable for a fixed sum once crime, however you decide to measure it, falls below a threshold for a sustained period.

Essentially, you would be contracting out the achievement of crime reduction to the market. Holders of your bonds would have incentives to look for the most efficient ways of reducing crime. Criminals themselves could buy your bonds and make a profit by seeking alternative forms of distraction. Non-criminals might buy your bonds and do things that are beyond the imagination or experience of police forces: subsidise taxis for young men emerging from pubs; offer adult literacy classes; subsidise marginal types to move away; subsidise employment for youths etc.

You might have other objectives. You could, for example, issues Social Policy Bonds that target pollution in your city, or te water quality of a local river or lake. Or you might want to see better health or education standards in a developing country. As a first step, you could download a handbook (pdf file) I prepared, using the example of literacy amongst schoolchildren in Pakistan. Feel free to get in touch directly with me (via the Comments, below, or through email link given in my Profile), if you would like to take it further.

Design versus liberalism

The desire to overcome politics is based on the assumption that, if not subject to structures imposed from on high, free human action - whether in international affairs or domestic politics - is unstable and dangerous. People who think in this way cannot conceive of their being an order which they have not consciously designed: they cannot imagine that people and states themselves might be able to devleop rules, perhaps unspoken ones, to foster peaceful free commerce. John Laughland, 'The tainted source', p162

Laughland argues persuasively in favour of the constitutional foundations of the liberal order and against post-national structures, such as the European Union, which he sees as corrosive of liberal values.

What does this mean for an advocate of Social Policy Bonds? Essentially that policymakers have a tendency to be overly prescriptive. Suspecting, probably correctly, that a market free-for-all would bring about unacceptable levels of poverty and a collapse in the social order, they finance programmes and institutions ostensibly aimed at avoiding these disasters. They legislate well-meaning (at least at first) measures, such as trade restrictions, which have such unarguable objectives as the maintenance of decent standards of living for their (alleged) beneficiaries. Within a generation or so, these measures become corrupted, fossilised and counterproductive. Vested interests take advantage of them and ensure their persistence, while the intended beneficiaries gain nothing. If this sounds far-fetched simply look at agricultural subsidies in the rich world, or subsidies to other sectors, such as energy and transport. Under a Social Policy Bond regime, on the other hand, government would not prescribe how its social and environmental objectives are to be met. It would simply reward people for achieving them, however they did so.

Another quote from the same book:

[M]any countries of the European Union ... often have a corporatist understanding of the state. There, the activities of government are identified almost entirely with spending money. Federal states are particularly prone to this understanding of statehood, because the bulk of their doemstic politics is devoted to wrangling between the various layers of government over funds. Ibid, p 194

Even imaginative governments are limited

Here in Thailand there is a grim insurgency by Islamic fascists in the deep south of the country. As one response, the Thai Government has put up tv screens in coffee shops and bars in an effort to distract potential militants. I myself believe that the role of tv, movies, and pornography in weaning people (men, I mean) away from militarism has been underestimated, so I do approve of this government inititiave. Unfortunately, simply the fact that it has been undertaken by government could be its downfall. Partly because anything the government does is bound to be deliberately misinterpreted to the impressionable, partly because in putting up these public tv screens the government has exposed itself to ridicule if the insurgency continues.

The private sector is much freer to experiment with initiatives of this sort. If Social Policy Bonds targeting the insurgency were issued, bondholders could go further than government, for instance by screening raunchy DVDs. They would not be deterred by fear of ridicule if they failed and, most important, they would have incentives to terminate failed initiatives as soon as their failure becomes apparent, and concentrate on finding successes. I cannot see this Thai Government, nor any other, being so ready to admit that their ideas are ineffectual and to explore and implement new ones.

Pluralism versus central planning

The Social Policy Bond mechanism encourages diverse responses to social and environmental issues. It does this via market forces. Unfortunately, many believe that market forces must inevitably conflict with social goals. This is understandable, since in recent decades an enhanced role for markets has made many people very wealthy indeed, while the less well-off have gained relatively little and many social and environmental problems appear to have worsened.

So it is important to remind ourselves that market forces and self-interest can serve public, as well as private, goals. Often, these private goals coincide with social goals, so that, for instance, the market routinely performs vital tasks such as food distribution and the provision of such indispensables as home medicines, baby needs, furniture and other consumer goods. These are exceedingly complex tasks but, left to the multiplicity of agents operating in reasonably competitive markets, they are accomplished in ways that fulfil not only the private goals of the firms and consumers involved but also society’s goal of efficient supply of goods and services. This feat results from the combination of the self-interest of large numbers of market players, and their ability to react appropriately to ever-changing circumstances.

Some would attribute the triumph of the western market economies over the state-controlled, centrally-planned economies of the Soviet Union and its satellites to the victory of materialist motivations over political ideals. But it is more likely that the efficiencies and incentives of pluralism had won out over central direction; in short, that decentralisation and diversity had triumphed over dirigisme and central planning.

Governments tend to be centralist in their instincts. In practice, this has meant that market forces are rarely allowed to play a significant role in organising the production and distribution of those goods and services that governments supply. Government agencies also operate in a non-competitive environment, which discourages self-evaluation. Since governments in the developed countries now spend on average about 37 per cent of national income, these are significant deficiencies. One result is that public services, such as health, education and housing, seem perpetually to be in crisis. Another is that crime and the fear of crime are soaring. I recently spent several weeks in a compact, English city during the summer, and was surprised at how dead the city centre was after 6pm, even on warm, dry days.

Yet another result of the central planning is that large sums of consumers’ and taxpayers’ money are spent on perverse subsidies to sectors such as agriculture, road transport and energy. Perverse subsidies are those that are economically inefficient, socially divisive and environmentally destructive. They also favour the large and global over the small and local. So, for instance, in the US about 88 per cent of support to the agriculture sector goes to the largest (in terms of gross sales) 25 per cent of the farmers. Perverse subsidies are significant: those for agriculture in the developed countries alone amount to more than $300 billion annually.

Social Policy Bonds would enable governments to continue to set society's goals, and the market to achieve them. Clarity and single-mindedness in achieving social goals are important, and governments can have those qualities. But diverse and adaptive solutions are necessary to achieve these goals, and that is where markets, through Social Policy Bonds, can play their part.

Sponsoring intermarriage

In my post about Israel Peace Bonds I raise the possibility that one way of solving the Arab-Israeli conflict is intermarriage between the two communities. This seems to be controversial, so I will elaborate.

First, I am not advocating intermarriage. Rather, I am advocating a policy that will encourage anything that will end the conflict peacefully. If intermarriage is likely to do then, I believe, it should be rewarded. Second, note that it is not me, nor any government official, who would sponsor intermarriage: it would be holders of Israel Peace Bonds. They would reward intermarriage only if they think doing so would help solve the conflict. I can't see anything very controversial about this. As human beings, most of us agree that anything that resolves conflict peacefully should be encouraged. Apart from fanatics, most of the devout on both sides of the conflict would also put human survival above ethnic purity or identity politics. There is very little intermarriage between the two communities today. Even a little could go a long way. Bondholders would be unlikely to pursue intermarriage as their sole solution - though if they did, and were successful, who could argue with that? Most likely it would be one of a range of policies aimed at increasing informal contacts between the two sides including, as I suggested, school exchange visits, sports teams and freer trade.

Subsidising oil consumption

A Social Policy Bond would subordinate policy to meaningful, agreed, outcomes. It's unlikely, I think, that we'd choose to divert scarce resources to, amongst other things, oil consumption:

Jan Lundberg, veteran petroleum analyst who joined the environmental movement and fought industry expansion, has a different explanation for record gasoline prices than the one provided by his former firm, Lundberg Survey, which on Aug. 14 attributed them only to high crude oil prices.

"Lundberg ... told Fox News that it is erroneous to calculate that the adjusted price for gasoline, including inflation, is under the price of two and a half decades ago. This is because "subsidies - direct, indirect and hidden, such as the War on Iraq -- to oil and refined products, if included in the price, would make oil cost perhaps $120 per barrel today. This is one reason people must work longer hours and obtain extra jobs," he explained." Source

Israel Peace Bonds: give greed a chance

This is an unpublished article outlining the application of the Social Policy Bond principle to the Arab-Israeli conflict

Israel Peace Bonds: give greed a chance

Or to put it more politely: ‘give financial self-interest a chance’. Why? Because the idealists and ideologues, the politicians, the generals, and the men of religion have failed tragically to end the violence in the Middle East. Perhaps it’s time now to bypass the usual suspects and contract out the achievement of peace to the private sector.

It’s largely a matter of focus: we don’t have to be as ruthless as the terrorists, but we do have to be as focussed on what is presumably our ultimate goal: peace in the Middle East. We need to go beyond the slogans, beyond history and even beyond the different sides’ views on truth and justice. We need to reward the successful achievement of peace, rather than activities that are supposedly aimed at achieving it—activities that are often counterproductive, unethical or disturbingly violent themselves.

There are too many people with a vested interest in continuing the conflict between Israelis and Palestinians. Many people, all over the world, and certainly most Israelis and Palestinians, would like nothing more than to see an end to the violence in the region. But there are many in positions of power or influence who are half-hearted about peace; others who feel threatened by it, and others who, for whatever reason, actively promote violence.

Ideally, then, we need a way of promoting peace that can modify or circumvent these people’s uncooperative or obstructive behaviour. We need to mobilise the interests of the far greater number of people who want peace. We need to find a way that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine, those opposed to our goal.

Ideally too, we would use market forces. Markets are the most efficient means yet discovered of allocating society’s scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals. Israel Peace Bonds are a new way of channelling the market’s incentives and efficiencies into what must be one of the most sought after objectives by most Israelis, Jews and Palestinians wherever they are: ending the violence between Palestinians and Israelis.

Unlike current funding programmes, which reward activities, organisations or individuals, Israel Peace Bonds would reward only the targeted outcome: peace in Israel. And unlike policies run by governments or inter-governmental organisations, they would encourage diverse, responsive and cost-effective projects.

My suggestion is that interested individuals and organisations collectively back Israel Peace Bonds. They would launch the bonds by making deposits into an escrow account. Then they would issue the bonds, which would be sold by auction, and redeemed for a fixed sum only when the number of Israeli citizenqqqqqs or Jewish visitors killed by terrorism in Israel reached a very low level.

Unlike normal bonds, Israel Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that peace is achieved quickly. Importantly, the bonds would make no assumptions as to how to bring about greater peace—that would be left to bondholders.

Once issued, the bonds will be freely tradeable on the free market. As the level of violence fell, so the bond price would rise. Bondholders would have incentives to cooperate with each other to do what they can to achieve peace, then to sell their bonds at a higher price.

The issuers of the bonds would decide only on the definition of peace to be targeted—not on how to achieve it. That would be left up to investors in the bonds, who have every incentive to maximise the reduction in violence per unit outlay. So, in contrast to the current fossilised, counterproductive approach, an Israel Peace Bond regime would stimulate research into finding ever more cost-effective ways of achieving peace. All initiatives would have a chance: not just those thought up or approved of by a limited number of politicians.

Investors in Israel Peace Bonds would be in a better position than governments to undertake a wider range of peace-building initiatives. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might even subsidise intermarriage between members of the opposing communities, or try to influence the financial supporters of conflict outside the region to redirect their funding into more positive ways. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at enlightening Arab citizens. All these measures would be a cause of suspicion and mistrust if undertaken by governments. But when done by private sector bodies that either hold Israel Peace Bonds themselves, or are financed by bondholders, the motivation for them would be clear: they would be a commercial undertaking, with no hidden agenda other than to bring about peace, as defined by the bonds’ redemption terms.
Bondholders could lobby, or work with, the Israeli and Arab governments to, say, give a higher priority to peace studies in schools, but they could also develop peace-teaching projects of their own. While immediate peace might not result, much more could be done to enhance the prospect of peace in the future. Bondholders could, for instance, make strenuous efforts in Israel and the neighbouring countries to have some mixed classes of Jewish and Palestinian children at kindergarten and school. Both groups could be given the chance of spending time with each other. At the very least, bondholders might think, there should be opportunities for the younger people from both sides of the conflict to meet, discuss, argue and form friendships.

Some powerful people in governments, religious institutions or militant organisations would resent the targeting of such objectives by external agencies in this way. But, while under the current system they can oppose peace in ways that attract support, under a Peace Bond regime, they would have to openly declare their opposition to peace itself. It is precisely this focus on the outcome of peace—rather than activities or institutions—that would help strengthen the coalition working to achieve it.

Too many small bondholders could probably do little to build peace. The bonds would most probably end up in the hands of a few large holders, who would have incentives to co-operate with each other, and to finance those projects that they believed would be most effective in reducing the level of conflict.

By appealing to people’s self-interest, Israel Peace Bonds are likely to be more effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds could bypass or even co-opt the corrupt or malicious people in government or elsewhere who stand in the way of peace.

In today’s emotional climate decision-making is too often reactive. It is too easily swayed by those with a propensity for violence or those who benefit from it, whether financially or emotionally. Governments can evade or deflect censure on grounds of communal affiliation or patriotism, because the adverse effects of their policies are difficult to relate to their cause. Israel Peace Bonds would focus on an identifiable outcome and channel market efficiencies into exploring the ways of achieving it. They could be the most effective means of achieving the peace that the people of the Middle East yearn for and deserve.

Outcomes and metrics

A Social Policy Bond regime would mean focusing entirely on outcomes. Apart from other advantages, this means that the range of indicators of success or failure can be expanded. Currently, a government that wants to reduce cocaine consumption has to rely on pretty dodgy figures to monitor how well its policy is doing. Its indicators will tend to be derived from current institutional structures. Its metrics for cocaine consumption, for instance, currently include seizures by customs, or the numbers of people requiring hospitalisation or dying from their addiction. These have obvious flaws.

A story in today's [London] Times shows how much more versatile in its choice of indicators a Social Policy Bond regime could be. Scientists in Italy can measure the extent of cocaine abuse by measuring the concentration of a metabolic by-product, benzoylecgonine in the Po river basin. "[T]he Po carries the equivalent of about 4kg of the drug a day, with a street value of about £20,000. ... [F]or every 1000 young adults in the catchment area, about 30 must be taking a daily dose of 100 milligrams of cocaine, which greatly exceeds official national figures for cocaine use." ('Where rivers run high on cocaine'.)

Focusing on outcomes makes it easier to target such indicators, which are more strictly correlated with policy targets. Unfortunately, in today's policy environment, policymakers target indicators for reasons unconnected with their usefulness. So Kyoto targets not the stability of the climate, nor even the composition of the atmosphere, nor even emissions of greenhouse gases, but anthropogenic emissions of those gases that were thought to be greenhouse gases in the 1990s. A Climate Stability Bond regime would be different, because it would reward people for achieving what we actually want to achieve: a more stable climate. It could include such indicators as insurance payouts for adverse climatic events, variations in temperature, the sea level at various locations etc. All of these would be more closely related to society's goal than the alleged causes of climate change.

The need for over-arching objectives

If we aggregate individuals' and corporations' actions, we don't necessarily move closer to achieving society's goals. Government, at least in democracies, is supposed to do that, by creating a legislative and regulatory environment that restrains anti-social behaviour, by taxation and transfer payments and by the provision of public goods.

Corporations (and individuals) we assume, always act in their own best interests, and these can conflict with social goals. But corporations, like governments, can become so big and cumbersome that they lose sight of their own objectives. Short-term interests predominate:

Randy Hayes ... once told me of of a talk he had with the uber-CEO of the Mitsubishi Company. Hayes said he was able to convince this CEO that Mitsubishi's program of global devastation for short-term profit was not in the long-term interest of either the planet or the company. Hayes achieved this moment of clarity only to have it followed by a far larger and more monstrous clarity for both himself and the Mitsubishi Head: Mr Mitsubishi had no idea how to change the practices of the company, because the logic that drove the company was both systemic and autonomous. Curtis White, The middle mind: why consumer culture is turning us into the living dead, Penguin Books, 2005 (page 98)

Even the short-term interests of parts of a single corporation, then, can be in conflict with the long-term survival of the corporation itself, let alone wider society. When corporations - and governments - are small in relation to the damage they can cause, then perhaps there's no urgent need to change the system. But when, as now, corporations and governments are huge, society needs to agree on explicit social and environmental targets. If we don't we shall find that our basic social and environmental needs go unmet.

A Social Policy Bond regime would begin by defining broad social and environmental goals. At a global level, these could include conflict reduction targets, or the avoidance of global environmental catastrophe. We have no intrinsic, inherent mechanism for avoiding social or environmental disasters. Unless we explicitly target the survival of our species and the health of our planet, and reward people for achieving them, we are very likely to lose them.

Investments as options

Allocating resources between competing projects can, and perhaps should, be quite a sophisticated exercise. New techniques, such as treating investments like stock options, can be more useful than the fairly crude cost-benefit analysis often used by government bodies. One feature of the stock option approach is that it can deal more readily with changing circumstances: for example, it keeps open the possibility of making large investments if a project shows early promise. Holders of Social Policy Bonds, because they would subordinate their investment decisions to targeted outcomes, could possibly deploy such investment criteria more readily than government, which is more heavily constrained by existing institutional structures.
The effect of this sort of tool is to expand the range of projects that are amenable to objective assessment. Within an existing institutional body - a police force, for example - a limited budget may well be spent rationally; that is, in such a way as to maximise the reduction in crime that the police force can achieve. But the decisions about allocating the entire country's crime reduction budget are almost certainly not made on purely rational grounds. Most likely, they will be largely dictated by past patterns of expenditure and the wishes of existing institutions, including police forces, to perpetuate their existence.

We need, instead, investment decisions that are entirely subordinated to targeted outcomes. Holders of Social Policy Bonds would maximise the returns to society's limited capital partly because maximising the returns to society would maximise their own returns, and partly because they would be freer than existing bodies to consider the full range of likely projects, even ones that threaten existing bodies. Sophisticated financial techniques would give bondholders the tools to consider a wider range of projects than bodies who use outdated investment criteria, or who are handicapped by the vested interests of existing institutions.

Ideology or outcomes?

Obviously food,clothing,shelter should and must be available for everyone; there should be a world pool of man's essential needs and right organisation for distribution. There is sufficient scientific knowledge to produce the essential needs of man but greed, nationalistic spirit, craving for prestige and power prevent the production of the essentials for all human beings. We are not concened with feeding,clothing,and sheltering man but engrossed in a particular system which will guarantee food,clothing and shelter for all. The extreme left or the right are wrangling over a formula that will assure man security; so they are not concerned with man's happiness, but with which formula will guarantee him happiness. J Krishnamurti

Exactly. Formulas, ideologies and systems do not work. They cannot work, because they cannot cope with changing circumstances, nor with the multiplicity of variables, mostly non-quantifiable, that actually determine outcomes. A Social Policy Bond regime implies no formulas: it would stipulate only the desired social and environmental outcomes. Diverse, responsive approaches would be encouraged, and would thrive - provided they were effective and efficient. And, in a spectacular difference from the current system, failed approaches would be terminated. The self-interest of bondholders would see to that.

War, terrorism and 'root causes'

Once conflict is happening, it's not difficult to reel off plausible reasons for its occurrence, or even its inevitability. Poverty, ignorance, despair, and differences of wealth, ethnicity, religion, class, culture or ideology: all these are thought to be some of the 'root causes' of war and violence. So are inequalities in access to resources, scarcity and economic decline, insecurity, the violation of human rights, exclusion or persecution of sectoral groups, and state failures including declining institutional and political legitimacy and capacity. Other key foundations for conflict could be historical legacies, regional threats, the availability of weapons, economic shocks, and the extension or withdrawal of external support. Demography is also significant: large numbers of unemployed males can catalyse conflict.

Sometimes inward factors are cited; such as individual pathologies; perhaps a history of being abused that predisposes someone to take up violence in later life. Often blamed too are the media, and the frequency with which our children are exposed to images of violence - especially when violence is presented as an acceptable and effective way of solving problems.

No doubt all these factors can and do play a part in fomenting and fanning the flames of conflict. But even aside from the impossibility of eliminating every potential cause of conflict, there is no inevitability that these causes will lead to war. Selective memory has strengthened these linkages in the collective mind, but for each of these 'root causes' there are examples that disprove any simple cause-and-effect relationship. There are, for example, dozens of countries in which people of different ethnicity and religion live happily side-by-side.

Perhaps Tolstoy summed it up best:

The deeper we delve in search of these causes the more of them we discover, and each single cause or series of causes appears to us equally valid in itself, and equally false by its insignificance compared to the magnitude of the event.

An alternative to policymakers' trying to look for and deal with 'root causes' of violence, then, is for them to issue Conflict Reduction Bonds'. (See my post of 9 July (below)). Then it would be up to bondholders to identify the most cost-effective ways of reducing conflict, which may or may not involve looking for root causes, but will certainly be more responsive and diverse than top-down, cumbersome, state-directed efforts.