29 July 2005

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.

26 July 2005

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.

23 July 2005

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.

17 July 2005

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.

13 July 2005

The private sector can issue Social Policy Bonds

Governments are unlikely to be the first issuers of Social Policy Bonds. Doing so would mean they relinquish some of their power. They would be surrendering their power to dictate how specified social objectives shall be achieved. They would still be specifying what these objectives are, and they would still be raising, through the tax system, the funds that would be used to achieve them, but the decisions about how to achieve them would, in effect, be contracted out to the private sector. These contracts would be tradable, via the bond mechanism. But governments are not known either for their willingness to surrender power, nor for their deployment of innovative financial instruments.

So I now see the private sector as being the more likely first issuers of Social Policy Bonds. I have prepared a handbook using the example of female literacy in Pakistan, suggesting how this might be run. (This is a pdf file of about 15 pages.)

09 July 2005

Terrorism, war and market incentives

The Greeks saw war as an inescapable fact of human life. In the aftermath of terrorist outrages many commentators take the same view; and preventing every such outrage is indeed a formidable task. Which is why, in my view, it should not be the sole responsibility of the state. Government, I believe, could contract out much of the work needed to eliminate terrorism. It could issue Social Policy Bonds redeemable for a fixed sum only when there had been no people killed or injured by terrorist attack for a sustained period.

Bondholders would then have incentives to prevent terrorism efficiently. They would explore and invent new, more diverse options than are currently open to government. They could, for example, subsidise intermarriage between members of different religious communities. They could sponsor school exchange visits, sports matches or the broadcasting of peaceful propaganda. They could arrange for the most virulent preachers of hate to take long, luxurious holidays in remote resorts without access to communication facilities. They could pay people to seduce arms dealers into other areas of activity. Whatever holders of bonds targeting war and terrorism do, they will have successes and failures. But they will also have incentives to terminate projects that are failing and to refine and replicate their successes - to be efficient, in other words.

Government has no such direct incentive. It cannot offer direct financial rewards for success, and its talent pool is limited, partly for that reason. It would get into trouble if it advocated things like intermarriage, or sponsored sybaritic vacations for rabble rousers. As in other areas of social policy, its options are limited. They tend to be one-size-fits-all, slow to adapt and justified mainly because they have been done before, rather than by their efficiency.

The private sector can and should be given the chance to operate more freely. After all, it is largely private incentives that have aggravated the problem of war and terrorism. We need to redress the balance and reward those who strive for peace.

Under a bond regime targetting war and terrorism, Government would still have the responsibility of defining our peace goal, and it would be the ultimate source of finance for achievement of that goal. But the actual achievement would be contracted out to the private sector, who would have powerful incentives to achieve it as cost-effectively as possible. Government and the private sector would each do what it does best: respectively, articulating its citizens' wishes, and finding the most efficient ways of achieving its goals.

05 July 2005

Corporate goals are not social goals

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

By default, GDP, or GDP per capita, has become the measure of social progress. What Galbraith calls fraud, I would call a trap or an irrational tendency, which parallels, or arises from, our individual psychology. For most of us education has been almost entirely verbal. So we see happiness as a set of circumstances rather than a state of mind. But the correlation is neither strict nor necessarily positive. Our societal obsession with GDP is, in my view, an exact projection of our individual obsession with preconceived, generally numerical and monetary, goals. What gets lost are crucially important, but neglected public goods, such as a healthy environment, low rates of crime, or a low probability of war. Social Policy Bonds would explicitly target these goods and reward those who help achieve them. Our current incentive structure rewards those who increase GDP, even if they do so by, for example, destabilising the climate or selling weapons to corrupt despots.