13 March 2007

Simplify policy by targeting outcomes

Perhaps the sophistication of modern financial structures means that the distribution of risks and the design of governance structures can be finely tuned to the needs of individual investors and the businesses they fund. Or perhaps there is a miasma of complexity and confusion in which everyone persuades themselves that the uncertainties of business have been landed on someone else. John Kay, Financial Times, 13 March
Professor Kay is writing about private equity, but I am not sure his forebodings don’t apply to policymaking and its impacts on the environment and society. If they do, then it would be for similar reasons. I suspect the complexities in the worlds of finance and policymaking can work in society’s favour if behaviour is ethical and people trust each other. Economic complexity, based on the division of labour, works well under such circumstances. But it’s not obviously better than stone age economics in complex economies, with their alienation, asymmetries of information and power, extreme interdependence, and widespread availability of highly destructive weapons. One becomes nostalgic for a simpler, more comprehensible world.

Can we have the benefits of complexity without its costs? Social Policy Bonds would recast politics, by starting out with broad, comprehensible and meaningful outcomes, to which all policy programmes would be subordinated. The world’s complexities, manifold, ever-changing and hence unknowable to the elite caste of current policymakers, would be pored over by anyone with an interest in investing in the bonds. Efficiency, not status or chance, would determine how well people are rewarded for achieving social outcomes.

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