31 August 2008

Management of the market

In today's Observer:
For three decades a single dominant thought has crowded out all others: that managing, whether of economies or organisations, is a matter of switching on the automatic pilot of the market's invisible hand and letting rational selfishly motivated individuals do the rest. .... But the dominant idea is now under attack. One prong of the offensive is the course of events; after all, it wasn't supposed to be like this. Over the past decade, rather than a stimulating pat on the back, the invisible hand has administered a succession of increasingly damaging haymakers: South East Asia, hedge fund LTCM, the dotcoms, Enron and other corporate scandals, now the sub-prime shambles. After several knockdowns, the unfettered market has put the global economy on the canvas for the count. [And] just as the practice of financial capitalism is being questioned, so are its intellectual underpinnings. As it excavates the foundations, the burgeoning school of behavioural economics is shouldering aside the desiccated calculations of economic man to make legitimate space for emotion, altruism and fair play in economic behaviour. Simon Caulkin, 31 August
Mr Caulkin points out that there are many incentive structures that can bring about excellence in the private sector and that:
It has nothing necessarily to do with stock options, private ownership or extravagantly paid senior executives. It does have to do with effective work organisation and systems, which the individual performance management regimes favoured by the private sector are as likely to destroy as to support. It is now apparent that where the private sector does excel is in disguising the full costs of its incentives by externalising their dysfunctional results on to society as a whole. Today's credit crunch is the most stunning example of this perverse behaviour in economic history.

Mr Caulkin ends by saying that 'Management of the market is as important as management by it'. I can't disagree with this, except to point out:

  1. that the public sector also behaves anti-socially (see passim on this blog or the websites at right references to perverse subsidies) and
  2. that the broader incentives do matter when it comes to the private sector externalising its costs (onto the environment as well as 'society as a whole').

There are few incentives not to so externalise. The private sector is always going to 'excel in disguising the full costs' of its negative impacts on the rest of us if it doesn't get punished for doing so, or rewarded for not doing so. It is reacting rationally (and anti-socially) to the incentives on offer. So the question is not so much 'how is the market to be managed?', but rather 'how can we rejig the incentives so that the organizations - whether they be private or public sector - behave themselves?' That's where Social Policy Bonds enter the picture. They can act as a market-based device for correcting market failure. If the product of the mix of private and public sector bad behaviour is a filthy environment or a high rate of crime, then rather than regulate with a (pace Mr Caulkin) not-always-efficient public sector, a bond regime with environmental and social goals that are understood and agreed by ordinary people could be the solution. Social Policy Bonds could be issued that reward people for bringing about a cleaner environment and a lower crime rate, however they do so.

So management of the market could in effect be done by the market. The beauty is that under a bond regime it is that the market would be allowed to do what it is best at doing - allocating scarce resources - but in the service of social and environmental goals, rather than the private accumulation of wealth.

28 August 2008

Fossil fuel subsidies: facts and figures

I'm pleased to see that the United Nations has tried to quantify subsidies to fossil fuels:
Globally, governments spend some $300 billion on fuel subsidies that encourage consumption, delay transition to cleaner energy sources, and mainly benefit the already-rich even though most of the programs are intended to help the poor with fuel costs. "In the final analysis, many fossil-fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy," said U.N. Environment Program director Achim Steiner.... Russia is the largest fuel-subsidy spender, throwing down some $40 billion a year mainly to subsidize natural gas; Iran is in second place, spending about $37 billion a year on fuel subsidies. You're not fueling anyone, 'Grist'
Perhaps surprisingly, most of these subsidies are given by governments of the developing countries. The UN report says that the 2006 Stern Report:
estimates that direct government support to the deployment of low-carbon energy sources worldwide is currently of the order of $26 billion per year: $10 billion on deploying renewable sources of electricity and around $16 billion on supporting existing nuclear power. Reforming Energy Subsidies (pdf)
The problem with subsidies is that they are so difficult to terminate, even decades after they are shown to be economic nonsense, environmentally disastrous and socially inequitable. Subsidies of this sort finance a coalition opposed to their removal.

For more on fossil fuel subsidies see: End Oil Aid, which has a database showing subsidies to the oil industry by country; and Oil Change USA; an informative, entertaining site which looks at the influence of oil in the US.

27 August 2008

Ends and means in energy policy

James Lovelock in The Revenge of Gaia:
I find it sad, but all too human, that there are vast bureaucracies concerned about nuclear waste, huge organizations devoted to decommissioning nuclear power stations, but nothing comparable to deal with that truly malign waste, carbon dioxide.
Energy policy is largely politicised; which means that people are less likely to engage in rational argument. But Lovelock's case for going nuclear should be debated. Unfortunately, like so many other facets of life in a complex world, nuclear technology is highly technical, which probably explains why most of us react emotionally to it. But Social Policy Bonds could bring about more public participation in the debate - essential if we are going to have the buy-in that will become increasingly necessary. Under a bond regime we would target broad environmental indicators and supply of energy. These are the outcomes of an energy policy, and much easier to understand than highly specialised technical data. Holders of bonds targeting such environmental and social goals would have incentives to achieve the specified goals, but it would be up to them to decide how. They would have powerful incentives to meet the agreed environmental criteria. And these criteria would be agreed by society in general, rather than a handful of politicians taking advice from a few scientists and industry lobbyists.

Nuclear or non-nuclear: that is not the question. Meeting agreed social and environmental goals: that is what is important, and that is what an outcome-based policy approach, such as Social Policy Bonds, would deliver.

23 August 2008

Buy-in and regional development

A key chapter, titled 'What sort of Future?', by David Byrne, in Geordies: Roots of Regionalism, discusses amongst other things the British Government's policy towards northeast England in and after the 1930s:
The proposals for regional development ... were an interesting and fruitful combination of macroeconomic industrial strategy and Keynesian social strategy. ... All public bodies were involved in this programme, but the major initiatives were associated with a new political form, the corporatist political organizations created by the Special Areas Commission in the form of appointed rather than elected bodies. ... The significance of this separation of economic development from direct democratic control by local government cannot be overstated.
The significance, to me, is that of a growing gap between government and the people it is supposed to represent. It's a reminder of the crucial importance of buy-in to policies that affect us. The continuing turmoil in the world's financial markets tells us that even banking experts don't fully understand the nature of the risks they are taking in a complex environment. There is a case, then, for delegating economic and policy decisions being taken by a small group of experts. But their goals should be those of the people affected. Economic policy can be arcane and amenable only to specialists. But its goals need not be. A Social Policy Bond regime, by targeting broad social and environmental objectives, could draw more people into the policymaking process. Some statistical economic growth might be sacrificed but the benefit in terms of more buy-in could be immense. It could do a lot to eliminate the bitterness and rancour that affects so much of Britain outside the southeast; the feeling of being colonised by the capital, of being a victim of decisions made hundreds of miles away.

19 August 2008

What is it all about?

From testimony delivered 12 March before the US Senate Committee on Commerce, Science, and Transportation, Subcommittee on Interstate Commerce by Jonathan Rowe,codirector of West Marin Commons, a community-organizing group, in California:
Every time you say that “the economy” is up, or that you want to “stimulate” it, you are urging more expenditure and motion without regard to what that expenditure is and what it might accomplish, and without regard to what it might crowd out or displace in the process. That term “the economy”: what it means, in practice, is the Gross Domestic Product–a big statistical pot that includes all the money spent in a given period of time. Our Phony Economy, "Harper's Magazine", June
In the absence of any clear, coherent, agreed goals, growth in Gross Domestic Product, or GDP per capita, has become the de facto objective of most governments. Thankfully more people are realizing that GDP or economic growth as conventionally measured, is not a meaningful end in itself - at least not to ordinary human beings in western economies. GDP probably was a useful indicator in the past, when it correlated strongly with social wellbeing, but we'd do better now to focus on different measures.

A government-backed Social Policy Bond regime would mean asking what it's all about right from the start. As a society we'd need some agreement on where taxpayer funds should be spent - or rather, on what they should be spent to achieve. In my view, we'd do best to target broad, basic levels of health and education; and lower levels of crime and pollution. We could also target the absence of social or environmental catastrophe: using the bonds as an insurance policy against calamity. Of course, the Social Policy Bond concept is versatile enough for any group of wealthy individuals, who could issue their own bonds for their own, hopefully philanthropic objectives. In this example (pdf) I discuss the possibility of issuing bonds targeting female literacy in Pakistan.

14 August 2008

New book

I've just completed my book Market Solutions for Social and Environmental Problems: Social Policy Bonds. It supersedes my previous books and is much longer, weighing in at 71700 words plus citations. I haven't yet found a conventional publisher, so have published it myself via Lulu. Details here:

Support independent publishing: buy this book on Lulu.

13 August 2008

Bruce Schneier gets it

Bruce Schneier, suggesting the actions that the US Government could take to boost cyber security:
[L]egislate results and not methodologies. There are a lot of areas in security where you need to pass laws, where the security externalities are such that the market fails to provide adequate security. For example, software companies who sell insecure products are exploiting an externality just as much as chemical plants that dump waste into the river. But a bad law is worse than no law. A law requiring companies to secure personal data is good; a law specifying what technologies they should use to do so is not. Mandating software liabilities for software failures is good, detailing how is not. Legislate for the results you want and implement the appropriate penalties; let the market figure out how -- that's what markets are good at. Memo to the President
Exactly; and as in security, so in other policy matters. Government doesn't know how to do things, but it's the best forum we have for deciding which outcomes we should strive to achieve, and it's the best way we have of raising revenue to achieve those outcomes. For such tasks, being big, monolithic and decisive are advantages, and government has them. But for actually achieving goals in complex, ever-changing societies, we need diverse, adaptive approaches. Stipulating outcomes and rewarding people for achieving them: government can do those things very well. But as Mr Schneier says, the market is the best way we have of allocating resources to actually achieving society's goals.

12 August 2008

Why isn't this guy running for President?

This from Jonathan Rowe, of West Marin Commons:
The purpose of an economy is to meet human needs in such a way that life becomes in some respect richer and better in the process. It is not simply to produce a lot of stuff. Stuff is a means, not an end. Yet current modes of economic measurement focus almost entirely on means. For example, an automobile is productive if it produces transportation. But today we look only at the cars produced per hour worked. More cars can mean more traffic and therefore a transportation system that is less productive. The medical system is the same. The aim should be healthy people, not the sale of more medical services and drugs. Now, however, we assess the economic contribution of the medical system on the basis of treatments rather than results. Economists see nothing wrong with this. They see no problem that the medical system is expected to produce 30 to 40 percent of new jobs over the next thirty years. “We have to spend our money on something,” shrugged a Stanford economist to the New York Times. This is more insanity. Next we will be hearing about “disease-led recovery.” To stimulate the economy we will have to encourage people to be sick so that the economy can be well. Harper's Magazine
There's nothing to disagree with here. There are difficulties in measuring happiness or social wellbeing, but there are far better indicators than abstract, highly aggregated economic variables. Broad indicators of physical and environmental health would be a start, and under a Social Policy Bond regime we could explicitly target them and channel market incentives into improving them. Another critical goal could be the avoidance of catastrophe, whether its cause be social, environmental or military. Again, Social Policy Bonds could be issued that reward people if a catastrophe - which could be defined as a single event that kills 10000 people in any 24 hours - is avoided for a sustained period.

There are not enough incentives directed at such goals, which are both more meaningful to ordinary people and more widely held than those economic aggregates that we do, by default, target. A Social Policy Bond regime could do something to redress the balance.

09 August 2008

Government suppresses adaptation

...Americans have been eating oil and natural gas for the past century, at an ever-accelerating pace. without the massive 'inputs' of cheap gasoline and diesel fuel for machines, irrigation, and trucking, or petroleum-based herbicides and pesticides, or fertilizers made out of natural gas, Americans will be compelled to radically reorganize the way food is produced, or starve. James Kunstler, The Long Emergency (page 239)

Without government subsidies, it's unlikely Americans (and other industrialised countries) would be in this predicament. Government has subsidised the extraction of oil. It was also obsessed with maximising per hectare yields of farm products, and the way it subsidised agriculture led to highly intensive, specialised production that relies absolutely on oil. Without government backing, we'd probably still be eating oil, but not to the same degree and we'd not be so locked into that mode of production. Government is not immune to the winnowing effect of Darwinian evolution. But replacing governments take time, during which irreversible harm can be done to people and the planet. The Soviet Union was directly responsible for the death of millions, but its demise took decades. If government had refrained from getting involved in subsidising oil and agriculture we'd probably be in a much better position to deal threats like oil shortages. The effect of government has been to suppress our capacity to adapt. That's partly because it thinks it knows how best to achieve social goals. It thought that an oil-based infrastructure and agriculture would maximise social welfare, and because of the self-entrenching nature of its subsidies it's as locked into that paradigm as the rest of us.

Social Policy Bonds are an alternative. Instead of targeting narrow goals such as miles of roads built or yields per hectare, it would set basic nutritional or health standards for everybody. The incentives would be for people to maximise people's health in ways that are diverse and adaptive. The bond principle is to subordinate government-funded activities not to the one-time opinions of a handful of experts but to targeted outcomes themselves. The result would be a more resilient food supply system - one that would have the capacity to adapt and evolve.

05 August 2008

Entrenching insanity

With 88 percent of the EU's fish stocks over-fished, diminishing fuel supplies, and its Kyoto emission targets looking unlikely ever to be met, what is the response of the EU Commission? Raise fuel subsidies to the fishing industry of course. You can read about it here. Also today's news gives more details of UK government bailout of Northern Rock, which currently owes UK taxpayers will stand to lose up to £17.5 billion.

There's a perverse logic to these perverse subsidies. Once you've started dishing out subsidies, it's very difficult to stop. The effect of the subsidies is to swell the power of the recipients to oppose any reduction in their subsidies. It's a corrupt, insane way of running things from the point of view of society as a whole. But who has that point of view any more?

01 August 2008

Old Beijing

Reviewing City of Heavenly Tranquility: Beijing in the History of China by Jasper Becker, the Economist (subscription) says that one of its strengths
is the depiction of Beijing as a canvas for the projection of others’ fantasies. In the case of 17th-century Jesuits or 20th-century Westerners in search of the exotic, this was fairly harmless. With purges, famine and urban destruction, Mao Zedong visited immense grief on a city he treated as a blank page. But it is China’s recent dictators who have finished off Beijing, bulldozing its past with the criminal approval of the world’s leading architects throwing up “signature” structures....
There's nothing unique about China in this respect. Most British cities, for example, suffer from ludicrous zoning rules, brutal modernism, and the car cathexis of town planners. The desolation of our urban environment is a physical manifestation of how policy is made. Well-meaning (for the most part) government has its own ideas about what's best for the people. But the gap's too wide: they don't really know what's best for us. They have to rely on aggregated data and their own ideology, and it doesn't work. Heavily influenced by big business and corporate goals, our physical and social environments serve abstract, ideological or economic goals.

A Social Policy Bond regime would be different. The economy would be seen as a means to various specified ends, not as an end in itself. And the specified ends would be meaningful to ordinary people. It's possible that aesthetic, social, psychological and environmental horrors - in the eyes of Mr Becker (and me) - would still be perpetrated, but they would then happen with the people's participation and consent. More likely, some economic growth or Olympic razzmatazz would be traded off against a higher level of well-being. That would be policy as if outcomes mattered.