30 March 2009


"In government papers it's considered that everybody should have more self-esteem... It's thought to the the answer to crime, abuse aggression, risk-taking and almost every problem..."' From all the studies, however, there is no good evidence to show that low self-esteem causes anti-social behaviour. Quite the reverse: people who rate themselves highly are the ones most prone to do violence and most likely to take risks, believe themselves invulnerable. John Naish (quoting Nicholas Emler) in Enough: breaking free from the world of more

In society, as in our economy and the environment, things are just too complex for any single organization to understand. As well, causal relationships change dramatically over time, as does our knowledge and expertise. No single policy approach can work. And when government is so big that it forms a policy monoculture, the consequences of getting it wrong can be disastrous. It's far better to target universally-desired outcomes, rather than the means that government at some stage thought was the best way of achieving them.

26 March 2009

Does financial collapse prefigure social and environmental catastrophe?

The pattern of land use in the expanding cities of the South and West [of the US] - which have had the most rapid population growth, with very few people per square kilometer - was itself established over the period that has elapsed since the energy crisis of the 1970s. It is a consequence of prices as well as preferences, and of the changing distribution of public expenditure, or public partiality. Emma Rothschild, Can we transform the auto-industrial society?, 'New York Review of Books', 26 February
I'm glad to see a recognition that the, to my mind, disastrous, changes in land use that we have seen in the US owe a lot to government intervention. With its corrupt, insane subsidies to agribusiness and big landowners and its gung-ho promotion of the oil extraction and consumption infrastructure, the US Government is, sadly, not alone in favouring corporations and abstract economic indicators at the expense of the wellbeing of ordinary people - and the environment. Bio-fuels are the latest in the long litany of woeful government wheezes, ostensibly aimed at solving some genuine social problem, but mainly an effort to divert taxpayer funds to election campaign donors. Tragically, our social and environmental pathways seem to be paralleling those of the financial sector, and for much the same reasons: government and big business working hand-in-hand to postpone the solution of urgent problems and along the way grab what they can for themselves.

Politicians are almost as much the prisoners of this absurd system as the rest of us, and there's little point now in trying to allocate blame. The problems that the corporatist state has created are now so huge that they require further government intervention. I feel strongly that government should stop trying to prescribe solutions (a la bio-fuels) and instead switch to something like Social Policy Bonds, by means of which it can reward people for achieving such widely agreed goals as the avoidance of catastrophe, without imposing its own (or its paymasters') ideas as to how to achieve these goals. We need diverse, adapative policies and projects, not the dead hand of government and its friends in big business with their failed and fossilised thinking. We need to specify the outcomes that we want, instead of blindly aim for economic growth whatever its consequences and whoever benefits. To be frank, I'm not optimistic that anything like this will happen; not before some calamity anyway.

23 March 2009

Peak everything

Reading books like Peak Everything: Waking Up to the Century of Declines by Richard Heinberg one is struck by the apparent certainty and magnitude of the decline we human beings face. We seem to be on the brink of some sort of collapse, whose precise form and precipitating causes cannot be foreseen. It's very much like the unravelling of the world's financial system, whose impacts, even now are uncertain.

Many of the causes, though, are similar. To my mind, the underlying problem is the combination of extreme globalisation with lax regulatory policy. The market for financial instruments is effectively, a single global market. With its massive volumes, the rewards from exploiting even inadvertent regulatory deficiencies can be massive - and entirely legal. No regulatory system can anticipate and stop up all loopholes. What could have been done, though, was to set up countervailing incentives: reward people for avoiding the collapse that we are now seeing.

Disastrously, in my view, we are heading in the same direction in other areas. Take climate change or peak oil. With both these challenges our governments are behaving inadequately. Now government is not all-powerful and, as with financial markets, it cannot foresee which laws, regulations or projects are going to best deal with the problems. But what it can do (apart from obvious things like remove subsidies to oil consumption) is to offer incentives for people to avoid catastrophe, however they do so. One way of doing this would be to issue Social Policy Bonds that would reward investors in the bonds if (say) climate-related disasters are avoided or their impacts minimised. See an earlier post on this theme. The key is to target the desired outcome, rather than try to anticipate and deal with all the impediments to such an outcome - an impossible task, as we have seen in the finance sector. We urgently need outcome-based policy when it comes to climate change and other environmental and social problems, which are just too complex for the conventional approach.

18 March 2009

The meaninglessness of abstract economic variables

Andrew Gelman asks 'What is Russia's GDP per capita?'
$7,600 (World Bank 2007)

$9,100 (World Bank 2007)

$14,700 PPP [Purchasing Power Parity] adjusted, World Bank 2007)

$4,500 (World Bank 2006)

$7600 or $14,400 (gross national income: "Atlas method" or "purchasing power parity," World Bank 2007)

$12,600 (IMF 2008), $9,100 (World Bank 2007), or $12,500 (CIA 2008)

$2,637 in 2000 US dollars (World Bank 2007); that's $3,200 in 2007 dollars

$2,621 (World Bank 2006) or $8,600 (IMF)
I've posted before on the uselessness of Gross Domestic Product as an indicator of societal well-being. The disparity that Mr Gelman depicts is another reason why I think we should as far as possible target meaningful outcomes themselves, rather than indicators that might be, or might in the past have been, strongly correlated with wellbeing. In large, complex societies such indicators will be hard to find, but we can make the attempt. Take physical health: in the rich countries we could use broad health indicators such as longevity and infant mortality. In the poorer countries we might encounter problems gathering reliable longevity data, but objective sample data on, for instance, infant mortality, weights of young children, nutritional intake, could be available and useful. Refinement by experts, and aggregation into something like the Human Development Index, would see the creation of much targets that would be both more sound and more meaningful than the current array of indicators such as GDP per capita which, in the absence of sensible targets, has become the de facto over-arching target of governments everywhere.

17 March 2009

Anyone any better idea...?

Quietly in public, loudly in private, climate scientists everywhere are saying the same thing: it’s over. The years in which more than two degrees [Celsius] of global warming could have been prevented have passed, the opportunities squandered by denial and delay. On current trajectories we’ll be lucky to get away with four degrees. Mitigation (limiting greenhouse gas pollution) has failed; now we must adapt to what nature sends our way. If we can. George Monbiot
The current solutions are not working. There's not a sliver of the political will necessary to meet the challenge. The unattractiveness of the Kyoto process probably has something to do with it: high, upfront cost for an uncertain, remote, reward. A process that politicises the climate change issue, setting country against country in ways that encourage negotiators to spend all their time defending their country's short-term interests at the expense of a global solution. This, and the fact that it's underpinned by 1990s science with little role for our expanding scientific knowledge, has sealed Kyoto's fate, and possibly that of our entire planet.

Climate Stability Bonds might not be perfect - but has anyone any better idea?

13 March 2009

Centralization: costs and benefits

"The food system is so centralized that, when a food crisis hits like it did this year, we are less able to react," said Eric Holt Gimenez, executive director of Food First/Institute for Food and Development Policy. "We get these tremendous spikes in commodity prices. ... It also shows up at the cash register." Our Hungry Planet, Chris Serres, Startribune.com (cited in an Oligopoly Watch post about Cargill)

Centralisation doesn't always work against societal wellbeing. Indeed, in my view it's essential for such tasks as articulating society's needs and wishes, and for raising the revenue needed for public goods and services. But extreme centralization, I think, has two main, overlapping, problems. First, it fosters corporatism, and works in favour of big companies at the expense of small enterprises and the interests of ordinary people. Second, and more relevant to the Social Policy Bond idea, is that it creates a policy monoculture. As Mr Gimenez indicates, this can mean a disastrous sluggishness; it also inhibits diversity of response, and so limits the degree to which successful policies and projects can supplant the failures.

For all these reasons, Social Policy Bonds could score heavily over our increasingly centralized policymaking decisions. Under a Social Policy Bond regime national governments or supra-national bodies like the United Nations could do what they are best at: setting long-term social and environmental goals, expressed in terms of outcomes that are meaningful to ordinary people. But rather than spawn a centralized bureaucracy supposedly aimed at achieving these goals, the bonds would be bought by private investors, who would have powerful incentives to co-operate with each other to achieve targeted goals as cost-effectively as possible. With Social Policy Bonds we could enjoy the benefits of centralization and the benefits of a multitude of competing, diverse, adaptive programmes and projects.

12 March 2009

Climate change: the problem

The problem:
If a product is made in China, by a company based in Singapore, using Australian coal, for a company in the UK, and exported to end users in the US, then which country should 'own' the emissions?". Oliver Tickell, 2008
The solution? Subordinate policy to the desired outcome: climate stability. Not to the wish to attribute emissions to particular countries. Nor even to the wish to cut back emissions. Our politicians are too adept at gaming whatever will be agreed, while climate change is simply too complex to address with one policy, which might well not be effective or efficient.

The solution in more detail? Issue Climate Stability Bonds, which will transfer the burden of assessing the cost of stabilising the world's climate to investors who have an incentive to stay abreast of our rapidly expanding scientific knowledge and technology. The bonds will reward the achievement of the climate stability goal without prejudging how that shall be achieved. For more details, see here.

11 March 2009

Missing emails

If you have tried to email me over the past few months and haven't had a reply, it's because your email didn't reach me. I have only recently discovered that my ISP has been filtering my emails and blocking some important ones. Please resend your email and I will reply promptly. Thank you.

Reacting rationally to perverse incentives

The Icelandic financial crisis explained:
You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.” Wall Street on the Tundra, Michael Lewis
The result? In the same article, we learn that
When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child.
The details are no doubt more complex, but I would guess, that as in the rest of the financial world, the Icelanders were reacting rationally to the incentives on offer. Indeed, facing those incentives, the multitudes of traders, bankers and experts would have been mugs not to behave irresponsibly.

A Social Policy Bond regime might have avoided the entire calamity, at least from the viewpoint of ordinary people. Unlike with other financial assets, investors in Social Policy Bonds might well get rich, true, but their rewards would be inextricably linked to achievement of specified social and environmental goals. Achievement of such goals might be as complicated as the financial markets used to be, but the investors' goals, and those of the general public would be entirely congruent. If government backed Social Policy Bonds then social and environmental goals would be decoupled from the financial world's volatility. There would still be huge gyrations in fortunes, but not at the expense of taxpayers.

05 March 2009


If we're going to have large, centralised governments, we should probably accept that much of their policy will centre round the use of highly aggregated numerical data. The Social Policy Bond principle is no different, but I advocate that the bonds target broad indicators of wellbeing that are meaningful to ordinary people. Here's what happens when governments use Mickey Mouse micro-targets:
[H]ead teachers in the [UK's] government-controlled sector live and die by targets. Their careers depend on them. One of the targets is high attendance. Then came the snow [in the first week of February]. Most schools in London were closed on the Monday. But more schools managed to open on the Tuesday. Now you might think that those schools whose head teacher and staff struggled into work for the benefit of the children in their care were particularly conscientious. Not in target-land however. They were mugs. Since their schools were open, the many absences of children from their schools on that snowy day will count against them when it comes to calculating how good their attendance figures have been. But those schools which stayed shut will be deemed to have been shut because of exceptional circumstances and their attendance figures will not be affected at all. So the conscientious schools that opened will be punished with bad attendance figures. The less conscientious schools that stayed shut will be rewarded with high attendance figures. Thus does the state give perverse incentives. Source

03 March 2009

Why so coy?

Overfishing, which affects 19 percent of major commercial fish stocks monitored by the FAO [the UN's Food and Agriculture Organization], was being facilitated by a higher number of trawlers in operation and increasingly effective technology, it said. Grist, 2 March
The United Nations report to which this press release refers is due out next week. I hope it mentions the grievous role that UN member governments have played in subsidising overfishing. Many of the subsidies to the industry, estimated to be worth around $30 billion annually, take the form of reduced-cost fuel, or cheaper high-technology that does much to contribute to the destruction of the world's fisheries.

02 March 2009

The real revolution: targeting outcomes directly

The philosophes claimed that critical reason would prove emancipatory. Reason and science, they held, would make people more humane and happy. But certain scholars have recently been arguing that just the opposite occurred. When rulers and administrators heeded the promptings of 'reason', it was to increase their power and enhance their authority, in ways which often penalized the poor, weak, and inarticulate. Roy Porter, 'The Enlightenment'

Knowing what we do about the complexity of our society, it's less forgivable nowadays that at the time of the French Revolution to say we're targeting, say, poverty, by implementing policies whose effect, at best, is indirect. You do not target, for example, the wellbeing of people who are farming by a hugely elaborate system of import and price controls whose main beneficiaries are the very rich, agribusiness corporates and fraudsters. You do not, these days, necessarily raise literacy standards by spending more on education. Nor crime by spending more on police.

If we want to raise literacy, why not target literacy? If we want to reduce crime, why not reward people for reducing crime, however they do so? In short, why not target outcomes, rather than activities, institutions, inputs or outputs, and let the private sector, rather than the taxpayer, be penalised for failure? Revolutionary talk. But such would be the effect of a Social Policy Bond regime.