Command and control versus evolution

When it comes to generating wealth we accept that a Darwinian approach is best. This is not only on the basis of economic theory, but on empirical evidence. Success, broadly defined, comes from the creative destruction of inefficient or ineffective firms, and the redeployment of society's scarce resources into more profitable investments.

For a mixture of ethical and historical reasons, we don't adopt the same approach when looking at social and environmental problems. Here the model tends to be command-and-control. This approach can work; indeed sometimes it is the only answer, despite occasional resistance. Thus, The Times, editorialising (on 1 August 1854) against measures to provide basic sanitation in London:

[W]e prefer to take our chance of cholera and the rest than be bullied into health.

Sometimes, though, government or any big organization gets it wrong. And when these organizations are too big, there's very little we can do about it, except perhaps wait for their folly to antagonise coalitions of interests (natural or man-made) that are big enough to oppose them. In the ensuing conflict - between reality and nature, between opposing coalitions - large numbers of people are generally killed. It's a sort of Darwinism, but not one whose terms people would choose to accept, because its destructive power is immediate, large scale and permanent, and any benefits too nebulous and remote.

If we accept, though, that a global population of more than six billion requires big government and large corporations, we can try to supplant this clumsy, destructive way of proceeding with something less haphazard. And that's where Social Policy Bonds can come in. A Social Policy Bond regime could combine the benefits of creative destruction with those of the command-and-control approach. The difference is that instead of prescribing how social goals are to be achieved, government (or non-governmental organizations, or philanthropists) would limit themselves to setting these goals and raising the revenue required to achieve them. The market for Social Policy Bonds would bring about the termination of inefficient projects, and motivate would-be investors to seek out and implement only those projects - or combinations of projects - that are efficient and effective.

Under a bond regime, creative destruction would play its part in selecting for efficiency, while command-and-control would do what it's best at: prescribing meaningful social and environmental outcomes for the benefit of large populations.

It's not going to work

Concluding his litany of the deficiencies of the United Nation's Clean Development Mechanism (CDM), Mark Schapiro says the market for carbon offsets is:

...an elaborate shell game, a disappearing act that nicely serves the immediate interests of the world's governments but fails to meet the challenges of our looming environmental crisis. Conning the Climate (subscription), Mark Schapiro, 'Harper's Magazine', February

Not only the immediate interests of the world's governments (politicians and bureaucrats) but also the interests of the legions of economists, assessors, validators, and big corporations. Everybody who counts that is. Heaven forbid that we reward the outcome we actually want to achieve: a climate that's reasonably stable, however one wants to define that.

Even if we believe that capping anthropogenic greenhouse gas emissions is consistently found to be the best way of averting climate change and its worst effects; even then, this author believes that the CDM and all entire Kyoto-Copenhagen edifice is structurally unsound.

But how would my proposal - a Climate Stability Bond regime - be any better? Holders of Climate Reduction Bonds would probably still target anthropogenic greenhouse gases in a similar fashion to Kyoto, but they would have strong incentives to do so more efficiently. They would want and would have wider scope for action. For example, they wouldn't be bound by political correctness or realpolitik of the sort that exempts some countries that emit huge quantities of greenhouse gases from any disciplines at all. They would have the flexibility to buy these regimes off or otherwise undermine any weakening of the disciplines. Kyoto-Copenhagen is so politicised and its money flows so unpalatable that it is seen as an imposition: in the rich countries it’s seen as an imposition by environmentalists on everybody else. In the poor countries it’s seen as an imposition by the rich countries on them. It means huge upfront costs for a very small payoff well into the future. Being a political construct it is so compromised that even its most ardent advocates think it ineffectual in its own right. They see it as first step; but it is one that might well not be actually taken – as distinct from being endlessly discussed, debated, written into law and performed as an elaborate charade or shell game.

Climate Stability Bonds, in contrast, would target an array of outcomes that ordinary people can understand, empathise with, and support, or at least, buy into; and that would entail taxpayer spending only when it had been achieved. If we are serious about climate change and its effects, we are going to need the buy-in that only an outcome-based regime, such as Climate Stability Bonds, can bring about.

Social Policy Bonds and Social Impact Bonds

Social Impact Bonds are a new financial instrument being developed in the UK by the Young Foundation and Social Finance. There is more about them here and here. They are similar to Social Policy Bonds in that they link rewards to success in achieving meaningful social outcomes. They appear to differ in that unlike under a Social Policy Bond regime, the contract to achieve the specified outcome would not be tradable. It seems that Social Impact Bonds would reward pre-selected organizations, or parts of pre-selected organizations for working efficiently: they would still have incentives to achieve the specified goal. They might even contract out some of the required work.

Compared with Social Policy Bonds, though, SIBs would be less tradable. There would be no transparent market for them. The composition and structure of the organization trying to achieve the outcome would therefore be fixed and pre-determined. Under a Social Policy Bond regime, on the other hand, the type, structure and composition of organizations working to achieve the target would be subordinate to the most efficient way of reaching it. This means, amongst other things, that broad, longer-term goals could be targeted. The identity of the organizations envisaged as benefiting from any efficiency gains under a SIB regime is another point of departure. They seem to be local authorities or other government agencies. It would appear, therefore, that gains from improved efficiency would be most likely to be remain with the agency and so, perhaps regrettably, be less motivating than direct financial incentives to employees.

The problem with lobbying

Michael Tomasky writes about the lobbyists against health care reform in the US:

At one point last year, more than 3,300 people were registered as lobbyists on health care. That's six for every member of Congress, House and Senate combined. ... In addition, it's worth remembering that, apart from lobbying legislators, these organizations spend vast sums for television and radio advertising. The Money Fighting Health Care Reform, 'New York Review of Books', dated 8 April

Lobbying is, of course, a legitimate activity. What makes it problematic, for me, is that it is almost all done by organizations, supposedly on behalf of their members. These organizations can be corporations, trade unions, NGOs, or other bodies, but they have in common that their over-arching goal is self-perpetuation. It is not the long-term interests of their members as individuals, still less of people in general. Lobbying today is, essentially, lobbying of corporate interests by corporations. And in achieving their main goal, they are remarkably successful. With corporations going bust everywhere, growing unemployment and a still-fragile economy, as Mr Tomasky says, 'federal lobbyists and their clients spent more than $3.47 billion last year [2009]. That is an all-time high, according to the Center for Responsive Politics, whose executive director notes dryly that lobbying is one business that appears to be "recession proof." '

We need a way of re-orienting policy towards the interests and aspirations of ordinary people. Transparency about what are government's goals would help, and a Social Policy Bond regime would necessarily bring that about. Under a bond regime, government funding would be inextricably tied to efficient achievement of agreed, explicit social and environmental goals. There would probably still be lobbyists - but no longer could they concentrate their efforts (and enticements) on the (much smaller) number of legislators. Instead they would have to convince the rest of us as to the justice of their cause. A stark contrast to, and I believe, a big improvement on the current system.

Social Policy Bonds: an alternative to the bolshevik approach

Comparing the relative economic performance of Russia and China, David Ellerman writes:

Another part of the pragmatic approach, also evident in China, is the willingness to allow parallel experiments in different parts of the country and then foster horizontal learning and the propagation of the successful experiments. This is an important part of the alternative to the bolshevik/jacobin approach of legislating the brave new world from the capital city to be applied uniformly across the country. Pragmatism versus economics ideology in the post-socialist transition: China versus Russia(pdf), David Ellerman, real-world economics review, issue no. 52, 10 March

This explains much of the relative economic success of China. Unfortunately it's not the way most of our social and large-scale environmental problems are tackled. For these, government agencies are usually in charge, and they adopt the top-down approach. They are also far more tolerant of failed experiments than any moderately sized private sector business can afford to be. (The largest corporations can often suppress competition so their inefficiencies can persist.) So while a competitive private sector fosters efficiency, the public sector does not. This is not only a waste of resources; it also limits our vision of what government - and only government - can do. When the public sector becomes a byword for inefficiency we don't, for example, even imagine that it can tackle such tenacious and seemingly intractable problems as violent political conflict, for instance, or global poverty.

And that's where Social Policy Bonds come in. Under a bond regime government would still do what it does best - and what only government can do: tackle large-scale social and environmental problems, and raise the revenue to reward people who solve them. But, by issuing the bonds, government would, in effect, contract out the achievement of our social goals to the private sector who would have exactly the same incentives to be efficient as any but the largest corporations have today to achieve their more limited goals. The current approach to tackling our most urgent and challenging goals is what Mr Ellerman would call bolshevik or jacobin. Social Policy Bonds would be the pragmatic alternative.

Business as usual

World recession? People being thrown out of jobs? House foreclosures? An imploding financial system? No worries - if you're a subsidised US farmer:

the United States budget for 2011 announced this February proposed to cut back spending by reducing agricultural subsidies by US$ 10 billion over ten years. It suggested that subsidies only be granted to farmers earning under US$ 250,000 a year, down from a current cap of US $500,000 a year, and cutting aid to crop insurance companies. According to Reuters, this proposal was rejected on 3 March by the U.S. House Agriculture Committee, who stated that changes to farm policies should wait until the next farm law is negotiated in 2012. Will budget deficits provide leverage for farm subsidy reform?, 'Global Subsidies Initiative'

Overcoming mistrust of science: Climate Stability Bonds

As a means of averting disaster, we might be better to formulate policy by targeting basic goals, such as human survival, rather than wait for evidence that will persuade enough people to ensure that action is taken, eventually, by our current political process. Too many influential organizations have vested interests in opposing policies that would benefit society as a whole. George Monbiot suggests that no amount of evidence will convince some people:

[I]n some cases debunking a false story can increase the number of people who believe it. In one study, 34% of conservatives who were told about the Bush government’s claims that Iraq had weapons of mass destruction were inclined to believe them. But among those who were shown that the government’s claims were later comprehensively refuted ... 64% ended up believing that Iraq had WMD. The Unpersuadables, George Monbiot, 8 March

One of the huge advantages of the Social Policy Bond approach is that the evaluation of evidence about such potential problems as climate change is done by private interests. If Climate Stability Bonds were issued, it would be potential purchasers of the bonds who would have to evaluate the evidence about climate change, its causes and consequences, and the best ways of dealing with it. They would have to do continuously from the time the bonds are first floated until they are redeemed. They would have every incentive to do so, and to do so impartially; that is, regardless of their opinion of the science, or the influence of powerful corporations or environmental bodies.

Mr Monbiot is gloomy about the prospects of doing things the conventional way:

The battle over climate change suggests that the more clearly you spell the problem out, the more you turn people away. If they don’t want to know, nothing and no one will reach them.

But even people with a visceral distrust of science; even those who genuinely believe that climate change isn't happening, could not rationally oppose a Climate Stability Bond regime, under which the costs of failing to assess the risks accurately would be borne not by taxpayers, but by those who are willing and able to accept that risk by investing in the bonds. By targeting the desired outcome - a climate with tolerable impacts - governments or whoever issues Climate Stability Bonds could avoid the divisive, arduous and protracted process of evaluating the mass of evidence about climate change. It would be much easier to generate buy-in to the goal of climate stability, than to massive and shifting scientific evidence that will underpin any activities taken to bring it about.

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Low-hanging fruit

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The way big organizations work, whether they be public or private sector, there's often little incentive to explore cheap but effective ways of improving performance. There's little glamour attached to mundane ideas and, where status is correlated with budget size, little reason to adopt them when there's a more expensive option available. This mentality, of course, is encouraged by an environment in which outcomes don't matter. But when people do care about outcomes, there's a surprising amount of low-hanging fruit available for the plucking. Here's the result of using checklists for surgical procedures for 8000 patients for six months:

In every hospital major complications were reduced by 36 per cent and the death rate was halved. One minute with Atul Gawande, 'New Scientist', 20 February

This is outcome-based policy at its best. (See here for more.) All 167 hospital trusts in the UK are now adopting this simple innovation.

A Social Policy Bond regime would similarly encourage the adoption of efficient techniques, even if they are unglamorous. It would build efficiency incentives into all activities aimed at achieving the targeted goal. As Dr Gawande's work indicates, the scope for improvement under the current system is quite astonishing.

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More transfers from the poor to the rich

George Monbiot writes about the UK Government's feed-in tariffs for electricity produced by photovoltaic (PV) panels:

The government is about to shift £8.6bn from the poor to the middle classes. ... On April 1st the government introduces its feed-in tariffs. These oblige electricity companies to pay people for the power they produce at home. ... . Solar PV is a great technology - if you live in southern California. But the further from the equator you travel, the less sense it makes.... It’s not just that the amount of power PV panels produce at this latitude is risible, they also produce it at the wrong time. In hot countries, where air conditioning guzzles electricity, peak demand coincides with peak solar radiation. In the UK peak demand takes place between 5 and 7 on winter evenings. A great green ripoff, George Monbiot, 1 March

And so on and on.... This is what happens when policy is determined by image, sentiment, lobbyists and corporations. It's policy as if outcomes don't matter in the least.

A Social Policy Bond regime wouldn't allow this sort of nonsense to occur. Correction: it would - but only if people actually wanted it. That's to say, if people deliberately choose to transfer millions of pounds from the poor to the rich and to fraudsters, they could do so under a bond regime. The difference is, they'd be doing it with their eyes open, instead of having their view obscured by a policymaking regime that is concerned mainly about image, the welfare of corporations and government agencies, and arcane debate about structures and process.

Who cares about the planet so long as Al Gore look silly

One of the virtues of the Social Policy Bond approach is that setting goals would be done deliberately, consciously and more rationally than it is now. Consider this quote from David Brooks, a 'New York Times' columnist says:

I have to confess, I am not at my best when dealing with environmental issues. On the one hand, I totally accept the scientific authorities who say that global warming is real and that it is manmade. On the other hand, I feel a frisson of pleasure when I come across evidence that contradicts the models. I don’t know if this is just because I distrust people who are so confident they can model complex systems or because I relish any fact that might make Al Gore look silly. Source (quoted here)

This sort of puckish perversity does matter, especially when widely promulgated in the mass media. In the absence of referendums about climate change and other major policy issues, it stands in for, and influences, received opinion. Yet his conclusion doesn't even reflect Mr Brooks' own opinion about the fact of climate change. Our current system gives us so little influence over policy that we treat the whole process as an entertainment.

Social Policy Bonds would bring some rationality to policymaking. Instead of focusing on personalities a bond regime would start out by considering which social and environmental goals we should aim to achieve. Because it is entirely focused on meaningful outcomes, it would bring more people into the policymaking process. We'd think carefully about which outcomes we want to target, and how we'd rank them and, in contrast to the current system, we'd do so relatively dispassionately.