25 November 2010

Innovation is a threat to the public sector

But the benefit of competition is not just that it serves customers’ needs today, but that it is a mechanism for adapting to what they will need tomorrow. The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure. Apple is changing the nature of the phone industry, Amazon the book business. But anyone who had approached these industries from the marketing or the legal standpoint would have concluded that there was enough competition already. Radical innovation rarely comes from within, John Kay, 'Financial Times', 24 November
There are bodies, whose weaknesses Mr Kay discusses, that are charged with improving competition in the private sector. And it's true that they are often needed. It's unfortunate, though, that there's no such mechanism for public sector monopolies, because it's these bodies, typically government agencies, that are supposed to bring about social outcomes that, from a broad perspective, are far more important than reasonably priced books or phone calls. We rely on various levels of government to, for example, relieve poverty, reduce crime rates or insure against environmental - or financial - catastrophe. The absence of innovation in achieving these outcomes is an embarrassment. Yes, there have been some minor changes in the identity of the service-deliverers, some contractings-out and quite a few privatisations. But on the whole, the contrast between the private and sectors is stark. Our political system, like any other institution, has as its over-arching goal that of self-perpetuation, and its interests are not only different from those of ordinary people; they are often in conflict with them.

Perhaps Social Policy Bonds could re-align the goals of our policymakers with those of the citizens they are supposed to represent. Under a bond regime how outcomes are delivered, and who delivers them, would be less important that the fact of their delivery. There would be less discussion about structures and spending; instead there'd be a constituency of highly-motivated investors whose goals would be entirely congruent with those of society. By maximising their own rewards, bondholders would be necessarily achieving social goals, whether they be local, national or even global, as efficiently as possible. Innovation, to investors in Social Policy Bonds, would be an opportunity not, as under the current system, a threat.

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