Black swans

In the Introduction to his book Whoops!, about the 2008 crash, John Lanchester says:

Many bright, literate people have no idea about all sorts of economic basics, of a type that financial insiders take as elementary facts about how the world works.

Nor can many of us follow the technical debate about climate change or the dangers of strangelets or supervolcanoes.... Along with the esoterica of the financial markets, the complexities and obscurities of the relevant scientific relationships just cannot be unambiguously fathomed by policymakers - or even teams of experts.

That's why I advocate that, instead of attempting the impossible task of trying to identify such relationships and their consequences, policymakers target outcomes instead. We don't have fully to understand the climate change debate to know that it would be to our advantage to avoid climate catastrophe. Nor should we have had to anticipate the myriad derivatives that the finance industry constructed to avoid the derailing of the entire global economic system. It's the outcomes that matter, not how we reach them.

Under a Social Policy Bond regime, we could define the circumstances we want to avoid, and issue bonds that become redeemable only when these circumstances have not arisen for a sustained period. Defining such circumstances would not necessarily be a simple matter. It could involve constructing an index that combines measures of human, animal and plant health, or physical and financial indicators. No, it would not be simple - but it would be preferable to the current policy, which is basically that of reacting to crises only after they have occurred and caused immense, and possibly fatal, damage. For more on using the Social Policy Bond principle to avoid catastrophe, however caused, see my paper on Disaster Prevention Bonds.

On another note, the Economist of 19 February has an article on Pay for Success Bonds (subscription), a US version of Social Impact Bonds. At first glance they suffer from the same (as I see it) weakness as SIBs: they would not be tradable, and so would be limited to fairly narrow, short-term goals whose would-be achievers are known in advance. (See my previous post, on Social Impact Bonds.) These bonds are definitely a step in the right direction, in that they reward successful achievement of social outcomes, rather than merely pay people to undertake ostensibly beneficial activities. But I think that, because they are non-tradable their scope is necessarily limited, and also that, as a result monitoring their success or otherwise might be too costly in relation to their benefits.

The book

My book Market Solutions for Social and Environmental Problems: Social Policy Bonds, is now also available from CreateSpace (part of Amazon) with ISBN number 978-1456512095. It costs US$19.95. It's a slightly updated version of the book available from Lulu (see right-hand column) and will eventually supersede it.

Social Impact Bonds - progress report

Social Impact Bonds (not to be confused with Social Policy Bonds) were launched in the UK in September 2010. SIBs are similar to Social Policy Bonds in the sense that investors receive higher returns if their social intervention is successful. They are being tried over four years with 3000 UK prisoners at Peterborough prison. The more their reoffending rate falls, the more the backers of the bonds will receive.

Toby Eccles, development director of Social Finance, says it hopes to launch half a dozen such bonds across the country and for a variety of social projects over the next 18 months. Other groups ... are looking to foster similar bond schemes in areas such as cutting the number of children going into care or handling people with long-term health conditions better. “Making these work is complex,” says David Hutchison, Social Finance’s chief executive. “You have to be able to measure success accurately and work out how much to pay for it and when. Peterborough is relatively easy – people either reoffend within a year or not. Bonds set to help prisoners break with past, by James Boxell and Nicholas Timmins, 'Financial Times', 10 February

I met Toby Eccles in London last June, and we discussed both Social Impact Bonds and Social Policy Bonds. SIBs are definitely a step in the right direction. The idea of rewarding desirable social outcomes (rather than paying people for simply turning up to work), while obvious in theory, is (sadly) revolutionary in practice. Social Impact Bonds have the great virtue of being easier to trial than Social Policy Bonds. But in other ways Social Policy Bonds have the advantage.

The biggest difference is that, compared with SIBs are less tradeable than Social Policy Bonds. There would be no transparent market for them. The composition and structure of the organizations trying to achieve outcomes under a SIB regime are therefore 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. Such goals can be more closely aligned with society's wants and needs. Rather than target a relatively narrow indicator (like the re-offending rate of a certain set of people), over a period of a few years, they could target regional or national crime rates over a period of decades.

Nevertheless, I am pleased to see Social Impact Bonds being tried and I hope that their major departure from current policy - rewards that are inextricably linked to relevant performance - is taken up more widely.

Say no more

In his dissenting opinion for Citizens United v. Federal Election Commission, a case that gave the notion that money equals speech and corporations equal individuals the imprimatur of the Supreme Court, Justice John Paul Stevens went so far as to make a sort of bitter joke out of the whole thing: "While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics." Murdoch Triumphant (subscription), by Marvin Kitman, Harper's Magazine, November 2010

Foreign Aid for Scoundrels

Wiliam Easterly writes:

[T]he nations and organizations that donate and distribute aid do not care much about democracy and they still actively support dictatorships. ... [T]he French government continued to aid the Hutu government [of Rwanda] even after the genocide had become public knowledge. Foreign Aid for Scoundrels, William Easterly, 'New York Review of Books', 25 November 2010

How does this happen? One reason is institutional inertia:

Aid agencies exist to give aid, so they must keep the money flowing. The department of an aid agency assigned to help a country may not get a budget next year if its officials don't disburse to the country's ruler this year; so they hand out funds no matter how autocratic he is.

And it's a fact that institutions have objectives that can have little to do with their lofty mission statements. Indeed, their over-arching goal, the one that over-rides all others is that of self-perpetuation. How could it be otherwise? As in biological evolution, considerations such as well-being are important only insofar as they they influence survivability. Since funding determines survivability of institutions, and since nobody bothers to check (pdf) the performance of institutions, let alone reward them according to their success, the current, corrupt, destructive aid regime is an inevitable result.

This is where Social Policy Bonds could make a difference. Under a bond regime, organizational existence would not be taken as a given. In a neat reversal of the current system, the efficient achievement of a targeted outcome (the welfare of a poor country, say) would determine the structure and nature of the organizations that pursue that goal. If any agency trying to improve the welfare of a poor country's people were inefficient, it would lose funding by investors in the bonds. The structure, composition, and all activities of all agencies would be totally subordinated to the bonds' targeted goal.

Of course the Social Policy Bond principle can be applied to the welfare of people in the rich countries too, where there is plenty of inefficiency and the system of poor people subsidising the rich is a long-established tradition (see my posts aid for big business, fisheries, and energy and New Zealand's policy of subsidising movie tycoons). It can also be applied to global challenges, such as climate change or, indeed, any catastrophic event.

It won't be though. The Social Policy Bond idea has been in the public arena for more than 20 years now. The level of interest from individuals, the academic world and think-tanks is heartening; but from policymaking institutions - well, the word 'nil' perhaps overstates their enthusiasm for this (or any other) idea that threatens their funding.