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.