14 April 2013

It's all too complicated

Our financial system has become as complicated as our social and physical environments. All are too complicated and too rapidly changing for ordinary people ever to understand fully so, by default, hugely important policy decisions are made by people who are at best, under-informed or, at worst heavily influenced by the campaign funding contributions of vested interest groups. We aren't going to see a reduction in complexity; not in our social and physical environments. There are just too many variables and time-lags, combined with rapidly changing circumstances and growing knowledge of scientific relationships. Politicians can readily escape or deflect censure even for their worst policies, because the relationships between cause and effect are too delayed or obscure to identify unambiguously. The incentive to get long-term policy  right is correspondingly diluted.

Social Policy Bonds don't require a prior knowledge of cause and effect. Instead, they start from broad, desirable social and environmental outcomes. Say we want to increase society's physical well being, defined as some agreed, weighted combination of objective indicators, such as longevity, Quality Adjusted Life Years, etc. It would not then be up to policymakers to establish, rule on (or obscure), say, the relationship between burning coal and lung disease, or between a new drug and its net benefit; instead our politicians would, in effect, contract out the achievement of society's health goal to a motivated coalition of investors, with powerful incentives to reward the most efficient ways of improving society's health and, crucially, to terminate the least efficient.

Health, like a robust financial system and a benign physical and social environment, is too complicated for anybody to understand. But, rather than resign ourselves to cynicism and despair, we could adopt some or all of the most salient features of a Social Policy Bond regime: a focus on desirable outcomes in the form of broad, quantifiable, goals; and the channelling of market incentives into their achievement.

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