Dog food or doomsday

A longer version of a previous posting:

It's a puzzle to me how we have created regimes that allow financial incentives to operate creatively in interesting but ultimately not very important aspects of our lives - advertising dog food, for example - while ways of dealing with the most serious determinants of mankind's well-being rarely reward efficiency. So employees of companies selling dog food have sales and revenue targets to meet, stringent deadlines, and they are offered meaningful incentives backed up by robust reporting and analysis systems to monitor progress and so achieve maximal dog food market penetration. In contrast, responsibility for what you might think should be major priorities for homo sapiens is given over to the dead hand of government or brave, well-meaning, hard working but under-resourced non-governmental organizations.

What are these priorities are? Most of us would probably give a high rating to things like avoiding the deaths of many millions of people in a nuclear exchange. Or the ending of any violent political conflict of the sort that, amazingly, in the 21st century, still kills, maims or makes homeless countless thousands of us around the globe. Or minimising the deaths caused by natural disasters, or pandemics.

Climate change too: it's no different from other potential catastrophes in that we don't know when or how it will strike. The most fortunate amongst us can insure against some of the financial costs of some adverse climatic events. But even there, markets cannot fully redress the balance. The uninsured, whether uninsurable or not, cannot be compensated at all. Markets are even less capable of addressing the more global calamities of nuclear war, or large-scale violence.

Some years ago I came up with the Social Policy Bond idea, which aims to channel market incentives into the achievement of social goals. Much of this idea has been taken up by governments worldwide, in the form of Social Impact Bonds. But SIBs leave out one crucial aspect of the Social Policy Bond principle: tradeability. When the bonds are tradeable on a secondary market, we can greatly enlarge their scope, because we do not have to specify which organizations shall achieve our goals, and because we can target goals that might be too remote to interest existing organizations.

Take something that has recently made the news: nuclear catastrophe. As the members of the Bulletin of Atomic Scientists shift the hands of their doomsday clock to three minutes to midnight, where are the incentives that will mobilise large numbers of us actually to do something to avoid the doom represented by midnight? There aren't any - we're all doing better by devoting our ingenuity to selling dog food.

The answer could be Social Policy Bonds. Targeting nuclear catastrophe they would be backed by governments, NGOs, philanthropists and anybody with a strong interest in human well-being. Floated on the open market they would become redeemable for, say, $1m each only after a thirty-year period during which no nuclear explosion takes place. Floated on the open market, they might fetch just $10000 each, if the market thinks the probability of thirty years’ nuclear peace is low. But these bonds would be tradeable: their value would rise and fall according to how likely people think the peace target will be reached.

Initial investors would buy the bonds and do whatever they can to increase that probability. Even helping existing ways of monitoring nuclear material might see the value of their bonds double. Others, with expertise in different areas, would buy their bonds and do what they can to raise the value of the bonds still further. At every stage, the bonds would be in the hands of those most able to bring about nuclear peace. The bondholders’ goal is exactly congruent with society’s: they make money only by achieving society’s goal. At every stage of every process required to achieve that goal, incentives will motivate people to be as efficient as possible.

Rather than encourage endless speculation about what projects will make the world more peaceful the bonds would, in effect, contract out the achievement of world peace to the market. They would encourage a wide range of adaptive projects, whose sole criterion for funding would be that they would raise the probability of world peace being achieved. In this way, the governments and others who back the bonds would do what they are best at: articulating society’s goals and raising the revenue for their achievement. At the same time, the market would be doing what it is best at: allocating resources as efficiently as possible.

If nuclear peace sounds too lofty a goal, then we could start by aiming for something like peace in the Middle East. The same principle would work for natural disasters or climate change. In every case, we'd be rewarding the successful achievement of a sustained, desirable outcome, without - as now - distracting ourselves by self-indulgent irrelevancies such as who shall achieve it and how they shall do so. It is a shame to me that few people seem to think along these lines.