24 March 2016

Society needs more creative destruction

'Creative destruction' is the term coined by Joseph Schumpeter to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." 

Creative destruction in the private sector essentially means that failing companies go out of business and successful ones survive and prosper. One of the reasons that social problems persist is that creative destruction rarely determines which policies shall be aimed at solving them. Largely for historic reasons, the solution of national and global social problems, including crime, pollution, terrorism and war, has been left to the public sector. That is, to bodies that face no competition and are seldom rewarded in ways that correlate with their success. Indeed, many failing institutions supposedly devoted to solving social problems are likely be penalised for success, by seeing their budgets cut or even their very survival threatened. At some level, for some employees, this perverse incentive is bound to operate, to the detriment of the people they are supposed to serve but to the continued survival of the inefficient institution.

Social Policy Bonds are intended to re-jig these incentives by injecting market incentives into the solution of social problems. A bond regime would direct funding to those approaches that bring about the most benefit, defined in terms of beneficial social impact per taxpayer dollar. Note the word 'approaches': it's the best policy initiatives that are rewarded, not the body that introduces them, which otherwise might well become more interested in self-perpetuation than in achieving targeted social goals.

The unfortunate trend is that, rather than social problems becoming more subject to creative destruction, the private sector is becoming less and less subject to it. The current Economist focuses on the US manifestation of this:

The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. ... If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged. The problem with profits, 'the Economist, dated 26 March
Exactly, and it's not only the biggest firms that can abuse government for their own purposes. Farmers do it too, and have been for decades, though it is likely that most benefits that are in the public mind accrue to farmers do in fact go to the biggest landowners and agribusiness corporates.

I believe this trend is unsustainable. The capture of government by big business and its lobbyists, which has led so much inequality, is already provoking a reaction. Let's hope that this leads to a policy environment that will allow creative destruction to play a bigger role in both the public and private sectors. I write about the need for a new protean type of organization, whose composition and activities will be exclusively focused on achieving social goals, here. New technology, including the blockchain, might help bring these organizations into being.

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