I haven't read The Moral Economy: Why good incentives are no substitute for good citizens, by Samuel Bowles, but I have read reviews. Mr Bowles points out that, in some circumstances, monetary incentives alone cannot make people behave as we should wish and can even encourage perverse behaviour. This echoes the work of Professor Bruno Frey who found that monetary incentives can undermine our willingness to do the right things for ethical and moral reasons. People perform valuable social or environmental services not only for monetary gain, but also because they enjoy doing them for their own sake, because they believe them to be the morally right things to do, or because they believe that their actions will advance some cause to which they are committed. These ‘intrinsic’ motives are qualitatively different from external, monetary incentives, and offering monetary rewards might ‘crowd out’ or undermine these less mercenary and more civic-minded motivations. Crowding out internal motivation can occur, writes Prof Frey, because, monetary incentives can undermine people’s feelings of self-determination and self-esteem. Also, when external incentives are supplied, the ‘person acting on the basis of his or her intrinsic motivation is deprived of the chance to exhibit this intrinsic motivation to other persons.’
Not mentioned by Frey, but also plausible is that financial incentives can undermine the cognitive outlook that sees socially and environmentally beneficial services as worthwhile in their own right, rather than as a cost for which compensation and payments must be paid by taxpayers.
What do these findings mean for Social Policy Bonds, which at first sight seem to be entirely dependent on monetary incentives that will encourage achievement of socially desirable goals? First, it's important to note that, as Frey points out, the crowding-out effects are not always significant. In markets, which are based on relationships amongst essentially self-interested strangers, financial incentives as exhibited through the price effect do work as classical economics predicts. That is, they work to increase supply. And when (as they would be under a Social Policy Bond regime) external rewards are seen as correlated with civic duty rather than an attempt to ‘buy’ one’s civic performance, they may well support, rather than undermine, moral and other intrinsic motivations. This would be especially true if, partly because of the role that a bond regime could play in raising taxes on less socially valuable forms of wealth accumulation.
Second: Social Policy Bonds are not merely a system by
which monetary incentives are funneled into the most efficient providers
of public goods and services, but a 'meta-system' that motivates
bondholders to find the best ways of encouraging socially beneficial
behaviour - whether these be monetary or not. A bond regime could give bondholders incentives to explore further the insights of Mr Bowles and Prof Frey, looking in detail at the relationships between financial incentives and civic performance. They could use this knowledge to minimise the costs of achieving targeted objectives by, for example, finding out when monetary incentives are least likely to supplant the intrinsic motivations of people who help achieve objectives, and concentrating their use in those circumstances.
Social Policy Bonds, then, are not a relatively crude financial instrument that rewards payment for performance in a narrow sense (that would be Social Impact Bonds), but rather a way of rewarding people for encouraging socially beneficial behaviour, however they do so.