21 January 2017

What are economists for?

Markets are means, not ends

Though much of my working life was intended to promote free trade, I question most economists' adherence to it. On the grounds of freedom, I fully agree that governments have no business interfering with willing buyers' importing goods and services from willing sellers. With some caveats, concerning risks to plant, animal and human health, and labour and environmental standards, I do think people should be free to trade with one another. The other argument in favour of free trade is slightly more subtle, but no less persuasive: it's underpinned by the principle of comparative advantage. Essentially, it shows that international specialisation of labour can benefit all trading countries. There are, again, caveats, but generally the theory holds. My concerns are that, yes, a country, say, the US, will benefit from trade with China, but who within the US captures most of the benefits? Consumers, including many poorer consumers, do benefit from cheaper imported goods. But do those gains from cheaper goods outweigh the income lost from jobs now done overseas? Are most of the gains from free trade going to the owners of capital, rather than low-income labour? Comparative advantage says that even after compensating the losers countries benefit from free trade. The problem is that most of the losers are not being fully compensated.

There's what appears to be a similarly misplaced ideological commitment to something called 'markets' in such policy areas as health and education where these are mostly run by government. Much intellectual effort has gone into trying to implant in the public sector those disciplines that characterise the creative destruction of the private sector. This is the sort of work in which my profession seems to revel. (Along, incidentally, with making false predictions: here's how successful they were in predicting the Great Recession:  "As you can see, even in the third quarter of 2008, the best models we have missed the big recession entirely.")
Source: Economists' biggest failure, Noah Smith, 'Bloomberg', 5 March 2015

I don't know whether such efforts have been successful; I'm not sure anybody does. They have certainly been divisive and morale sapping, and have expanded bureaucracy, and led to such wasteful distractions as Mickey Mouse micro-objectives and 'teaching to the test'.

This is where Social Policy Bonds could enter the picture. Instead of seeing 'free trade' and 'markets' as ends in themselves, why not see them as means to an end, and so why not target those ends directly? All the empirical evidence backs up economic theory that markets are the best means we have of allocating society's scarce resources. The definition of economics I was taught is the allocation of scarce resources in order to meet prescribed ends. Most countries don't bother with broad social or environmental goals. By default, therefore, the implicit goal becomes something like Gross Domestic Product per head, or its growth rate. Occasionally a social or environmental problem becomes so acute - and visual - that it becomes impossible to ignore, so resources are devoted to solving it. But we can do better than that. Instead of seeing free trade or markets as ends in themselves, we can yoke them to a higher purpose, as defined by society and its government. That would probably mean helping those severely disadvantaged, including those who suffer from the freeing up of international trade.

So I think society should define certain ends and use markets to achieve them. This has to be at a broad level, because resources can readily move between sectors. Under a Social Policy Bond regime, government would do what it is best at: articulating society's goals, whether they concern health, education, or extreme poverty; and raising the funds  necessary to achieve them. And markets would do what they are best at: allocating our scarce resources in order to achieve our social goals with optimum efficiency.

18 January 2017

Land use and mental well-being

Society's long-term goals often conflict with the short-term, narrow, outlook of our political systems. As well, many of the most valuable things in life are often ignored by our economic and political systems, because they cannot readily be converted into monetary terms. Some contributors to air pollution, for instance, are still disregarded in most countries. The consequences to plant and animal life of loss of habitat are usually ignored too.

But I'll look today at mental health, and specifically the negative impact on it of certain forms of planning and land use. Society's mental health goals are difficult to quantify, but I think we can be reasonably sure that our recent patterns of development of the built environment and land use increase alienation, loneliness, anxiety and depression. A brief extract from a recent article on land use in the US:
[W]alkable communities and co-housing — sound exotic to American ears. Thanks to shifting baselines, most Americans only know single-family dwellings and auto-dependent [ie car-dependent] land use. They cannot even articulate what they are missing and often misidentify the solution as more or different private consumption. But I do not think we should just accept that when we marry and start families, we atomize, and our friendships, like our taste in music, freeze where they were when we were young and single. We shouldn't just accept a way of living that makes interactions with neighbors and friends a burden that requires special planning. How our housing choices make adult friendships more difficult, David Roberts, 'Vox', 16 January
My own belief is that the evidence that US-style suburban patterns of settlement are injurious to mental health is compelling, though perhaps not proven nor provable. But my opinion isn't important. What is important are these points: 
  • Few of us have any incentive to find out whether in fact our land use patterns do create or exacerbate psychological problems for large numbers of people, and 

  • Even were we to find that suburban living does destroy communities, lead to alienation and atomisation, and so aggravate psychological problems, policymakers have no incentive or capacity to do anything about it.
Acute mental health problems - the sort whose consequences are tragically newsworthy - do get some passing attention. But long-term mental well-being counts for very little in our economic and political systems. Just as policymakers failed to consider most aspects of our physical environment for decades until the consequences of doing so became too difficult to ignore, so too are mental problems and their causes neglected today. And, as the excerpt above implies, if we don't even know what we're missing, there's very little chance of either the market or benign central planners doing anything to help.

Perhaps Social Policy Bonds targeting for improvement the mental well-being of all citizens could be a solution. They could function as a way of representing the interests of people as human beings, as distinct from economic units. Such bonds, in targeting mental health indicators, could act as a countervailing force to the weight given to financial indicators in the property sector. Quantifying mental health might appear difficult, but there is important work being done in this area: examples are here and here.

Mental health is a hugely important issue, but there are others equally important that are similarly ignored by policymakers. There are measures being taken to help avoid nuclear war, for instance, but they are laughably small in relation to the enormity of the problem. The few people charged with conflict reduction - hard working and well meaning though they undoubtedly are - are not paid for their success in doing so, nor do the aggregate funds on offer reflect the urgency and magnitude of the challenge. Which is why I believe we should back Social Policy Bonds that reward the achievement of sustained nuclear peace - an indispensable requirement for humanity and one that is routinely ignored by policymakers. Just like long-term mental health.

16 January 2017

Outcomes versus Justice

Sometimes we have to put aside notions of justice and fairness in order to achieve our goals:
Richmond to me is a story of pragmatism ... This idea that we’re going to step away from a purely ideological, moralistic approach to try new things and see what works. Barry Krisberg, criminologist at the University of California in Berkeley, quoted in A radical approach to gun crime: paying people not to kill each other, by Jason Motlagh, 'The Guardian', 9 June 2016

This (long) article discusses a programme in Richmond, California that entails paying people not to kill each other. Such payments amount to "a pittance compared with what Richmond police department must pay for overtime, or what the city pays for the cost of a criminal trial, or medevac helicopter rides to take shooting victims to hospitals." There are moral or ethical principles that might be being violated here, but that shouldn't be a bar to pragmatic solutions. It's not difficult to think of problems whose solution might mean that, for instance, killers aren't brought before a court of law, but instead are, essentially, bribed to give up (or decommission) their weapons. Real-world examples include the recent peace deal in Colombia, and deals made with men of violence in Northern Ireland and South Africa. In such cases, despite their crystallising injustice, the benefits to society as a whole far outweigh the costs.

They are not pure expressions of the Social Policy Bond ideal, but they do embody payment-for-outcomes, which is an essential element of that ideal. How would Social Policy Bonds differ? They would allow us to take a longer-term, broader, approach. A bond issue targeting gun deaths in Richmond, California, for instance, could target the reduction of gun deaths by 50 percent over a sustained period; say twenty years. Payments to potential killers might be one way of achieving that goal, but holders of those bonds would make such payments only when they are convinced that they are the most efficient way of achieving their goal - a goal which is exactly congruent with that of society. Still: it's a start.

08 January 2017

Target health, not surrogate indicators

Surrogate indicators in medicine are measures that might be correlated with physical health. An example would be cholesterol levels, which can be correlated with heart disease. There are general problems with such indicators: correlation does not imply causation; the correlation anyway may be weak; or the measure might indicate a specific medical concern but not the overall health of an individual. In recent years (here and here, for instance) I've inveighed against the medical establishment's use of surrogate indicators for policy purposes, claiming that most medical professionals have neither the incentive nor capacity to look at the broad health of a nation and to target that for improvement.

It's been a lonely road, so I was much cheered to hear this British Medical Journal podcast, with Professor Emeritus of Surgery, Michael Baum, arguing on exactly the same lines as I do in my work on applying the Social Policy Bond concept to health. There is a link to the BMJ article on which the podcast is based here. My paper on Health Bonds, and links to some of my other blog posts on the subject can be found here.

05 January 2017

How to become a nuclear optimist

Bruce Schneier discusses Steven Pinker's optimism that trends that have brought about a less violent world will continue. Schneier doesn't share this optimism, thinking that 'the damage attackers can cause becomes greater as technology becomes more powerful', and that this trend will overtake Pinker's. it's an interesting discussion.

What do I think? I can't see any reason to doubt Schneier's belief, which is predicated on what 'the most extreme person with the most extreme technology' will be able to do, if trends continue. But I think that, understanding this, we can do something to influence the speed and direction in which 'technology' takes us. It's not only the compactness and falling cost of massive destructive power that threaten us; it's their proliferation. These need not be taken as a given: all can be influenced by the incentives on offer.

Unfortunately, the incentives currently on offer reward people for finding ever cheaper, more concentrated destructive power, and for selling it. The results, which we see now, fully justify Schneier's pessimism. So I think the time has come to offer countervailing incentives: in other words, to reward the sustained non-use of weapons of mass destruction.

Issuing a sufficiently large number of very high-value Nuclear Peace Bonds would, in my opinion, go a long way toward avoiding nuclear catastrophe. Assume that we issue bonds that become redeemable for, say, $10m each only when a period of thirty years of non-use of a nuclear weapon has been achieved. While that long-term goal seems remote, the bond issue would have an immediate effect on current investment programmes. Incentives would cascade down from the expected redemption value of a large bond holding, to finance an array of approaches aimed at reaching our goal. People or organizations would benefit by doing what they can to reduce the possibility of a fatal nuclear detonation: it would be up to them to decide the most effective ways of doing that. Such ways could entail bribing politicians or 'religious' leaders to tone down their rhetoric, the investigation into technical ways of detecting nuclear materials, giving nuclear scientists now working for belligerent regimes one-way, first class air tickets to the tropical resort of their choice, or any of a vast array of other possible initiatives. The important point is that we don't have to know in advance which will be the most efficient ways of achieving our nuclear peace goal. That will be up to bondholders to decide, continuously, as our political, scientific and psychological environments evolve.

I fully accept that even the most dangerous demagogues in human affairs are unlikely themselves to be amenable to financial incentives. But their capacity to unleash destruction can be realized only by dealing with others - who will be. Social Policy Bonds can re-jig the incentives, giving a more credible voice to the vast majority of humanity who don't want to see nuclear catastrophe.

For a short piece on Nuclear Peace Bonds see here. For a longer article about Conflict Reduction see here. For a 5800-word essay about how we can use the Social Policy Bond principle to bring about World Peace see here.