17 January 2019

Channelling viciousness

From a letter to the editor of today's Financial Times:
Bernard Mandeville, the 18th century Dutchman who left Rotterdam to live in England, was not only an early modern crossover representative, he also understood the psychological roots of humankind. In his Fable of the Bees he asserts that rationality is not necessarily virtuous. In fact, individuals acting viciously can bring about positive aggregate results such as higher investment, employment and economic growth. Dr Jacob Borheim, Financial Times, 17 January 2019
For sure, the accidental effects of human actions can be beneficial as well as disastrous. Adam Smith's Invisible Hand apodictically generates material wealth. But pursuit of our individual goals can and does create serious social and environmental problems too. A benign, quick-acting, and impartial government can regulate away the worst excesses arising from our pursuit of happiness. But governments aren't quick acting, and rarely are they benign and impartial. In fact, society is now so complex that even such an ideal government couldn't react quickly enough to the negative impacts of economic growth. As well, the world is too small now for the solution of social and environmental problems to be left to chance: with a human population of more than 7 billion, and difficult-to-identify feedback loops and time lags, no single body can anticipate or successfully regulate the world economy's adverse impacts. Yes, 'positive aggregate results' can result from individuals acting in our own interest. They might even be net positive results. But (1) that still implies a lot of negative results and (2) we'd do better to minimise negative results before they occur. 

This is what Social Policy Bonds could do. One of the great advantages of the bond approach is that we can encourage people to achieve social goals without anyone knowing in advance how they will do so. A subset of such goals would be the targeting for reduction of the negative impacts of economic growth however they arise. Investors in the bonds would then have incentives to scrutinise current and proposed private- or public- sector projects with a view to minimising their negative impacts. Taking a broad, long-term, global approach, we could, for example, aim to reduce disasters of any sort, without having to specify how or where they occur.
Under a Social Policy Bond regime, then, people would still be acting rationally and even viciously, but we'd be channelling such behaviour into the pursuit of society's well being. In short: giving greed a chance

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