Make them tradeable

This is a brief article, unpublished, about making Social Impact Bonds tradeable.

Make Social Impact Bonds tradeable

It’s fair to say that Social Impact Bonds have failed to live up to expectations. I think this is because they are not tradeable. This sounds like a minor technical issue, but it is a crucial flaw. It means that, if people are going to profit from investing in the bonds, the goals they target must be achievable within the time horizons of the people who buy them—a few years, perhaps. So SIBs inevitably target narrow, short-term objectives. But our social and environmental problems are complex, difficult to solve, and require long-term investment. They require a range of diverse, adaptive approaches to be tried, with the most promising ones refined and implemented, and the ones that don’t work terminated (something that governments are reluctant to do). Creative destruction, allowed to operate in the private sector, has vastly improved the quality of life of a burgeoning world population. Making the bonds tradeable would allow it to work in the service of public goals too.

Because SIBs aren't tradeable, we'd expect to see what we do see: a lack of innovative approaches, the favouring of existing service providers, high transaction costs and not much in the way of increased efficiency. Yes, there has been some transfer of risk from taxpayers to the private sector, but the overall benefits are hardly enough to justify the high hopes they raised when they were first issued. And, as in other areas of the economy, the persistence of our social and environmental problems while the rich get richer is leading to increased cynicism about markets – the best way of allocating society’s scarce resources.

A market for the bonds would mean people could buy bonds, do what they can to help achieve a targeted goal, see the market value of their bonds rise as a result, and sell their bonds at a profit to people who can take the next steps towards the achievement of the goal. Investors in the bonds would form a protean coalition, all interested in one thing: maximising the value of their bonds. With carefully specified social goals, investors’ goals would be exactly the same as those of society. As with the owners of a company’s shares, the membership of this coalition will change over time but, importantly, the way the market works will mean that bonds are always owned by those who bid most for the bonds: these would be investors who think they will be the most efficient at solving the targeted social or environmental problem.

One big benefit of making the bonds tradeable is that we can target goals that currently we have no idea how to achieve, and let bondholders and the market work out who is best placed to achieve them, and which are the most efficient ways of doing so. When I first developed the original bond concept, their tradeability was integral, and I had goals such as reducing national crime levels in mind. Without tradeability, we see SIBs targeting such short-term, narrow goals as reduced local levels of recidivism. Tradeable SIBs wouldn’t be so limited: they could target national, or even global problems, such as natural or human-made disasters, or climate change.

There is more consensus over these goals than the ways of achieving them. They are more stable, and being broad, are comprehensible to ordinary people, who could participate in their prioritisation, and thereby help close the ever-widening gap between our political caste and the rest of us.

Much human ingenuity, and their attendant resources, naturally go into activities in which people have the best chance of making a good living, but whose value to society is (to be polite) questionable, such as the financial services sector. There is no correlation between where our best talents go, and the value to society of the activities they undertake when they get there.

Making SIBs tradeable would change that. Instead of the purely coincidental relationship between activity and social utility that we see nowadays, a bond regime would channel resources into society's goals. These goals would be long-term, broad and meaningful to ordinary people, who could therefore participate in their prioritisation. Tradeability would extend the range of the goals we target to encompass those we now regard as unsolvable. It would attract resources into completely new areas, currently the responsibility of underpaid hard-working people who have few resources to play with, and are rewarded in ways that have nothing to do with their efficiency or success.

These elusive, yet urgent, goals have long been considered unrealistic or idealistic not, I contend, because they are unattainable, but because they are not rewarded in ways that attract sufficient human and material resources. With tradeable SIBs we could target such noble and, in my view, quite achievable goals, such as minimising the impact of all kinds of disaster, and the ending of war.

© Ronnie Horesh 2020

Power and patronage

Elang Adhyaksa, in a letter to the editor of the 'Economist' was writing about one particular country but, in truth, this could apply almost everywhere:

In such a fractured country as [*see end of this post], leaders must contend with entrenched power bases, then cultivate patronage networks of their own if they are to govern at all. Elang Adhyaksa, the 'Economist', 31 October

That's how things work. The power bases could be corporations or they could lie within government or the public service. I don't actually think things are drastically worse today in that respect than any other time. I do think, though, that we can do better. Power bases don't always share the same goals as ordinary people. The gap between power bases and the public may be widening. Often, the goals of the elite that constitute the power base (or are the people the power base has to listen to) and ordinary people are in conflict. Overall, trust in government is declining; it's not a hopeful trend.

 There might have been good reasons for why the our current political systems are weighted in favor of interest groups. Reasons to do with an uneducated population with not much free time to spend considering policy issues; the logistical difficulties of informing many people, and finding out what they think. The result is that government's goals depend on the bargaining power of special interests, whose influence is largely a function of how wealthy they are, but also such attributes as the personality of their spokespeople, and the emotions that can be generated from selective video footage. 

I think we need policymaking systems now that prioritise the goals of ordinary citizens. These goals would be based not on emotion, but on the actual wishes and needs of the public. 

Social Policy Bonds could be the way forward. They target outcomes that are  meaningful to ordinary people; outcomes such as better health, reduced crime rates, a cleaner environment and, at a global level, absence of war. There is more agreement about such outcomes than there is about how they shall be achieved, and which political party is best placed to achieve them. As well, these goals are more stable over time, so it is realistic to target them. A bond regime is well placed to target long-term goals, especially those that require research, experimentation, and refinement before they can be implemented. It would reward those who best advance these goals. Instead of self-entrenching power bases whose time, I believe, has passed, we'd have coalitions of bondholders; coalitions whose composition and structure would be subject to change, but that would always have as their goal, the maximising of their wealth. In that one respect, they would be similar to existing power bases. The crucial difference is that, under a Social Policy Bond regime, these new types of organisation would become wealthy only by achieving society's goals as efficiently as possible. Their goals, in short, would be exactly the same as those of ordinary citizens. 

*Which country was Elang Adhyaksa writing about? Indonesia.

How to minimise the risk of catastrophe

One typical manifestation of the 'New Optimism', is Steven Pinker's book The Better Angels of Our Nature. According to the New Optimists, most of the indicators of human health, freedom, and educational achievement are improving. This is undeniably good news, but as Adam Salisbury writes:

[W]e should not be complacent about our past trajectory, and not indulge in the New Optimist’s flawed fixation on observed outcomes. Second, we should develop more holistic measures of human progress: ones that take into account our exposure to catastrophe. New Optimism Ignores Our Potential for Catastrophe, Adam Salisbury, 'Paladium', 13 November

I agree that we underestimate the risk of catastrophe. There are many people working hard to find vaccines, cures and treatments for disease, for example, or to prevent natural disasters or deal with their aftermath. There are peacekeepers, arms control talks, and other efforts to avoid human-made conflicts and disasters. But, in my view, this is not enough. The potential for catastrophe—the probability of a disaster of any sort, multiplied by its impact—is high enough to warrant more resources devoted to reducing its likelihood. Efforts to contain nuclear weapons proliferation, for example, are minimal in relation to their potential for calamity. 

Why is this? I think it's partly because the incentives aren't there for people to get involved. Much human ingenuity, and their attendant resources, go where people have the best chance of making a good living. Advertising dog-food for instance, or the useless (at best) financial services sector.  It's only natural. But there is no correlation between where our best talents go, and the value to society of the activities they undertake when they get there. 

Social Policy Bonds would change that. Instead of the purely coincidental relationship between activity and social utility that we have nowadays, a bond regime would channel resources into society's goals. These goals would be long-term, broad and meaningful to ordinary people, who could then participate in allocating them a priority. One such goal that would, in my view, receive far more funding under a bond regime than at present would be disaster prevention. You can read more about how the Social Policy Bond concept could address the minimisation of the risk of disaster here. The bonds could even bring into our purview those goals long considered to be unrealistic or idealistic; not because they are unattainable, but because they are not rewarded in ways that attract sufficient human and material resources. I am thinking now of that most noble but, in my view quite achievable, goal of world peace.

Defining peace, so that we can achieve it

They keep coming: Ethiopia, Azerbaijan/Armenia, Mali/Nigeria/Benin, etc. 

It's too late to do anything much to stop the current conflicts or to avoid the imminent ones, but we can at least set in place mechanisms to prevent those wars and civil wars that are not yet inevitable. There are links here to my work on applying the Social Policy Bond concept to the elimination of war. An important question though, is what constitutes peace? This is not just an abstract point. A Social Policy Bond regime targeting peace would differ radically from the conventional, and not always successful, approaches. Most markedly it would not directly try to address war's alleged causes; or rather, it would not prejudge what those causes are. Such an approach has (in my view) great merit. War is so complex that it is not always obvious, even after a long conflict has ended, what its supposed ‘root causes’ are, and perhaps the very notion of a ‘root cause’ needs questioning. It implies that factors such as ‘poverty’ or ‘ethnicity’ can be removed from their social context, and somehow dealt with, and that then a desired result will follow. But human societies are complex. Poverty can feed grievance, but grievance can be a result of poverty. No single formula, no single set of parameters will always lead to conflict, and guarantee freedom from conflict. Indeed, even the notion of ‘causation’ in this context is questionable. Perhaps Tolstoy summed it up best:

The deeper we delve in search of these causes the more of them we discover, and each single cause or series of causes appears to us equally valid in itself, and equally false by its insignificance compared to the magnitude of the event.

If we are going to issue Social Policy Bonds that target the elimination of violent conflict, how exactly would we define our goals? Peace - the absence of open war, the minimising of numerical casualties - would probably not suffice. Regimes can pile up armaments and blackmail neighbouring countries into making concessions or suffer the consequences. Under such circumstances, the open outbreak of military conflict would be unlikely, but it's hardly the sort of peace that we'd like to target. I have no definitive answers, but I think that apart from the numbers of soldiers and civilians killed in armed conflicts, we could include elements such as the expenditure on armaments, numbers of full-time equivalents in the military, and mass media indicators of impending conflict. This last is interesting: there appears to be strong evidence that the underlying intentions of governments can be accurately gauged by a systematic analysis of opinion-leading articles in the mass media, regardless of the relative openness of the media in question. (See Getting to war: predicting international conflict with mass media indicators, W. Ben Hunt, University of Michigan Press, 1997.) Such analysis allows the prediction of both the likelihood of conflict and what form of conflict - military, diplomatic or economic - will occur. This sort of indicator could be useful as a target where military conflict has not begun, but appears possible, and where other data are scarce. Once we have a set of indicators for peace, we could set about issuing Conflict Reduction Bonds, with national, regional or global objectives. We'd most probably have to refine the indicators over time, but the important point is that we'd be building a strong and highly motivated coalition for peace - in contrast to the current mess, under which the most dedicated individuals and groups seeking peace are the least rewarded, and the most highly rewarded are those who sell weapons of war.

Forget grand ideologies

Haonan Li and Victor Yaw write:

If there is a lesson from Singapore’s development it is this: forget grand ideologies and others’ models. There is no replacement for experimentation, independent thought, and ruthless pragmatism. Haonan Li and Victor Yaw, The True Story of Lee Kuan Yew’s Singapore, 'Palladium', 13 August

Social Policy Bonds have been in the public arena for something like 32 years now and their non-tradeable variant, Social Impact Bonds, are now being issued in about 25 countries. In my naivety,  I thought in the early years that my original concept, which, simplistically is a right wing method (markets) aimed at achieving left-wing (social) goals, would appeal to everyone, rather than...not many people. 

Unsurprisingly, perhaps, it's been the ideologues on the left that are most opposed to the concept. Often implicit, sometimes explicit, is their feeling, or argument, that Social Policy Bonds are a means by which investors make money out of doing what they should be doing anyway. It is true that some wealthy bondholders, whether they be individuals, corporations of government or non-government bodies,  could become even more wealthy by first buying Social Policy Bonds, then doing something to achieve the outcome that they target, then selling their bonds for a higher price. This is what some call "profiting from others' misery" and it offends their sensibilities.

But it can also be called "working for a living while doing something socially useful". In the long run it's quite probable that only a few people or organisations would amass huge fortunes under a bond regime, even if they do successfully achieve society’s goals and profit from their bondholding. The way the market for Social Policy Bonds works would mean that excess profits could be bid away by would-be investors in a competitive market for the bonds. The market would openly transmit a huge amount of information about the constantly varying estimated costs of moving towards a targeted goal (see Chapter 5 of my book for a full explanation). Barriers to entry into joining the coalition of bondholders and helping achieve the target could be low, especially if most bonds are held by investment companies who would contract out the many diverse approaches necessary to achieve most social and environmental goals.

The absolute sums of money at stake might be huge, particularly for Social Policy Bonds that target apparently remote, national or global goals, but there’s no particular reason to assume that, in the long run, it would be shared out any less equitably than, say, teachers’ salaries. Teachers? Yes, and nurses, doctors, nurses, and social workers, all of whom perform socially valuable services for which nobody begrudges payment—--not even those on the left

Buy-in, and that other global threat

From the current New Scientist:

The world has now already warmed about 1⁰C since the pre-industrial age... "Even at 1⁰C warming, climate change is bringing us to the edge, or even over the edge, of what we are able to cope with." says Friederike Otto at the University of Oxford. Climate's make or break year, Adam Vaughan, 'New Scientist', 17 October

As the political caste all over the world floats ever higher away from the concerns of ordinary people, it's perhaps time to look at its consequences for the long-running, not very televisual, slow-moving disaster that is climate change. I've written many times here and on the SocialGoals.com website about the importance of buy-in. For dealing with climate change, which is going to require the expenditure of massive resources, upfront, for an uncertain and inherently long-term benefit, buy-in is as elusive as it is crucial, but there certainly isn't enough of it at the moment. There are many worthwhile efforts going on, mostly aimed at reducing greenhouse gas emissions, but they are clearly not enough. I think the reason for this is that the objectives that are cited by climate scientists and activists are too abstract to generate much buy-in. I suggest that, instead of targeting degrees Celsius, or greenhouse gas emissions, or the composition of the atmosphere, we target climate goals that are meaningful to ordinary people. By this I mean broad goals, such as reductions in the numbers of people killed or made homeless by adverse climatic events, wherever in the world they occur. 

The Climate Stability Bond approach might also have presentational advantages and more palatable money flows than such elegant solutions as a carbon tax. Any presentational advantages would be due to people's more readily identifying with the direct targeting for reduction of the impacts of adverse climatic events, whether they be short term - and televisual - such as hurricanes, or long term and drawn out, such as desertification. The money flows would be more palatable because, essentially, payment would be for results: Climate Stability Bonds would not be redeemed until all targeted goals had been achieved.

Goals that are meaningful to ordinary people, and more palatable money flows: with these two advantages, Climate Stability Bonds, would, I think, be better than the current, failing, approach.

Philanthropists: step forward!

One reason why Social Policy Bonds haven't been implemented, in contrast to their non-tradable variant, is that it's difficult to experiment with them. To stand a chance of being implemented in preference to more-conventional policies, Social Policy bonds have to be shown to have been successful where other policies have failed. But the criteria for bonds' being an improvement over policy alternatives militate against small-scale trials. Social Policy Bonds will work best when:

• We have no real idea how to solve the problem;
• One or a combination of diverse methods need to be tried, refined and implemented, with resources being transferred from failed or inefficient approaches to more promising ones;
• The bonds must not simply transfer problem from one area (geographic or otherwise) to another;
• Goals must be robustly and verifiably quantifiable at low cost; and
• The time-scale must be long enough to enable objective-achievers to enter and leave the coalition of bondholders.

Social Policy Bonds can work s for things like climate change, improving health, reducing crime (in a country or large region: we don't want crims simply to travel a few miles). But none of these objectives lends itself to experiment. Nevertheless, there is a class of projects that the bonds could target at no risk: achieving those goals that have eluded policymakers, or indeed anyone and that, partly for that reason, receives resources that are minute in comparison to the benefits that achievement would bring. Such goals could include the ending of all violent political conflict, nuclear peace, and disaster prevention - which would include adequate protection against disasters that are foreseeable (like the current pandemic), and unforseeable. These are goals that humanity as a whole would like to see reached, but that do not attract the funding that their achievement requires. Apart from the inescapable inability to conduct trials, the benefits of achieving these goals are too diffuse and long term to influence politicians or corporations. We need sources of funds that are wealthy, willing to take a chance on a new financial instrument, and willing to relinquish the power to dictate exactly who benefits from their largesse. Step forward, public-spirited philanthropists: humanity is waiting for you.



 

Where is this going?

Social Policy Bonds haven't exactly set the world on fire. Despite my high hopes, or naivety, when I first came up with the idea, back in the 1980s, they have not not been issued anywhere. Social Impact Bonds - the non-tradeable variant - have, however, been issued in around 25 countries, according to Wikipedia. They appear in different guises: pay-for-success financing, pay-for-success bond, social benefit bonds, etc. I've had no involvement with SIBs, and have expressed my ambivalence about them here and here. I have been lucky to be able to spend so much time working on Social Policy Bonds, mainly writing about them here, or on my main website, or in books and papers. I've also given presentations about them at the Universities of Cambridge and St Andrews, and at OECD and think-tanks and conferences in the UK, Australia, and New Zealand.

However, book sales are in the single digits per annum, and there is a near-universal lack of interest from those whom I thought would be keen to take up the idea: politicians, bureaucrats, academics, philanthropists ...the list goes on.... So I am having now to focus more on earning a living. No bad thing: it's a reminder of what it's like to work for slightly more than minimum wage doing something I do not enjoy, which has no prospects for advancement. That is what life is like for billions of people—if they're lucky! So this is just to serve notice that posting may continue to be thin for a while, though I will keep both this site and SocialGoals.com going. If you have questions, queries or comments on  Social Policy Bonds I can always be reached my email, or you may find them addressed on this site or on SocialGoals.com. All my work is downloadable from there, free of charge.

Outcomes, not algorithms, should define policy goals

There are sound reasons for being disdainful of quantitative targets in policymaking - something that forms the very basis of Social Policy Bonds. But, perhaps unfortunately, in our highly aggregated, complex, societies, the alternative to targeting broad, explicit and, most important, meaningful goals is to target narrow, opaque goals that are devoid of meaning in that they do nothing to improve social well-being. The current Economist does a good job of illustrating the problems of consequences of using narrow, short-term, incoherent targets (what I have called Mickey Mouse micro-targets):

They produce perverse results when people focus excessively on them. They tempt managers to manipulate numbers. The obsession with measurement diverts people from useful activity to filling in forms. The [UK] department of health provided a fine example of the first when it penalised hospitals whose emergency departments took too long to treat patients after ambulances had dropped them off. Hospitals responded by keeping patients waiting in ambulances rather than in emergency departments. The [London] Metropolitan Police illustrated the second, after it linked pay and promotion to achieving a crime-reduction target. A police whistle-blower told a parliamentary committee that downgrading or underreporting crime had become “an ingrained part of police culture”. The universities to which A-level students are struggling to get admitted provide an example of the third. Tenure and promotion are awarded on the basis of the production of articles (which can be measured) rather than teaching (which can’t), so students suffer.  How the British government rules by algorithm, the 'Economist', 22 August 

The most important quality of a target is that it should be in itself, or be inextricably linked to, things that we actually want to achieve. In other words, they should not merely have (perhaps) been associated with social well-being in the past. They should be outcomes that are meaningful to ordinary people, because that's what matters most and that is what will encourage people's engagement with policymaking and hence our buy-in to policies that affect us. They need to be broad, so that achieving one target does not come at the expense of other social goals. The alternative? Well, it is what we have now: indicators defined not by society, but by vested interests within organizations who suspect that broad, meaningful targets - indicators of actual, meaningful outcomes - would threaten their way of doing things, their status, or indeed their existence.

Nuclear peace: dogs and cats would also win

Nuclear war is as likely as ever, says former defense secretary William Perry

America’s nuclear weapons are thousands of times more powerful than the bombs that destroyed Hiroshima and Nagasaki 75 years ago. They’re on hair-trigger alert: ready to be set off by a false alarm, computer malfunction, or by human error. President Trump has the sole authority to start a war that would end civilization as we know it. KCRW, 31 July

That's really all we need to know, though the whole interview is worth a read. Nuclear proliferation demands a multiplicity of approaches. It's probably at least as great a threat to our survival as climate change, but there's no single, over-arching way of dealing with it. Government is especially bad at dealing with issues like this, where solutions are unlikely to come from the limited repertoire of command and control bureaucracy. Unless Government identifies solutions that it can implement, it's discouraged and tends not to follow through. It lacks the imagination to conceive of non-bureaucratic solutions, and it's not keen on relinquishing control. The result is our current perilous position.


Government cannot solve the problem, but it could set in place a system of incentives that would encourage a solution - or rather, the necessarily diverse and adaptive array of partial solutions. Government could recognise that, while it doesn't have all the answers, it can at least mobilise the private sector to come up with solutions. Collectively, we have the brainpower and the desire: look at the ingenuity and resources that go into analysing the pet food market, for instance. Or, worse, perhaps, see where even more of our best intellectual resources end up: in the, arguably parasitic, financial services sector. To divert some of our talents away from almost-useless (or worse) activities into reducing the probability of a nuclear conflict would, you might think, be worthwhile. Government could do this by issuing something along the lines of Nuclear Peace Bonds. It would define a set of nuclear peace targets, and back the bonds with rewards to be paid after specified periods during which a nuclear exchange does not occur. Bondholders would be motivated to bring about nuclear peace by whatever means they see as being efficient. They would not be limited to the solutions or activities that only government can implement. With a decent monetary incentive they could bring in our undoubted, boundless ingenuity to remove what is probably one of the greatest threats to our survival. If we're misanthropes, with a gloomy view our own species, its worth keeping in mind that nuclear peace would benefit our dogs and cats too.

Applying the concept to health

Emma Walmsley writes:

[T]he world needs to be better prepared for global health threats. ... Antimicrobial resistance is just such a threat.... We risk returning to a time when a simple cut could have lethal consequences and common surgical procedures might be too risky to perform. ... The world needs commitment from pharmaceutical companies and new incentives to attract long-term R&D development. Antimicrobial resistance is the new battle for drug developers, Emma Walmsley, Financial Times (subscription), 14 July

Ms Walmsley goes on to talk about a UK pilot plan to test a subscription model for new antibiotics, and to say that 'exploration of other incentives, such as an intellectual property-based extension voucher, or changes to health technology assessment methods for valuing antibiotics ...are promising options.....'.

This is true, so far as it goes. The problem is that it appears that not enough resources are being allocated to dealing with anti microbial resistance (AMR). Ms Walmsley suggests ways of addressing this. But what's missing is the broader context, with which I believe that the Social Policy Bond concept applied to health could deal with more efficiently.

Whether we are looking at global or national health, we need to know whether putting funds into reducing AMR is the best use of society's scarce health resources. Perhaps funds would be better spent on preparing for epidemics or pandemics. The word better is the key: we need to know where our health pounds or dollars will generate the biggest improvements in health. More precisely, we need people to have incentives to find out this sort of information and, because circumstances, including our scientific knowledge, change rapidly, this has to be done on a continuous basis.

Governments have to make their resource allocation decisions on the basis of data that are necessarily incomplete. How can they know the effect that spending to oppose AMR will have on the overall health of the nation, as compared with allocating the same spending to preparing for epidemics? So, by default, health expenditure is influenced by groups of medical specialists with little incentive or capacity to see improvements in the general health of the nation as an objective. As a result, funding of health depends to a great and varying extent, on the strength of their lobby groups or on their public profile, rather than on what would best meet the needs of society.

The Social Policy Bond concept, applied to health, would change that. I have described how they would work in more detail here. Essentially, they would give a coalition of investors incentives to look for and exploit the most efficient approaches to dealing with society's long-term health problems - on a continuing basis. Health would be defined broadly, using some index of which one component could be Quality Adjusted Life Years. And the goal would be long term. The coalition of investors would be a new type of organisation; one whose structure and composition could change over time, but who could profit with the long (perhaps 50-year) lifetime of the bonds by buying bonds, doing whatever they can to advance toward the targeted goal, then selling their bonds at a higher price.


Especially with health, we need people and governments who can take a long-term view, and have incentives to do so.

Panoptics and experiments

Tim Harford writes: 

From steroids to social policy, what works and what doesn't is often surprising. That is why rigorous experiments in real-world settings are invaluable. The risk of harm and the greater good, Tim Harford, Financial Times (subscription), 27 June

Rigorous experiments are, as Mr Harford points out, more complicated and time consuming than just going with solutions that sound right, or seem obvious. With many of our goals requiring long-term research and experimentation, there are few incentives for people to do these things, and only a tenuous relationship between successful approaches and rewards. There are also few bodies of any kind that are motivated to take a panoptic view; looking, for instance, at efforts to reduce conflict worldwide, and adopt and adapt the more promising ones. There are some who do these things; charities, NGOs, United Nations agencies, perhaps. But they suffer from some or all of these deficiencies:

• they are poorly resourced
• they have their own agenda
• their rewards aren't correlated with their success at achieving meaningful outcomes.

This is not to say that these bodies aren't staffed by hard-working, well-meaning people. For the most part they are. But incentives matter. Take wars and civil wars: reducing such conflict is fine as a career option where job security and a steady income can give people a decent standard of living, regardless of what actually happens to the particular conflict within one's remit. But there is a glaring mismatch between the laudable efforts of these employees and the challenges that conflict, say, poses to human well-being. The potential for catastrophe requires that efforts be stepped up. More intellectual and financial resources are essential. We need the sort of brainpower that currently is devoted to lucrative but socially useless questionable activities such as high-frequency trading or advertising dog-food.

We need, therefore, a system that offers the possibility of worthwhile gain to people for whom that is a prime motivation. We need to channel their self-interest into solving our biggest problems. We need them to benefit from taking the panoptic view, investigating alternatives, conducting experiments, and implementing and refining potential solutions to our long-term social and environmental problems.

Social Policy Bonds would do this. A bond regime would address the three bullet points above. First, if there is more money to be made by solving our social problems, then  more resources will be devoted to that end. Second, the agenda of investors in Social Policy Bonds that would be redeemed only when explicitly and transparently defined goals such as reducing conflict' (or similar) are achieved, would be exactly the same as those of society. Third, there would be the opportunity to buy bonds when the prospects for achieving the targeted goal are gloomy, to do something to make the prospects brighter, and to sell the bonds at a higher price, even before the goal has actually been achieved. So we can target remote goals, such as the end of world conflict, and still have investors interested in achieving them.

Underlying the approach that investors in Social Policy Bonds would be motivated follow, and one that isn't being done frequently enough today, is to take that panoptic view, and conduct the sorts of experiments that Mr Harford writes about - and that are essential if we are going to come up with the diverse, adaptive solutions to our urgent, long-range, social and environmental problems.

DIY biotech: something else to worry about

Biotech: DIY disaster zone...

...reads the header to an article in today's Financial Times (image at bottom of this page). It's a short article, but a frightening one:

Biotech is now within the grasp of hobbyists who can experiment with home-brewed opiates, DIY biohacks and even a mail order gene-editing kit to double the size of a tree frog. ...Modified microbes could damage ecoystems or trigger antimicrobial resistance.... A 'genetic engineering home lab kit' is marketed for just $1845. Lex, Financial Times (subscription), 24 June

How should we deal the disasters that this, or any other technology, known or unknown, could unleash? We can't anticipate exactly where disasters will come from; our tendency is to let government take the lead. But government has little incentive or capacity to get it right - as we are seeing right now. Perhaps it's too much to expect government, an inherently big, cumbersome organisation, to deal efficiently with unforseeable catastrophes. It doesn't appear to be doing a great job managing even those that we know about but that are happening in ways that do not make television news: things like the always-present potential for a nuclear exchange; or climate change.

Yet there are things that only government can do, and things it does well. Managing disasters that are already happening, and have a readily identifiable cause and effect is one such. Raising the revenue (or, as now, borrowing) on a large enough scale to mitigate disasters is another. But what government cannot, and has no incentive to, do well is deal with complex problems that require diverse, adaptive solutions. Lex says that reinsurer Swiss Re 'reckons there is scope for havoc' arising from amateur biotech, and its dangers appear in the company's annual round-up of emerging risks. Right, and you'd think it would be in insurance companies' interests to do something to forestall such havoc. Maybe it is, in the short term, but if they did too much what would happen to insurance premiums and their revenue? Perhaps quelling brewing calamities wouldn't fit their business model. I don't really know.

But I can offer what I think is a less speculative solution: Disaster Prevention Bonds. These could be backed by government and swelled by contributions from philanthropists, NGOs and the public, and made redeemable only when no major disaster befalls human beings over a period of a decade or more. The type of disaster doesn't have to be foreseen or foreseeable. Backed by sufficiently large funds, the bonds would encourage investors to do whatever is possible to avert major disasters, including being alert to embryonic threats, such as those posed by DIY biotech. Incentives are important. Some people today benefit by doing things that reduce the likelihood of certain, specified disasters. But only specified disasters and, besides, there aren't that many such people, that's partly because the rewards on offer do not correlate with a successful, sustained, disaster-free outcome. That's where Disaster Prevention Bonds could help.

I am grateful to Lex, not only for giving me something to blog about, and all of us something else to worry about, but also for this quote from Eliezer Yudokovsky:

Every eighteen months, the minimum IQ necessary to destroy the world drops by one point.

Sociopathic metrics

It still amazes me how badly metrics are thought out and used. I have railed for years against Mickey Mouse micro-objectives. The problem is that the metrics our governments use are invariably too narrow and short term. It seems that they are chosen because:

• they sound good,
• they are easy to collect,
• they take, as given, current ways of doing things, and
• they take, as given, current institutional structures and responsibilities.

The result though, is even more concisely stated:

• they are useless, or worse.

Useless, in the sense that they do not target outcomes that are meaningful to ordinary people. Worse in that...well, let US writer Matt Taibbi give examples from policing:

In the same way our army in Vietnam got in trouble when it started searching for ways to quantify the success of its occupation, choosing sociopathic metrics like “body counts” and “truck kills,” modern big-​city policing has been corrupted by its lust for summonses, stops, and arrests. It’s made monsters where none needed to exist.Where did policing go wrong?, Matt Taibbi, 2 June

There's no coherence about the construction of such metrics because I suspect, little thought goes into them. Government has become adept at obscuring the policymaking process so that even its stated goals don't work, and its unstated goals go unexamined and unexaminable by anybody other than wealthy interests or the people they employ to follow and influence the process on their behalf.

Social Policy Bonds might not seem the obvious solution to the serious problems this policymaking process has created: a widening gap between government and ordinary citizens, growing levels of inequality and growing cynicism. But, as I have said more fully here, they would impose one discipline that is as essential as it's currently evaded, and that is to agree on broad, long-term, social and environmental goals. We are seeing the result of sociopathic metrics and the arcane policymaking process that has led to their creation; not just in riots and mayhem, but in heightened levels of cynicism and despair. Politics and policymaking have become the ultimate closed shop, closed to ordinary people because we just don't understand it. It's time to open it up and the first step is to ask, not tell, all of us what are our policy priorities?

Who really cares?

The problem with the worldwide protests is simple to state, difficult to solve: giving power to the people who say they'll help groups X and Y doesn't actually help people in groups X and Y. This is one of the few constants of history.

And that is even with the assumption that the leaders or spokespeople for these groups actually mean what they say, and care about the people they purport to represent. I have my doubts about the leaders of the current protests but, even if we assume their good intentions, the probability that they, or the people who shove them aside once their bid for power succeeds, can or will do anything to help their constituency is low. This is not a party political view: just a statement of fact. From the current US President's base to the idealists who fomented revolution in France or Russia...the gap between hopes and reality is wide and deep. There is very little correlation between the stated goals of people wanting power and the post-election or post-revolutionary facts.

Social Policy Bonds, at first sight, might seem a wacky solution to the problems we are all facing. I mean not only such global problems as climate change and threats of nuclear catastrophe, but also problems such as the systemic, self-reinforcing inequalities, between and within countries that should be unacceptable in their own right, as well as posing a threat to democratic political and economic systems that are the least worst in human history, when it comes to maximising the chances of a decent life for the largest number of people.

Social Policy Bonds? A new financial instrument? As if there aren't already enough ways in which the financial sector has invented new ways of obscuring the ways in which it syphons off resources - including some of the world's best mathematical brains - from the rest of society, for its own selfish purposes.

But Social Policy Bonds would be different. Yes, they would use the market's incentives and efficiencies, but they would be doing so to achieve society's goals. Their use of markets is secondary to their first essential element: that of clarifying and targeting our social and environmental goals.A Social Policy Bond regime doesn't need to take an opinion on the more controversial and divisive aspects of policy: how our goals shall be achieved or who shall achieve them. That would be left to investors in the bonds who would be rewarded exactly according to how successful they are in achieving our goals. Under a Social Policy Bond regime, politicians wouldn't be able to obscure the workings of government by making arcane, protracted,self-serving decisions about regulation, or institutional structures and funding—procedures that, you might think, are specifically designed to deter anyone other than powerful interests and their paid agents from following. On the contrary, Social Policy Bonds would target outcomes that are meaningful to ordinary people. On the national level these would include improved health, reduced crime rates, universal literacy. On the global level, the bonds could target nuclear peace, the prevention and mitigation of all kinds of disaster including adverse climatic events or, again universal literacy. The point is that these would be society's goals. Goals that are comprehensible and meaningful; goals that all can help in formulating and prioritising.

It is this aspect of Social Policy Bonds—the articulation and prioritising of our social and environmental goals—that needs to be emphasised if they are going to become acceptable, just as much as their use of markets which, rightly in many cases, have been discredited by their manipulation and subversion to the benefit of the already powerful. After thirty-plus years of advocating Social Policy Bonds, I remain hopeful. Well, put it this way: I certainly can't be hopeful about any of the other policymaking systems currently on offer.
anising society currently on offer.

Crime and alternatives to Punishment

The Economist writes:

Although the general call for "defunding" risks a backlash, the details of redirecting part of the police budget to arms of local government, such as housing or mental health, may make sense. The power of protest and the legacy of George Floyd, the 'Economist' dated 13 June

Right. The best way of dealing with crime, is not necessarily to give more money to the police, or to imprison more people, or to impose more drastic punishments. By 'to deal with crime' I mean: to reduce the crime rate. That is a goal that, I think, most of us can agree on. Other supposed goals are nothing more than surrogate indicators, or the product of sorrow, or anger, or revenge psychology. But if we accept that our goal is to reduce the crime rate, and admit the truth: that we don't have a clue how best to do so...well that is a good starting point.

We don't have a clue because the causes of crime vary from place to place, from person to person, from time to time. The best way of reducing crime in some small town might be to subsidise small businesses - which might be a lot cheaper and less divisive than beefing up the local police force. In another area, at a different time, the most efficient way of reducing crime might be to install surveillance cameras, or lay on free taxis for youths leaving nightclubs, or provide talking therapies rather than antipsychotic medication.... The problem we have is not only that the causes of crime are too complex and dynamic for any single organisation to address. It's that there is no incentive for anybody to take such a broad approach. Everybody—politicians, the police, psychiatrists—has their own agenda. Well meaning, hard working these people may be, but they are not rewarded for their success in dealing with a major social problem. It's far too complicated for any single organisation to deal with. We need diverse, adaptive approaches.

My suggestion is that we apply the Social Policy Bond concept to crime. A short essay on how to do this appears here. The paradigm fits other social and environmental problems. The first task is to clarify and articulate exactly what outcome we are looking to achieve. Because we are not concerned with how our goals shall be achieved, nor with who shall achieve them, we can target long-term goals that have eluded past efforts at achieving them, such as world peace or universal literacy or, indeed, reduced crime rates. The role of government would be to articulate society's goals and raise the revenue to achieve them. But the actual achievement of complex social goals should be done by a coalition of people who are motivated to find the most efficient solution, regardless of how many vested interests they have to undermine to do so. And that is where Social Policy Bonds enter the picture.

To read more, please go to the Social Policy Bonds site. All my papers and book chapters are available there and can be downloaded for no charge.

An honest politician

An honest politician or Why we need to target outcomes

Michael Lind quotes Jean-Claude Juncker.

Jean-Claude Juncker, the prime minister of the tax haven Luxembourg who became the president of the European Commission from 2014 to 2019, described how the European Council systematically expanded its authority by stealth: We decree something, then float it and wait some time to see what happens. If no clamor occurs . . . because most people do not grasp what had been decided, we continue—step by step, until the point of no return is reached. Michael Lind, in an excerpt from his book The New Class War, quoted here.

The quote goes a long way to explaining the wide, and widening, gap between politicians and the people they are supposed to represent. Our policymaking system is just too complex, protracted and boring for anyone other than powerful people, or their paid lobbyists, to follow and influence. That means, on the one side of the gap: politicians, bureaucrats and big business. And on the other, ordinary people and small businesses.

We are not heading toward a more simplified policymaking system. Society and the environment are not becoming easier for the public to comprehend. The trend is toward more complexity and, therefore, more opportunity for powerful interests to influence policy in their favour. The world economy might shrink as a result of, say, the pandemic, or climate change, or some other disaster. But there no indication that the rich and powerful will voluntarily relinquish any of their share. The future, then, might seem to be bleak: even greater inequality and, quite possibly, mass impoverishment.

I suggest that one way of avoiding such a miserable scenario is to re-orientate policymaking in such a way that most of us can understand it. Our current systems emphasise personality, image, spending pledges, legislation and organisational structures.These have in common one thing: they have nothing to do with outcomes that are meaningful to ordinary people.

Social Policy Bonds are a possible way in which we can express our policy goals in ways that people can understand and, in so doing, participate in their formulation and setting their relative priorities. So, for instance, rather than look at the sums spent on a health service, or at the numbers of people tested (or 'tested' - some of the results are spurious) for covid-19, or the quantity of protective (or 'protective'...) equipment acquired by a country, or other micro-targets, we would focus on the health of citizens, and target that for improvement. Social Policy Bonds would work by contracting out the achievement of our health goals to the market - which would include government bodies, so long as they are efficient. But the important first step would be to define our health goals, and let investment flow according to our health targets. My piece here gives more detail.

The great advantages of Social Policy Bonds are twofold. One, the market will reward only the most efficient approaches to achieving society's health goals. Two, a bond regime would require that we have explicit, transparent, broad, long-term goals that would be understood, and contributed to, by any members of the public who wish to get involved. That, perhaps even more than greater efficiency, would be a worthwhile benefit. It would certainly help avoid the cynicism of a Juncker, and the outrage that his world view—widespread I am sure among our leaders—ought to elicit.

The Coronovirus Bailout alternative: how it might work

My previous post was a letter published in the Financial Times, which suggested that instead of disbursing covid-19 bailout funds to businesses, the UK Government could instead issue coupons to people entitling them to spend the equivalent per capita sum in particular expenditure categories. Here I will sketch out some broad outlines as to how this scheme might work.

Guiding principles

• Aim for what’s best for the country.
• Aim to compensate sectors for losses incurred.
• Aim to give consumers choice about which businesses to support within each expenditure category.

The starting point is the sums that Government would otherwise spend on bailing out businesses hit my covid-19. 

Categories are broad, partly for simplicity, partly because coupon-holders should be able to choose between providers of services. Coupon-holders can choose within categories. All coupons are tradeable and exchangable. I would assume that all businesses have barcode or QR scanners but that many consumers don't.

• I suggest as examples of categories: 
• Air travel
• Surface travel
• Personal services (hair, nails, massage, body-piercing, tattoos, any similar one-to-one service) 
• Hospitality 
• Private healthcare, including dentistry

Expenditure statistics per UK household for 2019 are given here. To some extent categories will be decided by the statistics available. 

Example: The ONS says each UK household spends £51.30* per week on restaurants and hotels. Rather than try to assess and then compensate each business for any lost income, I suggest giving each household coupons worth 104 times £51.30* = £5335 to be spent on restaurants and hotels, within the UK, within the next two years. 

*Bear in mind that the UK Government's aim is to compensate UK business, so a sum representing expenditure on overseas hospitality would have to be subtracted from the £51.30 

There are other aspects that would need discussion. In particular, the entitlements of each household should be broken down to adults and children. 

The scheme would be more complex and more contentious than the likely government plan of direct compensation to big business. But, in my view, if properly done, its advantages could outweigh the disadvantages. The advantages, as outline in my previous post, are mainly that it would stimlate competition, and help small businesses. It would also benefit consumers who aren't interested in, for example, air travel who could swap their coupons for a smaller amount of cash or for other services that they want or need. Under this scheme, an adult could exchange their air travel coupon for a coupon for childcare or private dentistry.