Finance, like dog food advertising, is a low priority

Social Policy Bonds are intended to channel our ingenuity and ever more impressive technology into achieving our social and environmental goals. I often suggest that many of the activities into which we currently devote boundless energy and resources are socially useless or in conflict with society's wishes. It is not only the relatively minor indulgences that somehow win society's approval against which I inveigh: advertising dog food for example, but such far more consequential resource sinks, such as nuclear weaponry (see my previous post), or finance: 

That’s finance. The total value of all the economic activity in the world is estimated at $105 trillion. ...The value of the financial derivatives which arise from this activity – that’s the subsequent trading – is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. It does nothing and adds no value. It is just one speculator betting against another and for every winner, on every single transaction, there is an exactly equivalent loser.  For Every Winner a Loser: What is finance for?, John Lanchester, London Review of Books, 12 September 2024

We ought not to condemn those who choose financial trading as a career, whatever the net results of their collective actions. These people are reacting rationally to the incentives on offer. As Mr Lanchester says:

[I]n our society the classic three ways of making a fortune still apply: inherit it, marry it, or steal it. But for an ordinary citizen who wants to become rich through working at a salaried job, finance is by an enormous margin the most likely path. And yet, the thing they’re doing in finance is useless.

It's the incentives that are perverse, directing our efforts into socially useless, or worse, activities. One way of re-jigging the incentives would be to issue Social Policy Bonds, which would inextricably link the rewards gained by efficient resource allocation to the achievement of our social goals. These non-interest bearing bonds would be redeemable for a fixed sum only when a specified social goal. These goals would be broad and, importantly, meaningful to ordinary people, who could thereby participate in which goals would be chosen, and which would have higher priority. Such goals could include: reduced crime, an improved environment or, at the global level, nuclear peace, or a reduction in adverse climatic events. 

A Social Policy Bond regime would allow us to target broad global and national goals explicitly, while channeling the market's efficiencies into the best use of our limited resources. Given that the survival of the planet itself is under threat, I think the case for such targeting is a strong one, even if financial markets lose a fraction of their liquidity in order for us to get there.

Bypass the generals and politicians: target nuclear peace

How do we get to the point at which the US has 14 US Ohio-class submarines, each one of which has the destructive power of 1250 Hiroshima bombs? It's a complicated, expensive, extremely dangerous way of achieving ...what exactly? I'm not singling out the US here: all countries are doing it. What I'm getting at is the disconnect between the stated goals of policies - in this case, presumably, national security - and the likely results of the way we go about achieving them.

As with other social and environmental problems, we really don't know the most efficient and effective ways of ensuring national security. But our decisions as to who gets to choose these ways embody the assumptions that the military, especially those generals who fought previous wars, are those who know best. I believe that there could well be other, less potentially disastrous, ways of achieving the security that we all yearn for, and that we should explore those ways. Actually, we can go further back and ask: who chooses the choosers? Those who delegate national security to the military are invariably politicians whose expertise lies in the acquisition and retention of power. 

I suggest we explore alternatives; or rather, that we put in place incentives that would encourage people to explore alternatives. A goal that we should target immediately is, in my view, sustained nuclear peace. It's one that probably everyone on the planet would like to see, and one whose achievement or otherwise is easy to monitor. If it's a priority at all, it's one that only a few dedicated people have as their vocation and for which they receive derisory funding. 

By backing nuclear peace bonds, a combination of governments, non-governmental organisations, philanthropists and ordinary people could increase the rewards to existing bodies working to achieve nuclear peace, but also increase the resources available for them - and, crucially, others - to work with in support of the nuclear peace goal. It would be up to highly motivated investors in the bonds to research, experiment and eventually implement the ways in which they best think nuclear peace could be achieved and sustained. To be sure, they might decide that the best way of doing so is for big countries to pile up masses of nuclear destructive potential and hope that nothing goes wrong. But they might also look into alternative approaches that pose less danger and that are being neglected by those who currently make all the relevant decisions.

We might then look at other social problems, and decide to target those directly, rather than via politicians and so-called experts working in organisations whose interests invariably differ from those of society.

So, if we want to raise literacy, why not target literacy directly? If we want to reduce crime, why not reward people for reducing crime, however they do so? If we want to improve the environment, why not target the well-being of human, plant and animal life? In short, why not target outcomes, rather than activities, institutions, inputs or outputs, and let the most effiicient operators, be they public- or private sector, rather than the taxpayer, be penalised for failure? Such would be the effect of a Social Policy Bond regime.