Targeting long-term goals

James Hansen talks about climate change:

You’re talking about a system that responds on the timescale of decades to centuries — that’s a different time constant than the political constant.” James Hansen talking to David Wallace-Wells in The Uninhabitable Earth: Annotated Edition (reference 12)

It's not only climate change for which our current politics is inadequate. Any crisis building now, but whose effects will be felt only by future generations or, even more scarily, future administrations, is going to to be neglected within our current system. Our politicians face few incentives to consider future generations, and plenty of incentives to ignore them completely. We see this in the amassing of grotesquely inflated debt levels, badly thought-out immigration policies, under-investment in critical infrastructure, and environmental behaviours including, but by no means limited to, those that affect the climate. The narrow, short-term interests of powerful interests, public- and private-sector, win out every time. As for future generations: our politicians are expert at kicking the can down the road.

Social Policy Bonds could remedy this neglect of long-term consequences. They would create a coalition of interests in favour of achieving social and environmental goals that are currently too remote to receive much attention - though plenty by dystopian fiction writers. The way the bonds work would be to reward the achievement of our long-term goals at every stage of the process.

Social Policy Bonds (unlike Social Impact Bonds) are radeable, which means that bondholders don't have to hold them until redemption to see their value rise and realise a profit.. This allows the bonds to target effectively such remote goals as climate stability, universal literacy and world peace. The bonds would begin their work as soon as they were issued: those who buy the bonds would be motivated to begin the explore measures that would immediately raise the chances that the targeted goal will be achieved quickly. For most long-term goals, a large array of diverse measures will need to be proposed, implemented on a small scale, then either terminated or implemented more widely. No government can effectively oversee such a range of projects, nor can any single, conventional organisation. In particular, terminating failed approaches in favour of more efficient ideas does not come easily to government. But under a Social Policy Bond regime there would be every incentive to focus only on those approaches that will achieve our targeted goal most efficiently. And, crucially, the optimum mix of approaches will change over time - especially over the long time period that remote goals will require for their achievement. The bonds would give rise to a new type of organisation; ones whose composition and structure would change, perhaps radically, over the lifetime of the bonds, in response to changing circumstances and improving knowledge. Again, such adaptiveness is not a characteristic of government action, but it is an essential element of any attempts to solve our long-term problems.

Social Policy Bonds would represent a radical change from today's politics. But, as long-term problems threaten to overwhelm humanity (click on the source excerpted at the top of this post, for one example) it's clear that business as usual is not working. Targeting long-term goals and injecting market incentives into their achievement would seem to be our best hope. Social Policy Bonds, uniquely amongst policy instruments, would do both.

I've written about why I believe tradeability is important here, and why I am ambivalent about Social Impact Bonds here.

Creeping corruption afflicts charities too

I've blogged before about my two opinions about organisations, which I deem axiomatic:

• Every organisation, be it a church, trade union, university, government or whatever, will always seek to overplay its hand.


• Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.

Sadly, but not unexpectedly, the list in the first axiom can be taken to include charities, which appear to be just as subject to creeping corruption as all the others. There's little point in trying to find why this happens, but there is a great deal to be gained, in my opinion, by remedying the problem.

Social Policy Bonds would lead to the creation of a new sort of organisation: ones whose composition and structure will adapt to changing circumstances. The bonds would encourage the achievement of social goals that will take longer to achieve than the current, relatively short, time horizons of people or bodies in the current system. Under a Social Policy Bond regime, the members of the coalition of bondholders targeting, say, better health, would gain by buying bonds, doing what they can to improve the nation's health, then selling their bonds at an increased value. They need not stay invested in the bonds for the lifetime of that bond. At every point in time between the flotation of the bond and its redemption, the bondholders would form the body that can advance goal-achievement most efficiently. Bondholders need not be directly involved in achieving the goal; they might be investment companies, whose role will be to allocate funds according to what they think will be the most efficient people or projects that will help bring about the next step toward achievement of the targeted goal, simultaneously raising the value of their bonds. The identity of any and all bondholders would change over time, if that turns out to be the best way of achieving our objective quickly. Blockchain technology could facilitate any shifts in the membership of the coalition of bondholders.

The important point is that every activity of every bondholder would be devoted to achieving our goal. Their self-interest would be exactly congruent with those of society - in stark contrast to what happens now under even the best of our current systems of government.

Self-entrenching atomisation

In a discussion about air travel, Steve Randy Waldman makes an interesting point:

Aggregate outcomes are not in general or even usually interpretable as an aggregation of individual preferences. When we learn about the Prisoners’ Dilemma, we don’t interpret the fact that both players rat as evidence that, really, they both just wanted to go to jail for a long time. After all, that is their revealed preference, right? No. We understand that the arrangement that would obtain if they could cooperatively regulate one another’s behavior is in fact the outcome that they would prefer. As isolated individuals, they simply have no capacity to express this preference. Source See also Prisoner's Dilemma

This explanation of the mismatch between the sum of individual preferences, and aggregate decisions makes a lot of sense, and we can see its implications beyond the air travel industry in the deficiencies of our policymaking system. (I'm not, incidentally, convinced by the rest of Mr Waldman's discussion of the air travel industry.) To my mind, it points to the need for more public engagement with policy; more discussion amongst ordinary people about the costs and benefits of policy alternatives. But policy itself is not really the issue: policy is a means to various ends, and those ends under our current system are rarely articulated, often  deliberately obscured, and often in conflict with each other and with the interests of anybody except those bodies wealthy enough to follow and influence them. We don't  "cooperatively regulate one another's behaviour" in the policymaking process, because that process is just too esoteric and time-consuming for ordinary people to follow.

The result is that our politics is ceded to powerful bodies, public- and private-sector, which benefit by ordinary people's unwillingness or inability to follow the policymaking process. A self-entrenching mechanism seems to be at work: certain policies weaken social and family bonds. I'd include amongst these policies that deal with welfare payments, subsidies to (for instance) road transport and capital-intensive agriculture, zoning laws, regulations that favour big business, and trade agreements. Importantly, the positive effects of these policies might well outweigh the negative, but the negative effects do tend to divide us. And, as atomised individuals or nuclear families, we exhibit exactly the behaviour that Mr Walden talks about: we cannot translate our wishes through a broken policymaking system, into 'an aggregation of individual preferences'. This cycle perpetuates itself.

Social Policy Bonds could help. They would refocus policy discussion onto outcomes that are meaningful to ordinary people. Goals, in short, that we could understand and debate. Under a bond regime anyone could engage with the policymaking process and, crucially, with each other, over policy goals and priorities. Even if our individual wishes were over-ruled, we'd have the satisfaction of knowing we'd been consulted. One result of this would be more buy-in: a crucial feature missing from politics these days. Another would be the solution to the problem to which Mr Waldman alludes: our individual preferences could be aggregated in a meaningful way. For example: few of us would want to see, say, a conflict anywhere in the world that led to the detonation of a nuclear device. Or, at the national level, most of us would like to see universal literacy and reductions in the level of violent crime. Currently, we have no way of articulating and debating these preferences in a systematic way: we can vote for political parties that may or may not offer different perspectives; we can join single-issue groups (which tend to deviate from their initial remit), and there are various other ad hoc activities we can undertake in support of some, but not all, of our individual goals. But they're unsystematic, often incoherent, and rarely exposed to moderating or contrary argument. And a large number of interest groups anyway replicates almost exactly the mismatch discussed above.

In contrast, a Social Policy Bond regime would enable us meaningfully to express goals that our current system finds difficult to target: goals like the avoidance of a nuclear conflict. The bonds could do this effectively because they would not presuppose how our goals shall be achieved, nor who shall achieve them. By focusing entirely on outcomes and costs, Social Policy Bonds would translate and modify our individual preferences into coherent, consensual policy goals. An invaluable by-product of a bond regime would be its reversal of the atomisation process afflicting western democracies.

Focus on outcomes, not party

Matt Taibbi discusses the US Democratic Party's reaction to the Bernie Sanders campaign, in a piece originally penned on 9 June 2016:

Politicians are so used to viewing the electorate as a giant thing to be manipulated that no matter what happens at the ballot, they usually can only focus on the Washington-based characters they perceive to be pulling the strings. Through this lens, the uprising among Democratic voters this year wasn’t an organic expression of mass disgust, but wholly the fault of Bernie Sanders, who within the Beltway is viewed as an oddball amateur and radical who jumped the line. Nobody saw his campaign as an honest effort to restore power to voters, because nobody in the capital even knows what that is. In the rules of palace intrigue, Sanders only made sense as a kind of self-centered huckster who made a failed play for power. Matt Taibbi, Insane Clown President, January 2017

Exactly. We need to reconnect politicians and their parties with voters. Policymaking systems have been subject to two principles which I deem axiomatic:

• Every organisation, be it a church, trade union, university, political party, large corporation or whatever, will always seek to overplay its hand. 
• Every organisation will, sooner or later, forget its founding ideals and its stated objectives, and devote its energies to self-perpetuation.

So political parties are no better, and not much worse, than any other large organisation, except in their oligopolistic power over the rest of us. I think our policymaking models are outdated. In the western democracies we choose a person or a party who promises to do something to help achieve some vague, usually unverifiable outcome at some indefinite time in the future, usually long after they can be called to account. It's a very indirect form of influence, and one that, as we see, has been corrupted, so that the link between the voter and the politician is distorted and broken by wealthy interest groups, whether they be corporations or government agencies who don't want their boat to be rocked.

I propose that instead of choosing people or parties, we choose outcomes: explicit, verifiable outcomes that are meaningful to ordinary people. Which means outcomes that are not phrased in terms of expenditure, institutional size, structure or remit, or regulatory or legislative powers. Outcomes such as improved health, or world peace, that people can understand, and that we can help choose and prioritise. I am not necessarily advocating Social Policy Bonds here: a shift toward discussing outcomes and their costs would be an improvement over our current systems. But Social Policy Bonds could focus debate more, and have the crucial advantage that they inject the market's incentives and efficiencies into all processes necessary to achieve society's goals.

I don't know

'I don't know.' How often do we hear this from policymakers? Ask them how they plan to reduce crime, improve the environment or grow the economy and they will talk about things to do with funding allocations, institutional structures, laws, regulations and processes. They will never say 'I don't know.' We could even ask them how they intend to bring peace to the Middle East, to reduce the chances of a nuclear exchange, or to deal with climate change...and they'd still come up with superficially adequate responses. Responses, though, not answers.

Simple goals - sanitation, basic education, satisfying the nutritional needs of children etc - are those for which cause and effect are easy to identify, don't vary much over space, and don't change much over time. A benign and reasonably efficient government knows how to achieve these things. The more complex problems, though - including how to bring about benign and efficient government where it is absent - require a range of approaches to be tried, with only the most efficient being implemented. This is something policymakers don't do very well. Probably no single conventional organisation can do it well, beholden as they are to fixed world views, and the interests (monetary, ideological) of their supporters and employees.

I don't know how to bring about world peace, nor improve a nation's health, nor prevent or mitigate disasters, man-made or natural. I offer no solutions, but I do think that the Social Policy Bond concept is a way of encouraging people to find solutions: a way that channels the market's efficiencies and incentives into all the processes necessary to discover and implement the optimal mix of approaches to solving our complex problems. So, when asked how to solve the world's problems, I answer 'I don't know. However...'

Reinforcement learning and the public sector

Will Knight writes about reinforcement learning:

Reinforcement learning is a way of making a computer learn through experience to make a series of decisions that yield positive outcomes—even without any prior knowledge of how its actions will affect its immediate environment. A software-based tutor, for example, would alter its activities in response to how students perform on tests after using it. Reinforcement Learning, Will Knight, 'MIT Technology Review', March/April

It's the same approach practised by the computer called DeepMind, which 'mastered the impossibly complex board game Go and beat one of the best human players in the world in a high-profile match last year.' It's also, at least in theory, the basis of our economic system: the learning process that is supposed to go on through the creative destruction of business enterprises that fail to adapt to changing circumstances. As applied to driverless cars, 'the software governing the cars’ behavior wasn’t programmed in the conventional sense at all.' The software learns through trial and error.

Large corporations and their friends in government have seen to it that competitive markets play a lesser role than they should in determining our economic prospects. Corporations succeed today not so much through competing in markets, but more by manipulating the legislative and regulatory environment, and participating in effective cartels with other powerful players, both private- and public-sector. But the principle - that of survival of the most adapted, and the most quick to adapt - has generated enormous material wealth, and continues to operate, though more to the benefit of the already-wealthy than to ordinary people.

With its record of success, why isn't reinforcement learning, or competition to find the best approaches, allowed to operate in the public sector. That is, why don't we allow competition to solve our social problems? It's partly for  historical reasons. When governments began to take an interest in the welfare of ordinary people, solutions to their basic problems were fairly easy to identify. Requirements for things like sanitation, elementary education, a police force, fire engines and hospitals were - and are - difficult to argue against. But as society has grown more complex so too have our social and environmental problems. How, for example, do we go about reducing crime, improving our (already relatively high) levels of physical health, improving our mental well-being, or ending war? No obvious solutions leap to mind.

Which is where Social Policy Bonds could enter the picture. Rather than let public-sector organisations have a monopoly on trying to deal with these problems, a bond regime would, in effect, contract out finding the best solutions to the private sector. A goal such as eliminating war is going to need the exploration, deployment and refinement of a multitude of potential approaches. More than that, though, it's going to need to reward the most effective of these approaches and to terminate the useless ones. There are well-meaning organisations working to end war, but the people working for them are not rewarded for their success. There are no built-in incentives for the organisations to find optimal solutions, nor for inefficient organisations to be dissolved if their efforts prove futile or counterproductive. The result is that the challenges humanity faces, including environmental calamities or nuclear proliferation, are nowhere near being effectively met. But, unlike computers learning how to drive cars, or businesses operating in competitive markets, our failed approaches and ineffectual organisations aren't terminated. Sometimes, in fact, our politicians pump even more money into them.

Social Policy Bonds would change that. They would channel the market's incentives and efficiencies into the discovery and implementation of diverse, adaptive and, above all, efficient approaches to our social and environmental problems, including those, like war, that many of us have concluded have no solution. Our current system places responsibility for the solution of our problems in the hands of large, usually monopolistic, organisations that face little competition and have no incentive to try diverse approaches. There's certainly no reinforcement learning. It is because of its ability to stimulate diverse, adaptive approaches that a Social Policy Bond regime could succeed where existing policies have failed.

Sacrifice on the altar of 'renewable energy'

From the current issue of  New Scientist:

Last week, air pollution in London soared to heights not seen since 2011. The usual suspects were named and shamed, including traffic fumes and a lack of wind. But joining them was a surprising culprit. "We think about half of the peak was from wood smoke," says Timothy Baker, part of a team at King's College London that monitors air pollution. The trendy log-burning stoves producing much of this pollution are marketed as a source of renewable energy that can cut fuel bills while helping reduce global warming. But recent findings suggest they pose a serious threat to the health of their owners, and are also accelerating climate change in the short term. If nothing is done to discourage log burning in homes, it could become the biggest source of air pollution in cities like London. .... Children are especially vulnerable ....  Where theres's smoke, Michael LePage, 'New Scientist', 4 February 

This is just one example showing how our governing institutions cannot deal with broad, long-term social and environmental problems. We have in mind something that sounds like an unarguable benefit: 'renewable energy', say, and target it, explicitly or implicitly. But we fail to take into account the broader, longer-term ramifications. There's no clarity about the distinction between means and ends. Something like 'renewability' - which is anyway a function of our ever-expanding scientific knowledge - is not an end in itself. At best, it's a means to certain ends, which are rarely specified, or specified in such vague terms ('sustainability') as to be subject to bureaucratic or corporate manipulation. The bigger picture is lost: in this instance, the health of vulnerable people and children is sacrificed on the altar of 'renewability'.

It's not good enough. We need to be reward the achievement of goals that are meaningful to ordinary people. 'Physical health' would be a good starting point. Defined in terms of objective criteria, such as longevity or Quality-Adjusted Life Years, a benign and far-sighted government could target the health of its citizens for improvement, and contract out the achievement of such a goal to bodies motivated to, and capable of, keeping up with relevant scientific advances. Our existing institutions and systems of government cannot do this, but Social Policy Bonds targeting health could. I have written about such bonds here. As society grows more complex and the linkages and time lags more intricate, so the scope for problems such as the increased air pollution described above or self-interested deception expands. We need a system that keeps the big picture in mind, and that starts with articulating what, as a society, we want to achieve. Our existing institutions, hard working and well intentioned as they doubtless are, have little incentive to advocate for goals broader than their remit. That worked in times and circumstances when the relationship between cause and effect was easy to identify and address. In today's society, that no longer applies. New organizations with an interest in seeing the big picture are necessary, and a Social Policy Bond regime would see their creation.

Policy for the post-truth era

US President Barack Obama talks about the new media system which:

...means everything is true and nothing is true. ...An explanation of climate change from a Nobel Prize-winning physicist looks exactly the same on your Facebook page as the denial of climate change by somebody on the Koch brothers’ payroll. .... Ideally, in a democracy, everybody would agree that climate change is the consequence of man-made behavior, because that’s what 99 per cent of scientists tell us. And then we would have a debate about how to fix it. That’s how, in the seventies, eighties, and nineties, you had Republicans supporting the Clean Air Act and you had a market-based fix for acid rain rather than a command-and-control approach. So you’d argue about means, but there was a baseline of facts that we could all work off of. And now we just don’t have that. It happened here, David Remnick, 'New Yorker' dated 28 November

Science isn't a consensual process though, so even if the majority of scientists agree 
on one thing, whether it's anthropogenic climate change, or acid rain, or whatever, that should carry no more weight than the collective wisdom of experts in other fields, such as economists or opinion pollsters. There is a genuine problem here: how should we make policy when the relationship between cause and effect in our ever more complex societies is impossible to identify? It's not simply a question of following the opinions of existing bodies often backed by vested interests - nor of reflexively ignoring them: they might after all be right as well as self interested. Nor should we simply identify a problem then mindlessly dole out funds to the organizations whose stated objective is to solve it, but whose over-arching objective - in common, I think, with all organizations - is self-perpetuation.

We should instead recognize that resolving complex social and environmental problems, cannot wait for our receiving perfect information about causal relationships, and nor should we delay making decisions until such information becomes available - it might never happen. Take climate change: it's likely that, by the time we know the effects of man's greenhouse gas emissions on the climate, it will be too late to do anything to avoid or reverse their catastrophic effects on the environment. The current way of addressing the problem seems inadequate: extravagant gestures that might lead to some reductions in emissions that we think contribute to climate change, which might lead to some tiny, almost imperceptible (but unverifiable) effect on the climate some decades hence.

I think we can do better than this. We could use the Social Policy Bond idea, first to identify exactly what we want to achieve; and second to channel the market's incentives and efficiencies into achieving it. With climate change, we need to clarify whether we are more concerned about climate change, or about the impacts of climate change on human, animal and plant life. In other words, we define the outcome that we wish to achieve, then let the market decide how best to go about achieving it. Most social and environmental goals will embody an array of conditions that have to be satisfied for the goal to have been deemed met and the Social Policy Bonds redeemed. Our climate change goal should embody measures of physical, biological, social and financial variables that shall have to fall within a targeted range for a sustained period before the redemption of Climate Stability Bonds.

And as with climate change so with other major challenges.The important point is that the Social Policy Bond principle works even when the facts about what causes climate change, say, or crime, or war, are disputed. As such, Social Policy Bonds are the perfect policy instrument for today's post-truth politics.

Update 5 December: a version of this post for newcomers to the Social Policy Bond idea is available here

Bootlickers, yes men, liars

There are many ways we can interpret the US Presidential election result. I prefer to see it as the victory of ordinary people over the people who are supposed to look after their well-being. In domestic politics, just as in the international aid industry, a whole class of intermediaries, supposedly devoted to improving the condition of the ordinary man and woman, has grown and expanded so much that its interests have now diverged from the
very people they are supposed to represent. Mr Trump speaks for these people. Whether he will improve their lot remains to be seen, but it would difficult to do a worse job than the current motley coalition of politicians, bureaucrats, academics and media persons.

Two statements I take as axiomatic:

• Every institution, whether church, government body, trade union, university, charity or whatever, however well meaning it began, however well meaning and hard working the people it employs will, sooner rather than later, have as its over-arching goal that of self-perpetuation.
• Everybody - everybody - in a position of power, will always overplay their hand.

The US establishment - the political parties, the bureaucrats, the media, the countless lobbyists, academics and government bodies - are no better and no worse than innumerable other spinners of dreams, bootlickers, yes men, liars, whose corruption and degeneracy have let ordinary people down. Hence Brexit - and hence President Trump.

Policymaking is incomprehensible to outsiders

Lee Drutman writes:

The organizations that are most likely to be the winners in the modern policymaking process are those that:

•  are able to lobby on multiple issues over multiple years;

•  can pay the increasingly high price of entry necessary for effective participation; and

•  gain from policy complexity, both because it gives them more opportunities to insert narrow provisions with limited public scrutiny and because they are more capable of supplying expertise to overworked staffers.
More and more, the only organizations that are capable of marshaling the resources to do all these effectively are business organizations,—both individual companies and the associations that represent them. The business of America is lobbying, Lee Drutman, 2016

I've long railed against the increased complexity of policymaking in western countries. It is now too complicated for ordinary people to follow. So, on the one hand we have government and big business in a mutually enabling relationship, and on the other we have ordinary people and small enterprises. The gap is widening and so we see rising and potentially dangerous levels of alienation and cynicism.

Social Policy Bonds could narrow that gap. Ordinary people understand broad national or global goals, such as better health, a cleaner environment, or world peace. Governments could target these goals by issuing Social Policy Bonds. The current system is arcane, long-winded and incomprehensible to outsiders - presumably by accident rather than design. It's focussed on process and decisions about funding and organizational composition and structure. It rewards activity, rather than outcomes.

Achieving goals such as better health or world peace would in most cases mean that governments relinquish control over those organizations that are currently charged with achieving these goals. Governments, naturally, are not keen to do so willingly, so perhaps the first issuers of Social Policy Bonds will be philanthropists, non-governmental organizations or members of the public: or some coalition of all three, who would put up the funds necessary to redeem the bonds. I discuss the transition to a Social Policy Bond regime here and in chapter 4 of my book.

Political parties are divisive and unnecessary

John Lanchester writes about UK politics:

Political parties are the mechanism through which divisions in society are argued over and competing interests asserted. The trouble with where we are now is that the configuration of the parties doesn’t match the issues which need to be resolved. Brexit Blues, John Lanchester, 'London Review of Books', dated 28 July

Quite so. Society has become too complex for the old political parties which, I believe, will have to evolve much as the stonemasons did, into organizations that are less concerned with improving material circumstances than with ritual, bonding and inner development. In their place we could see new types of organization: ones with protean structure and composition that are dedicated to single issues.
In a Social Policy Bond regime, these organizations would target social or environmental outcomes. All their activities would be devoted to achieving broad, meaningful outcomes as cost-effectively as possible. Most of us agree that we need a society that both looks after its disadvantaged members and has a healthy, efficient business sector that will generate surpluses to pay for a welfare state. Broad, meaningful goals would encompass (for examples) health, education, the state of the environment, crime, and poverty; at an international level we could target the elimination of all war and civil war.

Of course there will be disagreements about priorities, but there will be more consensus about these goals than there is about the supposed means of achieving them. Political parties are failing. They cannot cope with society's complexities and are unnecessarily divisive. They're unlikely ever voluntarily to relinquish their over-sized role in making policy, but a transition toward a Social Policy Bond regime could see them decline or encourage them to reinvent themselves as something different, much as did the old stonemasons. For my thinking as to how this transition could be managed, see chapter 4 of my book.

DAOs and Social Policy Bonds

Decentralized Autonomous Organizations might be the sort of organization that I envisage here; organizations whose structure, composition and activities are all subordinated to the market's constantly changing view as to who is best placed to achieved targeted goals efficiently. A discussion on DAOs and Social Policy Bonds has started in this ethereum forum.

Society needs more creative destruction

'Creative destruction' is the term coined by Joseph Schumpeter to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." 

Creative destruction in the private sector essentially means that failing companies go out of business and successful ones survive and prosper. One of the reasons that social problems persist is that creative destruction rarely determines which policies shall be aimed at solving them. Largely for historic reasons, the solution of national and global social problems, including crime, pollution, terrorism and war, has been left to the public sector. That is, to bodies that face no competition and are seldom rewarded in ways that correlate with their success. Indeed, many failing institutions supposedly devoted to solving social problems are likely be penalised for success, by seeing their budgets cut or even their very survival threatened. At some level, for some employees, this perverse incentive is bound to operate, to the detriment of the people they are supposed to serve but to the continued survival of the inefficient institution.

Social Policy Bonds are intended to re-jig these incentives by injecting market incentives into the solution of social problems. A bond regime would direct funding to those approaches that bring about the most benefit, defined in terms of beneficial social impact per taxpayer dollar. Note the word 'approaches': it's the best policy initiatives that are rewarded, not the body that introduces them, which otherwise might well become more interested in self-perpetuation than in achieving targeted social goals.

The unfortunate trend is that, rather than social problems becoming more subject to creative destruction, the private sector is becoming less and less subject to it. The current Economist focuses on the US manifestation of this:

The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. ... If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged. The problem with profits, 'the Economist, dated 26 March

Exactly, and it's not only the biggest firms that can abuse government for their own purposes. Farmers do it too, and have been for decades, though it is likely that most benefits that are in the public mind accrue to farmers do in fact go to the biggest landowners and agribusiness corporates.

I believe this trend is unsustainable. The capture of government by big business and its lobbyists, which has led so much inequality, is already provoking a reaction. Let's hope that this leads to a policy environment that will allow creative destruction to play a bigger role in both the public and private sectors. I write about the need for a new protean type of organization, whose composition and activities will be exclusively focused on achieving social goals, here. New technology, including the blockchain, might help bring these organizations into being.

Overcoming institutional sclerosis

The disenchantment we see with western governments, the European Union, and some United Nations bodies is almost inevitable. But it's not particular to government bodies; it is a feature of almost any large institution, be it a trade union, church, university, or political party. It's also a feature of the largest private-sector corporations: those whose survival doesn't depend on customers buying the products in something more competitive than a monopolistic or oligopolistic market. These are the large corporations that can manipulate or subvert the policy environment to their ends at the expense of consumers. Institutional sclerosis can also afflict the military, where it remains untested. So I'd expand a bit on this quote from Thomas Sowell;

The most fundamental fact about the ideas of the political left is that they do not work. Therefore we should not be surprised to find the left concentrated in institutions where ideas do not have to work in order to survive. Thomas Sowell, 'The Survival of the Left', in The Thomas Sowell Reader, 2011

Big businesses that are close to government, lobbyists for farmers (for example), right-wing political parties, and other bodies not linked to the political left are subject to exactly the same sclerosis that Mr Sowell describes. It's not about 'left' or 'right'; it's about being responsive to changing circumstances. Many big organizations, not just those on the left, are institutions 'where ideas do not have to work to survive'. The long-term result of this is alienation from ordinary people and a culture of insiders against outsiders. And the result of that is something we are seeing now: a disenchantment with conventional politics and a willingness to embrace anything that promises radical change. This could turn out to be positive; it could also be calamitous.

Which is why I have suggested we think about policy not in terms of institutions, with their limited capacity to think in the very long term or to prioritize, when it comes to the crunch, anything other than their own survival. I suggest that we encourage instead the creation of new types of organization whose funding, composition, structure and activities are entirely a function of how well they achieve society's goals. This would happen under a Social Policy Bonds. As well as channelling society's scarce resources with optimal efficiency, a bond regime would, by rewarding people for achieving society's goals, close the gap between policymakers and the people they are supposed to represent.

Insiders, outsiders, and world peace

The Economist describes the French labour market as...:

 ...divided into “insiders”, those with permanent, protected, full-time jobs, and “outsiders”, whose work is insecure and temporary. .... And France’s biggest unions, for all their revolutionary rhetoric, have become talented and conservative defenders of insider privileges, at the price of shutting too many young people out of decent jobs altogether. Fighting French unemployment: mode d'emploi, 'The Economist', 16 January

It seems to be the way of all big organizations, be they trade unions, religious institutions, government bodies, large corporations or political parties. They start out well intentioned but at some point their interests diverge from those of the people they purport to represent, and their over-arching goal becomes self-perpetuation. Sometimes, especially during their early years, these bodies have interests that coincide with those of their members. Later, institutional growth or survival becomes an end in itself. Even when they do represent their members, large organizations do so only in their members' capacity as members - as distinct from human beings with interests that are longer term and broader than those encompassed by their membership. People outside these bodies suffer, either directly, because the organizations' rules benefit insiders at the expense of outsiders, or less directly, in that people expend a great deal of time and energy trying to become insiders because, largely thanks to big organizations' ways of working, that's the only way to improve one's quality of life. So, for instance, we see large corporations manipulating the regulatory environment to keep out smaller companies.

My own thinking is that of course there must be large organizations - including countries with borders - but they must be made to keep to their principles and so have broader goals than self-perpetuation. Many of our social and environmental goals are the responsibility of the large bureaucracies that, in common with other other large bodies, have self-perpetuation as their ultimate goal. That is why I think Social Policy Bonds could help. Under a bond regime the structure and composition of organizations responsible for achieving our social goals would be constantly changing. The market for the bonds would see to it that the people working for these organizations would be paid according to their efficiency in achieving our goals - which coincide exactly with society's goals. The market for would ensure that only the most efficient approaches to solving our social problems would flourish, and that unsuccessful approaches would be terminated. 

The organizations' structure, composition and all their activities, would be subordinated to the outcomes that we, as a society, want to see achieved. These new types of organization, because of the way the market for Social Policy Bonds work, would always have powerful incentives to achieve our social goals. For all these reasons, Social Policy Bonds mean that we could meaningfully target long-term, urgent, but  hitherto idealistic-sounding goals such as the achievement of world peace.

Loyalty ... to what?

My previous post mentioned the climate change bureaucracy. Underpinning that bureaucracy are two assumptions: that it's better to deal with climate change than with its effects; and that cutting back greenhouse gas emissions is the best way of dealing with climate change. But what if those assumptions wrong?  Would the climate change bureaucracy reform itself?

Freeman Dyson reviews a biography of Max Planck:

My Princeton colleague Albert Hirschman published in 1970 a little book with the title Exit, Voice, and Loyalty ...., exploring these issues in a different perspective. Hirschman was writing as an economist about large-scale enterprises that he had seen in many countries, beginning with the railroads in Nigeria and ending with the American war in Vietnam. In each of these enterprises, gross failures were manifest, and the individuals occupying positions of responsibility had to choose between three alternative responses. Exit meant to quit the enterprise. Voice meant to stay on the job but speak out publicly for change of direction. Loyalty meant to stay on the job and give support to the continuation of failing policies. Hirschman observed that in the majority of enterprises, voice is sadly lacking. Most people choose loyalty and very few choose voice. Those who choose exit have only a small effect on the enterprise. If gross errors and injustices are to be corrected, voice must be fearless and fierce, loud enough to be heard. Max Planck: the tragic choices (subscription), Freeman Dyson, 'New York Review of Books', 22 October

"Most people choose loyalty": with existing organizations this means loyalty to the people in control and their way of doing things. It's perfectly understandable: most organizations have worthy-sounding goals and are staffed by ethical, hard-working people. I have met such people who work to ensure compliance with the Kyoto agreement's climate commitments. Their loyalty - naturally, understandably, but regrettably - is to the climate change bureaucracy. Though they may express private doubts about the value of their work, they feel they are in no position to question the bureaucracy that employs them or its underlying assumptions. The bureaucracy has an inertia of its own; it continues living and breathing and trying to grow, even when its goals conflict with those of society.

That is what conventional organizations do. Under a Social Policy Bond regime though, things would be different. A bond regime would lead to new kinds of organizations: ones whose composition, structure and range of activities would be subject to continuous change. Their entire purpose would be to achieve society's goals, as expressed in the redemption terms for Social Policy Bonds. Their composition and activities would depend entirely on how efficient its members and projects are in helping to achieve that goal. Assumptions as to who is best placed to achieve society's goals or how they will go about achieving those goals would be subject to continuous questioning by would-be investors in the market for the bonds. These investors would have interests exactly congruent with those of society as a whole: to achieve our social and environmental goals as efficiently as possible. They would, in short, be loyal to society's goals rather than, as at present, to a hierarchy, ideology or dubious assumptions.

Biology, engineering, and Social Policy Bonds

An academic paper about the use of the Precautionary Principle says:

Significantly, the failure of traditional engineering to address complex challenges has led to the adoption of innovation strategies that mirror evolutionary processes, creating platforms and rules that can serve as a basis for safely introducing small incremental changes that are extensively tested in their real world context. This strategy underlies the approach used by highly- successful, modern, engineered-evolved, complex systems ranging from the Internet, to Wikipedia, to iPhone App communities. Source (pdf)

The paper justifies the application of the Precautionary Principle where 'ruin', defined as low-probability, infinite cost policy outcomes, is a nonzero possibility.
Importantly, it also recognises the positive role that evolutionary processes play in engineering. As the authors say, this mirrors biological evolution. It results in more robust outcomes. I suggest we adopt the same mechanism for society's broad, long-term goals: create a policy environment within which diverse, adaptive approaches are tried, and only the most successful (in their place and time) are given the funds necessary to continue and proliferate. There's very little of this in today's policy world. The necessary first step, self-evaluation, is rare. Even less frequent are learning from failed policies and applying those lessons to current policymaking.
Explicit acknowledgement of the need for failed approaches is probably rare in engineering; it's equally unusual in the world of policy. But, society is approaching the complexity of that of biology. For those broad, long-term goals that we have failed to achieve (ending violent political conflict, for instance), it's clear that no single, top-down approach is going to work - especially one based on relationships that apply in only one part of society or at only one point in time.

That's where Social Policy Bonds can play a role. A bond regime would target society's long-term problems: problems that no single approach can ever solve. Investors in the bonds would have incentives to try many different approaches, and to continue to fund only those that are working efficiently at achieving society's goals. Unlike in today's world, failing projects would be terminated: bondholders would be motivated to end them swiftly, rather than, as today, lobby for government funds to keep them going. A Social Policy Bond regime would create new types of organization, whose activities would be entirely subordinated to achieving social goals efficiently. The bodies that currently are charged with achieving social goals are rarely paid in ways that encourage better performance. (Indeed, very successful organizations might even be punished by seeing their funding reduced.)

In policy, as in biology and engineering, we should let evolution do what it does efficiently: encourage a wide array of approaches and reward only those that are most successful for their time and place. Social Policy Bonds would do exactly that.

For more about Social Policy Bonds, please go to my main website. For examples of previous posts about the bonds and evolution see here and here.

Bertrand Russell anticipates Social Policy Bonds

Bertrand Russell (1872-1970) wrote: 

There is one peculiarly pernicious application of the doctrine that human nature cannot be changed. This is the dogmatic assertion that there will always be wars, because we are so constituted that we feel a need of them. .... If political organization were such as to make war obviously unprofitable, there is nothing in human nature that would compel its occurrence, or make average people unhappy because of its not occurring. Exactly the same arguments that are now used about the impossibility of preventing war were formerly used in defence of duelling, yet few of us feel thwarted because we are not allowed to fight duels. An outline of intellectual rubbish, first published 1943,from 'The Basic Writings of Bertrand Russell', Routledge Classics 2009

Incentives are important and so too is belief that we can end war. Of course, nobody knows how to end even a single conflict, but much human progress has happened serendipitously, with no overall plan. I think we can do better than that, and issue Conflict Reduction Bonds, for instance, which supply incentives for people to find ways of ending conflict that we cannot know in advance. The causes of war are many, complex and volatile. No organization as currently structured can possibly anticipate and address them. We need new types of organization that have incentives to research, adapt, and address all likely causes of war. War and any form of violent political conflict are too important to be left to government or the generals.

Wisdom

I've long argued that social policy needs institutions that must be subordinated entirely to broad, meaningful outcomes. Instead, we have institutions whose over-arching purpose is self-perpetuation. Francis Fukuyama writes, wisely in my view:

The very stability of institutions, however, is also the source of political decay. Institutions are created to meet the demands of specific circumstances, but then circumstances change and institutions fail to adapt. One reason is cognitive: people develop mental models of how the world works and tend to stick to them, even in the face of contradictory evidence. Another reason is group interest: institutions create favored classes of insiders who develop a stake in the status quo and resist pressures to reform. America in DecayThe Sources of Political Dysfunction, Francis Fukuyama, 'Foreign Affairs', September/October

The current regime takes existing organizations as a given. Debate centres around their funding, composition, remit and structure. A Social Policy Bond regime would instead fund outcomes, and let bondholders decide on the optimal organizational form; one that, especially for remote social goals, would - or just as importantly - could change shape, size, and the projects it supports, constantly, in response to changing circumstances and our expanding knowledge.

[M]any [of the US's] political institutions have become increasingly dysfunctional. A combination of intellectual rigidity and the power of entrenched political actors is preventing those institutions from being reformed. And there is no guarantee that the situation will change much without a major shock to the political order.

Exactly. Social Policy Bonds would target outcomes directly, and let motivated bondholders and would-be bondholders compete continuously  to decide how best to achieve them. Intellectual rigidity under a bond regime would be penalised. Efficiency would be rewarded. All in stark contrast to the system not only in the US, but in much of the rest of the world. 

Public service reform

The Economist talks about public service reform:

But voters, and thus politicians, are especially intolerant of civil-service inefficiency nowadays. One prompt is austerity. Another is technology, which is changing not only how public services are delivered—think of “massively open online courses” in education—but also the way they can be measured. Social networks enable users to grumble about hospital waiting-times and mathematics results. Perhaps the biggest pressure is the passing of time: private-sector workers are incredulous as to why civil servants should escape the creative destruction that has changed other offices around the world. Mandarin Lessons, 'the Economist', 9 August 2014

Quite. Why is it that the achievement of social goals remains (largely) a government monopoly? No good reason, other than vested interests and highly successful patch protection.

The Economist goes on to talk about pay and the need for long-term, strategic thinking. Politicians love to restructure and re-prioritize, to tinker with funding, and to appoint placemen in powerful positions. The remedies the journal suggests include better pay, reduced security for top public service positions and, perhaps, appointing some overlord who takes an exceptionally long-term view.

I have another suggestion: target broad, meaningful outcomes, and let a motivated market decide on organizational structures, composition and the projects they undertake. Under a Social Policy Bond regime there might or might not be 'destruction' of such organizations, as envisaged by the Economist and as occurs in a well-functioning private sector, but such destruction is a means not an end. Social Policy Bonds would ensure that any such destruction would occur only if it were truly 'creative' in the sense of better achieving society's goals, as defined in the redemption terms of the Bonds.

It's likely that a new type of organization would result: one subordinated to the efficient achievement of meaningful social and environmental outcomes rather than, as now, the caprice of powerful interests, be they government or private sector.