Perverse incentives and health

Dr Jason Fung explains why 'there is so much money being raised for heart disease or cancer or diabetes, and why there is so little real medical progress.' As he says, 'there are many ways that Big Pharma pays doctors':

• The most common are speaker’s fees and consulting fees. ...
• The second form of graft is consulting fees. The company will pay the doctor for his/her ‘advice’ as a consultant on how to market a drug. Of course, the company cares not at all about what he/she says. It is an opportunity to give these doctors a 2 hour advertisement disguised as a consultation. For this the doctor is paid $2000-$5000. ...
• The most insidious form of corruption is ‘research’ money. While it sounds great, it is usually another thinly disguised form of bribery. Some research project is usually set up with little or no academic merit. The universities setting this up are well paid. The doctors who participate are well paid. Best of all, research meetings are held regularly in lovely locations like Vienna and Hawaii. ‘Researchers’, of course, are invited to participate, all expenses paid. The public only sees that the company has donated ‘research’ money and that the doctor is doing ‘research’. These shenanigans happen every day, in every university. If you’ve ever wondered why there is so much money being raised for heart disease or cancer or diabetes, and why there is so little real medical progress – this is the reason.Clinical Practice Guidelines or Legalized Bribery?, Dr Jason Fung, November

He's mostly referring to the United States, but perverse incentives pervade even government-run healthcare systems. By default, health expenditure is influenced by groups of medical specialists with little incentive or capacity to see improvements in the overall health of a large population as an objective. As well as the substantial money flows described by Dr Fung, funding decisions are also heavily influenced by the public profile of a disease or its victims, rather than on what would best meet the needs of society. Health is about a lot more than what Big Pharma does, or how governments allocate healthcare funds. It’s also a question of diet, exercise, transport, and culture. Recent research shows, for instance, the beneficial effects on health of green spaces in our cities (see here (pdf) for instance). The way government is structured, with its discrete funding bodies, makes it unlikely that such benefits will influence funding decisions.

We cannot expect a government nor any single organisation, even if they were ethical and altruistic, to identify the huge numbers of variables, with all their time lags and interactions, that influence the nation’s health. We can, though, devise a system that rewards people who explore and implement the most cost-effective health solutions, even when circumstances and knowledge are changing continuously. I have tried to do this with my essay on Health Bonds, which would aim to distribute scarce government funds to where they would do most good, as measured by such indicators as Disability Adjusted Life Years.

Incentives matter, and current incentives have nothing to do with achieving society's broad, long-term goals. Instead, they accrue to those who maximise the narrow, short-term goals that have more to do with the financial success of big companies than the health of ordinary citizens.

Short selling

A correspondent asks whether short selling will work against the Social Policy Bond concept. Specifically: if Conflict Reduction Bonds are issued, would short sellers profit from events that would make peace less likely?

Short selling in this context would be the selling of Conflict Reduction Bonds that are not currently owned, in the hope that their market price will fall, and that the seller will buy the bonds at their lower price. Short sellers could then be motivated to foment conflict.

I have these responses:

(1) The short seller doesn't own the bonds, but has to borrow the bonds from the broker or dealer when placing the sell order. The seller is then obliged to buy back the bonds at some point in the future. Just as the seller will want to see the value of the bonds fall, so the broker or dealer will want to see their value rise. In the Conflict Reduction Bond example, any additional incentive to foment conflict on the part of the seller would be balanced by an incentive on the part of the broker to reduce conflict.

(2) The weight of money - that is, the funds for the bonds' redemption - will be in favour of progress toward the goal; just as in the share market, the short selling of a company's shares doesn't change the incentives for the company itself to succeed. It's likely that any profits from short selling will be short term in nature; the long arc of the market for the bonds will bend in our favour.

(3) Public opprobrium. While people or corporations do profit from the failure to achieve social goals, they do so in ways that are indirect. If short sellers were to work to make social goals less achievable, the source of their activity and the reasons for it would be direct and identifiable. Taking the Conflict Reduction Bond example, again, weapons manufacturers and military contractors do already profit from their activities. They could even now be deliberately fomenting conflict with the aim of boosting their revenue. Short selling would be only one more way of profiting from war, but it is one that is both more identifiable and more likely to attract public opprobrium than any other so, even if a corporation were that way inclined, it would be unlikely to follow through.

Social Policy Bonds are not a Utopian solution but (in my view) they are much better than the current system. They would bring about the re-jigging the incentives to reward the outcome we want, rather than the activities, institutions or policies ostensibly trying to achieve it.

The stability of the septic tank

I often agree with British journalist and military historian Max Hastings. But not with his remarks in this interview with Tobin Harshaw:

MH: One of the things I've learned as a historian is that one should never listen to anybody who uses the word "solution." Most difficult problems in the world are not susceptible to solutions. What they are susceptible to is management. We'd all get along a lot better if we understood there is not the remotest possibility of a "solution" or even multiple solutions to the troubles in the Middle East because they are so fantastically complex. The only way to approach them is to think how we can best manage them. How best can we avoid making things worse?
TH: That goes back to what you said earlier... about peace not being the goal. What did you say - it should be stability?
MH: Yes, stability is the key.

Trump, Brexit and Echoes of World War I, Tobin Harshaw, 'Bloomberg View', 11 November

I think Mr Hastings is too pessimistic. Yes, war and conflict have been a feature of humanity at least since history began, and yes, many conflicts appear intractable. But Mr Hastings is in good company: here is Professor Colin Gray:

War is a part of the human condition, it is not a problem that can be solved. However, it is a condition some of the worst features of which can be alleviated by law, custom, norms and plain self-interest. Another Bloody Century (page 379), Colin S Gray, 2007

I am much more optimistic, and I think we should be aiming for outcomes more edifying than the stability of the septic tank. I think that if war's negative impacts can be satisfactorily defined, then targeted for reduction, then, with sufficient incentives, the suffering imposed by human conflict can be drastically reduced. As Professor Gray explains elsewhere in his book "Warfare is social and cultural, as well as political and strategic, behaviour. As such it must reflect the characteristics of the communities that wage it." (page 385). These characteristics are deep-seated and pervasive, which means that any solution to the problem of human conflict will need to be long term in nature. An array of diverse, adaptive and focused approaches will therefore be required.

Stability: our highest aspiration?

A Conflict Reduction Bond regime could work to stimulate such approaches of the sort that we cannot necessarily foresee. We should, I believe, contract out much of the work needed to find the best approaches to eliminating war. While robust definitions of 'peace' will need to be thought through, we could immediately issue bonds redeemable only when there had been large numbers of people killed, injured or forced to flee their homes for a sustained period.

Bondholders would then have incentives to prevent conflict with maximum efficiency. They would explore and invent new, more diverse options than are currently being undertaken, and they could divert funding into the most promising of these. They would have more latitude for action than government. For example, bondholders could subsidise intermarriage between members of different religious or territorial communities. They could sponsor school exchange visits, sports matches or the broadcasting of peaceful propaganda. They could arrange for the most virulent warlords and preachers of hate to take one-way, first-class journeys to luxurious holidays in remote resorts with limited access to communication facilities. Whatever holders of bonds targeting war and terrorism do, they will have successes and failures. But they will also have incentives to terminate projects that are failing and to refine and replicate their successes - to be efficient, in other words.

Government has no such direct incentive. It cannot offer direct financial rewards for success, and its talent pool is limited, partly for that reason. It would get into trouble if it advocated things like intermarriage, or sponsored sybaritic retirement for warmongers. As in other areas of social policy, its options are limited. They tend to be one-size-fits-all, slow to adapt and advocated mainly because they have been done before, rather than by their efficiency: government will always prefer tried, tested and failed to promising, innovative - and potentially destabilising.

The field of conflict is one area where the private sector can and should be given the chance to operate more freely. Sadly, it is largely private incentives - to arms manufacturers and brokers - that have contributed to human conflict. We need to redress the balance and reward those who strive for peace.

Under a Conflict Reduction Bond regime, government would still have the responsibility of defining our peace goal, and it would be the ultimate source of finance for achievement of that goal. But the actual achievement of peace would be contracted out to the private sector, who would have powerful incentives to achieve it as cost-effectively as possible. Government and the private sector would each do what it does best: respectively, articulating its citizens' wishes, and finding the most efficient ways of achieving its goals. We can, and should, aim for peace, not managing the stability of the septic tank. Peace, after all, is what almost all of us want for ourselves and for future generations.

Society as an interest group

Clive James writes:

[W]e tend to believe that there is some natural state of justice to which political life would revert if only the conflicts between interest groups could be resolved. but whatever justice we enjoy arose from the conflicts between interest groups, and no such natural state of justice has ever existed. The only natural state is unjust.... The Meaning of Recognition, 2005, page 4

I'm not so gloomy. When it comes to how things shall be done, and who shall do them then, yes, interest groups - those motivated to follow the policymaking process and so to benefit from it - are the only protaganists that really matter. But it doesn't have to be that way. Or rather, by targeting outcomes rather than the alleged means of achieving them, we can enlarge the interest group such that it includes all citizens.

Targeting broad outcomes, such as better health or reduced adverse environmental impacts, that are meaningful to all of us can bring about greater public engagement in the policymaking process. Yes, there will be disagreements over priorities, but we shall have been able to follow the process and contribute to it - unlike under today's regime, where policymaking is strictly for devotees or their paid employees.

The world is too small now for the solution of social and environmental problems to be left to exclusive interest groups to sort out. Social Policy Bonds could represent a middle way between the happenstance of a free market approach to solving our problems, and the coercive, and (often) ham-fisted, inefficient way of central planning. Government, influenced as it is by interest groups, usually does a terrible job in actually achieving our complex social goals. A Social Policy Bond regime, on the other hand, would play to government's strengths: articulating society's goals and raising the revenue to achieve them. But then it would, in effect, contract out the achievement of those goals, letting market forces do what they are best at: ensuring the optimum allocation of society's scarce resources in order to achieve society's goals - not those of interest groups, be they private- or public-sector.


Social Policy Bonds would, I believe, achieve our social and environmental goals more efficiently and less randomly than the current system. The planet as a whole cannot afford either the time for conflicts between interest groups to be resolved or the collateral damage that such conflicts are inflicting on our ever smaller planet.

Who cares about efficiency?

The title of an article in last week's Economist itself gives cause for concern:

Counties that voted for the president get more in disaster relief

The article is referring to the federal aid that United States dispenses following natural disasters. It's a bit more nuanced than the title suggests. Research found that:

[G]iven two natural disasters that inflict the same amount of damage, presidents have been twice as likely to declare a disaster when one occurs in a swing state like Ohio or Florida, with a roughly equal number of Republican and Democratic voters, as when one happens in a politically uncompetitive place. Economist, 20 October

 Another study quoted in the article says that: 

[I]t takes about $27,000 of relief spending to “buy” just one extra vote for an incumbent party. It would be far more efficient to invest that money in disaster preparation, since each dollar governments spend on preventing harm from nature’s wrath is thought to yield some $15 in savings on future relief costs. Unfortunately, the electorate seems to reward only politicians who open up the public purse after damage is done.

The problem, then, is not solely one of cynical politicians: we citizens are culpable to the degree that we react emotionally in times of crisis, especially when that such crises have impacts that can be filmed. Which is why I advocate targeting outcomes, including the impacts of national or global disasters, ahead of time, so that we can channel our scarce resources into the areas where it will relieve most suffering. Disaster Prevention Bonds could do this. Issuers of these bonds would target for reduction the numbers of people killed, injured or made homeless by natural or manmade disasters. The nature of the disaster need not be specified in advance and the bonds could aim to target for reduction national or global catastrophes.

Disaster Prevention Bonds targeting global disasters could be backed by some or all of the world’s governments and issued by an international body like the United Nations or World Bank. These bonds need not bear interest, and would redeemable for a fixed sum once a sustained period of absence of a humanitarian disaster had passed. The bonds would be floated on the open market and be tradeable at any time thereafter. Because they are tradeable, they would give people incentives to look for solutions to problems that might arise years beyond the planning horizon of today's policymakers. The bonds' redemption terms would stipulate that they would become worthless the moment an unspecified calamity killed, say, 100 000 of the world’s citizens by a single catastrophic event in any 48-hour period. So bondholders would have powerful incentives to anticipate such an event, and minimise the chance of its occurring. Nationally backed Disaster Prevention Bonds would work in similar fashion, on the national scale.

Disaster Prevention Bonds would entail our making decisions about funding before catastrophes arise, when efficiency, in terms of the reduction of suffering per dollar spent, will be our key driver. They would not stop the misallocation of resources once a disaster has occurred, but the second piece of research quoted above would suggest that disaster prevention is currently underfunded. A bond regime would make such funding levels transparent, in ways that ordinary people can comprehend, and it's likely that, as a result, it would work to minimise the suffering inflicted by future disasters.

Whose goals?

There are two main elements to the Social Policy Bond idea. One is the injection of market incentives into all the processes necessary to bring about our social goals. The other is the focus on these goals themselves, and my contention that they be goals that are meaningful to ordinary people. Goals such as reduced crime, better health, and a cleaner environment. Under a Social Policy Bond regime we could target such apparently remote goals as world peace, or universal literacy.

Our current policymaking systems don't really consider either element. There's plenty of rhetoric about market forces but the people spouting it are, most likely, using them to justify decisions made in the favour of large corporations, typically multinationals. The hypocrisy is breathtaking: market forces imply competition, but large corporations typically try to maintain their status by undermining competition, usually by pressuring governments to manipulate the legislative, regulatory and trade environment in their favour.

Nathan Robinson's article about how Amazon is going about choosing its second headquarters in the US makes sombre reading:

There’s something sad about watching suffering post-industrial cities like Gary plead for an investment from Amazon. (Gary’s mayor issued a heartfelt appeal, on the mistaken assumption that Jeff Bezos possesses a conscience.) It feels like the peasants are coming before the king, bearing whatever meager offerings they can scrape together, and begging him for his favor. Having humbled themselves at Bezos’ feet, praised his products and promoted his brand, nearly all of them will walk away with… nothing. Even though Bezos could single-handedly transform the economic fortunes of a place like Gary, the spoils will almost certainly go to a place that is already prospering. The sad spectacle of cities groveling to Amazon, Nathan J Robinson, 'Current Affairs', 16 October

 A long article by James Meek looks at the human costs of such subservience to the interests of multinationals from a European perspective. I think it's time for us to ask the question: whose goals should have a higher priority: those of the multinationals or those of ordinary people? It's an important question, not only because these goals differ, but because they often conflict. Most of us as individuals have longer-term and more broad interests than large corporations, which are duty bound to put the interests of the company (though not specifically shareholders) above all. Because our political systems give little voice to our interests as individuals or as a society, we now have policymaking that is largely influenced only by those who have the means to follow it closely. That is, large corporations, including government agencies.

Which do you want? Do you want to live in a town patronized by some great combination of capitalists who pick it out as a suitable place to plant their industry and draw you into their employment? Or do you want to see your sons and your brothers and your husbands build up business for themselves under the protection of laws which make it impossible for any giant, however big, to crush them and put them out of business? Attributed to US President Woodrow Wilson, 1912

Social Policy Bonds could be a way of raising the influence of ordinary people at the expense of large corporations. They would take as their starting point our interests: as individuals, families, communities and societies. Being tradeable, the bonds could target goals whose end-point might be years or decades into the future. Large corporations could still play a part, but their goals would be congruent with those of wider society. In much the same way, governments issuing Social Policy Bonds while still, articulating society's goals and raising the revenue for their achievement, would be doing so with the aim of raising the long-term well-being of all society and not, as now, the short-term interests of large corporations.

How to bypass cultural imperatives

Philip Salzman writes:

Peace is not possible in the Middle East because values and goals other than peace are more important to Middle Easterners. Most important to Middle Easterners are loyalty to kin, clan, and cult, and the honour which is won by such loyalty. These are the cultural imperatives, the primary values, held and celebrated. When conflict arises and conflict-parties form based on loyal allegiance, the conflict is regarded as appropriate and proper. Why There Is No Peace in the Middle East, Philip Carl Salzman, 14 October

On first reading, this seems correct. If so, it would devalue my attempts to encourage the issuing of Middle East Peace Bonds. But what would ordinary people - men and women - in the Middle East or, indeed, anywhere else, say if they were given the chance to voice their opinions in private? I'd like to think that they would happily ditch tribal loyalties in exchange for peace and the consequent brighter prospects for themselves and their descendants. Middle East peace might seem overly idealistic, and it probably is, if we see tribal loyalties which, simply because they've persisted for a thousand years or more, as intractable. But slavery too, used to be considered part of the natural order of things, along with other physical and societal pathologies. Over the course of a conventional politician's planning horizon, of course, Salzman is correct. Conventional politicians, unfortunately, generate conventional policies; a particularly ineffectual approach when trying to address problems that will most likely require an array of possibly untried and adaptive approaches for their solution.

Applying the Social Policy Bond concept to armed conflict might be the way forward. For some regions, a definition of our peace goal might need to be more nuanced than 'cessation of conflict' (as measured, say, by numbers of people killed or made homeless). But the bonds can target peace, however defined, over a decades-long term, which means that bondholders would be motivated to bring about popular, sustainable peace agreements. 'Cultural imperatives' and other so-called 'intractable' problems, I believe, are amenable to solution: we might not know the exact nature of such solutions, but we can and should be giving people incentives to finding them.

Avoiding the disaster of disengagement

Peter Arnold writes:

Mimicking ‘the Trump phenomenon’, Emmanuel Macron did not win the French presidential election. The politicians who had, for decades, governed the country, lost. Mark Rutte’s governing party lost seats in the Dutch parliament to Geert Wilders and other small parties. Matteo Renzi’s governing party lost the 2016 plebiscite to change the Italian constitution. Theresa May’s governing party lost ten seats to minor parties. Malcolm Turnbull’s governing party lost seats to minor parties. As further proof my thesis, Angela Merkel will lose seats next month.

What is it about governing politicians in these democracies that has caused their electorates to vote against them? The French have a word for it, a word which emerged after Mr Macron, although lacking a political party, saw his opponents fall by the wayside – dégagement. ‘Disengagement’. Winning by default, Peter Arnold, 'Quadrant online', 13 October

We shouldn't be surprised at this all-pervasive disengagement. Policymaking is now so removed from the concerns of ordinary people and the process itself is so arcane, that only specialists, usually employed by large public- or private-sector bodies, can afford to follow it. Despite the odd referendum, the gap between the politico-bureaucratic complex and the people they are supposed to represent grows ever larger. In such a dysfunctional environment, disengagement would seem to be the least timewasting strategy for ordinary citizens to adopt.

Social Policy Bonds might be a way of closing the gap. Their aim is to inject market incentives into the solution of our social and environmental problems. But, as well as, and perhaps even more important than, the channeling of the market's incentives and efficiencies into such problems, they take as their starting point outcomes. Social and environmental outcomes, that is, that we want to achieve. Under a bond regime, the focus of political debate would be on these outcomes: the priority we attach to them and how much we are willing to spend on them. Current policymaking focuses on institutional funding and structures and esoteric aspects of law and regulation, all of which can be, and are, manipulated by those lobbyists and their paymasters. The rest of us have to live with the consequences. The underlying assumption is that, if we have a social problem, it's government who should decide how we'll try to solve it, and who shall be charged with doing so. With anything at all complex it's unsurprising that such a way of doing policy is at best inefficient, and at worst an opportunity for vested interests to delay or oppose anything that threatens their business model.

Social Policy Bonds, in centering policy debate on outcomes, would encourage less rarefied policymaking than the current system. People understand broad meaningful outcomes more than we do the obscurantist tactics of today's legislators. So we should be able - if we want - to participate for more fully than we can today. It's likely too that some of the heat would be taken out of politics: there's probably far more consensus over outcomes that we want to see - healthier citizens, less air pollution, universal literacy, say - than over the supposed means of reaching them.

Under a bond regime, probably nobody would see exactly the policy priorities they want to see. But, compared with today's policymaking, (1) it's probably more likely that citizens' interests will be considered and taken seriously, and (2) public participation in the process can be seen both as a desirable goal in itself (see here, for instance), and as a necessary condition for buy-in, without which many of our most urgent challenges are unlikely to be met. Disengagement presages disaster. Social Policy Bonds could be the way to avoid it.

Emotion-based policy

What drives policy? And what should drive policy? Two entirely separate questions. What actually drives policy today is largely emotion, which seems to be supplanting other policy drivers, and is easily manipulated by large private- and public-sector bodies. Society is growing ever more complex as are the relationships between cause and effect in social and environmental policy. Emotion is easier to communicate and exploit than a rigorous accounting of which policies work and which don't. But as a policy driver emotion has obvious faults. It's far too easy to subvert for mercenary and more sinister ends.


I'd much prefer to see meaningful outcomes drive policy. These could bypass the complexities of our economy and society, so they would berelatively easy for non-specialists to understand. It's far simpler, say, to aim to reduce violent crime, or climate change, than it is to make a case for (say) subsidising leisure centres for youths or urging poor countries to stop building coal-fired power stations. These actions, at some point in time, might be necessary and efficient, but that should be an open question: one to be answered by informed and motivated investors, rather than remote, cumbersome, corruptible and monolithic central government.

Which is where Social Policy Bonds would enter the picture. One of the benefits of a bond regime is to bring transparency and stability into the policymaking process. Framing policy decisions in terms of costed outcomes would be an inescapable first step. Currently policymakers can - indeed must - express their decisions as vague, noble-sounding declarations of intent, backed up by funding programmes for favoured bodies, be they government agencies or other interest groups. As Milton Friedman said: “one of the great mistakes is to judge policies and programs by their intentions rather than their results”. (I would insert 'stated', before 'intentions' here.) Issuers of Social Policy Bonds, would in contrast, have to be explicit about their objectives: transparency and accountability are built into a bond regime, as surely as they are excluded from the current policymaking apparatus. as well as more efficient goal-achievement, formulating policy in terms of meaningful outcomes would generate more buy-in - something that we urgently need as the gap between citizens and the politicians they are supposed to represent is in danger of becoming unbridgeable.

Short termism: taking advantage of complexity

There's much of interest in John Kay's presentation at the Public Hearing on Sustainable Finance at the European Commission. The key point is this:

Short termism is the product of the intervention of intermediaries. Evolution of the financial system over the last 40 years has been characterised by the steady growth of the process of intermediation, a process which has taken finance further and further away from meeting the real needs of the underlying users and suppliers of finance. Market-based capital allocation and long-term decision-making do not fit easily together. John Kay, 18 July

There's a mismatch between people's long term goals, and the short-term focus of the people who are supposed to help us achieve those goals. The same sort of mismatch occurs not only in finance but also, though perhaps less pervasively, in healthcare and education. Reasons vary, and are not easy to pin down. Information asymmetry may play a big role: in finance, as in healthcare, providers know a lot more than customers. Society is complex and large institutions are adept at misusing that complexity to take advantage of our relative ignorance. In fact, they are not above manipulating the regulatory environment to add to our confusion.

The more important question, though, is how to close the gap between what we want to see, and what our public- and private-sector institutions deliver. My suggestion is that we articulate long-term social and environmental goals, and reward people for achieving them. We don't need to prejudge intermediate steps, nor specify who shall achieve our goals. If we issue Social Policy Bonds with the aim of improving our citizens' health, say, or achieving universal literacy, then intermediaries will proliferate only if bondholders think them necessary to reach our targets with maximum efficiency. Information asymmetry means that intermediaries can take advantage of our relative ignorance about how best to achieve our personal long-term goals and substitute their own, usually much shorter-term objectives, which rarely coincide with our goals and often, indeed, conflict with them. But whereas we might not know how best to achieve our personal goals, nor society's goals, we are not at all ignorant about what those goals actually are. Social Policy Bonds would recast the way we, as a society, do things. They would put our broad, long-term, goals back where they belong: as top priorities, to which our institutions and all their activities are entirely subordinate.