We need to direct ends, not means

John Kay, reviewing Mission Economy, discusses the author, Mariana Mazzucato's, contention that 'we need a “solutions based economy”, driven and co-ordinated by more powerful governments engaged in every stage of the process of innovation' in order to solve urgent global problems as effectively as the Apollo space programme achieved its goal of landing men on the moon and returning them to Earth. But, Mr Kay writes:

Apollo was a success because the objective was specific and limited; the basic science was well understood, even if many subsidiary technological developments were needed to make the mission feasible; and the political commitment to the project was sufficiently strong to make budget overruns almost irrelevant. Centrally directed missions have sometimes succeeded when these conditions are in place; Apollo was a response to the Soviet Union’s pioneering launch of a human into space, and the greatest achievement of the USSR was the mobilisation of resources to defeat Nazi Germany. Nixon’s war on cancer, explicitly modelled on the Apollo programme, was a failure because cancer is not a single illness and too little was then — or now — understood about the science of cell mutation. Mao’s Great Leap Forward, a vain bid to create an industrial society within five years, proved to be one of the greatest economic and humanitarian disasters in human history. At least 30m people died.

With political direction of innovation we regularly encounter grandiosity of ambition and scale; the belief that strength of commitment overcomes practical problems; an absence of honest feedback; the suppression of sceptical comment and marginalisation of sceptical commentators. Mission Economy by Mariana Mazzucato — could moonshot thinking help fix the planet?, John Kay, 15 January (emphasis added)

I agree: political direction of innovation doesn't work. But political direction of the outcome, I believe, can work, if the necessary innovation is contracted out to motivated bodies, be they in the public or private sector. Governments are good at specifying goals, and democratic governments are good at specifying society's goals. They are also efficient at raising the revenue necessary for their achievement. Where they are not so effective is in dictating how that revenue shall be spent and who will do the spending. As Mr Kay continues: 

All these were seen in Britain’s experience with Concorde, the Channel Tunnel and the AGR nuclear reactor programme, some of the worst commercial projects in history. More recently, there is the £12bn wasted on the NHS computerisation programme ....

This is why I continue to advocate the Social Policy Bonds concept, which allows governments to do what they are best at: specifying a desirable outcomes, while letting motivated bodies compete for the right to join a protean coalition that will co-operate, continuously, until the outcome has been achieved. In that way, goals can be long term in nature - see my piece on global goals, for example. The composition and structure of that coalition can and, most likely, will change, but at every point in time, its attributes will be subordinated to the over-arching goals specified by government, in consultation with the public. Whoever issues Social Policy Bonds - and it needn't be government - cannot specify the diverse, adaptive policies that will be necessary to solve our most urgent, big, complex problems. But they can specify the outcome, and in so doing ensure that the most efficient problem solvers are rewarded in ways that directly correlate with their contribution.

How better to solve our global problems?

At the very outset (pdf), I envisaged that Social Policy Bonds could be used to solve global problems, because that is where their advantages over other policy mixes would be most marked. These advantages arise because:

• Current global solutions are lacking. Take climate change, or the possibility of nuclear war. There are many initiatives being undertaken by well-meaning, hard-working people in many institutions worldwide. But measured in terms of outcomes - reduced probability of adverse climatic events, or nuclear war - the results of all this endeavour are unimpressive.


• Under a bond regime, resources can readily shift to where they will do most good. 'Good' being measured as objectively as possible, with such tools as Quality Adjusted Life Years. Consider just two areas into which huge quantities of human ingenuity are concentrated: financial trading and marketing. The financial rewards from excelling in these activities far outweigh those who that accrue to people involved in efforts to diminish the prospects of, say, violent political conflict. The mismatch between what could be done, and what is being done can be seen by considering the co-existence of both neglected tropical diseases and high-frequency trading.
  


• A mix of diverse solutions are required. No single solutions, of the type favoured by governments or supra-national bodies, are going to solve humanity's global problems. We need a mix of diverse, adaptive solutions, which vary continually with both space and time - always with the aim of being maximally efficient. Governments can specify, and raise funds for, the ends of such solutions, not their means.
  


• Most global problems require long-term solutions; they extend beyond the lifetime of individuals, corporations or government bodies. But people today receive their income from such organisations, and organisations have goals that differ from those of humanity. Their prime goal, after their idealistic beginnings, often becomes self-perpetuation, which can not only be inconsistent with humanity's goals - it can even conflict with them.
  

For all these reasons, I believe Social Policy Bonds offer the best hope for humanity. Our goals are more stable than those means of achieving them currently thought to be optimal. Our governments are good at raising revenue, and they can articulate society's goals, but they are not very good at solving complex problems or thinking for the long term good of society, even when that is their goal. There is no shortage of human ingenuity or other resources, but we do need incentives to divert such resources into areas where they can do most good. Social Policy Bonds, backed by national governments and issued by a global body (it could even be an private-sector organisation) are, in my view, the best way forward. I cannot think of a better alternative.

Centrally planned goals are fine

I haven't read Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed, by James C Scott, published in 1999. (There is a good review of it here.) The description on the Amazon page sums it up: 

Centrally managed social plans misfire, Scott argues, when they impose schematic visions that do violence to complex interdependencies that are not -- and cannot -- be fully understood. Further, the success of designs for social organization depends upon the recognition that local, practical knowledge is as important as formal, epistemic knowledge. The author builds a persuasive case against "development theory" and imperialistic state planning that disregards the values, desires, and objections of its subjects. He identifies and discusses four conditions common to all planning disasters: administrative ordering of nature and society by the state; a "high-modernist ideology" that places confidence in the ability of science to improve every aspect of human life; a willingness to use authoritarian state power to effect large-scale interventions; and a prostrate civil society that cannot effectively resist such plans.

While we're content to let the market's efficiencies work in the private sector, our current way of solving social and environmental problems is, in essence, centrally managed. The result is something like a policy monoculture, and the results are predictably lamentable. But the important distinction to make is that between centrally planned outcomes and centrally managed ways of achieving them. We all want to see such centrally planned goals reduced poverty, the ending of violent political conflict, and universal literacy, for examples. Government does a good job at articulating our wishes in these and other areas. But centrally planning the ways of achieving these goals just does not work. We need diverse, adaptive solutions; ones that take into account circumstances that vary with time and space. Central planning can't do that and the results of its failure are widespread and tragic. 

Which is why I advocate Social Policy Bonds. Under a bond regime we would set goals and contract out their achievement to people motivated to investigate and implement the only the most efficient projects. These projects would adapt to changing circumstances, and be sensitive to local conditions. Under a bond regime, the complex interdependencies about which Scott writes, which cannot be understood by government, need not be understood by government. Instead, via an automatic system of cascading incentives, Social Policy Bonds would encourage diverse, adaptive initiatives that would contribute to achieving our large-scale - even global - goals.

Make them tradeable

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

Make Social Impact Bonds tradeable

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

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

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

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

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

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

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

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

© Ronnie Horesh 2020

Power and patronage

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

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

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

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

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

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

*Which country was Elang Adhyaksa writing about? Indonesia.

How to minimise the risk of catastrophe

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

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

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

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

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

Defining peace, so that we can achieve it

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

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

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

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

Forget grand ideologies

Haonan Li and Victor Yaw write:

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

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

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

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

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

Buy-in, and that other global threat

From the current New Scientist:

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

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

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

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

Philanthropists: step forward!

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

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

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