25 November 2010

Innovation is a threat to the public sector

But the benefit of competition is not just that it serves customers’ needs today, but that it is a mechanism for adapting to what they will need tomorrow. The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure. Apple is changing the nature of the phone industry, Amazon the book business. But anyone who had approached these industries from the marketing or the legal standpoint would have concluded that there was enough competition already. Radical innovation rarely comes from within, John Kay, 'Financial Times', 24 November
There are bodies, whose weaknesses Mr Kay discusses, that are charged with improving competition in the private sector. And it's true that they are often needed. It's unfortunate, though, that there's no such mechanism for public sector monopolies, because it's these bodies, typically government agencies, that are supposed to bring about social outcomes that, from a broad perspective, are far more important than reasonably priced books or phone calls. We rely on various levels of government to, for example, relieve poverty, reduce crime rates or insure against environmental - or financial - catastrophe. The absence of innovation in achieving these outcomes is an embarrassment. Yes, there have been some minor changes in the identity of the service-deliverers, some contractings-out and quite a few privatisations. But on the whole, the contrast between the private and sectors is stark. Our political system, like any other institution, has as its over-arching goal that of self-perpetuation, and its interests are not only different from those of ordinary people; they are often in conflict with them.

Perhaps Social Policy Bonds could re-align the goals of our policymakers with those of the citizens they are supposed to represent. Under a bond regime how outcomes are delivered, and who delivers them, would be less important that the fact of their delivery. There would be less discussion about structures and spending; instead there'd be a constituency of highly-motivated investors whose goals would be entirely congruent with those of society. By maximising their own rewards, bondholders would be necessarily achieving social goals, whether they be local, national or even global, as efficiently as possible. Innovation, to investors in Social Policy Bonds, would be an opportunity not, as under the current system, a threat.

14 November 2010

Catastrophe avoidance: we're not doing it

Stepping back from the society's turmoil for a moment, it's pretty clear that we aren't developing ways of dealing with our social and environmental problems. The negative impacts of a person or firm's profit-making used to be either small, or uncertain, or simply ignored because society as a whole counted for too little against the power of wealth. There was much distress, then, as costs of economic activity were socialised, while most of the gains accrued to the few. In response, we have laws, rules, and regulations. But the disparity between the wealth of the corporate sector and the ever more constricted and degraded lives of most individuals has rarely been so striking as today. On the whole, the aggregation of corporate incentives is not, these days, seen as improving the quality of life of most of the population. The planet is too small for the corporate sector's bye-products, social and environmental, to be absorbed or ignored as in the past. And corporate incentives now influence (to put it mildly) much of government: the form of organisation whose legitimacy is entirely based on its role in enhancing the lives of most of its citizens. No wonder, then, that we are facing multiple crises, taking the forms of cynicism and despair about politics, and threats of massive financial, economic and environmental disruption.

In response, I believe we need to make a conscious effort to re-align incentives. Society and the environment are too complex and rapidly changing for market failure to be addressed by laws, regulations and small-scale tax or price adjustments. We urgently need to give priority to things that really matter. I'd target, above all else, the avoidance of catastrophe, however caused.

Social Policy Bonds are one way in which we can give catastrophe avoidance the priority it deserves. It's clear now that it needs explicitly to be targeted, and Disaster Prevention Bonds are one way of rewarding people for maintaining a habitable planet. How would they work? Governments (and non-governmental organisations) would set up a fund that would be used to redeem bonds, issued on the open market, that would become valuable after a sustained period during which no major disaster has occurred. Investors in the bonds would have incentives to anticipate potential catastrophes and seek out those ways of avoiding them that are most cost-effective. The advantages over the current way of doing things are many: The exact nature of the catastrophe need not be known in advance. We'd stimulate a diverse, adaptive range of approaches. Cost-effectiveness is built into the bond mechanism. In effect, we'd be creating a new, protean, type of organisation: one that, in contrast to the current multiplicity of, mostly, ineffective bureaucracies, would be motivated not merely to turn up for work and perform various activities, but actually to achieve an explicit, urgent, and vital goal: the survival of human beings on planet Earth.

06 November 2010

Why wait centuries?

The late Tony Judt, historian, in an interview published in The Nation, 17 May:
Democracy has always been a problem. The truly attractive features of the Western tradition that we accidentally - and it really is accidentally - get the benefit of are the rule of law, liberalism and tolerance, all of which are virtues inherited from predemocratic societies, whether they were based in eighteenth-century Anglo-American aristocratic individualism or nineteenth-century European forms of a type of developed postfeudal legal state.
Indeed, the accidental effects of human actions can be beneficial as well as disastrous. Adam Smith's Invisible Hand generates material benefits, as does government planning. But they also create social and environmental problems, and only partly because of market failure. In my view, the world is too small now for the solution of social and environmental problems to be left to chance. And, once we have achieved, however haphazardly, virtues such as the rule of law, liberalism and tolerance, and once we see recognise their importance, we can consciously set out to maintain them.

This is what Social Policy Bonds could do. One of the great advantages of the bond approach is that we can encourage people to achieve social goals without anyone knowing in advance how they will do so. Issuers of 'Rule of law' Bonds could target the achievement of rule of law, in societies that currently don't have it; and its continuance in societies that do. The accidental achievement of rule of law (and liberalism and tolerance) in the societies that have it took centuries of conflict and bloodshed. We cannot know how best to achieve these virtues in remote, complex societies, nor how to sustain them in more fortunate societies. But we can offer incentives for people to do so. Yes, defining what we mean by 'rule of law' poses difficulties. But the alternative, waiting for societies to achieve it accidentally is unlikely to be any easier.

02 November 2010

No way...

No way to check emissions puts climate deal in danger reads the header of a recent article by Fred Pearce in 'New Scientist'. One example:
China does not record CO2 emissions from its small coal-burning factories and long-standing fires in mines which may result in under-reporting by as much as 20 per cent. The uncertainties for other greenhouse gases are even greater.... 'New Scientist', 9 October (page 12)
Another article, Dead Oceans, in the same issue (page 37) talks about the possible consequences of oxygen-deprived dead zones in the oceans; a result of warmer waters and the smaller quantity of dissolved oxygen they can contain. These regions:
...could come to host bacteria that emit nitrous oxide, a powerful greenhouse gas. Working out the likely extent of such feedback processes...will be a major preoccupation for scientists in the coming years.
We might not have those years. Our policymaking systems are incapable of dealing with a problem like climate change. Focussing as they do on processes and institutions they seek, at their best, to identify the causes of problems before they set up institutions supposed to solve them. Of course, these institutions develop their own agenda, and the people working for them aren't paid in ways that reward successful solutions but, given sufficient funding and sufficiently robust knowledge of the relationships between cause and effect, and plenty of time, this mechanism has been known to work.

Sadly, though, the deficiencies of such an approach become serious flaws with potentially disastrous challenges like climate change. The relationships, as the two snippets quoted above suggest, are just too uncertain and complex. Our knowledge of them, though expanding rapidly, is too sparse to generate the buy-in required to deliver effective solutions. We need diverse solutions that can adapt to changing circumstances and our expanding knowledge. And we need to target the outcome we want to achieve, rather than waste years trying (and, most likely, failing) to identify the important scientific and economic relationships before we take effective action.

That's where Climate Stability Bonds could help. They'd be issued by some global organisation, and be backed by contributions from national governments. They would define some climate target, probably in terms of a combination of physical, biological and financial indicators. The bonds would reward the maintenance of a climate whose index fell within defined boundaries. It would be up to investors in the bonds to decide how best to deploy resources to achieve our goal. They would have incentives to do so as cost-effectively as possible. It would be up to them to keep abreast of all the important science. They would adapt their approaches as our knowledge expands. Every aspect of this behaviour would be far, far better than the current approach, which, to put it mildly, is not working.