This excerpt from my book Market Solutions for Social and Environmental Problems concludes a brief survey of the current ways in which policy is made, its flaws, and the consequences of those flaws. It precedes the chapter introducing Social Policy Bonds.
Incentives and pluralism: the best features of the private sector
The aspersions cast on government need to be balanced by praise for what, at least in the west, we take for granted: the maintenance of law and order, defence against invasion, freedom of expression, and a generally rising standard of living and of health. We suspect that our national governments could do these jobs more efficiently but we ought to recognise that they do on the whole succeed in supplying these vital public goods and services. Similarly, they do a reasonably good job at raising revenue through their tax policies.
But there does appear to be a contrast between government's performance and that of the private sector. Deregulation of western economies and lower barriers to trade over the past three decades or so have vastly increased the range and quality of affordable goods and services. The freer operation of self-
It is likely that one reason for the failings in government's performance is that there are not sufficiently large numbers of influential people whose prosperity depends on its success. In the private sector, the success of an enterprise is identically equal to the success of its owners. But the motivation is very different for those agencies, whether they be public sector or non-
Unfortunately governments rarely set explicit targets in the form of outcomes that are meaningful to ordinary people. Their policies are driven by a whole host of factors -
There are pointers as to what are existing organizations' true priorities. We need only listen to the spirited, and often ingenious, defence of perverse subsidies presented with straight faces by the organizations that stand to lose most if they are withdrawn. Or discover that about half of the funds allocated to humanitarian relief and development aid organizations stays with these bodies
Such a mismatch between incentives and social goals becomes even more damaging when it perpetuates its own dysfunctionality. It then becomes a self-
In my view, such a re-
Diverse, adaptive solutions
Targeting outcomes; yes. Providing incentives to achieve these outcomes; yes also. But even that combination would not suffice to ensure effectiveness and efficiency. When the distance between government and people is large, as it is in our highly specialised economies, national or global policy decisions about resource allocation are essentially central planning. Central planners think they know best how to solve economic, social and environmental problems, and their policies embody this assumption. Central planning is ponderous, uniform and slow to adapt, while the sort of complex issues -
Markets are diverse and adaptive. Markets encourage people and firms to try different approaches, and also to assess the results of these approaches. Markets also hold people accountable for the results and ensure that ineffective or counterproductive approaches are terminated once they are seen to have failed. They both generate and make good use of a phenomenal information-
Unfortunately, many believe that market forces must inevitably conflict with social goals. This is partly because a large part of what passes for the 'market' in current parlance is anything but: it's more like large corporations and governments distorting the market to their mutual advantage. But it's also because the negative impacts of production unleashed by market forces are growing more numerous and more significant.
So it is important to remind ourselves that market forces and self-
Governments tend to be centralist in their instincts. In practice, this has meant that market forces are rarely allowed to play a significant role in organising the production and distribution of those goods and services that governments supply. Government agencies also operate in a non-
that the pluralism evoked by market forces allocates the resources we devote to accomplishing our social and environmental goals,
that any organizations that might arise are entirely subordinated to the achievement of these goals, and
that rewards given to those who achieve these outcomes are linked to their success in doing so.
The next chapter, and the rest of this book, describe one such way.