Does anyone actually issue Social Policy Bonds?
Not that I’m aware of yet (September 2016), despite the concept having been in the public arena since 1988. (Click here for the pdf of the original paper.) Some private bodies in the US and elsewhere are thinking about it. Governments are more wary, but there is some interest at the officials' level. See News for ways in which people are thinking about issuing the bonds. One difficulty with the bonds is that their advantage over conventional policy instruments is most marked at a large scale, for problems that require a multiplicity of diverse potential solutions, not all of which can be known in advance. Social Policy Bonds, uniquely, would see resources shifting between these solutions, which are themselves adaptive to changing circumstances. This allows the targeting of broad, long-
What are Social Impact Bonds, and how do they differ from Social Policy Bonds?
Social Impact Bonds are a new financial instrument being developed in the UK by the Young Foundation and Social Finance. They adopt one of the principles of Social Policy Bonds: that of linking rewards to outcomes. It seems that Social Impact Bonds would reward pre-
Unfortunately, in my view, it appears that the recipients of such rewards are to be those agencies already working to achieve the specified outcomes. This limits not only the efficiency of the bonds but, perhaps more crucially, their range of operation. Existing bodies tend to have expertise in doing specified things in a certain way. Their vision is limited by the specificity of these things. Any stipulated goals, under a Social Impact Bond regime would, I believe, therefore be too narrowly defined to allow for broad social and environmental goals and the creative destruction of those that are unpromising. Sadly, therefore, it would seem that Social Impact Bonds are afflicted by that bane of policymaking worldwide: their effectiveness and efficiency are subordinate to current institutional structures. To that extent then, Social Impact Bonds represent only an incremental improvement over conventional policymaking. Under a Social Impact Bond regime our social and environmental objectives, would continue to be driven not by society's wishes, but by the organisational needs and limited vision of those currently supposed to be supplying them. To me, that's a recipe for failure.
What do people think of the bond concept?
Many economists are intrigued. See News for more.
Who would buy the bonds?
The most important buyers would be institutions, who would buy many of the bonds, and use the profits they anticipate from early redemption as collateral to finance projects that would help achieve the targeted social objective.
Wouldn't people just buy Social Policy Bonds, then do nothing?
If enough people did nothing, the value of the bonds would fall, as the targeted objective became ever more remote. At some point, the market price of the bonds would fall to such a low point, that it would pay somebody to buy the bonds, and do something to help achieve the targeted objective.
What happens if Social Policy Bonds are held by many different holders?
If the proportion of bonds held by free riders is small, then their passivity would have little effect on the market value of the bonds, and they might benefit by hanging on to their holdings if active bondholders are successful in their efforts to move towards the goal’s achievement. Such behaviour would, to a limited degree, undermine the Social Policy Bond concept, but keep in mind that:
The true standard of comparison is not perfection: just something significantly better than any alternative.
The goal is to achieve social goals as efficiently and quickly as possible; not to ensure that everyone is rewarded strictly in accordance with their efforts.
But what about those with smaller holdings?
Some might think that holders of bonds representing, say, 5 per cent of all the bonds issued would be deterred from taking actions to help achieve the targeted objective because they will not be the sole beneficiaries of appreciation in the value of the bonds. First, typically people do take actions that will enrich others as well as themselves. Minority shareholders and company managers, for instance, frequently initiate actions that will see major shareholders benefit far more than themselves. They might try to accumulate more shares in anticipation of their own activities, but this activity certainly does not inhibit initiatives aimed at increasing share prices. Second, the important criterion for bondholders is whether their investment in objective-
What happens when a targeted objective has actually been achieved? Wouldn't more bonds have to be issued to maintain the status quo?
For the bonds to be redeemed, the achievement would have to be sustained for a specified period. After that period, it is likely that the most successful and efficient systems developed to solve the social problem the first time will allow government to allocate less funding for maintaining or improving the new status quo. The bonds encourage diverse and efficient solutions to social problems.
Could the bonds really solve such global problems as war, famine, disease and environmental disaster?
Once the bonds have been successfully used at the national level, there would be every reason to apply the principle to global problems. The thrust of the concept is to give people incentives to solve targeted problems. Too many global resources are wasted on corrupt or inefficient governments who have no real incentive to help solve global problems. Social Policy Bonds can undermine, co-
Social Policy Bonds are not a profit-
Why Social Policy Bonds?
For my original presentation (pdf; for context see here), b