Governments using regulators and other institutions to stick-and-carrot people into acting for the common good is not the way to deliver policy. Henry Leveson-Gower shares his discovery of a more inpired way, which we could need more than ever post pandemic.

We have a growing consensus on the need for more economically-activist government – government that doesn’t just tweak markets where they see them as failing but seeks to drive positive economic outcomes. The emerging tendency has now been put on steroids by the current crisis. But just as more is demanded of government, it is becoming clear that the standard policy approach is not up to the task.

I know this from my own experience. In 2010 I started a new position at Defra with a blank sheet of paper. My task was to reform the rules on taking water from rivers and aquifers in England to provide greater resilience in the face of climate change. The existing rules were little changed from their origins in 1963. In the end, my policy baby never made it to puberty. It was abruptly killed by Brexit.

I was gutted. However I had at least learnt something. I had started out trying to design centralised regulatory incentives and in the end it became clear that the real answer seemed to lie in enabling local management. And with my policy project dead, I grabbed a chance to build on this learning.

I became a part-time research fellow at a snappily monickered Centre for Evaluating Complexity Across the Nexus at Surrey University. At this groundbreaking research centre I discovered that the failure of the standard approach to policy was much more fundamental. 

“Incentives, including regulatory penalties, don’t work if they clash with the values, motivations and beliefs of those regulated.”

Elinor Ostrom, after a lifetime of research into the success and failure of policy institutions, set this out in her 2009 Nobel Prize in Economics lecture:

“Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. Extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans.”

I also discovered the work of Professor Christopher Hodges at Oxford University, who had gained influence with the UK Cabinet Office. A city lawyer turned academic, he had examined a range of regulatory regimes in different sectors. He concluded that incentives, including regulatory penalties, don’t work if they clash with the values, motivations and beliefs of those regulated and actually undermine the ethical rationale for Government action (see box: Why incentives don’t generally work). As these values, motivations and beliefs are increasingly dominated by maximising short-term returns to shareholders, a clash is now almost inevitable.

Why incentives don't generally work
The story is an old one of action and reaction. Policymakers and regulators try to “get the incentives right” for business to do what they think is the right thing. But given the information and data limitations they are likely to have to work with, they are lucky if they are in the right ballpark. Businesses respond by ticking all the boxes to get the incentives or avoid the penalties, but actually do as far as possible what seems right to them.

Meanwhile by reducing the task to “force (or nudge) entirely self-interested individuals to achieve better outcomes” as Ostrom puts it, any potential for a shared public purpose is undermined and potentially lost. This then starts an arms race as the regulators revise their regulations and the regulated respond with increasing ingenuity to avoid doing anything they don’t want to do, while meeting regulations on paper. Just think of all the bright lawyers and finance executives getting together in a room to find loopholes in the latest tax regulations. And they may even have helped design those regulations in the first place through well placed secondments into government.

Of course, it is probably not always so blatant. From the regulators’ view (and often ours), in this game of move and counter move, the regulated are the bad guys, the greedy capitalists who won’t do the right thing. However the view from the regulated may look very different. They probably sleep soundly at night thinking they are just trying to do their job or even survive within the system they are working in. While they probably see the regulators as naïve, ill-informed and/or incompetent.

This does not of course mean that all regulations and incentives fail, but it does mean that they only possibly work when there are shared values and objectives between the regulators and regulated. The question then becomes how to create them given our system is so often driven by a short-term profits and growth.

After that I came across Mariana Mazzucato’s mission-based policy approach. Here was a textbook that could guide activist government today.

At first glance the mission to the moon – which she uses as a standard example of a government having a mission – doesn’t seem to have much in common with local collective river catchment management. However if you look further in the detail, you see that Mazzucato proposes that activist governments should shape markets through co-creation by public, private and third sectors.

But how this works with the rise of populism as captured by the 2020 Edelman Trust Barometer remains a major issue. It shows the wider public in so-called developed countries don’t trust any of the key players in the “policy bubble” – government, business, media or even NGOs.

In this context of growing distrust, how can activist governments be successful? How can they get the wider public on board with “missions”?  How might they achieve the goal to “facilitate the development of institutions that bring out the best in humans”? And all this with growing power inequality, which Ostrom did not address.

Evidence from the Edelman trust barometer does suggest a direction of travel: two of its four findings on what would build the trustworthiness of institutions are about partnering across institutions.

This suggests a belief that partnerships involving a diversity of interests might keep each honest and allow a focus on a common purpose. It is a sort of social analogue to Buckminster Fuller’s 1960s architectural innovation of ‘tensegrity’: tensions creating integrity.  This is in contrast with cartels as famously described by Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Clearly partnering has to go beyond those within the policy bubble, who the rest of the population seem to see as more or less a cartel conspiring against them. It must also somehow address the power inequalities between the different groups if it is to be a real process of partnering. These are big asks.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In seeking to put into practice Ostrom’s ideas in designing “good” institutions, I came across a recent innovation in co-operative structures that was designed precisely to provide a vehicle for equitable, multi-stakeholder collaboration, called FairShares. To date it has been applied to individual enterprises, but it seems ideal to adapt it to be used for collaborations of multiple stakeholders with a common purpose (see box: How FairShares work p18).

These structures are neither well known nor straightforward. I am also distrustful of silver bullets. However, no one has suggested alternative models that provide better ways to support collective action including the ability to raise finance. These new structures also don’t need new laws.  They can be built on the ubiquitous limited company structure.

How FairShares works
The FairShares framework is an innovation in cooperative forms to create multi-sector organisations. Traditional co-operatives are either producer or consumer co-operatives. FairShares creates the potential for co-operatives that include producers, consumers, suppliers and other stakeholders.

In the simplest terms, they do this by creating different classes of shares in companies for different stakeholder groups. Classes of shares have both financial and decision-making powers and responsibilities, which can be tailored to the nature and needs of different stakeholder groups. Different classes of shares are widely used already – think of Bezos having a special class of share so he doesn’t lose control of Amazon.

However in the FairShares framework, different classes of shares are used to give equal control rather than to concentrate control. Substantial detailed work has been done on how this might work in practice. I think this framework can also be used to create an organisation to facilitate collective action by a number of stakeholder groups at a system level. Examples of systems where it could be used are circular product chains, river catchments, landscapes or energy systems.

So what role is there for activist government given these types of collaborations by their nature need to emerge from the bottom up? While I was considering this question, I happened to be applying for charitable status for my venture in promoting economic pluralism. Anyone can set up a charity, but to be recognised as such by government, you need to meet their requirements giving government a role in shaping charitable activity. So the parallels with this system jumped out.

Potential charities emerge bottom up but have to meet broad criteria in terms of objectives and legal structure to receive charitable status. In a similar manner government could give status to collaborative organisations that are delivering government-set objectives with diverse and equitable involvement.

Once such organisations have an official status, governments can give them resources, expert support and even powers to assist them deliver the objectives set. Objectives could include delivering sustainable, nutritious protein and rural livelihoods, regenerating sustainable catchments or landscapes, creating sustainable energy systems, and so on.  These are the sort of missions, that Mazzucato has advocated and have been taken up by the previous UK government.

There remain lots of questions such as how collaborations can be encouraged. Who are the key people who might catalyse such collaborations? How can they be supported?  How can diversity of collaborations be encouraged, when people often stick with people most like them?  How should these collaborations interact with existing regulatory and governmental institutions?  What is the default if no such collaborations exist?

We hope to explore some of these issues in a project developing collaborative river catchment management in Wiltshire over the next few months. This will involve working with a range of catchment stakeholders to explore what sort of organisational and governance structures would help them deliver their common purposes.

One thing seems clear though: effective activist government should not be about centralised command and control, but about catalysing positive action. It should be about providing vision, inspiration and support for diverse collaborations to emerge to drive systems change.

Potentially this could form a key element of rebuilding economies with purpose post pandemic.  It could combine the drive for recovery with the energy from growing climate change protest to catalyse action and build on the current increased community cohesiveness that seems to be emerging.

Henry Leveson-Gower

Henry is the founder and CEO of Promoting Economic Pluralism as well as editor of The Mint Magazine. He has been a practising economist contributing to environmental policy for 25 …

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