Evidence for the Efficacy of “Rewards”

The theme of this blog is what happens when we give people control over their online information. A major impact appears to be the potential empowerment of individuals in their dealings with others. In practical terms this means that many of the complex systems we have established to facilitate cooperation between people may be achieved in different ways. One of these is the collection of taxes for use where we have market failures. These failures occur because of externalities or because the markets cannot work because of mismatches in information (such as health insurance where the person asking for insurance knows more than the insurer). Instead of trying to create traditional markets we modify the system so that we create markets but in narrowly defined areas and we give people control over expenditure. Giving people more control over expenditure related to them means that they are more careful with how their money is spent and make less expensive choices where ever they can. This can result in a dramatic reduction in total costs.

This has long been recognised and we know it will result in efficient allocation of resources. The reason is simple and was explained by Milton Friedman. http://time.blogs.com/daily_dish/2006/11/a_great_man.html. Friedman says that we get the best value for money when we spend our own money on ourselves and we get the worst value when we spend someone else’s money on other people. Money we control and that we spend on ourselves is more wisely spent than money given to governments for them to spend on us.

Unfortunately the evidence is that our economies are increasingly dominated by government allocation of resources through taxes and by situations where we have a market failure due to government regulations. The problem is not just a tax problem but it is any situation where there is a market failure which can be caused by such things as a natural monopoly as in the supply of water or a failure due to the imbalance in knowledge between consumers and suppliers as with health insurance. In 1980 taxes in Australia were 25% of GDP. In 2003 it was 32%. The Telstra debacle with the inadequate provision of broadband is classic example of market failure due to inappropriate regulation of a natural monopoly. Although it is not as obvious, the inefficiencies caused by inappropriate regulation of other natural monopolies such as money, stock exchanges, water supply, electricity delivery, and legal services all cause massive inefficiencies in expenditure because choice is taken away from the people who benefit from the expenditure. What tends to happen is that the suppliers of existing services benefit from regulations and stifle the introduction of more efficient methods of delivery of services. The imposition of regulations coached as protection of consumers tend to protect suppliers to the disadvantage of consumers.

In many economies the approach can be applied to many and potentially most taxes. If we give individuals the power to decide on what happens to their taxes, within limits, then it means we can remove many taxes and the bureaucracies surrounding them and allow individuals to direct the use of the funds. This approach is used for Australian Superannuation and funding of the Singapore Health System. Both these systems are working well and are achieving their aims at low overall costs. The evidence is particularly strong for the Singapore Health System where the total cost of health care in Singapore per head is the same as the cost to administer Health Care per head in the USA.

The Australian compulsory superannuation system requires all Australian employers to put superannuation amounts into accounts that are owned by individuals but which cannot be accessed by the individuals until they retire or reach a certain age. The Singapore Health Funding is an extension of their compulsory superannuation where individuals must put a percentage of the income into special health accounts which can only be used for health care. The money goes into the account and accumulates until the person needs to use it – but it can only be used for health care. When a person dies any money remaining can be inherited. The Singapore Health system has an insurance component and a safety net component for catastrophic events but most funds are spent on less costly procedures and these expenses are controlled and paid for by the individual from their Health Savings account.

For these systems to work it is not simply a matter of giving money directly to people to spend on particular things. This has to be put into a wider context and total systems have to be built to manage and control but the principle is that most expenditure on an individual or family be directed by individuals or families themselves and that there be limits on what is available to people.

In effect we can build systems where most social expenditure (like unemployment benefits, superannuation, health care costs, education costs, public transport costs, public utilities like water supply, telecommunications supply, or energy infrastructure) can all be allocated to individuals and the individuals can spend their “quota” on these items as best they see fit. The system can be likened to a universal budgeting system where people’s income is allocated to different expenditures without leakage from one expenditure item to another. Fluctuations are dealt with by “savings” where the savings in one year can be used in a future year for the different expenditure types.

The system is regulated like all budgeting systems by varying the total amount to be spent on a particular activity or function. The political question becomes one of determining the overall expenditures – not the way the money is spent.

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