As John Tamny recently reminded us, ideas often need to be tested in the real world before their value can be assessed. Majority vote and expert opinion just don’t cut it, as many people, some quite prominent, considered light bulbs, airplanes, and iPhones impractical, if not impossible. Thankfully, somebody invested in all those unlikely inventions, and countless others, and rightfully reaped the rewards. Others invested in infamous failures, like Frito-Lay Lemonade, but with private money at stake few truly dreadful ideas get tested in real world markets and they quickly lose their funding.
An entire industry, venture capital, takes calculated risks, few of which pay off. Those few that succeed change the world for the better while the others wither or die. That many errors of commission occur strongly suggests that few errors of omission are made. As a group, in other words, angel investors and VCs do not leave “money on the sidewalk” by passing on projects that would have been big hits.
In policy, matters are rather different. Government commits many errors of commission, policies that create higher costs than benefits, but instead of cutting off funding quickly, it often blames the failure on budget constraints and doubles down until the monstrous policy has spawned a bureaucracy too big or influential to eliminate. Social Security is one example of many.
Unseen lurks an even bigger problem, the many policy proposals that go unheeded and untested. Citizens, foundations, NGOs, professors, and especially great think tanks like Cato, Mercatus, the American Enterprise Institute, and that one in Great Barrington, Massachusetts develop all sorts of interesting ideas that too often do not get tested in the real world. Narrowly trained economists, Michael Munger recently reminds us, “often miss the creative capacities of groups of people to build institutions that solve collective action problems” but those of a classical liberal bent trained in the liberal arts often come up with creative solutions that do not require higher taxes or more intrusive government.
Other organizations, like Historians Against Slavery (which I serve as Treasurer), stress education, outreach, and awareness. The strategy seems to be that if only enough people can be induced to speak out, politicians will implement a policy fix, hopefully one backed by solid research and not unduly distorted during the legislative process or by the bureaucratic deep state. Such a strategy sometimes works, more or less, but usually only after years or decades of human suffering.
A riskier but potentially much more fruitful approach attempts to disrupt cloistered markets, ideologically-induced psychological barriers, and suboptimal policies through radical innovation. Do you think that central banks would be investigating issuance of their own cryptocurrencies were it not for Bitcoin? Would there be regulatory sandboxes without FinTech?
Due to the free rider problem, however, the quest for profits often achieves only modest, incremental reforms. Lacking are financial incentives to invest resources in a better policy regime if doing so only opens the door to competition, which of course is often the best policy.
That is why I would like to see the creation of a social entrepreneurship venture capital fund designed to open markets currently closed by regulatory or ideological zealousness. It would function much like a foundation or think tank but instead of sponsoring research it would fund real world efforts to disrupt markets with radical new approaches to old problems. The fund could be organized as a non-profit and simply plough back the earnings from any winners into new projects, or it could be a source of tax write-offs for its owners as its projects fail, financially speaking.
Here are a few examples of the types of real world projects I have in mind, simply by way of illustration as I hold no monopoly on innovative ideas:
Private unit of account and medium of exchange in the form of bearer international money market shares.
Fiat currencies like the dollar are liquid but subject to depreciation vis-a-vis goods (inflation). Here I describe a form of private money in the form of international money market shares, called Hamiltons or Hayek’s Ducats, backed by gold and financial assets. Not only would the shares constantly but slowly appreciate against fiat currencies, they would be seamlessly convertible between their physical, deposit, and crypto forms. The big risk is not that the business model might not work but that it might work too well, drawing the wrath of central banks, especially the Federal Reserve.
Mutual life-health insurers.
As described here, America’s healthcare system is such a mess that any half decent alternative should thrive if only regulators allow it entry. Mutual life insurers offering high deductible health insurance policies linked to life insurance policies, on a participating plan, directly to individuals seem to offer the best alignment of incentives between insurer and insured. If allowed to offer policies across the nation, the insurers would be much bigger than HCP networks and thus be able to force them to keep costs down. They would have strong incentives to eliminate wasteful practices, like over-testing, and could adjust life insurance payouts on the basis of the informed life choices of their insureds. (To vape or not to vape? would be one question.) The problem here, in addition to resistance from incumbents, is that mutuals are owned by their policyholders, not a separate group of stockholders, so the incentive to form them is limited. A possible solution is to create hybrids, part-mutual and part-stock, that automatically mutualize over 20 or 30 years, and for which there is long-standing precedent.
Professional partnership universities.
Tuition soars faster than inflation because colleges and universities remain notoriously inefficient. As I show here, non-profit, government, and for-profit, joint-stock ownership structures all suffer from major incentive mis-alignment issues. None have strong reasons to keep costs in check, especially when federally-guaranteed student loans flow freely. At least some universities should be owned by their professors in professional partnerships akin to law firms, business consultancies, or old school investment banks because they would then have incentives to minimize costs and maximize effectiveness. Tenure would be priced instead of all or nothing and college sports would probably go away, as they have in most of the rest of the world. The main barrier here is accreditation and federal regulation. Partnerships composed of attorneys who have passed the bar are legit, and so should partnerships composed of Ph.D.s.
ISAs/university loans to students.
One way to eliminate costly federal regulation of colleges and universities, as I explain here, is for them to not accept federal money or student loan guarantees, which are bad policy anyway. To better align their incentives with those of their students, universities ought to finance the education of their own students, either as straight up loans or in the form of income sharing agreements, or ISAs. The latter are often capped so the effect is the same as a loan with an interest rate that varies with income. In both cases, universities, regardless of their ownership structure, succeed only when, and if, their students do, which should induce them to focus on knowledge and skills instead of sports, identity politics, and trigger warnings. Again, simple lack of competition/high entry barriers seems to forestall this common sense reform, which Hillsdale College and some coding schools have successfully implemented.
From iCivics to iEverything.
Numerous teachers (friends from college, where I was an education major, and those I met at a Constitution Day fundraiser in Manhattan in September) laud iCivics because it gets students engaged in learning via its interactive activities and games, which are modernized versions of the programs I called for almost two decades ago in “Growing History: A Vision of Historical Renaissance Through Interactive Learning” (History Computer Review, Fall 2000, 61-73). iCivics caters to the K-12 crowd and is non-profit but there is no reason why iCivics-like interactive learning modules could not be developed by a for-profit company and sold, especially to homeschool and university students and lifelong learners across the curriculum. The main problem here appears to be simple institutional inertia. When I tried to develop iBanking in the mid-2000s, computer companies would not talk to me so I ended up going to Thomson, just before it became Cengage, and unsurprisingly ended up with a Money and Banking textbook, now in its Third Edition with FlatWorld, instead of the interactive computer product that I originally wanted to create. Ostensibly, professional partnership universities financing their own schools would quickly embrace iEverything products as relatively inexpensive but powerful methods of helping students to obtain high impact experiential learning.
Criminal justice reform.
As noted here, punishing people is a nontrivial problem. Keeping people out of the criminal justice system after they have been punished, however, should be relatively easy. In fact, non-profits like the Doe Fund and the Prison Entrepreneurship Program have developed techniques effective at reducing recidivism. As Marc Maurer shows, America locks up too many people because prosecutors use the threat of long prison terms to induce people, even innocent ones, to accept plea bargains. America’s long prison sentences, however, do not deter crime because of temporal myopia/hyperbolic discounting. Worse, they keep people imprisoned, at great public expense, even after they have ceased being a threat to society. (Think Brooks and Red from Shawshank Redemption.) A company with sufficient confidence in its ability to discern the difference between the few “diehard” and the many common prisoners, and to rehabilitate the latter, could contract with government to take on its probation and parole functions for a monthly capitation fee that would decline over time and be returned, perhaps with an additional fee, when one of its ex-cons returned to prison. The proposed company would profit if the costs of rehabilitation, plus any recidivism fees, remain less than the fees governments would be willing to pay to get and keep people out of prison, which could be quite hefty given that it costs almost $100 per day on average to incarcerate one person in federal prison. Of course those high rents would soon attract competitors that could not be easily stopped from free riding on rehabilitation programs and processes.
Corporate malfeasance bonds.
As explained here, corporations often break the law and governments, unsurprisingly if you know anything about public choice theory, often do not hold them accountable. Even big fines tend to be small in the scheme of things and, disturbingly, many go at least partially unpaid! Corporations also often break promises not to injure the environment in certain ways, have slaves in their supply chains, launder money for narco-terrorists, and so forth. Malfeasance bonds would ensure that corporations have some skin in the game, something tangible to lose if they do break the law or their promises. The bonds might take a form similar to old-fashioned performance bonds or they might be tradeable and hence provide information about the market’s perception of the likelihood of malfeasance. Either way, fees are to be had, along with the satisfaction of knowing that corporations now have a mechanism for constraining their own future behaviors. What seems to repress this innovation is ideology: those on the Left hate bonds too much to embrace the idea, while those on the Right love corporations too much to countenance such blasphemy.
Long distance, non-lethal incapacitation technology.
In this post, I narrate the use of technologies available today that entrepreneurs could use to greatly reduce the number and severity of mass killings, including mass shootings. I chose drones (flown by expert humans, not AI) in lieu of numerous other possible technologies because the same machines could also be used to administer first aid, provide light or comms after natural disasters, relay temperature readings to fire fighters, and so much more. Along with some regulatory barriers to drones, ideology seems to stand in the way of implementation as those on the Left seem to want to confiscate guns more than they want to stop mass shootings, while those on the Right fear that the emergency drones I imagine would reduce demand for handguns and hence gun-friendly laws.
To test the feasibility of such ideas in the real world requires two components of Warren Zevon’s mighty triad, lawyers and money, that most of us don’t have abundant access to. But venture capitalists do and that is why we need a classical liberal, or at least broadly socially innovative, venture capital fund. A good idea, like the mind that created it, is a terrible thing to waste, but we do it every day anyway even though all we have to lose is our ideological and regulatory chains.