Sunday, March 27, 2011

Libertarian Paternalism

I have decided to read Thaler and Sunstein's (T&S) recent book Nudge because I have been told that this is the direction in which big government liberalism will likely be moving.

The arguments are very subtle, and the implications powerful. Central to the argument is the idea of a "choice environment" --- i.e. the non-neutrality of the decision milieu (p. 3). Consumers make choices, but, according to T&S, there is no neutral way to frame the environment in which choices are made. Moreover, behavior is easily manipulated according to the way available choices are framed and advertised. Therefore, it is up to "choice architects" (libertarian paternalists) to try to make people "best off, all things considered." The standard libertarian position that decisions should be made so as to allow people to choose options they "would choose on their own" is misleading because this suggests that "choice environments" can be neutral. But available options must be framed (advertised) in some way, and the results will invariably have important consequences for how people behave. People are not rational maximizers. People suffer from biases, experience frequent self-control problems, and are subject to social influences. In short, people are Homer Simpsons, and not Mr. Spocks (p. 42).

That is the basic argument. And it is an interesting one. Now how should the true libertarian respond to this? Well, the libertarian might say that attempts to improve the "choice environment" will have adverse unintended consequences, and will lead to a dangerous slippery slope. But the analysis T&S are employing is very subtle. The central idea in the book is that all choices are non-neutral. We are never free to make our own choices. This is an implicit (yet very powerful) attack on libertarianism and laissez-faire. All choices must be framed and advertised in some way, and each proposal and option will affect behavior differently. This is a very powerful argument. Libertarianism collapses. How can we be in favor of freedom from government regulation and control if it is ontologically impossible to possess autonomy in our decision-making? There is no such thing as a "neutral" market.

Now an ancillary thesis to the argument of the non-neutrality of "choice environments" is the idea that private markets have recognized the existence of non-neutrality (and the concomitant manipulability of individual behavior) and have proceeded to exploit this to their own advantage. Private companies are acutely aware "of the power of social influences" and might try to make money by "enlisting conformity" (pp. 62, 64). T&S write:

"Frequently they [private companies] emphasize that 'most people prefer' their own product, or that 'growing numbers of people' are switching from another brand, which was yesterday's news, to their own, which represents the future. They try to nudge you by telling you what most people are now doing. ... The key point here is that for all their virtues, markets often give companies a strong incentive to cater to (and profit from) human frailties, rather than to try to eradicate them or to minimize their effects" (pp. 64-65, 72).

Can you think of a commercial on television that does not do this? Moreover, S&T anticipate objections to this analysis by arguing against the efficacy of market competition in writing that "[y]ou might think that firms could educate people not to buy [goods], and indeed they might. But why should firms do that? If you are buying something that you shouldn't, how do I make any money persuading you not to buy it?" (p. 79). The basic idea behind this book is that "social nudging" should try to offset (and possibly eliminate) the efforts of private companies in manipulating the the "humanness" of individual decision-making.

One final point I would like to make, and this applies to the field of "behavioral economics" generally. I think that something is being lost here in focusing almost exclusively on human psychology. The entire argument is based on research that has been done by psychologists, and not economists. We learn about "representativeness," various "self-control strategies," "spotlight effects," "priming," and many other things that seem to have no direct connection to economics. I think that we are missing something by diverting attention away from economic phenomena. Human behavior is best understood by trying to explain human plans in relation to incentives, scarcity, and opportunity cost. This book reads more like a treatise in psychology rather than in economics. Lachmann had it exactly right in his essay "Economics as a Social Science."

1 comment:

  1. "This is an implicit (yet very powerful) attack on libertarianism and laissez-faire. All choices must be framed and advertised in some way, and each proposal and option will affect behavior differently. This is a very powerful argument."

    Though how to frame choices is a choice one can make. All the fancy ads in the world won't make me buy ketchup.