I became aware of “libertarian paternalism” in 2005, when I read this dismissive post by Don Boudreaux at Cafe Hayek. From 2005 to 2019, I wrote more than a dozen posts about “libertarian paternalism”, which Wikipedia calls
the idea that it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice, as well as the implementation of that idea. The term was coined by behavioral economist Richard Thaler and legal scholar Cass Sunstein in a 2003 article in the American Economic Review.
This post reprises the key points of my earlier ones. I give more attention here to Thaler than to Sunstein. I will devote a separate post to Sunstein because he is (or was) truly dangerous to liberty for ideas other than “libertarian paternalism”.
Thaler and Sunstein say that “libertarian paternalism” (sneer quotes removed, but implied, hereinafter) is intended to help individuals make better decisions by having corporations and governments shape choices more artfully. Blogger Zimran Ahmed Winterspeak defended the concept because he
spoke to Thaler about this and read the monograph he [Thaler] wrote with Sunstein.
“Libertarian Paternalism” is noting that people often just take whatever default choice is offered and therefore working hard to come up with good default choices. This does not limit choice because you don’t need to stick with the default. But since *something* has to be the default, you might as well put effort into making it something good.
I don’t think it’s quite that easy to defend libertarian paternalism, which strikes me as another paving brick on the road to hell.
Consider an example that’s used to explain libertarian paternalism (and which will recur at later points in this post). Some workers choose “irrationally” when they decline to sign up for an employer’s 401(k) plan. The paternalists characterize the “do not join” option as the default option. (In my experience, there is no default option: An employee must make a deliberate choice between joining a 401(k) or not joining it.) To help employees make the “right” choice, libertarian paternalists would find a way to herd employees into 401(k) plans (perhaps by law). In one variant of this bit of paternalism, an employee is automatically enrolled in a 401(k) and isn’t allowed to opt out for some months, by which time he or she has become used to the idea of being enrolled and declines to opt out.
The underlying notion is that people don’t always choose what’s “best” for themselves. Best according to whom? According to libertarian paternalists, of course, who tend to equate “best” with wealth maximization. They simply disregard or dismiss the truly rational preferences of those who must live with the consequences of their decisions. Richard Thaler may want you to save your money when you’re only 22, but you may have other, more urgent, things to do with your money, such as paying off a college loan while affording a decent place to live and buying a car that gets you to work faster than riding a bus.
Libertarian paternalism incorporates two fallacies. One is what I call the “rationality fallacy,” the other is the fallacy of centralized planning.
As for the rationality fallacy, I once wrote this:
There is simply a lot more to maximizing satisfaction than maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.
Nevertheless, many economists (like Thaler) do equate rationality and wealth maximization, which leads them to propose schemes for forcing people to act more “rationally”. Such schemes, of course, are nothing more than centralized planning, dreamt up by self-anointed wise men who seek to impose their preferences on the rest of us. As I said in a different connection,
The problem with [rules aimed at shaping economic behavior] is that someone outside the system must make the rules to be followed by those inside the system.
And that’s precisely where [central] planning and regulation always fail. At some point not very far down the road, the rules will not yield the outcomes that spontaneous behavior would yield. Why? Because better rules cannot emerge spontaneously from rule-driven behavior….
Of course, the whole point … is to produce outcomes that are desired by planners.
And to hell with what the individual thinks is in his or her own best interest.
Libertarian paternalism consists of paternalism and a rather subtle form of socialism. There’s no libertarianism in it, no matter what its proponents may say.
As Michael Munger put it in an essay at The Library of Economics and Liberty,
The boundary we fight over today divides what is decided collectively for all of us from what is decided by each of us. You might think of it as a property line, dividing what is mine from what is ours. And all along that property line is a contested frontier in a war of ideas and rhetoric.
For political decisions, "good" simply means what most people think is good, and everyone has to accept the same thing. In markets, the good is decided by individuals, and we each get what we choose. This matters more than you might think. I don't just mean that in markets you need money and in politics you need good hair and an entourage. Rather, the very nature of choices, and who chooses, is different in the two settings. P.J. O'Rourke has a nice illustration of the way that democracies choose.
Imagine if all of life were determined by majority rule. Every meal would be a pizza. Every pair of pants, even those in a Brooks Brothers suit, would be stone-washed denim. Celebrity diets and exercise books would be the only thing on the shelves at the library. And—since women are a majority of the population, we'd all be married to Mel Gibson. (Parliament of Whores, 1991, p. 5).
O'Rourke was writing in 1991. Today, we might all be married to Ashton Kutcher, instead. But you get the idea: Politics makes the middle the master. The average person chooses not just for herself, but for everyone else, too. . . .
The thing to keep in mind is that market processes, working through diverse private choice and individual responsibility, are a social choice process at least as powerful as voting. And markets are often more accurate in delivering not just satisfaction, but safety. We simply don't recognize the power of the market's commands on our behalf. As Ludwig von Mises famously said, in Liberty and Property, "The market process is a daily repeated plebiscite, and it ejects inevitably from the ranks of profitable people those who do not employ their property according to the orders given by the public."
Paternalism -- when it is sponsored or enforced by government -- deprives people of the ability to think for themselves, to benefit from their wise decisions, and to learn from their mistakes.
Bryan Caplan came at the same point from a different angle regarding Thaler and Sunstein’s proposal to help consumers make “rational” choices about mortgages, Caplan observed that
government long ago took up the burden of helping consumers, and the result is a mess.
The problem with behavioral economics is that it’s more sophisticated than standard econ, but not nearly sophisticated enough. Thaler and Sunstein may have a more realistic view of borrowers than the average economist, but they have an even less realistic view of the political process. As I argue in The Myth of the Rational Voter:
Before we emphasize the benefits of government intervention, let us distinguish intervention designed by a well-intentioned economist from intervention that appeals to noneconomists, and reflect that the latter predominate. You do not have to be dogmatic to take a staunchly promarket position. You just have to notice that the “sophisticated” emphasis on the benefits of intervention mistakes theoretical possibility for empirical likelihood.
Additional regulation of mortgages isn’t going to help real human beings cope with complexity. Democracy already gave us a pile of inane “pro-consumer” regulation, and reform will probably just give us more of the same.
So what would I recommend? Abandon the vain effort to protect consumers from themselves, and switch to a message simple enough for real humans to understand:
1. You’re an adult; if you screw up it’s your problem.
2. If you’re baffled by the complexities of mortgage markets (or anything else), stick with the simple, standard options that you actually understand.
Glen Whitman weighed in with two scathing posts at Agoraphilia. In the first of the two posts, Whitman wrote:
[Thaler] continues to disregard the distinction between public and private action.
Some critics contend that behavioral economists have neglected the obvious fact that bureaucrats make errors, too. But this misses the point. After all, wouldn’t you prefer to have a qualified, albeit human, technician inspect your aircraft’s engines rather than do it yourself?
The owners of ski resorts hire experts who have previously skied the runs, under various conditions, to decide which trails should be designated for advanced skiers. These experts know more than a newcomer to the mountain. Bureaucrats are human, too, but they can also hire experts and conduct research.Here we see two of Thaler’s favorite stratagems deployed at once. First, he relies on a deceptively innocuous, private, and non-coercive example to illustrate his brand of paternalism. Before it was cafeteria dessert placement; now it’s ski-slope markings. Second, he subtly equates private and public decision makers without even mentioning their different incentives. In this case, he uses “bureaucrats” to refer to all managers, regardless of whether they manage private or public enterprises.
The distinction matters. The case of ski-slope markings is the market principle at work. Skiers want to know the difficulty of slopes, and so the owners of ski resorts provide it. They have a profit incentive to do so. This is not at all coercive, and it is no more “paternalist” than a restaurant identifying the vegetarian dishes.
Public bureaucrats don’t have the same incentives at all. They don’t get punished by consumers for failing to provide information, or for providing the wrong information. They don’t suffer if they listen to the wrong experts. They face no competition from alternative providers of their service. They get to set their own standards for “success,” and if they fail, they can use that to justify a larger budget.
And Thaler knows this, because these are precisely the arguments made by the “critics” to whom he is responding. His response is just a dodge, enabled by his facile use of language and his continuing indifference – dare I say hostility? – to the distinction between public and private.
In the second of the two posts, Whitman said:
The advocates of libertarian paternalism have taken great pains to present their position as one that does not foreclose choice, and indeed even adds choice. But this is entirely a matter of presentation. They always begin with non-coercive and privately adopted measures, such as the ski-slope markings in Thaler’s NY Times article. And when challenged, they resolutely stick to these innocuous examples (see this debate between Thaler and Mario Rizzo, for example). But if you read Sunstein & Thaler’s actual publications carefully, you will find that they go far beyond non-coercive and private measures. They consciously construct a spectrum of “libertarian paternalist” policies, and at one end of this spectrum lies an absolutely ban on certain activities, such as motorcycling without a helmet. I’m not making this up!…
[A]s Sunstein & Thaler’s published work clearly indicates, this kind of policy [requiring banks to offer “plain vanilla” mortgages] is the thin end of the wedge. The next step, as outlined in their articles, is to raise the cost of choosing other options. In this case, the government could impose more and more onerous requirements for opting out of the “plain vanilla” mortgage: you must fill out extra paperwork, you must get an outside accountant, you must have a lawyer present, you must endure a waiting period, etc., etc. Again, this is not my paranoid imagination at work. S&T have said explicitly that restrictions like these would count as “libertarian paternalism” by their definition….
The problem is that S&T’s “libertarian paternalism” is used almost exclusively to advocate greater intervention, not less. I have never, for instance, seen S&T push for privatization of Social Security or vouchers in education. I have never seen them advocate repealing a blanket smoking ban and replacing it with a special licensing system for restaurants that want to allow their customers to smoke. If they have, I would love to see it.
In their articles, S&T pay lip service to the idea that libertarian paternalism lies between hard paternalism and laissez faire, and thus that it could in principle be used to expand choice. But look at the actual list of policies they’ve advocated on libertarian paternalist grounds, and see where their real priorities lie.
S&T are typical “intellectuals,” in that they presume to know how others should lead their lives — a distinctly non-libertarian attitude. It is, in fact, a hallmark of modern “liberalism” (i.e., authoritarian leftism). Elsewhere, I had this to say about the founders of modern “liberalism” — John Stuart Mill, Thomas Hill Green, and Leonard Trelawney Hobhouse:
[W]e are met with (presumably) intelligent persons who believe that their intelligence enables them to peer into the souls of others, and to raise them up through the blunt instrument that is the state.
And that is precisely the mistake that lies at heart of what we now call “liberalism” or “progressivism.” It is the three-fold habit of setting oneself up as an omniscient arbiter of economic and social outcomes, then castigating the motives and accomplishments of the financially successful and socially “well placed,” and finally penalizing financial and social success through taxation and other regulatory mechanisms (e.g., affirmative action, admission quotas, speech codes, “hate crime” legislation”). It is a habit that has harmed the intended beneficiaries of government intervention, not just economically but in other ways, as well….
The other ways, of course, include the diminution of social liberty, which is indivisible from economic liberty.
As I have said, Thaler’s idea of rational behavior seems to be behavior that maximizes one’s wealth. The surest route to wealth-maximization — for the Thalers of this world — is to evaluate alternative courses of action by discounting projected streams of revenues (income) or costs (expenses). Consider the following passage from an old paper of Thaler’s:
A discount rate is simply a shorthand way of defining a firm’s, organization’s, or person’s time value of money. This rate is always determined by opportunity costs. Opportunity costs, in turn, depend on circumstances. Consider the following example: An organization must choose between two projects which yield equal effectiveness (or profits in the case of a firm). Project A will cost $200 this year and nothing thereafter. Project B will cost $205 next year and nothing before or after. Notice that if project B is selected the organization will have an extra $200 to use for a year. Whether project B is preferred simply depends on whether it is worth $5 to the organization to have those $200 to use for a year. That, in turn, depends on what the organization would do with the money. If the money would just sit around for the year, its time value is zero and project A should be chosen. However, if the money were put in a 5 percent savings account, it would earn $10 in the year and thus the organization would gain $5 by selecting project B. (Center for Naval Analyses, “Discounting and Fiscal Constraints: Why Discounting is Always Right,” Professional Paper 257, August 1979, pp. 1-2)
More generally, the preferred alternative — among alternatives conferring equal benefits (effectiveness, output, utility, satisfaction) — is the one whose cost stream has the lowest present value:
the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk.
It is my view that economists seize on discounting as a way of evaluating options because it is a trivial exercise to compute the present value of a stream of outlays (or receipts). I should say that discounting seems like a trivial exercise because the difficult tasks — choosing a time horizon, choosing a discount rate, and translating outlays into future benefits — are assumed away.
Consider the choices facing a government decision-maker. In Thaler’s simplified version of reality, a government decision-maker (manager) faces a choice between two projects that (ostensibly) would deliver equal benefits (effectiveness, output), even though their costs would be incurred at different times. Specifically, the manager must choose between project A, at a cost of $200 in year 1, and equally-effective project B, at a cost of $205 in year 2. Thaler claims that the manager can choose between the two projects by discounting their costs:
A [government] manager . . . cannot earn bank interest on funds withheld for a year. . . . However, there will generally exist other ways for the manager to “invest” funds which are available. Examples include cost-saving expenditures, conservation measures, and preventive maintenance. These kinds of expenditures, if they have positive rates of return, permit a manager to invest money just as if he were putting the money in a savings account.
. . . Suppose a thorough analysis of cost-saving alternatives reveals that [in year 2] a maintenance project will be required at a cost of $215. Call this project D. Alternatively the project can be done [in year 1] (at the same level of effectiveness) for only $200. Call this project C. All of the options are displayed in table 1.
(op. cit, pp. 3-4)
Thaler believes that his example clinches the argument for discounting because the choice of project B (an expenditure of $205 in year 2) enables the manager to undertake project C in year 1, and thereby to “save” $10 in year 2. But Thaler’s “proof” is deeply flawed:
If a maintenance project is undertaken in year 1, it will pay off sooner than if it is undertaken in year 2 but, by the same token, its benefits will diminish sooner than if it is undertaken in year 2.
More generally, different projects cannot, by definition be equally effective. Projects A and B may be about equally effective by a particular measure of effectiveness, but because they are different things they will differ in other respects, and those differences could be crucial in choosing between A and B.
Specifically, projects A and B might be equally effective when compared quantitatively in the context of an abstract scenario, but A might be more effective in an unquantifiable but crucial respect. For example, the earlier expenditure on A might be viewed by a potential enemy as a more compelling deterrent than the later expenditure on B because it would demonstrate more clearly the government’s willingness and ability to mount a strong defense against the potential enemy.
The “correct” discount rate depends on the options available to a particular manager of a particular government activity. Yet Thaler insists on the application of a uniform discount rate by all government managers (op. cit., p. 6). By Thaler’s own example, such a practice could lead a manager to choose the wrong option.
For a decision to rest on the use of a particular discount rate, there must be great certainty about the future costs and benefits of alternative courses of action. But there seldom is. The practice of discounting therefore promotes an illusion of certainty — a potentially dangerous illusion, in the case of national defense.
The fundamental problem is that Thaler presumes to place himself in the position of the decision-maker. But every decision-maker — from a senior government executive to a young person starting his first job — has a unique set of objectives, options, uncertainties, and risk preferences. Because Thaler cannot locate himself in a decision-maker’s unique situation, he can exercise his penchant for arrogance only by insisting that each and every decision-maker adhere to a simplistic rule of thumb — one that obtains results favored by Thaler.
In the context of personal decision-making — which is the focal point of libertarian paternalism — the act of discounting serves wealth-maximization (a favored paternalistic objective). But, as I have said,
[t]here is simply a lot more to maximizing satisfaction than maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.
Thaler popped up in the April 2010 edition of Cato Unbound, “Slippery Slopes and the New Paternalism”, which was about libertarian paternalism”and whether it deserved to be called libertarian. Thaler was a key contributor to the colloquy and a fierce defender of his ideas, which have had their fullest exposition in Nudge: Improving Decisions About Health, Wealth, and Happiness.
Thaler’s method of defending his position was to insist, repeatedly, that it is “libertarian”, even as he oozed paternalism. Consider one of his entries (“The Argument Clinic“) in the colloquium, where he wrote the following:
[S]ince the word paternalism is what seems to give [the colloquium’s lead essayist Glen] Whitman fits, let’s re-label our policy “Best Guess”. “Best Guess” is the policy of choosing the choice architecture that is your best guess of what the participants would choose for themselves if they had the time and expertise to make an informed choice.
If that isn’t pure, presumptive arrogance, I don’t know what is. It conveys a presumption of omniscience on the part of the “best guesser”, along with a presumption that the “best guesser” ought to be making decisions for others.
Here’s another passage from Thaler’s post:
In many domains we [paternalists] can drastically improve on what is customary. Consider organ donations. In most states in the United States, to make your donation available you have to take some action such as sign the back of your driver’s license and get two witnesses to sign it. In some countries such as Spain they have switched to an “opt out” system called presumed consent. In Nudge we endorse a third approach, in this domain called “mandated choice.” It also happens to be used in my home state of Illinois.
Under this plan, when you go in to get your drivers license picture retaken every few years, you are asked whether you want to be a donor or not. You must say yes or no to get a license. About two thirds of drivers are saying yes, and lots of lives will be prolonged as a result. This is a great example of libertarian Best Guess in action. Although a large majority of people say in polls that they would want their organs harvested, many never get around to opting in, and a vocal minority in the United States object strenuously to the idea of presumed consent. So it is worthwhile to find a policy that gets many of the benefits of presumed consent without while honoring the preferences of those who object to having to opt out. Mandated choice has some other advantages in this context, namely that families are less likely to overrule the choices of the donor if that choice has been made actively rather than passively.
Let me count the assumptions: (1) Organ donation is the government’s business. (2) The government should deny a driver’s license to a person does not wish to say whether or not he wishes to be an organ donor. (3) This oppression of an individual is justified by the supposed fact that “a large majority of people . . . say that they would want their organs harvested.” Why give the government yet another excuse to intrude into private matters? The obvious answer to that question is that Thaler can’t resist the urge to lead others toward the decisions that he wants them to make. If, when you renew your driver’s license, you’re asked if you want to be an organ donor, your likely (politically correct) response is to say “yes,” even if you don’t really want to be an organ donor. This is not freedom of choice; it is subtle coercion.
Thaler stretches hard to discredit Whitman’s objections to libertarian paternalism; for example:
One of the examples we discuss in Nudge is an innovation by the city of Chicago on a dangerous curve on Lake Shore Drive. The city painted horizontal lines across the road that get closer and closer together as the driver approaches the apex of the curve. As we recently posted on our blog, this innovation has reduced accidents by 36%. Does Whitman think this is bad because it was implemented by the government? Should only private toll roads be allowed to think creatively? And notice that the “customary” signage in this location, which included a reduction in the speed limit to 20 mph, was less effective than the nudge.
What does this have to do the subject at hand? The government of Chicago is already in place as the paternalistic provider of Chicago’s streets — having usurped voluntary private decisions about the placement, construction, upkeep, and regulation of those streets. Given that the government is the provider of Chicago’s streets, it has assumed the duty of making those streets “safe” for their users, without the benefit of market feedback about users’ preferences as to the the tradeoff between safety and other attributes (e.g., speed). The government merely adopted an innovation (the horizontal lines), which replaced (or supplemented) another innovation (a speed-limit sign). Horizontal lines are no more or less paternalistic than speed-limit signs, merely different in their effectiveness along one dimension of street-users’ preferences.
In the examples that I have given, Thaler simply assumes that government is “the answer”. Instead of arguing that decisions are best made by private, voluntary actors, he too readily accepts the role of government and, instead, seeks ways to embed it more deeply in citizens’ lives by making it seem more effective. That is one path down the slippery slope toward serfdom — a slope that Thaler denies, even as he pours intellectual lubricant on it.
Thaler’s invocation of the Lake Shore Drive innovation is especially revealing. Only a hardened paternalist would stretch so far (and fail) to find something non-paternalistic about one of America’s most paternalistic — and fallible — institutions: the government of Chicago.
Thaler stepped into it again in this NYT article, where he wrote this:
Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.
I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush cuts that are due to expire at year-end. They’re expiring because the only way they could be enacted initially was by pretending that they were temporary….
There is another possible argument for including the rich in these tax cuts, one based on “fairness.” By this reasoning, the wealthy are entitled to low tax rates because they have temporarily had them, and it would now be unfair to take them back.
But by that same argument, unemployment insurance should never expire, and every day should be your birthday. “Temporary” has no meaning if it bestows a permanent right.
By Thaler’s convoluted logic, the money one earns is a gift from government, and those who pay taxes have no greater claim on their own money than those to whom the government hands it. How is this “libertarian,” by any reasonable interpretation of that word?
Then there is Thaler’s defense of the individual mandate that was at the heart of Obamacare. Thaler attacked the “slippery slope” argument against the mandate. Annon Simon nailed Thaler:
Richard Thaler’s NYT piece from a few days ago, Slippery-Slope Logic, Applied to Health Care, takes conservatives to task for relying on a “slippery slope” fallacy to argue that Obamacare’s individual mandate should be invalidated. Thaler believes that the hypothetical broccoli mandate — used by opponents of Obamacare to show that upholding the mandate would require the Court to acknowledge congressional authority to do all sorts of other things — would never be adopted by Congress or upheld by a federal court. This simplistic view of the Obamacare litigation obscures legitimate concerns over the amount of power that the Obama administration is claiming for the federal government. It also ignores the way creative judges can use previous cases as building blocks to justify outcomes that were perhaps unimaginable when those building blocks were initially formed….
[N]ot all slippery-slope claims are fallacious. The Supreme Court’s decisions are often informed by precedent, and, as every law student learned when studying the Court’s privacy cases, a decision today could be used by a judge ten years from now to justify outcomes no one had in mind.
In 1965, the Supreme Court in Griswold v. Connecticut, referencing penumbras and emanations, recognized a right to privacy in marriage that mandated striking down an anti-contraception law.
Seven years later, in Eisenstadt v. Baird, this right expanded to individual privacy, because after all, a marriage is made of individuals, and “[i]f the right of privacy means anything, it is the right of the individual . . . to be free from unwarranted governmental intrusion into matters so fundamentally affecting a person as the decision whether to bear or beget a child.”
By 1973 in Roe v. Wade, this precedent, which had started out as a right recognized in marriage, had mutated into a right to abortion that no one could really trace to any specific textual provision in the Constitution. Slippery slope anyone?
This also happened in Lawrence v. Texas in 2003, where the Supreme Court struck down an anti-sodomy law. The Court explained that the case did not involve gay marriage, and Justice O’Connor’s concurrence went further, distinguishing gay marriage from the case at hand. Despite those pronouncements, later decisions enshrining gay marriage as a constitutionally protected right have relied upon Lawrence. For instance, Goodridge v. Department of Public Health (Mass. 2003) cited Lawrence 9 times, Varnum v. Brien (Iowa 2009) cited Lawrence 4 times, and Perry v. Brown (N.D. Cal, 2010) cited Lawrence 9 times.
However the Court ultimately rules, there is no question that this case will serve as a major inflection point in our nation’s debate about the size and scope of the federal government. I hope it serves to clarify the limits on congressional power, and not as another stepping stone on the path away from limited, constitutional government. (“The Supreme Court’s Slippery Slope,” National Review Online, May 17, 2012)
Simon could have mentioned Wickard v. Filburn (1942), in which the Supreme Court brought purely private, intrastate activity within the reach of Congress’s power to regulate interstate commerce. The downward slope from Wickard v. Filburn to today’s intrusive regulatory regime has been been not merely slippery but precipitous. And Chief Justice John Roberts did a great disservice to liberty by upholding the individual mandate. Perhaps he was operating under the influence of Thaler.
Next up is Thaler’s book, Misbehaving: The Making of Behavioral Economics, from which he drew “Unless You Are Spock, Irrelevant Things Matter in Economic Behavior” (The New York Times, May 8, 2015). The article displays three of Thaler’s pet tricks:
He misrepresents classical microeconomics.
He assumes (implicitly) that everyone should make economic decisions from an omniscient, end-of-life perspective.
He substitutes his economic desiderata for the free choices of millions of persons.
Regarding Thaler’s misrepresentation of classical microeconomics, consider these passages from his article:
Economists [who adhere to traditional microeconomic theory] discount any factors that would not influence the thinking of a rational person. These things are supposedly irrelevant. But unfortunately for the theory, many supposedly irrelevant factors do matter.
Economists create this problem with their insistence on studying mythical creatures often known as Homo economicus. I prefer to call them “Econs”— highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions. Think of Mr. Spock in “Star Trek.” In a world of Econs, many things would in fact be irrelevant.
No Econ would buy a larger portion of whatever will be served for dinner on Tuesday because he happens to be hungry when shopping on Sunday. Your hunger on Sunday should be irrelevant in choosing the size of your meal for Tuesday. An Econ would not finish that huge meal on Tuesday, even though he is no longer hungry, just because he had paid for it. To an Econ, the price paid for an item in the past is not relevant in making the decision about how much of it to eat now.
An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. What difference do these arbitrary dates make?…
Of course, most economists know that the people with whom they interact do not resemble Econs. In fact, in private moments, economists are often happy to admit that most of the people they know are clueless about economic matters. But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers.
This reads more like the confession of an Econ than an accurate description of the principles of microeconomics. Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.
Yes, there are Econs, but they’re usually economists who also know full well that the mass of people don’t behave like Econs (as Thaler admits), and for whom the postulate of utter rationality is, as I’ve suggested, shorthand for an imprecise tendency. The fact that most human beings aren’t Econs doesn’t vitiate the essential truth of the traditional theory of choice. What seems to bother Thaler is that most people aren’t Econs; their tastes and preferences seem irrational to him, and it’s his (self-appointed) role in life to force them to make “correct” decisions (i.e., the decisions he would make).
I’ll say more about that. But I can’t let Thaler’s views about markets pass without comment. He continued with this:
There is a version of this magic market argument that I call the invisible hand wave…. Words and phrases such as high stakes, learning and arbitrage are thrown around to suggest some of the ways that markets can do their magic, but it is my claim that no one has ever finished making the argument with both hands remaining still.
Hand waving is required because there is nothing in the workings of markets that turns otherwise normal human beings into Econs. For example, if you choose the wrong career, select the wrong mortgage or fail to save for retirement, markets do not correct those failings. In fact, quite the opposite often happens. It is much easier to make money by catering to consumers’ biases than by trying to correct them.
This is a perverted description of the role of markets. And it betrays the peculiar vantage point from which Thaler views economic decision-making. Markets provide information, much of which reflects decisions already made by others. Markets, in other words, enable persons who are contemplating decisions to learn from the decisions of others — whether those others view their decisions as bad, good, or indifferent. But it’s up to persons who are contemplating decisions to take advantage of the information provided by markets.
Moreover, markets don’t merely “cater to consumers’ biases”. Markets enable businesses to shape consumers’ tastes and preferences by presenting them with information about the availability and advantages of their products and services. Markets transmit information in two directions, not just from consumers to producers.
What about people who make “bad” choices, such as choosing the “wrong” career, selecting the “wrong” mortgage, or failing to save for retirement? That’s Thaler the Nudge talking. He wants to save people from such fates. While he’s at it, perhaps he can also save them from choosing the wrong spouse or the wrong number of children.
I say that because when Thaler writes about “wrong” choices in such matters, he writes as if people can and should make their minute-by-minute, hour-by-hour, day-by-day, week-by-week, and year-by-year decisions by reckoning (like an Econ) how those decisions will affect their “score” when they reach the finish line of life, or some other arbitrary point in time. What about all those points in between, don’t they count, too? And who knows when the finish line will arrive? Given such quandaries and uncertainties, how are the irrational masses supposed to cope? Well, they don’t — or so Thaler would like to believe. So it follows that Thaler must cope for them, but only when it comes to his pet projects (e.g., automatic enrollment in 401(k) plans). He’s silent about the myriad other decisions that real people face.
Why should Thaler care if X chooses the “wrong” career, takes a mortgage he can’t afford, doesn’t save “enough” for retirement, chooses the “wrong” spouse, or has “too many” children? It’s paternalistic thinking like Thaler’s that leads politicians to concoct programs that transfer the cost of bad choices from those who make them to those who are just trying to live their lives without making them. I expect that Thaler would respond by saying that government is already in the business of making such transfers, so the best thing is to reduce the need for them. No, the best thing is to make individuals responsible for the consequences of their choices, and let them — and others — learn from the consequences. The best thing is to dismantle the dependency-creating, handout-giving functions of government. And a behavioral economist like Thaler is just the kind of person who could mount a strong economic case against those functions — if he were of a mind to do so.
Thaler doesn’t seem to be of a mind to do so because what he really wants is for people to make the “right” decisions, by his lights. Why? Because he knows what’s best for all of us. Returning to a favorite topic, he wrote:
Consider defined-contribution retirement plans like 401(k)’s. Econs would have no trouble figuring out how much to save for retirement and how to invest the money, but mere humans can find it quite tough. So knowledgeable employers have incorporated three [features] in their plan design: they automatically enroll employees (who can opt out), they automatically increase the saving rate every year, and they offer a sensible default investment choice like a target date fund. These features significantly improve the outcomes of plan participants…. [TEA: This assumes that everyone should care more about retirement income than about anything else, at the margin.]
These retirement plans also have a supposedly relevant factor: Contributions and capital appreciation are tax-sheltered until retirement. This tax break was created to induce people to save more….
[The authors of a recent study] conclude: “…Automatic enrollment or default policies that nudge individuals to save more could have larger impacts on national saving at lower social cost.”
Get it? One of the objectives of nudging people to participate in 401(k) plans is to raise the national saving rate. Saving should be a voluntary thing, and the national saving rate should emerge from voluntary decisions. It shouldn’t be dictated by those, like Thaler, who view a higher national saving rate as a holy grail, to be advanced by policies that effectively dictate the “choices” that people make. But that’s Thaler for you: Imposing his economic desiderata on others.
I was therefore irked when I learned of Thaler’s selection as the 2017 Noblel laureate in economics. (It’s actually the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel, not one of the original prizes designated in Alfred Nobel’s will.) The award led James R. Rogers to write about Thaler and behavioral economics:
[M]edia treatments of Thaler’s work, and of behavioral economics more generally, suggest that it provides a much-deserved comeuppance to conventional microeconomics. Well . . . Not quite….
… Economists, and rational choice theorists more generally, have a blind spot, [Thaler] argues, for just how often their assumptions about human behavior are inconsistent with real human behavior. That’s an important point.
Yet here’s where spin matters: Does Thaler provide a correction to previous economics, underscoring something everyone always knew but just ignored as a practical matter, or is Thaler’s work revolutionary, inviting a broad and necessary reconceptualization of standard microeconomics?…
… No. He has built a career by correcting a blind spot in modern academic economics. But his insight provides us with a “well, duh” moment rather than a “we need totally to rewrite modern economics” moment that some of his journalistic (and academic) supporters suggest it provides….
Thaler’s work underscores that the economist’s rationality postulates cannot account for all human behavior. That’s an important point. But I don’t know that many, or even any, economists very much believed the opposite in any serious way. [“Did Richard Thaler Really Shift the Paradigm in Economics?“, Library of Law and Liberty, October 11, 2017]
That’s what I said.
A non-economist, law professor Ilya Somin, joined the chorus:
Thaler and many other behavioral economics scholars argue that government should intervene to protect people against their cognitive biases, by various forms of paternalistic policies. In the best-case scenario, government regulators can “nudge” us into correcting our cognitive errors, thereby enhancing our welfare without significantly curtailing freedom.
But can we trust government to be less prone to cognitive error than the private-sector consumers whose mistakes we want to correct? If not, paternalistic policies might just replace one form of cognitive bias with another, perhaps even worse one. Unfortunately, a recent study suggests that politicians are prone to severe cognitive biases too – especially when they consider ideologically charged issues….
Even when presented additional evidence to help them correct their mistakes, Dahlmann and Petersen found that the politicians tended to double down on their errors rather than admit they might have been wrong….
Politicians aren’t just biased in their evaluation of political issues. Many of them are ignorant, as well. For example, famed political journalist Robert Kaiser found that most members of Congress know little about policy and “both know and care more about politics than about substance.”….
But perhaps voters can incentivize politicians to evaluate evidence more carefully. They can screen out candidates who are biased and ill-informed, and elect knowledgeable and objective decision-makers. Sadly, that is unlikely to happen, because the voters themselves also suffer from massive political ignorance, often being unaware of even very basic facts about public policy.
Of course, the Framers of the Constitution understood all of this in 1787. And they wisely acted on it by placing definite limits on the power of the central government. The removal of those limits, especially during and since the New Deal, is a constitutional tragedy.
Deirdre McCloskey, an economist, takes a similar view in “The Applied Theory of Bossing“:
Thaler is distinguished but not brilliant, which is par for the course. He works on “behavioral finance,” the study of mistakes people make when they talk to their stock broker. He can be counted as the second winner for “behavioral economics,” after the psychologist Daniel Kahneman. His prize was for the study of mistakes people make when they buy milk….
Once Thaler has established that you are in myriad ways irrational it’s much easier to argue, as he has, vigorously—in his academic research, in popular books, and now in a column for The New York Times—that you are too stupid to be treated as a free adult. You need, in the coinage of Thaler’s book, co-authored with the law professor and Obama adviser Cass Sunstein, to be “nudged.” Thaler and Sunstein call it “libertarian paternalism.”*…
Wikipedia lists fully 257 cognitive biases. In the category of decision-making biases alone there are anchoring, the availability heuristic, the bandwagon effect, the baseline fallacy, choice-supportive bias, confirmation bias, belief-revision conservatism, courtesy bias, and on and on. According to the psychologists, it’s a miracle you can get across the street.
For Thaler, every one of the biases is a reason not to trust people to make their own choices about money. It’s an old routine in economics. Since 1848, one expert after another has set up shop finding “imperfections” in the market economy that Smith and Mill and Bastiat had come to understand as a pretty good system for supporting human flourishing….
How to convince people to stand still for being bossed around like children? Answer: Persuade them that they are idiots compared with the great and good in charge. That was the conservative yet socialist program of Kahneman, who won the 2002 Nobel as part of a duo that included an actual economist named Vernon Smith…. It is Thaler’s program, too.
Like with the psychologist’s list of biases, though, nowhere has anyone shown that the imperfections in the market amount to much in damaging the economy overall. People do get across the street. Income per head since 1848 has increased by a factor of 20 or 30….
The amiable Joe Stiglitz says that whenever there is a “spillover” — my ugly dress offending your delicate eyes, say — the government should step in. A Federal Bureau of Dresses, rather like the one Saudi Arabia has. In common with Thaler and Krugman and most other economists since 1848, Stiglitz does not know how much his imagined spillovers reduce national income overall, or whether the government is good at preventing the spill. I reckon it’s about as good as the Army Corps of Engineers was in Katrina.
Thaler, in short, melds the list of psychological biases with the list of economic imperfections. It is his worthy scientific accomplishment. His conclusion, unsupported by evidence?
It’s bad for us to be free.
Exactly.
Consider the biography of the nudger-in-chief at The Library of Economics and Liberty. In it, the reader is treated to such “wisdom” as this:
Economists generally assume that more choices are better than fewer choices. But if that were so, argues Thaler, people would be upset, not happy, when the host at a dinner party removes the pre-dinner bowl of cashews. Yet many of us are happy that it’s gone. Purposely taking away our choice to eat more cashews, he argues, makes up for our lack of self-control.
Notice the sleight of hand by which the preferences of a few (including Thaler, presumably) are pushed front and center: “many of us are happy”. Who is “us”? And what about the preferences of everyone else, who may well comprise a majority? Thaler is happy because the the host has taken an action of which he (Thaler) approves, because he (Thaler) wants to tell the rest of us what makes us happy.
There’s more:
Thaler … noticed another anomaly in people’s thinking that is inconsistent with the idea that people are rational. He called it the “endowment effect.” People must be paid much more to give something up (their “endowment”) than they are willing to pay to acquire it. So, to take one of his examples from a survey, people, when asked how much they are willing to accept to take on an added mortality risk of one in one thousand, would give, as a typical response, the number $10,000. But a typical response by people, when asked how much they would pay to reduce an existing risk of death by one in one thousand, was $200.
Surveys are meaningless. Talk is cheap (see #5 here).
Even if the survey results are somewhat accurate, in that there is a significant gap between the two values, there is a rational explanation for such a gap. In the first instance, a person is (hypothetically) accepting an added risk, one that he isn’t already facing. In the second instance, the existing risk may be one that the person being asked considers to be very low, as applied to himself. The situations clearly aren’t symmetrical, so it’s unsurprising that the price of accepting a new risk is higher than the payment for reducing a possible risk.
That’s enough of Thaler. More than enough.