Nudging for Liberty

In response to: Free to Err?: Behavioral Law and Economics and its Implications for Liberty

In this essay I will begin by disagreeing with the authors on two counts.   First, I will argue that defenders of liberty might want to think long and hard about specific issues, such as retirement accounts, where liberty and the free society might be enhanced through nudging.  Put another way, short of a libertarian winning the White House in 2012, would advocates for liberty benefit from looking closely at some of the potential long-term gains from nudging?  Second, I want to ask bluntly what these authors, and economists in general mean by the term “behavioral” economics.  Wright and Ginsburg seem to lump a large group of researchers together when they use this phrase, much to the detriment of their arguments.  However, I also concur with the authors that the risk of wide-spread adoption of “nudging” by the state raises too many new opportunities for rent-seeking and creates the potential for a slippery slope leading towards a significant decline in liberty for society.

One of the examples that Thaler and Sunstein use repeatedly to defend nudging is the default option in retirement plans.  Most private firms set non participation in the retirement plan as the default option for their employees.  Thaler and Sunstein argue that by switching the default to participation–forcing people to voluntarily opt out of the program– we’d increase savings and have a better (based on utilitarian criteria) outcomes.  Libertarians argue that it is fine for a private sector firm to make such a decision but not for the government to force firms to do so.  Let’s stipulate that governments have to do something.  I’m not advocating or defending out of control power grabs and expansions of state authority.  Even libertarians and the Founding Fathers acknowledge that government, albeit it a limited one, is needed to provide basic services, enforce contracts, and promote the rule of law.  This begs two questions.  First, in the scope of limited powers, should it nudge; if so, whom should be on the business end of said nudge?  Second, could nudging help move us back towards less government?

In Indiana, Governor Mitch Daniels has used classical liberal and business principles to reshape the way that many government services are provided to Hoosiers.  Today Indiana citizens can renew their license plates and drivers licenses online rather than going to a branch office.  One could argue he has “nudged” Hoosiers away from using license branches (where, I should add, service has dramatically improved partially because of the decline in use and partially because of an overhaul of the employees who staff the branches and an altered pay scale that rewards quality service).  So we have an example where the government “nudges” us towards an activity that provides a basic service that few would call unreasonable,, changes behavior, and is consistent with classical liberalism.  Perhaps I’m stretching the definition of nudging too far, but by influencing the choice set of citizens and making them better off (who wouldn’t like to avoid a BMV?!) Governor Daniels sure seems like a nudger to me.

Regarding the second possibility that nudging might lead us to shrinking the state, Richard Thaler, in an interview on Liberty Fund’s highly popular podcast EconTalk, hosted by Russ Roberts, discussed and defended his research that he has conducted with Cass Sunstein that has led to the publication of their widely read book Nudge.  Thaler defended his positions throughout the interview, but one part of the interview that struck me was a discussion of the adoption by Sweden of a privatized national retirement plan.  The Swedish plan, which is strikingly similar to the one that was soundly rejected during the second term of the Bush administration, involves persons setting aside a percentage of their income in personal retirement accounts in lieu of placing the money in the hands of the government.

Perhaps it’s simply today’s context that grabbed my attention, but Roberts and Thaler focused on the issue of how the system was set-up, particularly the use of a default fund by the government that ended up out-performing most of the 400+ funds that were available for participants to choose.  What I found striking was the idea that Thaler and Sunstein are promoting – encouraging more private savings as a means by which individuals can gain greater control and autonomy over their financial futures.

Returning to the issue of whether the state should regulate that companies set the default retirement option as participation in plans rather than non-participation, one can easily imagine that with more money placed in 401(k) programs the political effectiveness of arguments from the left to fight tooth and nail for Social Security would diminish – substantially.  So would such a nudge enhance liberty?  Sure, in the short-term those people would lose the benefit of the money to spend, but would such a nudge not enhance responsibility and help to kill off a large government welfare program?  So perhaps nudging can move us back towards more limited government as well.

The second issue I’d like to raise is a small point, but one that merits discussion – what do critics of “behavioral economics” think of experimental economics as compared to behavioral economics?  Wright and Ginsburg spend a fair amount of time in the early part of their essay critiquing the fact that behavioral economics has not built up a fully specified model to compete with the utility maximization approach and yet would like to justify a large increase in regulator power.  That’s a fair question, but one might as easily ask, how can we accept the findings of experimental economics that we “like” that support liberty and then reject out of hand as dangerous findings that give rise to claims for greater regulation.

Strangely the authors seem to understand there is a nuance here that matters.  They cite experimental work that supports their position (see footnotes 25 and 26) but only after they seem to napalm what they call behavioral studies that test the utility maximization models in the opening part of their essay.  True, experimental economists who are supporters of freedom typically do not advocate using the state to impose their findings onto others.  But the inconsistency is striking.

Many experiments are highly consistent with the belief that markets are naturally occurring among humans.  There are experiments that show how property rights have developed in the absence of strong centralized power, and additionally work that suggests that when a “leviathan” is introduced that individual is more likely to steal or shirk than aid in the establishment of order and justice.  In short, experimental work that does not fit the “homo economicus” assumptions that dominate certain parts of the economics profession is not all contrary to liberty, markets, and personal responsibility.

Despite all this, the authors are absolutely correct in showing skepticism towards the behavioral law and economics project as it relates to maintaining personal freedom and limited government.  At its core, the movement is utilitarian and depends on heroic assumptions about the nature of government policy-making and bureaucratic incentives.

Rent-seeking is the phrase economists use to discuss private sector individuals and companies who lobby the government in search of legal protections and advantages for themselves and their business interests.  There is a reason why K Street in Washington, DC is full of lawyers who do nothing but lobby politicians on behalf of clients trying to protect their profits and exclude competitors from entering into their markets.

Rent-seeking is an enormous problem in government today, but would only get worse in a world with rampant government nudging.  In the conversation between Richard Thaler and Russ Roberts, Thaler explains that he believes that the default fund in the Swedish private retirement system was created, successfully, through the work of a group of bureaucrats who managed to build a diversified, low cost stock fund.  Now try to picture what the construction of a default fund in the U.S. would look like, and more importantly try to imagine the wheel-barrows full of money that one would see being pushed around Washington during the negotiations to create such a fund.  The rents, the wealth gained when government granted the right to be the default fund to an investment firm, would be enormous.

Additionally, it is naïve to imagine that nudging would be limited to the scope of areas that Thaler and Sunstein currently suggest.  Any student of politics and history knows that governments don’t shrink, and Wright and Ginsburg rightly note that bureaucracies have no incentive to keep themselves confined to regulating narrow areas of public policy.  It doesn’t fit their economic incentives or the world views of individuals attracted to government employment.

The idea of nudging is not going to go away, particularly if President Obama wins re-election.  Following the more consistent ideological and philosophical arguments of the authors, and other prominent writers, would be preferable if the political landscapes change, but what if public and elite support for nudging grows?  I would urge us to at least consider areas, such as nudged private retirement savings, as one possible way to reach a wholly unintended consequence – the elimination of government retirement programs