Joshua Wright and Douglas Ginsburg have given us a very good analysis of many of the problems inherent in normative behavioral law and economics (especially in the form of “libertarian” or soft paternalism) from the perspective of liberty. I am in basic agreement with them. Thus I shall simply elaborate some further criticisms of this approach as I see it.
The form of paternalism criticized is based on an adoption of the behavioral-economics view that individuals (but not apparently policy-makers) are less than “rational.” But since rationality, in the particular sense meant, is thought to be normatively compelling, some behavioral economists have devised policies designed to move people to make rational decisions. Typically, the therapies developed by these economists are less invasive than those of the old-style paternalists. Many in the journalism profession, spurred on by incautious academics, are excited by these developments as they promise a yet-another “third” way between heavy-handed coercion and laissez-faire.
Behavioral economists not only deny that people are always or usually rational in a specific economic sense, they believe that these divergences from rationality are systematic and predictable. So they claim to know the nature and extent of these deviations. Furthermore they claim to know the qualitative and quantitative effects of their proposed policies in affecting individual behavior.
Thus: People are not “rational”, but they should be. Their deviations from rationality are systematic and predictable. Policies can be devised that will correct the deviations. Furthermore, these policies can be implemented with little damage to personal autonomy and individual liberty.
Behavioral paternalism, as I call it, is a thicket of confusions and delusions. Glen Whitman and I are writing a book to sort out all of these. In this short comment, however, I will simply explore a few of the problems.
What is Rational?
The current discussion of rationality, both in the scholarly journals and in the popular press, suffers from an unfortunate association of the technical economic concepts of rationality with more general, and more widely accepted, concepts. The general public is more impressed with the behavioral discovery of “irrationality” than they should be. Most ordinary people associate rational decision-making with having good reasons for a decision or with being reasonably informed of the available options. One economist says that his favorite definition of rational decision-making is a decision for which the individual has reasons that would not be embarrassing to state publicly [Gilboa, 2010]. Of course this is a subjective standard, meant partly in jest, but it does make a good point. Rationality is not just one thing. It is subtle and context related.
Thus when an economist says that people are not fully rational because they do not have perfect knowledge, unlimited cognitive, especially computational, abilities and steely willpower, the ordinary person would and should be startled [Thaler and Sunstein, 2003]. Has there ever been a rational decision in the history of the world?
The real issue is the comparative efficacy in decision-making between individuals and policy-makers. Efficacy is not simply rationality, however it is defined, but a combination of general knowledge and concrete knowledge of the circumstances of time and place. The policy-maker, in principle at least, has access to the findings of scientific studies by behavioral economists and others. But he does not have access to the individual’s concrete circumstances – the personal knowledge of tastes or preferences and the local knowledge of opportunities. Thus when a person is overweight the relevant knowledge is not only of the caloric content of various foods, the effect of exercise and the average consequences of weight on health. It is also the individual’s degree of enjoyment from particular foods, his other health-related characteristics (blood pressure, cholesterol, heredity) and the particular nuances of his possible diet-plan. Some individuals find it useful to cheat from time to time as a reward or to eat unhealthily at restaurants but healthily at home and so forth. Some may choose, all things considered, to remain overweight. This concrete knowledge is simply unavailable to the policy-maker.
Disregard for Important Distinctions
Wright and Ginsburg discuss the disregard Thaler and Sunstein have for making a distinction between the structuring of choice-situations in the private and in the government sector. There are many examples of this. But I think the most revealing is the “slight” change in the cafeteria food-placement example that is in both their journal articles and in their book Nudge. In one of the journal articles [Thaler and Sunstein, 2003 ] we are asked to consider a cafeteria (somewhere and owned by someone – it is not clear) in which the manager is faced with a decision of food placement. Should the fruit go before the cake or the cake before the fruit? Some kind of decision obviously must be made. Essentially they say the decision comes down to doing what is best for the people who eat there (putting the fruit first) or being malevolent and putting the cake first. In the first case the manager is acting paternalistically. The assumption is that the placement will affect relative consumption of the foods. There is no discussion, however, of arranging the order so as to maximize profits. This occurs all the time, for example, in supermarkets which must allocate shelf space. There is no discussion of competition among restaurants for menus that cater to specific desires among people – dieters, vegetarians, organic food consumers, and so forth. The consumer is assumed to be some captive of his circumstances who, period after period, will be affected by a few inches or feet of separation between foods.
In Nudge  however, the cafeteria is in a school. If it is a public school it is in the government sector. If it is a private school it is not. We do not know. Perhaps more importantly, the consumers are children (the younger the better for Thaler and Sunstein’s case). So we are dealing not with paternalism in the standard sense but with parentalism in the old form of in loco parentis. The role of parents in affecting the diets of children is not our issue.
This case is instructive. They do not care about the state action and private action distinction. They do not care about the role of the market and of competition among firms. They do not care whether the subjects (or shall we say objects) of paternalism are adults or children. It is all the same from their analytical perspective. They start with these blinders.
Lack of Knowledge Vitiates the Distinction between Old and New Paternalism
The basic distinction between new paternalism (behavioral paternalism) and old paternalism is deceptively simple. A joke will capture it. Old paternalism means “We know what you should do and we’ll force you to do it.” New paternalism means “You know what you want to do and we’ll ‘force’ you to do it.” The old paternalist doesn’t care what you want either on the surface or at some deep level. He knows what is best. The new paternalist thinks that he can identify what you really, really wantand he will help you to get it, which is necessary because you cannot ascertain it, blinded as you are by cognitive and behavioral biases.
Many of the examples that behavioral paternalists give of “welfare” improving policies are described in such a way that they present exceedingly simple problems for the policy-maker. If, on the other hand, we look at social issues more realistically, we shall find that the practical impossibility of acquiring the knowledge necessary to carry out the new paternalist program leads us to the old-time liberty-disregarding paternalism. We cannot nudge people toward what they really, really want. So we shall “nudge” them to what the paternalist wants.
The Case of Cigarettes
If someone would have said some fifteen or twenty years ago that cigarette-pack health warnings would become graphic pictures designed to horrify the public into not smoking, most people would have thought that the speaker was engaged in a kind of reductio ad absurdum.
Over the years the arguments about the purpose of government interference in this area, as well as the policies, have undergone important changes
- In the beginning we had the Surgeon General’s Report simply warning people about the health consequences of cigarette smoking. Of course people realized that cigarette smoking was harmful even before the 1962 report.
- Then we had fairly general warnings about “hazards” to health. In fact, at first it was simply said that smoking may be hazardous to one’s health.
- Warnings evolved to include mention of specific illnesses.
All of this is the provision of information, although with the warnings on the package itself the idea was to remind people at the moment of purchase.
Why was it perceived by some that the provision of information, even at the moment of sale, is not sufficient? Why must we move to dramatic presentation of low-probability events? (Most people who smoke do not turn out as the photographs suggest, and many people who do not smoke will have breathing tubes, feeding tubes and nasty medical procedures sometime before they die.)
There are two answers to this question. The first is the “scholarly” answer. Behavioral economists tell us that many people exhibit “optimism bias.” This is the cognitive attribute in which the person simultaneously realizes that the probability of, say, getting ill from tobacco smoking is p but that this population frequency does not apply to him. It does not apply to him for “magical reasons.” He has good luck and so forth. So the probability of getting ill is for him (significantly?) less than p.
In view of this, some behavioral economists have suggested that policy makers use another cognitive bias – “availability bias” – to offset the optimism bias. Availability bias refers to the exaggerated fear and estimate of the probability of harm when one is confronted with, say, a plane accident or instance of terrorism. After a plane accident many people think that the probability of dying in a plane crash is much higher than a cool statistical analysis would suggest.
So now let us put the two biases together and construct a policy. Telling people that smoking is dangerous – even providing people with statistics – is not enough. They will still think that their personal good luck will save them. So we must use their availability bias. We must make the images of a horrible death so available to their minds that they are jolted out of their optimism bias.
But wait. There is evidence that smokers already think that the probability of death and illness from smoking is higher than it really is [Viscusi, 2002]. So it is unclear what optimism bias does here. Perhaps it just offsets it? In addition, how scary should the advertising campaigns be? Theoretically, they should just be scary enough to offset the optimism bias.
Thus we need to know the effective personal probability the typical individual places on disease from smoking and the degree to which the scary graphic offsets that. Bottom line: We do not have this information nor are we likely to get it soon.
The second answer follows from the practical irrelevance of the first. The campaign of scary pictures, scenarios, and the like will be deemed successful only when cigarette smoking is reduced to an extremely low level. The “optimum” is not well-informed decision-making by morally autonomous agents. It is not even the deeply-hidden true preferences of an individual with unlimited willpower. It is doing what the paternalist thinks you should be doing.
The whole campaign is an attack on the older principle of informed choice. It does not respect individual moral autonomy. It is an example of the anti-libertarian direction in which new paternalist reasoning tends to lead us. The vicious dynamic of new paternalism is generated not simply by the present set of policies that they advocate but by the reasoning with which they rationalize the policies. The arguments set up impossible expectations which, in turn, are likely to be corrupted by the political system.
As the classical liberal sociologist William Graham Sumner (1919) said in his 1887 essay, “State Interference”:
“The only question at this point is: Which may we better trust, the play of free social forces or legislative and administrative interference. This question is as pertinent for those who expect to win by interference as for others, for whenever we try to get paternalized we only succeed in getting policed.”
Itzhak Gilboa, Rational Choice (Cambridge: MIT Press, 2010), p.5.
William Graham Sumner, “State Interference ,” War and Other Essays, ed. Albert Galloway Keller (Yale University Press, 1919). The Online Library of Liberty.
Richard H. Thaler and Cass R. Sunstein ,“Libertarian Paternalism,” American Economic Review Papers and Proceedings, vol. 93 (2003), pp. 175-179.
Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale University Press, 2008).
W. Kip Viscusi, “The New Cigarette Paternalism,” Regulation, vol. 25 (2002), pp. 58-64.