The literature on behavioural economics has set off a very interesting debate on the extent to which policy-makers should intervene to improve outcomes in cases where individuals are potentially harming themselves but not others.
A paper by Camerer et al in 2003 put forward the case for asymmetric paternalism whereby policy could potentially help individuals who are not making rational decisions, while not infringing on others. An example is pension auto-enrolment whereby individuals procrastinating on pensions decisions are helped in the process of saving while those who genuinely do not want to take out a pension are not forced to.
Sunstein and Thaler added the idea of Libertarian Paternalism to the literature whereby policy-makers strive to improve outcomes (paternalism) while also placing a high weight on freedom to choose (libertarianism). The now-famous book Nudge is an expression of this philosophy and has had a dramatic impact on policy-makers in the US, UK and to some extent Australia and is being discussed at least in the Irish policy environment.
A big debate is ensuing around Nudge with some claiming the philosophy is too interventionist (see Sunstein’s Storr lectures for a list of these critiques and also his responses – see also a reading list I put together here).
Another line of argument is that Nudge artificially restricts the application of behavioural economics to non-mandated policy interventions. A recent Harvard Law Review piece by Bubb and Pildes examines three areas of policy (financial regulation, fuel pollution and consumer credit regulation) and makes the case that the behavioural evidence does not support soft-paternalist policies but rather a more interventionist approach. In particular they argue that there is a large tension between the evidence provided by behavioural economics and the political position being advocated by many of its adherents. In their view, the bounded rationality displayed by citizens leaves them far more open to exploitation and also far less likely to respond to soft-policies to improve their welfare. They cite an extremely interesting article by Lauren Willis in the University of Chicago Law Review, who argues that Nudges are insufficient in cases where large corporations have incentives to counteract them and she gives a detailed case-study from US financial regulation where financial companies quite easily ran around various default options embedded in consumer protection regulation. She argues that mandates and generally more active regulation is needed in many cases due to the degree of control that the regulated firms have over how to implement “nudges”.
Sunstein’s response to this is available here where he argues that it is important to respect people’s freedom of choice and that it is unclear yet that nudges are ineffective in the face of counteracting moves by vested interests. He argues that, while in some cases mandates may turn out to be neccesary and more effective, this should at least partly be an empirical question and should not ignore the importance of autonomy.
This debate is important in the Irish context. There are many areas of policy where policy objectives lead to tensions between implementation of effective policies and the autonomy of individuals to choose. In cases where individual actions lead to costs to others then traditional economics and regulation is on more solid ground. But when there is active debate about how to reduce health-damaging diet and consumption patterns, promote greater pension coverage and other policies effectively aimed at improving individual welfare through changing their behaviour then this debate is very important and interesting. It also hits against the idea that behavioural economics is an attempt to individualise wider social and economic problems. In this debate, there is a clearly interesting tussle between the interests of large companies, the decisions of boundedly rational households and the political factors that lead to the mandates of regulators. It provides an interesting and realistic way of debating policy and regulation.
15 replies on “How Paternalistic Should Policymakers be?”
Support for behavioural economics in the area of financial regualtion from an unusual quarter:
On another fornt, Michael Grubb and his colleagues seek to separate the role of behavioural economics (satisficing) from that of conventional neoclassical economics (optimisation) and the transformative role of the state in:
He gets a bit more specific in the context of the current CMA energy market investigation in Britain here:
about why energy consumers can’t be bothered engaging effectively in the market, but fails to take the next step, as Prof. Willis does in the study you cite, to show how the big energy companies bamboozle their customers so that they can continue to gouge them.
At least the issue is being addressed, how ever patchily, in Britain. In Ireland, the gouging of final consumers is officially authorised and approved.
Nudging people versus regulating the sale of crap industrialised food . Nudging is cheaper. We need more joined up thinking about the link between what is sold and who pays for the end stage health costs. With populations ageing, it will not be ossible to meet obesity related costs in the over 70s . Something like 80% of NHS costs relate to the last 2 years of life.
Nudging people into pensions when markets can’t price tail risk and growth is banjaxed. Those ads- X is regulated by th Financial regulator. What does that actually mean ? . And shares can fall as well as rise. And value at risk works within 2 or 3 standard deviations. But not beyond.
Other peoples’ money. Trichet didn’t see Lehman coming either.
Nudging money out of the hands of the already wealthy and off bloated balance sheets and in the direction of people who can spend it- impossible.
Everything is political.
Reading this post brings a thought to mind: ‘the divine right of kings’. Absolute monarchs were anointed by God, so they knew best and everyone was obliged to bow to their superior wisdom in all things. We all know how that ended up.
The level of paternalism advocated by Sunstein and others who follow an ‘irrational weigher’ model of individual choice is not consistent with the principles of representative democracy. Further, it precludes any deliberative forms of effective democratic engagement in policy-making. It rests on the assumption that the prescriptions of policy-makers, and their expert advisers, are somehow more rational and devoid of cultural, class ideological or group identity biases – and self interest – than are exhibited in the choices and preferences of less well-informed, less-educated and, therefore, irrational individuals.
However learned his theory and the usefulness of many of his insights, a key problem with Sunstein’s approach, as D.M Kahan and his risk analysis colleagues, among others, have been pointing out since the mid-2000s, is that is ignores the influence of cultural identity in decision-making and the way in which groups and individuals interpret information in exercising their own rational choice.
It’s not surprising that ‘nudge’ theories etc. are eagerly grasped by policy-makers. Especially by those whose capacity to devise policies which responds to the needs of, and protects the interests of, ordinary citizens and serve to equitably distribute resources and wealth within society, has been consistently exposed as woefully deficient. Lacking any useful or socially beneficial [policy ideas a good old dose of ‘benevolent paternalism’ is called for! We’ll make you do the right thing for your own good, whether you like it or not!
Tim Harford had an interesting piece called “what a radical Conservative Government could do ” in the FT on Saturday . Quite libertarian
but maybe the assumption of ubiquitous private sector competence is a bit of a stretch….Just thinking about Crapita and Serco.
I think a key issue that the above points towards is that a high level of priority should be afforded to preserving the freedom of government to regulate large businesses in the face of assault from negotiations on trade agreements, and other forms of supranational policy making.
Not to worry! The whole shebang is going precisely where it deserves i.e. nowhere.
On the other hand, individual behaviour, the old-fashioned idea of free will, if you like, does matter.
Unfortunately, it cannot be disconnected from collective behaviour. The Greek tourism minister may well be right but the attempt to transfer the responsibility to foreign tourists is unlikely to work cf. the many blog posts. Any more than the idea of the current Greek minister of finance who suggested, in a formal document, that they act as tax inspectors.
The collective response of a society worthy of the name is that all accept the responsibility that they pay the taxes needed to make it function. Acceptance of this is based on two essential considerations (i) acceptance that the basis of the levy is fair and (ii) and that the proceeds are spent equally fairly. There are very few societies where this balance exists.
I wasn’t thinking about tax collection mechanisms, which are a matter for government. If they can’t hack it in terms of convincing citizens that taxes are necessary to provide public services, demonstrate the services/goods are going to be provided in a competent, fair and quitable manner for the good of society as a whole, then they deserve to be thrown out on their ear. (Here, the debacle of Irish Water provides a pertinent example.) I was more thinking about the intrusive interventions by imbecilic politicians into the personal lives of citizens to improve their ‘moral character’ because they lack the competence, or willingness, to deal with core issues of inequality, unfairness and bad governance within their own policy domains. My argument with the whole ‘nudge’ concept is that while expertise is a very fine thing; it comes with its own baggage and potential for forms of technocratic tyranny that play into the hands of political control freaks.
The vast majority of law is to protect, not just others from us but us from ourselves. Law seems to be a means to persuade us to do the right thing.
I don’t see how this idea of paternalism is new or different. We already have laws that encourage us to help ourselves even if it doesn’t affect others. Suicide is the most obvious. We also have laws that allow certain people with mental issues to be committed or restrained if they are intent on harming themselves. Even when laws are designed to prevent harm to others, the stick used is that if we engage in them it will hurt us too e.g. murder = life in prison.
The justification for not allowing citizens to carry certain weapons is that the citizen is in fact safer if the weapon they believe is needed to defend themselves is less prevalent in society. So in general it protects us from ourselves.
I have to disagree with you on the point in relation to taxation. It is a central part of the social contract and most definitely not solely a matter for government. I mentioned it because it should IMHO be the central focus of economic study given how much of GDP transits a modern government’s coffers. Such study would pose the fundamental questions; who benefits and who pays and how do the decisions taken impact on economic growth (or well-being)? Only the wealthier economies of northern Europe – Ireland excepted – with a few others of the OECD have created the mechanisms that have resulted in a broad societal consensus in the matter. That is what has made them rich and contented (or smug, if you like).
As for the rest, I agree wholeheartedly with the points that you make.
The individual earthling is dead. The philosophy of consciousness runs into dead ends. Long live the individual! The Neanderthals lasted 400,000 years – longer than our lot (Seven_of_9 gives us only a 50-50 of making 400,000 years;I’m ahead of Hawking as Seven has a seat for me later on …)
Earthlings live in lifeworlds. They are subjected, yes subjected, and collectively, to the systems of money and power. Within the short history of democracy this power used to be allocated to ‘the state’. Big Money Systems see the dangers to their ‘power’ from ‘the state’ … so … they have taken over the state: in the US almost completely and heading that way in the EU. Load the states with debt and they have control – e.g. Hibernia is now in hock to the Financial System for foreseeable generations ….
Democracy has lost its meaning.
The dominant variable in economics, especially macroeconomics, as it stands is ‘ignorance’.
Behavioural economics is making a contribution to changing thinking and adds some ontological richness. Psychology matters. It is young … part of the overall mosaic … give it time …
The dominant variable on the planet is ‘POWER’. Ordinary Joe and Joan citizen-serf no longer have any of the ‘real’ … merely the illusion of democratic choice, as Hibernia’s recent history amply demonstrates.
On a more optimistic note – the next lot of earthlings might be somewhat ‘collectively as distinct from individually’ brighter and saner …. in a few million years or so but probably on another planet!
I’m nudging towards ….
fyi on Power and Failed States
A new paper by Dutch economist Servass Storm znd C.W.M. Naastepad, embedded at the end of this post, does a deft job of shredding the two key beliefs that underlie austerity policies: that government profligacy and insufficiently competitive labor markets caused the crisis, so the remedy is to crack down on government spending and wage rates.
In contrast to most economic papers, this one is not just well documented but also well written. The authors give themselves license to decry these intellectually bankrupt policies. The abstract:
The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labour cost competitiveness (caused by rigid labour markets), or a combination of both. Based on these diagnoses, crisis-countries have been treated with the bitter medicines of fiscal austerity, drastic wage reductions, and far-reaching labour market deregulation—all in the expectation that these would restore cost competitiveness and revive growth (through exports), while at the same time allowing for fiscal consolidation and private-sector debt deleveraging. The medicines did not work and almost killed the patients. The problem lies with the diagnoses: the real cause of the Eurozone crisis resides in unsustainable private sector debt leverage, which was aided and abetted by the liberalization of (integrating) European financial markets and a “global banking glut”.
The raw numbers show how badly the orthodox policies have performed. European GDP has yet to reach its precrisis level, and the average unemployment level is 12%, and the social costs are high as well:
The crisis is creating an even more polarized society in which the poorest have to fight for access to basic items such as critical medicines, have to queue up for the soup kitchens and are ever more often homeless. The crisis has turned the Southern Eurozone into a depressing world of closing of possibilities, hopes and dreams, a dark world of heightened inequalities, high unemployment, pay cuts, rising in-work poverty, and people going hungry, hunting for food through garbage cans—as there is no (longer a) welfare state to fall back upon.
As Storm and Naastepad debunk what they depict as the central myths of the Eurozone crisis …
Read on inc. link to paper:
I work on the basis that any large firm (large meaning having more than, say, a 10% share of a market) dealing directly or indirectly with the public is operating a conspiracy against the public. We need to remember that these firms are fully aware of the bounded rationality of their existing or prospective customers (either from publicly available research or from research and experience of consumers’ behaviour they’ve built up) and are magnificently adept at exploiting it.
In a recent paper, Pete Lunn of the ESRI
poses the question “Are Consumer Decision-Making Phenomena a Fourth Market Failure?” (the other three being externalities, the abuse of market power and the exploitation asymmetric information). His broad conclusion is that poor decision-making by consumers should not be viewed as market failure. However, if governing politicians and policy-makers believe it is and that it mandates their intervention they need to be aware they are entering a minefield.
In those situations where a potentially competitive market exists, it may be sufficient for the authorities to ensure that there are no barriers to entry or exit. Examples are the grocery markets in Ireland and Britain. Given the rents that were being captured by the large incumbents in the Irish market it’s not surprising that Aldi and Lidl sought to establish and have established a strong presence – which has benefited consumers. In Britain it took more time for a sufficient number of shoppers to reject the exploitative model of the Big 4 (Tesco, Sainsbury’s, Morrisons and Asda). But now the implicit cartel is under serious pressure and this will benefit consumers.
However, these implicit cartels can prove to be damnably resilient in some markets and are able to sustain their capture of economic rents. The electricity and gas markets in both Ireland and Britain are perfect examples. Even though final prices in Britain are much lower than they are in Ireland the rip-offs being perpetrated by the Big 6 energy suppliers combined with the UK Government’s costly and stupid policies on climate change have compelled a full-blown investigation by the UK Competition and Markets Authority. Apart from some tinkering around the edges the report of this investigation is unlikely to change anything. With lower global energy prices some of the pressure is off. In addition, the roll-out of ‘smart meters’ may empower many consumers to impose some discipline on rent-capturing suppliers. However, the most effective response – the statutory representation of the collective interests of final energy consumers – is not on the agenda for obvious reasons.
In the meantime, Irish electricity and gas consumers continue to be ripped off far more rapaciously subject to the full official approval of political, policy-making and regulatory authorities. These rip-offs are endemic for all service provision by the sheltered private, semi-state and public sectors.
Can the state be trusted to “nudge” us plebs in the “right” direction? Who designs the “nudge” and which lobbies do they listen to?
Freedom and responsibility always go hand-in-hand. If the state grants itself the freedom to nudge, then it also takes upon itself the responsibility of dealing with adverse consequences. What happens if citizens are “auto-pensioned” into funds that later produce poor returns (or are simply confiscated by the state, as happened here)? What happens if citizens are “nudged” into eating foods that are later found to be unhealthy?
I see what you are saying – much the same point as I think I am trying to make.
Sunstein, for all his scholarship, fell a bit short of the mark.
If you want an example of how silly the ‘tell people how to live because we know best’ stuff is capable of becoming, please note the reporting on the WHO obsesity ‘study’ on obesity this a.m. Great PR and media headlines , all achieved on the basis of largely un-peer reviewed or, in any other way, responsibly verified data. Add in: projection of scenario several decades ahead. So we’re en route to becoming the ‘fattest country in Europe. Really? Who says? On what basis do thse experts support thier assertions?
So Government must immediately introduce legislation which suits the perspective of a tiny group of so-called ‘health’ lobbyists/un peer revied experts? Otherwise we will all drop dead from eating too many hamburgers and consuming too many soft drinks. Oh dear God, gimme a break!
Sure. without food we will also all starve. And that cannot be projected 50 years ahead. WHO can, of course; as it did , so accurately, with flu pandemic a couple of years ago?
Whose ideology,and whose agenda, are being followed here? On the basis of half-cooked non-peer reviewed data? Thankfully, our Minister for Health has attempted to inject some notes of reality. Rightly, he points out that the data is speculative.
As we all now know, predictions of risk may not be borne out Thirty years down the road of telling a whole generation that natural products, like butter,are bad for them; without so much as an ‘oops’the mistake is suddenly acknowleged. ‘Oops’ indeed if you want to follow the ‘nudfge’ formula.