Nudge. A Book on Libertarian Paternalism

Interesting book review. The book, Nudge, is written by two people with connections to Obama.

The reviewer for Mises is economist Gary Galles. I don't know much about him but I would assume he's more of anarcho-capitalist style libertarian who doesn't like the "libertarian paternalism" argument put forth by the authors.

Says Galles:

In Nudge (Yale University Press, 2008), authors Richard Thaler and Cass Sunstein try to combine libertarianism and paternalism by arguing that a nudge — "any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives" — can benefit those nudged, while staying consistent with liberty because it does not force anyone to do anything. Nudge's argument is far from airtight. But even more devastating is its reliance on a false premise. The "market failure" examples it promises to improve are actually government failures.

The argument he puts forth goes to the heart of how different people perceive our realities. Quite frankly, I find that we do not debate this paradigm enough in our national discourse. It may seem like we do but we really don't. To Galles, the authors start from a "false premise"...that false premise being that the problems they seek to correct with a "nudge" are not grounded in market failure. The authors show a variety of economic shortcomings and Galles seeks to demonstrate how their focus on the root of the problem is misplaced.

Is he right?

Read on and share your thoughts.

I've previously posted in detail concerning Libertarian Paternalism, Here and here.

The second post prompted David Friedman himself to do a drive by at Freedom Democrats and take me to task over Sen's Paradox.

I read that review over at Mises.org. and Galles isn't really framing Thaler and Sunstein's argument accurately. I haven't read "Nudge" itself, but I have read some of their more technical, academic papers dealing with the same subject.

Thaler and Sunstein are using empirical results from Neural-economics to argue that economic agents are only "boundedly rational." Bounded-rationality usually means either that transaction costs are too high for economic agents to have perfect information to make utility-maximizing decisons or that economic agents suffer from cognitive limitations that a priori prevent utility maximization. Either way economic agents aren't "instrumentally rational."

The second part of the Thaler and Sunstein argument is that any exchange, even voluntary exchange in a free market, will have a default choice architecture designed to influence decisions.

Thaler and Sunstein combine both parts to argue that certain decisions should be choice architected so that the default bias is toward a more pareto-efficient outcome but that, nevertheless, people should be free to make less efficient decisions if they so consciously choose.

Galles doesn't get it right by stating that Thaler and Sunstein are making an "irrationality" argument. Ironically, Galles himself seems incognizant that the "irrationality" argument is actually a core element of the Misean tradition. I know you have expressed quite an interest in Bryan Caplan's "irrational voter' thesis, and Caplan is admittedly drawing from the Misean framework in proposing such.

However, the other part of Galle's criticism does indirectly get it right, that we are such a hopelessly mixed economy, that true price discovery is problematic to obtain.

So while I actually agree with Thaler and Sunstein on both of their points--boundedly rational agents subject to an inherent default choice architect bias--the Libertarian Paternalistic argument nevertheless suffers from a mile-wide gaping flaw, namely that monopoly enforcement of a default bias will impede true price discovery and that such a monopoly enforcement mechanism will always use force to ensure the success of the default choice(bail out, if needed).

Imagine George W. Bush privatizing Social Security under a Libertarian Paternalistic scheme, setting the default choice to favor 401Ks heavily weighted in mortgage backed securities and then having a rubber-stamp congress increase mortgage tax deduction in order to reinforce the default choice. Imagine if Social Security were tied into this current Wall Street bailout. Therein lies the essential problem with Libertarian Paternalism. Thaler and Sunstein acknowledge the Public Choice(alternatively, Libertarian Class) Theory problem with Libertarian Paternalism but underestimate the full power of this counter argument.

Libertarian Paternalism=socialize the losses and privatize the gains of the default choice. Only a boundedly-rational idiot would end up going against the default choice...