Saturday, May 02, 2009

Nudging Revisited

Tibor R. Machan

Ideas do have consequences and this is quite evident with the current administration's adoption of what has been labelled--or mislabelled--"libertarian paternalism." It was two political economists, Richard Thaler and Cass Sunstein, who proposed the notion that what government should do is not intervene in the market forcefully, the way champions of the New Deal would advocate, but by establishing numerous incentives that would nudge people to do the right thing. (This approach is nicely laid out in Franklin Foer and Noam Scheiber, "Nudge-ocracy," The New Republic, May 6, 2009.)

The approach favored by Thaler and Sunstein is one that is gaining much respect from center-left liberals because it avoids the failed and not too popular policies of aggressive interventionism, the sort that in fact had a lot to do with America's current economic mess. (It involved, for example, requiring mortgage providers to offer very low rates, ones that would never have been possible in a bona fide market economy.) Not ever wishing to give up on the policy of messing with the market instead of leaving it to its own resources, left of center liberals are happy to embrace nudge-ocracy since it keeps a bunch of conceited technocrats in charge of society. And here is where the problem lies, a problem that I do not see any of the advocates of this new approach confronting.

Thaler, Sunstein, Foer, and Scheiber simply ignore one of the most important insights of modern economics, namely public choice theory. Advocates of nudge-ocracy divide the country into two groups--economic market agents whose judgments they do not trust because they are supposedly baffled by the myriad of choices available to them, versus the politicians and bureaucrats in Washington and other corridors of power who have the benefit of superior wisdom, foresight, prudence, and even omniscience with which to manage the economy.

But as public choice theory shows, first and foremost these politicians and bureaucrats are not disinterested, neutral parties but have agendas of their own. Furthermore, considering how difficult if not impossible it is to know just what objectives should be pursued and foisted upon the citizenry by government intervention--including by means of nudging--there is the additional problem that partisan, biased regulators (or nudge-ocrats) cannot help but advance their own priorities as they make policy.

Just consider how difficult, if not outright impossible, it is to know all the details of the public interest, the general welfare, or the common good. (The American founders got it right: the public good is simply for everyone to be free to pursue his or her happiness!) Interventionists suffer from the conceit that they know what people ought to choose and proceed to set up their structure of incentives accordingly. But this is a fatal conceit, as F. A. Hayek so aptly described it--these folks do not know how people should choose; they only imagine they know. They have all kinds of nifty ideas of what sort of insurance programs are best for us all, what retirements programs workers should sign up for, whether people should save or spend money, etc., etc. The nudge-ocrats make no secret of their confidence that they know it all for the vast numbers of Americans. But this confidence is entirely unjustified. The problem is that since they do not know what is best for us all, when they make general policy they cannot get it right. There is simply no way to get it right for millions and millions of people with their highly varied priorities and opportunities.

But the nudge-ocrats insist that they do know it and proceed to forge elaborate schemes to steer us in the direction they believe we all ought to aim for. Since, first of all, this is a myth and, second, they have goals of their own which they mistake for the goals of those whom they propose to nudge, they will mostly foul things up good and hard. (Now and then, of course, they can get things right, too--as with the broken clock that gets the time right twice a day!)

With just a bit of attention to Hayek's thesis of the fatal conceit and the Tullock-Buchanan's thesis of public choice, the error of nudge-ocracy could become evident. But the conceit prevents these folks from even considering these obstacles to their outlook!

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