Corporate & Securities Law

Nudge

Sunstein and Thaler have a series of posts over at Volokh Consipiracy on their new book Nudge, which expands on their notion of libertarian paternalism (see here, here , here and here).  Something in the most recent post caught my eye.  In preparing to respond to various objections to libertarian paternalism, Sunstein argues that this sort of paternalism offers the “best of both worlds”:

In short, we hope that libertarian paternalism might provide a real third way, one that recognizes the best in Hayek and Friedman while also noticing the work of Simon, Kahneman, and Tversky (and Thaler), which shows that human beings often choose poorly. Thus, for example, libertarian paternalism offers fresh ways of thinking about the mortgage crisis, credit card reform, savings for retirement, prescription drugs, health care, environmental law, and even marriage. In all these contexts, a few nudges could help a lot.

One of the problems that I have with libertarian paternalism marketed in this manner is that it sells traditional economic theory short by describing it as missing the point that individuals make errors.  Perfection is costly, and so the optimal rate of errors is not zero.  The argument against paternalism, libertarian or otherwise, is not that individuals  have perfect foresight and do not make errors (even systematic ones).  It is that individuals will tend to make better self-interested decisions than the government would do on their behalf. 

A second problem, and one I’ve noted before, is that:

In accounting for the long run costs of paternalism, we must also be mindful of dynamic effects that are likely to follow from paternalistic decision-making before intervening (on this last point, see Klick and Mitchell in the Minnesota L. Rev., or more recently Ed Glaeser?s essay on Paternalism and Psychology).

These long term dynamic costs of paternalistic intervention surely must be part of the cost-benefit analysis with respect to any such regulatory proposal.   In other words, there is a danger that my mitigating the costs of errors through regulation, we increase the rate of errors.  This point goes directly to the appropriateness of the “libertarian” modifier for this type of paternalism.  Sunstein & Thaler argue that liberty is maintained because these proposals encourage choice rather than coercive mandates.  But the libertarian case also rests on the presumption that allowing individuals to bear the costs of their errors leads to better and more competent choices in the future.  Many, but not all, of the proposed “nudges” do not appear to take this concern to seriously.

Full post as published by Truth on the Market on April 18, 2008 (boomark / email).