Who needs a Nudge?

I said last week that I’d come back to the critiques of bevhavioural economics but it’s obviously taken a while. Part of the reason is that I got wrapped up in this great essay by Joshua Wright and Douglas Ginsburg. It’s a blistering critique of the “behaviourist’s agenda” that you should really read if you’re interested in the subject. I don’t think there’s much attempt at balance in it but it raises some excellent points, as well as overplaying a number of weaker ones.

The essay can really be read as a libertarian response to Richard Thaler and Cass Sunstein’s work, summarised in their book, Nudge. For those new to the field, Thaler and Sunstein’s thesis is that choices can be framed in such a way that people will be more likely to do what is in their best interests, as they themselves judge it. The book has been hugely influential in defining the concept of libertarian paternalism, which is the idea that a ‘choice architect’ can improve welfare without reducing the freedom to choose. They do it by framing the choice in such a way that people’s cognitive biases will nudge them towards the welfare-improving option.

The easiest example of such choice architecture is through the setting of default options. For example, if there is a choice about which provider of government-supported retirement savings to use (ie. Kiwisaver providers in NZ), then the default option for people who do not actively choose a program should be one that is recommended by experts. Those who choose may still choose, but people who do not choose are allocated a plan that experts approve of. The idea of manipulating defaults is definitely something I want to get a whole post on, but let’s now turn to the fundamental critique of Wright and Ginsburg.

They pack in quite a few arguments but I’m going to pull out just a few that seem central.

How should one evaluate a regulatory intervention that would increase welfare but also diminish liberty? What are the mechanics of trading off welfare and liberty when the two are in tension?

If individuals are to realize their full potential …then they must be free to err in large ways as well as small. The fatal flaw of libertarian paternalism is to ignore the value of the freedom to err.

So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty; it will pose a significant risk of reducing both.

Essentially, they criticise behavioural economists’ focus on welfare to the exclusion of the “process of liberty”. It’s a difficult criticism to make because the idea of welfare is draw from a consequentialist, utilitarian framework, whereas the ‘process of liberty’ sound like more of a rights-based, deontological concept. To suggest that one limmits the other is a hard argument to make coherently when the utilitarian framework contains a complete moral philosophy of its own. It’s also interesting that they cite Mill’s support for their views since he firmly believed that utilitarianism was a moral philosophy that promotes liberty. To suggest that we could be following a utilitarian path and simultaneously reducing liberty seems like an argument that needed more time to make than they gave it in their essay. However, I’m no philosopher so I’m happy to be set straight here. We’ll discuss some of the more nitty-gritty aspects of the argument over the next week of so, because this debate is undoubtedly an important one for the progression of both the law and economics.

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