Escaping Paternalism: Rationality, Behavioral Economics, and Public Policy

Cambridge Studies in Economics, Choice, and Society

by Mario J. Rizzo, Glen Whitman

The burgeoning field of behavioral economics has produced a new set of justifications for paternalism. This book challenges behavioral paternalism on multiple levels, from the abstract and conceptual to the pragmatic and applied. Behavioral paternalism relies on a needlessly restrictive definition of rational behavior. It neglects nonstandard preferences, experimentation, and self-discovery. It relies on behavioral research that is often incomplete and unreliable. It demands a level of knowledge from policymakers that they cannot reasonably obtain. It assumes a political process largely immune to the effects of ignorance, irrationality, and the influence of special interests and moralists. Overall, behavioral paternalism underestimates the capacity of people to solve their own problems, while overestimating the ability of experts and policymakers to design beneficial interventions. The authors argue instead for a more inclusive theory of rationality in economic policymaking.

Genres: Economics, Politics, Feminism, Nonfiction

506 pages, Paperback

Published January 16, 2020

Reviews

[Dan · Rating 5 out of 5]

An excellent book. This is applicable no only to economics but also many of its related fields.

[Paul Sand · Rating 4 out of 5]

[Imported automatically from my blog. Some formatting there may not have translated here.]

I think I put this book on my get-at-library list thanks to a post by Ilya Somin at the Volokh Conspiracy blog hosted by Reason.

It's a good book, I'm sure. Only problem is that it was way above my senior dilettante level at many spots in the discussion. Example (page 92, leading off a section titled "Intertemporal Trade-Offs and Time-Discounting Inconsistencies"):

The standard neoclassical model of time discounting is exponential. This means that an outcome at time t is evaluated now (t = 0) as δtu(x), where δ is a constant discount factor and u(x) is an undated utility function defined on outcomes.

Now I almost get that, because I see the t up there in the exponent. But pretty much I have to nod and read on.

So caveat lector, this is a very high-level academic discussion. I swear, I looked at every page.

The authors, Mario Rizzo and Glen Whitman, have undertaken to refute the underpinnings and conclusions of economists and psychologists who wish to influence public policy to encourage the citizenry into better behavior. You know, like your parents did. Specifically, your dad, hence "paternalism". Sometimes it's even dubbed "libertarian paternalism", in order to imply that such policies are "not really" coercive: they're simply designed to encourage you to make better choices, according to your own values and goals. Sin taxes, making retirement saving vehicles opt-out instead of opt-in, government warnings on potentially unhealthy products, are just three examples.

The leading book in this field is the best-selling Nudge by Thaler and Sunstein. (Which I really should read to get at least some of the other side of this discussion.) The authors disdain the marketspeak of "nudge". Why not "push" or "shove"? Or an entirely different metaphor (see the cover): puppet and puppeteer?

The authors note paternalism's underpinnings in neoclassical choice theory, whose mathematical axioms were posited in the 1940s by John von Neumann. They note that those axioms, while plausible, were primarily developed to allow well-behaved "utility functions", which go on to be useful in heavy economic theories. But they were also seized upon to give a rigorous definition of "rationality". Which gave rise to a regular cottage industry of psychologists revealing how people, in various ways, departed from that definition, and were hence labeled as "irrational".

And obviously those "irrational" folks need help from the rational. For their own good.

The authors point out that rationality is much fuzzier in practice than in theory. The thought processes deemed "biased" by the shrinks can often make sense outside the artificial von Neumann axioms. So there may be more holes in the foundations of paternalism than its advocates would admit.

There are a number of other pitfalls: paternalistic public policies are designed by human beings, not von Neumann machines; they are subject to the same biases and fallacies as the folks they want to "nudge". Worse, they have little skin in the game; they have minimal incentives to design optimal policies even if they could.

And they probably can't, for reasons popularized by F. Hayek decades ago: they lack the requisite knowledge, which is highly dynamic, scattered and tacit throughout society.

And finally, there are slippery-slope issues: suppose"libertarian" nudge A "works" (for some criteria of "working"). Won't that encourage policy makers to get even better results via slightly less libertarian nudge B?

Or suppose nudge A does not "work". Given what you know about bureaucrats, do they just give up at that point? Or do they say, "well, the actual problem was that we were too libertarian"?

As I type, I see failures all around of paternalistic policies. Most notably COVID-related ones: a large fraction of citizens aren't vaccinated, despite being incessantly "nudged" to do so. And there's the whole drug prohibition thing… You'd think all those smart nudgers whould have figured out how to get better success by now.

All in all, a fine book which (unfortunately) won't sell as well as Nudge. I can't do justice to all its arguments here.

[Alex MacMillan · Rating 4 out of 5]

I entered this book with a lot of background knowledge about behavioral economics. I read the ur text of this scholarship for fun some years ago, and even got a A-grade in a law school seminar on the regulation of addictive drugs, where I applied behavioral paternalism to recommend policies that would "nudge" self-identified addicts away from compulsive habits. This all helped me comprehend Escaping Paternalism's high-level deconstruction of the implications for society if the government were to actually implement my recommendations. In recent years I've found myself drawn towards books like this one, which try to answer the question of why we sometimes behave irrationally in certain domains. These books* return me to first principles, bringing attention back to a proper definition of what it even means to be rational, and why it's crucial to pin that down before you can claim to be coercing people for their own good. Economists understand a rational person to be someone whose decisions can be analyzed in hindsight to always be a correct balance between the short- and long-term costs and benefits. Real life rationality is far more inclusive and open to experimentation and self-discovery.

Escaping Paternalism is a wonderful example of attempting to rescue an academic discipline from itself. The authors approve of behavioral economics, the study of how human psychology deviates from an economist's idealized conception of rationality, while disapproving of behavioral paternalism. Many behavioral economists are lobbying governments and businesses to take their preliminary research as justification for coercing people for their own supposed benefit. The most extreme example of this is fascist China's Social Credit System, but more benign policy experiments are being carried out in America and Europe. These experiments are revealed to be nonetheless quite illiberal in outlook once this book has picked them apart. The authors ask economists and policy reformers to slow down and approach their task with humility; they remind us all that when we think we can improve upon the human brain, the most complex thing in the universe (individually and as a collective society), we all need to approach the project with grace and a presumption to first do no harm.

* - The books I'm talking about include: 1) books analyzing the causes of poverty in wealthy nations, such as Karelis' The Persistence of Poverty and Miller's The Alternative; 2) deconstructions of consumerism by Jacob Lund Fisker and Geoffrey Miller; 3) and criticisms of the disease model of drug addiction, a reform movement that is gaining ground as the kindler and gentler War on Drugs (see Saying Yes: In Defense of Drug Use and Outgrowing Addiction).

[Daniel Moss · Rating 3 out of 5]

Really good logical and empirical rebuttal to the behavioral economists.

[Emil O. W. Kirkegaard · Rating 4 out of 5]

Some boring parts but it gets good at the end