Book review of Thaler’s “Nudge”: How libertarian paternalism avoids the polarization of the right and left

I added this book to my list after I read an article about the 2017 Nobel Prize winner in economics, Richard Thaler, and his concept of libertarian paternalism. Our lab reading club ended up voting to read it this month for our book of the month! The book itself is based on two premises: (1) The way to structure choices can influence what people end up choosing (hence the power of “choice architects”, anyone who has power to structure the way choices are presented) and (2) the structuring of choices in no way takes away freedom of choice. “Libertarian paternalism” is not an oxymoron: you can preserve freedom of choice, while helping to nudge people to make good decisions.

I will give you a rundown of Thaler’s first example he uses to illustrate the concept. Imagine a school lunchroom. Just by the way the school chooses to display the food can have a huge effect on what the students choose to eat. If you put carrots at eye level and move donuts down a few rows, students are more likely to eat the carrots– and not because they were coerced or seduced or manipulated into making that choice.The key unit of libertarian paternalism are nudges: a little push in the right direction.

The tools in the nudge toolbox include:

  • Incentives: the carrot at the end of the stick.
  • Understanding mappings: Translate numbers that are less useful (say mpg) to more useful (how much money will I save?)
  • Defaults: whatever automatic is set to has a huge effect on outcomes
  • Give feedback: if you don’t directly experience to consequence to your actions, the less likely you are going to change for the better.
  • Expect error: if your choice architecture isn’t forgiving to mistakes, you’re going to screw a lot of people over.
  • Structure complex choices: complex decisions like choosing a prescription drug plan are going to overwhelm choosers, so help them out a little.

The authors explore a variety of different topics that can be solved with libertarian paternalist solutions. I found myself agreeing that each solution does sound ideal. It avoids the weaknesses of many solutions on the scale of “just the market handle it” to “let the government make every decision for you.” This dichotomy, present so often in our political discussion from traditional marriage to gun control, doesn’t have to be this complicated. Libertarian paternalism protects choice while also allowing promotion of good causes– in both the public and private sector.

Here’s a few discussion I particularly enjoyed:

  • Using a Greenhouse Gas Registry to make emissions public of companies public knowledge. This would put pressure on companies to lower their emissions without directly imposing a regulation. (In regards to climate change, they also discuss other methods including cap and trade systems and a carbon tax).
  • Privatizing marriage. Government would have no involvement in marriage at all, and the word “marriage” would be taken out of all legislation. Religious freedom advocates would be able to define marriage any way they want to while not taking away the right to marry from anyone else.
  • Privatizing social security. Instead of having a single government-enforced plan, users would be able to choose from a variety of plans. By using a carefully crafted choice architecture, this could benefit everyone without being overwhelming.

One of the key caveats of the book that I hugely agree with is that more choice isn’t always a fail-safe. Republicans and libertarians love more choices, because it means more freedom. But when choices are complex, this can ultimately result in confusion and in some cases financial ruin for some people. Libertarian paternalism recognizes this and the need for nudges.

I liked Thaler’s discussion taken from economics textbooks. In the textbook, it is assumed that the consumer is rational. He makes rational decisions that are good for him in the long-term. He understands complex economic theory. But this fake person (referred to as an Econ) doesn’t exist! And choice architects need to take into account the Homer Simpsons of the world.

A few interesting discussions I enjoyed:

One of the weaknesses of markets
The key point here is that for all their virtues, markets often give companies a strong incentive to cater to (and profit from) human frailties, rather than to try to eradicate them or to minimize their effects.

Recent non-libertarian approaches to climate change
Most of the time, governments seeking to protect the environment and to control the harmful health effects of pollution have gone well beyond a nudge, and their steps have not been libertarian. In this domain, freedom of choice has hardly been the guiding principle. Typically regulators have chosen some kind of command-and-control regulation, by which they reject free choices and markets entirely and allow people little flexibility in promoting environmental goals. Command-and-control regulation is sometimes embodied in technological mandates, through which government effectively requires the environmentally friendly technologies that it prefers; catalytic converters for cars are one example.

In the United States, national emissions limitations imposed on major pollution sources have been the rule, not the exception. Such limitations have sometimes been effective; the air is much cleaner than it was in 1970. Philosophically, however, such limitations look uncomfortably similar to Soviet-style five-year plans, in which bureaucrats in Washington announce that millions of people have to change their conduct in the next five years. Sometimes people do change, but sometimes they don’t, or the costs of making the changes turn out to be unexpectedly high, and then the bureaucrats have to go back to work. If the goal is to protect the environment, might good choice architecture be able to help?

Privatization of marriage
With respect to marriage, there are powerful arguments for privatization—for allowing private institutions, religious and otherwise, to do as they wish, subject to default rules and criminal prohibitions. We have argued that states should abolish “marriage” as such and rely on civil unions instead. If religious institutions want to restrict “marriage” to heterosexual couples, they should certainly be permitted to do exactly that. If such institutions want to limit divorce (that is, ending a “marriage”), they could do that too. The beauty of this proposal is that it would allow a wide range of experiments—increasing freedom for individuals and religious organizations alike while at the same time reducing the unnecessary and sometimes ugly intensity of current public debates.

Transparency in politics
We would love to see similar principles used to monitor governments. Require government officials to put all their votes, earmarks, and contributions from lobbyists on their Web sites. Require those determining the future of energy policy (to cite a random example) to reveal which profitmaximizing firms were invited to lend their all-too-invisible hands to the process of designing the rules. Require those determining the future of educational policy to reveal which interest groups, and which unions, gave them money in the most recent campaign. Require government agencies, not merely the private sector, to disclose their contributions to air and water pollution, and their greenhouse gas emissions. Supreme Court Justice Louis Brandeis urged that “sunlight is the best of disinfectants.” Democratic governments, as well as authoritarian ones, could use a lot more sunlight.

Addressing the “rob Peter and pay Paul” argument
Some of our most extreme critics offer an objection that will strike many readers as just odd. These critics object to any forced exchanges. They don’t like to take anything from Peter to give to Paul, even if Peter is very rich and Paul is very poor. They obviously oppose progressive taxes. (Well, most taxes, actually.) In the areas that concern us, these critics would disapprove of policies that explicitly benefit the weak, poor, uneducated, or unsophisticated. They would object to these policies not because they lack sympathy for these groups but because they think that any help for them should come voluntarily from the private sector, such as from charities, and that government policies would come at the expense of other groups (often the strong, rich, educated, and sophisticated). They don’t like any government policy that takes resources from some in order to assist others.

We must confess that we do not share the view that all redistribution is illegitimate. We think that a good society makes trade-offs between protecting the unfortunate and encouraging initiative and self-help—between giving everyone a decent share of the pie and increasing the size of the pie. In our view, the optimal level of redistribution is not zero. But even those who hate redistribution more than we do should have little concern about our policies. Most of the time, nudging helps those who need help while imposing minimal costs on those who do not. If people are already saving for retirement, offering the Save More Tomorrow program will cause them no problems. If people are not smoking, or are naturally (or unnaturally) thin, campaigns to help smokers and the obese will do them little harm.

Some skeptics might object that some of our proposals would require the Econs to pay something (not a lot) for programs they don’t need and from which they don’t benefit. But if the people who need the help are also imposing costs on society—for example, through higher health costs— then having the Econs share in the costs of helping the Humans seems like a modest price to pay. Of course, some anti-redistributive types will object to a health system that forces the rest of us to pay for those who need health care. And it is true that on a relative basis the Econs may still lose out from policies that help Humans. If Peter’s happiness depends, in part, on his being richer than Paul, then anything that pulls Paul up by his bootstraps makes Peter worse off. But we think, though we admit to having no evidence to support our view, that most Peters actually take pleasure in helping out the worst-off members of society (even if the Pauls are being helped by government rather than by private charity). As for those who feel miserable if their poorest neighbors close some of the gap, they have our sympathy, but not our empathy.

Diagnosis of the political scenario
Ever since FDR’s New Deal, the Democratic Party .has shown a great deal of enthusiasm for rigid national requirements and for command-and-control regulation. Having identified serious problems in the private market, Democrats have often insisted on firm mandates, typically eliminating or at least reducing freedom of choice. Republicans have responded that such mandates are often uninformed or counterproductive—and that in light of the sheer diversity of Americans, one size cannot possibly fit all. Much of the time, they have argued on behalf of laissez-faire and against government intervention. At least with respect to the economy, freedom of choice has been their defining principle.

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