When Nudging Isn’t Enough

July 16, 2010

by Glen Whitman

In a New York Times op-ed, George Loewenstein and Peter Ubel argue that policymakers are relying too heavily on behavioral economics, when traditional — that is, rational choice — economics would often serve them better.

On cursory reading, you might think this op-ed repudiates the facile use of behavioral economics to guide policy. But in fact, the authors encourage us to go further down that road. They do so by questioning the efficacy of behavioral policies while implicitly accepting behavioral welfare analysis.

Consider, for instance, their position on the “obesity epidemic.” They begin by diminishing the impact of New York’s nudge-like mandate on restaurants to post calories in restaurants, while nevertheless supporting it:

Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.

Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.

Aha! So it’s just the law of demand, a prediction of traditional rational-choice models. Do Loewenstein and Ubel conclude that consumers are rationally choosing greater girth in the face of lower prices (and, I might add, superior healthcare), and therefore recommend leaving them alone? Let’s see:

To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods.

In other words, Loewenstein and Ubel remain convinced that consumers are making poor choices that require government correction. If nudges don’t work, then shoves may be warranted.

(Removing corn-syrup subsidies could indeed make consumers better off, according to the traditional model, because doing so would eliminate the inefficiency resulting from a distorted price ratio. But for the very same reason, a tax on unhealthful foods would make consumers worse off. Notice that Loewenstein and Ubel see no important difference between removing a subsidy and imposing a tax.)

The pattern repeats through the rest of the op-ed. If gallons-per-mile laws don’t induce people to choose different vehicles, then we need higher gas taxes. If telling people how much electricity their neighbors use doesn’t cause them to turn out the lights, then we need a carbon tax. To be fair, these cases may involve genuine externalities — which are recognized as a problem in traditional economics — rather than the “internalities” of behavioral economics. But Loewenstein and Ubel don’t mention that distinction. The behavioral goals of policy are taken as given; only the means get scrutiny.

In our first paper on paternalist slopes, Mario Rizzo and I warned about precisely this kind of process. When a policy is enacted to achieve a specific goal and then fails to achieve it, further policies are justified on grounds of achieving the goal that “we” have already agreed upon. In Loewenstein and Ubel’s op-ed, I believe our prediction is vindicated.

[Cross-posted on Agoraphilia.]

2 Responses to “When Nudging Isn’t Enough”

  1. Richard Ebeling Says:

    May I suggest that the point that you are making about “nudging” people in the right direction through changing the relative price trade-offs draws attention to a significant difference between Neo-Classical and Austrian price theory.

    For the Neo-Classical economist, more often than not, the price system is an “incentive mechanism” and an “equilibrium mechanism.”

    For the Austrians, the price system is an “informational network” that integrates and coordinates decentralized and changing knowledge.

    The information must first be provided through the competitive price formation process before individuals can discover and interpret the incentives they may provide for various forms of action in the system of division of labor.

    For the Neo-Classical economist, it is assumed that the tastes and preferences of the market participants are known. A value judgment is made concerning the desirability of those preferences being satisfied, and if they are not considered to be “socially desirable,” the price system trade-offs are manipulated (through taxes or regulations) to get the policy preferred outcome in terms of the reactive behavior of the agents.

    In the Austrian perspective, subjectivism is more than merely “given tastes and preferences.” It is also individual meanings, purposes, self-motivated conceptions of the good, evaluative judgments that result in people initiating and offering trade-offs.

    Austrians, therefore, do not tend to view individuals as passive and merely reactive “objects” waiting to be told “what to do” and “how to react” on the basis of the relative price structure superimposed on market interactions by the political and policy paternalists.

    There seems to be no end to the “rerun” of attitudes concerning people and policy. Is this not the latest version of what Adam Smith warned about when he referred to the “man of system” (the social engineer) who views all of us as mere passive pawns on the “great chessboard of society”? And that the man of system forgets that each of those pawns are thinking, willing, and acting individuals?

    And that what he wants to superimpose as a pattern of relationships on that great chessboard of society may have nothing to do with how the actors, themselves, would have chosen to form patterns and associative relationships if they have been left alone?

    Or that conflict is inevitable when what the man of system tries to impose is inconsistent with the free actions of the individual human beings in society?

    It is like watching, over and over again, series of bad movies in which each of them closely follows the same boring plot.

    Richard Ebeling

  2. Bill Stepp Says:

    Good comment Richard and good post by Glen. Subjectivism is indeed “more than merely ‘given tastes and preferences’,” and individual meanings, etc. It implies a theory of how changing preferences are translated into prices and quantities supplied and demanded, and how these change in an entrepreneurial feedback loop. The latter is itself subjective and characterized by uncertainty and incomplete information. This is radically different from the top-down, mathematical textbook view of the mainsteam neo-classical school, in which entrepreneurship is either absent, or introduced so formally as to be useless. It is like a series of bad movies with the same boring plot, as you say.
    Paul Simon alluded to it (we might say) in a song he wrote about all the crap he learned in high school.


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