New Book: ESCAPING PATERNALISM

by Mario J. Rizzo and Glen Whitman

Book description

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.

 

Reviews

Gerd Gigerenzer (Director of the Harding Center for Risk Literacy, Max-Planck-Institut für Bildungsforschung, Berlin):

Taking issue with the narrow norms of rationality in much of behavioral economics, this remarkable book argues in favor of an inclusive concept of rationality and is one of the first to cover the full range of relevant empirical evidence from psychology. Escaping Paternalism promotes a serious attempt to understand why people do what they do.

Richard Epstein (Laurence A. Tisch Professor of Law, New York University):

Mario J. Rizzo and Glen Whitman have written an incisive yet accessible critique of the dominant strain of behavioral economics associated with Daniel Kahneman, Richard Thaler and Cass Sunstein. Rizzo and Whitman are wise enough to know that human beings, with quirks and practices, are ‘people, not puppets’. Yet they show how classical liberal principles of governance do far better in organizing social arrangements than the various forms of soft paternalism now in vogue with so many behavioral economists.

Robert Sugden (University of East Anglia):

Mario J. Rizzo and Glen Whitman present a powerful and well-documented critique of behavioural economists’ justifications of paternalism. They argue convincingly that these justifications illegitimately presuppose that rational-choice theory is a normative standard. Inspired by the psychology of Gerd Gigerenzer, they offer a more pragmatic and ‘ecological’ understanding of human rationality.

Tyler Cowen (George Mason University) via Marginal Revolution:

The authors are Mario Rizzo and Glen Whitman, and the subtitle is Rationality, Behavioral Economics, and Public Policy.  This is the most comprehensive, definitive attempt to respond to paternalism and nudge that I have seen, written from a (mostly) libertarian and partially Austrian perspective.

 

Richard Thaler’s Nobel Prize

by Mario Rizzo

Richard Thaler has won the Nobel Prize for initiating the behavioral moment in economics.

My view of the Nobel Prize in economics is much like Time magazine’s view of its “Person of the Year.” It is awarded to the economist who “for better or for worse… has done the most to influence” the course of economic thinking – at least in certain respects. It also, like Time magazine, operates under the constraint that an award must be given every year.

Military Service and the New Paternalism

by Mario Rizzo

In the last few years there has been a small expansion in the number of universities that are reinstating ROTC (Reserve Officer Training Corps) after the cancellation of such programs due to protests against the war in Vietnam. I express no opinion here about whether universities should have ROTC programs. My points here have equal applicability to military recruiting of all kinds.

My concern here is a relatively wonkish one. Why have not the new paternalists (those who base their paternalistic policies on the findings of behavioral economics) sought to apply their ideas to young college students signing up for ROTC? Or to other young people going to their neighborhood military recruitment center.

Consider that these potential recruits seem to meet all of the behavioral red flags. First, they are young with little experience of the world and so their decision is would be one in which their data base is deficient. They would seem to be similar to first-time home buyers who are alleged to be easily subject to fraud and manipulation.

Student Debt Bubble Side Effect

by Chidem Kurdas

Gore Vidal died a few days ago. He was a remarkably erudite author, as any reader of his marvelous historical novels – Burr and Lincoln are just a sample – notices.  He never went to college. 

Regulation Czar’s Net Effect

by Chidem Kurdas

Cass Sunstein, the White House regulatory affairs chief, is going back to academia.  It is not clear why he chose this particular time to return to Harvard Law School, leaving behind what looked like an experiment to implement the notions he advocated.

Has he made a difference as federal overseer of rulemaking? The record is at best mixed, at worst a prime example of how academic ideas can enable political hypocrisy.

Live Free and Let the Landlord Die

by Mario Rizzo

By now most of you know of the latest Mayor Bloomberg stupidity, that is, the proposed banning of sugary sodas in cups too big for his taste.

But you may not know of the latest in New York State housing law. If the loft you live in has not been brought up to various housing codes, you can live there free.

Alcohol and economic “success in life”

by Edward Stringham*

Don Boudreaux is a great economist and a consistent defender of letting individuals make economic choices for themselves. Yet I would take a different approach than his recent post that defends drug legalization by criticizing alcohol.

Boudreax writes, “But the same is true for alcohol – another drug that ruins many lives and contributes to no one’s ‘success in life.’”

Here Boudreaux appears to have paid too much time listening to the prohibitionists, and missed “No Booze? You May Lose” coauthored by me and Bethany Peters for the Journal of Labor Research. The article, which was mentioned in numerous outlets from Time to Maxim, found that social drinkers earn significantly more than otherwise similar non-drinkers. If one’s measure of success in life includes superior labor market outcomes then drinking should be viewed as a positive rather than a negative.

Continue reading here

*Edward Stringham, Hackley Endowed Professor for the Study of Capitalism and Free Enterprise, Fayetteville State University.

Elitist Hokum from Krugman

by Chidem Kurdas

It has become a standard left-liberal jibe that those complaining of government largesse receive a piece thereof themselves. Such beneficiaries go against their own interest if they favor smaller government—so it is alleged. Thus Paul Krugman in the NYT  largely agrees with Thomas Frank, who attributed apparent red state ingratitude to the exploitation of social issues by Republicans in his book What’s the Matter with Kansas? 

In addition Mr. Krugman cites evidence suggesting large percentages of Social Security and Medicare beneficiaries  are confused about their use of these government programs.  They don’t seem to think they’re getting handouts.

Maybe that’s because they’re in fact not getting handouts. 

The Real Culprit in Paternalistic Legislation?

by Mario Rizzo

Christopher Hitchens, the great journalist and essayist, has died. Mr. Hitchens was not always right but he often was. I saw at the Cato blog a brief piece, posted by David Boaz, that Hitchens wrote on Mayor Bloomberg’s Nanny State. (HT: Dave Johnson). It was in reaction to smoking restrictions, but could easily apply, more generally, to paternalistic legislation.

The Attack on Dignity and Moral Autonomy: The Case of Cigarettes

by Mario Rizzo

The latest in the paternalistic actions of the federal government are a kind of reductio ad absurdum.  At least this is how it might have seemed ten or fifteen years ago if someone would have said that cigarette-pack health warnings would become graphic pictures designed to horrify the public into not smoking. 

Consumer Data: Who Owns It?

by Mario Rizzo

Richard Thaler is one of those academics with an excess of nervous energy. He is constantly on the look-out for ways that he and his soft-paternalist sympathizers can tinker around improving our welfare, suitably defined.

The latest scheme is to force companies who have gathered data about product usage from particular individuals to share it with those individuals so that they can use it to improve their future purchases. Thus your cell phone company will reveal to you in convenient form everything it “knows” about “how much you use services like texting, social media, music streaming and sending photos.” (This, of course, is a kind of anthropomorphism because no human mind knows this stuff – it is all computerized!) Then you can use this information, with the help of other websites, to get your optimal phone plan.

Thaler argues, “After all, it is our data.”

Kissinger on Bismarck

by Chidem Kurdas

A man described as both great and evil, Otto von Bismarck-Schönhausen makes a fascinating study,  as Jonathan Steinberg’s Bismarck: A Life demonstrates.  Henry Kissinger reviewed this biography in the New York Times Book Review, highlighting the diplomatic and political victories the unifier of Germany won through nimble maneuvers.

The review is a bravura tribute from one practitioner of realpolitik to another. Yet a closer look at Bismarck raises doubts as to realpolitik.

While admiring Bismarck’s subtle power games, Mr. Kissinger  admits that the result lacked institutional balance and “sowed the seeds of Germany’s 20^th century tragedies.” But he takes issue with the connection Mr. Steinberg draws from Bismarck to Hitler. Kissinger points to the contrast between the two characters. “Bismarck was a rationalist, Hitler a romantic nihilist,” he writes. “Hitler left a vacuum. Bismarck left a state strong enough to overcome catastrophic defeats …”

Nevertheless, Bismarck’s actions led to those catastrophes.

The Blinders of Behavioral Economics

by Mario Rizzo 

At the turn of the new-year the Financial Times published two small articles about why people often do not adhere to their new year’s resolutions. One article was by a philosopher (Julian Baggini) and the other by a psychiatrist (Antonia Macaro). Interestingly, they each seem to focus on whether people really want what they resolve to do or not do. More fundamentally, the authors say, if people understood themselves better they would know more fully what their personal goals are and not have so difficult a time achieving them.  

Could Sarah Palin Be Right?!

by Mario Rizzo  

In an editorial the Wall Street Journal criticizes Sarah Palin for criticizing Michelle Obama’s anti-obesity campaign. The point seems to be that such talk from the Ms. Bully Pulpit is innocuous or benign. The writer makes an analogy with Nancy Reagan’s “Just Say No” anti-drug campaign. 

Now if Michelle Obama were just a Chicago-based community activist who was organizing a nation-wide propaganda campaign to urge people to eat healthily I would have no objection.  

Voters’ Best Interest

by Chidem Kurdas

Ronald Dworkin, a well-known legal scholar, describes last month’s election results as depressing and puzzling. In a commentary in the New York Review of Books, he asks, “Why do so many Americans insist on voting against their own best interests?” 

Two Visions Fuel Political Attacks

by Chidem Kurdas

Apparently left-liberal pundits are convinced that people oppose government expansion either out of stupidity or cupidity—not, say, out of a sincere belief in freedom. The oft-repeated story is that ignorant and misguided masses are being led by greedy business interests. Paul Krugman’s recent column is one of  many examples in the genre where billionaires intent on ravaging the country provide the bucks while clueless Tea Partiers provide grass roots brawn.

The best insight regarding this type of criticism comes from Thomas Sowell, whose analysis of two distinct visions of human nature puts current attacks into long-term perspective. Jerry O’Driscoll referred to this work in his comment on anti-intellectualism, a charge often levied by the same left-liberal critics.

In A Conflict of Visions: Ideological Origins of Political Struggles (published 1987, new edition 2007), Professor Sowell contrasted two fundamental views that go back several centuries.

Anti-Intellectualism and Freedom

by Chidem Kurdas

Anti-Intellectualism in American Life by Richard Hofstadter, a historian who died in 1970, is very much part of politics several decades after it was written. The past two years brought many charges of anti-intellectualism by left-liberals against people on the other side of the political divide.  The latest in Hofstadter-inspired critiques is an attack on Tea Partiers by Will Bunch — The Backlash: Right-Wing Radicals, High-Def Hucksters, and Paranoid Politics in the Age of Obama.

The term anti-intellectualism does not just denote those who don’t care for intellectuals. Rather, Hofstadter presents it as an ideology, an “ism” that periodically besets American culture and deprives intellectuals of political power. This deprivation disappears under certain administrations. Thus regarding the late 19^th and early 20^th century he wrote that “In the Progressive era the estrangement between intellectuals and power … came rather abruptly to an end.”

Similarly in the New Deal: “Never had there been such complete harmony between the popular cause in politics and the dominant view of the intellectuals.” Unfortunately – from Hofstadter’s perspective – this harmony was disrupted by right-wing reaction against policies associated with intellectuals.

When Nudging Isn’t Enough

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.

New Paternalism, Regulation and Cass Sunstein

by Mario Rizzo

The New York Times magazine has an interesting, if somewhat uncritical, article on Cass Sunstein, the Obama regulation czar. The “best” part is the section about me:

Some scholars dislike the strong, if subtle, governmental hand that is embedded in this last proposal. It seems more forceful than a nudge. “Once you get to a point where you have automatic enrollment, you raise the question, What kind of fund?” Mario Rizzo, a professor of economics at New York University, says. “The problem is that if you were enrolled automatically, you could complain later that you’d been put into either a too-risky or a too-conservative fund. So then you micromanage that and you say you have to have a balanced fund. But pretty soon you’re on a slippery slope, where you’re dictating people’s retirement choices.” Rizzo told me about an academic study of gift-giving that found that most people would value cash more highly than the gifts they get for holidays; if even your friends and family can’t figure out what you want, he asked, how can a distant bureaucrat? “Sunstein is very taken with the need for experts,” Rizzo says. “But it turns out experts are subject to these cognitive quirks, too.”

All Decisionmaking is Doomed to Failure: Questions for the Bias Industry

by Mario Rizzo  

Behavioral economists have an embarrassment of biases. They have discovered many cognitive and behavioral biases which plague human decisionmaking. By one count there are nearly a hundred of them.  

A cognitive bias is a systematic departure from rational decisionmaking. For example, a person may react differently if he is told that a drug has a 90% cure rate or that it has a 10% failure rate. A behavioral bias is the systematic inability to act in accordance with one’s true preferences. For example, I resolve to stop drinking but I don’t have the willpower.  

But what does all of this add up to?

New Paternalism: Odds & Ends

by Glen Whitman

The Cato Unbound discussion on new paternalism has come to a close, but I want to address a few loose ends that came up during the exchange.

The Demand for Evidence

Richard Thaler has demanded empirical evidence that the new paternalism has led to slippery slopes. Given that the new paternalism is a relatively new phenomenon, I certainly don’t claim that the slope has already occurred.

I do claim that slippery slopes are real, that slopes are most likely when certain features are present, and the new paternalism has many of those dangerous features.

Historically, there can be little doubt as to the existence of slippery slopes. Examples that came up during the Cato Unbound forum included the run-up to Prohibition, the escalation of the drug war, and the gradual encroachment of smoking restrictions. I believe an honest examination of other, non-paternalist domains yields similar conclusions. For instance, after passage of the 16th Amendment, the vast majority of people paid no income tax at all, and the top marginal tax rate was only 7%. We all know how that turned out. A much more complex story could be told about early interventions in healthcare that laid the groundwork for more extensive intervention later.

Threats to Individual Autonomy: ObamaCare, Salt and Sugar

by Mario Rizzo  

I love-hate the word “progressive.” Its political uses derive from the so-called Progressive Era and the less-than-socialist reforms that were enacted during that early twentieth-century period.  

Today, of course, few people who use the term think about its historical origins. They think it is simply a word that means “advanced,” “better,” – well, “progressive.”  

For a long time in the nineteenth-century, “progress” meant the gradual liberation of human beings from the control of the state. For some thinkers, like Herbert Spencer, it was tied to a particular view of evolution. For others, like Benjamin Constant, it was based on certain historical changes that involved increasing complexity of life spurred on the process of “globalization.” Increasing division of labor, specialization and trade were critical in this view. Others, like Sir Henry Maine, emphasized the legal changes: from status (serf/nobility) to contract – each of us now decides how to relate to others in commerce.  

Constant reminded us that the “liberty of the ancients” was a collective liberty. The citizens of Athens could do whatever they liked. The “liberty of the moderns” is an individual liberty. The individual is sovereign. It is a liberty against the state.  

Now this progress has become reversed.

Cafeteria Marvels

 by Mario Rizzo  

The market is a “marvel.” What does that mean? According to Marcus Tullius Cicero, the Roman orator and senator, a marvel is something contrary to or surpassing common understanding.  

In that sense, the market is a true marvel – so much so that it even surpasses the understanding of many economists.  

Richard Thaler (a University of Chicago Business School professor) and Cass Sunstein (a Harvard law professor and Obamian regulatory czar) have illustrated the benign qualities of paternalism with a curious example of cafeteria food placement. (An interesting and important exchange between Glen Whitman and Richard Thaler – among others – is now taking place at Cato Unbound.)

The Most Important Thing You Can Read

by Mario Rizzo

My frequent coauthor, Glen Whitman, has the lead essay on new paternalism at Cato Unbound this month. There will be responses by Richard Thaler (Chicago), Jonathan Klick (U of Penn), Shane Frederick (Yale).

This is the most important thing you can read this month — better than anything anywhere else in the blogosphere, world wide web, and all traditional media publications. Except posts at Think Markets, of course.

Hayek’s Knowledge Problem, as Applied to New Paternalism

by Glen Whitman

Mario Rizzo and I have recently published another article on the new paternalism, titled “The Knowledge Problem of New Paternalism,” in the BYU Law Review. (Mario briefly blogged about it here.)  The article lacks an abstract, but here’s a lightly edited portion of the introduction:

The “new paternalism” spawned by behavioral economics faces a severe knowledge problem akin to the knowledge problem that Friedrich Hayek argued afflicts centrally-planned economies. If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough.