Sunday, April 24, 2005

Libertarian Paternalism


There's a fuss about "libertarian paternalism," which its proponents (Richard Thaler and Cass Sunstein of the University of Chicago) say is intended to help individuals make better decisions by having corporations and governments shape choices more artfully. Zimran Ahmed (Winterspeak) defends the concept because he
spoke to Thaler about this and read the monograph he [Thaler] wrote with Sunstein.

"Libertarian Paternalism" is noting that people often just take whatever default choice is offered and therefore working hard to come up with good default choices. This does not limit choice because you don't need to stick with the default. But since *something* has to be the default, you might as well put effort into making it something good.
I don't think it's quite that easy to defend libertarian paternalism, which strikes me as another paving brick on the road to hell.

Consider an example that's used to explain libertarian paternalism. Some workers choose "irrationally" -- according to libertarian paternalists -- when they decline to sign up for an employer's 401(k) plan. The paternalists characterize the "do not join" option as the default option. In my experience, there is no default option: An employee must make a deliberate choice between joining a 401(k) or not joining it. And if the employee chooses not to join it, he or she must sign a form certifying that choice. That's not a default, it's a clear-cut and deliberate choice which reflects the employee's best judgment, at that time, as to the best way to allocate his or her income. Nor is it an irrevocable choice; it can be revisited annually (or more often under certain circumstances).

But to help employees make the "right" choice, libertarian paternalists would find a way to herd employees into 401(k) plans (perhaps by law). In one variant of this bit of paternalism, an employee is automatically enrolled in a 401(k) and isn't allowed to opt out for some months, by which time he or she has become used to the idea of being enrolled and declines to opt out.

The underlying notion is that people don't always choose what's "best" for themselves. Best according to whom? According to libertarian paternalists, of course, who tend to equate "best" with wealth maximization. They simply disregard or dismiss the truly rational preferences of those who must live with the consequences of their decisions. Richard Thaler may want you to save your money when you're only 22, but you may have other things to do with your money, such as paying off a college loan.

Libertarian paternalism incorporates two fallacies. One is what I call the "rationality fallacy," the other is the fallacy of centralized planning.

As for the rationality fallacy, I once wrote this:
There is simply a lot more to maximizing satisfaction than maximizing wealth. That's why some people choose to have a lot of children, when doing so obviously reduces the amount they can save. That's why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.
Nevertheless, many economists (like Thaler) do equate rationality and wealth maximization, which leads them to propose schemes for forcing us to act more "rationally." Such schemes, of course, are nothing more than centralized planning, dreamt up by self-anointed wise men who seek to impose their preferences on the rest of us. As I wrote more recently:
The problem with [rules aimed at shaping economic behavior] is that someone outside the system must make the rules to be followed by those inside the system.

And that's precisely where [central] planning and regulation always fail. At some point not very far down the road, the rules will not yield the outcomes that spontaneous behavior would yield. Why? Because better rules cannot emerge spontaneously from rule-driven behavior....

Of course, the whole to produce outcomes that are desired by planners...
...and to hell with what the individual thinks is in his or her own best interest.

"Libertarian paternalism" consists of paternalism and a rather subtle form of socialism. There's no libertarianism in it, no matter what its proponents may say.

Free people, free markets, no compromise.

UPDATE: And here comes "libertarian" paternalism -- from the left, of course:
Rep. Rahm Emanuel, D-Ill., who this year has proposed three pieces of retirement savings legislation, said Monday, "We need to work on strengthening Social Security, but if you look at where the immediate problems are, it's not in Social Security, it's in their ability to save for retirement and the amount they have saved."....

...Peter Orszag, an economic policy adviser in the Clinton administration who now heads the Retirement Security Project. recommending Emanuel's proposals to extend the savings tax credit and automatically enroll workers in 401(k)s. Orszag also wants automatic increases in the percentage of income directed toward 401(k)s and the automatic diversification of assets in them as workers near retirement.

"This is an area where there is strong bipartisan interest," Orszag said. "Why not do something that both sides agree on, and do something that will build a sense of bipartisanship, as a precursor to dealing with some of the more difficult issues down the road?"

So, instead of allowing workers to invest 12.4 percent of their income in a real retirement plan, they will be forced to continue paying that amount into the Social Security Ponzi scheme. On top of that, a chunk of their income will be forcefully diverted to 401(k) plans -- because Big Brother thinks that's the "rational" thing to do. Workers will have no say in the matter, because socialist paternalists know what's best for them.

UPDATE II: Then there's this, from an article about "neuronomics":
The problem, of course, is that people don’t always behave rationally. They make decisions based on fear, greed, and envy. They buy plasma TVs and luxury vehicles they can’t afford. They don’t save enough for retirement. They indulge in risky behavior such as gambling. Economists understand this as well as anyone, but in order to keep their mathematical models tractable, they make simplifying assumptions.
As Steve Antler (EconoPundit) explains:
Look: economics teachers with good sense tell students they're talking about how people would behave if they were rational.

Whether people actually are rational is another matter entirely.
And, to repeat myself, rationality isn't the same thing as wealth maximization.