Private versus public nudging
The classical liberal tradition is not, and never has been suspicious of the idea that individual behaviour can or should be ‘steered’ and that conscious attempts might be made to ‘shape’ our character. Outside of the nudges provided by family life, people may join voluntary associations which exert different forms of social and peer-group pressure to steer them in one direction or another. Religious associations have long discouraged alcohol consumption and have favoured abstinence in various aspects of life. Many of the mutual aid associations that thrived during the heyday of liberalism in the nineteenth century modelled themselves explicitly as ‘character-building’ associations that encouraged thrift and an independent spirit. And, in the contemporary world the various reward schemes offered by health insurers to encourage personal fitness, devices such as minimum term gym memberships, and penalty charges for early withdrawal of investment funds are all examples of privately generated strategies to cope with ‘weakness of will’ and ‘short-sightedness’.
Listening to Professor Thaler I was reminded of the claim made by many socialists in the past – Lenin being perhaps the most prominent – that since private firms routinely engage in ‘planning’ there should not be any concern about the state ‘planning’ on a society wide scale. Yet, as Hayek noted on numerous occasions, to recognise that ‘planning ‘ is an essential element of a progressive society tells us nothing about ‘who should plan’ and ‘for whom’. Likewise, to acknowledge that ‘nudging’ strategies may be an aid to effective decision-making in the context of limited rationality, tells us nothing about ‘who should nudge’ and ‘for whom’. It does not follow that since some nudging may be desirable that we should automatically favour governmental nudging. On the contrary, there are several reasons to suggest that ‘private’ nudging should in fact be preferred to the statist variety.
First, in a context of limited knowledge and limited rationality, we do not know which nudges are most appropriate and for which particular types of behaviour. It makes sense, therefore, to rely on a decentralised process which reduces the possibility of erroneous nudges being imposed on a society wide basis – and this requires that no particular nudge is imposed by law. In the same way that planning by private firms is preferable to planning by government’s precisely because it is competitive, decentralised and voluntary planning, so competitive nudging in markets and civil society is to be preferred to ‘central nudging’ by the state. That the consequences of misplaced nudging by government agencies tend to be far more pronounced than equivalent failures in the private sphere is all too evident in what has happened to savings ratios across much of the developed world. It is odd, to put it mildly, that governments which have ‘nudged’ people towards immediate consumption through a combination of inflationary monetary policies and taxes on capital should now be trusted to encourage more frugal habits.
Second, while behavioural scientists in general (such as Thaler) may have better knowledge about the biases that limit people’s choices, the specific knowledge needed to cope with particular instances of irrational conduct and detailed knowledge of the reasons why people make the choices that they do is more likely to reside with those who actually make these choices. Classical liberalism does not claim that people are fully rational but that people are more likely to be aware of their own character traits than distant experts, however technically skilled in behavioural economics. Someone who is, for example, prone to ‘weakness of will’ may find it advantageous to join an organisation such as the army, or an amateur boxing club – a life choice that may be entirely inappropriate for an individual who already exhibits the necessary strength of character. Centrally imposed mandates and taxes are not, however, best placed to identify those choices which reflect preferences free from behavioural bias from those that are not, and are likely to place obstacles in the way of those who have genuinely unbiased preferences to act in ways of which officially sanctioned nudgers disapprove.It might of course be suggested that people may lack the knowledge or determination to avail themselves of private nudging strategies in shaping their own lives. Yet, if people are as lacking in motivation to address their character problems as this analysis implies then there would seem no more reason to believe that they would vote for a government proposing to subject them to ‘libertarian paternalism’.
Finally, people who are to be charged with nudging in the public sector may themselves be subject to the same or perhaps different behavioural biases to those of the population at large. That Professor Thaler seems unwilling to consider the dangers of behavioural bias in the institutions of government and those of democratic politics might be considered to indicate a cognitive blind spot on his behalf…
Read the full article on the Pileus blog.
Mark Pennington’s new book, Robust Political Economy: Classical Liberalism and the Future of Public Policy, will be launched at the IEA on 20 January 2011. Click here for details of the event.