Society and Culture

Implications for Behavioural Economics from the Scottish Enlightenment

Behavioural science has caused a revolution in public policy over the past two decades. In 2017, the OECD reported that behavioural insights were applied to policy issues over 100 times across 60 public bodies in 23 countries. Many countries around the world, including the UK and the United States, now have entire units devoted to behavioural science.

This behavioural turn has been sharply felt in public health policy and the revival of nanny statism. Classical paternalism, like sin taxes on sugar and the proposed generational tobacco ban, is alive and well. But under the surface, a new form of paternalism has reared its head; one that seeks to make us better off as ‘judged by our own standards’.

This new approach can be seen in plain packaging for tobacco products and auto-enrolment into workplace pensions. These policies are undoubtedly well-intentioned. But the age-old wisdom of Adam Smith and David Hume shows us that this new paternalism suffers from the same old problem: it imposes the preferences of policymakers onto individuals.

This shift in public policy can be traced to developments in cognitive psychology beginning in the 1970s. A research program spearheaded by Daniel Kahneman and Amos Tversky recorded many ways human behaviour deviates from the norms of rational choice theory.

Human beings do not possess a perfectly defined, well-ordered set of preferences that exist outside of the context of our choices, and we do not choose in real-time by attempting to maximise our expected utility.

Our decision-making heuristics work well most of the time, but sometimes, they can lead us astray. The habit of settling for ‘good enough’ might work well on average, but it can lead to suboptimal choices in significant one-time decisions like picking a spouse or buying a house. Our desire for present pleasure is an important survival instinct. But it sometimes leads us to overemphasise present enjoyment at the expense of future satisfaction: we sometimes save too little, eat too much sugar, and so forth.

In the early 2000s, a group of scholars proposed a new approach to public policy based on the research programme in cognitive psychology and its interface with economics. The idea was to use knowledge of individuals’ cognitive and behavioural quirks to design regulations that would help people do what the people themselves would in fact like to do. The regulations would help people become healthier, wealthier, and happier.

Richard Thaler and Cass Sunstein famously described the new policy paradigm as a ‘libertarian paternalism’. It was seen as paternalistic in its effort to intervene in individuals’ lives for the sake of their welfare, but libertarian in its preservation of choice options.

A classic example of the proposed regulations (nudges) of libertarian paternalism is changing the defaults. Using knowledge of citizens’ inertia and preference for the status quo, regulators can change defaults for retirement account contributions, either to higher contribution rates or simply to ‘opt in’. In doing so, proponents argue, the regulators are helping citizens help themselves. A regulator might also require changing the presentation of food items in a cafeteria or grocery store to make dessert – which people will, by assumption, overconsume – less salient relative to fruit, in order to encourage healthier eating.

A slew of criticisms of the ‘nudging’ approach have come forth concerning issues of transparency (do citizens know they are being nudged?), effectiveness (do the nudges work as advertised?), and presuppositions. Critics have contended that the libertarian or new paternalism presupposes an inappropriate vision of human rationality and therefore draws incorrect normative conclusions.

Many human choices appear irrational relative to a formal model of rationality used for modelling purposes in the social sciences. But more holistic concepts of rationality more faithful to the human experience indicate that behavioural inconsistencies can sometimes be reasonable.

My book, New Paternalism Meets Older Wisdom published by the Institute of Economic Affairs, offers some reflections on the issues just summarised through the lens of two giants in the history of philosophy and economics, Adam Smith and David Hume. I come alongside recent engagements with the new paternalism, bolstering criticisms with formulations from intellectual history.

Smith and Hume were writing long before the dawn of behavioural economics. But remarkably, they observed similar patterns (and sometimes anomalies) in human behaviour to those documented in cognitive psychology and behavioural economics over the past 40 years.

After engaging with Smith and Hume, I emphasise two key points: first, that inconsistency is not necessarily an indication of error, and second, that human welfare is a dynamic phenomenon, not a static mathematical model.

We cannot reliably discern human error by observing inconsistent behaviour, for inconsistency might indicate genuine deliberation in contexts of uncertainty or it might signal learning. Life involves a highly complex set of trade-offs, and there is no hard-and-fast rule that can guide us without fail in any situation.

Sometimes fellowship and the enjoyment of the moment can and ought to trump sugar, alcohol, and tobacco vigilance. Our well-being, moreover, lies much less in satisfying a given set of preferences and much more in personal dynamism and improvement. Dynamism naturally entails inconsistency of a sort.

The behavioural scientist has insights to offer about health, wealth, and happiness, and there are important conversations to be had about how behavioural science informs our thinking about human agency. But, as I argue, behavioural scientists, if they claim to hold to liberal notions of pluralism, should not offer their insights as if they constitute an enlightened theory of the good.

Regulators inspired by behavioural insights should be honest if they find paternalistic coercion desirable and justify it as such. No pretence should be made that, for instance, smoking bans or gas stove bans, are really what people themselves desire.

Smith and Hume have been vital figures in our conversations about a free and good society since they wrote over 250 years ago. Centuries on, their insights are vital in scrutinising the merely decades-old behavioural turn in social science and public policy.


This article was first published on CapX.


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