The ‘Third Way’ At The University Of Chicago

Recently The Chronicle of Higher Education (May 9, 2008) devoted four full pages to a new book by two professors at the University of Chicago, Richard Thaler and Cass Sunstein, one a professor of economics and behavioral science and the other a professor of law. The book, entitled Nudge: Improving Decisions About Health, Wealth and Happiness is intended to approach policies that encourage, but do not insist on, socially desirable directions.

Presumably cognitive limitations stand in the way of appropriate choices. Since people are basically inert, impulsive and often irrational they would be best off nudged into acceptable behavior, claim the authors. What they call for is “libertarian paternalism” which they argue is not an oxymoron.

A “nudge”, according to them, is a non-coercive alteration in the decision making process, e.g. innocuous details such as the pattern of lines on a road. Professor Sunstein explains that “For too long, the United States has been trapped in a debate between laissez-faire types who believe markets will solve all our problems and the command and control types who believe that if there is a market failure then you need a mandate.” He and his colleague stand astride arguing that an understanding of human irrationality can improve how public and private institutions shape policy. The presumption is that a nudge does not limit free choice; it merely provides a desirable direction.

One example used by the authors is the reluctance of employees to sign up for 401k plans even though it is in their best interest to do so. They suggest that companies adopt automatic enrollment, while retaining an opt-out provision. That would be seen as the right kind of nudge that still allows for free choice.

Professor Thaler has spent a career thinking about decision making and, in his judgment, people often opt for irrational or overly optimistic positions. For example, he notes they are more fearful of unlikely threats like a nuclear power accident then they are something more probable like a car accident.

As I see it this book is yet another academic argument for the “third way,” a path between the free market and the command economy that has failed so many times before. The problem is that the “nudge” will come from the same government and the same bureaucrats often responsible for failures in the public sector. Surely it is fair to say that people sometimes make irrational and undesirable choices in life, but isn’t that often true of bureaucrats who have the same temptations? Or are Thaler and Sunstein merely indicating that there are intelligent social engineers who can tell us how to behave?

It seems to me that if you are paternalistic in subliminally nudging someone in the “right direction” you cannot be a libertarian, even if the nudge is intended to be noncoercive. Moreover, even when there are rewards for certain behavior that ate well established and well understood, some people choose to ignore them. For example, there is an unquestionable correlation between education and a standard of living. A college degree is worth more than a high school diploma and a PhD is worth more than a college degree. Is there anyone who doesn’t know this? Yet many cannot be nudged into higher education.

Professor Thaler argues that many people are more fearful of unlikely threats than probable threats using nuclear power accidents as an example. Surely Thaler must realize that threats are related to perceptions. As a result of the “China Syndrome” there is the fear that a nuclear explosion could have widespread and catastrophic consequences, however limited the probability; while a traffic accident – while more probable – has limited consequences and is something already integrated into one’s consciousness.

Clearly the market mechanism isn’t perfect. But it does account for irrational choices and it assumes as well the ultimate prevalence of what the public wants. As I see it, anyway you cut it, I would prefer the “invisible hand” to the manipulated hand of social engineers. How long would it take for the subtle nudge to become, as the estimable Roger Kimball put it, the big push? Is it enough to say, as Thaler and Sunstein do, that transparency is sufficient to offset the nudging of social engineers. But is it? After all, what makes a free economy work is its freedom which includes the freedom to know. And yet, as the authors note, people still make irrational decisions.

It is an illusion to think that there are appropriate alternatives to the free market despite the clever conflation of words in the Thaler-Sunstein thesis. In the end, of course, paternalism is not liberty and liberty cannot be paternalism.