Whyte: a nudge in the wrong direction

I've been catching up on some older articles by Jamie Whyte, and have yet to read a bad one. I'll highlight a few of my favourites; please forgive the bombardment.

This one from 2 August 2008 is about the contradictory philosophy of 'libertarian paternalism':

A few hippies aside, everyone agrees that paternalism is a good thing when practised by parents. Children do not know what is good for them. Left to their own devices they would make many bad decisions. Caring parents will threaten, bribe, cajole, trick or otherwise manipulate their foolish offspring into doing the right things.

When practised by governments, however, paternalism is more controversial. The idea that adults do not know what is best for them, and that the government should manipulate them into doing the right thing, strikes libertarians as outrageous.

Yet most politicians find the idea irresistible. The present Government aims to make us change our behaviour in all sorts of ways that libertarians would think none of its business. Among other things, they want to make us smoke less, drink less, eat less, take fewer drugs, exercise more, save more and spend more time with our families. So do David Cameron's new Conservatives.

Treating adults like children is an idea that needs some justification, especially when it is espoused by a political party that until recently claimed to champion the individual against the State.

So you can imagine the delight with which these nannies have received Nudge, a book by the Chicago University professors Richard Thaler and Cass Sustein that claims to provide a new justification for paternalism and new ways of manipulating people that are compatible with libertarianism.

He explains the basic premise: like children, many adults behave irrationally. They follow the herd. They resist change. They fail to properly evaluate probabilities and statistics. Their cost-benefit calculations, where they happen at all, are faulty.

The nudgers would address this not with the regulations and prohibitions so favoured by the Labour party, but rather by a subtle system of incentives and disincentives, intended to correct our irrational impulses.

But as Whyte asks, "If the Government knows what's best for us, why only nudge us in that direction? Why not give us a mighty shove - as the Australian Government has - by making saving compulsory?"

Sustein and Thaler reply that nudging is consistent with libertarianism, but shoving is not. And they are libertarians. They advocate what they call “libertarian paternalism”.

Alas, this is as incoherent as its name suggests. Libertarianism is motivated by the idea that a government cannot know what is best for individuals. That is why it is likely to harm us when it attempts to influence our behaviour. Those who favour governmental nudging must think the “central nudger” knows what is good for us. But then they have no reason to be libertarians.

Nor does behavioural economics justify paternalism, because it does not show that the Government knows better than we do what is good for us. The advantage that individuals have over central nudgers in deciding what we should do was never our perfect rationality. It is our superior knowledge of our own preferences and circumstances.

Take a simple example. Should you save more, as our would-be nudgers suggest? The answer depends on your present and likely future incomes, on how much you can expect to inherit, on how long you are likely to live and on your preferences regarding consumption now versus consumption in the future. The Government may know that you are foolish. But it cannot possibly have better information than you on all these matters.

Knowing that someone is irrational does not tell you what they should do, nor that they are at present doing the wrong things. Our would-be nudgers are like doctors who think that they can prescribe the right medicine simply because they know you are a hypochondriac.

Faultless logic. Unfortunately, George Osborne isn't listening.