Libertarian paternalism series at Cato Unbound

Lynne Kiesling

I’ve been meaning to write about the libertarian paternalism series at Cato Unbound for a week or so, but have been too busy to pull it off. Happily, Ilya Somin has a good post that touches on a couple of the themes I wanted to raise (and I second his recommendation to read the series, and the Whitman posts specifically). In particular, he points out that the libertarian paternalism arguments do have a double standard because they focus on the cognitive biases of individuals in making consumption and investment decisions, but they fail to apply the same behavioral analysis to policymakers and regulators.

It may well be that private citizens acting in markets and civil society often make decisions that they later regret because of cognitive errors. However, regulators and voters are people too. They also might make bad decisions because of cognitive errors. Libertarian paternalist scholars generally ignore this possibility by implicitly comparing perfectly rational regulators with often irrational consumers. But there is no a priori reason to believe that the former are more rational than the latter.

He then goes on to discuss the cognitive biases of regulators, and voters, and their implications for these policy “nudges”. I know that there are several electricity regulators and policymakers who, being naturally attuned to the top-down control culture and history of the industry but also wanting some expansion of individual choice, see the concept of “nudge” as a way to overcome the biases and transaction costs associated with individual consumers paying attention to their electricity consumption. These policymakers should also pay attention to their own biases, though, and the ways that their inclinations to control and manage economic outcomes lead them to focus on outcomes that actually may not be in the best interest of individuals, and may therefore lead to either a decline in economic welfare or a set of unintended consequences as people innovate around the nudges. Or both.

2 thoughts on “Libertarian paternalism series at Cato Unbound

  1. Okay, that’s a lot of oxymorons rather than a market call on bundled preferences of rugged individualists; I’ve been called worse than both at some time, but I still don’t know what thick chewy CATO-like reading product you’re advocating.

  2. I’m no economist, but wouldn’t this promotion of policy nudges fall into a variation of the “nirvana fallacy?” Demsetz’ warning appears quite relevant 40 years later:

    “The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”

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