We are all paternalist when it comes to our children. We wouldn’t dream of allowing them to do whatever they wanted. But paternalism is not limited to the parent-child relationship – it is also rife among politicians who seek to control how much adults smoke, eat and drink. They also want us to exercise more and spend more time with our families. And there is now a lighter version called Libertarian paternalism that has become all the rage in the last 5 or 6 years. (It can also be called soft paternalism, or asymmetrical paternalism.) The idea is to nudge steer and coax but not to bring in bans or coercion as in traditional paternalism does. Two of its principal proponents are law professor Cass Sunstein and economist Richard Thaler, authors of the 2008 book Nudge: Improving Decisions About Health, Wealth And Unhappiness. Thaler, summed up their philosophy in the following way:
“Although the phrase sounds like an oxymoron, we contend that it is often possible to design policies, in both the public and private sector, that make people better off — as judged by themselves — without coercion. We oppose bans; instead, we favour nudges”
What is behind this theory is a lot of recent work in behavioural economics. This is where Homer Simpson comes in. Thaler believes that many of us are limited by an inner Homer Simpson. Behavioural economists believe that many impulsive decisions are taken the Homer Simpson part of our brain. These decisions may have very negative consequences. There are many examples of this. It could be continuing to pay a magazine subscription years after the six-month free trial period is over – we are suckers for the word free and are often victims of our own inertia. Another example is anchoring when we get stuck on an initial number and use it as a basis for our decisions. And we are extremely bad at judging probabilities.
Let us look at some concrete examples. Take pensions for example. Opt-in schemes have participation rates of around 60 per cent, while otherwise identical opt-out funds retain between 90 and 95 per cent of employees. This prompted Adair Turner, the chair of the FSA to recommend an opt-in default position in his report on pensions. Spain has made kidney donation the default option unless people consciously decide to opt out. A more trivial example comes from men’s lavatories. As any woman will testify, men when urinating do not always achieve precision with their delivery. This effect can be multiplied in any public convenience. An economist came up with a brilliant solution for Amsterdam’s Schipol airport. His idea was to put an image of a black fly onto the bowls of the airport’s urinals, just to the left of the drain – I think I have also seen spiders. The result was that spillage went down by 80 percent. Apparently, if you give men a target, they can’t resist aiming at it. And who said economics was the dismal science?
All this libertarian paternalism may sound quite reasonable idea but for traditional libertarians it is a misnomer, an oxymoron. They argue that it is impossible for a government to know what is best for individuals. Just because we are sometimes irrational does not mean government would do any better. We have an intimate knowledge our own preferences. To go back to the pension example how can the government know your exact circumstances (present and likely future incomes or how you value consumption now versus consumption in the future.) No government can possibly know all this. Just because you know someone is irrational doesn’t mean you are capable deciding for him or her.
I am always a bit wary of government intervention. It is such a great temptation for politicians to interfere. There is a danger that libertarian paternalism could become a slippery slope toward greater government intrusion in our lives. But as long as there is always the possibility to opt out, I think there are far more egregious uses of government power that should be attacked.