Friday, June 22, 2007

Libertarian Paternalism???!! What the...

A very astute-seeming reader of this blog asked me, as a behavioral economist, about my take on libertarian paternalism. Now, I taught an economics tutorial entitled "Sex, Drugs and Rock & Roll", where we discussed risky behaviors and various takes on the libertarian viewpoint. Nonetheless, this concept is (was) foreign to me, and in literal terms doesn't even seem to make sense. The nice people who contribute to Wikipedia, however, inform me that "soft paternalism, also referred to as libertarian paternalism, is a political philosophy that believes the state can 'help you make the choices you would make for yourself—if only you had the strength of will and the sharpness of mind'". Okay, so far so good, though I'm not convinced that the state knows how a perfectly rational me would behave.

Now, for my take on the matter. Let's take a person that smokes crack as an example. This person may be
a. Behaving perfectly rationally, but his discounting of future happiness is so large that he is willing to sacrifice a lot of long-term happiness for the immediate high
b. Behaving in a time-inconsistent (or state-inconsistent) way such that after he smokes some crack he's going to look back and really wish that he had made a different choice
c. Be unaware of the true costs and benefits of smoking crack (note that this can apply to both rational and time-inconsistent people)
d. Not considering costs and benefits at all, since some hard drugs can actually suppress the areas of the brain that analyze those tradeoffs

Now, consider that the aim of policy in general is to maximize social welfare. I would then argue that situations b and d could warrant some paternalistic intervention, since those crack smokers will almost certainly be thankful later. Choice c seems to call for some sort of education initiative. And choice a...well, that guy is just somebody that I can't relate to, but he seems to be doing okay for himself. A policy gets very tricky here because an outside observer, and perhaps the people themselves, cannot distinguish between possibilities a-d, so there would have to be a blanket rule that raises some people's long-run utility (b,d) through limiting choices and lowers that of others (a and potentially c). Do the benefits to the winners outweigh the costs to the losers? I at least think that this is the relevant question to consider.

I found the paternalism argument curious in general, since it is often a hard sell, and much of the justification for intervention can be made through an externalities argument as well. For example, I would be much more behind the government outlawing crack because of what it can do to children, both before and after birth, since children cannot choose who their parents are and presumably are not in the market for crack themselves.

Addendum: I added a comment to the Marginal Revolution post that initially started this discussion. Basically, one of the arguments being made was regarding paternalism for poor people since they are more prone to "irrational" choices. A colleague of mine did experiments on this very topic (paper source is given in the comment), and he finds that it is cognitve ability that drives biases, not specifically level of wealth. So even if somebody was into peternalism for those that can't help themselves, targeting poor people isn't the way to go. Also, when behavioral economists hear about increased choice being utility-decreasing, they usually think of bounded rationality issues rather than self-control ones.

Addendum #2: Apparently the Australian government doesn't have qualms about being selectively paternalistic.


Angad said...

First, agreed that the state doesn't really know how a truly rational individual will behave because it is made up of imperfect humans, but anyhow it does end up making decisions for people in many cases.

I think (but am not sure) that the term "libertarian paternalism" was coined by Richard Thaler. Here is a argument he had with Mario Rizzo on the same issue.

WSJ - Should Policies Nudge People To Make Certain Choices?

From what I got from these guys is that term or concept "libertarian paternalism" (whatever it really is) is used not to signify a "coercion." Thaler gives an example,

"People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London,
pedestrians from abroad are reminded by signs on the pavement to "look right" because their instincts from back home are
to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks."

There are many such examples where we make mistakes as individuals, books like Stumbling on Happiness are filled with them. But a issue that Rizzo raises is why use a political term like "libertarian" to identify it. Here I agree with Rizzo.

Thaler sums up his philospophy by saying, "We favor better government, not more government."

It appears that he is advocating that use of a concept like
"libertarian paternalism" is to make a already existing policy more efficient. If there is already a government policy intended to maximize social welfare, using concepts of behavioral economics can make the policy more efficient. That sounds reasonable. If the government is going to anyhow intervene in to reduce the use of crack then why not do it in a "smart" way?

But I don't have any clue why and from where did the name libertarian paternalism come into being!

Angad said...

Here are some more thoughts,

In your Marginal Revolution comment you say,

".....shows that how "behavioral" someone behaves is correlated with
cognitive ability but not specifically with wealth."

But that leads to the question, what is "cognitive ability" correlated with. And I suspect it is related significantly with genes and environmental influence (parents, schools etc). And then it can be shown that rich parents are able to afford better
environments for their children than poor. I would think there is evidence that income disparity doesn't affect cognitive ability
in a severe way. I mean I don't think there should be a severe difference in the IQ of kids of parents earning, say, $40,000
or $200,000, just based on income. There could be a difference but then other factors can be said to come into play.

But, when the difference is below a subsistence parents and decent earning parents, I think difference in cognitive ability
can be shown to depend on income levels. That I think explains why the average IQ of thirdworld countries is significantly lower
than that of developed countries.(wikipedia has a chart of various IQs at
/IQ_and_the_Wealth_of_Nations )

The above claim is similar to the ones made usually by psychologists that after a base level of income like $30,000 happiness is not correlated with income.
( )

Though income could come into play as a relative measure, in the sense, if I earn $100,000 and everyone else in my neighborhood is making $300,000 I won't be as happy as if I earn $50,000 and everyone else makes $40,000.

"Therefore saying that potential welfare recipients exhibit particularly non-rational behavior makes a sometimes unfair
assumption, namely that low income people are less intelligent."

What is so "unfair" about making the assumption that low income people in general are less intelligent than high income people?

It could be unethical if this is used to claim something inaccurate like saying that limitiations of cognitions are so severe that the poor won't become more intelligent even if they somehow start earning a relatively higher income.

(thank you for the use of the word "astute" while referring to me. ;)

Angad said...

Going back to the original Cowen post, I haven't read the Bryan Caplan paper he talks about, but I suspect that Behavioral economics doesn't have much on redistribution, at least yet.

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