Some time back, I had a post discussing Nudges, an interesting book by Richard Thaler and Cass Sunstein arguing for what they call libertarian paternalism. As I pointed out there, one problem with the proposal is that it is easy to convert libertarian paternalism—presenting alternatives to people in a way designed to get them to choose the one that they would choose if they were acting in a fully rational way in pursuit of their existing objectives—into ordinary paternalism, choosing for them. All the choice architect has to do is to raise the cost, in time, money, convenience, and/or information, of choosing the alternative that he believes the chooser doesn't really want to choose—or that the architect himself doesn't want chosen. And I offered a real world example, in a private context, of just that happening—twice.
Some of these issues have recently been hashed out on Cato Unbound in an exchange involving Thaler, Glenn Whitman, who is a libertarian critic of libertarian paternalism, and other posters. Thaler protests that what he is in favor of is "one-click" libertarian paternalism—meaning that it should, wherever possible, be costless to choose the disfavored alternative. But he recognizes that other people might use the idea in less libertarian fashion. Which got me thinking... .
In other contexts, it is useful to shift the discussion from outcomes to mechanisms. It is straightforward to argue that transport firms ought not to engage in various monopolistic practices. To get from there to transport regulation requires some argument to show that the regulators will reduce such practices rather than increasing them—hard to manage, given the empirical evidence provided by the history of the ICC and CAB. Looking at it that way moves us from the theory of optimal regulation to public choice theory, from what regulators should do to what they will do.
Suppose we apply that approach here. Thaler et. al. argue, convincingly, that one cannot avoid choice architecture, since individuals are making choices and some process is deciding how those choices are presented to them. We can, however, imagine different processes to make that decision, different ways of selecting our choice architects. We could, for example, leave firms free to decide for themselves whether automatic payment of part of an employee's wages into a retirement system is the default, with the option of choosing to get all the money immediately, or whether the latter is the default and the former the option. Or we could have a government agency make the decision for them. In choosing between those alternatives, one obvious question is which will come closer to Thaler's goal of nudging individuals into making the choice that bests serves their goals, while leaving them free to make other choices at no significant additional cost.
It's tempting, at least for libertarians, to claim that the answer is obvious, that the firm has, for conventional economic reasons, an incentive to tailor what it produces to the desires of its customers, and a similar incentive with regard to employees. Hence one might expect the firm to always produce the version of choice architecture, for both groups, that was optimal.
But that is to ignore a central element of Thaler and Sunstein's argument, that since individuals are not perfectly rational, a choice architect can take advantage of their irrationality to control, at least to some extent, their choices—including choices such as what firm to work for or what product to buy. The obvious tactic for a choice architect, including a private one, is to nudge individuals in the direction not of their interests but of the objectives of the architect.
Which brought me to something else I had been thinking about, not libertarian paternalism but the technology of making firms work. There are some I deal with—the lumberyard where I get material for carpentry projects is one example—which feel like happy places. Employees are friendly to customers and each other, and it does not feel synthetic. Asked for advice, they give it, even when not in their immediate interest; I am thinking now of a camera store which, when I asked them what scanner I should buy to turn slides into digital photos, told me I would be better off sending the slides to a service, not theirs, that would scan them for me.
I have never run a firm and would probably not be good at it, but presumably some people who do run firms know how to do it in a way that results in the people involved acting in a way that takes account of the interests of both customers and fellow employees. And I think that, to a considerable extent, customers and employees can recognize firms that work that way, despite the attempts of firms that don't to pretend they do.
I would prefer, as customer or employee, having my choices architected by those people to having it done by a government agency.
Some of these issues have recently been hashed out on Cato Unbound in an exchange involving Thaler, Glenn Whitman, who is a libertarian critic of libertarian paternalism, and other posters. Thaler protests that what he is in favor of is "one-click" libertarian paternalism—meaning that it should, wherever possible, be costless to choose the disfavored alternative. But he recognizes that other people might use the idea in less libertarian fashion. Which got me thinking... .
In other contexts, it is useful to shift the discussion from outcomes to mechanisms. It is straightforward to argue that transport firms ought not to engage in various monopolistic practices. To get from there to transport regulation requires some argument to show that the regulators will reduce such practices rather than increasing them—hard to manage, given the empirical evidence provided by the history of the ICC and CAB. Looking at it that way moves us from the theory of optimal regulation to public choice theory, from what regulators should do to what they will do.
Suppose we apply that approach here. Thaler et. al. argue, convincingly, that one cannot avoid choice architecture, since individuals are making choices and some process is deciding how those choices are presented to them. We can, however, imagine different processes to make that decision, different ways of selecting our choice architects. We could, for example, leave firms free to decide for themselves whether automatic payment of part of an employee's wages into a retirement system is the default, with the option of choosing to get all the money immediately, or whether the latter is the default and the former the option. Or we could have a government agency make the decision for them. In choosing between those alternatives, one obvious question is which will come closer to Thaler's goal of nudging individuals into making the choice that bests serves their goals, while leaving them free to make other choices at no significant additional cost.
It's tempting, at least for libertarians, to claim that the answer is obvious, that the firm has, for conventional economic reasons, an incentive to tailor what it produces to the desires of its customers, and a similar incentive with regard to employees. Hence one might expect the firm to always produce the version of choice architecture, for both groups, that was optimal.
But that is to ignore a central element of Thaler and Sunstein's argument, that since individuals are not perfectly rational, a choice architect can take advantage of their irrationality to control, at least to some extent, their choices—including choices such as what firm to work for or what product to buy. The obvious tactic for a choice architect, including a private one, is to nudge individuals in the direction not of their interests but of the objectives of the architect.
Which brought me to something else I had been thinking about, not libertarian paternalism but the technology of making firms work. There are some I deal with—the lumberyard where I get material for carpentry projects is one example—which feel like happy places. Employees are friendly to customers and each other, and it does not feel synthetic. Asked for advice, they give it, even when not in their immediate interest; I am thinking now of a camera store which, when I asked them what scanner I should buy to turn slides into digital photos, told me I would be better off sending the slides to a service, not theirs, that would scan them for me.
I have never run a firm and would probably not be good at it, but presumably some people who do run firms know how to do it in a way that results in the people involved acting in a way that takes account of the interests of both customers and fellow employees. And I think that, to a considerable extent, customers and employees can recognize firms that work that way, despite the attempts of firms that don't to pretend they do.
I would prefer, as customer or employee, having my choices architected by those people to having it done by a government agency.
