Business Standard: Libertarian Paternalism

by Professor Deepak Lal, Senior Fellow in Globalization of the Adam Smith Institute (30/9/08)

The Nanny State must not be allowed to replace the Planned Economy.

With the ending of political debates about the plan versus the market, Western politicians, particularly on the Left, have been searching for new areas to rouse the political interest of their electorates. Increasingly they have turned to interventions in the previously protected private domain. It began with the attempts by Clinton’s New Democrats and Blair’s New Labour to find a Third Way between collectivism and liberalism. Since this ended in a blind alley, British and US politicians (Obama and Cameron) are embracing a new ruse — “nudging" — to justify their interventionist instincts. This moral paternalism is the subject of this column.

Moral paternalism has a long lineage in social democratic thought, which makes its adoption by the UK’s Tory leader surprising. A clear exposition was provided by the distinguished Oxford legal theorist and philosopher Herbert Hart in a debate with Lord Devlin in the 1960s (Law, Liberty and Legislation, 1963) about the legalisation of homosexuality. Hart upheld Mill’s principle of liberty that an individual is at liberty to undertake feasible actions if they do not harm others, in advocating the legalisation of every consensual private sexual activity. But, he abjured the classical liberal case against moral paternalism, on the specious grounds that individuals are not really free to choose. So while sexual permissiveness is legitimate, all forms of paternalistic supervision or coercion are needed to ensure that all other individual choices are in fact freely made. As these choices are psychologically determined, it becomes imperative to exercise thought control: to make “windows into men’s souls". This is not classical liberalism but the route to 1984 and Big Brother, which classical liberals would eschew.

The most recent manifestation has been labelled “libertarian paternalism" by its progenitors, the behavioural economists Richard H Thaler and Cass R Sustein (in Nudge, 2008). Based on the findings of psychology, behavioural economists have found many anomalies in the standard economic model of an individual’s maximising utility subject to the usual budget constraints. The centrepiece of these findings is the problem of self-control, or akrasia, as the Greeks called it. A divided self is postulated with the short-term myopic self being tempted not to act in the interests of its longer-term rational self. Just as Ulysses tied himself to the mast to prevent his destruction by the voices of the Sirens, it is suggested that “nudges" can help the far-sighted Planner self “to promote your long-term welfare … [which] must cope with the feelings, mischief, and strong will of the Doer [self], who is exposed to the temptations of arousal" (p. 42).

Paternalism is advocated because “of the false assumption that almost all people, almost all of the time, make choices that are in their best interest or at the least better than the choices that would be made by someone else" (p. 9). They are libertarian because instead of coercing people to serve the long-term Planner self, the public and private “choice architects" would merely use “nudges" to point people in the right direction as in the male urinals at Schiphol airport in Amsterdam. These bear etchings of a black housefly, and an economist’s “fly-in-urinal trials found that etchings reduced spillage by 80 per cent" (p.4). But as the economic journalist Tim Harford rightly remarked: “I am no more in favour of spillage than the man standing at the urinal beside me, but how is this libertarian paternalism? ‘We recognise your right to wet your shoes, but in case that is not your objective we will structure your choice environment to help you’" (FT, 22 August, 2008).

But if the ‘nudges’ fail, as in the case of smoking, the State has moved towards coercion.

This is justified by moral paternalists by basing themselves on Mill’s correct argument against a person’s freedom to sell himself into slavery, namely that “the principle of freedom cannot require that the person be free not to be free. It is not freedom to be allowed to alienate his freedom" (On Liberty, Everyman edition, p. 158). Amartya Sen (FT, 11 Feb, 2007) has claimed the smoking ban in the UK is based on Mill’s principles of liberty: “as habit-forming behaviour today restricts the freedom of the same person in the future". But as I and others pointed out, this is a complete travesty of Mill’s argument against slavery (FT, 15 Feb 2007, and especially S Simpson, FT, 2 March 2007). Mill’s robust arguments against bans on addictive substances like alcohol and opium do not mention his argument against slavery as being relevant in any way.

The argument for prohibiting addictive substances, based on assuming a divided self, postulates a negative inter-temporal consumption externality facing potential addicts. Current consumption depends on past consumption but not future consumption. This omission is repaired in the rational addiction models of Becker and Murphy (Journal of Political Economy, 1988). They show how even with inter-temporally inconsistent preferences, consumers maximise utility over their life cycle taking account of the future consequences of their actions in consuming addictive substances.

More seriously, as the economic theorist Dew Fudenberg’s (Journal of Economic Literature, 2006) critical review of behavioral economics rightly notes: “Even if we believe people do make systematic errors in evaluating how various choices will influence the appropriately defined measure of their ‘welfare’, we might not trust that the government or policy analysts would make better evaluations. For this reason, it is consistent to believe both that people make mistakes and that government policy should be based on the assumption people’s actions and ex-ante predictions are the best guide to what is in their own interests" (p.707). Quite!

But, this does not mean that in teaching our children “how to live", they should not be encouraged to exercise self-control and think of long-term consequences. But this is the domain of preachers. There is nothing libertarian about “libertarian paternalism". It is paternalism which should on Mill’s principle of liberty play no part in the public policy of the good society. The Nanny State must not be allowed to replace the Planned Economy.

published in Business Standard here


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