A lot of economists lean more towards libertarianism and have thus a negative view of paternalism which, according to Richard Thaler and Cass Sunstein, is based on a false assumption and on two false misconceptions. The false assumption is that people always make rational choices, which we’ll look more into detail further in the article. The two false misconceptions are that there is always a good alternative to paternalism and that paternalism always involves coercion.
What is Libertarian Paternalism?
Libertarian paternalism comes as a bridge between libertarianism and paternalism, the individuals have freedom of choice, but this same choice is partly manipulated. When there are a lot of choices, individuals can experience choice overload, a phenomenon that causes them to become overwhelmed and to make a rushed decision. In order to avoid this phenomenon, it could then be useful to try to help individuals in making the best choice for themselves. So essentially the main idea is that the agents can make their choices freely, choosing what they want according to the different options presented, while they are being nudged into choosing one of the options, specifically the one that would maximize their welfare. It is important to highlight that the agents are not forced to choose that specific option, they are just incentivized to do so.
Are we rational in our choices?
In economics, it is usually assumed that individuals have rational preferences and make rational choices. However, research has shown that this doesn’t always happen, for example, often people make different choices for the same problem just because it is phrased differently. Another proof of non-rational choices is valuing current consumption much more than future consumption, instead of preferring to smooth consumption over time. A lot of economists are skeptical on these conclusions arguing that individuals choose better in the “real” world than in a laboratory. Nevertheless, there are also studies on actual choices that show substantially the same issues on the “real” world decisions, which makes us conclude that we are not always rational on our choices and, although we might usually choose according to our best interests this isn’t always the case and we sometimes make choices that are not maximizing our welfare.
Can we avoid paternalism?
For a fact, paternalism, as we know it today, is often inevitable. It appears more frequently than we believe, as it is, again and again, the simplest and most neutral way to nudge, both for the decision-makers and the consumers – seeing the case with the default rules is actually a great way to realize this.
So, as the first example of libertarian paternalism policies, we go back to academia, reaching the example provided by Richard Thaler and Cass Sunstein regarding employee savings – the Save More Tomorrow plan. Under this volunteer program, employees were invited to sign up for a program in which their contributions to the savings plan are increased annually whenever they get a raise. The results of this plan were quite good, as the persons who entered the program have increased their saving rates from 3.5 percent to 11.6 in a little over two years and, also, there were really few dropouts from the program.
This measure defies the standard economic theories, as they don’t recognize the non-rational aspects of decision-making from the consumers, particularly the self-mastery problems that are present in the most frequent and random aspects of our day-to-day life. This policy comes from the idea that, in general, retirement savings programs are not well formulated by the standard economic theory (from authors such as Franco Modigliani or Milton Friedman, because they all derive from the rational idea that each person saves exactly the necessary amount each period, among with intelligent investing with that amounts.
Another type of libertarian paternalism being put into practice is simple things such as requiring shops to place unhealthy products, such as soda or processed food at the back of the store so that they don’t appear so frequently in consumers’ eyes. This measure, with the clear goal of increasing healthy eating, is paternalist because it rises from the assumption that healthy eating is a good thing for the consumer, which is clearly plain to see, with the decision-makers having space to design a policy that contributes for the achieving of that goal. However, as it doesn’t involve coercion, it is also a libertarian policy. So, these kinds of procedures are always great examples of this concept developed by Thaler and Sunstein.
While we have understood the concepts and proper examples related to this important concept in the Behavioural Economics area, we know that the expression “libertarian paternalism” is far from being a paradox. In Nudge’s theory, proper public solutions can be agreed upon by the biggest supporters of liberalism. As these public policies can support some paternalist views that benefit the overall society, while don’t take away the freedom of each person to choose, they account for one of the most important concepts that a behavioural economist must understand in order to rethink the way that we, as a global and plural economy, make public policies that aim to the general welfare of our society.
Thaler, Richard H., and Cass R. Sunstein. “Libertarian Paternalism.” The American Economic Review 93, no. 2 (2003): 175–79. http://www.jstor.org/stable/3132220.