Libertarian Paternalism

For several years, Richard Thaler and I have been working on the topic of "libertarian paternalism." The basic idea is that private and public institutions might nudge people in directions that will make their lives go better, without eliminating freedom of choice. The paternalism consists in the nudge; the libertarianism consists in the insistence on freedom, and on imposing little or no cost on those who seek to go their own way. (Our principal paper, Libertarian Paternalism Is Not an Oxymoron, can be found in the University of Chicago Law Review, on the website of the AEI-Brookings Joint Center on Regulatory Policy, and on ssrn.com.) A core example of libertarian paternalism is Thaler's Save More Tomorrow plan, by which workers can sign up to devote some of their future wage increases to savings. Another example is the automatic enrollment plan, by which workers are automatically enrolled in a savings plan, but can opt out with no trouble and at no expense if they choose to do so. We could easily imagine a Give More Tomorrow plan, for charitable giving, or automatic enrollment for the same purpose (with costless opt-out).

One of our central arguments is that because default rules and starting points often matter, institutions can't avoid nudging people -- and hence can't avoid a kind of paternalism, or at least a nudge. If 0% of take-home pay goes to savings, it isn't because nature so ordained it. In addition, the legal system sets up a wide array of default rules that govern the law of contract, law, and tort. People didn't specifically choose those default rules, and they greatly matter. If the default rule says that employment is at-will, so that an employer may fire an employee for any reason or for no reason at all, it will much affect outcomes; freedom of contract could be preserved with a different default rule.

Libertarian paternalists insist on preserving freedom of contract. They also want to think about whether some default rules are better than others, by reference to the interests of contracting parties themselves. Libertarian paternalists emphasize that government officials are also subject to bounded rationality, and hence they are especially skeptical of approaches that ban freedom of choice or impose high costs on those who do what officials don't like.

Variations on or cousins of libertarian paternalism -- sometimes labelled "thin" or "soft" or "weak" or "asymmetrical" paternalism -- have been receiving a great deal of attention in recent years, perhaps as a way of going beyond the now-tired debates between liberals unduly enthusiastic about government mandates and conservatives unreflectively committed to "laissez faire." If there is a "third way," libertarian paternalism might provide a place to start.

Gary Becker and Richard Posner have posted an interesting exchange, at the Becker-Posner blog, on the topic of libertarian paternalism, but they seem to have another subject in mind. Becker in particular is concerned about approaches that favor a "stronger 'self'" over a "weaker 'self'" -- by, for example, imposing high cigarette taxes or banning choices. Posner wants to limit the idea of paternalism "to situations in which government wishes to override the informed preferences of competent adults." Both Becker and Posner complain that libertarian paternalists fail "to weigh adequately the significance of the cognitive and psychological quirks emphasized by libertarian paternalists on government officials."

Becker and Posner make some nice points against those who like government bans and mandates (though Posner, interestingly, defends the ban on trans fats in New York City restaurants; libertarian paternalists would disapprove of any such ban). But libertarian paternalists do not mean to allow government to forbid the triumph of the supposed "weaker" self over the supposedly stronger one. If people want to eat a lot of candy and ice cream, or refuse to save for their retirement, that is their right. Far from neglecting the bounded rationality of government officials, libertarian paternalists emphasize government error as a strong reason for respecting freedom of choice.

What libertarian paternalists add is that the opposition between "individual choice" and "government" is confusing and unhelpful when government is inevitably establishing default rules that govern outcomes if choices haven't been specifically made -- and that influence people's choices in any case. A key point, then, is that private and public institutions can't possibly avoid a form of paternalism, so long as they establish default rules and starting points. (For some reason, economists in particular seem not to understand this point.) The question is how to make those starting points as good as possible, while also preserving free choice.

Libertarian paternalism is hardly a panacea, and a lot of work remains to be done. But it might be worth thinking about how the basic approach can be applied to such diverse problems as savings, prescription drug plans, social security reform, obesity, school choice, preparation for natural disasters, and safety on the highways.

Comments

[Law Student]

Libertarian paternalism sounds much like a variant of conservatism which uses the law to encourage "virtuous" conduct.

Here's a relevant example. Let's assume, arguendo, that homosexuality is unhealthy for individuals. One might favor decriminalizing homosexual conduct, but favor policies that deny governmental benefits to same-sex couples. We are not prohibiting bad conduct, but merely disincentivizing it. You call it "libertarian paternalism." But all of this sounds familiar to the conservatism of Russell Kirk or the National Review.

So I would like to know what -- aside from the provocative name -- is novel about "libertarian paternalism"?

[Roach]

It's funny; when I first read the title, I thought that the paternalism in question would be the Constitution itself and its restraints on the majority.

It seems that much of the paternalism that has been pervasive in Anglo-American law--usury laws, laws against gambling, notions of "public policy" in contract law--are based not so much on an "us v. them" paternalism, as they are on a notion of pre-commitment. "I" want to restrain "me" in these different cases, just as we, the political community, want to restrain ourselves in the form of constitutional restraints on direct democracy.

One problem with traditional notions of rationalism is that there are differnt ways to be rational, just as there are certain choices that are objectively irrational when one's entire lifecourse is the interest at staek. Thus, a law against usury might make sense because, even if in a fit of desire and need and desperation, I want a loan at 500% interest, I know that in cooler moments of rationality and over my life course as a whole allowing that choice may not be in my long term interests, just as doing something like getting addicted to heroin may not be in my interests. The "future self" should be able to restraint the out-of-control present self.

The market-based libertarian approach generally looks to the market and its "revealed preferences" as the ultimate arbiter of self-interest, but the more deliberative and forward-looking and public exercise of lawmaking may be more rational than these immediate decisions, where longer term intersts may be out of vieew or overwhelmed by what were once called "the passions."

So, restraints on ourselves may not be so much external restraints by others who do not like the way one lives and chooses, but restraints that I (as a member of a community) choose for myself in a moment of deliberate rationality, aware that another I, far from the best self, may make bad choices if I am not restrained by the laws. And these retraints, like tying oneself to the mast, may enable me to pursue certain long-term interests more readily than if at every individual moment of my life find every choice is available. What is called paternalism, far from being paternalistic, may simply be a form of self-discipline, where the cool-headed I of deliberation restrains the less-disciplined "I" of the passions.

[Anon]

Law Student--

Prof. Sunstein can certainly explain this better than I, but I believe libertarian paternalism isn't about incentives for (or against) certain behaviors; rather, it stresses that there is a background against which people make decisions, and that background can change what decisions people make.

Take the 401(k) example--should the default be that people opt into 401(k)s, or opt out? Whatever the default is, there's no significant cost inherent in making one decision over the other. But oddly (or at least, oddly if people are truly rational), significantly more people save if 401(k)s are opt-out. Or, to take another example Prof. Sunstein has used, the order in which food is presented in a buffet line affects how much, say, dessert people take. What's objectionable (even from a strict libertarian perspective) about changing the order in which the food is presented?

In other words, libertarian paternalism takes advantage of the fact that people do not make decisions rationally. It's my understanding that a libertarian paternalist approach should impose no (significant) extra costs on, and should not change the decisions of, a truly rational decisionmaker.

[Law Student]

Anon --

Thanks for the clarification. I'll look more into it. On second cut, however, I remain skeptical that Sunstein's project is limited to the innocuous examples you described. I also am curious about where to draw the line between changing default rules and imposing heavy incentives to engage in certain conduct.

[Anon]

Law Student--I agree that line-drawing here can be a problem, especially since Sunstein sometimes seems to define "libertarian" as meaning simply "not foreclosing choice." Obviously there's a difference between costless default rules and making certain choices possible but artificially expensive. Anyway, he acknowledges these issues in his article, but you may be right that in some situations he would advocate increasing the cost of certain choices.

Here's one link to the article:

http://www.aei.brookings.org/publications/abstract.php?pid=328

[Frederick Hamilton]

Prof's Thaler and Sunstein put forth an intriguing policy of "libertarian paternalism". It is worthy of wider discussion and further study. The recent debate of privatizing a portin of Social Security fits into the concept of libertarian paternalism.

In fact it seems to represent a middle ground between conserative "anti-government control" thinking and liberal "complete government control" thinking.

I look forward to reading these posts.

[Michael Risch]

As I read the blurb above, the freedom of choice must be "nearly costless" - giving full benefits to only one class is not nearly costless.

Perhaps some of the work that needs to be done is determining how little cost maintains freedom of choice.

[Penty]

I would like clarification of the impact of libertarian conservatism onthe following three examples:
HPV Innoculation: There is a move to shift the default to school-based HPV innoculation of all teen girls to prevent the spread of this serious sexually-transmitted disease. Is a parental opt-out sufficient freedom?
HIV Testing: There is a move to change the medical standard of practice to default inclusion of HIV testing in every blood test. There is no provision for opportunity to inform patients of any right to opt out. Is an opt out of such a test a good reflection of liberitarian paternalism?
Abortion: Is it a public policy fix to shift to firmly and substantially incenting women to avoid abortion with pre-natal and post-natal services and options for the care of the child while permitting access to abortion in the face of these incentives?

Is it possible to change the size, diversity and aggression of the incentives and defaults through libertarian paternalism depending on the emotional temperature of the society on the particular subject?

Thanks.

[Dennis Cahillane]

So the idea here is to make the default choice the smart choice. The smart choice is determined by a detailed analysis by experts in the area in question, i.e. a retirement specialist recommending a 401(k).

Is the fundamental assumption that the people subject to libertarian paternalism would make this choice if given enough time to decide? Or is that we want to help people who could never figure out which choice to make?

I understand the impact of inertia on "opt-in vs. opt-out" retirement plans and such, but I think that only reinforces my point, which is that "libertarian paternalism" is only setting the default position where an informed person would put it. Half the population is below the median intelligence level, and some individuals would never be able to figure out what to pick. In addition, modern people have so many decisions to make and so little time, that even someone who would figure out the right answer might not bother.

Can someone point out a downside to libertarian paternalism? I can't find one.

[William Rhoads]

Professor Thaler is a founder and prominent exponent of behavioral economics, which posits multiple selves with differing preferences within us to explain our choice behavior. How does behavioral economics affect your concept of libertarian paternalism? Does its concepts of "lead us not into temptation" strengthen the need for default situations that protect us from our known weaknesses in making various kinds of choices?

[Roach]

The downsides should be obvious from the broader libertarian critique: the government does not know best, there is dissensus on the best choice, political decisionmaking is subject to abuse and corruption, even if the best choice is known the system is not self-enforcing, and therefore government policing of our private affairs, voluntary contracts, and business associations is costly and intrusive. Finally many libertarians argue in a kind of deontological way that says the governmetn interfering with our lives outside of the prevention of force and fraud is simply wrong, an affront to human dignity, the essence of which is found in free and unfettered and unconstrained choice.

Dennis, you last comment is surprisingly parochial.

[Ken Arromdee]

The HPV inoculation example seems like libertarian paternalism, since there aren't any costs for the parents to opt out.

The HIV example is not, because this paternalism depends not on people's irrationality, but on their lack of knowledge. Or to look at it from another angle, becoming informed is a cost.

The abortion example is not because it attempts to be paternalistic by subsidizing one of the choices, changing their relative costs and possibly affecting how a rational person would choose. Libertarian paternalism affects only irrational people.

[Joan A. Conway]

Too much uncertainty with Save More Tomorrow plan, when employees are eliminated in droves and do not work until they are unable to. Better to stop being the father to the employed and direct them to their living rooms to investigate how they plan to survive today's disposable society.

[Phil]

I kind of love this, but if you want self-identified libertarians to buy in then, oxymoron or not, you'll have to call it something other than "paternalism".

[LAK]

I wish, Professor Sunstein, that you would argue with a bit more force. What you are proposing almost sheepishly, that "libertarian paternalism" "might be worth thinking about" as a basic approach to certain problems, is and should be obvious to anyone who actually lives in the the world and interacts with others on a regular basis, and has any kind of honest self awareness.

The ideas that 1. human beings do not always act consistently or rationally, and that 2. the initial conditions and rules into which anyone is thrown matter to producing certain outcomes should be uncontroversial. It is a testament to the force with which the ridiculous assumptions about rational action have pervaded the very foundations of the debate, how all this is a refelction off a surface of classical economics.

Economics is currently a subpar academic discipline. It is about 75 years behind the times. Some day it will have the sophistication in describing human decision making that physics has in desribing the quantum behavior of particles. Human beings have severley flawed and limited rational capabilities. They use heuristics all day long, and the initial conditions of any isolated decision are often outcome determinative. When you bother to take a measurement of someone's preferences, or even one's own, in many ways it is much the same as when you take a measurement of an electron. The very act collapses a wave function into a singularity, and the state at which you find the person may look discrete in that instance, but in reality it is not.

The point is, it is almost depressing that this is up for deabte at all, that white men three standard deviations away from the mean in intelligence have created policies in which average blokes are assumed to be able to act rationally in all of life's decisions, and that someone of your intelligence has to spend his time talking in their language to show them what should be obvious to anyone.

On that note, I'm going to put off signing my organ donor registration card until another day.

[golddog]

"Economics is currently a subpar academic discipline. It is about 75 years behind the times. Some day it will have the sophistication in describing human decision making that physics has in [describing] the quantum behavior of particles. Human beings have [severely] flawed and limited rational capabilities."

LAK, while I am usually sympathetic to your arguments I must take issue with this one.

No serious or thoughtful economist believes that economics exactly describes the behavior of people. Instead he or she uses the assumption of rationality to help simplify models. At all times though, one should remember that they are simply models, where a number of real life variables must be excluded.

The goal of modeling is not to exactly describe reality, for that to occur the model would have to be as complex as reality, but rather to help show a relationship or show an aspect of reality. Think of models as a metaphors. They don't recreate the exact scenario, but simplify the situation to show a relationship. When viewed from this perspective models can help bring new insight to a problem.

Having said this, I agree that it is wrong to give too much weight to models without examining empirical evidence. Models themselves are useful tools, it's people's misuse of them to oversimplify complex situations into easily memorable phrases (i.e., "Government intervention is always bad.") that is the problem.

[LAK]

Ok, I'm a bit hard on the old economists. U of C will do that to a man. However, the fact is much of our regulatory policy, or more accurately the lack thereof, is predicated on the underlying belief, nutured nowhere more than at the U of C, that consumer citizens are rational. Thus the lack of adequate consumer protection regulation, the the protection of commerical speech under the 1st amendment, thus the hostility to mandatory savings programs or organ donation presumptions requiring opt out.

While totally off the wall, as an ideological
matter much of our philosophy of government is still based on these false ideals, and that Cass Sunstein spends so much of his precious time talking in their terms, trying to get the conservative classical laissez faire guys to recognize what is obvious to the rest of us is depressing to me.

[Joan A. Conway]

A Market place of ideas provides us with worthless slogans, such as compassionate conservatism.

Their is not intention to be compassionate with negated with the word conservatism.

Their is equally no way to be liberal when associated with paternalism.

[Tibor R. Machan]

Perils of State Soft Paternalism

Tibor R. Machan

Jim Holt discusses the recent debate about soft paternalism, in his essay in this Sunday's, New York Times Magazine. His “The New, Soft Paternalism” is a fair and pretty thorough account of the debate about whether people have multiple selves of which some may be wiser than others and it does a decent job of considering whether the wiser selves we have ought to get government support, as when states limit gambling or other easily abused activities by their citizens. Holt comes out in favor of the government’s lending a hand to our wiser selves in the end. Here is how he put his conclusion:

“But what if you are one of those people who rely on more mundane stratagems, like self-binding? The general problem you face (as put by the political theorist Jon Elster [a member of the analytical Marxist school, by the way]) is this: For a given uphill goal and a given strength of will, does there exist a path, however circuitous, that will get you to the top of the hill? By adding a new path here and there, state soft paternalism makes it more likely that the answer will be yes.”

A couple of preliminaries. Invoking David Hume’s idea of the totally—indeed, impossibly—fragmented human self is a non-starter here. For Hume the idea was not to show that there is no self. He advance the notion merely as a reductio absurdum argument against radical empiricism, to show that simply relying on our senses gets us nowhere in trying to understand anything, including ourselves. Of course we have different ideas and desires, with some of us remaining intact over time while others waffling about with no integrity at all. Yet even the worst of us, with the most discombobulated personalities and unhinged character, can have some good moments during which we try to set about straightening our who we will be henceforth--just think of all the New Year's resolutions here. And, yes, a bit of push from peers and institutions may help when such folks are ready to lapse once again.

Now it might be tempting to do what Jim Holt, on the advice of Jon Elster, is proposing, get the state involved here. State soft-paternalism has its greatest appeal not because of its successes and because good theory supports it, quite the contrary. It appeals because of the powerful governmental habit that has been cultivated in the human race from time immemorial. This is a bit akin to the root idea behind paternalism—"parents know best." And that’s right for most kids, of course; for adults, however, it is a disabling, inept approach to dealing with life and gives dangerous powers to governments.

The governments of most societies have, of course, sold themselves to the people as their parents—or uncles or nannies—who have nothing but the best interest of their children, the people, in mind. Kings notoriously justified themselves along these lines, as have dictators. What differentiates democratic governments is merely the fact that they work by a process of decisions-by-committee and there are numerous competing committees vying to dominate until in the end a decision is reached that supposedly has had the benefit of extensive discussion. Of course, the decision will be coercively imposed but, presumably, wiser then many private decisions would be.

Now this is the kind of view that began to be questioned with the writings of Baruch Spinoza. Thomas Hobbes, writing just a bit before Spinoza, made the mistake of trusting the democratically selected absolute monarch, arguing, like Holt and Elster, that people want themselves to be ruled and a king or government is just who should do the ruling. But as Spinoza began to suggest and, later, classical liberals like John Locke, Adam Smith, and a host of others began to warn us, governments aren’t made up of angels but people. People with the crucial added attribute that makes it easy to yield to bad temptations, namely, power over other people.

In the 20th century Jim Buchanan and Gordon Tullock finally put the idea into a fully developed theory called "Public Choice" which argued that politicians and bureaucrats will routinely pursue their own agendas, not those assigned to them by the people via the democratic process. Now this pretty much means that entrusting government to engage in benign soft paternalism is futile.

Yes, some people could benefit from this if it could be counted upon—although that alone doesn’t make it good public policy either—but counting upon government to administer soft paternalism without corruption, without abuse, is the big mistake embraced by the likes of Jim Holt, Jon Elster, and, sadly, millions of others across the globe.

[AsymmetricalLibertarian]

The Federal Reserve is already practicing what I call "Asymmetrical Libertarian" monetary policy - it does nothing when asset inflation occurs and only steps forward and bailout the market participants when asset bubble burst. The Federal Reserve assumes that market knows best on its way up, however, when market is on the way down, it is assumed to be not so rational and therefore justifies monetary intervention.

But seriouslly, it'll be interesting if we can apply such asymmetrical analysis to monetary policy, or in general, our government policies in other area.

[Rechtsanwalt]

That's interesting.
I'll agree that if the default rule says that employment is at-will, so that an employer may fire an employee for any reason or for no reason at all, it will much affect outcomes; freedom of contract could be preserved with a different default rule. Another key point is that private and public institutions can't possibly avoid a form of paternalism, so long as they establish default rules and starting points.