Sunday, August 9, 2009

"Nudge" This!

Back in early 2008, the University of Chicago professor team of Richard H. Thaler & Cass R. Sunstein wrote a book called Nudge: Improving Decisions About Health, Wealth, and Happiness.

After the financial collapse (which it unsurprisingly failed to even remotely predict - and I'll get to why in a bit), they created an updated edition, which was purchased by my parents, read, and then sent to me.

My folks claimed that the book was written by a "couple of libertarians", but also that it was about how to "nudge" people into making "the right" choices. What the authors actually claim, is that they are a bunch of "libertarian paternalists", whatever that means! I don't really want this to turn into a "No True Scotsman" issue, but as I explain what they're really talking about here I think it will become quite clear that these are hardly advocates of anything any true libertarian I've ever met would subscribe to... I know I don't. American libertarianism is fundamentally oppositional to "paternalism" period, so it's a bit oxymoronic to mash the terms together. I think the authors do understand that.

That said, the policy prescriptions they advocate are vastly more benign than most of the "command and control" style restrictions on freedom that have encroached on every aspect of American life in the last several decades.

The book is about preserving choice, which I applaud. However, these are not supporters of laissez-faire. These are "behavior economists", which is a field that has cropped up relatively recently - sort of in tandem with the resurgence in more "empirical" versions of psychology like cognitive/neuropsychology & evolutionary psychology. Personally, I find some of this to be a little strange since Ludwig von Mises covered a lot of Thaler & Sunstein's "revolutionary" explanations of human behavior with Praexeology WAY back in 1949's Human Action.

Also, I figured out that people respond to incentives and the like explicitly (and in many of the same terms) by the time I was 14-15 years old. It's not exactly news.

The truly unfortunate part about the book is that the authors never figure out the distinction between a government using "nudges" - which are intrinsically backed by force (police, guns, jail), and private individuals and businesses using similar means of persuading people to engage in different behavior. In addition - the authors spend a great deal of time at the top of the book explaining the various ways in which human reasoning can fail and err (all true and important to be aware of), but then somehow we are expected to believe that politicians don't make the exact same errors in reasoning. Worse still, in many instances, it would appear that in the world of Sunstein and Thaler, the addage "power corrupts, and absolute power corrupts absolutely" isn't even a consideration - to the contrary, politicians aren't at all influenced by special interests, selfish concerns or even experience the lust for power.

Businesses, which in a free market succeed or fail (like most businesses do every day) only in the extent to which they serve their customers in pleasing ways, are the really scary ones apparently. And in our non-free, quite corporatist market, Thaler & Sunstein have a point. But much like so many individuals, they confuse cause & effect. Any casual observer should realize that the more power government has grabbed over the past century, big business has only gotten more powerful. They never bother to address why. Few people do of course, but if any government was actually something that was designed to "reign in" business interests and protect consumers, the United States government - which is the biggest, most expansive & most powerful government in the history of the world - would have accomplished this. But in reality, the bigger government gets, the more businesses need to focus their attentions on lobbyists and currying favor with power-seeking public officials. The more power public officials have - the more command they have over the economy, the more incentive everyone has to try to influence them.

The root of the problem is the concentrated power. Not the business.

I'm not particularly convinced Thaler & Sunstein actually understand that. And if you don't at least get that, you should probably quit refering to yourself as "libertarians". Even if you follow it up with "paternalists".

Ultimately, my biggest complaint about the book is not that the things that the authors are saying are fundamentally wrong, or even that their policy prescriptions are so terrible. In fact a few are great (they are Friedman-style advocates of school choice & vouchers, getting marriage entirely out of the hands of the government, and actually promote the idea - however briefly - of allowing markets for organs!). If their "nudges" were implemented right now instead (key point) of the freedom-crippling destruction of the Bill of Rights generously called "legislation" in modern America, I would be a pretty happy guy.

The goal of the nudges is at least to preserve choice. I can get behind that, but we've seen time and time again that for most governments, "nudges" will never be enough.

Ironically, all businesses can do is "nudge" but the book still manages to make them seem more dangerous than the people who's nudges invariably turn into fines, then into jail, and in the extreme turn into jackboots.

At any rate, as I was reading, I compiled a series of notes - some good, some not-so-good about the book and I wish to share them with you all here:

Page 47:
"For example, smokers might benefit from cigarette taxes, which discourage consumption without forbidding it."
First off, there is nothing "libertarian" about sin-taxes. It's nothing more than nannyism at it's most banal, and it's none of the government's business whether or not a person chooses to smoke. Social engineering is not libertarian.

As a minor side note, I do find one really interesting thing about sin-taxes... Sin-taxes are as clear an admission as you'll ever get that politicians fundamentally understand that raising the price of something decreases demand (and conversely that lowering the price increases it). But they're inconsistent! They are counting on the fact that an increase in a consumption tax on specific goods can discourage their use, but they pretend that the same is not true for increases in things like the minimum wage (which is an artificially increased tax raising the cost of labor). If higher cigarette prices discourage cigarette use, than why politicians think that raising the cost of labor doesn't discourage employment is impossible for me to understand.

Page 48:
"Note: Three-quarters of Americans get refunds when they file their taxes... If these refunds were described as interest-free loans to the government, they probably would not be so popular."
A good friend of mine (shoutout to Bill) and I had a discussion about this very thing ages ago. The government actually puts our tax money into a wide array of interest bearing accounts... So if they take more from you over the year than you actually owe, you are simply giving them free money on which to earn interest. When you realize that you could have been earning interest on that same money... Well, it gets rather irritating to me. However Thaler & Sunstein's point was that these are basically forced savings accounts for many people. This may be true, they they're pretty crappy ones. Even the paltry 1-2% being offered by most savings accounts, or the 4% you might get with a CD or government bonds is better than zero percent! But obviously, the way things are done now is rather beneficial to the government, isn't it? Course they'd never have a system set up that works against the people's interest...

Page 57:
"On the other hand, social scientists generally find less conformity... when people are asked to give anonymous answers."
Something to think about anytime legislation like Card Check the "Employee Free Choice Act" comes up, huh?

Page 61:
" is a possibly comforting thought: they [other people] aren't really paying as much attention to you as you think."
Something I've said for a long, long time. The quote I like to use much of the time is "Anytime you worry that people are thinking badly of you, stop and realize that they're not thinking about you at all."

This is also a reason why in the vast majority of cases, Occams Razor should always lead us to the conclusion that some perceived slight against us is almost always caused by carelessness, and not maliciousness. This is also rather optimistic... The world is filled with very few actually bad people, just a lot of occasionally thoughtless ones.

Page 65:
"Candidates... do the same thing; they emphasize that 'most people are turning to' their preferred candidates, hoping that the very statement can make itself true. nothing is worse than a perception that voters are leaving candidates in droves."
...No kidding. And how did the media treat Ron Paul as a presidential candidate again? Ohhhhh yeah. They said he was a crank & a crack pot and George Stephanopoulis said, point blank that he had no chance of winning. He remains the only guy who ran or who is saying anything in government today who has the slightest clue, and yet the media & his opponents easily created the perception that he had no shot. From there, we've all heard the term "cascading" referencing this kind of thing as well. Or in marketing terms "band-wagon" comes to mind. This sort of thing has really helped to make the Republicans & Democrats firmly committed to running media-savvy, but otherwise completely useless candidates for elective office. UGH.

Page 69:
"...those households that consumed more [energy] than the norm received an unhappy "emoticon..." :(
I highly doubt that this would work consistently over the long term since I know I at least would simply ignore the stupid thing, but in either case it's nothing but ridiculous nannying BS! There are a thousand circumstances which might require someone to use more or less energy than the average individual. Central planners have no way of knowing how much is the "right" amount for any individual. I myself have 2 computers and a host of electronics that I use for working on music projects - my roommate is the same for video editing. We use electronic equipment much more than most... Do we deserve a constant scolding from some bureaucrat who only has access to one metric of information about our lives? I'd say not.

Regardless, the solution to any energy problem is not to "conserve". Conservation is no answer. Better, more efficient and just more production period is. If we were producing 10 times the amount of energy we actually "needed", just think of what new and exciting things we could accomplish for the benefit of the world.

Page 82:
"But if some of the consumers are Humans who sometimes make bad choices (as judged by themselves, of course) then all of us may have an interest in which set of firms wins the battle."
Excuse me for being just a might skeptical of their generous statement that the correctness of people's choices are to be "judged by themselves" when virtually the entire book is devoted to judging other people's decisions as good or bad and nudging them to make the externally-defined "good" ones.

Page 99:
"If you're a Democrat, and you like books that fit your predilections, you might want to see what Republicans think, no party can possibly have a monopoly on wisdom."
But apparently both parties can have a monopoly on abject stupidity...

Page 100:
"Many markets (and choice architecture systems) are replete with with incentive conflicts. Perhaps the most notorious is the U.S. health care system."
There is some implication here that we actually have anything remotely functioning or "free" market in health care! There's nothing of the sort - which obviously I have written extensively on - and the entire history of medical care from World War II on in the United States has been replete with the very nudges that this book is essentially advocating. It's also yet another story of where government has gone with "nudges" and when they produced unintended results, it just snowballed into the kinds of "command & control" legislation that destroys any form of choice.

You can read about this in other chunks of my writing, but it bears repeating that the only reason we have employer-paid health care in the US is because companies needed a way to compete for good workers after FDR imposed wage controls in 1943. Eventually, as a result of corporate lobbying & meddling politicians, tax breaks & other small incentives were passed to make it easier for employers to provide that benefit, which firmly ensconced it as the way health care is provided in the United States. Since they didn't pass equal tax-reductions for individual health insurance, it's significantly more expensive to pay for it yourself... And now, in 2009, we no longer expect (or want) to have the same job for our whole lives! So anytime we quit or move, which is common, we lose our insurance. This is obviously a huge problem, but who caused it!? NOT the market.

Wanna talk HMO's? Government created! Wanna talk high cost of care? That's what happens when government subsidizes something! Thaler & Sunstein acknowledge that cheaper prices result in increased demand. (Duh!). So when government makes health care cheap or even "free", they do nothing but encourage massive over use - which puts a strain on available resources. And then what do you think happens? COSTS SKYROCKET!

The exact same thing happened with college tuitions too.

And that's not even factoring the other layers of idiocy in health care, like letting the AMA (with government backing) dictate the number of doctors allowed to be licensed at any given time, creating a shortage of doctors - again driving up the price per MD, not to mention depriving people (especially in rural areas) of much needed medical care providers.

In a book called "Nudge", the authors seem to meticulously avoid discussing all of those playful little shoves.

Pages 129/130:
"...we must acknowledge that a nonlibertarian argument can be made for limiting the percentage of an employee's retirement portfolio that is held in company stock - say, to 10 percent."
"By giving company stock this odd preferential treatment, existing law actually encourages the inclusion of company stock in 401(k) plans."

So, here's a perfect example of my major complaint with not only "Nudge", but virtually all people arguing for more government intrusions into people's right to freedom of association & choice (the market).

The authors say that we can make a case for "intervention" while on the very next page noting that it was earlier intervention which caused the problem to begin with! And what's worse, yet again, the problem wasn't exactly created with "command & control" but with a simple "nudge". I get a little irritated eventually because the authors keep ignoring that much of the principles of their book have been employed in the US for years. And inevitably - the first nudges create problems that are unanticipated - which require more nudges, which create more problems, which require stronger pushes, which create even bigger problems which lead to command & control and the inevitable loss of liberty.

Page 139:
"But market forces did not prevent the problem from occuring, so there have been calls for more intervention. Some demand an end to predatory lending, but because loans do not come stamped "predator," it's hardto implement any such ban without depriving many deserving but high-risk borrowers from any source of financing."
First: Exactly a case in my point.

The government intervened in dozens of ways prompting the reallocation of resources into the housing sector... There are many great books on the topic, including Tom Woods' Meltdown, Thomas Sowell's The Housing Boom & Bust, and even Johan Norberg's soon-to-be released, Financial Fiasco: How America's Infatuation with Home Ownership & Easy Money Created the Financial Crisis. I won't get into all that much of it here, (because I covered it all here) but between stuff like the Community Reinvestment Act and Clinton & Bush's obsession with pushing home ownership, the FDIC and FNMA & FDMC, we had no end to government interventions leading up to the crisis.

...and then... OF COURSE... when things got really screwed up - we call for (you guessed it) more interventions to fix the disastrous consequences of the earlier ones!

But more to the point, every bit of this whole section in the book is undermined by the authors' avoidance of discussing the biggest "nudge" of them all: THE FEDERAL RESERVE.

Because the Fed controls interest rates and the money supply, it literally has "control" of whether or not people save or spend, invest or borrow. When rates are the at historic lows, that encourages people to borrow & spend... The Fed's "nudge" turned on the spigots of money full blast, and people lapped it up - as any sensible person predicted they would.

As Peter Schiff likes to say; "President Bush said that Wall Street got drunk, but who supplied the booze??"

Pages 140/142:
"Students typically try for a federal loan because they are cheaper..., then look at private loans if necessary."
"One might wonder why lenders are so eager to get the student loan business that they are willing to engage in practices that are at least sleazy and possibly illegal. The answer is that the combination of loan guarantee and subsidy by the government makes these loans exceptionally profitable, so lenders compete hard to get the business."
...Indeed. And, just like in health care, and in the housing market, the government has skewed demand for college way, way over supply can bear and costs shoot up.

(Also, finally the authors mention "rent-seeking" and actually sound like libertarians for a moment!)

Page 148:
"If we were to pick a single phrase to characterize the design of the Swedish plan, it would be 'pro-choice.'"
Note: In the "democratic socialist" land of Sweden, the things that they've done to successfully make their systems work invariably involve market liberalization.

Here's more Johan Norberg:

At least in terms of retirement/Social Security - Sweden is more "free market" than the United States. Shocker...

Page 156: Authors Thaler & Sunstein explicitly demonstrate that they are not, in fact laissez-faire supporting libertarians, but instead "behavioral economists". To the uninitiated, perhaps the distinction is hard to understand since they are attempting to preserve choice - but it's disingenuous for them to call themselves libertarians and it's frustrating to me personally because so few people actually understand the principles involved as it is. It's not enough to want to preserve choice merely for practical reasons (of which there are many!) but also to understand that fundamentally a human being is autonomous and a self-owner - in other words, you have no right to control what other people do unless it specifically hurts you or infringes on your right to control your own actions.

Chapter 11: Organ markets.

I have almost nothing bad to say about this chapter what-so-ever. Although most of this has been criticisms, Thaler & Sunstein get full support for this one. Dr. Walter Block (one of my favorite economists - and certainly one of the most entertaining) has written on this topic and once gave a great lecture where by simple show of hands in the class he asked how many people were already organ donors (only a few) and how many people would agree to become organ donors at $100, $1,000 and $10,000. By the end, the entire class had raised their hands.

When we suffer from shortages of all sorts organs and thousands of people die each year waiting for livers, kidneys, hearts, lungs & everything else... Why in the world don't we just allow insurance companies & private individuals to offer some compensation! Demand is high, supply is limited and government-mandating that organs be "free" is clearly setting the wrong price.

I have a minor complaint that they claim that "a few interventions" may be needed - since, the actual problem is that we have existing government interventions preventing organ markets from developing, but I do especially like two of their proposals (although not their nannying bits):

1. Change the default presumed consent rule to "yes" instead of "no". It's arbitrary either way, and as long as we have a default setting - make it the one that actually saves people's lives.
2. As an interim step between organ sales being illegal and allowing an actual market in organs to take place (which would actually solve the supply problem and save many thousands of lives), setting up a system where people could "trade" for organs within a given network of blood types voluntarily would be a really good start. "Paying" for organs would still be illegal (unfortunately), but at least we could set up a great way for people to save lives and have their own lives insured.

Moving on...

Page 195:
"Take one example from the hotel business... When the key is removed, the lights and air conditioning go off, but the power to the clock radio does not. Why are rooms designed this way? Because the hotel company has to pay the utility bills , and managers know that customers have no incentive to turn tout the lights."
The Tragedy of the Commons: Why "public-ownership" of goods and the means of production - i.e. Socialism - is the worst idea ever conceived by mankind. Inevitably, owners have incentive to be careful, prudent & economically efficient with their resources. Governments (and smaller-scale collectivist communes) have no such incentive.

Page 209:
"Our principal claim here is that patients and doctors should be free to make their own agreements about that right. If patients want to waive the right to sue, they should be allowed to do exactly that. This increase in freedom is likely to help doctors and patients alike, and to make a valuable, even if modest, contribution to the health care problem."
Yes... YES! This is one of the best ideas in the entire book.

Annnnnd........................ All the way at the end of the book, we get:

Page 214:
"Of course, we are libertarian paternalists, not libertarians "full stop."
Finally a little actual honesty on this point. I know to some this may seem like a semantic issue not worth discussing, but it goes to what I said at the beginning of this. These guys are not libertarians - primarily because they fundamentally avoid the entire question of morality and the choice of non-aggression one must make to understand the philosophy itself.


Page 232:
" sensible choice architect would design the current income tax system, which is famous for its complexity... Ordinary people and the Internal Revenue Service would benefit even more if the process could be made more automatic."
I suppose I have two points to make about this.

1. Taxes are the involuntary taking of money from the people upon threat of force (arrest/jail). Taking money from someone against their will is called theft. Theft is theft, regardless of whether or not it's taken at the beginning of the year, the middle of the year, the end of the year or 100 times a day. And although, yes, it would probably make it "easier" and by extension result in slightly less theft (hopefully), merely making it so that the theft is automatic versus requiring people to fill out forms & write checks doesn't make it not theft...

2. ...Unless you're Harry Reid. If you're Harry Reid than you would believe that, because we have deductions and withholding, and then have to forcibly write a check to the government at the end of the year, the United States tax system is "voluntary". Although he "recognizes" that you can't "cheat" and not pay, or the IRS will take you to court and send you to jail (and probably destroy all of your assets in the process)...... Even though you have to pay, it's still "voluntary" because you have to fill out complex forms at the end of the year and mail in your return instead of having it automatically filed for you.

I wish I was joking... But I'm not. Watch for yourself:

Taxes are not voluntary and Harry Reid should be unemployed by the United States.

* * * * *

That covered all of the notes that I took while reading the book... As you can see, I'm quite skeptical. The very notion of "libertarian paternalism" strikes me as inconsistent right from the start. On top of that, I have a great many (well founded) objections to the very field of Behavioral Economics itself. Ultimately, it is impossible to know the full complexity of an individual's values or what will make him happiest - so judging people's behavior as "irrational" or mistaken - without knowing their internal thoughts - is simply untenable. Mises & Hayek knew this extremely well. So did the University of Chicago's most important contribution to Economics: Milton Friedman...

At any rate, admittedly - on the scale of things - libertarian "paternalist" is a vastly superior position to "authoritarian idiot"... But how do Thaler & Sunstein actually expect choice to be maintained when they're actively given power-seekers the tools with which to destroy it??

To be fair, the authors do address some "objections" in the update at the end. The most salient of these is the one I've been making this entire time: These "nudges" merely become the testing ground for governments to exert more control on their citizens. The authors dismiss this essentially by saying that governments are going to do something anyway (just give up trying to combat tyranny now, folks!) and that it's really just a "slippery slope" argument that doesn't carry much water.

The truth is however, I think I've shown repeatedly above that in fact, it does carry water. Not only that, but that pointing to any slippery slope objection with this stuff now is way, way too late! The proverbial horses ran away from the barn decades ago and Thaler and Sunstein are just now getting around to closing the barn-door.

Governments have been using "nudges" forever. They're almost always effective (albeit the secondary & tertiary consequences are virtually never considered and almost always a nightmare that requires even more nudges...). But a lot of times they are so buried in dense legal-ese within 1,000+ page legislation that ordinary people don't even realize they're being influenced. That, combined with the fact that if you don't abide by government's "nudges" you go to jail or get fined, and I think we should all be concerned about that, all the time. Especially when our benevolent "planners" have turned out to be woefully wrong time and time and time again with horrendous consequences.

Doctor shortages, water shortages, rolling power black-outs, booms and busts in housing & finance, and even now - ruinous economic "bailouts" and idiotic car destruction schemes... All a result of government nudges. And that's only the tip of the iceberg for central planners. Certainly anyone who has heard of central planner, Robert Moses, would know how much damage they can do...

And yet the book spends the vast majority of it's pages fretting about private sector nudges that everyone already knows about and which are obvious like advertising. People trying to sell you their products are hardly a massive threat, even if they're good at it. If you don't like what they have to offer, or if you don't get the results you're looking for you can try somebody else or something else, or nothing if you choose - no harm, no foul and most of the time you can even get your money back... And you actually get treated like an important person because most companies realize that they need to make you happy in order to stay in business. In the occasional instance that you get defrauded or swindled, you can typically sue the company and win and you can always make enough noise to get others to boycott.

But try suing the government! And even if you succeed in suing, which is nigh-impossible to begin with, what then? It's not like they're going to go out of business from bad management, production & customer service, now are they? Of course not. When government nudges screw up - government officials merely pass the buck around the world a few times and keep on taking your money year after year.

As professors, it's quite possible that Thaler & Sunstein's luke-warm treatment of the market (which actually preserves and enhances choice all the time in accordance with their professed goals) and completely whitewashed ignorance of government as interventionist ultra-nudger was just a way for them to avoid incurring the wrath of their colleagues for saying anything nice about market liberalism... But for anyone claiming a libertarian moniker, they should be ashamed.

I think I've made my point... possibly too much so... But I'll leave you, and myself, with this:

Any book called Nudge on economics that does not contain even a single instance of the words; "Federal Reserve System"... FAIL. If nothing else, I just wish Thaler & Sunstein would have taken the time to learn from their own research and apply it to their understanding of policy.

(Note: Reason Magazine published a review of this book late last year, which I avoided reading until after writing this: Why Opting Out is No "Third Way": The perplexing banality of "libertarian paternalism")

No comments: