March 28, 2005
"Libertarian Paternalism"
Posted by Gordon Smith

Richard Thaler and Cass Sunstein coined this term in their 2003 paper, published in the American Economic Review and in later form in the University of Chicago Law Review. They begin with the observation that "The idea of libertarian paternalism seems to be a contradiction in terms." Yes, that was my very first thought. Thaler and Sunstein want me to reconsider.

A few aspects of this paper interest me. First, Thaler and Sunstein base the notion of libertarian paternalism on the falsification of strong-form purposive human action. That is, they contend that people do not always -- perhaps even "usually" -- make choices in accord with their own "best interest." This is not a trivial assertion, but it is one that I am more than happy to accept. That said, it is also not true that people never make choices in their best interest. Law is interesting precisely because we are working in the large middle region, in which people sometimes choose wisely and sometimes do not.

Second, Thaler and Sunstein employ the concept to encourage "welfare-enhancing" interventions by institutions:

We urge that such rules should be chosen with the explicit goal of improving the welfare of the people affected by them. The libertarian aspect of our strategies lies in the straightforward insistence that in general, people should be free to opt out of specified arrangements if they choose to do so. Hence we do not aim to defend any approach that blocks individual choices. The paternalistic aspect consists in the claim that it is legitimate for private and public institutions to attempt to influence people’s behavior even when third party effects are absent. In other words, we argue for self-conscious efforts, by private and public institutions, to steer people’s choices in directions that will improve their own welfare.

As you might expect, this idea has already generated strong reactions. For example, Daniel Klein accuses Thaler and Sunstein of acting disingenuously: "I believe they seek to dispose of libertarianism by speaking in a way that upsets libertarianism’s key semantics, but without making clear that that is what they are doing, much less challenging those semantics directly." The heart of Klein's criticism relates to the distinction between voluntary and coercive action. According to Klein, Thaler and Sunstein muddy the waters "because they reject the key distinctions between governmental and nongovernmental affairs." In a reply to Sunstein, Klein clarifies his target: "Social Security taxes and consumer protection laws (with concomitant enforcement) tread on property and freedom of contract, and hence on freedom; they are coercive." By contrast, company policies and other "private" arrangements are non-coercive. By conflating governmental and non-governmental action, Klein argues, Thaler and Sunstein attempt to undermine the force of libertarian claims about the illegitimacy of government action.

Fair enough. Thaler and Sunstein are playing loose to score rhetorical points. But I think Sunstein can be forgiven for concluding that "Klein seems to me to have nothing to say against" the proposal. That is, assuming that fundamental changes in the size and functions of government are not on the table, Klein has nothing to say about the proposal that policy makers should embrace "the explicit goal of improving the welfare of the people affected by them." For a more fundamental challege to the proposal, we might consult Don Boudreaux who wonders:

What are the "desired social objectives"? How are they chosen? The range of options – from among which the "desired" ones are to be chosen – is vast. Do our "desired social objectives" include absolute income equality among families? Zero rates of divorce? Reducing the number of abortions? Curing cancer within ten years? Putting a man on Mars? No more petroleum imports? Reducing air pollution nationwide by 10% annually? 25% annually? 50% annually? Eliminating the trade deficit? Completely eliminating tobacco consumption? Reducing alcoholism by 5%? By 30%? TiVo in every family room?

The implicit assumption underlying Boudreaux's critique is that individual choice is always a viable alternative to collective choice. Thaler and Sunstein reject that assumption:

The first misconception is that there are viable alternatives to paternalism. In many situations, some organization or agent must make a choice that will affect the behavior of some other people. There is, in those situations, no alternative to a kind of paternalism -- at least in the form of an intervention that affects what people choose. We are emphasizing, then, the possibility that people’s preferences, in certain domains and across a certain range, do not predate the choices made by planners.

Thus, Thaler and Sunstein view themselves as making a rather modest and obvious point. They are not attempting to justify the New Deal, but trying to direct policy makers who operate within our current system. With respect to those policy makers, Sunstein rightly observes:

Libertarian paternalists insist on freedom of choice; they do not want to foreclose options (Sunstein and Thaler 2003). At the same time, they believe that, in many contexts, planners cannot help influencing choosers, even if they aspire to neutrality. If influences are inevitable, shouldn't planning be undertaken with some awareness of its effects? Libertarian paternalists believe that the answer is clearly yes—and that planners in the private and public sectors should explore approaches that lead people toward welfare-increasing outcomes while also leaving them free to choose. (emphasis added)

The difficulty with this debate is that the participants are playing on various levels. Thaler and Sunstein have offered a thoughtful and provocative proposal that is not easily dismissed with simple appeals to individual v. collective choice.

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