Libertarian Paternalism 2

Notes for November 26

Main points

We talked about the parts of Nudge devoted to specific policy prescriptions.

Choice and political philosophies

Professor Brown kicked things off by asking us to think back to how other political philosophers dealt with decision making errors. Dworkin didn’t do that at all: his view was that society should strive to distribute goods according to people’s choices, period. Mill was highly conscious of error, but he didn’t think the state should do anything about it. He believed the state would do an even worse job of making decisions and that people learn from mistakes. Rawls and Locke were operating too far away to even ask the question. Williams had some interesting remarks about false beliefs but nothing at this level of sophistication. So it’s Dworkin and Mill.

I think it’s pretty obvious that Thaler and Sunstein’s work marks a significant advance on both. There’s ample evidence that we are bad decision makers. So we can’t ignore that. And the sorts of errors that we make aren’t of the sort that Mill was talking about. They aren’t errors in opinion or concerning the best way to live. Rather, they are errors that escape our attention. So we don’t learn from them.

Plus, Thaler and Sunstein have the point that our choices are already structured by our circumstances. And our circumstances often include actors who don’t have our best interests at heart. So a little paternalism won’t make our choices less free than they already are.

That said, there is one part of Mill’s argument that hasn’t been addressed: his case against the state. Mill did not trust the state to make good decisions largely because he did not trust the mass public to behave in a thoughtful and tolerant manner. Even if you don’t find Mill’s specific case compelling, it does point out a hole in Thaler and Sunstein’s theory. They need to give some reason for thinking that the state can be trusted to employ nudges well. This is especially so in the light of Robert’s observation that some of the most effective nudges won’t even be noticed by those who receive them.

So I think Madison was right to say that the thrust of their theory runs counter to a major thread in libertarian thought that individuals have to look out for themselves. Thaler and Sunstein think it’s fairly obvious that the state can be trusted to look out for the individual. But, as Maddie pointed out, the state’s interest is not necessarily the same as the individual’s interest. You can imagine the state taking the power to employ nudges in all sorts of malign ways. How, for instance, do you get people to put their lives at significant risk for low pay by joining the military? Patriotism and peer pressure help quite a lot.

So there is a hole in libertarian paternalism. Why can the state be trusted with this power? Our next reading will try to show that this hole cannot be closed.

Criticisms withdrawn

Last time, I complained about what I saw as a gap between the first three chapters and the fourth chapter. In a nutshell, the fourth chapter says that nudges are especially appropriate for big decisions that are rarely made while the previous chapters had been about errors in small, everyday decisions. Who is to say that we don’t focus on the big decisions, such that our Reflective system takes over from the Automatic one that is trusted with the run of the mill stuff?

Well, Thaler and Sunstein are to say! The chapters on financial decisions show that we make a hash of big decisions such as how to save for retirement.I wonder if the book started with the financial chapters at the core and then they built it out in both directions. And that’s not all. I said that there are market solutions to the problem of making hard decisions; for example, you can hire professionals like mortgage brokers to guide you. But they have actual evidence that this does not work well for minorities and women (136, 140). All in all, I think my objections have been met. I concede.

As long as I’m being all warm and fuzzy, I was impressed by requiring high school students to apply to the local community college in order to get a diploma (Ch. 13). What a great idea!

Health care

We talked a bit about their discussion of Medicare Part D. This case struck some of us as being different in kind from some of the others. Here, the problem wasn’t that our circumstances conspire to get us to make bad decisions. It’s that the decision is really hard. You don’t need fancy psychology experiments to show that hard decisions are hard! And the nudge is similarly familiar: make charts that present the information in a way that is easier to understand. Again, this is less novel than the other stuff.

Anyway, quibbling aside, you might find the reflections of the administrator who was in charge of the Medicare Part D rollout interesting. In particular, he compares the problems they faced with the Obamacare pratfall in October.

Why just paternalism?

We already went over some suspicions about the propriety of calling this libertarianism. As Professor Brown noted, some of their cases are very loosely related to anything that you would call paternalism. You won’t benefit at all by signing up to be an organ donor since, when the time comes to donate, you’ll be dead. You may benefit from a system in which organ donation rates are higher (ch. 11) or energy use is lower (ch. 12), but it’s a stretch to call that way of benefitting from a government program paternalism. That’s just good old improving the public welfare.

The central claim of the book is about how our choices are structured by the environment in which we make them. It’s a short leap from that to thinking about intentionally manipulating the environment in which choices are made. Thaler and Sunstein emphasize paternalistic reasons for doing that: it would make those who are manipulated better off. But there could be other reasons for messing around with the circumstances in which choices are made as well. We could do that to make the environment cleaner, to save lives through organ donation, to maximize alumni giving to Pomona College, or any other worthy cause.

How to save for retirement

I shared the health and insurance parts of our benefits package. I didn’t share the retirement part because I don’t have anything handy. We are forced to review our health plans every year during what is called “open enrollment.” But we aren’t ever forced to review our retirement plans: they keep going with whatever you had the previous year.

Anyway, the retirement package is about as daunting as the health insurance one. However there is good news here. The decisions you have to make about retirement savings certainly seem complicated. But they really aren’t. It’s mostly a matter of keeping it simple, avoiding taxes (money that goes to the government) and fees (money that goes to a financial services firm), and having the willpower to save a big chunk of your monthly income.

Harold Pollack, another University of Chicago professor, summarized what he learned from talking with a financial planner on an index card.

Retirement plan on an index card

The only term that won’t be obvious when the time comes is “actively managed funds.” These are funds whose managers try to beat the market. They are contrasted with passively managed funds, also known as index funds. The managers of index funds try to match an index of some financial asset like stocks or bonds. Since that is a lot easier to do, their fees are significantly lower. Research shows that index funds do much better than actively managed ones. Basically, it’s unlikely that any actively managed fund will beat the market over the long run and the fees definitely add up (much more than you would think since they compound over time).

Bookmark this page and come back to it when you get your first job.


The meaning of the word has evolved. It can now mean either ‘literally’ or ‘figuratively.’ I’m with Professor Brown in thinking this is regrettable. Still, the world has moved on and the OED calls the regrettable use “one of the most common.”

colloq. Used to indicate that some (freq. conventional) metaphorical or hyperbolical expression is to be taken in the strongest admissible sense: ‘virtually, as good as’; (also) ‘completely, utterly, absolutely’.

Now one of the most common uses, although often considered irregular in standard English since it reverses the original sense of literally (‘not figuratively or metaphorically’).

1769 F. Brooke Hist. Emily Montague IV. ccxvii. 83 He is a fortunate man to be introduced to such a party of fine women at his arrival; it is literally to feed among the lilies. …

1876 ‘M. Twain’ Adventures Tom Sawyer ii. 20 And when the middle of the afternoon came, from being a poor poverty-stricken boy in the morning, Tom was literally rolling in wealth. …

1975 Chem. Week (Nexis) 26 Mar. 10 ‘They're literally throwing money at these programs,’ said a Ford Administration official.

2008 Herald-Times (Bloomington, Indiana) 22 Oct. a8/1 ‘OMG, I literally died when I found out!’ No, you figuratively died. Otherwise, you would not be around to relay your pointless anecdote.

This page was written by Michael Green for Freedom, Markets, & Well-being, PPE 160, Fall 2013. It was posted November 27, 2013 and updated November 28, 2013.
Freedom, Markets, & Well-being