The Case Against Libertarian Paternalism

There is no practical, objective way for an outside observer to define another individual's best interest.

The Manipulation of Choice: Ethics and Libertarian Paternalism, by Mark D. White, Palgrave Macmillian, 150 pages, $19.98.

Selling a big gulp Dr. Pepper can land you in court, but a Diet Coke is just fine? That would have been the law of the Big Apple had Mayor Michael Bloomberg's now kyboshed attempt to "nudge" New Yorkers away from sugary drinks been successful. Then Justice Milton Tingling struck down the initiative as arbitrary and capricious, and New Yorkers danced in Union Square to celebrate the right to drink what they want.

But there is more wrong with Nanny Bloomberg's nudge than its restrictions on New Yorkers' freedom to hype up on two liters of Peach Snapple. In The Manipulation of Choice, a concise and straightforward manifesto for freeing individual choice from the public sector's influence, the College of Staten Island philosopher Mark D. White argues that there also practical reasons why these nudges towards "correct living" are poor public policy.

The moral certitude that even the most progressive New Yorkers felt about Bloomberg's limits on the size and location of "unhealthy drinks" was palpable in the days before the law was set to take effect. But a similar ban on trans fats in 2007 was implemented to little real protest.  And tight restrictions on where you can smoke outside have become something New Yorkers have learned to live with. The lack of moral concern for these other paternalistic laws is why White argues the critique of nudges and so-called "libertarian paternalism" needs to be more robust.

The idea of libertarian paternalism was popularized five years ago by the legal theorist Cass Sunstein and the behavioral economist Richard Thaler, in their bestselling book Nudge. Sunstein and Thaler argue that policymakers can preserve an individual's liberty while still nudging him towards choices that are supposedly in his best interests. A classic example is having employees automatically enrolled in a 401(k) retirement account, rather than asking employees to opt in to such a program. The nudge doesn't stop employees from opting out, and it encourages people to invest in their future, which Sunsteing and Thaler think is in their best interests.

To this, White replies that there is no practical, objective way for an outside observer—even a super-rational economist—to define another individual's best interest. And that undermines the very premise of libertarian paternalism.

Sunstein and Thaler would say anyone who does not see the benefits of saving for retirement is suffering from a cognitive failure. Similarly, the Bloomberg attempt to limit the size and location of unhealthy drinks was predicated on the idea that sugary beverages are bad for us and that people who want to drink them aren't making wise choices.

But in order to make these claims there has to be a baseline, objective standard for determining good and bad behavior. And people's preferences are too varied to nail down such a standard.

Some people want to retire on a beach in Tahiti and live off their retirement account, so good behavior for them is saving a large percentage each month. But what if the best form of retirement planning is taking cash and sticking it under the mattress while the suckers lose all their 401(k) value in a stock market crash? Or what if an individual would prefer to use part of their income every year to travel abroad and enjoy a more robust life now, rather than have the money when they are old and decrepit? Depending on your preferences and risk appetite, the definition of behavior in accordance with your best interests will vary dramatically.

White believes our behavior is also guided by hard-to-quantify principles, defined as "elements in decision-making that are not easily traded off against preferences and are not as responsive to opportunity cost as preferences." This argument is weaker, since principles are just strongly held preferences and are not necessarily impossible to quantify. It would be enough to say that economists simply don't have enough information about the preferences of individuals to decide what is in their best interests. As the economist F.A. Hayek observed, knowledge is so dispersed throughout society that no singular policymaker or advocacy group can collect enough information to fully understand how people would define their own preferences and principles.

Practically speaking, therefore, nudges can't do what they are intended for—to design a system to help individuals overcome cognitive biases make choices in their best interests—because economists and policymakers can't understand the full range of motives that determine "best interest" when picking a retirement planning strategy to consuming a sugary beverage. Instead of helping people overcome cognitive weaknesses, policy makers are just nudging people towards the interests that policy makers prefer. "Libertarian" or not, paternalism is paternalism.