Ideas

The Applied Theory of Bossing People Around

Richard Thaler's prize isn't noble.

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Richard Thaler won the 2017 Nobel Memorial Prize in Economics. It's not an original Nobel prize, as recipients in the other fields will be glad to inform you. Alfred Nobel detested economics. Nonetheless, since 1969, some 79 prizes have been given by the Swedish National Bank to economists, and one to a psychologist in economists' clothing.

Thaler is distinguished but not brilliant, which is par for the course. He works on "behavioral finance," the study of mistakes people make when they talk to their stock broker. He can be counted as the second winner for "behavioral economics," after the psychologist Daniel Kahneman. His prize was for the study of mistakes people make when they buy milk.

Thaler's is the 10th Nobel for finance. (What, labor economics doesn't exist? Public finance is chopped liver? One lonely prize for economic history?) It's also the 29th for an economist associated in one way or another with my beloved University of Chicago. Yet Thaler is not of the famed "Chicago School," which thinks the mistakes people make when buying milk or talking to their stock brokers are not all that important for how and why markets and trade work.

The Committee wrote that by "exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes." I object to the market outcomes part. His work is not about markets. It's about the mistakes you make all the time, you idiot. Along with his fellow behavioral economists, Thaler is reinventing individual psychology.

One might wonder why he would go to the trouble of doing so, and then claim, with no evidence, that individual mistakes discernible with the methods of individual psychology matter greatly for market outcomes.

Yet the politics is clear. Once Thaler has established that you are in myriad ways irrational it's much easier to argue, as he has, vigorously—in his academic research, in popular books, and now in a column for The New York Times—that you are too stupid to be treated as a free adult. You need, in the coinage of Thaler's book, co-authored with the law professor and Obama adviser Cass Sunstein, to be "nudged." Thaler and Sunstein call it "libertarian paternalism."*

Adam Smith spoke of "the man of system" who "seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." Thaler and his benevolent friends are men, and some few women, of system. They hate the Chicago School, have never heard of the Austrian School, dismiss spontaneous order, and favor bossing people around—for their own good, understand. Employing the third most unbelievable sentence in English (the other two are "The check is in the mail" and "Of course I'll respect you in the morning"), they declare cheerily, "We're from the government and we're here to help."

We humans face a choice of treating people as children or as adults. A liberal society, Smith's "liberal plan of [social] equality, [economic] liberty, and [legal] justice," treats adults as adults. The principle of an illiberal society, from Thaler's to the much worse kind, is that you are to be corrected not through respectful dialog that treats you as an equal, but by compulsion or trickery, which treats you like a toddler about to walk into traffic.

Wikipedia lists fully 257 cognitive biases. In the category of decision-making biases alone there are anchoring, the availability heuristic, the bandwagon effect, the baseline fallacy, choice-supportive bias, confirmation bias, belief-revision conservatism, courtesy bias, and on and on. According to the psychologists, it's a miracle you can get across the street.

For Thaler, every one of the biases is a reason not to trust people to make their own choices about money. It's an old routine in economics. Since 1848, one expert after another has set up shop finding "imperfections" in the market economy that Smith and Mill and Bastiat had come to understand as a pretty good system for supporting human flourishing.

The Progressive economists believed they saw monopolies, spillovers, informational asymmetry, consumer ignorance, producer ignorance—in short, everyone's folly and ignorance except the nudging government's—to the number of over one hundred imperfections. They imagined a new one every year or so, and lately have been getting Nobels for discovering allegedly fresh market failures. Paul Krugman, for example, received the prize in 2008, supposedly for reinventing monopolistic competition for international trade. He deserved it eventually, though he got it embarrassingly prematurely (compare Obama's for peace) because the social democratic Swedes wanted to buck up a left-of-center columnist. Krugman tweeted about Thaler: "Yes! Behavioral econ is the best thing to happen to the field in generations." He would say that.

The great essayist Lionel Trilling wrote in 1950 that the danger is that "we who are liberal and progressive know that the poor are our equals in every sense except that of being equal to us." The same may be said of Burkeans or conservatives, too. He also wrote that "we must be aware of the dangers that lie in our most generous wishes," because "when once we have made our fellow men the object of our enlightened interest [we] go on to make them the objects of our pity, then of our wisdom, ultimately of our coercion."

How to convince people to stand still for being bossed around like children? Answer: Persuade them that they are idiots compared with the great and good in charge. That was the conservative yet socialist program of Kahneman, who won the 2002 Nobel as part of a duo that included an actual economist named Vernon Smith. (The Committee amuses itself by pairing opposites. Vernon, like the earlier Smith, believes that people can and should be trusted to make decisions.) It is Thaler's program, too.

Like with the psychologist's list of biases, though, nowhere has anyone shown that the imperfections in the market amount to much in damaging the economy overall. People do get across the street. Income per head since 1848 has increased by a factor of 20 or 30. It is a scientifically bizarre oversight, as though a geologist offered an alternative theory of plate tectonics without showing that her ideas do a better job of explaining the shape of mountains or the alignment of the continents.

The amiable Joe Stiglitz says that whenever there is a "spillover"—my ugly dress offending your delicate eyes, say—the government should step in. A Federal Bureau of Dresses, rather like the one Saudi Arabia has. In common with Thaler and Krugman and most other economists since 1848, Stiglitz does not know how much his imagined spillovers reduce national income overall, or whether the government is good at preventing the spill. I reckon it's about as good as the Army Corps of Engineers was in Katrina.

Thaler, in short, melds the list of psychological biases with the list of economic imperfections. It is his worthy scientific accomplishment. His conclusion, unsupported by evidence?

It's bad for us to be free.

CORRECTION: Due to an editing error, an earlier version of this article referred to Thaler's philosophy as "paternalistic libertarianism." The correct term is "libertarian paternalism."