Reason.com

Free Minds & Free Markets

The Applied Theory of Bossing People Around

Richard Thaler's prize isn't noble.

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."

Photo Credit: Davie County Public Library

Deirdre McCloskey is emerita professor of economics, history, English, and communication at the University of Illinois at Chicago and the author most recently of Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World

Media Contact Reprint Requests

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • MarkLastname||

    But he discovered the January effect!.... that afterward failed to recur...

  • MarkLastname||

    Ok he didn't discover the January effect, he just wrote something about it, never mind.

  • SIV||

  • Jevioso||

    Socialism in theory, is technocracy in practice.

  • Libertarian||

    Economist Don Boudreaux can't be beat. His thoughts on McCluskey's Reason article prompted him:

    ". . . to wonder why the case for economic freedom is held to a much higher standard than is the case for other freedoms, such as freedom of the press and freedom of speech.

    "Clever theoreticians could describe . . . what a "perfect" system of freedom of the press or of freedom of speech looks like. No doubt the features of such perfection would include the absence of any misunderstood written or spoken words, the absence of words written or spoken in haste or in anger and that are later regretted, and the absence of any conflicting communiqués.

    "Were such a description of "perfection" offered, would the case for freedom of the press or of freedom of speech then be held suspect if someone – say, a professor Thalitz or a Dr. Samuelof – pointed out that in the real world people often write and speak in ways that deviate from the ways that they are assumed to write and speak in the models of 'perfect press' and 'perfect speech'? Would revelations of inaccurate newspaper reports – or even fraudulent newspaper reports – prompt scholars to call for government to oversee newspaper reporting and to 'correct' press 'failures' whenever and wherever these 'failures' occur?"

  • Shirley Knott||

    Cafe Hayek is worth at least one visi a day. It has become a superb resource. Boudreaux is a great teacher.

  • Dalben||

    Yes. Of course. It already does.

  • Colossal Douchebag||

    They are treated differently because the Constitution treats them differently, unfortunately.

  • I'm Not Sure||

    Would revelations of inaccurate newspaper reports – or even fraudulent newspaper reports – prompt scholars to call for government to oversee newspaper reporting and to 'correct' press 'failures' whenever and wherever these 'failures' occur?"

    Don't give them any ideas.

  • Shirley Knott||

    You mean this isn't already being actively pushed?
    I'm pretty sure I've seen a lot of moves towards this; they're rarely first steps, often not second or even third.
    Be afraid, be very afraid.

    We live or die on free speech.

  • vek||

    Right? Is this not what censoring "fake news" is all about??? If it weren't sooo ingrained in our culture, and law, many would looove to censor the press. And freedom of speech is turning into freedom of only "polite speech that us enlightened progressives agree with" speech.

  • khm001||

    This is exactly what's driving the left's attempts to repeal the 1A. They constantly claim "fake news" to rationalize their censorship.

  • El Oso||

    What happened to the 'milk' part'?

  • Scarecrow Repair & Chippering||

    Been reading Cafe Hayek for some time, which is where I first heard of this article, and where I heard of McCloskey's three volume set "Bourgeois Equality", which has been sitting in the middle of my four shelves of To-Read books. If it's written like this, it's moving closer to the top.

  • Libertarian||

    " four shelves of To-Read books."

    Hey brother!

  • Stormy Dragon||

    Is Mcloskey's field economics or theology? His argument here seems to be that the impact of psychology on economics can't even be studied because it might eventually lead to the conclusion that the efficient market hypothesis is false, and we dare not tolerate such blasphemy against the holy writ.

  • Shirley Knott||

    Her field is eco mics.
    Her point is not that it can't be studied, it's that it hasn't been. Certainly not adequately. Boudreaux talks a fair bit about this.
    Note well that markets need not be 'efficient' in any absolute sense. They only need to be more efficient than any of the alternatives at hand.
    A critical question about any economic notion or proposal is "as compared to what?"

    McCloskey, Boudreaux, and others rightly point out that data matters. You don't get to cherry-pick. You don't get to compare real data with fantasies.

  • Stormy Dragon||

    Note well that markets need not be 'efficient' in any absolute sense.

    The problem is that most economic theory assumes they are as a precondition. If they aren't, then most of that theory is wrong. And that's what Mcloskey is against: any research that might change standard economic theory because then it might be harder to justify her preferred political outcomes.

  • silver.||

    I interpret Mcloskey's argument to imply that we don't know enough about the psychology of economics to make "nudges." She acknowledges the presence of cognitive biases and flawed decisions, but the outcome has been better than any other systems.

    Thaler is saying that we have the knowledge and ability to exert governmental influence on the markets; Mcloskey disagrees, and so do I. It'd kind of be like learning about circuit components (capacitors, resistors, etc), then randomly changing components on a motherboard even though you've never held a soldering iron or made circuits. We know the names of some of the psychological components; is that enough to support Thaler's hypothesis?

    Even Keynes begrudgingly admits that his attempts to manipulate the market early in his career with the Treasury was foolish. As he aged be became more convinced that the market was an animal that could scarcely be predicted or controlled. Those utilizing his ideas ignore his warnings against hubris and only use the politically convenient aspects. Bailouts, interest rate control, regulations, and of course, print, baby, print!

  • Deflator Mouse||

    Most scientific theories, even in natural sciences, contain assumptions that are known to be false. For example ideal gas theory assumes that gas molecules have zero volume, which was known to be wrong even when the theory was proposed. But you have to start from somewhere, so having any theory at all requires making simplifying assumptions that are "almost true" (gas molecules have extremely small volumes, and markets are very close to being efficient). Ultimately in a scientific discipline, if the theory is wrong then the experiments and observations will show that it's wrong.

  • Old Mexican - Mostly Harmless||

    Re: Stormy Dragon,

    it might eventually lead to the conclusion that the efficient market hypothesis is false


    But it is false. If you're talking about is actually the perfect competition hypothesis or perfectly competitive market model, not the perfect market hypothesis. And it is false because the model assumes price decisions that behave as a continuous variable whereas, in reality, humans make decisions on discrete changes only. So whether psychology unlocks the secrets behind marginal value and marginal decisions and why some are cat people and others dog people, or not, it will be irrelevant for PCM modeling because it is already, conceptually, bunk.

    If, on the other hand, you're talking about the efficiency of markets as a mechanism of allocating scarce resources to all economic actors, then psychology would only be able to explain why some are cat people whereas others are dog people, but would mean bupkis when it comes to how prices are generated through market networks and how markets reduce scarcity determination errors, i.e. economic calculation. For that we will continue to rely on Economics.

  • Deirdre Nansen McCloskey||

    Dear Stormy Dragon,

    Income per head rose by 3,000 percent since 1848, while economists were piling up reasons, they thought, to doubt "perfection." By now no one instructed conventionally in economics believes that 3,000 percent would be possible, considering how very imperfect the system of liberalism is.

    Nice touch to call me "he."

    Deirdre Nansen McCloskey

  • Microaggressor||

    You can bring an idiot to knowledge, but you can't make him think.

  • khm001||

    His argument is it's silly to think politicians, who are as biased and limited as everyone else, could "correct" for the biases and limits of everyone else. The theory of psychological biases in economics actually strengthens to idea of liberty and libertarianism, while weakening the case for political control over economics.

  • Nicholas Conrad||

    I'm no Thaler fan, but this seems like wild strawmanning; at least from my brief reading of the first several chapters of nudge. All of his interventions were about informing people, or setting the defaults such that his desired outcomes were more likely, but he was always adamant that the final decisions be left up to each individual to make. Has he taken a more command-and-control stance since then?

  • Diane Reynolds (Paul.)||

    Forcing restaurants to print calorie counts is a perfect example of a "nudge". It "informs the consumer, ostensibly leading to 'healthier choices'", but ultimately leaves the choice to the consumer.

    But in practice it hasn't, and the program is mostly useless because of the complex and unquantifiable decision making that occurs with humans.

    Humans are pesky creatures and "nudging them with information" hasn't worked.

  • John C. Randolph||

    The purpose of such regulations is to favor McDonalds (which can easily absorb the expense of such useless bureaucracy) over your neighborhood burger joint, which can't.

    Anyone advocating "nudging" policies needs to be smacked upside the head with a shoe for the first offense, and corrected with tar and feathering if they persist.

    -jcr

  • The Last American Hero||

    It's worse than that. McD's and Burger King need to print their calorie counts, but the fancy restaurants where the Right Sort of People (tm) eat are not subject to such rules. Because people that can afford fancy restaurants aren't part of the unwashed, ignorant masses or something.

  • vek||

    Yeah, labeling laws in practice are usually retarded, but if they were limited and sensible I don't find them to be THE WORST abuses of government power in the world. If there were zero food labeling laws, how many sketchy ingredients that people intentionally try to avoid might be left off of junk pre packaged food labels? I eat plenty of crap food, but I also pay attention sometimes too. Companies might comply voluntarily, but with no legal repercussions they could also misrepresent, hence the nanny state!

    It's one of those things where if done in moderation it's not sooo bad, but of course idiots bureaucrats can never leave well enough alone and it will always end up fucked eventually. To me a lot of stuff is just common sense... If more crazy politicians had common sense us libertarian leaners wouldn't have to be so incensed about their endless stupidity because it would be objectively less over the top and ridiculous.

  • Bubba Jones||

    The conclusion is that Americans don't care about being fat. Or more precisely, they don't think they eat out often enough to worry about the contribution of restaurant meals to their obesity. Or some variation.

    I care and I definitely take it into account.

  • Deflator Mouse||

    Hayek's Nobel Banquet speech (aka prophecy of Paul Krugman):

    I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it. One reason was that I feared that such a prize, as I believe is true of the activities of some of the great scientific foundations, would tend to accentuate the swings of scientific fashion. This apprehension the selection committee has brilliantly refuted by awarding the prize to one whose views are as unfashionable as mine are.

    I do not yet feel equally reassured concerning my second cause of apprehension. It is that the Nobel Prize confers on an individual an authority which in economics no man ought to possess. This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.
  • Deflator Mouse||

    But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally. There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society - as the press tends to treat him till in the end he may himself be persuaded to believe. One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention.

    I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past. I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence.
  • JoeBlow123||

    Heh, really interesting. Thanks for sharing.

  • vek||

    "(aka prophecy of Paul Krugman):"

    LOL

    What a smart and humble man... Unlike Krugman.

  • Diane Reynolds (Paul.)||

    "You need, in the coinage of Thaler's book, co-authored with the law professor and Obama adviser Cass Sunstein, to be "nudged."

    Nudged by the same flawed idiots as you are?

  • silver.||

    If he "nudges" me, I'm going to eviscerate him for sexual assault. I demand that I consent affirmatively before any nudging activities.

  • Paloma||

    Psychology is much closer to theology than is economics. We only have to look at the last few moral panics - Satanic panic, memory "recovery", stranger danger, bath salts and rainbow parties, to see how groups of "experts" use claims of expertise to wreak havoc on the ordinary people they think they're protecting with their expertise. Does this class of experts pay any price whatsoever when they are wrong?

  • SQRLSY One||

    "Does this class of experts pay any price whatsoever when they are wrong?"

    No!

  • I am the 0.000000013%||

    Well, I ignore them, so there is that...

  • SFSpartacus||

    Reminds me of one of my favorite quotes:

    "Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.

    They may be more likely to go to Heaven yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be "cured" against one's will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals."
    - C.S. Lewis

  • Cloudbuster||

    The entire essay is a gem. Well worth reading. "The Humanitarian Theory of Punishment."

  • sgreffenius||

    Excellent quotation, and full of C. S. Lewis's personality. It captures exactly the feeling of dismay and resentment I have when the Affordable Care Act comes to mind.

  • vek||

    The bottom line here is that "The Market" is all kinds of fucked up. People are all kinds of fucked up.

    But it's irrelevant! Because there is no better alternative. The one eyed man is king in the land of the blind. Even if people make lots of bad decisions, and they do, it's still better than communism.

    As far as things go, I think that do gooders are correct in thinking that SOME people are not in fact equipped to make good decisions. People who pretend that everyone is an intelligent actor are just as full of shit as people who think nobody (but the control freaks themselves) are intelligent actors. Many people obviously fuck their own lives up constantly. The truth is some people are smart, some people aren't. Sometimes smart people fuck up, and other times idiots do the right thing. It's all over the map really.

    The thing is: SO WHAT? Poor blow it cases with crap jobs are better off in a chaotic market economy than in a socialist one.

  • vek||

    The one thing I personally think is reasonable to concede to the control freaks though is that the very VERY stupidest people in a 100% capitalist system would in fact be worse off than in a socialist one. But I'd peg that at 10% or less of the population. That's the permanently unemployable, drug addict, mentally insane, homeless type people. The working poor are still better off in a capitalist system. But private charities would probably care for most of these sorts anyway, so it's almost a moot point.

    But even if not, is it worth throwing the 10% of total blow it cases under the bus to benefit the other 90%? My morals say yes. Commie morals say no. Fuck the commies.

  • The Last American Hero||

    Are they?

    I honestly don't know if mental health treatment in the Soviet Union was any good, and based on their rates of alcholism I doubt their treatment was better than in the West. I suspect that many of the people at the bottom would be left to die in "the People's Republics" of the world.

  • vek||

    In real world practice? I'm sure you're right. In the perfect utopian communist country that exists in leftists heads, probably not.

    I don't actually know a lot about how European countries handle the insane, but I would imagine they spend more money and have a cushier life than they do in the USA, and probably far cushier than it would be in a 100% no government welfare capitalist society.

    But then again private charities did do lots of good work in welfare back in the day. I am inclined to think that if we today went towards a no government welfare society that private charities would do a pretty damn good job. A lot of the harshness with welfare cases back in the day was that societal norms just didn't have ANY patience for lay abouts back then. Nowdays people are falling over themselves to want to help the disadvantaged. I think private charity would work faaaaar better now than it ever did in the past, and even in the past it was pretty well as good as the government run boondoggle we have now.

  • khm001||

    "The one thing I personally think is reasonable to concede to the control freaks though is that the very VERY stupidest people in a 100% capitalist system would in fact be worse off than in a socialist one."

    This is categorically false and can clearly be seen to be false in case after case after case.

  • ericg||

    Like vices, every bias has an opposite, so we have anchoring and not reacting sufficiently to new information, and we extrapolate too much based on new information. Moderation in all things, I guess, who knew?

    Yet, the biases of individuals does cancel out, and a competitive market does filter them out, whereas the biases in institutions given state power have much weaker mechanisms for correction. Progressives always think that the problem in the past was merely being wrong, not that giving a state large power was wrong.

  • sgreffenius||

    Good article. Here's a page with related quotes:

    https://www.pinterest.com/pin/492299802997882813/

  • Cyril Morong||

    Here is a letter I wrote to the editor of The Chronicle of Higher Education that they printed in 2008

    I enjoyed Evan R. Goldstein's "The New Paternalism" about Richard H. Thaler and Cass R. Sunstein, authors of Nudge. Who could disagree that "human perception is flawed," or that we all have "cognitive limitations"? This suggests enacting policies that "nudge" people in the right direction.

    But it seems like a straw man is being used when Thaler and Sunstein say that policy makers previously assumed that all people can think like Albert Einstein and can exercise the patience of Mahatma Gandhi. Surely no neoclassical economist would believe that. Even Milton Friedman, in Capitalism and Freedom, said that "there is no avoiding the need for some measure of paternalism." But he also said that the principle that "some shall decide for others" is very troubling and that "there is no formula that can tell us where to stop."

    Coincidentally, Alan Wolfe summarized John Stuart Mill's view in the same issue: "The purpose of liberty is not to give us what we want but to help us grow so that we can best understand our wants" ("The Forgotten Philosopher," The Chronicle Review). Let us hope that the "new paternalism" does not end up stifling such human growth. In understanding our wants, we get to know ourselves. If someone else is always nudging us in the right direction, we will never figure anything out on our own.

  • ket sat ngan hang||

    Online Safes Hotel WELKO Hotel Safe

    Commitment to genuine and new products 100%

    ✅ Commitment only gives customers the best products.

    ✅ Working from 7am to 10pm on Saturdays, Sundays and holidays

    ✅ Warranty statement, manual, home warranty for free.

    ✅ Payment on receipt and carefully checked (can transfer)

    ✅ Any questions about the product or need advice on fire safety.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online