Saturday, April 11, 2009

Behavioral Economics and the Tyranny of the Self-Righteous

The latest rage in economic theorizing is “behavioral economics.” The term has been around for several decades, at least, and the underlying concepts are even older. The area is in vogue right now, however, and is being captured and used by those who would like to impose their beliefs on everyone. See this article and this article, both from a few years back.

The basic idea is fairly simple: while basic microeconomic models start with the presumption that firms seek to maximize profits and individuals seek to maximize their well-being, common sense will tell you that these outcomes do not always occur. One possible explanation is that psychological issues that make “rational” decision-making difficult. For example, many individuals choose not to make 401(k) contributions even though their employers will match contributions up to some fraction of salary. Under reasonable assumptions about the time value of money, failing to contribute up to the matching limit is irrational. If employers instead create opt-out programs, automatically enrolling employees in a 401(k) plan unless the employee specifically opts out, participation rates are much higher. Leaving aside the tricky issue of how we know that any individual really is making an irrational decision (or an ill-informed decision) about her investment strategy, what can be done about it? One solution that has been suggested is for the government to require employers to use the opt-out method. (And to heck with the problem that employers may react by reducing or eliminating their contributions.)

If that sounds reasonable, then how about the following: obesity causes health problems. Children living near fast-food restaurants are more likely to be obese than those without nearby access to fast food. Therefore, the government should limit the availability of fast-food restaurants. Think that’s crazy? These people don't. Granting the premise, it’s still hard to see how the conclusion follows.

One can apply the same logic, in reductio ad absurdum fashion, to almost anything a bureaucrat doesn’t like: just assert that the behavior is “irrational.” Buying low-mileage cars? Irrational. Drinking cheap gin? Irrational. Wearing ugly clothing? Completely irrational. Outlaw them all.

Liberty requires the ability to make one’s own decisions, even if those decisions are sometimes wrong. When the government mandates or prohibits certain types of behavior, it reduces our liberty. Sometimes this is necessary; for example, my freedom to drive through intersections is curtailed in the interest of the safety of others. But this power needs to be used sparingly. At the risk of sounding horribly pompous, using it to modify behavior that some bureaucrat or elected official finds to be suboptimal amounts to a tyranny of the self-righteous that should not be endured.

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