Nudging our way to freedom?

[by JSC7]

There’s been some debate in the blogosphere this last week about an article on nudging*. It’s in the Bill Easterly vein of saying, hey, nudging is cool and all but it’s no panacea, and sometimes you need to push. From an economics point of view, I find the topic fascinating, and worked on a few research projects that dealt with these sorts of nudging questions while at school. From a policy side, though, there’s always been something that bugged me about the nature of the debate, though I could never put a finger on what exactly that was, until I read Chris Blattman’s response to the aforementioned article. Key quote:

…if we really want to change a behavior, we have to change incentives (like prices) or impose restrictions. We don’t nudge people away from domestic violence, for instance, we criminalize it. We don’t just encourage people to stop smoking, we tax the socks off cigarettes.

The obvious rejoinder is that not everyone is comfortable with regulating and taxing and messing with prices. Nudging’s appeal is that it preserves free choice and minimizes state manipulation.

Italics mine. Blattman’s characterization of nudging’s appeal is 100% accurate, but I think the appeal itself is misguided. Worse, the nature of the appeal suggests that many of nudging’s advocate don’t understand the point of nudging.

The underlying thought behind nudging, and much of behavioral economics, is that mental costs are often as important as monetary ones. Classical economics assumes that the most important characteristic of a product is its price. Changing the price of gallon of milk by five cents will have much more impact than, say, where in the supermarket you put that milk (in fact, the latter is assumed to have no impact at all). Behavioral economics comes along and says, hang on a minute, let’s use cool experiments to prove otherwise. What we’ve concluded from these experiments is that non-monetary costs are not negligible. Okay, so rather than just having monetary costs in your equation for how much milk you buy, you now have to factor in both monetary and mental costs.

Is there some kind of fundamental difference between these two kinds of costs? As far as the economics is concerned, no. And yet, policy people seem to be enamored with the idea that raising the monetary costs of a transaction reduces free choice while raising the mental costs of a transaction does not. They’re turning a semantic difference into a normative one. The point of nudging is that we take advantage of the peculiar irrational wiring of our brains in order to unconsciously change our actions. The point is to circumvent our usual (suboptimal) decision-making apparatus. How does that retain free choice any more than a tax (if anything, I can see an argument for the reverse)?**

The idea that nudging ‘minimizes state manipulation’ also seems to stem from strange logic. I think people who think this are conflating the how much a particular state manipulation costs with how much is actually being manipulation. The nice thing about nudges is that there are certain tricks we can implement to get people to do particular things, and often these tricks are quite easy to implement. It may be cheaper to nudge than to pass a tax law, collect the tax, audit, enforce, etc.*** On the other hand, a consumer will probably see none of this. If you buy two packs of cigarettes a week with no intervention, and one pack a week with either a tax or some nudge in place, would the state be manipulating less if it implemented the nudge instead of the tax?  No, it would be the same manipulation, only more efficient. The state is still meddling in your consumption. Ron Paul should still be upset. It can just meddle on the cheap.

The big picture problem is that behavioral economics puts into question some traditional assumptions about human rationality, and offers some cool byproducts of doing so. Policy people snatch up those byproducts, but continue to hang onto dated ideas about human rationality, and thus can say with a straight face that nudging both actively changes people’s choices and gives them more freedom to choose at the same time. They should ask themselves, what is the value of a choice that we know, ex ante, we will not choose?

—

* If the word nudging means nothing to you, it’s an idea in behavioral economics that has made its way into pop public policy via this book. The gist is that there are certain problems we can solve by making small structural changes that seem trivial but actually matter a lot, like improving health by making unhealthy foods slightly harder to reach or increasing bank use among the poor by making forms easier to fill out.

** Interesting aside: with taxes, we have progressive and regressive taxes, the former taxing rich people proportional to their wealth, like the income tax, and the latter taxing everyone equally, and usually hurting the poor more, like a hike in subway fares. A nudge is like a mental tax (or subsidy, depending on which way it goes). Is it regressive if it disproportionately affects stupid people? What happens to people with non-standard thought patterns?

*** Although not necessarily. I’m sure there are plenty of nudges that would work but would be a pain to implement, like putting an actor posing as a hobo next to liquor stores.