Nudge Nudge, Wonk?

Legend has it that at the first cabinet meeting after the Conservatives’ general election victory in 1979 Margaret Thatcher banged a copy of Friedrich von Hayek’s Constitution of Liberty on the table and declared: “This is what we believe.” 

Hayek argued that the government should not try to plan the economy, nor other social interactions, because it could never know enough about individuals’ preferences or circumstances to make better decisions than could the individuals themselves. Parents may know better than their children what is good for them, but the same is not true of politicians and citizens. 

David Cameron is not the type to bang books on tables and tell people what they believe. But he did set his (then) shadow cabinet summer holiday reading: most notably Happiness by Lord Layard of Highgate and Nudge by the Chicago University professors Richard Thaler and Cass Sunstein. 

Both are works of Behavioural Economics, a new branch of economics concerned with human folly. We are not simply error-prone, these economists claim, but systematically and predictably irrational. We are apathetic, favouring options that require no action or that preserve the status quo. We are herd followers, doing things that are bad for us simply because others do them. And we are hopeless at statistics, buying insurance and lottery tickets even when the odds make them a bad deal. 

But politicians are not so foolish — or, at least, not when armed with Behavioural Economics. On the contrary, such enlightened politicians can save us from the mistakes to which our irrationality inclines us. Cameron has ordered the Office of National Statistics to construct a measure of happiness, against which our progress will be judged. And the Cabinet Office now has a Behavioural Insights Unit, better known as the Nudge Unit. Our government plans to make us happy.

This new paternalism is a mistake, and not only because the “science” on which it is based is flimsy. Even if we really were as irrational as Behavioural Economists say, that would not justify paternalism. For it does not show that central nudgers can know better than we do what is good for us. Our advantage was never supposed to be our superior rationality. It is our superior knowledge of our own preferences and circumstances.

Consider an example. Should you save more, as the nudgers suggest? The answer depends on your present and likely future incomes, on how long you are likely to live and on your preferences regarding consumption now versus consumption in the future. Politicians may know that you are foolish, that you might not save even if you should. But they cannot possibly have better information than you on all the matters that determine whether you should save more or save less.  

Knowing that someone is irrational does not tell you what they should do, nor that they are currently doing the wrong things. Our would-be nudgers are like doctors who think that they can prescribe the right medicine simply because they know you are a hypo-chondriac. 

Politicians are naturally drawn to the idea that experts issuing commands (or nudges) can improve on people making decisions for themselves. Hayek called this the “fatal conceit”. It is astonishing that only 30 years after Mrs Thatcher’s book banging, a Conservative government could fall prey to it. 

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