Arnold Kling  

A Case for Paternalism?

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Because it appears in the latest American Economic Review, I got around to reading carefully Daniel Kahneman's Nobel lecture, Maps of Bounded Rationality. He contrasts an intuitive way of processing information with a calculating, rational method.

The central characteristic of agents is not that they reason poorly but they often act intuitively. And the behavior of these agents is not guided by what they are able to compute, but by what they happen to see at a given moment.

Kahneman refers to some papers by George Loewenstein, so I Googled Loewenstein and went to his web page. Among his many publications is a paper arguing in favor of paternalism, based on findings in behavioral economics.

In a sense, behavioral economics extends the paternalistically protected category of “idiots” to include most people, at predictable times. The challenge is figuring out what sorts of “idiotic” behaviors are likely to arise routinely and how to prevent them, while imposing minimal restrictions on those who behave rationally.

An example of a policy that is asymetrically paternalistic is a policy that consciously chooses a default that supposedly is in the consumer's interest. For example, if you are a company with a 401(K) program, the default could be that the employee contributes the maximum to the program. Only employees who consciusly select another alternative will fail to contribute the maximum. For rational, calculating employees, this will make no difference (they ignore the default and make their choice). For non-calculating employees, this will steer them in the direction of greater saving.

Professional licensing requirements, in fields like real estate or medicine, seem like cartel-enforcement mechanisms to Milton Friedman and other economists. Loewenstein and his co-authors argue that

The beauty of licensing requirements is that if they are truly diagnostic and inexpensive to administer, they impose minimal costs on those who are actually competent, but present a serious obstacle to those who are not.

A point that the authors touch on is that their argument does not necessarily imply the necessity of government mechanisms. If the objective of this type of paternalism is to protect people from rash judgments, then people could, in their more "rational" moments, buy protection from private sources against making poor choices. Of course, one of Loewenstein's hypotheses is that people irrationally under-estimate their propensity to make irrational decisions. In that case, it seems that market mechanisms are likely to fail.

For Discussion. Do real-world regulations evolve to serve the interests of consumers with bounded rationality or to serve other interests?

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The author at Leaderlog in a related article titled The category of idiots writes:
    I often wonder about the boundary between licensing/ credentialing and rent-seeking, and this Arnold Kling post sums up an interesting perspective: [Quote of a Loewenstein paper] in favor of paternalism, based on findings in behavioral economics. In a ... [Tracked on January 5, 2004 4:51 PM]
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Lawrance George Lux writes:

Real-world regulations almost invariably reflect the desires of some vested interest, who is willing to spend the time and effort to influence the bureaucratic mentality. lgl

Eric Krieg writes:

It seems almost insane that a behaviorist would put forth an argument in favor of paternalistic regulation.

The mechanism that creates regulations is both legislative and bureacratic. What about the motivations of the people making and enforcing the regulations? Their motivations would seem to be ripe for examination.

Lawrance George Lux writes:

Wested Interests use co-option of specific sub-classes of the Polity to advance their own agenda--classic Politics. The content is in the small print though. The co-opted Polity maintains attention only in achievement of the projected Regulation. The Time after the enabling legislation is used to sculpt specific Vested Interest desires, which often diverge from the enabling Polity's understanding of the Regulation. The length of Period between enabling legislation and current regulation establishes loss Polity personal interest to Vested Interest by percentage ratio. lgl

John Thacker writes:

Well, taxi medallions and regulations in New York City seem to have definitely evolved away from serving the interests of consumers and towards serving the interest of the incumbent taxi owners.

The case for paternalism runs smack into public choice theory. It seems to me that if this theory is correct, then the body of consumers would be even less likely to understand their true interests at all times, and that small vested interests would thus have even greater success in manipulating regulations, as public choice theory would predict.

In short, this theory, while demonstrating that the market will fail, also demonstrates the real world regulations will fail as well. Which fails worse-- well, that's a technical question, but one's initial hunch is probably correlated with political leaning.

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