What does the UK want from Brexit?

When the UK voted to leave the European Union, many Brexiteers argued that this would allow Britain to move toward free market policies, free of burdensome EU regulations.

Today, the two sides are still engaged in difficult negotiations. Contrary to the arguments made by prominent Brexiteers back in 2016, it’s not at all clear that the EU will agree to a free trade agreement. Interestingly, the sticking point seems to be Britain’s reluctance to follow free market policies:

It is safe to say, though, that any Brexit deal will not fail over fish. The really big issue is what the EU refers to as the level playing field. Within that category, the state aid regime is one of the toughest elements. The EU wants the UK to adopt a legal framework for competition policy that broadly mirrors its own. What the EU fears is a politicised state aid regime where a British government subsidises companies for opportunistic reasons, and thus undermines competition with EU companies. It is highly unlikely UK prime minister Boris Johnson could agree to this.

Here Wolfgang Münchau of the FT is suggesting that Britain’s Conservatives are so eager to start subsidizing their corporations that they are willing to walk away from a free trade deal with the EU rather than forgo that sort of interventionism. Britain has drifted far from the lofty ideals of 2016. But then that’s often how nationalism evolves over time.

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Escaping Paternalism Book Club: Part 5

Summary

When you begin the final chapter of Escaping Paternalism, Rizzo and Whitman (RW) seem ready to rest their case.  They neatly recap their nested argumentative strategy:

We began this book with an extended critique of the neoclassical model of rationality, which behavioral economists have rejected as a positive model of human behavior but nevertheless have accepted as a normative standard…

The rest of the book could easily be read as a series of “even if” arguments: even if we accept neoclassical rationality as true rationality, behavioral science has not advanced far enough to answer a number of crucial questions for policymaking, such as the generalizability of behavioral results across different contexts and the applicability of laboratory results in the wild. Even if we had better research on those questions, policymakers would face practically insurmountable local and personal knowledge gaps that would hobble attempts at crafting paternalist policies that are effective and cost-benefit justified. Even if we could acquire such knowledge, policymakers have little incentive to do the hard work of crafting good policies, especially when interested parties (such as rent-seekers, moralists, and bureaucrats) can tilt the legislative and regulatory process in their favor – and so much the worse if policymakers are afflicted by any of the cognitive biases attributed to regular people. And even if we set all of these concerns aside, behavioral paternalism creates the risk of a slippery slope toward more extensive and intrusive policies that go beyond what has been justified by theory and evidence, resulting in ever greater restrictions on individual choice.

They also fault their opponents for dire intellectual negligence:

The reality of behavioral policymaking stands in sharp opposition to the rhetoric. Behavioral paternalists have frequently emphasized the need for evidence-based policy (Thaler 2015b, 338) that should be implemented in a cautious and disciplined manner (Camerer et al. 2003, 1212). Their confident tone often suggests that it is anti-paternalists who eschew evidence and rely on gut instinct for policymaking. To paraphrase the Bible, they behold the mote in the anti-paternalists’ eyes while neglecting the beam in their own. Consider this telling passage from Sunstein that purports to recognize the need for better evidence:

With respect to errors, more is being learned every day. Some behavioral findings remain highly preliminary and need further testing. There is much that we do not know. Randomized controlled trials, the gold standard for empirical research, must be used far more to obtain a better understanding of how the relevant findings operate in the world. Even at this stage, however, the underlying findings have been widely noticed, and behavioral economics, cognitive and social psychology, and related fields have had a significant effect on policies in several nations, including the United States and the United Kingdom. (Sunstein 2014, 11–12)

Notice the speed of the transition from the need for cautious collection of more research to a congratulatory discussion of policy impact. If the need for better research were taken seriously, surely the “significant effect on policies in several nations” would be cause for concern, not approbation.

Instead of heading home, however, RW return to the stage for a stunning encore.  They list, explore, and critique an encyclopedic list of intellectual “escape routes” for paternalists.  In order of appearance: revert to objective welfare paternalism; appeal to obviousness; shift the burden of proof; loosen the definition of paternalism; rely on the “libertarian condition”; invoke the inevitability of choice architecture; focus on the irrational subset of the population; rely on extreme cases,;treat behavioral paternalism as a “toolbox”; and invoke fiscal externalities.

Each of these sections is rich and wise.  Yes, if you make paternalism vague enough, “We’re all paternalists now.”  A silly game.

Is GPS really a form of paternalism? Sunstein thinks so. In fact, GPS is one of his favorite examples, and not just when it’s a gift. He even calls GPS an “iconic nudge” that should be seen as “a form of means paternalism,” and one that paternalists should seek to build upon (Sunstein 2015, 61–62). GPS is, of course, almost always self-adopted… Is consulting a map also a form of paternalism? A map does, after all, simplify the territory that it depicts in order to ease the process of finding things.

But GPS is not the most trivial example of alleged paternalism. According to Sunstein, a restaurant providing a low-calorie menu for its customers is (or can be) a paternalist nudge (2014, 2). According to Thaler, giving someone accurate instructions on how to get to the subway is a form of paternalism (2015b, 324). Text-message reminders from doctors (Thaler 2015b, 342) and credit card companies (Sunstein 2015, 518) are also apparently paternalism… As Sunstein and Thaler see it, any time someone gives helpful advice, provides useful information, or gives a friendly warning, that’s paternalism. The paternalist bar seems to be remarkably low.

Escaping Paternalism then provides a series of “friendly warnings” about how to spot dangerous paternalism:

We want to focus on the characteristics that distinguish innocuous interventions from more problematic ones, irrespective of the label attached. Here are several factors, often overlapping and highly correlated with each other, that will help us to distinguish the harmless activities from more troubling ones…

RW name the following criteria: self-imposed versus other-imposed; invited versus uninvited; competitive versus monopolistic environment; coercive versus voluntary; public versus private; and informative versus manipulative.  On the latter point:

When a Swedish maker of snus, a form of smokeless tobacco, petitioned to modify the warning label on its product to say that it carries “substantially lower risks to health than cigarettes,” the FDA rejected the petition even though the claim is true given current medical knowledge. Why? The primary concern seems to have been that “labels that indicate lower risk may tempt people, particularly young people, to use tobacco products that they might not have tried otherwise” (Tavernise 2015). We don’t know whether any behavioral paternalists weighed in on this particular issue, but it is indicative of how providing truthful information, even that which is clearly relevant to some consumers, takes a back seat when the regulatory focus is on changing behavior.

In short, behavioral paternalism has a complicated relationship with the truth. Truthful disclosures may be useful from a paternalist standpoint . . . but not necessarily. To judge whether a given piece of information is desirable, the paternalist must have some notion of how the targeted agent should behave, all things considered. Then information can be delivered – or obscured – in the manner most likely to nudge the agent in the supposedly correct direction.

None of these “escape route” sections is without its charms, but RW’s critique of the “inevitability” argument is my favorite.  Highlights:

If paternalism is inevitable, it’s pointless to discuss whether or not to be paternalistic, and instead we should focus on how and how much to be paternalistic. But in fact, only choice architecture is inevitable. That means we can ask about other ways, besides paternalistically, that choice architecture might be chosen.

Even this wording may be too narrow, as “chosen” implies a level of intentionality… It would be a mistake, then, to assume that undesigned choice architecture is simply arbitrary or random. Here is one simple example: goods displayed in public view in a store, particularly those with price tags, are available for sale to anyone who can afford the price. When this rule is violated, merchants will usually say so explicitly (“Display items not for sale”). This simple default rule, a kind of choice architecture, minimizes confusion and eases communication between potential buyers and sellers. As far as we know, this practice was never explicitly chosen by anyone.

Consider a more detailed example: the case of refunds and exchanges. In the United States, there is no general legal rule requiring merchants to let customers return goods for a refund or exchange. Although there are some exceptions, especially with regard to door-to-door sales, for most transactions merchants are free to make all sales final (Ben-Shahar and Posner 2011, 115–116)… Consumers assume goods can be returned in good condition during a reasonable period, unless sellers explicitly say otherwise…

Furthermore, the usual default rule is suspended in a number of familiar cases, undergarments and perishable foods being well-known examples. In these cases, most customers are aware that refunds cannot be taken for granted, even if the merchant hasn’t said so explicitly. These goods presumably differ from other goods because the goods in question “depreciate” quickly after sale or use. What all of these cases together suggest is an ongoing market for default rules. If all-sales-final were the universal default, we might suspect that consumers aren’t thinking carefully and sellers are simply taking advantage of them. But the variation of default rules tells a different story – one in which market default rules are responsive to the needs of both buyers and sellers.

Furthermore:

Even when defaults are chosen deliberately rather than evolving, there exist ways to decide among default rules that do not necessarily involve paternalism. Here are a few possibilities:

* Defaults may be chosen in line with conventional expectations. This has the advantage of not surprising or confusing people who have become accustomed to the usual rules…

* Default rules may be chosen in a minimalistic fashion – i.e., assuming that people are not making promises or exchanges unless they explicitly consent to them. This would rule out, for instance, a default rule that assumes for-cause termination, as that constitutes an additional promise on top of the simple agreement to exchange labor for compensation…

* Defaults may be chosen in line with the goal of minimizing transaction costs, which usually would mean minimizing opt-outs…

* Defaults could be chosen to minimize how much choosers infer from the rule. In other words, people are more inclined to infer advice or information from some defaults (or framings) than others…

Analysis

1. Big picture: Rizzo and Whitman’s Escaping Paternalism is probably the best book about paternalism ever written.  The authors demonstrate an old-school mastery of their subject, and pack the work with so much insight that you’ll keep learning new things if you read it five times.  This book is a more valuable contribution to human knowledge than the latest paper in the AER, or even the whole latest issue of the AER.

2. While RW insist otherwise, I reluctantly conclude that their “inclusive rationality” verges on unfalsifiable.   Given their level of expertise, their refusal to name a single definite example of irrationality in the world is telling.  They’ve raised their bar so high even they can’t meet it.

3. Still, RW rightly point out that mainstream economists are too quick to call others irrational.  Yes, saying, “People changed their mind,” is an unsatisfying explanation of human behavior.  Yet people really do change their minds, and they’re hardly “irrational” to do so.  Indeed, stubbornness is a greater cognitive flaw than flightiness.  To quote Emerson:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict every thing you said to-day.

4. While reading the book, I kept thinking about (a) kids; and (b) opioid addicts.  RW cover an immense range of topics, but gloss over the human beings almost everyone thinks should be treated paternalistically.  RW could have bitten the bullet and declared kids and opioid addicts to be “inclusively rational.”  Or they could have backed off and said, “Paternalism for such people clears the burden of proof.”  Disappointingly, they decline to take a stand.

5. RW have little patience for the “revert to objective welfare paternalism” escape route:

From our perspective, the very idea of objective welfare is implausible. No such thing as “welfare” exists until an individual mind comes into being. The individual mind generates values, desires, and preferences (typically through interaction with many other minds). And as it turns out, different minds can generate very different values, desires, and preferences. People are idiosyncratic; they want different things. And despite the many wants they have in common, they want the same things to a different extent. We see no plausible grounds for stepping outside of the mind to define what is good for it.

Despite my shared hostility to paternalism, I staunchly disagree.  The very idea of objective welfare is not merely plausible, but compelling.  (Even “inevitable”!)  Like everyone else, the homeless act on their own preferences; but almost all of them would have much higher objective welfare if they adopted a sober bourgeois lifestyle.  The same goes for children, alcoholics, drug addicts, and so on.  Left to their own devices, these impulsive humans generate “very different values, desires, and preferences.”  And left to their own devices, they ruin their lives.

6. RW convincingly accuse the “new paternalists” of being crypto old paternalists.

The apparent willingness of behavioral paternalists to favor some expressed preferences over others also colors the policy debate. They lend the veneer of science to what are in fact subjective judgments, giving policymakers the cover they need to implement policies based on prejudices and moralistic attitudes, such as the universal desirability of conventional virtues such as patience, moderation, and temperance.

So far so good.  But aren’t the new paternalists wrong for the right reason?  Namely: Despite RW’s incredulity, the conventional virtues of patience, moderation, and temperance are indeed universally desirable.  If someone taught their kids to be impatient, immoderate, and intemperate, you would baffled.  And if you had to quickly summarize the “root causes” of the miseries of homelessness, drug addiction, and so forth, isn’t the obvious answer that those who suffer fail to practice these bourgeois virtues?  This is no “veneer of science”; this is common-sense.

7. RW almost grant this point in their “Rely on Extreme Cases” section:

If you want to demonstrate the irrationality of human beings, one very simple strategy is to point to extreme cases: drug addicts whose actions destroy their lives, compulsive gamblers who lose everything they have and more, morbidly obese people who cannot even leave their homes. It is hard to believe that such people are acting rationally, even by the most permissive definition.

In these cases, perhaps we can safely indulge our intuition that their biases are truly damaging in terms of their own well-considered well-being, and if only they could see their situation globally they would truly wish to behave differently.

I agree that “intuition” (or just “common-sense”) says this.  The reason, though, is that “well-considered well-being” is a thinly-veiled version of objective well-being.  The morbidly obese are plainly acting in accordance with their own preferences, but they are acting contrary to their own long-run happiness.

Couldn’t you simply say, “The morbidly obese care about food more than happiness”?  You can and you should.  I’ve argued much the same about the “mentally ill.” But this doesn’t show that objective well-being is a myth.

8. If we concede that objective welfare exists, doesn’t this open the door to paternalism?  Sure, in the same sense that conceding that China exists opens the door to protectionism.  Logically speaking, the cleanest way to prevent a trade war with China is to deny that China exists.  This, however, is an absurd claim, and will at best convince your most dogmatic allies.  Similarly, the cleanest way to prevent paternalism is to deny that objective welfare exists.  But this, too, is an absurd claim, and will at best convince your most dogmatic allies.

9. What then is the reasonable position on paternalism?  Per Michael Huemer’s The Problem of Political Authority, we should begin with a strong but defeasible moral presumption against using coercion to increase objective welfare.  This is hardly an exotic libertarian position; in their personal lives, almost everyone holds such a presumption.  To justify paternalism, you have to show that the net benefits of paternalism are large, even after factoring in knowledge problems, public choice problems, slippery slopes, and all the other practical difficulties RW detail.

10. This Huemerian position explains why it is typically OK to treat your own young children paternalistically.  Why?  Because they’re incompetent, you really do know better, and you really do have their best interests at heart.  (And don’t forget, “My house, my rules.”)  The same goes for elderly relatives with dementia, though the bar should be much higher because the love of the old for the young is so much stronger than the love of the young for the old.

11. Doesn’t this justify actually-existing paternalistic government policy?  Hardly.  As RW explain, governments habitually use their powers with gross negligence – and plenty of earlier researchers document the collateral damage of policies like Prohibition and the War on Drugs.  Yes, the world is complex; but as long as there is a strong moral presumption against coercion, the complexity of the world tips the moral scales strongly toward inaction.

12. To return to my own nagging concern, what about the opioid addicts?  I say government should leave them – and their suppliers – in peace.  Why?  Yes, they’re acting strongly against their own objective welfare.  Yet this pales before (a) the classic economic arguments against prohibition, (b) RW’s pragmatic concerns, and (c) the strong moral presumption in favor of leaving strangers alone.  The case against parents forcibly placing their adult children in rehab for their own good is weaker, though even there we should be skeptical.  As the old joke goes, “How many therapists does it take to screw in a lightbulb?  Just one, but the bulb must want to change.”

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Flaaen et al. on Washing Machine Tariffs in the A.E.R.

Trump’s early 2018 tariffs on washing machines are costing American consumers $1.5 billion a year in higher prices, even after deducting the meager $82 million in customs revenues. The whole tariff was paid by American consumers in higher prices—in fact, even more than the whole tariff if we consider that dryers, a complement good, also increased in price. The total cost to American consumers amounts to more than $800,000 a year for each of the 1,800 jobs created in America by the tariff.

These are the main results of an econometric study by three economists, Aaron Flaaen (Federal Reserve), Ali Hortaçsu (University of Chicago and NBER), and Felix Tintelnot (same affiliations as the latter). Their article was published in the latest issue of the American Economic Review under the title “The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines” (the article is not gated). I previously mentioned on Econlog the authors’ preliminary research on the same topic as published in March and April 2019.

Another lesson of the washing machine tariffs, which is not surprising either, is that the tariffs have had the same impact on the price of domestically produced washing machines as on imported ones. I explained in a few previous Econlog posts why a tariff always increases the price of the domestic substitute as much as the price of the targeted imported good (see, for example, “Post Scriptum on Steel Tariffs,” December 5, 2018). A simple way to see this is to realize that the very reason domestic producers ask for a tariff on the competing foreign goods is to be able to increase their prices at the level from which they had to cut them because of this competition.

Flaaen et al.’s estimates are not too far from the results of my back-of-the-envelope calculations the Spring issue of Regulation (“Putting 97 Million Households through the Wringer”). More than a praise for your humble blogger, this is a vindication of the usefulness of economic reasoning.

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Free to build

You would think that if conservatives could agree about anything it would be zoning reform. Making it easier to build new housing would increases freedom (something libertarians like), increase economic growth (something businesspeople like), and help lower class Americans afford homes (something all conservatives like.)

Recently, however, a split has developed in the conservative ranks, as exemplified by a recent National Review article by Stanley Kurtz.  Here he criticizes the idea of having the federal government pressure cities to make it easier to build housing:

They will lose control of their own zoning and development, they will be pressured into a kind of de facto regional-revenue redistribution, and they will even be forced to start building high-density low-income housing. The latter, of course, will require the elimination of single-family zoning. With that, the basic character of the suburbs will disappear. At the very moment when the pandemic has made people rethink the advantages of dense urban living, the choice of an alternative will be taken away.

Before getting into zoning, let me acknowledge that the specific complaint here has some merit. It’s not obvious that the federal government has any business telling local governments to reform zoning.  (Is this more like schooling, where local control is best, or more like free speech and interstate commerce, where you want the federal government to guarantee certain freedoms? I don’t know.)

But Kurtz doesn’t stop with defensible complaints about the merits of federalism; he also disagrees with the claim that zoning reforms to boost density would be welfare improving.  And that argument is very hard to make.

Residents often complain about new apartment complexes because it increases traffic and brings in lower income residents.  But these arguments are very weak.  In aggregate, greater density reduces traffic.  People must drive farther in less dense suburbs.  And lower income people need a place to live.  Surely its better to allow them to live closer to job opportunities than to force them into slums, or even homelessness.

Nor would these proposals “destroy” the suburbs.  Even the NYC metro area—which is a sort of poster child for dystopian density in the minds of many zoning fans—the vast majority of the region is devoted to low density suburbs, including much of Long Island, northern New Jersey, Westchester County and southwest Connecticut.  When people hear the term ‘New York’ they think of Manhattan, but there are plenty of nice suburban communities for people who prefer that sort of living.

You might argue that removing zoning would turn American suburbs into New York City-style dystopias, but there are far to few people in America to densify more than a tiny, tiny fraction of suburbia.

And some densification is optimal.  Suppose Midtown and the Upper East and West Sides of Manhattan had not been allowed to densify, because residents who liked the formerly quiet neighborhoods had used NIMBY lawsuits to hold up development.  Think about how much less impressive New York City would be today.

The goal should not be to have all dense cities, or all sprawling suburbs, but a mix of the two.  Zoning reform helps to allow America to develop organically, according to the wishes of the public.  Each family will move to the sort of area that they prefer.

Conservatives often oppose progressive policies that are intended to help the poor.  In many cases, conservatives are correct to oppose those initiatives, as government involvement in the economy often does more harm than good.  But if conservatives were then to turn around and support government regulations that made it hard to build affordable apartments, even though those regulations reduced freedom and reduced economic growth, all because growth might inconvenience some affluent people who like things to always stay the same, then there are going to have to accept the fact that their motives will be questioned.  (I say “some affluent people”, because I favor more density in Orange County.)

Isn’t the conservative view that higher minimum wages reduce freedom and economic growth?  OK, but doesn’t zoning also reduce freedom and growth? Or is something else motivating conservative opposition to higher minimum wages?

I know why I oppose higher minimum wages, but I’m no longer confident I know why other conservatives do.

Of course many on the left oppose new low-density suburban developments.  I also disagree with that view.  So I’m not taking sides on the overall housing density debate, just the specific idea of relaxing zoning rules to allow greater density.

Some progressives have a vision for how people should live—densify.  Some conservatives have a very different vision for how people should live—suburban sprawl.  My vision is freedom.

PS.  The American Conservative has an article by Charles Marohn that points to numerous federal regulations that have subsidized suburban sprawl.  Stanley Kurtz mostly ignores those market distortions when he advocates a hands off approach by the federal government.

 

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Escaping Paternalism Book Club: Part 1

Summary

Rizzo and Whitman (R&W) begins with a primer on the “new paternalism” – the influential policy reform movement powered by the engine of behavioral economics.

For most of history, paternalists have drawn their support from religious or moral notions of goodness. They have claimed special knowledge, from God or some other source, about how people ought to live. The overtly religious character of temperance movements in the nineteenth and early twentieth centuries exemplifies this kind of “old” paternalism. Given their moral convictions, the old paternalists did not usually appeal to the preferences and desires of those whose behavior they wished to regulate. The very desire for alcohol – or drugs, or deviant sex – was condemned directly.

[…]

Behavioral economists, like most economists, still accept subjectivism. However, they have rejected the notion of accurate preference revelation. Experimental evidence suggests that individuals may systematically deviate from the behavior that would best satisfy their own preferences. The list of alleged deviations from strict rationality includes – but is not limited to – status quo bias, optimism bias, susceptibility to framing effects, poor processing of information, and lack of willpower or self-control. To the extent that these phenomena cause people to make errors, paternalist policies can in principle help them to do better – not by some exogenous standard, but by their own standards. This is the defining feature of new paternalism that distinguishes it from the old: the new paternalists claim to help people better achieve their own preferences, not someone else’s.

Cass Sunstein and Richard Thaler are the popular and intellectual leaders of the new paternalists.  As R&W succinctly explain:

Cass Sunstein and Richard Thaler, coming from an economic perspective, support policies that will make people better off “in terms of their own welfare.” That welfare is best advanced by the choices people would make “if they had complete information, unlimited cognitive abilities, and no lack of willpower” (Sunstein and Thaler 2003, 1162). In other words, Sunstein and Thaler define the correctness of choices in terms of what people would choose for themselves – if only they were not afflicted with cognitive biases.

New paternalists then present novel rationales for a wide range of government interventions.  For example, they advocate “sin taxes” to help not society, but the “sinners” themselves.  Fat taxes help fat people weigh what they “really want to weigh.”

R&W close the chapter by explaining their multi-stage argumentative strategy.

Our case will consist of a series of challenges – in effect, hurdles that behavioral paternalist proposals must clear in order to be justified as a matter of policy. We will begin with the most abstract and conceptual, then proceed to more pragmatic and applied challenges.

The most abstract: Behavioral economists take simple models of rational choice too literally.

We refer to the traditional economic definition of rationality, adopted by mainstream and behavioral economists alike, as “puppet rationality.” It is a brand of rationality well suited for building models of how the world works. Models are not unlike stage plays, and puppets are the players. The puppets are always well behaved. They play the roles they were designed to play. They follow the rules. They have no motive force of their own. Real human beings, however, are not puppets. Their preferences and behavior may deviate from what is expected of agents in a model. But such deviation does not provide sufficient warrant for deeming them irrational.

But even if standard notions of rationality are solid, the much-hailed experimental evidence is sorely lacking in external validity:

Much of the evidence for “failures of rationality” derives from experimental settings that are effectively context-free. Such experiments may identify “raw” or unmodified propensities in human behavior in the laboratory. But they do not tell us how strong those propensities are “in the wild,” where people make real decisions…

We also argue that people are often (though not always) aware of their cognitive biases, and sometimes they act to counteract or control them. People “self-debias” in myriad and idiosyncratic ways…

Pragmatically, R&W argue that the new paternalism suffers from a massive yet neglected knowledge problem.  Most fundamentally: “If actions do not reveal preferences, then what does?”

Last, the book explores public choice and slippery-slope problems with paternalism in great detail.

This is only Chapter 1.  In Chapter 2, R&W appeal to “inclusive rationality” to critique behavioral economics at its root.

Are human beings rational? …But it is not easily answered, because the word “rational” has many meanings. Rationality can simply mean purposefulness, that is, trying to use the best means available to satisfy your goals or preferences given your beliefs about the world. It can mean taking an abstract approach to solving problems, applying universal systems of thought and inference, and following scientific methods. It can mean avoiding errors of logic and reasoning. It can mean revising one’s beliefs in accordance with Bayes’ Rule. It can mean having preferences that conform to certain axioms – transitivity, completeness, and so forth – which together guarantee the preferences are internally consistent and have a certain structure. In neoclassical economic theory, it has historically meant all of the above.

[…]

In this book, we will defend what we call inclusive rationality. Inclusive rationality means purposeful behavior based on subjective preferences and beliefs, in the presence of both environmental and cognitive constraints. This notion of rationality preserves the core notion of purposefulness, and in that sense it should seem familiar. But unlike other notions of rationality – many of which were invented for modeling purposes but have since taken on a life of their own – inclusive rationality… allows a wide range of possibilities in terms of how real people select their goals, form and revise their beliefs, structure their decisions, and conceptualize the world.

They continue:

[R]eal people may do all of the following and still qualify as inclusively rational:

  • Experience internal conflict that has not yet been (and may never be) resolved;
  • Have preferences that change over time;
  • Have preferences that are indeterminate or incomplete – i.e., that do not specify attitudes over all possible decisions at all possible times and states of the world;! Have preferences that are in the process of being created or discovered;
  • Have preferences that depend on context, including both the options available and the way in which decisions are framed;
  • Hold beliefs that serve purposes other than truth-tracking, such as providing motivation or intrinsic satisfaction;
  • Make inferences based not on the strict rules of classical logic, but on contextual and linguistic cues they have learned from human interaction;
  • Indulge “biased” modes of decision-making when the costs are low and rein them in when the costs are high;
  • Economize on scarce mental resources by refusing to impose perfect consistency on their preferences and beliefs;
  • Structure their environments, possibly in ways that constrain their own choices;
  • Adopt personal rules and resolutions that create internal incentive systems;
  • Enlist the help of friends, family, and other groups to assist in attaining goals;
  • Rely on institutions, social customs, and market structures to assist in attaining goals;
  • Employ heuristics that minimize cognitive effort and/or informational input.

R&W are well-aware of the methodological objection:

Because our notion of inclusive rationality is very broad, we might be accused of offering a theory that cannot be falsified. We should therefore clarify that we do believe positive claims should, in principle, be falsifiable. But some claims are more easily tested than others, and there is no guarantee that the most easily tested claims are also normatively relevant.

In Chapter 3, R&W flesh out this critique in great detail.  To take one example: In real life, people often seem to change their preferences.  Yet behavioral economists either refuse to consider this possibility, or treat changing preferences as ipso facto “irrational.”

The second interpretation is that the agent’s preferences have simply changed over time. In other words, if someone chose A over B on Monday but B over A on Tuesday, that could be the result of consistent (complete and transitive) preferences on Monday, and a different set of consistent (complete and transitive) preferences on Tuesday.

In general, economists resist preference change as an explanatory strategy because it feels ad hoc. Virtually any change in behavior can be rationalized as resulting from changing preferences, but economists usually wish to show the reasons why behavior may change even if tastes do not – for example, because of changing relative prices. To resort to saying preferences have changed seems like cheating. These are valid concerns from a positive perspective. But from a normative perspective, they hold little weight. There is no reason a person’s preferences should remain fixed. Rational people may change their minds – and we have not encountered anyone arguing otherwise.

Critical Comments

1. Escaping Paternalism focuses almost entirely on the “new paternalism.”  Yet the more I read the book, the more I concluded that “new paternalism” is largely an attempt to repackage “old paternalism” for an elite, secular audience.  Even today, no more than 5% of people who want to forcibly reduce alcohol consumption think they’re helping heavy drinkers “achieve their true preferences.”  Instead, they seek to give drinkers “what they need, instead of what they want.”  The main audience for the new paternalism is: meddlers who also have an ideological ax to grind against the want/need distinction.

2. On present bias, behavioral economists don’t go far enough.  It’s not enough to have exponential discounting rather than hyperbolic discounting.  Instead, I say the rational discount rate for utility is no time discounting at all.  Contrary to what you may have heard, this would not lead you to starve to death.  And you should still discount for uncertainty, finite life, and so on.  But, pace Hume, ’tis contrary to reason to prefer a present pleasure to a future pleasure solely because the present is now and the future is later.

3. R&W repeatedly mention behavioral economists’ support for mandatory “cooling-off periods.”  I wonder how many behavioral economists have ever examined how often people even take advantage of this opportunity to cancel a contract.  The last time I refinanced, we had to sign paperwork apprising us of our right to renege.  When I asked the banker how often people exercised this right, he furrowed his brow and laughed, “Never.”  I believed him.

4. R&W repeatedly discuss behavioral economists’ support for “employee-friendly” labor contract defaults.  Given all the evidence that unemployment breeds misery, a wise paternalist would strive to “nudge” labor’s total compensation down, not up!

5. R&W insist that “inclusive rationality” is falsifiable, but I don’t think they name a single concrete counter-example.  This is arguably intentional, for they often say things like:

We do not, however, claim that everyone is always fully rational. We are happy to concede that they are not. But it is one thing to say people make mistakes; it is another to clearly and definitively identify which actions are, in fact, mistakes.

Strikingly the word “opioid” does not appear in the text.  (“Heroin” does, but sans empirics).  I sincerely wish they had provided an “inclusive rationality” take on the putative opioid crisis.

6. One of my favorite passages:

We don’t expect that every reader will find all of our challenges to paternalism equally compelling. Some may find our conceptual objections persuasive, others may see the knowledge problem as definitive, etc. But our hope is that, taking the gauntlet of challenges as a whole, readers will recognize just how tenuous the entire new-paternalist enterprise is. Behavioral paternalism’s proponents often present it as just common sense – a set of smart, simple, straightforward corrections that will make us all better off. All we’re trying to do is correct some mistakes; who could be opposed to that? But the reality is far more difficult, complicated, and even dangerous.

As you’ll see, I find the conceptual objections only moderately persuasive, but the rest of their critique is strong indeed.

7. R&W go through a lengthy list of defensible “mistakes” people make in experiments.  Let’s consider them one-by-one:

When real people take tests designed to test neoclassical rationality norms, they do not leave their inclusive and contextually shaped rationality at the testing room door. Instead, they may behave as they do in the real world. For example:

  • They may assume, in accordance with ordinary conversational norms, that experimenters provide only information that is relevant to solving the problem – i.e., no irrelevant or “tricky” information. They do not immediately assume the experimenters are trying to fool them.

Reasonable.

  • They may resist the distinction between the validity of a syllogistic inference (e.g., “People with red hair are Martians, John has red hair, therefore John is a Martian”) and the truth of a conclusion itself (John is not a Martian). Normally, in everyday life, it is the truth that is more important.

This isn’t entirely wrong, but the ability to recognize such logical errors really is a crucial real-life skill.  Anytime you propose an explanation for anything, logical reasoning opens your theory up to testing.  Even for an explanation as simple as, “If I go to McDonald’s before 7 AM, the line will be less than 5 minutes long.”

  • They may not assume that prior probabilities about something – such as the likelihood that someone has a disease – must be equal to the “base rates” from the population provided to them. Instead, their priors may be affected by their evaluation of the significance of the base rates to a particular problem in front of them – say, whether a specific person who chose to visit the doctor and chose to take a test has the disease. Treating priors in this way is fully consistent with the subjectivist Bayesian view that prior probabilities are subjective – a fact frequently ignored in the rush to deem subjects “irrational.”

Reasonable.

  • They may not agree with model-builders on the informational equivalence of different descriptions of a situation. Instead, they may infer implicit information or advice from how a problem is presented. For example, they may perceive an important difference between a stated probability of success equal to 0.7 and a stated probability of failure equal to 0.3. Perhaps the former conveys greater optimism, despite the formal mathematical equivalence of the two statements. Conversational norms and expectations do not always align with logic and probability theory. The former can be adaptive in the real world while the latter is adaptive on experimental tests. Which is more important?

Seems pretty crazy to me.  Sure, if you’re marketing a product, you’re better off saying “70% success” rather than “30% failure.”  Yes, the former phrasing suggests “greater optimism.”  The only reason such rhetoric works, however, is that some potential customers are confused.

  • They may attach satisfaction or utility to things other than what the analysts expect. For instance, they may value an object more because it is theirs already. Or they may care about feelings of gain and loss experienced during the experiment, not just how much money they have when they leave the laboratory. Or they may gain satisfaction purely from having a particular belief, irrespective of its truth (“My wife is beautiful and my children are gifted”).

Somewhat reasonable, though it’s usually tempting to call such behaviors “childish.”  Picture a kid who wants his teddy bear, not an identical teddy bear that’s a hundred miles closer.

8. While we’re on the subject, R&W never discuss children.  Are they, too, “inclusively rational”?  If so, should parents stop treating them paternalistically?  Or what?

9. Suppose someone has inconsistent preferences.  How are we supposed to identify their “real” preference?  While this might seem like nitpicking, R&W show that behavioral economists have been cavalier  at best.

Some defenses have been offered for favoring some preferences over others in cases of conflict, but we find these defenses weak:

Verbal Statements and Survey Responses: When asked, people may say they would rather behave differently or have different preferences. For instance, smokers may say they would rather not smoke, and overweight people may say they would like to eat less. It is indeed possible that these statements reveal “true” preferences. However, the incentives for speech differ from the incentives for other kinds of action. Behavioral research has cast doubt on many economic principles previously taken as given, but the principle that talk is cheap remains intact. Speakers who say one thing while doing another may simply be expressing what they regard as socially approved attitudes – a phenomenon known as social desirability bias (King and Bruner 2000; Grimm 2010). Or their statements may simply reflect “experienced opportunity cost,” i.e., the dissatisfaction that always results from options the agent has forgone.

Note: If we take Social Desirability Bias seriously – as I think we should – we can readily identify the “real” preference.  Namely: Contrary to the new paternalists, the real preference is what people really do!

Regret: A person may feel, and express, feelings of regret about the choices they have made: “I wish I had not done that.” Although regrets are real, they do not necessarily reflect all costs and benefits associated with an action.  specially for intertemporal choices, such as getting inebriated last night and having a hangover today, the regret is typically experienced while the cost is being experienced in the present and the benefit is already in the past. That does not mean the costs outweighed the benefits at the moment of choice – only that the remaining costs outweigh the remaining benefits. In addition, it’s worth noting that regret can also be felt about the kinds of choices that behavioral paternalists favor. When approaching death, people often express regret at not having lived a more spontaneous and present-oriented life (Ware 2012).

They’ve got them there!

If regret may be experienced regardless of the action taken, then it offers little guidance to the paternalist about which preferences are “true.” As with verbal statements, regret can simply reflect the experience of opportunity cost…

Self-Constraint and Commitment Devices: People will often use various devices and strategies to try to keep their vices under control: planning automatic deductions for savings, avoiding locations where they will be tempted to smoke or drink, etc. These activities do provide further evidence of conflicting preferences, and we will discuss them more in future chapters. They do not, however, show which preferences are superior. Commitment devices reveal one set of preferences at work – but other choices show other preferences at work. Furthermore, the outside observer has no means of knowing whether the right amount of self-constraint has been performed.

Planned versus Unplanned Choices: Behavioral paternalists often favor the preferences of a “planning self” over the spontaneous or “acting self.” The idea is that the planning self is more likely to take all costs and benefits into account and render a considered decision. But the planning self does not necessarily represent a disinterested party; rather, the planning self may represent only the longer-term and more self-denying parts of one’s personality (Cowen 1991). This becomes most apparent in the case of extreme behaviors such as anorexia, where the planning self dominates an acting self that might wish to indulge more often.

10. When I began Escaping Paternalism, I skipped over chapters 1-5, fearing they’d be long-winded, half-baked Austrian philosophy.  I was so impressed with chapters 6-10, however, they I started reading the book from the beginning as soon as I finished chapter 10.  I soon concluded that unlike so many other Austrian-inspired works, Escaping Paternalism was not only conceptually thoughtful, but eager to engage with an array of empirical literatures.  If you’re impatient with economists waxing philosophical, I urge you to make an exception here.

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Bill Whalen and David Henderson Conversation

On June 4, my Hoover colleague Bill Whalen interviewed me about my latest article for Hoover’s Defining Ideas, “Just Say No to State & Local Bailouts,” June 3. I had heard and seen a talk by Bill on Zoom a week earlier and was impressed with his deep knowledge of California politics. His show is titled “Area 45.”

The interview was really a conversation, something I prefer to a standard interview. Bill has a charming personality, with just the right amount of humor.

In the first 20 or some minutes I make the case that I made in my article, in response to Bill’s questions. But he also raised an issue I hadn’t addressed in my article: whether on grounds of emergency aid, California’s state government should be given a bailout. I said no and I said why.

Some highlights from the rest of the conversation:

23:20: Why I worry that Senate Majority Leader Mitch McConnell will go along with some kind of bailout.

36:00: My case for bonds instead of tax increases. (My first choice, of course, is budget cuts.)

37:10: Why, if the feds do bail out California’s government, I would prefer aid with no strings over aid with strings.

38:30: States going their own way on coronavirus policy and why that’s important.

41:00: Related to what’s directly above: The states as laboratories of democracy and why that’s so important.

41:27: Why economists and other social scientists are almost orgasmic about the forthcoming data.

45:20: Eat the rich.

45:40: I’m seeing it as rich people saying “eat the rich.”

 

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