Thursday, September 14, 2006

Asymmetric Paternalism

RUSSELL ROBERTS DRAWS ATTENTION to a newly found source of "market failure" being asserted by some. I'm not convinced and neither is he:
I guess I'm not part of the political specturm. Asymmetric paternalism has no appeal to me whatsoever.
This asymmetric paternalism is supposed to be the policy answer to the new market failure. Roberts explains the market failure and policy response by quoting from a piece by John Cassidy. Here is the market failure explanation:

Today, most economists agree that, left alone, people will act in their own best interest, and that the market will coördinate their actions to produce outcomes beneficial to all.

Neuroeconomics potentially challenges both parts of this argument. If emotional responses often trump reason,there can be no presumption that people act in their own best interest. And if markets reflect the decisions that people make when their limbic structures are particularly active, there is little reason to suppose that market outcomes can’t be improved upon.

And, here is the policy answer:

Laibson and Brigitte Madrian, an economist at the Wharton School, have studied one such “pre-commitment device” for 401(k) plans, which deduct part of an employee’s earnings each month and invest them in stocks and bonds. Because the plans are often optional, many people fail to join them, even when their employers offer to match a portion of their contributions. Laibson and his colleagues have called for people to be automatically included in the plans unless they choose to opt out. At companies that have adopted such a policy, enrollment rates have increased sharply.

Reforming 401(k) plans is an example of “asymmetric paternalism,” a new political philosophy based on the idea of saving people from the vagaries of their limbic regions. Warning labels on tobacco and potentially harmful foods are similarly intended to keep subcortical structures in check. Neuroeconomists have suggested additional policies, including warning buyers of lottery tickets that their chances of winning are practically nonexistent and imposing mandatory “cooling off ” periods before people make big-ticket purchases, such as cars and boats. “Asymmetric paternalism helps those whose rationality is bounded from making a costly mistake and harms more rational folks very little,” Camerer, Loewenstein, and three colleagues wrote in a 2003 issue of the University of Pennsylvania Law Review. “Such policies should appeal to everyone across the political spectrum.”

I think this is chock full of normative nonsense. The market failure concept is used to describe conditions under which we expect the market to fail to allocate resources efficiently. There seems to me no relevance to asking whether people act in their own best interest or not. The normative foundations of efficiency economics make the value judgment that we economists take the preferences of others as our given data. I think there are few other options for our normative foundations when we evaluate policy alternatives. I do not want economists to be in the business of judging good and bad preferences, and I don't think many economists want to either. Nor do I think a credible normative position for economics involves us trying to figure out whether people can or cannot pursue their own interests and preferences.

It seems to me that this so called market failure, which is then solved by asymmetric paternalism, really comes down to saying that people make mistakes, and therefore their mistakes will lead to an inefficient allocation of resources. Okay so far, eh? So what should we do about these mistakes? Well, we should have government force people to act so they don't make mistakes with respect to their own best interests. Of course, what shall we suggest to government about identifying these mistakes, that people don't know they are going to make until the mistakes have been made? After all, if I figure out my choice is going to turn out to be a mistake, I'm sure not going to make that choice after all.

This seems to me simply a new way to talk about that ages old economic concept of merit goods. This "new" market failure amounts to the old merit goods, just juiced up with a new "neuroeconomics" scaffolding. Paternalism, asymmetric or soft or the old traditional variety, is paternalism, and it is not consistent with efficiency economics. I simply cannot agree that paternalism of any variety should be part of the normative foundations we economists use to evaluate government and public policy.

No comments: