Nudge, Nudge

Posted on September 25, 2013 by

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Economics is often thought of as a quasi-hard science;   a field where number crunching and rationality yield positive and true results.  While Ph.D.s in the field acknowledge that it is often hard to account for all the variables, in the past they would argue that if it were possible to account for all factors, a  mathematical conclusion would emerge.

Enter the world of “nudge” economics, technically known as behavioral economics.  It originated in the 1970s from a combination of economics and psychology as some economists began to question the neo-classical assumption of rationality of individuals in choice situations.  Homo eonomicus was called into question.  Non-rational choices were now accounted for.  This was actually a helpful development, although one must be careful how to define rational versus irrational.  One may make a seemingly or real bad choice, but for perfectly rational reasons.  One may make what is seen as a rash choice, but in reality that choice may have been weighed rationally, albeit more rapidly.  Still, accounting for non-rational choice seems to be a good thing. 

Unfortunately, what may have been good has been misused by policy analysts and political decision-makers.  I had the opportunity to get a glimpse of this abuse when I attended a Heritage Foundation forum entitled “The Food Police: From Menu Labeling to Soda Bans.”  The panelists not only discussed the specific policies related to food choice but also the broader issue of how behavioral economics is being used (or misused) to reduce consumer choice and individual freedom and to raise prices for everyone.  The use of “nudge” economic policy works very simply.  An agency or political institution decides that certain behavior is undesirable–to them, irrational–and then enacts regulations or laws or taxes that do not actually (in some cases) ban the activity but make it more costly to engage in it.  Usually this takes the form of taxes-“sin taxes” they have been called.  In other cases of course the aim is to ban the activity, in which instance it is not a nudge principle at work but outright coercion.  But back to nudging.

One panelist, Nita Ghei, an economist from the Mercatus Center of George Mason University, has written quite lucidly on the subject and she also provided some of her insights at the forum.  One problem is that when an agency or political unit calculates the costs and benefits of a nudge action it designates the restriction of consumer choice as a benefit rather than a cost.  This of course skews the outcome to favor the regulation/law to the detriment of the consumer.  Ghei argued, persuasively, that the restriction is actually a cost to the consumer, as it reduces choice, raises prices and generally diminishes liberty. Another more perverse action is to impose a tax (the sin tax again) on a product just enough to continue to bring in revenue from the tax, but not enough to discourage consumption. If the activity is considered so harmful, then why not ban it, or impose a tax large enough to actually affect consumption (pretty high in may cases, given lack of consumer sensitivity to price changes of some products–price elasticity of demand).  So some nudging is then disingenuous.  Its obvious purpose is not welfare but revenue. There is also the lingering question of what it is that government agencies and politicians want to nudge.

This might seem like an arcane subject, not worthy of a blog.  But here in Washington, DC, nudging seems to be all the rage among policy makers. It has the political benefit of being more subtle than bans.  And is can also allow for continued revenue while appearing to oppose the activity. 

 

It would seem that nearly all activity is fair game for the “nudgers,” or at least all activities they (the “experts”) deem bad for us and of which they believe we are incapable of self-government. As was said by the panelists at our ‘Food Police” forum, all this activity also has an even more insidious outcome. It reduces individual freedom, as it is at the same time increasing governmental power over the lives of individuals. So I hope we can be more aware of nudge actions by officials as well as the influence of behavioral economics on those who fancy themselves as better able to run our lives.

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