Comparative Institutional Analysis and the New Paternalism

19 February 2010 at 12:08 pm 22 comments

| Peter Klein |

Comparative institutional analysis — defined as the assessment of feasible organizational or policy alternatives — is at the heart of the new institutional economics. Most economists and management scholars recognize, at least implicitly, that individuals and organizations don’t think, act, and choose with reference to some kind of global optimum, but are always evaluating trade-offs among imperfect alternatives. Yet, when it comes to public policy, even trained economists and strategy scholars easily lapse into Nirvana mode. Recent examples discussed her at O&M include the debate over Fed independence, the role of financial regulators more generally, and the “soft” or “libertarian” paternalism favored by Obama’s man Cass Sunstein, among others.

The new paternalism literature suggests that private actors suffer from biases and cognitive limitations such as lack of willpower or self-control, status quo bias, optimism bias, and susceptibility to framing effects leading them to make decisions that are inconsistent with their own preferences. By making marginal changes to the options available to market participants (“nudges”), the private benefits and costs of various actions, and the informational environment in which choices are made, market participants can be led to make “better” choices without reliance on heavy-handed, top-down regulation. The problem, of course, is that this literature virtually ignores the cognitive and behavioral limitations affecting policymakers. Incentive problems are an obvious example, along with the “slippery-slope” problem: the vulnerability of new paternalist proposals “to slippery slopes that can lead from modest paternalism to more extensive paternalism” (Rizzo and Whitman, 2009, p. 667).

Mario Rizzo and Glen Whitman’s have written an excellent set of papers on the new paternalism, the latest of which focuses on the knowledge problem, and how dispersed, tacit knowledge about preferences and constraints limits policymakers’ ability to plan paternalist policies that actually make people better off. The paper is here, and Mario blogs about it here. Highly recommended!

Entry filed under: - Klein -, Austrian Economics, Classical Liberalism, Public Policy / Political Economy, Recommended Reading.

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22 Comments Add your own

  • 1. Steve Phelan  |  19 February 2010 at 1:33 pm

    It’s almost like Gramsci version 2.0…instead of banishing “false consciousness” we need a “nudge” :-)

  • 2. John  |  19 February 2010 at 3:21 pm

    The bulk of the literature on the subject demonstrates that actually sitting and thinking long and hard about alternatives really does greatly improve decision making. Having a group of people who professionally sit and think is unlikely to have a negative effect or no effect on outcomes.

    Also, to the “slippery slope problem,” one could easily reply, “slippery slope fallacy.” If you’re glad the coercive power of the state is used to maintain a military but don’t vote Communist every election, you understand the point.

    Unless you assume active malice or rampant opportunism on the part of regulators, pretend “culture” doesn’t exist, and quote the JDM literature with precision selectivity this argument makes no sense.

  • 3. REW  |  19 February 2010 at 4:34 pm

    To presume that elected officials and political appointees are not subject to opportunism and decision biases is profoundly naive. And to presume that they are “thinking long and hard” about constraining individuals’ decision space without negative consequences for the individuals is criminally naive.

  • 4. John  |  19 February 2010 at 4:42 pm

    I never said either of those things.

  • 5. david hoopes  |  20 February 2010 at 6:17 am

    I think John’s point drifts far from the central issues here. First, I think his initial premise is incorrect. Second, were it correct, the conclusion he draws from it is incorrect.

    Initial premise(s):
    The government forces a military on us
    We like it

    Then, we should like the government to control many decisions

    1) Few think that, “The coercive power of the state is used to maintain the military” I’m sure there are those who think we don’t need a military (married a Mennonite actually). However, I think they are a distinct minority.

    It certainly cannot be considered axiomatic that military is forced on us and we like it.

    2) If for whatever reason we accept some centralized government, it does not logically follow that we would prefer many activities conducted by a strong centralized government. Nor does it follow that wanting one function to be centralized and another decentralized is illogical.

    That a people would agree to the government having some centralized powers hardly implies that the government should have extremely broad centralized power.

    Is this not John’s argument? You want centralized military. Don’t complain about other decisions being centralized. That there is a time and place for centralization in government is not at all like saying that the government should centralize a great many decisions.

    Having a centralized military is quite different from having a centralized economy. It hardly seems worth describing the differences. I don’t think there is any logic that would connect the desire for a military and the need for centralized health care (for example).

  • 6. simone  |  20 February 2010 at 11:19 am

    The assumption that Government Policy Makers are neutral is not simply incorrect ,it is absurd. Government policy is the result of a political process that places a group (and its values) in power to do its bidding. By definition there is NO soft paternalism, unhindered by human foibles – it is human foibles incarnate. The government policy makers are thus “executing” on the will (fancy) of their constituents. Reason is thus local – stay elected and in power.

    Mario’s excellent work on the slippery slopes is excellent when accounting for legal and regulatory processes driving policy. It explains why institutional stickiness can arise when certain policy actions are taken.

  • 7. John  |  20 February 2010 at 12:39 pm

    David (Simone too) considering in my first post I reminded readers of the “slippery slope fallacy,” I’m hoping that your first point is simply bad parody. “We have a military, therefore we should be a Communist state” is not what I was going for – I’ll just mumble somthing Phelanian about your “criminal naivete” and move on from that one. Me and my neighbors are forced to pay taxes on something under penalty of imprisonment, and I’m glad we are – just something to think about.

    My point is that Klein’s argument is false reasoning if the reasoning is based on the domain he was addressing. For all of your attempts at grand philosophical extractions from my pointing out the fact that Sunstein’s previous work has nothing to do with what Klein says it does, you have badly, badly missed the point. On some level Klein’s point – and your point, and Simone’s point, and Steve’s point – all remind me of the people who say, “scientists can’t claim to know anything because their means to knowing is itself flawed.” Especially considering the tepid “nudges” Sunstein actually talks about. But on another level, my point was, “wait, which Sunstein is this? Not the one I’m familiar with.”

    Its fine if you have a sort of acquaintance with what you’re frothing about here, and its fine if your only recourse to a simple thought experiment is a series of un-clever personal attacks. Just don’t expect to be taken seriously in return, is all.

  • 8. simone  |  20 February 2010 at 3:03 pm

    John the point you keep missing is that Sunstein and his ilk do not recognize the limits of any vantage point the policy maker assumes. He/she is confronted with the same limits any other agent engaged in the system. You are correct a “better” view may be possible. No one is arguing that point.

    In addition, you confound that the “better” view is available only to the policy makers. Why?

    A “better” view is possible for potentially many actors. The question then becomes how to let the “better” view emerge and find its way into the system. Systems that can accommodate new information, ideas and action will be more responsive and robust.

  • 9. david hoopes  |  20 February 2010 at 3:19 pm

    I think Simone is correct.

    Since this seems to have gotten personal I’ll be very brief and consider my “discussion” with John dead. Peter’s reasoning is NOT fallacious. It simply is not.

    Aside: one of the reasons I love O&M is that we can disagree and be civil.

  • 10. John  |  20 February 2010 at 3:36 pm

    Okay David, I take your reasoning to be sound. The claims you invented and falsely attributed to me are wrong, and therefore I am wrong. In addition, Peter’s errors aren’t errors because you say they aren’t. Great points all around. We’ll just chalk up my comments above refuting you as so much “ad hominmem.” I totally understand your frustration, David. You’ve been asked to learn someone’s work before you criticize it, and that must be super annoying. How “un-civil” of someone to dare ask that your claims and reality be aligned.

    Lest we dare ask the public to take economists seriously.

  • 11. Peter Klein  |  20 February 2010 at 3:51 pm

    John, speaking of “learn[ing] someone’s work before you criticize it,” have you bothered to read either of the Rizzo and Whitman papers I cited?

  • 12. John  |  20 February 2010 at 3:59 pm

    Simone, I also believe you’re correct. My post said nothing about the informational capacities of government regulators compared to others who make careful, thought-out decisions in general. Peter and David simply have to assume that regulators and the rest of us actually have wildly differing cognitive constraints, and that’s where their opinions and the evidence diverge. Obviously it is frustrating that David has decided to exit the conversation without acknowledging his false statements, hence my tone.

  • 13. Peter Klein  |  20 February 2010 at 4:12 pm

    “Peter and David simply have to assume that regulators and the rest of us actually have wildly differing cognitive constraints, and that’s where their opinions and the evidence diverge.” I have no idea how you could have gotten that out of my post, which pointed out simply that the New Paternalist literature does not generally consider the biases and cognitive limits of policymakers. I said nothing about whether those biases and cognitive limits are more or less than those of private decision makers (though of course the knowledge problem affects the former more than the latter). Apparently John is unfamiliar with Coase, Demsetz, Williamson, and others who developed the comparative institutional analysis perspective, which calls for a careful weighing of feasible alternatives, something that is largely absent from the paternalist literature.

    John, it would help the discussion if you would read a little more carefully and write a little more thoughtfully.

  • 14. John  |  20 February 2010 at 5:05 pm

    Peter, I did. I can’t say I found their arguments about slippery slopes very convincing, and their lack of review of the literature on how ordinary people go about correcting for potential slippery slopes (namely by thinking about them, as I said in my first post) does not help their case. At 119 pages of reading I admittedly engaged in some serious information consumption satisficing on these papers, but I’ll give them a full reading this weekend.

    The three authors you accuse me of not reading form most of the core of my background in this field, so clearly I have failed to make my point more clearly. The approach to agency costs, transaction costs, etc. that helps inform the mindset of this blog – as any of its readers will be familiar with it – is not in dispute. What 80 years of org theory has demonstrated about economics is not in question here.

    My concern is with your reading of the behavioral economics literature, nothing more. To date, I have never read a critique of the BEcon literature that fully assesses the claims being made (or the empirical evidence validating it, for that matter). If you read Williamson, or Alchian and Demsetz, on institutional correction, you’ll understand that there’s a difference between attempting to correct for an economic loss and attempting to correct for a systematic organizational error. Sunstein proposes that systematic errors in the thinking of individuals in aggregate result in deadweight economic loss that “nudges” can help correct. Taking for example his study about the spatial arrangement of a cafeteria line, it is abundantly clear that health perception is not performed in a way conducive to personal well-being in food choices. Sunstein makes the normative claim that people ought to eat healthier, and proposes imposing what should be a “trivial” form of the status quo bias on consumers to improve their health. Of course, he knows full well that this bias is a non-trivial influence on individual behavior, and that is his point. The bias is only a trivial cognitive cost to those who consciously, full-well know that they prefer the cake to the salad. To those of us who are indifferent, the status quo will likely prevail. Frankly, considering I like to go to the beach here in the South, I welcome government coercion that could result in people in bathing suits looking differently from how they now look in bathing suits.

    The criticism of this line of thinking occurs in cases where Sunstein’s normative proposals are probably wrong. “Nudging” firms into inefficient wage arrangements will probably not result in improved social welfare, for example. That is a valid criticism.

    Hence, the criticism of yours I believe to be invalid is the one that, because regulators are subject to an identical level of cognitive biasing as the rest of us, they will make bad decisions. The basis of this criticism is my understanding of various debiasing techniques, chief among them simple organizational controls that successful firms already have in place. It is self-evident, however, that these controls are not employed in some of the more obvious examples Sunstein gives of individual behavior. I believe that those debiasing techniques – such as the act of “thinking hard” – are used by regulators, and so it is incorrect to say that because of various cognitive biases, regulators themselves will make bad decisions. You would have to go out of your way to assume that regulators are particularly incompetent human beings, that all law makes everything worse, everywhere, always, and would have to assume that regulators are particularly malicious as a function of fulfilling nonexistent personal incentives – for example, to assume that regulators would systematically err in the direction of regulation that is overly costly even above the direction of their already ill-informed ideas.

    They will make bad decisions for a host of other reasons, such as the ones we all learned about when learning the particular school of thought you have erroneously accused me of being unacquainted with.

    Taking this one post as a contained summation of worldview, your point is correct, but not for the reasoning on which it stands. Voici, three days of economists yelling at each other.

  • 15. Aidan Walsh  |  23 February 2010 at 9:35 am

    ‘In this way there was introduced into Roman society the essentially erroneous notion that it is the business of legislative authority to prescribe or forbid anything whatever. Anyone who put forward a proposition of a seemingly advantageous nature for the immediate future was blindly applauded, even though his proposition subverted the entire permanent edifice of order.’ (Jouvenel, 1952, 276 ff.)
    Jouvenel, Bertrand de (trans by Huntington, JF). 1952. Power. The Natural History of its Growth. The Batchworth Press, London.

  • 16. Peter Klein  |  23 February 2010 at 2:16 pm

    Today’s WSJ features a report suggesting that taking a daily aspirin to reduce the risk of heart attack may actually be harmful. What a perfect illustration of Rizzo and Whitman’s knowledge-problem argument. John takes it as self-evident that nudging people toward more salad and less dessert is welfare-enhancing. What if it turns out that too much salad is bad for you? No one knows how the medical consensus on diet will change over the years. The drawback of the government-sponsored, coercive nudge, as opposed to allowing people to decide for themselves how they want to be nudged (either by constraining themselves, as in Schelling’s smoker whothrows away his cigarettes, or by patronizing competitive, private establishments that constrain patrons in various ways), is that the costs of error are extremely high.

  • 17. John  |  23 February 2010 at 2:34 pm

    Of course, if that’s the medical consensus at the time then it stands to reason that both private and public organizations would base their “nudges” on it, rendering your point about choosing a private or public “nudge” invalid or at least hypocritical, but thanks for at least getting back to the conversation.

  • 18. Peter Klein  |  23 February 2010 at 2:40 pm

    No. The point is about experimentation, creativity, and heterogeneity of beliefs. Under private nudging, not everyone will chose the same nudge. You seem to assume that on all these issues there exists at every moment a unique consensus, and that only bounded rationality or coordination failure prevents individuals and privately formed groups from following that consensus. Some individuals and groups may deliberately choose to ignore the dominant view to follow their own beliefs. Is the Amish lifestyle, including its idiosyncratic medical practices, objectively “bad”? If so, a top-down, one-size-fits-all approach would nudge (aw, hell, downright coerce) the Amish into using conventional pharmaceuticals. If not, how are the Amish made better off by being nudged to behave in ways that violate their own beliefs?

  • 19. John  |  23 February 2010 at 2:53 pm

    That point still ideologically requires that there be some medical information available to people who work outside the public sector not available to people who work inside the public sector, else in the long run there’d be no reason to foresee any difference. Actually, following your idea to its logical conclusion I’d expect a government-less system to produce a worse health regime than one where institutional culture derives some at least quasi-effective regulatory body designed to monitor health claims subject to constraints of ones personal right to believe nonsense. However, if I were born into an Amish tribe I would absolutely, absolutely want the coercive power of the state to be used to deny my parents their individual right to deny their child real medicine. Just as I’m glad that the coercive power of the state is used to fight snake-oil peddlers who sell quackery as medicine under false pretenses. For centuries “the market” failed to correct for that problem at all.

  • 20. Peter Klein  |  23 February 2010 at 2:58 pm

    John, you are now making a trivial argument that has been addressed, and convincingly refuted, in jillions of studies of health and safety regulation (going back to the old JLE studies from the 1970s). Quite the contrary, private efforts to regulate health and safety have been far superior to state-led efforts.

    But, in any case, this has nothing whatsoever to do with libertarian paternalism versus outright, old-fashioned, fully coercive paternalism, which you now seem to endorse. If your comment above (#19 in the thread) is right, then what is the advantage of soft paternalism over hard?

  • 21. John  |  23 February 2010 at 3:14 pm

    As with David’s comments I suppose I’ll just have to believe you because… well, because you say so, and that seems to be good enough for scholars in this field. I also won’t make you decide if a parent’s right to abuse a child is superior to society’s benefits from general well-being, as you seem to think it is. The advantage of soft paternalism in this case is, as I’ve said throughout, that it addresses the trade-offs between freedom and social benefit that you’ve been concerned with at the outset.

  • 22. Peter Klein  |  23 February 2010 at 3:19 pm

    Um, no, this is a blog, not a textbook or an encyclopedia, and certainly not an academic journal. David and I don’t go to your blog and demand explanations for things that specialists in your field consider basic, freshman-level stuff. But thanks for visiting.

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