Political Ignorance and Libertarian Paternalism:

"Libertarian Paternalism" is all the rage in law and economics circles these days. To slightly oversimplify, libertarian paternalists claim that people systematically make mistakes as a result of cognitive errors and biases. Afterwards, they end up with outcomes that they themselves consider inferior to at least some of the alternatives they could have gotten by making a different decision in the first place. As a result, third party intervention (usually, but not always, by the government) can help people make the "right" decision. The difference between the new paternalism and the old is that the former defines "right" by reference to the actor's own preferences, not by some "objective" theory of morality or utility imposed by others. Thus, claim libertarian paternalists, we aren't saying that government should override people's preferences; we just want to help people get what they themselves want. For an introduction to the concept by Richard Thaler (a leading proponet) and a critique by NYU economist Mario Rizzo, see this debate in the Wall Street Journal Econoblog.

At least tentatively, I agree with libertarian paternalists that cognitive errors often lead people to make mistakes that they afterwards regret. The question is, however, compared to what? To justify paternalistic policies ("libertarian" or otherwise), advocates must prove not only that autonomous individuals make mistakes, but that the government will make fewer mistakes if you let it constrain individual choices.

If government policy is subject to democratic control, the key question is whether people are more irrational and ill-informed when they act as consumers than when they act as voters. Regular VC readers won't be surprised to learn that my answer to this question is an emphatic "no." Ignorance and irrationality heavily influence voting decisions, and voters are routinely ignorant about very basic things, such as the mere existence of extremely important government policies. They also hold irrational and ill-founded beliefs about even simple political issues (e.g. - believing that the economy is a zero-sum game and that free trade reduces national wealth instead of increasing it). While direct comparisons with markets are hard to come by, few if any market errors are as widespread as numerous voter errors (of which the free trade example is a notable case). Similarly, few consumers are likely to be as ignorant of the basic characteristics of the products they buy as the 70 percent of eligible voters unaware of the very existence of President Bush's medicare prescription drug plan, the largest and most expensive new government program voters have "bought" over the last 40 years.

Overcoming bias and cognitive error requires time and effort. In political markets, voters have only an infinitesmal chance of influencing the outcome (less than 1 in 100 million in a presidential election, for example). That gives you very little incentive to do the hard work of increasing your knowledge and overcoming your biases. By contrast, when you choose to buy a product in the market, your individual choice is highly likely to be decisive in determining what you get. That gives you a much stronger incentive to try to choose wisely. Casual empiricism bears out this hypothesis. I have yet to meet a person of any ideological persuasion who spends more time and effort deciding which candidate to support for president than they do deciding which car to buy. And it's certainly not because the presidency is less complicated than your car, or less important!

Libertarian paternalists may be right to be pessimistic about how well people make decisions in market settings (though my colleague Josh Wright has an excellent article questioning this). They are, however, implicitly overoptimistic about the quality of the decisions we make as voters.

For some libertarian paternalists, of course, the alternative to market decisionmaking is not democracy but decisionmaking by unelected experts. I will take up this possibility in a follow-up post.