I'm not a fan of economists that use the term "irrationality" too lightly. Man is rational - that's our starting point. To debate rationality is plain silly. I've already alluded to "Nudge", and my problem with that book is two-fold:
- The claims that are interesting (i.e. framing effects) are not novel
- The claims that are novel (i.e. libertarian paternalism) are not true
The problem with "nudging" is that libertarianism is a political philosophy that unties social evolution from the conscious direction of individual men. It firmly recognises the potential for the fatal conceit and allows for an absence of collective decision making as an antidote to the possibility of mistakes brought about through collective decision making. The main dividing line is whether you believe policy makers have enough (i) wisdom to trace through the long term and unseen consequences of policy; and (ii) the incentives to choose policy that is consistent with long term prosperity and the protection of liberty. Libertarians feel that the above are unlikely to occur in practice. Socialists have more confidence (perhaps faith is a better term) that the above will hold. Or, at least, relatively reasonable socialists would say that "sure - in practice policy makers aren't omniscient and benevolent, but DOING SOMETHING IS BETTER THAN DOING NOTHING!!!". The fallacy is that this statement still requires justification. Without justification, perhaps doing nothing is indeed optimal.
The critique is being led by Mario Rizzo's WSJ article, and his new paper with Glen Whitman, “The Knowledge Problem of New Paternalism"
The “new paternalism” is a set of policy prescriptions based on recent findings in behavioral economics whose purpose is to help individuals overcome a wide variety of behavior and cognitive biases. According to its proponents, it does not aim at replacing the preferences of individuals with those of the paternalist but rather to uncover the “true” preferences of individuals, that is, the preferences they would have if they had perfect knowledge, unlimited cognitive abilities and no lack of willpower.
The purpose of this Article is to show that new paternalist policies founder on the shoals of a profound knowledge problem revealed in Friedrich Hayek’s famous critique of central planning. Feasible policies require not only accurate scientific knowledge but also accurate knowledge of “the particular circumstances of time and place” that constitute the local and personal knowledge of individuals. This knowledge is not accessible by paternalists.
So notice a recent story from The Economist:
So, two possible responses:
Libertarian: "I told you so. This is inevitable. Your nudging has made things worse.
At least leave these as voluntary standards so that there's a
competitive process to make sure we're not locked into bad policies"
Socialist: "Yes but this failure is good data. We'll learn from it. Trust us. Things will be different next time. Iraq is better off."