Do We Want Government to Guide Our Choices? A Critical Look
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Chapter 1: The Flaws of Behavioral Economics
In the previous entry, we delved into Peter Foster's critique of behavioral economics. Now, we will examine how its misdiagnosis of economic issues has led to calls for increased government intervention in economic affairs.
This school of thought has given rise to a form of "libertarian paternalism," which Foster finds problematic. Richard Thaler and Cass Sunstein’s influential book "Nudge," published in 2008, advocated for policymakers to shape decisions in a way that directs individuals toward what they perceive as beneficial choices.
Foster challenges the notion that policymakers possess superior knowledge compared to the general populace. Sunstein’s portrayal of Homo economicus as resembling Homer Simpson underscores this point, suggesting that ordinary individuals are inept and require guidance from intellectuals like Thaler to navigate economic complexities.
Thaler’s perspective during the 2008 housing crisis indicated that the intricacies of mortgages contributed to the problem. He proposed that instead of banning complicated mortgage structures—which could stifle innovation—simplified "plain vanilla" mortgages should be offered, with more complex options available only through "certified mortgage planners."
Foster is unconvinced by the idea of introducing a new class of ‘certified experts’ to assist everyday individuals. He humorously points out the irony of relying on entities like ratings agencies that inaccurately assessed toxic mortgage securities as safe investments.
Foster further critiques Thaler’s reliance on government assistance for the average citizen, drawing a parallel to the fictional Mayor Joe Quimby from "The Simpsons," whom he depicts as both corrupt and inept. This raises the question of whether experts can truly plan better than the market, considering they are merely human and just as fallible.
Chapter 2: The Role of Government in Economic Crises
Foster notes that while Thaler focused on policy solutions for the mortgage crisis, he overlooked the existing government measures that contributed to it. Entities like Fannie Mae and Freddie Mac enabled banks to unload unprofitable loans, while various government agencies and laws—from the Department of Housing and Urban Development to the Fair Housing Act—played significant roles in the housing market's dysfunction.
This prompts a reconsideration of whether the mortgage crisis stemmed from free market capitalism or from a convoluted web of government interventions meant to aid individuals. Legislators had effectively nudged lenders into issuing subprime mortgages to facilitate home ownership for low-income individuals. Additionally, the Federal Reserve’s decision to lower interest rates following the dot-com bubble contributed to the housing boom, ultimately leading to a financial collapse.
Foster references French economist Anne-Robert-Jacques Turgot, who cautioned against the assumption that all malpractices could be regulated away without stifling innovation. Turgot’s insights resonate with the field of Public Choice, which recognizes the fallibility of government due to its human components.
He warns against the illusion of security that government regulations provide, which can lead individuals to neglect their own responsibility in safeguarding against fraud. When government failures occur, it often leads to unexpected crises, as those in power are just as prone to error as the rest of society.
Interestingly, the Nudge theory has found favor among government officials, likely because it enhances their authority. For instance, Cass Sunstein, co-author of "Nudge," held a significant role in the Obama administration, while Thaler was consulted by the British government to establish a Behavioral Insight Team.
In our next discussion, we will explore the inherent challenges that policymakers encounter when attempting to manage economic systems.