Geoffrey A. Manne is Executive Director of the International Center for Law & Economics and Lecturer in Law at Lewis & Clark Law School
The problem with behavioral law and economics (and its behavioral economics cousin) is not that it has nothing interesting to say, but rather that the interesting things it has to say do not mean what its proponents think they mean. It is one thing to claim that people are less rational than we thought. It even one thing to claim that people are systematically less rational than we thought, in predictable and important ways. But it is entirely another to presume that the implication of this is a larger scope for government regulation to protect the market and market actors from the depredations of this irrationality.
Why? Well, the market, of course. Just because individuals may be less-rational than we thought does not mean that the complex and nuanced activities of markets can’t account for these deviations (particularly if they are predictable). Add to this well-canvassed problems like government actors subject to the same biases, the problem of competing and conflicting biases, and the problem of unacknowledged, contrary implications, and the case for doing anything about behavioral quirks is extremely weak.
Thus, for example, let’s grant that, as many behavioralists aver, hyperbolic discounting exists. Um, so, if that’s right, what should we do about it? Force everyone to save more of their paychecks for retirement? Insist on opt-out rather than opt-in retirement investing? Ban cigarettes? Raise tax rates? (I don’t know if anyone has argued this one yet, but it seems like a plausible implication, and it’s only a matter of time)
Here’s the problem, as I see it: Let’s say the behavioralists are right that, in the abstract, people save less money for future consumption than they would like. Richard Thaler’s solution to this problem is the “Save More Tomorrow plan (pdf),” which takes advantage of people’s alleged current hyperbolic discounting to commit them to future savings that they actually want but can’t otherwise adhere to when the future actually arrives. This is a “libertarian paternalist” (pdf) solution to the problem.
But there is a problem, even with a libertarian brand of paternalism here. Continue Reading…