In response to my recent post on governmental regulation and energy conservation, an excellent debate has started in the comments. On the one hand, there is a long list of areas in which governmental regulation has forced corporations into making decisions that are beneficial for society at large:
Catalytic converters? Mileage requirents on cars? Unleaded gasoline? Clean water act? Clean air act? Endangered species act? Vaccination requirements for public schools? Building codes? OSHA regulations? Fire codes? Why do we have these things? Were they decided on by consumers? Nope. Nearly every time they were forced on people and corporations by government because industries and individuals would not do the right thing without that evil government telling them to behave, or because some unbelievable idiotic crisis or accident forced us to realize that regulations needed to be put in place.
On the other hand, it's generally true that "Governments have never, ever been as good at allocating resources as well as people working for their own best economic interests." Just look at any one of the failed attempts at creating a command-and-control economy. Winston Churchill's take on democracy is also true of free-market capitalism: "It is the worst possible system, except for all the others that have been tried."
That said, I think the new science of neuroeconomics, which has challenged the assumptions of rational decision making ingrained in classical economics, should make us rethink many of our reflexive libertarian tendencies. The free-market isn't perfect, and crowds aren't always wise. As John Cassidy noted in the New Yorker:
If emotional responses often trump reason, there can be no presumption that people act in their own best interest. And if markets reflect the decisions that people make when their limbic structures are particularly active, there is little reason to suppose that market outcomes can't be improved upon.
So how can this new research on human decision making help us make better decisions? Take this example: behavioral economists have long known that people aren't very good at making choices concerning the future. We buy cars with big engines for the same irrational reasons that we purchase cheap (and energy inefficient) air conditioners, refrigerators and water heaters. Instead of cooly calculating the cost of energy over the long term, we are swayed by the growl of V8 engines and the prospect of immediate cash rebates. Given our own errors, it only seems fair that the EPA step in, and impose mandatory energy efficiency standards on automakers and appliance manufactuers. I can happily tolerate that sort of liberal paternalism, especially when it saves me money.
Here's another example: Americans currently have a negative savings rate. Various neuroeconomic experiments have demonstrated that thinking about getting something right away activates brain areas associated with impulsive emotion, like the midbrain dopamine system. On the other hand, when subjects contemplated financial decisions in the distant future, brain areas associated with "higher level deliberative processes and cognitive control, including numerical computation" were turned on. The bad news is that our "rationality" is usually overruled by our impetuous emotions. We instinctively want to spend money now, and end up delaying saving until tomorrow (and tomorrow and tomorrow.)
But some behavioral economists have begun designing savings programs that take our impulsive emotions into account. In March 2004, Richard Thaler of the University of Chicago testified before the American Senate on ways to increase the national savings rate. His plan was simple: rather than asking people whether they want to start saving right away, companies should ask people if they want to opt into a savings plan in a few months. Since this allows people to make decisions about the distant future without contemplating the present, it bypasses our emotions. Trial studies of this program have been a resounding success: after three years, the average savings rates went from 3.5 percent to 13.6 percent.
This is another example of the sort of very limited paternalism I can live with. Rather than forcing people to make a certain set of decisions, it simply nudges them in the right direction. It helps us help ourselves.
PS. If you want to read an elegant essay that completely disagrees with me, check this out.
Comments (8)
I don't see this as paternalism, I think only libertarians see these measures as paternalistic, I see this as intelligent utilization of pooled resources.
I think what I'm arguing against is this "fallacy of the omniscient consumer." You similarly identify the consumer as a less than ideal economic actor, and there we agree. But I think it's more than just bad choices being made for emotional reasons, it's just the inability to know everything about everything. An average consumer can't, for instance, know enough about pharmacology to determine if a medication is safe, enough about architecture to know a building is safe, to know enough about software/engineering to know their airplane is safe, enough about individual business owners to know they won't be defrauded, etc. This libertarian argument that the government should not regulate requires this omniscient consumer, and most people have to work for a living and can't afford to research every goddamn decision they make.
That's why we have the government regulate these various industries. It's a pooling of resources. We can't check every food item and drug, so we have the department of agriculture and the FDA. We can't check airplanes software and engineering ourselves, so the FAA has to approve each new design and software change. We can't prevent people from screwing us in scams over state lines, so we have the FTC track down the crooks. We can't be sure stockbrokers aren't colluding and breaking the rules so we have the SEC, etc. The regulations that exist are there because we've decided, correctly, every consumer can't be omniscient. Next they'll respond that if there's a problem you could always sue or something. Well, frankly, I don't want the threat of lawsuits to be the only thing between me and shoddy airplane engineering, contaminated food, ineffective/dangerous drugs etc., because I'll be dead, and my family then would have to pay the expense of figuring out exactly which unregulated item killed me. This idea just doesn't take into account sensible prevention.
Then when you get to these more sophisticated regulations, it's people saying they want the government to fix a problem, and they simply don't have the time or resources to take care of it. For instance, we have the clean water act because lake Erie caught fucking fire. How does the individual consumer correct this problem? One could organize, I suppose, and oppose the polluting industries. But then you'd need someone to figure out which industries did it, someone to monitor that they have changed their ways, someone to track the water quality, not to mention someone to organize the protests and information campaign to make consumers aware of the problem (sounds like a government), and then, people will probably still just buy whats cheaper and pollutes more! Consumers can't control things like this with choice. It's just fallacious reasoning, and a luxury of a society that protects us to the degree that we think we're safe and long-lived because were just so freaking smart. Well, we're not. People are stupid, and they don't deserve to die or wreck the planet just because they're dumb and make bad choices.
Posted by: quitter | October 18, 2006 11:55 AM