Behavioral Welfare Economics and the ‘View from Nowhere’

As Richard Thaler has just received a well-deserved ‘Nobel prize’ for his pioneering contribution in behavioral economics and behavioral finance, many commentators are reflecting over the scientific and ethical significance of Thaler’s work and more generally of behavioral economics regarding policy matters. Thaler is of course well-known for having developed with legal scholar Cass Sunstein the whole nudge idea as well as the seemingly oxymoronic “libertarian paternalism” notion. In a somehow challenging review of Thaler’s contribution, Kevin Bryan expresses some worries regarding the ethical implications relating to the nudging practice:

“Let’s discuss ethics first. Simply arguing that organizations “must” make a choice (as Thaler and Sunstein do) is insufficient; we would not say a firm that defaults consumers into an autorenewal for a product they rarely renew when making an active choice is acting “neutrally”. Nudges can be used for “good” or “evil”. Worse, whether a nudge is good or evil depends on the planner’s evaluation of the agent’s “inner rational self”, as Infante and Sugden, among others, have noted many times. That is, claiming paternalism is “only a nudge” does not excuse the paternalist from the usual moral philosophic critiques! Indeed, as Chetty and friends have argued, the more you believe behavioral biases exist and are “nudgeable”, the more careful you need to be as a policymaker about inadvertently reducing welfare. There is, I think, less controversy when we use nudges rather than coercion to reach some policy goal. For instance, if a policymaker wants to reduce energy usage, and is worried about distortionary taxation, nudges may (depending on how you think about social welfare with non-rational preferences!) be a better way to achieve the desired outcomes. But this goal is very different that common justification that nudges somehow are pushing people toward policies they actually like in their heart of hearts. Carroll et al have a very nice theoretical paper trying to untangle exactly what “better” means for behavioral agents, and exactly when the imprecision of nudges or defaults given our imperfect knowledge of individual’s heterogeneous preferences makes attempts at libertarian paternalism worse than laissez faire.”

As Noah Smith however rightly notes, that is not a problem that is peculiar to the nudge approach nor more generally to behavioral welfare economics:

“There are, indeed, very real problems with behavioral welfare economics. But the same is true of standard welfare economics. Should we treat utilities as cardinal, and sum them to get our welfare function, when analyzing a typical non-behavioral model? Should we sum the utilities nonlinearly? Should we consider only the worst-off individual in society, as John Rawls might have us do?
Those are nontrivial questions. And they apply to pretty much every economic policy question in existence. But for some reason, Kevin chooses to raise ethical concerns only for behavioral econ. Do we see Kevin worrying about whether efficient contracts will lead to inequality that’s unacceptable from a welfare perspective? No. Kevin seems to be very very very worried about paternalism, and generally pretty cavalier about inequality.”

According to Robert Sugden, what standard and behavioral welfare economics have in common is that they endorse – if implicitly – the ‘view from nowhere’ in ethics. The latter – whose name has been coined by Thomas Nagel – is the view that goodness or rightness is to be judged according to criteria set by some exogenous impartial or benevolent dictator. In welfare economics, the criteria imposed by the benevolent dictator are instantiated through a (Arrowian or Bergsonian) social welfare function (SWF). An SWF is itself traditionally obtained through the definition of the relevant informational basis (which kind of information should be taken into account in the normative analysis) and aggregation rule (how to use this information to make social evaluations and comparisons).

In this perspective, it is right that standard and behavioral welfare economics share a feature that some may regard as problematic: the very definition of the relevant SWF is left to a putatively impartial and benevolent being who is thought to lay outside the group of persons to whom the normative evaluation is addressed. The problem with the view from nowhere is that it creates a divide between the one making the impartial ethical judgments and evaluations and the persons whose welfare, rights and so on, are the objects of these judgments and evaluations. That means that welfare economics as a whole is somehow paternalistic in its very foundations.  Arguably there is a difference between standard and behavioral welfare economics: the latter is more restrictive regarding the relevant informational basis. In the classical preference-satisfaction account of welfare that most welfare economists endorse (including most but not all behavioral economists), preferences whatever their content are considered as relevant from a welfare point of view. Behavioral welfare economists argue however that it is legitimate to ignore preferences that are revealed by choices resulting from cognitive biases, lack of awareness, errors and so on. This only contributes to strengthen the paternalistic tendencies of welfare economics. In other words, the difference between standard and behavioral welfare economics is not one of nature but rather “merely” of degree.

Ultimately, it is important to acknowledge that welfare economics as a whole is not fitted to discuss most issues related to (libertarian) paternalism, especially the problems of manipulation and autonomy. Welfare economics is nowadays essentially a theoretical framework to make social evaluations given exogenous welfare criteria but cannot be a substitute for moral and ethical reasoning (though the related social choice approach can be a way to reflect on ethical problems).