Sunday, 7 October 2012

Paternalism and Irrationality

I have talked before about how most economists have an instinctive dislike of paternalism: a dislike of the idea that someone (usually someone in authority) knows better what is good for people than people themselves. I think this is a very good instinct to have, but sometimes it has to be set to one side. Economists should know this, because they often use economic theory in a paternalistic fashion.

How can I write this last sentence? After all, are economists not very careful to focus on agent’s revealed preferences, rather than any objective model of what is good for people? They prefer what people actually choose as measures of well being (like consumption), rather than some scheme of what is involved in the good life dreamed up by some philosopher.  

However, as Daniel Hausman discusses in a recent book, the idea that a preference based measure of individual welfare can ever be a completely adequate measure of individual well-being is deeply problematic. There are many reasons for this, but the one most economists recognise is where individuals clearly act in ways that are not in their own self interest (or in the interest of others). The example I used before is seat belts.  But behavioural economics and experimental data are giving us many more. For example, an individual’s choice may be influenced by the presence of irrelevant alternatives: the choice between A and B may be influenced by whether C is an option, even though A and B are both preferred over C.

These features of behaviour pose an obvious problem for any preference based measure of well being. What economists typically do, faced with this dilemma, is one of two things. The first may be to deny the premise that agent’s choices in these cases are inconsistent with their own self interest. Failing that, the second response is to try and correct the preference measure of welfare to get round the problem. For example, if someone’s preference for not wearing seat belts is due to ignorance about the statistics, then we might be justified in imagining what their views would be if they did have this information. We can talk about welfare as involving maximising preferences that are not based on false beliefs. The idea is that maximising these purified preferences then maximises individual well-being.

There are a lot of problems with this approach, which Hausman discusses in detail. However, it strikes me that once this attempt is made, economists themselves tend to be paternalistic. Because how do we judge whether preferences need correcting? Often we simply ask whether choices are consistent with rational choice theory i.e. the basic axioms of much of microeconomics. If they are not, then any preferences that violate these axioms need correcting. What we are doing here is elevating rational choice theory, or more generally the micro theory we typically use, to an objective theory of well being.

Let me give one final, and rather more complex, example. There is a lot of evidence (and has been for some time e.g. Ainslie (1992), Picoeconomics, CUP.) that individuals discount over time in a hyperbolic way, rather than in the simple exponential manner which captures impatience as a constant discount factor. Hyperbolic preferences mean that if the choice is between A now and B in x periods time, we may choose A, but if it is between A in y periods time, and B in y+x periods, we choose B. Now hyperbolic preferences cause problems because they are clearly time inconsistent. From a welfare point of view, we have to ask who is the individual whose welfare we are maximising: the individual today with one set of preferences, or the individual tomorrow with different preferences. Faced with this dilemma, economists and governments typically ignore the preferences agents actually have, and carry on using a constant discount rate. Yet if this is not what people actually do, does it make sense to discount at all?    

In this and many other ways, economists appear quite happy to ‘correct’ the preferences people have, and instead make judgements on the basis of the preferences they should have. That may be the sensible thing to do, but it seems pretty paternalistic to me.


  1. Agreed.

    It is high time to divorce the concept of a choice function from the concept of a personal welfare/utility function – or at least to make people state the assumption that they are equivalent explicitly.

  2. In his latest post, Chris Dillow addresses a very similar issue from a different side (

    Those questions are fundamental but they are never discussed, although proper debates on issues such as time-preferences, equality or leisure may lead to significant differences in economic policy (with variations of a bigger magnitude than those that result from the choice of a neo-keynesian vs a new-classical macro model by the central bank).

  3. People tend to base a lot of choices, especially fundamental ones, on habits and social conventions (work, marriage, children, etc.). Now, if people think a little about such issues, they may realize that the choice they would have intuitively made is not the one that maximizes their satisfaction.
    Habits-derived choices may be considered as consistent, or even rational, but certainly not optimal.

  4. "I think this is a very good instinct to have, but sometimes it has to be set to one side. Economists should know this, because they often use economic theory in a paternalistic fashion."

    Of course they do this, everytime an aggregate welfare function is used for policy analysis.

  5. In my domain of Complex, High-Consequence Circumstance Enterprises (e.g. the Global Nuclear Energy Enterprise) we have substantial cascades of decision-making that are inescapably not one-by-one optimization choices. The events at Fukushima illuminated decision making on an "among-a-few" basis that needed to address remote possibilities with difficult to agree upon consequence potential.

    Since I've been aware of the neuroscience discoveries about Mirror Neurons, I become increasingly skeptical that individual optimization based calculus makes sense for any important matter outside those governed by the most deeply ingrained habits.

    I'm not deep at all as a student on the micro-economics body of knowledge, but it seems to me that modeling how small groups arrive at decisions under circumstances of varying uncertainty comes a lot closer to examining what seem to be contradictions of self-interest.


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