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.
