Dynamist Blog

For "Your" Own Good?

With its insights into the ways people act inconsistently or against what they say they want, behavioral economics can provide useful ideas for incrementally improving management, and self-management. Richard Thaler, for instance, has turned his research into the successful and practical Save More Tomorrow program to encourage employees to put their future raises (or portions of them) toward retirement savings.

Some economists, however, have rushed to apply behavioral economics not to private dilemmas but to public policy, arguing that inconsistent preferences need to be corrected with paternalist government policy. In a smart, careful new Cato Institute study economist Glen Whitman argues that the paternalist notion of "internalities" has serious flaws--flaws analogous to those identified in traditional "externality" theory by Ronald Coase in his breakthrough 1960 paper, "The Problem of Social Cost" (PDF file here). Unlike many people who throw around Coase's name, Whitman gets that paper right and applies it well.

UPDATE: More on behavioral economics at Marginal Revolution. It's a mistake to view the field as primarily about public policy. It isn't. But people who are primarily interested in government policy (pro or con) naturally apply any new social science discoveries to that interest.

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