Behavioral Economics and Liberty

Over at our sister site, Econlog, Art Carden has a post that touches on behavioral economics and its uses for and against liberty. Readers may remember I have written about how behavioral economics is somehow rarely applied to the regulators. Art touches on this tangentially in his Who Nudges the Nudgers?:

the enthusiasts for nudging are almost certainly correct that we believe all sorts of silly things, have all sorts of flawed information, and make all kinds of bad decisions.  A lot of these problems, though, are the results of flawed policies to begin with, policies enacted by the same groups of people we are supposing will nudge us into righteousness.

Art also references Econlog co-blogger Bryan Caplan’s essay, written with Scott Beaulier, that talks about how welfare state programs hurt the poor precisely because they are subject to behavioral economic characteristics:

Within the confines of standard microeconomics, then, manyclaims about the welfare state’s perverse effects cannot be sustained.  [However] the perverse effects frequently attributed to the welfare state are easy to interpret from a behavioral [economic] perspective.  If people overestimate the magnitude of immediate benefits relative to more distant ones, you can actually— on net — harm them by offering them additional immediate benefits.  They already tend to under-invest.  Making their present more livable with cash gifts only amplifies this tendency. Similarly, if individuals systematically over-estimate their own abilities, you could easily harm a student by admitting him to a program for which he is under-qualified.  Blinded byover-confidence, he would be likely to select the best school that accepted him, scarcely considering the possibility that he will be out of his league.

Looking at the welfare state from a behavioral standpoint lays the groundwork for a stronger claim: Potential welfare recipients’ deviations from neoclassical assumptions tend to be especially pronounced.  If the average American falls short of the neoclassical ideal, the average recipient of government assistance does not even come close.  To justify this generalization, we draw on the large literature on “pathological” behavior among the poor.

As with many social science theories, they do not uniformly support or undermine onepolitical system.  Rather, they only do so when selectively applied.  Behaviorial economics can provide strong support for the market and liberty.