R E S E R V A T I O N S A B O U T T H E‘ N U D G E ’ P H I L O S O P H Y 1

ecaf_2063 121..122

Philip Booth

The government has embraced the Nudge philosophy. Its enthusiasm is misplaced.It undermines freely chosen paternalistic mechanisms and has no guarantee ofproducing better government decision making about whether to intervene in a freeeconomy.

Keywords: Nudge, libertarianism, paternalism.

The new government seems to have embracedthe so-called libertarian/paternalism of the‘Nudge’ philosophy. It is clearly attractiveto Conservatives because it seems novelwithout appearing to smack of marketfundamentalism. The ideas simultaneouslyappeal to the paternalistic wing of the partywithout posing too much of a problem for themore classical liberal wing.

One reservation that I have about ‘Nudge’is not about the basic underlying idea, butabout the likely problems in implementation.The authors of ‘Nudge’ clearly intend thattheir proposals should be an alternative toovert state regulation, but it is difficult to seethem being implemented that way in practice.For example, in the pensions field,auto-enrolment into personal accounts isgoing to be used in addition to all the currentgovernment interference in the provisionof pensions: we will still have agovernment-provided state pension, a ‘secondstate pension’ and continued regulation andtax relief relating to private arrangements.In addition to all this, people will beauto-enrolled into saving through personalaccounts.

A second problem is that of who decidesthe direction in which to nudge people. Thepolitical elite, for example, wish to nudge theyoung to take out pensions but this risksmaking pension mis-selling compulsory.Young people will be saving in a pensionwhilst paying off a mortgage or even payingoff credit card bills: saving and borrowingwith two different financial institutions at thesame time is an expensive business. Of course,the people who will lose out most are thosewho are not sufficiently sophisticated toshoulder barge the nudger and do their ownthing. Nudging does not resolve the problem

as to whether intervention is a good thing atall. If intervention is misplaced, then nudgingis wrong too. In practice, whether to interveneis just as likely to be decided by pressure fromlobby groups or prejudices of politicians as byincisive economic reasoning. The use ofnudging does not improve the quality ofgovernment decision making.

The best form of paternalism is that whichevolves naturally in society without theinterference of government. That is genuine‘libertarian-paternalism’ to use the phrase thatNudge’s authors use. People generally knowwhen they are not the best judges of their owninterests and they often choose to devolvedecisions to others.

Again, we can use an example from thearea of pension provision. Until 1988,employers were allowed to require theiremployees to join their pension schemes aspart of their terms and conditions ofemployment. It generally satisfied bothparties. A Conservative government then toreup freely negotiated contracts of employmentwhich contained ‘libertarian-paternalistic’clauses so the employees were free to not jointhe schemes. The consequence of thisintervention was the £12 billion pensionmis-selling scandal. The government’s pensionauto-enrolment requirements will be doingwhat employers and employees freely used todecide to do before they were prevented bygovernment.

Another nudging idea from the currentgovernment does not inspire confidenceeither. This is the idea of sending tohouseholds their next-door neighbour’selectricity and gas bills so that you are nudged(or shamed) into cutting down on energy use.It is worth looking at the results of NBERresearch on this kind of policy in the USA:

Economicviewpoints

© 2011 The Author. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford

1. The average change in energy use was just over 1.5% – thisis a very small saving.

2. This translated into a $24 saving a year per household. Asimilar 1.5% saving seems to translate into roughly a £12

saving in the UK – or about £5 per person per year for theaverage household.

3. Low-energy users, on average, increased their energyusage in one study!

4. The average saving includes a group that received monthlyreports on their neighbour’s consumption rather than justquarterly reports. This is significant because the biggestsavings come close to the time when people received theirneighbour’s usage figures. Those receiving quarterlyreports about their neighbour’s usage, in one of thestudies, made savings less than 50% of the savings madeby those receiving monthly reports.

So, if monthly reports on neighbours’ energy use are to berequired, this will be an awful lot of paper, postage and

information collation for a very small saving in energy bills. Ifthe Conservative Party really were both serious and honestabout energy-use issues and not just courting electoralpopularity, they would just propose VAT on domestic fuel atthe standard rate.

All in all, the government would be better focusing on theway in which its own policies nudge or shove people in thewrong direction rather than creating a new form of regulation– albeit one potentially less pernicious than existing forms ofregulation.

1. This article was first published on http://conservativehome.blogs.com/ and isreproduced with permission.

Philip Booth is Editorial and Programme Director, Institute ofEconomics Affairs, and Professor of Insurance and Risk Management,Cass Business School (pbooth@iea.org.uk).

122 r e s e r v a t i o n s a b o u t t h e ‘ n u d g e ’ p h i l o s o p h y

© 2011 The Author. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford