Libertarian Paternalism, Externalities, and the ‘Spirit of Liberty’: How Thaler and Sunstein are Nudging Us Toward an ‘Overlapping Consensus’

Abstract:     
In their 2008 book Nudge: Improving Decisions About Health, Wealth, and Happiness, Richard Thaler and Cass Sunstein use research from psychology and behavioral economics to argue that people suffer from systematic cognitive biases. They propose that policymakers mitigate these biases by framing people’s choices in ways that help people act in their own self-interest. Thaler and Sunstein call this approach “libertarian paternalism,” and they market it as “The Real Third Way.” In this essay, I argue that the book is a brilliant contribution to thinking about policymaking, but that “choice architecture” is not just a solution to the problem of cognitive biases. Rather, it is a means of approaching any kind of policymaking. I further argue that policymakers must take externalities into account, even when using choice architecture. Finally, I argue that “libertarian paternalism” can best be seen as motivated by what Sunstein has celebrated in his work on constitutional theory: a humility about the possibility of policymaker error embodied in Learned Hand’s famous aphorism about the “spirit of liberty”; and an attempt to reduce social conflicts by searching for what John Rawls called an “overlapping consensus.”

Number of Pages in PDF File: 33

Keywords: Richard Thaler, Cass Sunstein, libertarian paternalism, behavioral economics, cognitive bias, choice architecture, savings policy, debiasing, bounded rationality, willpower, status quo bias, externalities, minimalism, trimming, John Rawls, overlapping consensus, Learned Hand, spirit of liberty

JEL Classification: D60, D62, D63, E21, K00, K39

Accepted Paper Series