We’ve Been Nudged: The Effects of the Downturn on Dignity and Responsibility

Abstract

The economic downtown that began in 2008 has had tremendous consequences in the United States (and abroad), including declines in traditional economic variables such as gross domestic product, the stock indices, and employment, as well as the broader measures of well-being detailed in other chapters in this book. Scholars will argue for years to come over the true causes of the downturn - how much was due to imprudent practices on the part of business (chiefly, financial concerns), irresponsible behavior on the part of consumers and borrowers, and ill-designed regulation and intervention by the government - as well as the effects of various aspects of the government response.

Regardless of the relative validity of these factors, the common perception seems to be that private institutions - the market in general and the financial sector in particular - failed, and government intervention is necessary to serve the functions that private institutions used to provide. As a result of this perception, the American people may be more open to increased regulation of economic and financial activity, including state intervention in personal decisionmaking, as typified by the “libertarian paternalism” made popular by the book Nudge and incorporated into proposed federal legislation to enact broad reform of the financial sector. I argue below that we should not be too hasty to surrender choice over personal decisions to the state, based on criticism of libertarian paternalism and its academic basis in behavioral law and economics from the viewpoint of dignity and autonomy as described by 18th century philosopher Immanuel Kant. I discuss the specific work in the area that inspired the most recent attempt at financial regulatory overhaul, and show how its features are consistent with the broader literature from which it derives, and also how it suffers from the same flaws epistemic and ethical shortcomings. Ultimately, I argue that the perception of the failure of the market that has led us to question our own choices results from a misunderstanding of the role of the market in society, and an improved understanding of the market will serve to reassert the importance of individual choice and dignity over the supposed benefits of government decisionmaking on the behalf of consumers.

Keywords: Dignity, Choice, Paternalism, Libertarian Paternalism, Behavioral Economics, Financial Reform, Financial Markets, Lending, Consumer Credit

JEL Classification: A13, G2, H11