Windows and Winds

Here’s a way to fix run-riot capitalism that is wowing policymakers in the West

Ever since dross communism as practised behind the ‘iron curtain’ collapsed in 1989, liberals put off by crass capitalism have gone pink and purple in their search for a Third Way. But who would have thought that behavioural insights of the sort found in Vance Packard’s 1957 classic The Hidden Persuaders could present an option? In Nudge, that’s what Richard Thaler and Cass Sunstein do. They propose an interesting option. They’re behavioural economists, and they offer ‘libertarian paternalism’ in this book (updated to include lessons from the US Credit Crisis in this red-hot 2009 edition).

Broadly, libertarian paternalism is about the gentle re-direction of incentives, those little eggers-on which have been sliced and diced for study ever since they were blamed for the cop-outs of the command economy. Remember the Soviet window factory? Its assigned goal was not to make money, market its wares, install window panes or do anything as wishy-washy as satisfy customers, but to meet hardy tonnage targets. So, while America’s Microsoft was busy installing Windows as a software interface on your personal computer, the Soviet factory was dutifully churning out vast quantities… of solid blocks of glass!

Market incentives do a far better job of maximising satisfaction, clearly, and these work their wonders through free market competition that assures everyone freedom of choice.

Often, however, people take greater liberties than are good for them, and that’s where Thaler and Sunstein intervene—to reframe choices. If mobike riders insist it’s their own sweet choice whether to wear safety helmets or not, just make them get special permits for it. If it’s wind in their hair they want, wind in their hair they get—provided they pass stricter driving tests and pay extra for insurance cover. That’s what you call a nudge. If it sounds manipulative, it sure is. But this isn’t hidden, it’s open persuasion.

The American banking industry would be a good place to test the idea of nudging things along. ‘Market forces did not prevent [the subprime credit crisis], so there have been calls for intervention. Some demand an end to predatory lending, but since loans don’t come stamped ‘predatory’, it’s hard to implement any such ban…’ write the authors. Instead, they suggest that the terms of all loans be made to fit a format fixed by neutral data crunchers, a move which by itself would nudge lenders not to hoodwink the innumerate.

That’s a nudge that could work at the retail level. But, alas, it doesn’t address the core of the current crisis, which, apart from prompting banks to adopt a hybrid cushion of safety for themselves right now, ought to raise questions about how interest rates, risk labels and asset value delusions distort incentives. There’s an element of deja vu here. The Soviet window factory eventually gave up making its giant blocks of glass, since all it needed was to report tonnages (!), an exercise which only took ink as an input. The diktat of an all-so-mighty ‘proletariat’ had suborned the impulse for the truth. It’s known to happen. It’s also why America’s steely exaltation of its own idea of ‘liberty’ often feels so eerie.

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