The Knowledge Problem of New Paternalism

Mario Rizzo and I have recently published another article on the new paternalism, titled "The Knowledge Problem of New Paternalism," in BYU Law Review. The article lacks an abstract, but here's a lightly edited portion of the introduction:

The “new paternalism” spawned by behavioral economics faces a severe knowledge problem akin to the knowledge problem that Friedrich Hayek argued afflicts centrally-planned economies. If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough.

This article should be taken as a companion to our previous article, "Little Brother Is Watching You: New Paternalism on the Slippery Slopes" -- which I've promoted with a series of excerpts on this website. The two papers draw on many of the same aspects (and flaws) of the new paternalist literature, but with different critiques. "Little Brother" emphasizes the vulnerability of new paternalist laws to expansion, while "Knowledge Problem" emphasizes the high level of knowledge required for such laws to achieve their ostensible goals.

There is another important link between the two articles: the knowledge problem can exacerbate the slippery slope problem. Recall that the goal of new paternalism is to make targeted people better off by their own standards or according to their own preferences. But when government planners go about crafting policy, they will lack the necessary knowledge of targeted people's preferences. As a result, they will tend to rely instead on their own preferences, or those of other interested parties, instead. That is the beginning of a slippery slope toward implementing their own preferences in other ways as well.

Cross-posted at ThinkMarkets.

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Communist Paternalism

It's scary how many people could draw exactly the wrong conclusion from this:

When the Soviet empire began to unravel in 1989, Cuba was hit with serious food and fuel shortages. From 1991 to 1995, people were getting only about 1800 calories a day and had to walk or cycle wherever they needed to go.

The result was an average drop in body mass index of 1.5 units, and a halving of the obesity rate to just 7 per cent. In the years that followed, deaths from potentially fatal diseases fell dramatically - diabetes by 51 per cent, coronary artery disease by 35 per cent and stroke by 20 per cent...

In countries like Canada and the US, where obesity rates are around 30 per cent, the gains from population-wide weight loss would be even greater, the authors argue.

I offer two possible conclusions:

1. People would be better off if the U.S. adopted economic policies more like those of communist Cuba.

2. People have values other than maximizing their health.

I leave it to the reader to guess which conclusion I favor.

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Rum Thoughts

I recently finished reading -- and enjoying -- And a Bottle of Rum: A History of the New World in Ten Cocktails. It's just what it sounds like. Each chapter is named after a rum drink, from kill-devil through the mojito, each drink representing an era of our history. Lots of fun for fans of history, economics, and strong drink. I won't offer a full review, but I wanted to post a couple of my favorite passages before passing the book on to a friend. On how rum is made:

Distillation concentrates and intensifies the subtle tastes found in the original low-alcohol product. Brandy has thus been called the distilled essence of wine, and whiskey the distilled essence of beer.

And rum? It is, as we shall see, the distilled essence of fermented industrial waste.

And on rum's distinctly American qualities:

Bourbon fanciers, who often claim for their tipple the title of "America's spirit," drink one of the most regulated spirits known. To be labeled bourbon, it has to be made with a certain percentage of corn and aged in a certain kind of barrel. But excessive regulation is not the spirit of America. Unrestricted experimentation is. Rum embodies America's laissez-faire attitude: It is whatever it wants to be. There have never been strict guidelines for making it. There's no international oversight board, and its taste and production varies widely, leaving the market to sort out favorites. If sugarcane or its by-products are involved in the distillation process, you can call it rum. Rum is the melting pot of spirits -- the only liquor available in clear, amber, and black variations.

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State vs. Community

I really liked this post by Jonah Goldberg (linked by Arnold Kling):

... I don't know that you should be against building community and helping the community. I'm not against either of those things. What I generally (though not absolutely) oppose are efforts to build the state while invoking the language of community as if the two are the same thing. The state isn't the community and the community isn't the state.

Exactly right. However, I want to quibble with what comes next:

And what I passionately and absolutely oppose in almost every instance (freeing slaves, smashing Jim Crow, are good exceptions to this rule) are efforts to destroy traditional community with inorganic state-imposed customs all the while claiming to be on the side of community.

My problem is with the parenthetical, which implies that slavery and Jim Crow were instances of organic community traditions that the state had to dismantle. On the contrary, both were the products of heavy state involvement. Slavery was enforced by means of taxes and the conscription of able-bodied men (including non-slave-holders) to chase down runaway slaves. Jim Crow prohibited everyone (including the non-bigots) from freely associating and doing business with blacks on equal terms with whites. This is not to say that there weren't community norms that favored discrimination; clearly there were. But those norms were buttressed by the power of the state, and they might have crumbled sooner without state support.

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Monkey Prostitution?

If this is prostitution, then most women I've dated are prostitutes:

The [macaque] males use grooming as a form of currency to buy sex from the female, the study found. ... Left to her own desires, a female macaque mates about 1.5 times an hour, but that rate jumps to 3.5 times an hour when the male partner first provided grooming services, the study found.

What scientists call "currency," the rest of us call "foreplay."

Seriously, the problem here is that personal services are not currency. I don't know what would qualify as prostitution in a barter economy, but I think at minimum the female would have to receive, in exchange for sex, something she could exchange for something else instead of using it herself. Unless the male macaques were handing out day-spa gift certificates, this doesn't qualify.

UPDATE: This, however, does qualify as monkey prostitution:

Something else happened during that chaotic scene, something that convinced [Keith] Chen of the monkeys' true grasp of money. Perhaps the most distinguishing characteristic of money, after all, is its fungibility, the fact that it can be used to buy not just food but anything. ... What he witnessed was probably the first observed exchange of money for sex in the history of monkeykind. (Further proof that the monkeys truly understood money: the monkey who was paid for sex immediately traded the token in for a grape.)

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More on Waldfogel

I still haven’t read Joel Waldfogel’s book. But Peter Klein attended a lecture by Waldfogel, and he gives a somewhat more specific statement of Waldfogel’s market-failure argument:

Under increasing returns, if the number of potential users of a particular good or service is sufficiently small, and the fixed costs are sufficiently large, then the good or service will not be produced even though there exist users whose willingness to pay exceeds the marginal cost of production.

On reading this, I am further convinced of my initial reaction, particularly points #2 and #6. This is not a true market failure. Yes, one condition for economic efficiency is that more of a good should be produced if willingness to pay exceeds the marginal cost of production. But that’s only true given that the fixed costs have already been incurred. To justify incurring those fixed costs, it must be true that the consumer and producer surplus (once the fixed costs have been incurred) exceed the fixed costs. To put it another way, fixed costs are actually marginal costs of producing the first unit.

Perhaps the “increasing returns” are supposed to be doing some work I’m not aware of. The term can be used in different ways. If Waldfogel means a situation in which average costs are always decreasing (possibly because marginal costs are falling or constant), that does raise a possibility of market failure – specifically, the kind we usually refer to as “natural monopoly.” But this is not a novel discovery, and in any case, it doesn’t indicate that we have too little product diversity. On the contrary, the natural monopoly is a case is in which it’s efficient to have a single producer (the inefficiency arises from pricing behavior after the monopoly has been achieved). To justify having a second producer with a differentiated product to satisfy minority preferences, the gains to the minority group from having their preferred product must exceed both the fixed costs of production and the added cost for majority consumers who no longer benefit from greater economies of scale.

I haven’t thought the logic all the way through, but if anything I’ll bet there’s an argument that the market could produce too much product diversity from an efficiency perspective. In fact, as I recall, this was the argument made by the theorists of monopolistic competition: that competition in the context of a heterogeneous product leads firms not to fully exploit economies of scale, leading to inefficient excess capacity.

I should emphasize again that since I haven’t read the book, there may be nuances to the argument I’m missing.

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Waldfogel's Wiffle Bat

Joel Waldfogel criticizes the market because it doesn’t produce enough diversity. “For small groups with preferences outside the norm, the market often fails to deliver.” The argument is simple enough: some goods have large set-up costs or fixed costs of production, which means you need a large group of customers to justify incurring them.

I have several reactions.

1. While Waldfogel is criticizing the market for producing too little product diversity, Barry Schwartz is criticizing it for producing too much. Can’t we throw these two arguments together and watch them explode? Or will market critics find a way to embrace them both?

2. As far as I can tell (admittedly, I haven't read Waldfogel's book yet, so I'm going on his Slate column), Waldfogel does not demonstrate any kind of market failure as economists understand that term. For it to make sense to produce any product, people must value it enough to cover the fixed costs. Otherwise, it’s inefficient to make it; the costs of making it would exceed the benefits. That products desired by too few people don’t get produced is a success of markets, not a failure.

3. A system that forced us to satisfy all preferences, however rare, would be impossibly expensive. There are increasing costs and diminishing gains to satisfying ever more idiosyncratic preferences, so the line must be drawn somewhere. So how should the line be drawn? Seems to me that weighing fixed costs against the strength of preferences, in the form of willingness to pay, is the logical principle – and that is the market principle.

4. Talk about glass-half-empty thinking. For the most part, the market produces an incredible array of products catering to shockingly narrow preferences. For instance, I presume – and hope – that the fraction of the public interested in incest-fantasy pornography is exceedingly small. Yet the market provides; do a quick Google search for “incest porn” if you doubt me (and if you dare). You can criticize that outcome on other grounds, but don’t call it tyranny of the majority!

5. As Adam Smith observed, specialization is limited by the extent of the market. The more well developed markets become, and the more people and societies who participate in them, the greater are the opportunities for satisfying idiosyncratic tastes. Entrepreneurs, driven by the profit motive, have an incentive to exploit each niche as soon as there are enough potential customers to justify satisfying their preferences. A preference shared by only 0.01% of the population might initially go unsatisfied in a small market order, but as the population expands, it becomes ever more likely the preference will be satisfied. Isn’t this an argument for expanding the market order?

6. Waldfogel is committing the Nirvana fallacy – that is, condemning the market because it falls short of perfection. In this case, Nirvana is apparently a state in which all preferences are perfectly satisfied. That option is not on the table. So what institutional arrangement would do a better job? Would Waldfogel advocate having the government force firms to provide more options, despite the inefficiency of doing so (see #2 above)? Interestingly, Waldfogel blasts some market outcomes for how similar they are to the results of the political process! So the argument is that sometimes markets are almost as bad as government? Is this a serious criticism of markets, really?

UPDATE: Tyler Cowen likes the book despite disagreeing with its central thesis. I'll have to read the book just to find out what redeems it. For now, the positive claim seems true but unremarkable, and the normative claim seems silly. Maybe the book has lots of cool examples.

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Well, This Is Refreshing

This may be the first time I've heard of a celebrity -- or anyone else for that matter -- apologizing for wearing communist paraphernalia.

Cameron Diaz has apologized for carrying a bag emblazoned with a red star and the Communist motto "Serve the People" during a publicized visit to Machu Picchu.

"I sincerely apologize to anyone I may have inadvertently offended. The bag was a purchase I made as a tourist in China, and I did not realize the potentially hurtful nature of the slogan printed on it," Diaz said in a statement.

The bag, like the popular Che Guevara T-shirts, are fashion items now worn by people often oblivious of their full political messages. Sensitivities are higher in Peru, though, where the Maoist Shining Path insurgency left nearly 70,000 dead.

In her statement, the "Shrek" star also said: "I'm sorry for any people's pain and suffering and it was certainly never my intention to reopen what I now know is a painful wound in this country's history."

Good for Cameron Diaz. But I wonder if she'll continue to carry that bag in countries without a painful communist legacy.

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Icons and Irony

Intellectually, I’m with David Boaz and Radley Balko: it’s outrageous that communism is not treated with the same revulsion as Nazism when people wear its symbols on their skin and clothing. But emotionally, I’m in tune with Jim Henley and Julian Sanchez: somehow the commie stuff doesn’t bother me as much.

Julian seems to think that intentions make the difference: communism just turned out to be bad, whereas Nazism had evil goals from the get-go. This rationalization doesn’t quite work for me. Maybe it would have worked as an excuse in 1945. But in 2007, anyone who doesn’t understand that communism is murderous and brutal is either willfully blind or woefully ignorant. Besides, even Nazism can also be understood as an outgrowth of ignorance: the belief that economics is a zero-sum game, so that if the Jews are getting wealthy it must be at “our” expense.

If I had to justify my differing emotional reaction to commie iconology, I would appeal to the possibility of irony. When someone wears a hammer & sickle on a hoodie they bought at Urban Outfitters, I can at least imagine the wearer recognizes how ironic that is. But when I see someone sporting a swastika, it’s hard for me to believe it’s just a goof (“No, I wear this as a commentary on the idiocy of racism” – yeah, right). And my emotional reactions do seem to track the irony; when I suspect someone wearing a Ché T-shirt actually might support Ché-like behavior, I experience a revulsion very similar to that which I’d have for a swastika.

Of course, Nazism is not just about racism – it’s also about government control of the economy (remember, Nazism = National Socialism) – but that’s not its primary mental association; racism (or anti-Semitism) is. Communism, however, is primarily about the economic system, and thus Soviet icons on consumer merchandise create immediate dissonance in a way that Nazi icons cannot.

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A Materialist Take on Religious Doctrine

Eugene makes the excellent point that passages from religious texts don’t tell us much about current religious practice. While the Koran includes many passages that appear to justify violence and war, the same is true of the Bible. And while modern-day interpretations of the Bible tend toward the peaceful, that was not always so, as the Crusades and the Inquisition demonstrate. As Eugene says, “Modern Christianity and 1600s Christianity use pretty much the same holy works; the difference in militance between the two stems not from the words as such, but from the way Christians understand those words.”

What Eugene doesn’t address is why, when faced with religious texts that can justify both violent and peaceful behavior, people favor one interpretation over the other. Why is modern Christianity relatively peaceful, while modern Islam is less so? My take on this is admittedly materialist: I think religious interpretation is largely determined by economic conditions. Christianity happens to have arisen in parts of the world characterized by capitalism. A capitalist system encourages positive-sum games, in which one person’s gain need not be another’s loss. Members of other groups can be seen as potential trade partners rather than rivals. The resulting attitude naturally tends to be more peaceful (though by no means entirely peaceful), and Christian texts have been interpreted in a manner consistent with that attitude.

Islam, on the other hand, happens to coincide with areas of the world that lack capitalist economies. Such economies are characterized by zero-sum games, in which one person can gain only if others lose. Members of other groups will tend to be seen as competitors for wealth and resources; their successes will be viewed as the cause of one’s own misfortune. The resulting attitude naturally tends to be more violent and militant (though again, not entirely so), with a corresponding interpretation of Islamic texts.

An alternative to my explanation, in which causality runs from economic system to religious interpretation, is that religion has shaped economic institutions. And this is undoubtedly true to some extent. In Europe, for example, the competition between state authority and church authority during the Middle Ages fostered the growth of freedoms that laid the foundation for capitalism. But notice that this explanation has little to do with actual religious doctrine; it was the existence of a strong Christian church, not Christian thought per se, that shaped economic institutions. At the time, Christian doctrine was not notably peaceful. To the extent that Christianity is a peaceful religion now, I suspect that’s more the effect of capitalism than the cause.

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