Prepare to be nudged

Improvements to the “magic of the market” formula for maximising societal welfare involve intelligent “choice architecture” to address human frailties

According to Franklin Foer and Noam Scheiber, a new theory of state is in its embryos. In a piece for The New Republic they state that

Obama has set out to synthesize the New Democratic faith in the utility of markets with the Old Democratic emphasis on reducing inequality. (Nudge-ocracy: Barack Obama's new theory of the state, May 06, 2009)

They trace the genealogy of this new theory from the 70s with the disilllusionment of the “Old Democrat” establishment figure Charles Schultze with the command and control apparatus of the New Deal/New Society to the reinvention of government and pro-market stances of the “New Democrats” led by David Osborne and Bob Rubin to the current one unfolding. They say

…there is…certainly a sensibility that reigns in Obamaland. Perhaps the easiest place to see it is in the administration's fondness for behavioral economics, the branch of the dismal science that recognizes that humans aren't utility-maximizing utomatons, but flawed creatures who often screw up simple calculations and struggle with self-control. The key behavioral insight is that the way we frame choices matters enormously.

Much of this ethos finds its inspiration from Nudge, a book by his former colleagues at the University of Chicago Richard Thaler and Cass Sunstein (the latter was appointed to head up a regulatory review directorate in the influential Office of Management and Budget).

Foer and Sheiber dissect key decisions of the first 100 days of Obama in office over policies ranging from the banking and housing rescue plans to healthcare, education and the environment in which a preference for market mechanisms to state intervention has been evident to the chagrin of Old Democrats who prefer robust intervention. This is a brief synthesis:

1. where Keynesians like Paul Krugman would have preferred nationalising the banks, Tim Geithner and Larry Summers offered incentives and “nudges” to entice public private partnering to help determine the price of toxic assets,


2. where forcibly rewriting home loan contracts would have been more direct, subsidies were offered to creditors to provide easier terms to borrowers most at risk of default,


3. where the unions preferred beefing up public health and education systems, public options involving competition from private providers were enshrined as a way forward,


4. where environmentalists would have preferred picking winners, a cap and trade system was espoused.

The intent of these policies is not to do away with market mechanisms, but rather to correct for human frailties by offering incentives a.k.a. “nudges” to prompt individuals in the right direction. Foer and Scheiber state that

(i)n the grand scheme of things, these "nudges" were minor tweaks designed to elicit more rational behavior … Not all of Obama's nudges fall out of behavioral economics, per se. Some involve changing incentives to encourage certain activities and discourage others. Some involve fostering competition to trigger innovation. But, as in the behavioral examples, the Obamanauts typically have an outcome they want to promote. And, like the behaviorists, they instinctively recoil from imposing it unilaterally. So, instead, they monkey around with the choices people face, seeking to influence decision-making rather than mandate decisions.