Listening to Professor Thaler I was reminded of the claim made by many socialists in the past – Lenin being perhaps the most prominent – that since private firms routinely engage in ‘planning’ there should not be any concern about the state ‘planning’ on a society wide scale. Yet, as Hayek noted on numerous occasions, to recognise that ‘planning ‘ is an essential element of a progressive society tells us nothing about ‘who should plan’ and ‘for whom’. Likewise, to acknowledge that ‘nudging’ strategies may be an aid to effective decision-making in the context of limited rationality, tells us nothing about ‘who should nudge’ and ‘for whom’. It does not follow that since some nudging may be desirable that we should automatically favour governmental nudging. On the contrary, there are several reasons to suggest that ‘private’ nudging should in fact be preferred to the statist variety.
First, in a context of limited knowledge and limited rationality, we do not know which nudges are most appropriate and for which particular types of behaviour. It makes sense, therefore, to rely on a decentralised process which reduces the possibility of erroneous nudges being imposed on a society wide basis – and this requires that no particular nudge is imposed by law. In the same way that planning by private firms is preferable to planning by government’s precisely because it is competitive, decentralised and voluntary planning, so competitive nudging in markets and civil society is to be preferred to ‘central nudging’ by the state. That the consequences of misplaced nudging by government agencies tend to be far more pronounced than equivalent failures in the private sphere is all too evident in what has happened to savings ratios across much of the developed world. It is odd, to put it mildly, that governments which have ‘nudged’ people towards immediate consumption through a combination of inflationary monetary policies and taxes on capital should now be trusted to encourage more frugal habits.
I recommend the entire article.