Driving change

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29th August, 2009 Leave a Comment

When Transport Minister Steven Joyce released a major review of the roading system this week, he said the review contained 60 initiatives – but, in the same sentence, added that he was “not intending to introduce anything like that number”.

Joyce’s haste in offering reassurance that he had not been suddenly overwhelmed by the ethos of the so-called Nanny State, shepherding through laws to govern all aspects of individual behaviour, reflects a debate occurring in economic and political circles internationally.

The worldwide economic meltdown has allowed far more leeway for government interventions. As the Harvard Business Review recently calculated, industries and sectors representing more than a third of the US economy are currently being reshaped by government. In Europe and Japan, the percentage is likely to be even higher.

Not only markets themselves but also, rightly or wrongly, the theory of markets have taken a battering in the recession. The need for effective regulation has been demonstrably proved. People have been reminded that “good” government intervention is for everyone’s benefit, although in the interests of freedom and innovation, there must always be room for vigorous debate about the definition of “good”.

The idea that small interventions, rather than punitive action, could be made to encourage people to amend their behaviour was summed up in the influential 2008 book Nudge, by economists Richard Thaler and Cass Sunstein. Britain’s Conservative Party leader, David Cameron, included it on the summer reading list for his MPs, and Sunstein now heads US President Barack Obama’s Office of Information and Regulatory Affairs.

Nudge argued that although economists base their models on people making rational choices, real life sometimes gets in the way of being rational. It is common for people to make choices that, in fact, are not in their own interests. They will, for example, eat bad food and too much of it, even though they know obesity may threaten their health. They might spend too much money and save too little. Or drink too much.

The dilemma for governments is what type of interventions to make to alter people’s behaviour while not distorting other factors. The premise of Nudge was that a little push in the right direction is sometimes enough for people to make a small change that can have a large effect, especially if lots of people engage in that change.

A perfect example of where Nudge economics might have worked – but was never given the chance – was New Zealand’s smacking debate. There should have been a way for society, which always seemed reasonably united on the desired outcome, to have reached it without some parents being left risking criminal prosecution and feeling bereft of child-discipline options.

Thaler and Sunstein gave the name liberal paternalism to the brand of economics they wrote about. Whatever branding it goes by, we already live it every day. When you get a text from your doctor reminding you of an appointment the next day, and are required to reply “Yes”, it’s the Nudge theory at work. The doctor has reminded you of the appointment and you, by replying, have confirmed a contract, albeit unenforceable. But it does mean you are more likely to show up, and the doctor to have less unpaid downtime.

For any government to make effective interventions, it first needs very good information to identify exactly what the problem is and, second, to understand the likely effects of its policy. One of the most commonly cited consequences of an ostensibly well-meaning programme was the introduction of American subsidies for crops to make biofuels – without anyone foreseeing that farmers would then rip up food crops, because they had been incentivised to do that. Inevitably and, in some cases, tragically, the price of food rose.

The trick is always to try to avoid both heavy-handed blind paternalism and reckless liberalism. But the old option of often doing nothing about intractable environmental or health problems is no longer sustainable. It may be individuals who pay the highest price for poor behaviours – like binge drinking – but society, too, pays a considerable cost, especially in health and welfare.

Some problems are still beyond the reach of governments, as Samuel Johnson has long reminded us: “How small, of all that human hearts endure/That part which Laws or Kings can cause or cure.”

But sometimes all it takes to set us on the right road is a good nudge.

29th August, 2009 Leave a Comment

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