Understanding Libertarian Paternalism

Libertarian paternalism is a regulatory choice between two opposites - too much intervention or too little of it. It is a 'soft paternalism' that seeks to enhance individual freedom while assisting people to be better decision-makers. This philosophy is based on the belief that well-intentioned interventions by policymakers can support individuals in making better choices without restricting their freedom to choose otherwise.

Real Life Example: Default Organ Donation

One of the most compelling real-life examples of libertarian paternalism is the concept of default organ donation. A study found that while 80% of people surveyed stated they wanted their organs harvested upon death, only 20% had checked the relevant box on their driver's license or communicated their wishes to a loved one. The idea behind the default organ donation is to assume everyone's permission for organ donation unless they actively opt-out. This system has the potential to quadruple the donation pool, as it relies on the default to prompt individuals to consider and decide about organ donation.

Libertarian Paternalism and Behavioral Economics

Libertarian paternalism aligns closely with behavioral economics, a field that studies how people make economic decisions and the factors that influence such decisions. Behavioral economics often reveals that humans are not always "rational agents" as traditionally assumed. Instead, we tend to make sub-optimal decisions due to cognitive biases, time preferences, and other psychological factors. The core idea of libertarian paternalism is to use government interventions to counteract these biases and help people make better choices, particularly in areas like health, finance, and retirement planning.

Challenges and Criticisms of Libertarian Paternalism

While libertarian paternalism aims to balance freedom and improved decision-making, it faces significant challenges and criticisms. Critics argue that it undermines the very principle of self-determination by having authority figures make decisions for individuals. The classic example often used to illustrate the limitations of paternalism is the concept of betting in horse racing. Just as horses’ odds are affected by every bet, government interventions can similarly alter the perceived value of certain choices. In essence, the knowledge incorporated into prices and decisions through governmental actions is not superior to individual judgment.

Practical Application: The Save More Tomorrow (SMaRT) Program

A classic example of libertarian paternalism in practice is the Save More Tomorrow (SMaRT) program developed by Richard Thaler and Shlomo Benartzi. Their goal was to encourage employees to save more for retirement, rather than forcing them to participate or saving less because they feared immediate income loss. The SMaRT plan was designed to overcome the "present bias" - the tendency to value current benefits more than future ones. By delaying the increase in contribution rates until after the next scheduled pay raise, the SMaRT program addressed the short-term inclination to avoid saving.

The key elements of the SMaRT program:

Voluntary participation Automatically increasing contribution rates after a pay raise Opt-out option, allowing individuals to leave the plan at any time

As a result of this program, employees were more likely to save, as the immediate impact of the contribution increase was lessened by the timing of the raise. This principle led to the Pension Protection Act of 2006, which included policies similar to the SMaRT program, offering benefits to employers who adopted these provisions to increase employee savings rates.

Conclusion

Libertarian paternalism is a complex and nuanced concept that seeks a balance between individual freedom and better decision-making. While it presents challenges, especially concerning the role of government and the potential for misuse of authority, the practical applications show its potential to enhance individual well-being in significant ways. Whether in the form of default organ donation or strategies like the SMaRT program, libertarian paternalism offers a framework for improving public policy and enhancing societal welfare.