Is Libertarian Paternalism an oxymoron?

In order to understand the meaning of libertarian paternalism, we must understand each of the components. One definition of libertarianism is “the only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others” (Mill, 1859, p. 13). More simply, libertarianism is dependent on maximising freedoms in order to allow the free market to act efficiently. Arguments against libertarianism point to market failures derived from the irrational decisions people make. These are best explained through biases such as loss aversion (losing an object hurts more than gaining it brings pleasure) and overconfidence (people expect outcomes to be better than reality), which mean that the markets are not fully efficient, and therefore are unsuitable to run society alone (Kahneman and Tversky, 1974).

Paternalism has been defined as “the interference with a person's liberty of action justified by reasons referring exclusively to the welfare, good, happiness, needs, interests or values of the person being coerced” (Dworkin, 1972, p. 65). In other words, decisions are made on the behalf of the people and freedoms are limited for the good of the people. For example, the enforcement of seatbelts is considered paternalistic since the government has decided what is best for us and forced this decision upon everybody. However, issues with paternalism include the personal concern that someone else is deciding what is best for you. Welfare is a very subjective measure, and who is to say the government is not wrong. This leads to government failure, which often occurs when a state intervenes far too much.

In order to combat the issues with both ideologies, libertarian paternalism was created by Cass Sunstein and Richard Thaler in 2003, and popularised by their bestseller ‘Nudge’ in 2008. The basic principle is to improve welfare by ‘nudging’ consumers to make decisions that are best for them. The classic example is the arrangement of food within a cafeteria. How should the food be laid out? Should the food be put out randomly? Should the food be ordered by category and food type? Should (as the two argue) the food be laid out to maximise the health of those eating? Perhaps placing salad in front of fried food would increase salad consumption and improve welfare. Importantly, consumers always have freedom to choose since the cost of ignoring this nudge is negligible (in this instance probably a couple of seconds of time to reach over). Therefore, they believe they can claim this mild intervention as libertarian. The paternalistic side is much more clear as the choice architect (the cafeteria planner) decides what is best for the consumer and influences their decisions. (Sunstein and Thaler, 2003, p. 176)

There has been much debate as to whether libertarian paternalism is possible. Hayek once suggested that any government intervention inevitably leads to totalitarianism (Hayek, 1944). This would suggest that libertarian paternalism could never remain libertarian. Others go further. Some claim that the use of nudges can never be considered libertarian since there is a ‘cleverly manipulative and often invisible rather than overtly coercive’ power being exercised over society - contradicting Mill’s definition (Hurd and Baum, 2016, p. 40). The key response to this argument is that there is no possible alternative. In the example of a cafeteria, there is no sensible way to lay the food out without causing a nudge. The only possible way (a random layout) would never be plausible since it would be an inefficient system which could never be adopted. Therefore, there is a suggestion that decisions made by consumers can never ‘predate the choices made by planners’ (Sunstein and Thaler, 2003, p. 5). Therefore it is impossible to (as a libertarian might suggest) lay the food out in the way the consumer would themselves since consumers have no previously untainted preferences. Because of this, the idea presented is that consumers must be nudged, and that the government and firms should ‘nudge for good’.

A second example is pension contributions in the US. Employers often offer a variety of plans which can be chosen by the worker. However, what is the default option? Data shows that people stick with default options, and therefore participation in the programme can increase up to 25% if pensions were an opt-out system (Sunstein and Thaler, 2021, p. 11). This is because of status-quo bias (in effect laziness). The argument continues that there must be a default, and that this can simply be used to direct people towards the “best” choice. The argument in response is often that there is no objective system to decide what is “good” or “bad” behaviour (Randazzo, 2013). Therefore, planning an opt-out system could cause more harm than good and become a massive government failure. However, perhaps this is less convincing since data shows fewer are willing to opt-out of pensions than will opt-in (Sunstein and Thaler, 2003, p. 179). Therefore, there is a suggestion that a free market would be more inclined to have a pension. In this case, is this nudge not the most libertarian option? The only way to extend freedom of choice is to enforce a decision by having no default. Of course the irony is that this would reduce freedom itself. 

Because of the key disagreement, some (such as the IEA) have decided to call this method ‘new paternalism’. Whichever label is used, it has only grown in popularity. The UK government has created the ‘Nudge Unit’, using some of these methods. Additionally, Thaler won the Nobel Prize for Economics for his contributions to behavioural economics - giving his argument further credibility. 

To answer the question whether libertarian paternalism is an oxymoron, this author believes that it is not. While many may disagree, I believe it has been shown that pure libertarianism is unrealistic - if not impossible. This form of paternalism promotes freedom of choice and does not exercise  power to any significant extent. If we assume governments must exist, libertarian paternalism represents the maximum freedom possible, while nudging people to make socially and personally beneficial decisions.