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Monday, October 14, 2013

Strategic CSR - Milton Friedman

While I was reading a review of the book by Cass Sunstein (Simpler: The Future of Government) in the article in the url below, this quote caught my eye:
“Milton Friedman didn't need behavioral economics to know that each of us typically spends our own money on ourselves more wisely than a stranger spends other people's money on us.”
My first instinct was to agree. After all, government has certainly demonstrated an inability to predict market outcomes. And, as the author of the review indicates:
“[The author] fails to explain why the irrational and impulsively childlike people who are apparently the nation's citizens will elect a government that is itself not irrational and impulsive—or why government officials won't exploit, for their own corrupt ends, the people's cognitive weaknesses.”
On second thought, however, I know that it is also true that we are often incapable of making good decisions ourselves. Because human decisions are driven by our inherent fallibilities—irrationality, biases, cognitive constraints, etc.—we often make short term decisions that do not serve our long term interests. This happens even when we are trying to be rational—there are good reasons, for example, why most people fail to save sufficient money for their retirement.
Given that we are living in a system designed and operated by humans and that, as I tell my students in class, any system involving humans is flawed to some degree; where is the balance between government oversight and individual enterprise? Sunstein helps push the debate in a helpful direction. He does so by drawing on behavioral economics—the foundation of many ideas in his previous book, Nudge, written with Richard Thaler (Chapter 8, Case-study: Nudge, p485):
“Mr. Sunstein deploys behavioral-economics notions such as ‘framing effects’ (our interpretation of facts is affected by how they are presented to us) and ‘status-quo bias’ (we prefer the status quo, simply because it is the status quo, over potential alternatives) to promote what he calls ‘libertarian paternalism.’”
The beauty of many of the ideas discussed in Nudge and Simpler is that they preserve the illusion of choice, while also generating more socially-valuable outcomes:
“Government, he thinks, should change behavior using ‘nudges’ instead of commands. Regulations can tap into people's psychological quirks and prompt them to choose ‘better’ behaviors—while still leaving them free in many circumstances to act differently. Cigarette packages with grisly images of cancer-ridden lungs are an effort to nudge—rather than command—people not to smoke.”
Needless to say, the author of the review (it is published in The Wall Street Journal) feels that, while Sunstein’s ideas are more palatable than most advocates for “a paternalist state,” his view of the world places considerably more faith in the abilities of individuals and the power of the market:
“[Sunstein’s] faith in government combines with a scanty appreciation of the creative and disciplining powers of markets to render his case for active regulation, whether imposed through nudges or commands, less than persuasive. The pages of ‘Simpler’ bubble over with examples of adults' weak capacity to choose wisely, which, in Mr. Sunstein's view, calls for more expansive government.”
I find that, as I listen to the two sides in this debate and try and work out which side would generate the most optimal outcomes, it is usually helpful to keep Friedman’s core instincts in mind. His ideas remind me that it is important to work within the constraints of human nature as it is, rather than as we would wish it to be.
For those who haven’t seen it, here is a fascinating interview of Friedman on the TV program Donahue, from 1979:
Take care
David Chandler & Bill Werther
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Thank You For Smoking
By Donald J. Boudreaux
April 24, 2013
The Wall Street Journal
Late Edition – Final