… if it is to be a contractarian recommendation, it must be addressed to the individuals whom it will affect.
    —Robert Sugden, The Community of Advantage

In his new book,1 economist Robert Sugden challenges the philosophical underpinnings of conventional economic policy analysis. He takes particular aim at the use of behavioral economics to justify paternalistic intervention, as advocated by Cass Sunstein and Richard Thaler (co-authors of Nudge2), among others.

When writing an article for a professional journal, an economist often will include a section on “policy implications.” This falls within a tradition in neoclassical economics of trying to find policies that improve social welfare. Paul Samuelson and Abram Bergson went so far as to propose that economists think in terms of maximizing a social welfare function, meaning that we would aggregate the utility of all citizens and solve for the optimum. Although the project of calculating aggregate utility was found to be problematic, “welfare economics” still operates as if a social welfare function exists.3

Sugden points out that this neoclassical approach has the economist address his or her recommendations to a hypothetical benevolent autocrat. In effect, the economist plays the game that Kenneth Minogue called “fantasy despot.”4

As an alternative framework, Sugden proposes what he calls contractarianism, which he credits to James M. Buchanan. Instead of thinking in terms of social decisions made by benevolent autocrats, Sugden’s contractarian treats decisions as made by individuals acting voluntarily and in concert. The job of the welfare economist is to act as a mediator, making individuals aware of opportunities for mutually agreeable bargains as suggested by the economist’s research.

See Ronald Coase, biography in the Concise Encyclopedia of Economics. See also Ronald Coase on Externalities, the Firm, and the State of Economics, an interview with Ronald Coase, EconTalk, May 2012.

For example, consider the social problem of reducing carbon emissions. Using the standard neoclassical approach, many economists suggest that the benevolent despot should impose a carbon tax. Using the contractarian approach, we would instead suggest bargains to which everyone might agree. This might mean a bargain in which everyone agrees to pay a carbon tax, but some of the money raised goes to compensate those who are adversely affected, such as workers in the coal industry. The economist’s calculations would assist people in undertaking the Coasian bargaining required to get everyone to agree to a carbon-emission reduction plan.

“Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.”

It is fair to ask whether this contractarian approach is really feasible in practice. Whatever the philosophical shortcomings of the benevolent-autocrat model, it seems much simpler to implement public policy by fiat rather than through multi-person bargaining.

As a behavioral economist, Sugden is concerned with less complex bargaining situations. An example that he frequently discusses is Sunstein and Thaler’s cafeteria manager, who they argue should influence patrons’ food choices by placing healthy foods at the front of the line. That way, patrons may fill their trays with salads and fruits before they get to fattening desserts. Patrons are then presumably more likely to pass on the unhealthy foods; whereas if they arrive at the cake section with room on their trays, then they are likely to take the food that is bad for them.

See Richard Thaler on Libertarian Paternalism, EconTalk, November 2006.

Sugden argues that this paternalistic approach assumes that the cafeteria manager knows something about the “true” preferences of the patrons that the patrons themselves do not know. The patron does not “really” want a rich dessert. Knowing this, Thaler and Sunstein’s cafeteria manager sets up the food in order to minimize temptation.

Sugden says that this concept of “true” or “rational” preferences is embedded in most of behavioral economics. The intervention is justified on the basis that a rational individual would prefer the outcome that is influenced by the “nudge” to the outcome that would result otherwise from the individual’s choice.

But Sugden points out that the idea of “nudging” based on the assumption that you know others’ true preferences is problematic.

    If the scenario is one in which Robert Sugden is in a roadside restaurant and a morbidly obese stranger is sitting at another table ordering a huge all-day breakfast as a mid-afternoon snack, the answer is that I would do nothing. I would think that it is not my business as a diner in a restaurant to make gratuitous interventions into other diners’ decisions about what to eat. (page 50)

A different scenario would be one in which someone says that they really would prefer to avoid eating unhealthy foods, and they ask for help based on the insights of behavioral economics. In that case, we have been given permission to do the nudging. We should not tie Odysseus to the mast without his permission, but it is fine if he asks us to tie him to the mast so that he can hear the sirens while resisting their temptation.

Sugden’s book exposes standard welfare economics as based on the assumption that a benevolent autocrat knows, when informed by the economist, what is best for the autocrat’s subjects. But instead it is possible for economists to convey their insights to individuals while still leaving them to make their own choices and bargains. In theory, if the outcomes suggested by behavioral economics and welfare economics are truly desirable, then people can arrive at those outcomes without being commanded, or even nudged, by a benevolent autocrat.


[1]RobertSugden, The Community of Advantage: A Behavioural Economist’s Defence of the Market, p. 47. Oxford University Press, 2018.

[2]Cass Sunstein and Richard Thaler, Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press, 2008.

[3]See Pedro Schwartz, “The Poverty of Social Choice.” Library of Economics and Liberty, Nov. 2, 2015.

[4]See my essay, “Kenneth Minogue on the Servile Mind.” Library of Economics and Liberty, Nov. 4, 2013.

*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.