Cameron's free-market guru

Richard Thaler simply gives Friedman a makeover

Has David Cameron discovered his guru, who can do for him what Anthony Giddens did for Tony Blair or Milton Friedman and Friedrich von Hayek for Margaret Thatcher? The man of the moment is Richard Thaler, a Chicago University professor (as Friedman was), co-author of the newly published Nudge, and a recent visitor to London. The press isn't usually much preoccupied with ideas, but for the past month upmarket papers have been full of the book's central idea, libertarian paternalism, along with various - well, nudges - to make us think it will form the core of Cameron's political philosophy.

This is clever marketing by the Conservatives. Like Blair in the mid-1990s, Cameron needs intellectual ballast if he is to convince the public, and particularly the chattering classes, that he is anything more than an opportunist. Thaler and his collaborator, Cass Sunstein, another Chicago professor, claim to have discovered "the real Third Way", thus allowing the Tories to imply the entire new Labour project was flawed from the start. Even more helpfully, they argue that the basis of Friedmanite economics - markets always work because human beings can make rational choices - is flawed, but they don't deny the merits of economic and social liberty. So Cameron can distance himself from Thatcherism without appearing to embrace an over-powerful state.

What is Nudge all about? Its thesis is that governments should try to influence personal behaviour rather than control it directly through laws and regulations. Instead of requiring people to save through pension schemes, the state could automatically enrol them but still allow them to opt out. Instead of restricting gambling, it could allow addicts to put themselves on a list that bans them from entering casinos or collecting winnings. Incentives are often better than penalties. Thaler and Sunstein advocate giving teenage single mothers a dollar for every day they don't get pregnant again.

To those who see this as an attempt to micromanage personal behaviour, the authors of Nudge reply that private interests are doing it all the time. They are right. For example, many modern pubs reduce seating to a minimum, play loud music and put out bowls of crisps and salted peanuts because all these will increase the customers' rate of drinking. Supermarkets put sweets and chocolates at eye level near checkouts, so why shouldn't school canteens do the same with healthy foods? Techniques used by commerce to maximise sales and profits should be used in public policy to achieve social ends.

Some may feel queasy about this. One is reminded of a Norman Spinrad story in which subliminal advertising is used to persuade the population to support nuclear war. But provided governments are open about what they are trying to achieve, so they can be challenged and held to account, I don't see a significant objection.

I can't help feeling, though, that Nudge is pretty marginal to what politics ought to be about. All the main parties are going down this route. I wrote last year about how some new Labour types had taken up Robert Cialdini, who is credited by Thaler and Sunstein as "the great guru of social influence". Because Blair was then on his way out, nobody took much interest. Gentle persuasion isn't exactly Gordon Brown's style.

However, even Labour politicians obsess over personal behaviour because they have abandoned core issues: social and economic inequality, and the increasingly unrestrained power of corporate and financial interests. It is all very well to argue about the best way to stop people smoking, drinking, eating biscuits and so on. But though all these habits reduce life expectancy, low status in an unequal society has an independent effect over and above them. Again, I am not sure what kind of nudging would stop people being mugged by the financial services industry and left in unsustainable debt.

I rather lost confidence in Thaler and Sunstein when they stated that failing to invest in stocks "qualifies as a mistake" because "there is no twenty-year period in history in which stocks have declined in real value". This is simply untrue. Not until 1954 did Wall Street stocks return to the level that preceded the 1929 crash. Japan's Nikkei Index reached over 38,000 in 1989. It has never been as high since and is now in the 12,000s.

Despite their protestations, Thaler and Sunstein are still Chicago men, in spirit if not in precise doctrine. They devote only a couple of paragraphs to redistribution - generously allowing that the optimal level is "not zero" - and discuss at length, not the merits of privatising social security, but the best way of going about it.

All they have done is give Friedman a makeover. Their libertarian paternalism performs the same service for free-market theologians as intelligent design does for creationists.

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 28 July 2008 issue of the New Statesman, Money rules: Why cash now counts more than class