The Dark Side of Liberalism

Isaac de la Peña
Jun 4 · 9 min read

In my review of the masterful work of Antonio EscohotadoThe Enemies of Commerce” I charged quite hard against religion, nationalism, and communism, accusing them of using the best objectives of the human being to justify the worst means. I do not have any remorse but several people have asked me, politely. “What about Capitalism?” Well, it is fair that we dedicate a few lines to talk about the dark side of liberalism, and I do not see a better way to do it than through the ideas of a Nobel prize, well known for his ability to question the status quo.

Behavioral Economics

As you know this year 2017 Richard Thaler, a professor at the Chicago School, has been awarded the Nobel prize. In announcing the award, the Royal Swedish Academy of Sciences explicitly cited Thaler’s historical role in creating the field of behavioral economics, saying that “his contributions have built a bridge between the economic and psychological analysis of the process of making decisions”. Unlike most economists he is also known to the general public. For example, in 2015 he participated in a sketch of the cult film “The Big Short”, precisely explaining with the singer Selena Gómez the psychological reasons behind the speculative real estate bubble that led us to the Great Recession of our modern times.

For many, many years the professors of Economics have lived with what I like to call “envy of Physics”, the eldest brother in the family of sciences, and have perceived theoretical mathematization as the only way to obtain precision, prestige and due respect. Unfortunately this has not resulted in better predictability, but has led to the creation of very tight structures, such as Eugene Fama’s Theory of Efficient Markets about the infallibility of financial markets. It is thanks to Thaler’s work that we have remembered that economics is a social science, based on individuals. And if these individuals make gross errors of judgment when buying a car, a house or a yogurt — something that marketing has been able to exploit for centuries — why would they suddenly become oracles endowed with reason and perfect information at zero cost?

Developing the field opened by Thaler we have essential works of modern financial science such as “Beyond Greed and Fear” by Hersh Sherfin, where he identifies and analyzes in detail repeated failures in the real behavior of the markets, as well as “Adaptive Markets” by Andrew Lo, in which he reconciles classical theory with the phenomena described by behavioral economics, applying formulas from the Darwinian theory of evolution to financial interactions through concepts of competition, adaptation and natural selection.

But it is not our target to develop these ideas here. Today the goal is different; as we said, Thaler’s works have questioned classical ideas about what motivates the behavior of individuals in the economy, and have allowed a deeper understanding of human behavior in domains ranging from domestic finance to national policy issues. His books that are required reading include “Misbehaving: The Making of Behavioral Economics” and “Nudge: Improving Decisions About Health, Wealth and Happiness.” Precisely this last book seems to me a great way to explore one the dark sides of liberalism.

A Policy of Nudges

In “Nudge” Richard Thaler explores how the concepts of behavioral economics can be used to correct major social problems and influence public regulations. The main idea is that a relatively subtle change in the policies in use can have enormous consequences on how individuals plan and distribute their time and resources.

To dispel conspiratorial doubts, it is clear that here we are talking about policies that “invite” (hence the nudge), help people make decisions that, in fact, benefit them; They are aligned with their personal interest in a broad sense, such as: take more care, do more sport, eat healthier, spend better and save more.

Nor is it about penalizing people financially if they do not act in a certain way, but making it easier for them to make certain decisions that, in the end, are better for them. In the words of Thaler himself: “Knowing how and what people think, we can make it easier for them to choose what is best for them, for their families, and for society in general.”

We can find a good example in the pension policy of the United Kingdom. In 2012 the British Government instructed employers to establish a system of “automatic enrollment” in pension plans, with the aim of increasing what was a worryingly low percentage of retirement savings among private sector workers. This means that contributions would be deducted automatically from their salaries unless they formally requested to be exempt.

Richard Thaler, author of “Nudge”

The theory was that many people in fact wanted to save more money for their retirement, but they did not do so because they did not want to go through what they perceived as complicated decisions and lengthy procedures, while turning it into automatic would make it easier for them to what, in the end, they wanted to do before.

And … Has it worked? Experts say that without a doubt. Since the automatic enrollment was introduced in 2012, the downward trend of a whole decade has been reversed, and the private sector retirement plans in the system have jumped from 2.7 million to 7.7 million in 2016.

The Other Invisible Hand

Despite its proven effectiveness, or precisely because of it, there are considerable sectors of the population that oppose this type of action. It is usually about those who identify with libertarian thinking, the liberal extremism that elevates individual autonomy to the degree of absolute principle and perceives in each prerogative of the government a threat to that freedom.

It is understandable that the libertarians conceive the pushes as undesirable state interference, abuse of power almost conspiratorial; but it is at the same time quite ingenuous to think that in the absence of them there will be freer decisions, with less interference: all that is achieved is to leave the space open for it to be filled by the suggestive forces of marketing in other impulses from hands with particular interests and much less candid.

Michael Bloomberg and the Soda Cups

Maybe they will remember the big upheaval in 2012 when Michael Bloomberg, being mayor of New York, proposed limiting the size of soda cups in restaurants. What an attack to freedom! It should be noted that the maximum size proposed was almost half a liter, and any doctor would tell us that drinking such amount of sugar water during the meal is very unhealthy. Meanwhile, the cups that were served mostly in fast food restaurants were more than a liter. The discussion reached the paroxysm of stupidity, because if someone really wanted to do diabetic oppositions… he had nothing more to ask for another glass. But of course, that requires an additional effort that would negatively affect sales. And that is how the industry’s nudge is revealed.

It is also curious how, in a mirror image and for the same year 2012, certain states controlled by Republican governments like the one of Texas, of conservative orientation, established a law that forced mothers who wished to abort to witness ultrasound photos of their future baby. It might seem that republican “libertarianism” does not have as many followers when the decision does not coincide with their personal beliefs. Needless to say, we are not equating either “liberal” to refer in pejorative terms to the Democrat party as it happens often in the USA political discourse.

The Failure of Enlightenment

Liberalism is born with the Enlightenment, and its founding fathers like John Locke and Adam Smith share a corpus of ideas that crystallize in Europe during the XVIII: against obscurantism, superstition and tyranny, the enlightened philosophers put wisdom first. The lights of knowledge will raise the human being from his ignorant condition and lead to an era of personal progress and fulfillment. From these ideals arise initiatives that today we consider fundamental as literary circles, public libraries, and universal schooling, elements to build a better world.

“Une soirée chez Madame Geoffrin” of 1755: authors, philosophers and artists attend a literary circle on Voltaire’s works

And without a doubt we have managed to progress, with our ups and downs during the journey and more wars than planned, but with tremendous social advances. However, we have also found that technological advances do not have to go hand in hand with moral growth, that material abundance does not have to lead to greater personal fulfillment, and that the universal accessibility of knowledge does not have to motivate us to study more. This is what I call the failure of the Enlightenment: that having all the means to form themselves, large sectors of the population prefer the comfort of ignorance to the effort of learning. And since education is the only way to overcome our cognitive biases, that situation makes them much more vulnerable to the effect of many perverse nudges.

Some people even talk about “covert slavery”, without shackles or whips, but equally chaining for the individual once he has gotten himself into a loan for the new car (the former was already a couple years old), two mortgages (you can not live without a holiday home) and three credit cards with deferred payments at a growing interest rate. Frankly, that seems to me exaggerated victimization because unlike the old slavery, the real one, here is after all about personal decisions. Perhaps without the adequate capacity for a correct judgment, but if a reasonable universal access to education is guaranteed, then what follows suit is the individual responsibility to be educated and informed. That, or the protection of Big Brother.

Closing Remarks

The question about capitalism can not pretend to put it in the same bag of totalitarianism as nationalism, communism and religion. That would be unfair.

First, because although it is not a perfect system, it has allowed the opulence of our current societies in which, in the eyes of any previous era, we are all rich. For every shoe that was produced at the beginning of the twentieth century, today thousands can be created, and so with any article.

Second, because although Marx’s thesis on the tyranny of capital was not correct even when the ink was fresh on his work of the same name, the maturation of capitalism itself has led us to the current society in which this productive factor has become a commodity, and instead the scarce and most precious resource is individual talent, and therefore the one with the greatest market power.

Third, and much more important, because the philosophical liberalism that is the basis of both democracy and capitalism does not impose a universal purpose to which we have to submit, be it God, Homeland or Community: everyone has room for maneuver to establish their vital mission and pursue their own happiness.

Now, the Achilles heel of liberalism, democracy and capitalism is the assumption that society is composed by educated individuals who know how to decide well in freedom. Instead, daily experience shows us how vulnerable we are to the external suggestions of marketing and how easy it is to redirect the opinion of an ignorant mass. This is something that information technologies are exacerbating instead of correcting. On the one hand, increasing the amount of environmental noise to be processed. On the other, making possible the collection and analysis of individual preferences at an unprecedented scale that, in the right hands, become a weapon of mass manipulation of extreme effectiveness. With the right campaign we can be convinced even of the Orwellian paroxysm: that (preventive) war is peace, that freedom (of the unprotected) is slavery, that ignorance is strength (of faith).

We must assume that we are not born free but we become free, always in a temporary and precarious way, through a hard process of learning, trial and a lot of mistakes that lasts, in the best cases, a whole life.

Algonaut

Musings on technology, philosophy and economics

Isaac de la Peña

Written by

Investor @Conexo_vc and formerly @Inveready. Partner @AgoraEAFI & @Alt_Insights. MIT technologist. Finance, algorithmic trading, AI, big data, mobile, web.

Algonaut

Algonaut

Musings on technology, philosophy and economics