The economist Richard Thaler — a favourite of the Cameron and Obama camps — talks to James Forsyth about the power of ‘nudging’: small transformative acts of persuasion

No one likes to be pushed, prodded or shoved. But no one objects to a nudge in the right direction. The idea that people can be nudged into making better choices is the brainchild of Richard Thaler and Cass Sunstein, two whip-smart University of Chicago academics. The two professors see nudging as the ‘real third way’, an alternative to both government regulation and laissez-faire liberalism. The idea is the new big thing; the two politicians of the moment — Barack Obama and David Cameron — are both keen on it.  

Thaler and Sunstein, though, have no more discovered nudging than Benjamin Franklin discovered electricity. Thaler, who is currently in London teaching a summer school and having his brain picked by Conservative high command, gladly admitted to me that nudging was as old as time, quipping that ‘religion at its best is all about nudging’. But what Thaler and Sunstein have drafted is a guide to how the power of nudging can best be harnessed. In this ‘post-ideological’ age, this is something that politicians are eager to understand. Indeed, the Tories are so keen on Thaler’s ideas that George Osborne wrote an op-ed for the Guardian this week praising him and saying that Brown’s failure to appreciate his insights will lead to the PM losing power. There is also an away-day planned, where the shadow Cabinet will work with Thaler and other behavioural economists to develop policies.

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A nudge can come in many forms. Sometimes it is about providing the consumer with more information. For instance, what Thaler — with a grin playing across his affable, intellectual features — calls ‘the new nudge Cameron’ might require shops that sell Chocolate Oranges at the counter to label them prominently with their calorific content, which should help more of us to make the right decision. Then there is the power of social norms; letting people know what other people do. Informing them that most of their peers are organ donors leads to more registered donors. Another kind of nudge is making the default option the more socially desirable option. One example of this advocated by Thaler and Sunstein in their book Nudge — and adopted by the Obama campaign, to which Thaler and Sunstein are informal advisers — is automatically enrolling people in a pension plan. Those who want to can still opt out, but the default position is that you contribute. Such schemes have been proven to raise the savings rate.

These nudges work as they chime with human nature; a gentle reminder can dissuade us from doing something we know we shouldn’t; we want to fit in and inertia is a powerful force. We understand these forces all too well. I complain to Thaler about how I still have the same mobile phone price plan as when I was at university and so now get stung with horrendous bills for making international and peak-time calls, yet the fact that I pay by direct debit means that I never get round to actually changing it. Thaler advises that direct debit is ‘the right way to save and the wrong way to pay’. He makes me feel a lot better about my own failure to update my phone plan by telling me that he and his wife had not cancelled their monthly NetFlix subscription despite being away for the summer. (The power of social norms, though, means that I now feel too relaxed for my financial good about my failure to move to a more efficient phone plan. I had been nudged back to where I started.)

Understanding why nudges work requires doing something quite difficult for an economist: jettisoning the idea of homo economicus. Thaler thinks that man never was a purely rational economic actor, that the idea was a ‘useful figment’. He explains the economist’s traditional belief in him as a way to make the discipline work: ‘Economics started to get mathematical in the 1940s and especially in the 1950s and when it got mathematical, the math got hard very quickly. The only way to make the math easy is to make the people very smart.’ Thaler thinks that economists under 40 accept that homo economicus is a flawed concept while those older than that cling to the old certainties. But this problem is self-correcting. With a hearty laugh, Thaler recalls Max Planck’s adage: ‘science marches on, funeral by funeral’.

This, perhaps, explains Brown’s lack of interest in Thaler’s thinking and behavioural economics more generally. He is both of the wrong generation and quite close to actually being homo economicus. Somehow one suspects that Brown does not have direct debits for a gym membership that he never uses or anything like that.

Thaler thinks the most potent of his ideas is complete electronic disclosure which he claims would ‘completely change the way we think about regulation’. Thaler gives the example of credit cards. Your card issuer would be obliged to send you two files each year, one explaining every charge they make — e.g. interest charged, late fees, currency conversion — while the other file would list every time you incurred a charge. This would lead, Thaler argues, to websites springing up telling us what credit card was actually best for us. The knowledge of how and when we had been charged would leave us forewarned and fore-armed. Thaler believes this would ‘eliminate the need for credit card regulation’. Politically, this allows you to square the circle: consumers would welcome the increased transparency while it would allow for the bonfire of regulation that business is always demanding and that politicians are always promising but never delivering.

The speed with which the nudge agenda has been adopted by both Cameron and Obama tells us that they are both pragmatists, not ideologues. For nudge is all about what works. Indeed, Thaler sees similarities between the Obama and Cameron campaigns, remarking that the Cameroons he has met remind him of Obama’s people in that they are ‘smart, curious and pragmatic’. Nudge also requires an appreciation of the limits of government. Thaler, who has known Obama since his Senate primary campaign, disputes the characterisation of Obama as a big-government-style liberal, saying that ‘deep down he is a pragmatist’, and arguing that ‘you can’t spend 10 years at the University of Chicago Law School, even part time, and not get an appreciation for markets. It is just not possible.’

Perhaps the reason Thaler’s work resonates so much with the Tories is that both are trying to achieve the same thing. Thaler says that he wants to ‘see how far we can go using classical liberalism in directions favoured by the Left’, which sounds awfully close to Oliver Letwin’s definition of Cameronism as taking ‘Conservative approaches to achieving progressive goals’. Maybe it is this that is the real third way.

This article first appeared in the print edition of The Spectator magazine, dated