On the Rise of the "Economic Style of Reasoning"

Ironically, the impetus for subjecting government interventions to economic considerations did not come from conservative or “neoliberal” ideologues. Nor did it come from right-wing economists affiliated with the University of Chicago. Instead, this impetus came from economists who were ideologically left-of-center. These economists were confident that active, smart government intervention can improve economic performance and social outcomes; they shared none of the skepticism of government that marked the attitudes of their right-wing colleagues. As Berman summarizes, “[t]he central players in this story are economists (and their allies) who wanted to use economic reasoning to make government work better and more effectively, and who thought government had an important role to play in American life. Chicago Schoolers are on the stage, but they are not the stars.”

Also ironically, the left-of-center economists whose efforts would inadvertently over time result in restrictions on the reach of government intervention were given their main toehold in Washington not by a Republican administration or during a time when trust in government was waning. Instead, that toehold was created by President John F. Kennedy, who was in office when confidence in government ran quite high. Kennedy surrounded himself with impressively credentialed technocrats who were sincerely committed to science and quantitative methods. Naively trusting that neoclassical economic analysis is value-free—that is, is scientific—these administration advisors and appointees believed that using economics to guide government intervention would render that intervention more effective.

As Berman points out, however, the very use of cost-benefit analysis involves a value judgment. Yet because this economic practice appears to be value-free, the technocrats in Kennedy’s administration—many of whom continued in their positions of influence during LBJ’s administration—endorsed it enthusiastically. To carry out economic-style analyses of government programs, formal systems such as the Planning-Programming-Budgeting System (PPBS) were created for the purpose of improving government decision-making. In addition, more and more government agencies in the 1960s and 1970s established internal offices devoted to amplifying economists’ sway over policymaking.

Economic-analyses’ alluring scientific patina mixed with the increasing institutionalization into formal policymaking processes of what Berman calls “the economic style of reasoning” to produce a result that no one intended—namely, a government-wide displacement of policymaking based on “universalism, rights, and equality” by policymaking constrained by economic considerations.

This entrenchment of the economic style of reasoning into policymaking was fueled also by the success of think tanks—above all, RAND—that, starting in the mid-20th century, used economics to analyze and improve narrow aspects of government policy, such as weapons acquisition. But as government came increasingly to rely on the economic style of reasoning, demand grew for more such analyses to be supplied by not-for-profit think tanks. Government paid attention to such analyses and, thus, encouraged their development. In turn, there blossomed at universities public-policy programs that (as Berman puts it) “centered” the economic style of reasoning. Larger numbers of scholars were drawn to this style of reasoning. Many of these scholars consulted with government and often even took positions within government. Government’s heavy reliance on these scholars of course only further entrenched the economic style of reasoning into policymaking.

The triumph of the economic style of reasoning has been so complete that even the administration of a President as progressive as Barack Obama clung to it as a matter of course.

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In most of her book, Berman writes as an historian rather than as an advocate for a specific set of policies or for a particular approach to policymaking. And her history will be of interest to some public-policy wonks and historians of 20th-century American government. For example, details abound on the origins and activities of several policy-planning offices throughout the federal bureaucracy, as well as on the educational backgrounds of some famous, and of many obscure, government officials who played roles in the regulatory state. (Unsurprisingly, a good number of the officials highlighted in Berman’s account boasted degrees either in economics or in public policy.)

But despite Berman’s admirable attempt to write this history objectively, the reader from the start realizes that Berman regards the impact of the economic style of reasoning to be unfortunate. This realization is confirmed in her concluding chapter. There, Berman reveals explicitly that she’s a progressive who hopes that the economic style of reasoning will be supplanted by the ideals—or, as she calls them, “logics”—of “universalism, rights, and equality.” Her sympathies are with “those who want to restore an ambitious vision of how government might work differently”—a vision in which progressives’ pursuit of “values like equality, racial justice, rights, and community” is no longer “frustrated by the political restraints of the economic style.”

Berman never makes clear exactly what she means by the set of “logics” that she presents as an alternative to economic analysis. But the reader gets hints of what she has in mind when she discusses ways in which various government programs were hijacked by the economic style. She writes, for example, of how economists insisted that government health-care assistance to individuals be means-tested—presumably in contrast to it being universally available. Likewise, Berman obviously sympathizes with the wish of the early environmental crusader Senator Edmund Muskie that environmental regulations not be subjected to cost-benefit tests. A clean environment is, or ought to be, a right possessed by each citizen rather than merely a benefit to be enjoyed only if, when, and where it’s cost-justified.

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To explain what is, in her view, the unfortunate triumph of the economic style of reasoning, Berman identifies two factors that were indeed active during the second half of the last century. One is a naïve overestimation of the ability of neoclassical economics to guide policymakers to objectively ‘correct’ conclusions. Another factor is the institutionalization throughout government of economists and their style of reasoning.

These factors undoubtedly did help to promote and protect the economic style of reasoning generally and cost-benefit analysis in particular. But I submit that by far the most important reason for the rise and endurance of the economic style of reasoning is the fact that, as Thomas Sowell famously observed, reality isn’t optional.2

While governments—especially ones with printing presses—are better able than are individuals to hide the costs of their actions or to shove these costs onto others, not even the most powerful government can escape the bonds of scarcity. No government can divert resources into the production of butter without diverting resources out of the production of guns. And so with growth in government comes growth in the number of particular individuals and businesses who are deprived of some resources.

Especially in democratic societies, individuals and businesses who are thus deprived of resources don’t remain silent. They complain. They vote. Some organize and lobby. The expressed grievances of these individuals and businesses spur elected officials to search for ways to placate the complainers, or at least to welcome any such ways that are stumbled upon. One obvious means of placation is to limit the amount of resource diversion. And one obvious means of limiting resource diversion is to subject government interventions to cost-benefit tests. Interventions that fail such tests are blocked, resulting in fewer resources being diverted away from the complainers.

Few if any of the left-leaning economists (and other like-minded intellectuals) who Berman identifies as leading the charge for using cost-benefit analysis did so because of its ability to ease political pressures on officeholders. Being economists, they simply took for granted the legitimacy and usefulness of thinking in terms of costs and benefits. But politicians, eager to placate those who complain about paying the costs of ambitious new government programs, found it politically convenient to allow these programs to be subjected to cost-benefit analyses. And who better to design and conduct cost-benefit analyses than economists?

Indeed, even if no particular individuals explicitly complained about this or that program’s cost, because government cannot grow without someone paying for it, the negative effects of such growth inevitably show up in some form. Because government relied more on newly printed money to pay for its programs, inflation began to rise in the mid-1960s, topping out in 1979 at an annual rate of more than 13 percent.3 At the same time, to fund its expanding activities the U.S. government turned increasingly to deficit financing,4 thus passing larger and larger shares of the bills for today’s programs to future generations. (Unborn voters don’t complain!)

It’s true that when government pays for its activities by either printing or borrowing money it doesn’t incite as intense an opposition to these activities as would arise if these activities had been fully funded out of current taxes. But both inflation and deficit financing nevertheless each come with political costs. Eventually feeling inflation’s disagreeable bite, the public expresses its displeasure at the polls. As for growing government indebtedness, a handful of pesky intellectuals—such as the late Nobel laureate James Buchanan5– enjoy some success at warning the public not only that government debt might well be monetized and thus further fuel inflation, but also that the burden imposed by government borrowing on our grandchildren is unjust.

It’s hardly surprising that, anxious about these realities, very few elected officials rebuffed the economic style of reasoning; it helped to keep government spending from getting dangerously out of control.

And so Berman is correct when she writes about the economic style of reasoning that “[i]n contrast to accounts that see the changes of the 1970s as something ‘done to’ the state by outside actors, whether intellectual movements or political interest groups…. the call is coming from inside the house. The economic style that helps constrain the state is produced, and reproduced, by the state itself.”

But she’s incorrect to suppose that the adoption of the economic style of reasoning was avoidable in any way that wouldn’t have bankrupted Americans and their government. Enough government officials, thankfully, understood, if only intuitively, that spending without constraint on the likes of cleaning the environment, supplying medical care, and reducing poverty would devastate everyone’s economic fortunes and, along with these, the political fortunes of incumbent officials. Whether or not these officials additionally understood that follow-on results of such an economic calamity would have included also a dirtier environment, reduced access to medical care, and higher and more widespread poverty is here irrelevant.

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Berman should be commended for treating those with whom she disagrees fairly and with respect. Unlike too many scholars today, she doesn’t put words in her adversaries’ mouths or accuse them of moral depravity. She writes as a true scholar. Nevertheless, my disagreements with her are many.

The most fundamental of these disagreements is that, while I agree with Berman that the decision to reject policies the costs of which exceed the benefits reflects a value judgment, I disagree that this value judgment is either dubious or at odds with basic liberal, democratic norms. Instead, this value judgment is one to which nearly everyone subscribes, if most people do so only unconsciously. Nearly everyone is led to do so by the inescapability of scarcity and the corresponding need to make trade-offs.

Legitimate debates rage over just what counts as costs and as benefits, as well as over how to weigh each of the entries in the cost-benefit ledger. But because a widespread commitment to pursuing certain benefits in disregard of the costs would leave too few resources available for the pursuit of other benefits—and do so without any weighing of the benefits gained versus the benefits foregone—the consequence of a complete casting aside of economic considerations would be a society immensely more poor, dangerous, and unjust than is even the dystopian America that exists today in the minds of many progressives. It’s the odd person whose system of values tolerates such an outcome.

Footnotes

[1] Elizabeth Popp Berman. Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy. Princeton: Princeton University Press, 2022. 329pp. + xi.

[2] Thomas Sowell, Is Reality Optional?: And Other Essays (Palo Alto, CA: Hoover Institution Press, 1993).

[3] Macrotrends, “Historical Inflation Rate By Year”. Interactive chart showing the annual rate of inflation in the United States as measured by the Consumer Price Index back to 1914.

[4] Economicshelp.org, “US Federal Deficit % of GDP”. PNG.

[5] James M. Buchanan, Public Principles of Public Debt (Indianapolis: Liberty Fund, 1999 [1958]).