Thinking like an Economist

1. The "Economic Style" Defined: Efficiency as a Core Value

The economic style of reasoning is a loose approach to policy problems that is grounded in the academic discipline of economics, but has traveled well beyond it.

A pervasive framework. The "economic style of reasoning" is a distinctive way of thinking about public policy, rooted in microeconomics but extending far beyond academic circles. It emphasizes concepts like incentives, choice, competition, and especially, efficiency. This approach is often perceived as politically neutral, yet it inherently carries its own set of values.

Efficiency's many forms. Adherents to this style prioritize efficiency as the ultimate measure of good policy. This includes:

• Productive efficiency: Achieving a goal at minimum cost.
• Kaldor-Hicks efficiency: Maximizing net benefits to society, where winners could theoretically compensate losers.
• Allocative efficiency: Ensuring resources are distributed optimally in competitive markets.
  This focus often sidelines other political values.

Beyond the ivory tower. While originating in elite economics departments, a "weaker version" of this style permeates professional schools (law, public policy, business) and influences policymakers and advocates. This widespread adoption means that even those without a PhD in economics learn to "think like an economist," shaping the very questions asked and solutions considered in policy debates.

2. From RAND to Washington: Systems Analysis Transforms Government Decisions

The problem with RAND’s system analysts, in other words, was that they were thinking like physicists, or engineers. To truly accomplish their mission, they needed to think like economists.

RAND's innovation. The economic style first entered Washington through the RAND Corporation, a Cold War think tank. Economists there developed "systems analysis," a method for rational decision-making that applied economic principles to complex military problems. This approach emphasized quantifying goals, comparing cost-effectiveness of alternatives, and making choices based on efficiency.

McNamara's "whiz kids." In the 1960s, RAND's systems analysts, led by Charles Hitch, were recruited by Secretary of Defense Robert S. McNamara. They implemented the Planning-Programming-Budgeting System (PPBS) at the Pentagon, transforming defense budgeting by forcing a focus on measurable goals and cost-effective programs. This centralized control and introduced a new technocratic approach.

Spreading the gospel. President Lyndon B. Johnson, impressed by PPBS's perceived success in defense, mandated its adoption across nearly all executive agencies in 1965. Although PPBS largely failed as a budgeting tool in civilian agencies due to bureaucratic resistance and inherent limitations, it inadvertently created new analytic offices staffed by economists and policy analysts, establishing a lasting foothold for the economic style in government.

3. Reshaping Markets: Industrial Organization Economists Prioritize Efficiency

Economists were quite critical of the environmental approach taken by Congress in the early 1970s. From an economic perspective, the regulatory solutions it had settled on—rigid limits on how much pollution firms could emit and requirements that they adopt particular mitigating technologies—created problems of their own.

A new lens for industry. While systems analysts focused on government decision-making, industrial organization (I/O) economists aimed to redefine how markets should be governed. They viewed industries primarily as "markets" where efficiency was paramount, challenging older regulatory frameworks that prioritized stability, equity, or limiting corporate power.

Harvard vs. Chicago. Two main schools emerged:

• Harvard School: Believed in government intervention to ensure "workable competition" and address market failures, often through antitrust.
• Chicago School: More skeptical of intervention, arguing that markets naturally tend towards efficiency and concentration often reflects efficiency, not monopoly power.
  Despite their differences, both agreed that allocative efficiency was the primary goal of market governance.

From academia to policy. I/O economists began to influence policy by:

• Integrating economics into law schools, exposing future lawyers to the economic style.
• Increasing the role of economics in antitrust agencies like the Department of Justice's Antitrust Division and the Federal Trade Commission (FTC).
• Building influential networks in Washington think tanks, initially at Brookings (liberal) and later AEI (conservative).
  These efforts laid the groundwork for a fundamental shift in market regulation.

4. Social Policy Transformed: Efficiency Over Universalism and Rights

Centering efficiency repeatedly put Democratic advocates of the economic style into conflict with those they were otherwise politically aligned with.

Great Society's unintended consequence. The ambitious Great Society programs (War on Poverty, Medicare, Medicaid) were driven by values of universalism, equality, and rights, with little input from economists. However, Johnson's simultaneous rollout of PPBS forced these new social programs to adopt an efficiency lens, leading to unexpected conflicts.

Economists' influence. Policy planning offices (PPOs) within agencies like the Office of Economic Opportunity (OEO) and Health, Education, and Welfare (HEW) became strong advocates for the economic style. They pushed for:

• Negative Income Tax (NIT): As a more efficient alternative to community action programs or universal family allowances, targeting aid directly to the poor.
• Cost-sharing in healthcare: To combat "moral hazard" and reduce "overuse" of medical services, contrasting with calls for universal, free healthcare.
• Housing vouchers: Over public housing, as a more cost-effective and choice-driven solution.
  These shifts prioritized measurable outcomes and cost-effectiveness.

Sidelining alternative logics. The economic style's emphasis on efficiency often sidelined arguments based on:

• Social insurance: Universal programs for broad protection.
• Democratic participation: Empowering communities to define their own needs.
• Rights-based claims: Such as the right to healthcare or education, regardless of cost.
  This technocratic approach, though often advanced by liberals, inadvertently aligned with conservative desires to limit the welfare state.

5. Market Governance Reimagined: Competition Replaces Stability and Equity

The policy differences in approach between the Clean Air Act of 1970 and its 1990 amendments may seem subtle. Both laws passed with strong bipartisan support. Both represented serious attempts to ameliorate environmental problems. And both were successful at achieving meaningful pollution reductions. But the differences between the two laws represent a transformation in the logic of environmental policy.

Dismantling old frameworks. Historically, market governance prioritized stability, equitable access, and limiting corporate power. However, I/O economists argued that these goals often hindered efficiency. They advocated for deregulation, particularly in industries like transportation, where price and entry controls were seen as stifling competition.

Antitrust's new purpose. In antitrust, the shift was from a broad concern with corporate power and protecting small businesses to a singular focus on "consumer welfare," narrowly defined as allocative efficiency. This was achieved through:

• Organizational change: Economists gained influence in the Antitrust Division and FTC, leading to case selection based on economic rationale.
• Judicial shift: Supreme Court decisions, influenced by Chicago School arguments, enshrined efficiency as the sole legitimate goal of antitrust, effectively making other concerns legally irrelevant.
  This narrowed the scope of antitrust enforcement significantly.

Deregulation's triumph. In transportation, economists, initially from Harvard and later Chicago, found allies among liberal consumer advocates concerned with regulatory capture. This led to:

• Administrative changes: Regulators like Alfred Kahn at the Civil Aeronautics Board unilaterally began deregulating.
• Legislative action: The Airline Deregulation Act (1978) and subsequent laws dismantled price and entry controls, eliminating regulatory agencies like the CAB and ICC.
  This fundamentally reshaped how industries were governed, prioritizing market forces over traditional regulatory aims.

6. Social Regulation Redefined: Cost-Benefit Analysis Challenges Absolute Standards

The strategy of simply instructing government to determine safe levels of emissions and requiring firms to meet them, as Democrats might have proposed in the 1970s, was not even discussed.

A new wave of regulation. The late 1960s and early 1970s saw a surge in social regulation (environmental, health, safety), driven by rights-based arguments and a belief in technology-forcing standards. Laws like the Clean Air Act intentionally excluded cost considerations, aiming for absolute protection.

Industry's counter-attack. Industry groups, facing significant compliance costs, quickly pushed for the incorporation of cost-benefit analysis (CBA) into regulatory decisions. They found allies in economists who believed that ignoring costs was irrational and inefficient. This led to:

• Nixon's Quality of Life Review: Requiring "Economic Impact Statements" for new regulations, targeting agencies like the EPA.
• Ford's Council on Wage and Price Stability (CWPS): Reviewing regulations for inflationary impact and advocating for CBA.
• Carter's Regulatory Analysis Review Group (RARG): Mandating cost-effectiveness analysis for major regulations, further institutionalizing economic review.
  These efforts forced agencies to develop economic analysis capacity.

Eroding absolute standards. The push for CBA often clashed with the original intent of social regulation, which prioritized rights and ecological concerns over economic trade-offs. While not always legally binding, the constant pressure to justify regulations economically led to:

• Compromises on standards: Like the ozone standard, where economic considerations influenced the final decision despite statutory prohibitions.
• Market-based solutions: The development of "emissions trading" (cap-and-trade) as an alternative to "command-and-control" regulation, seen as more efficient.
  This shift redefined what constituted "good" regulation, moving away from moral imperatives towards a calculative, efficiency-driven approach.

7. Liberal Technocrats: Unwitting Architects of a Conservative Shift

For Republicans, economic reasoning remained a means to an end; for Democrats, the values of economics became an end in themselves.

A shared language, different goals. The expansion of the economic style was largely driven by liberal technocrats in Democratic administrations, who believed it would make government more effective and rational. They saw efficiency as a neutral, apolitical good. However, this shared language of efficiency often led them to policy positions that aligned with moderate Republicans and clashed with the traditional Democratic left.

Unintended alliances. In social policy, liberal economists' preference for cost-effectiveness led them to favor means-tested programs and cost-sharing, putting them at odds with universalist Democrats. In market governance, their belief in efficiency led them to support deregulation, aligning with conservative calls for less government intervention. In social regulation, their advocacy for cost-benefit analysis often mirrored industry's desire to limit regulation.

The "neutrality" illusion. These liberal advocates often dismissed counter-arguments based on rights, equality, or political power as irrational or naive, failing to recognize the inherent values embedded in their own "neutral" economic approach. This technocratic stance inadvertently weakened the intellectual and political ground for traditional liberal arguments, making them seem less legitimate in policy debates.

8. Institutionalizing the Style: Embedding Economic Thinking in Government

The economic style became a taken-for-granted approach to policy problems, one that was embedded in the state: in bureaucratic offices, in the ecosystem of policy organizations surrounding the federal government, and in the law and policy programs that trained the staff of both.

Organizational transformation. The economic style was not merely an idea; it was deeply institutionalized within the U.S. government. This involved:

• New analytic offices: Policy planning offices (PPOs) were created or expanded across executive agencies (e.g., ASPE at HEW, EPO at Antitrust Division).
• Congressional capacity: The creation of the Congressional Budget Office (CBO) in 1974 provided Congress with its own economic analysis arm, often led by economists.
• Think tanks and research organizations: Government funding fueled the growth of economics-oriented policy research organizations (e.g., Urban Institute, Mathematica, RAND's domestic policy work).
  These entities became permanent homes for the economic style.

Legal and academic embedding. Beyond bureaucracy, the economic style permeated legal and academic structures:

• Law schools: Introduced "law and economics" courses, exposing future lawyers to microeconomic principles and efficiency as a legal goal.
• Public policy schools: New graduate programs emerged, explicitly training students in "RAND-style" policy analysis, emphasizing quantitative methods and economic reasoning.
• Case law and administrative rules: Courts increasingly adopted efficiency as a guiding principle in antitrust, and executive orders mandated cost-benefit analysis in regulation.
  This multi-faceted institutionalization ensured the style's enduring influence.

9. Reagan's Strategic Embrace: Economics as a Tool, Not a Master

Ultimately, Republicans proved more willing than Democrats to simply ignore economic reasoning when it conflicted with other, more fundamental values or interests.

A shift in approach. Unlike previous administrations that saw economic reasoning as a neutral tool to improve government, Reagan viewed it strategically. His administration prioritized its core political values—reducing government size and scope—and used economic arguments selectively to advance these goals.

Selective application. Reagan's approach was inconsistent:

• Social policy: He drastically cut funding and staff for analytic offices in welfare, health, and housing, viewing them as justifying the welfare state. Research priorities shifted to "welfare dependency" rather than efficient poverty reduction.
• Market governance (antitrust): He fully embraced Chicago School economics, appointing staunch free-market advocates to lead antitrust agencies. This aligned with his pro-business, anti-regulation stance, leading to a lasting shift towards efficiency-only antitrust enforcement.
• Social regulation: He expanded cost-benefit analysis (EO 12291) as a tool for "regulatory relief," but was willing to ignore economic findings if they contradicted his deregulatory agenda (e.g., lead in gasoline).
  This demonstrated a willingness to prioritize ideology over technocracy.

A partisan divergence. Reagan's presidency marked a lasting divergence: Republicans used the economic style as a flexible instrument to achieve broader political ends, while Democrats increasingly internalized its values, allowing it to define the boundaries of legitimate policy debate.

10. The Democratic Dilemma: Constrained by the Economic Style

What is so striking about Obama’s time in Washington is not that he sought to achieve fundamental change and failed. It is how constricted the very horizons of possibility seemed to be.

Internalized limits. After Reagan, Democrats, particularly under Clinton and Obama, continued to operate largely within the confines of the economic style. This meant that policy options were often limited to those that could be justified on grounds of efficiency, incentives, and market mechanisms, even when other values were at stake.

Policy examples:

• Healthcare: Clinton's "managed competition" plan, and Obama's Affordable Care Act, prioritized market-based solutions, choice, and cost-sharing over universal, single-payer systems.
• Antitrust: Both administrations adhered to the efficiency-focused "consumer welfare standard," avoiding challenges to corporate power or size unless direct price harm could be proven.
• Regulation: They favored market-based environmental solutions like cap-and-trade and continued to emphasize cost-benefit analysis, sidelining arguments for strict, rights-based standards.
  This self-imposed constraint narrowed the scope of their policy ambitions.

The "reasonable" debate. Arguments based on universalism, rights, or broader notions of equality and corporate power increasingly struggled to gain traction within mainstream Democratic policy circles. They were often dismissed as "unrealistic" or "inefficient," even if they resonated with public sentiment or historical Democratic principles.

11. The Legacy of the 1970s: A Narrowed Policy Horizon

This shift made it much harder for competing claims, grounded in different values and ways of thinking, to gain political purchase.

A fundamental transformation. The rise of the economic style fundamentally reshaped the landscape of U.S. public policy. It moved the conversation from a pluralistic set of values—including stability, equity, and democratic participation—to a dominant focus on efficiency and market-based solutions.

Lost alternatives. Policies that were once central to liberal thought became marginalized:

• Universal social programs: Replaced by targeted, means-tested approaches.
• Aggressive antitrust: Replaced by a focus on consumer prices, ignoring broader power concerns.
• Strict environmental standards: Replaced by cost-benefit balancing and market mechanisms.
  This narrowing of policy options has had profound, long-lasting effects on American society.

The "no alternative" illusion. The economic style's perceived neutrality and its deep institutionalization created a sense that its prescriptions were the only rational path forward. This "there is no alternative" mindset, while often associated with neoliberalism, was significantly shaped by liberal technocrats who genuinely believed they were improving government.

12. Beyond Efficiency: Reclaiming Alternative Policy Frameworks

When our values align with those of economics, we should embrace the many useful tools it has to offer. But when they conflict, we much be willing to advocate—without apology—for alternatives, rather than allowing our values to be defined by the values of economics.

Recognizing the constraints. For progressives seeking to expand policy possibilities, understanding the economic style's pervasive influence is crucial. Policies like Medicare for All or robust antitrust enforcement are often dismissed not just for political reasons, but because they conflict with the ingrained logic of efficiency and market-based solutions.

Challenging the assumptions. To move beyond these constraints, it's necessary to:

• Reassert absolute principles: Argue for rights, justice, or liberty as ends in themselves, not subject to cost-benefit analysis.
• Question efficiency as the sole value: Highlight how efficiency can conflict with other desirable outcomes like equality, democracy, or community well-being.
• Critique underlying theories of behavior: Challenge the assumption that individuals and markets always respond rationally to incentives, and acknowledge political and practical barriers.
  This means recognizing that policy is fundamentally political, not just technical.

Building new infrastructure. Lasting change requires not just intellectual arguments but institutional support. This involves:

• Diversifying expertise: Expanding the range of disciplines and perspectives within government offices and policy organizations.
• Creating alternative institutions: Building new think tanks and research centers that incubate and promote different policy frameworks.
• Targeting legal veto points: Challenging legal doctrines (like the consumer welfare standard) that enshrine efficiency as the sole legitimate goal.
  By consciously advocating for alternative values and building the infrastructure to support them, progressives can broaden the horizon of what is considered politically possible.

Last updated: August 16, 2025