Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy
Elizabeth Popp Berman
Princeton University Press, $35 (cloth)
Cogs and Monsters: What Economics Is, and What It Should Be
Princeton University Press, $24.95 (cloth)
What’s Wrong with Economics? A Primer for the Perplexed
Yale University Press, $25 (cloth)
“Those who can, do science,” the economist Paul Samuelson once remarked. “Those who can’t, prattle on about methodology.” Until fairly recently this seemed to be the dominant attitude among mainstream economists, but a sea change came when the global financial system began to unravel in 2007. In the decade and a half since—painful years of sluggish recovery, stagnating real wages, yawning inequality, and populist upheaval—reflexive talk has exploded. Why was the crash not widely predicted? Was the “efficient market hypothesis” to blame? Have lessons from the Great Depression been forgotten? And why are core questions about finance, power, inequality, and capitalism still largely missing from Economics 101?
Far more than macroeconomic theory, it is microeconomic principles that define and unite the modern economic profession.
The most visible debates have centered on macroeconomics—the study of the gross features of the economy as a whole. At stake are some of the field’s bedrock concerns: the power of public spending and money creation, the role of banking and the risks of complex financial instruments, the relationship between employment, wages, inflation, and interest rates, and the nature and necessity of growth. Given the role macro models play in central banking and public spending, these are not merely academic questions but urgent matters of public policy—from pandemic response to Build Back Better and the new inflation wars.
Yet all this macroeconomic Sturm und Drang has obscured the basic unity of microeconomic methods employed by the vast majority of working economists today, whether in the academy, government, or industry. Crack open a bestselling introductory textbook like Harvard professor N. Gregory Mankiw’s Principles of Economics (now in its ninth edition), and the first “principles” one encounters are not the fundamentals of growth or employment but rather “opportunity cost, marginal decision making, the role of incentives, the gains from trade, and the efficiency of market allocations”—all microeconomic ideas. Far more than any core tenets of macroeconomic theory, it is this core bundle of microeconomic principles that defines and unites the modern economic profession. It is also what distinguishes mainstream methods, sometimes termed “neoclassical,” from the various heterodoxies—Marxist, Austrian, post-Keynesian, ecological—that most academic economists studiously ignore.
Although some of its roots stretch back centuries, microeconomics as we know it was born in the 1930s and ’40s, when a starkly formalist and deductive approach to modeling market behavior gradually but firmly displaced its historicist and institutionalist rivals in the Anglo-American profession. During World War II scores of economists were recruited to apply optimization models to wartime planning, and in the postwar era this shift was further entrenched by the global hegemony of intensely mathematized techniques (a trend pioneered by Samuelson himself). This revolution has proven exceptionally durable—far more, in fact, than the “Keynesian revolution” in macroeconomics that initially unfolded around the same time.
Given the outsize influence of economic thinking in modern life, it is odd that these microeconomic foundations have largely escaped public scrutiny. Three recent books help set the record straight. Each freely courts Samuelson’s scorn, showing how microeconomic methodology structures not only the theory and practice of economics, but the very institutions of American governance. In the face of the concatenating disasters of the present, economics will have to be remade, these authors suggest—from the inside and out.
For an accessible overview, historian Robert Skidelsky’s What’s Wrong with Economics? A Primer for the Perplexed is the best place to start. An esteemed biographer of John Maynard Keynes, Skidelsky has long been a sharp observer of the economic scene and played an important role in reviving Keynesian ideas over the last decade. Yet in contrast to previous work like Money and Government (2018), which sought to reimagine the macroeconomic paradigm, this book plunges into microeconomic foundations. Though more knowing readers will find little here that is original or surprising, the virtue of the book lies in its trenchant and highly readable synthesis of material not often brought together in one place. It should be required reading for anyone new to the field, students and general readers alike.
Skidelsky thinks economics suffers from a bad case of “physics envy,” while its textbooks function as instruments of indoctrination.
Skidelsky’s targets can be grouped into three main features of contemporary economic thinking: its intense mathematization, its caricatured portrait of human psychology, and its isolation from the other social sciences. Some economists, Skidelsky concedes, may object that he presents a caricature of his own. They are right, in one sense: he pays more attention to economic theory than economic practice, which has changed significantly over the last few decades. On the other hand, Skidelsky retorts, “it is the caricature which rules the textbooks”—and the textbooks matter. They function, in particular, as instruments of indoctrination. Students might better resist the “slide into ideology,” Skidelsky mischievously suggests, if they pressed their university lecturers to defend the “toy models” their books throw at them.
Consider first the issue of excessive reliance on math. Critiques in this direction are at least a century old, but Skidelsky (following Philip Mirowski, among others) finds a unifying theme: economics suffers from a bad case of “physics envy.” To first approximation, the fundamental technique of modern economic thinking is to generate highly simplified models of phenomena of interest, reducing the tremendous complexity of actually existing economies to precise and quantifiable mathematical formalism—just as physicists do for the natural world.
As this technique took off in the twentieth century, a great deal of economic theory became even less like physics and more like pure math: the goal was to formulate theorems—the more surprising the better—and, most important, to prove them, reasoning by a chain of unassailable logical consequences from a few basic assumptions (just as a mathematician might prove a theorem in geometry or number theory). One of the crowning achievements of this axiomatic approach is the modern theory of general equilibrium developed by Kenneth Arrow, Gérard Debreu, and Lionel McKenzie in the 1950s, which demonstrates how a market economy, under ideal conditions, achieves the perfect allocation of resources. Just as the mathematicians had their “fundamental theorem of algebra,” midcentury economists developed their own “fundamental theorems of welfare economics.”
Not all economic models are this abstract; others are closer the ground, examining the behavior of a firm under particular price and supply constraints, say, or individuals in a labor market. Either way, Skidelsky demonstrates, economic theorizing has often cared less about the performance of the model than the tightness of its logic, even its formal elegance. (Sociologically speaking, this is partly because mathematization has doubled as a sorting mechanism: in order to decide who gets a job or tenure, just pick the candidate doing the most sophisticated mathematics.) A model might begin with radically untenable assumptions, but that is no point against it so long as it is logically consistent, aesthetically pleasing in its simplicity, and makes accurate predictions, as Milton Friedman argued in his famous paper on the “The Methodology of Positive Economics” (1953). The purchase on reality, the argument goes, can always be improved through later revisions.
Mimicking mathematicians, economists developed their own “fundamental theorems.”
For Skidelsky, the fundamental problem with this methodology is that, because it imitates physical explanations of the natural world, it falsely assumes that lawlike regularities also govern the social world—or at least that models assuming such regularity are “good enough.” (On these issues, Skidelsky curiously overlooks Mary Morgan’s valuable 2012 study The World in the Model: How Economists Work and Think.) Moreover, the ideal assumptions of economic models often do a great deal of subtle ideological work by reinforcing laissez faire fundamentalism and conflating the descriptive and predictive uses of models with their prescriptive role in public policy. As economist Frank Knight once put it, equilibrium can be deduced only under assumptions so “heroic” that they bear little resemblance to reality at all. Yet when real world conditions depart from these assumptions, many economists act as though it’s the world that’s to blame, not the model. For them, the point is that markets ought largely to be left alone, or even created in domains where they do not already exist, so as to bring the world more in line with the model rather than the model more in line with the world.
This objection is hardly new, of course. Economists typically retort that equilibrium functions as a useful heuristic, or that some researchers are just better than others—less likely to slide into ideology, more likely to use models judiciously. “Bad economists, of course, do bad economics; but one should not confuse a complaint about quality with a complaint about methodology,” Paul Krugman intoned in his 1998 essay “Two Cheers for Formalism.” What this argument misses is that the stakes of bad economics are often far higher than bad physics: being wrong about gravitational waves may cost you tenure, but being wrong about the minimum wage might condemn tens of millions to poverty. Formalism per se may not always be a problem (though it can be when it crowds out other approaches), but the outsize social and political influence it has certainly is. Those invested in the logical rigor of equilibrium may—and many do—seek to make the world behave more like the equation, by hook or by crook.
Given these stakes, Skidelsky thinks explicit methodological reflection, far from the “prattle” Samuelson condemns, is necessary to guard against dangerous overreach and ideological distortion. “The authority of economics derives in no small measure from its opacity,” Skidelsky writes. Is equilibrium, he asks, “a necessary property of a market system, a benchmark, a logical requirement for quantitative prediction, or a mathematical ideal: beautiful to behold but of little practical relevance?” Even when they attempt to be transparent, textbooks and working economists offer very different answers. In light of the stranglehold economics has on public policy, the implications of this central ambiguity are not solely philosophical: they are also political.
The picture is not much rosier, Skidelsky thinks, within more applied domains of microeconomics. (Although he doesn’t mention it, this category accounts for the vast majority of research by academic economists today: theory for its own sake is now mostly relegated to textbooks rather than professional journals.) The trouble is that the economy as a whole, and even many smaller segments of it, cannot be subjected to the kind of experimental isolation undertaken in the physical sciences. Economic propositions are thus not open to the same degree of falsification as physical ones—despite the sophisticated statistical tools of modern econometrics, try as they might to parse correlation from cause. Even when the need for theory revision is conceded, it is pursued very incrementally, in the most conservative way possible. “With the lapse of time, the qualifications, the restrictions and the exceptions have piled up,” the heterodox economist Piero Sraffa once put it, until they “have eaten up, if not all, certainly the greater part of the theory.” Yet with manifest failures explained away as minor “frictions” in the model, Skidelsky observes, “the core theory” is protected “from attack.” Economics, in other words, is far too fond of its epicycles: it is long overdue for revolution.
When real world conditions depart from model assumptions, many economists act as though it’s the world that’s to blame.
What’s more, to the extent that robust empirical findings have emerged in recent decades, the results are often at odds with the predictions of microeconomic theory. The minimum wage is a case in point. Abstract equilibrium models predict that higher minimums increase unemployment. When empirical work began questioning this presumption, the outrage from some economists was severe. “The inverse relationship between quantity demanded and price is the core proposition in economic science,” Nobel laureate James Buchanan thundered in the Wall Street Journal in 1996: “Just as no physicist would claim that ‘water runs uphill,’ no self-respecting economist would claim that increases in the minimum wage increase employment.” Yet in the decades since, empirical research has consistently failed to find evidence for this supposedly self-evident relationship. How should we make sense of this divergence between theory and reality? Skidelsky thinks we ought to conclude that “there are no ‘laws of economics’ valid at all times and places. At best, theories can lead to approximately reliable predictions over such time periods as other things stay the same.” This may be the case in very special and limited circumstances, but it cannot be true over any long period or at a high level of generality.
The second main target of What’s Wrong with Economics? will be more familiar to general readers: the field’s thoroughgoing methodological individualism, and its highly stylized, utility-maximizing caricature of Homo economicus. Economists pride themselves on the artificiality of this construct, which they justify by its usefulness for modeling. In the definition of Nobel laureate Thomas Sargent, a person is merely a “constrained, intertemporal, stochastic optimization problem.” For Skidelsky, critical problems arise when we ask whether this “unlovely creature” is simply a theoretical tool or rather an ideal form to which flesh-and-blood mortals should aspire. As with equilibrium, textbooks and many professional economists toggle between contradictory answers. Nor has the puzzle been resolved by the rise of behavioral economics, despite its ingenious psychological experiments demonstrating how human rationality is “bounded” by a variety of cognitive biases. Talk of “loss aversion” and “the sunk cost fallacy” can still serve to reify a Platonic ideal of rational behavior. For Skidelsky this is a dangerous delusion, since it suggests we can calculate our way out of hard decisions or even deduce our way out of disagreement once and for all. In reality, “there is no escape from moral choices.”
The stakes of bad economics are high: being wrong about the minimum wage might condemn tens of millions to poverty.
These deep methodological issues do not render economic knowledge utterly useless, Skidelsky suggests. But they do mean economics as we know it may have to be thrown out. “To what worlds does the study of economics add unique value,” he asks, “to what worlds does it add about the same amount of value as do other social sciences, and to what worlds does it add no value at all, and even detract from it?” Skidelsky clearly believes this third case is true in many worlds of public life. We should instead take a more provisional, open, and flexible attitude toward economic phenomena and treat economics as (just) another social science, rather than one supposedly purified of uncertainty by its logical prowess. Concretely, this means we should abandon dreams of an immaculate science of economic life—and stop deferring to those who claim to speak in its name. More abstractly, in place of a discipline that neglects the “mesoeconomic” level—the institutions, firms, unions, banking systems, social movements, digital platforms, states, and other social entities that shape our behavior—Skidelsky proposes an approach “which is more modest in its epistemology and richer in its ontology.”
This brings us to Skidelsky’s third critique: economics has walled itself off from sociology, political science, ethics, and history—to its detriment, and ours. Skidelsky’s arguments here take inspiration from what he sees as a lost and richer past of political economy. Engaging sociology (the insights of Max Weber, say) and older forms of economic history would make space, he argues, for more context-specific economic analysis, as well as a methodological holism that systematically factors in the emergent properties of social institutions. Reviving required graduate courses in the history of economic thought would expose students to radically different methodologies. Finally, more serious engagement with ethics would reorient economics away from the satisfaction of theoretically limitless individual wants to “the end of absolute poverty and disease.”
The radical modesty, transparency, and pluralism Skidelsky calls for would surely be welcome. But in a world where microeconomic models are now being coded into the algorithms that govern more and more of our social and economic life, just how likely is it that these virtues are forthcoming? On this point, British economist Diane Coyle’s Cogs and Monsters: What Economics Is, and What It Should Be offers a more realistic assessment.
What sets Coyle’s book apart from other recent critiques is her insider perspective. After earning her economics PhD at Harvard in 1985—the height of a monetarist revival, she recalls, as well as the rational expectations revolution, when everyone was out to “microfound” macroeconomics—Coyle landed a job at the UK Treasury on the eve of massive financial deregulation. She worked several years as a government economist before spending two decades in financial journalism and ultimately entering academia. Along the way, she has written regularly for a broad audience; her other books include The Soulful Science (2007) and GDP: A Brief but Affectionate History (2014).
Cogs and Monsters adapts lectures Coyle has delivered over the past decade, and it shows. Readers who look beyond the occasional repetition and structural aimlessness, however, will find valuable reflections on the state of the field and “the public responsibilities of the economist.” Coyle is predictably defensive of her discipline, tired of the “straw men” savaged by critics, but the book is full of illuminating anecdotes about the gap between theory and practice. Her main interest is what happens when elegant models on paper are carelessly set loose on the world.
Policymakers don’t just observe the world; they intervene in it. Yet most economists, Coyle thinks, fail to account for their agency in the system.
To her credit, Coyle is willing to point fingers at stretches of her own field. The main problem, she contends, is that economists have broadly failed to understand how they shape the very systems they study. Take the Black-Scholes model for the pricing of stock options (the subject of the 1997 Nobel). As sociologists of finance like Donald MacKenzie have shown, these ideas reshaped financial markets in their own image: as more and more traders followed the model, actual valuations more and more closely matched its predictions, apparently confirming its validity. While these circular adjustments spiraled into a doom loop, blasé regulators turned a blind eye to fundamentals. The result was that systemic risk exploded in the global derivatives market, helping to bring the global financial system to its knees in 2007–8.
Coyle argues that this problem runs well beyond finance. By adopting the “perspective of an objective, omniscient outsider,” economists in many applied domains—especially public policy—fail to account for their own agency within the system. Policymakers don’t just observe the world; they intervene in it. And since the real economy is replete with feedback loops and two-way causality, models that don’t factor in the role of policymakers—and how people might respond to their interventions—are destined to be misleading.
Why can’t the models be tweaked to handle these issues or anticipate unintended consequences? The trouble is the hegemony of the microeconomic foundation on which the models are built. “The economist who accommodates reality, by using rules of thumb with no ‘microfoundations’—meaning theoretical accounts of actions at the level of every individual—will often be criticized for ad hoc-ery by their peers,” Coyle writes. Prestige journals—which can make or break an academic career—enforce the same attitude. Echoing Skidelsky, Coyle contends the field should abandon its utopia of pure reason and instead embrace the ad hoc nature of all approximations of reality. That means making more room for plausible narratives rather than airtight proofs, and borrowing qualitative methods from neighboring social sciences like sociology and anthropology. After all, as Keynes is often (erroneously!) said to have remarked, “it is better to be roughly right than precisely wrong.”
Where Coyle departs from other critics is in her claim that much of this transformation has already taken place. “Most economists,” she writes, “do applied microeconomic research, where data sets, econometric techniques, computer power, and a lively methodological debate about causal inference mean there has been an effective revolution in knowledge and practice since the 1980s.”
At one level, Coyle is correct: by many metrics the profession today really does bear little resemblance to the midcentury neoclassical mainstream. The share of publications devoted to empirical and applied work has steadily risen since the 1990s; it now exceeds 60 percent in fields like labor economics, public finance, and development economics. The objects of study have significantly expanded as well; they now range from identity, culture, and inequality to climate change, social mobility, and life expectancy. Political winds have shifted, too. Prominent, mainstream economists at elite universities now freely criticize economic libertarianism, as when Suresh Naidu, Dani Rodrik, and Gabriel Zucman repudiated “glib ‘markets work’ slogans” in these pages three years ago. Despite the sometimes deserved public caricature of “Econ 101,” these changes have even begun to trickle down into teaching, especially since 2008. Coyle herself, in her work with the CORE collective’s attempt to reconstruct the traditional college economics curriculum, has played a leading role in such efforts.
The fetish of mathematization still serves to crowd out political scrutiny, even if it now operates in a more statistical than axiomatic mode.
There is much that is encouraging here, but Coyle fails to ask whether this turn is as revolutionary as it appears. The surface certainly has shifted, but in many respects the deep structure beneath remains the same. For one thing, the turn to big data has not done away with the use of models that still overwhelmingly rely on microeconomic foundations. For another, the fetish of mathematization still serves to crowd out deeper epistemic and political scrutiny, even if it now operates in a more statistical than axiomatic mode. Take the highly influential and publicized work of Harvard economist Raj Chetty—poster boy of the empirical revolution, whom Coyle cites approvingly. With analytical rigor and causal precision, Chetty’s lab mines vast troves of data to parse social mobility at unprecedented levels of granularity. Yet for all this technical prowess, his work amounts to a highly sophisticated confirmation of the obvious: that those born into social disadvantage very rarely escape it. (Never mind that social reformers, socialists, and poor people themselves have said so for centuries. Their arguments were biased and anecdotal, we are supposed to believe, but Chetty’s count as high science thanks to the benediction of causal inference.) This sort of work may serve to nudge policy at the margins—a tax credit here, a voucher there—but as economist Marshall Steinbaum has argued, it remains woefully inadequate in the face of the deeper structures responsible for such outcomes.
This possibility lurks just beneath the surface of another of Coyle’s arguments: that the applied microeconomics of the present is surely inadequate for the digital economies of the future. The “cogs” of her title refer to “the self-interested individuals assumed by mainstream economics, interacting as independent, calculating agents in defined contexts”—the Homo economicus skewered by Skidelsky. The “monsters,” by contrast, are the “snowballing, socially influenced, untethered phenomena of the digital economy.” With some urgency, Coyle warns that the default microeconomic toolkit, which treats everyone and everything as a cog, “is inadvertently creating monsters, emergent phenomena it does not have the tools to understand.” Platforms like Uber and Airbnb exhibit network effects that can’t be reduced to individual interactions, and accelerating technological change is leading people to rapidly shift their “preferences” over time.
These developments, Coyle warns, make it even more difficult “to sustain the idea that economic experts can stand outside society looking down with benign objectivity, pulling levers.” Even hallmark indicators like GDP seem to outlived their usefulness. To fully grasp and manage this brave new world, Coyle suggests, some core microeconomic presuppositions may need to be jettisoned, and policymakers may need reconceive their goal as coordinating the “rules of the game” or setting “focal points,” rather than nudging individual behavior.
Throughout the book, Coyle is refreshingly honest about the shortcomings of her discipline, alive to its capacity for reinvention, and deeply thoughtful about some of the challenges we face. All the same, her title cannot help but evoke other, perhaps more frightening monsters—ecological breakdown, deadly pandemics, secular stagnation, rising inequality, authoritarian resurgence—that her analysis relegates to the margins when it mentions them at all. Her glib attribution of political polarization to “the failure of some people and places to experience economic improvements” exhibits a political obtuseness characteristic of much of the profession. On its very first page, Cogs and Monsters bluntly answers post-2008 critics of economics with the retort that it “has become more successful than ever in terms of its influence on policy-making, or more materially in terms of the incomes economics graduates can earn.” That these are the first defenses of the field this reform-minded author can muster indicates just how deep the problem goes.
Though Skidelsky and Coyle offer penetrating reflections on economic theory and practice, neither has much to say about their institutional power. For this, sociologist Elizabeth Popp Berman’s Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy is indispensable. Deeply researched and powerfully argued, it is easily one of the most important studies of American governance in many years.
Offering a counter-history of neoliberalism, Berman’s book traces how an “economic style” took over American governance.
The book gives a counter-history of neoliberalism of sorts, though Berman rarely uses the term. The conventional origin story focuses on a small cadre of right-wing intellectuals who convened at Mont Pèlerin in Switzerland in 1947 in opposition to the burgeoning postwar welfare state, and rode a wave of donor-backed PR efforts to government positions under Ronald Reagan and Margaret Thatcher. More recent studies have expanded the frame, from Central Europe (in the post-imperial turmoil after World War I from which several key neoliberals emerged) to the Global South (where a wave of nations reconfigured market-state relations in the wake of debt crises in the late 1970s). Yet with a few notable exceptions, this work still focuses mostly on the right and mostly on intellectuals. Berman takes a different tack on both fronts. Her starting point is the dominant form of policymaking in the United States today—embraced by technocrats in both major parties—and her object of study is not an intellectual body of work but a particular “style of reasoning” that pervades the institutions of modern government, one that prizes “efficiency” above all else.
This style will be familiar to anyone who has had to endure watching a presidential debate. Universal programs, we hear, are less efficient than means-tested policies because they subsidize services for people who can afford them. Carbon emissions are more efficiently dealt with via cap-and-trade measures than rigid mandates. It’s better to have competitive energy and transportation sectors than introduce more inefficient regulation. And how do we know all this? It says so right here in this report, written by nonpartisan economists.
As Berman sees it, these positions are all products of what she calls the economic style, which “starts with basic microeconomic concepts, like incentives, various forms of efficiency, and externalities” and deploys a few characteristic patterns of thought: “using models to simplify, quantifying, weighing costs and benefits, and thinking at the margin.” Above all, the economic style exhibits “a deep appreciation of markets as efficient allocators of resources,” so much so that it takes efficiency to be the primary metric of good policy. Though it gains prestige by affiliation with the graduates of elite universities, it is not necessarily derived from cutting-edge academic research. Rather, as one pioneer put it, “the tools of analysis that we use are the simplest, most fundamental concepts of economic theory [that] most of us learned as sophomores.” In other words, precisely the pedagogical just-so stories that Skidelsky excoriates.
How and when did this style emerge? Berman traces the key juncture to the 1960s, decades before the heyday of neoliberalism under Reagan. It was during this period that two groups of economists—whiz-kid systems analysts from the RAND Corporation on the one hand, industrial economists from the elite academy on the other—entered the state apparatus, spread their ideas, trained many others, and gradually but inexorably altered the fundamental mechanisms of American governance. Far from an alien ideology hatched by right-leaning intellectuals and imposed from the outside, then, the economic style was born in the heart of the midcentury liberal democratic state. Most of its partisans saw themselves as liberals (in the modern rather than classical sense), and all of them avowed the importance of a neutral, value-free science of policy. They did not set out to roll back the government, but they did seek to improve its functioning in the technocratic image of efficiency, using microeconomic tools to do so.
Far from an alien ideology hatched by right-leaning intellectuals, the economic style was born in the heart of the liberal democratic state.
The first of these two groups emerged from RAND, the Santa Monica think tank set up at the end of World War II. Although RAND initially focused on defense, its ambitious researchers—many of them economists—came to pioneer a mode of thinking they dubbed “systems analysis.” The basic idea was to use tools derived from operations research and cost-benefit analysis to develop a rational approach to all “problems of choice”—not just for bomber planes, but for any conceivable government objective. Microeconomics offered the ideal framework for this endeavor, RAND analysts Charles Hitch and Roland McKean argued in The Economics of Defense in the Nuclear Age (1960), given its concern “with allocating resources—choosing doctrines, equipment, techniques, and so on—so as to get the most out of available resources.”
Top military brass balked at its strategic recommendations, but systems analysis soon won favor for its applications to spending priorities—an increasing preoccupation as defense budgets exploded in the Cold War era. When President John F. Kennedy appointed Robert McNamara, already famous for bringing statistical management techniques to Ford Motor Company, to lead the Department of Defense in 1961, McNamara filled the Pentagon with a whole cadre of RAND analysts. They set out to apply systems analysis to the entirety of the defense budget in a program they dubbed the Planning-Programming-Budgeting System, or PPBS. Conventional budgeting approaches were turned on their head. Instead of the traditional method of adding up the spending for each branch and division, PPBS began with a set of broad military goals and then identified downstream the “combination of equipment, men, facilities, and supplies” to achieve them most cost-effectively. As prosaic as this approach may sound today, it required a complete transformation of the Pentagon and an army of new analysts to do the requisite measurement, benchmarking, and forecasting. By 1968 roughly 1,000 employees were working full-time to manage and implement PPBS.
In short order the economic style would extend far beyond defense budgets. In 1965, as the fiscal pressures of the escalating War in Vietnam alongside the Great Society began to bite, President Lyndon Johnson saw in PPBS a way to control spending across the board, and mandated its use across all federal departments and agencies by executive order. Although this style of budgeting was never fully implemented due to bureaucratic foot-dragging and was ultimately repealed by Nixon, the staff initially recruited to carry it out, Berman argues, were essential in disseminating the economic style across the federal government. In the first instance, each department and agency was required to create a “policy planning office” (PPO) for monitoring and implementation. These offices, which remained even after the demise of PBBS, were overwhelmingly staffed with new hires of recent economics PhDs and would serve as “beachheads for economic reasoning.” The affair amounted to a massive social engineering program, reconfiguring the organizational culture of the whole federal government.
Institutional incentives ensured the changes stuck. As successive presidential administrations rebalanced spending, fights over funding triggered an analytic arms race; rival agencies staffed up with economists to defend their turf. To avoid relying on the numbers of the executive branch, meanwhile, Congress opened its own Congressional Budget Office (CBO) in 1974 and reoriented the Government Accounting Office toward cost-benefit analysis. All this generated a steady demand for new analysts, and universities took note. Between 1967 and 1972, a dozen new academic programs were established in the brand-new discipline of “public policy,” which emphasized “microeconomics, macroeconomics, statistics . . . and elements of operations research and decision analysis” modeled on the RAND prototype. The founding director of Duke’s program was emphatic: there “was a market for fairly well-defined product—persons trained to do analyses like those done at RAND!” Not to be outdone, RAND launched its own Graduate Institute for Policy Studies in 1970.
Besides producing a new kind of professional, these developments also prompted the creation of a whole new ecology of institutions selling economic analysis to the government. The impetus came from the premium PPO offices placed on data gathering and evaluation, Berman shows. In 1967 Assistant Secretary of Planning and Evaluation William Gorham, another RAND alum and LBJ appointee, successfully pushed for 1 percent of funding for child health legislation to be set aside to evaluate the policy. The move rapidly became standard practice, and soon hundreds of millions of dollars were available for evaluation research across the federal government. Much of it would be contracted out to new policy research organizations—the Urban Institute, MRDC, and Mathematica (not to be confused with the software)—that were modeled after or strongly influenced by RAND. And who better to staff their swelling staff ranks than economics and public policy graduates?
Beginning under Kennedy, RAND’s vision of “systems analysis” reconfigured the organizational culture of the whole federal government.
It would be hard to overstate the impact this new regime had on every aspect of American governance. Systematically and persuasively, Berman documents how it touched nearly every major policy area of the late 1960s and ’70s. The effect was to dismantle the expansive social philosophy reflected in the landmark Great Society legislation passed in 1964 and 1965—in health care, housing, civil rights, education, and poverty—and replace it with a narrow economic logic that prized efficiency above all. As Berman slyly observes, there had been no “scoring” of the 1965 Medicare bill by the CBO: the office did not yet exist.
Take education. The 1965 Higher Education Act prioritized direct institutional aid as a public good, especially in grants to public universities. But by 1969, the analytical office of the Department of Health, Education, and Welfare (HEW), led by Johnson appointee and Harvard economics PhD Alice Rivlin, argued it would be more efficient to direct aid to individuals using student loans (then not in wide use). Not only would society reap productivity gains from the increased earning power of college graduates, but the government would no longer be subsidizing tuition for students who could afford to pay. Rivlin’s work would serve as the intellectual blueprint for Nixon’s 1972 Higher Education Reauthorization Act, which permanently tilted federal aid toward loans—setting the modern tuition arms race in motion. A similar pattern unfolded at the Department of Housing and Urban Development, whose economists successfully militated to reorient federal policy away from public housing funding in the early 1970s and toward the “efficient” solution of low-income family vouchers for market housing (today’s Section 8).
Even more momentous was the key arena of health care. Drawing on analysis completed under Rivlin, Nixon’s HEW launched a years-long, $80 million experiment—supervised by RAND—testing the economic theory of “moral hazard” (the idea that individuals fully insured against health costs would “overuse” care). The results proved politically useful. In response to Senator Ted Kennedy’s push for a universal expansion of Medicare coverage in the early 1970s, Nixon had his HEW economists work up an alternative plan based on market competition, private employer mandates, and substantial cost sharing to avoid moral hazard. Rivlin, having moved to the liberal Brookings Institution, railed in the New York Times against the economic illiteracy of organized labor’s position that national health insurance should “provide free care for everyone without any cost-sharing,” but her remarks about the Nixon plan were far warmer. Universal health insurance was never closer to passing Congress than in the early 1970s—Rivlin herself thought it was “virtually certain”—but Nixon’s proposals succeeding in heading it off. In place of universal public insurance, the United States got co-pays and employment-based HMOs.
The second group Berman follows are industrial organization (I/O) economists, who study the relationship between firms and markets. Unlike the RAND analysts, they hailed primarily from Harvard and the University of Chicago. The Harvard group emphasized issues like monopoly power, while their rivals at Chicago tended to focus on prices, but “what they shared was as important as what they did not,” Berman argues. The common denominator was neoclassical partial equilibrium theory (couched in the language of microeconomics) and a commitment to “allocative efficiency as the main purpose of market governance.” This orientation overturned the prevailing wisdom of the existing regulatory and legal system, which had prioritized stability and antitrust efforts in the face of “ruinous competition.” Despite theoretical divergences, Berman notes, “the liberal and conservative I/O networks overlapped considerably.”
Their most pronounced impact was in the legal system, where they pioneered the subfield of “law and economics.” Harvard had figures like Donald F. Turner, LBJ’s chief of the antitrust division of the Justice Department, and his deputy, future Supreme Court Justice Stephen Breyer. The new approach was even more advanced at Chicago, which housed the Journal of Law and Economics (founded in 1958) and such figures as Robert Bork (a fierce critic of antitrust enforcement and later Reagan’s controversial Supreme Court nominee), Ronald Coase (though an economist, the author of the single most cited legal article of all time), and Richard Posner (the leading law and economics scholar of the next several decades). Together these men disseminated the economic style throughout the elite legal scholarship of the 1960s. Perhaps even more influentially, curricula changed. Midcentury legal thinking once had little use for economic ideas; by 1973, however, economic theory classes were a requirement in 15 of the 22 top law schools in the country.
The impact wasn’t confined to academia, either. Key I/O figures began to enter administrative positions at the Justice Department and the Federal Trade Commission in the late 1960s and remained there throughout the next decade and beyond. Under their leadership, cases were now pursued more on the basis of efficiency concerns, rather than legal violations or market concentration per se. At the same time, the economic style flourished in the center-left, Harvard-associated Brookings Institution and the conservative American Enterprise Institute (AEI), both with active research programs on market governance and regulation led by economic analysts. All the while, as economic arguments became increasingly salient within legal antitrust cases, the courts also gave them increasing weight—to the point where any competing priorities became legally inadmissible. By the mid-1970s the center of gravity had shifted from Harvard to Chicago and Brookings to AEI, but efficiency remained the summum bonum of policy assessment. One outcome of this trajectory was the massive deregulation of the transportation sector in the late 1970s, carried out under the Ford and Carter administrations from within the federal bureaucracy, in which Breyer played a leading role.
Another effect was to transform regulation in areas where it wasn’t killed off. A slew of bills passed between 1966 and 1973 instituted major new regulatory regimes, from air and water to occupational safety and environmental protection. Suspicious of economists’ tightening grip over the federal bureaucracy, liberal stalwarts in Congress intentionally designed these bills with strict and inflexible legal mandates on the grounds that more lenient approaches would be open to regulatory capture by industry; key pieces of legislation went so far as to prohibit cost considerations altogether. Yet the economic style was not so easily defeated. A landmark court decision in 1971 found that a key requirement of the National Environmental Policy Act—that executive agencies issue environmental impact statements on their activities—necessitated an economic cost-benefit analysis as well. Successive moves by the Nixon and Carter administration centralized this system, requiring agencies to run their analyses through the White House. In the wake of these developments, industry groups flooded the government with data demonstrating the steep costs of this or that proposal, and agencies responded with their own economic counterarguments. The result was an increasingly hegemonic role for the economic style, even in enforcing legislation explicitly written to avoid it.
Berman offers a damning political moral: the liberal dream of rational governance produced monsters of its own.
Among the many casualties has been ambitious environmental policy. Following a 1977 amendment to the Clean Air Act permitting pollution offsets, the EPA’s PPO, led by former McKinsey consultant Bill Drayton, argued that across-the-board reduction targets were not cost efficient. Instead, firms should be allowed to count reductions in some parts of a plant against stable or rising emissions elsewhere. This was the first step in the marketization of pollution rights that ultimately led to cap-and-trade approaches to ozone regulation; economists would propose the very same approach to climate for years, leading to a spectacular failure of implementation in the United States and negligible impact on emissions in Europe to date. As the Intergovernmental Panel on Climate Change recently reiterated, the costs of this comprehensive failure have been staggering.
The institutional hegemony of the economic style endures to this day. The effects have been profound. It was Democrats’ institutionalization of the economic style—“through legal frameworks, administrative rules, and organizational change”—that cemented the rightward shift of the party, Berman concludes, hamstringing its ability to make significant policy in both the Clinton and Obama administrations. In fact, as Berman details in a chapter on the Reagan administration, conservatives were far more opportunistic wielders of the economic style than liberals, embracing its analysis when it aligned with preexisting values (say, on deregulation) but sidelining it in areas where it did not (welfare and the environment). As with so many other dynamics in American politics, this strategic asymmetry pushed the outcome ever further rightward. Drawn together, Berman’s story offers a damning political moral: the liberal dream of rational governance produced monsters of its own.
Berman ends the book by addressing progressives directly. Ambitious reforms—like Medicare for All or a Green New Deal—will only be achieved, she urges, by “denaturalizing” and partially displacing the economic style. The “ruse” of its neutrality obscures the fact that efficiency has become “a value of its own.” Recognizing as much would force efficiency to compete with other values in the political domain—among them fairness, equality, and justice. This would require not only developing alternative forms of expertise, but also eliminating the legal and institutional “veto points” that give the economic style its power. In short, Democrats must become more like Republicans in one crucial respect: “when our values align with those of economics, we should embrace the many useful tools it has to offer. But when they conflict, we must be willing to advocate—without apology—for alternatives.”
With considerably more concreteness than either Skidelsky or Coyle, Berman details precisely how economics has contributed to our present malaise. It is not just that models oversimplify reality, that politicians too often defer to claims of neutral economic expertise, or that this expertise itself can slide into ideology. The problem is far more fundamental: a dangerously simplified version of microeconomic ideas is legally and institutionally woven into the very fabric of American governance, largely invisible and unaccountable to the public.
A dangerously simplified version of microeconomic ideas remains legally and institutionally woven into the very fabric of American governance.
Yet the force of Berman’s argument is regrettably weakened by side-stepping a critique of efficiency itself. To use the Bayesian parlance that has become de rigueur in professional economics, a reader with different political “priors” could read her history as the steady and welcome triumph of technocratic analysis over barbarian irrationality. From this vantage, the entrenchment of the economic style is nothing less than a march toward perfection, and appealing to it opportunistically can only be the expression of a dangerous will to power.
In reality, “efficiency” is hardly the objective measure so many take it to be. Coyle’s discussion of digital economies offers a case in point. By official accounting, the Internet made a negative contribution to U.S. GDP growth in the early 2010s, the very moment when broadband and mobile technology exploded—an observation that should clue us in to the social construction of supposedly “neutral” economic facts. Whether it’s economic indicators or key model parameters like discount rates, the further the black box is prised open, the less natural and objective efficiency calculations begin to look—as any government economist under political pressure to “stack the deck” of a cost-benefit exercise can tell you.
Moreover, as both Skidelsky and Coyle point out, there are values at stake. One standard measure, so-called welfare or Kaldor-Hicks efficiency, presumes that interpersonal utility comparisons are impossible. Who is to say the reported $500 million price tag of Jeff Bezos’s yacht represents any less utility for him than a wage increase would for his 1.3 million employees? When it became orthodoxy in the 1930s, this prohibition on interpersonal comparison effectively ruled out any discussion of income redistribution. As Coyle writes, “economics has hamstrung its ability to evaluate social welfare by deeming situations where there are winners and losers—which is almost all policy contexts—to be out of scope.”
What is to be done? How can the state be liberated from the prison house of efficiency? If history is any guide, change is unlikely to be driven from within the discipline, despite the best intentions of reform-minded economists. Instead, some hope for a more radical transformation may lie in the repoliticization of expertise already underway. The technocratic ideal that turned economics into a value-free “science” of government appears to be collapsing. To be sure, the terrain opening up has been occupied by a great deal of paranoia, conspiracy, and irrationalism, yet the radical economization of public life bears considerable responsibility for the social dislocation that brought such dark forces into being. As Berman helps us understand, this transformation was shaped by political choices, and institutions are never carved in stone. Altering course will require the most comprehensive reengineering of governance in more than fifty years, but there is little alternative: the monsters are already here.