Berman identifies with the political left. She prefers policies that place values such as equality, equity, and universal rights above efficiency. As she explains at length in Thinking Like an Economist, she believes that concerns about efficiency have displaced progressive goals across large swaths of public policy, as the subtitle of her book tells us. The price of efficiency, she argues, has been a diminished concern with equality. For that reason, she views the rise of the economic style with dismay. In the concluding chapter of Thinking Like an Economist, she suggests strategies for advancing and implementing progressive policies that would make values other than efficiency a priority. Some readers might take issue with this part of her work, which tips over into advocacy; however, those willing to set aside Berman’s political and policy predilections—and their own—can learn much about how economics came to dominate public policy discourse, and how efficiency came to dominate antitrust.
Although antitrust is only one part of her story, Berman enlightens our understanding of its evolution in three ways. First, by taking a long view she shows how the economic style—and its concomitant concern with efficiency—gained a toehold at the antitrust agencies in the mid-1960s under the Johnson Administration, well before publication ofi, and well before the Chicago-influenced Reagan Administration took office. Indeed, Berman’s account of the rise of the economic style “is not, first and foremost, a story of right-wing economists pushing for smaller government and freer markets.” Instead, she argues that liberal technocrats—who wanted to make government work better and more effectively—adopted the economic style during the 1960s, well before their limited-government conservative counterparts had any substantial influence on policy. Largely associated with Harvard, these good-government liberals were the prime movers of policies promoting free markets and deregulation that came to fruition in the late 1970s and early 1980s. In antitrust, as well as in several other policy areas, Berman tells us, “the most important advocates for the economic style in governance consistently came from the center-left.” The simple before-and-after-Chicago School story does not survive her account.
Second, Berman shows that the rise of the economic style in the 1960s and 1970s did not influence only antitrust: it influenced a wide range of policy areas, including several that policy makers and bureaucrats traditionally had not thought of as amenable to economic analysis. Although regulation and antitrust naturally involved economics, housing, healthcare, education, and environmental policies seemed to be grounded in values that could not be reduced to the simple calculus of efficiency. Yet, debates about “non-economic” policies shifted in focus from such concerns as equality and universal rights, to concerns about efficiency. This suggests that common influences may have shaped policy in a wide range of areas. Berman notes that there was a substantial amount of cross-pollination of ideas among individuals and institutions involved in different policy areas, which may have contributed to the spread of the economic style. And she hints at other influences that might have driven concerns about efficiency, notably shifts in political mood for multiple reasons, including the changing position of the United States in the global economy, macroeconomic developments, business lobbying efforts, and dissatisfaction with government.
Third, Berman shows how the institutionalization of the economic style of reasoning, inside and outside of government, helped to establish, perpetuate, and entrench the role of efficiency in policymaking, making it difficult for reformers to pursue non-efficiency goals, such as the preservation of small businesses, the deconcentration of political power, or the redistribution of income. This is the true focus of her work. In her own words, she seeks to provide “an account of where the economic style of reasoning came from, how it spread and was institutionalized in Washington, and what its political effects have been.” She describes the ways in which economics-oriented communities of scholars, academic departments, think tanks, courts, and government agencies adopted the economic style. Once embedded in Washington, efficiency became the only game in town, crowding out other concerns. Berman’s work suggests that this institutionalization, beginning in the mid-1960s and continuing through to the present day, confined debates about antitrust policy within a purely economic framework, eventually leading to adoption of the consumer welfare standard.
The “Economic Style of Reasoning”
Berman focuses on a particular form of economic thought, which she refers to as “the economic style of reasoning.” She defines the economic style as something more and something less than what one might conventionally call “economic analysis,” or more simply, “economics.” Styles of reasoning are “collections of orienting concepts, ways of thinking about problems, causal assumptions, and approaches to methodology.” The economic style “starts with basic microeconomic concepts, like incentives, various forms of efficiency, and externalities. It takes a distinctive approach to policy problems that includes using models to simplify, quantifying, weighing costs and benefits, and thinking at the margin.” Berman’s description to this point largely is consistent with a loose characterization of the work of many microeconomists. However, there is more. The economic style incorporates two fundamental tenets: a belief in the power of markets to allocate resources efficiently, and a belief that efficiency is an appropriate guide to policy.
Berman examines the influence of the economic style on two broad categories of policymaking. The first is policy choice, which consists of selecting a policy from among multiple alternatives. A classic example would be deciding whether to alleviate poverty using direct payments, a negative income tax, in-kind assistance, or a universal jobs program. Another example would be deciding whether to limit environmentally-harmful emissions by mandating the use of defined emission-reducing technologies, imposing a tax on emissions, imposing a cap-and-trade scheme on emissions, or promoting the development of non-emitting technologies. The second policy category is market governance, which consists of government oversight of market activity through regulation and law enforcement. Antitrust falls into this category, as does the regulation (and deregulation) of industries such as transportation and utilities. According to Berman, both categories of government policymaking—policy choice and market governance—were subject to the growing influence of the economic style during the 1960s and 1970s.
In practice, adoption of the economic style led to the use of cost-benefit analysis (CBA) to make policy choices, and to a preference for a hands-off approach to market governance. With respect to policy choice, CBA, crudely put, calls for a consideration of the social costs and benefits of alternative policies aimed at achieving a particular end, and choosing the policy that produces the greatest net benefit. Cost-benefit analysis promotes efficiency in the sense that it can help identify cost-effective solutions to policy problems. As Berman notes, CBA seems unobjectionable and, indeed, desirable. It seems like little more than applied common sense. With respect to market governance, if the market is the most efficient allocator of resources, and efficiency is a desirable goal, then policy should focus on allowing markets to work by removing impediments to their effective functioning. Relying on markets serves efficiency in the sense that resources are allocated to their most productive uses, i.e., it promotes allocative efficiency. It also has the advantage of taking decision making authority out of the hands of government officials or others, who may be seeking their own ends to the detriment of others. The appeal of the economic style—whether applied to policy choice or market governance—is that it seems to be logical, objective, and politically neutral.
Appearances, however, are deceiving. Berman argues that the economic style is not terribly logical, objective, or politically neutral. Her most fundamental critique is that policymakers who have adopted the economic style fail to recognize that efficiency is itself a value that deserves no more consideration than any other value. As she bluntly puts it, the economic style “portrays itself merely as a technical means of decision-making that can be used with equal effectiveness by people with any political values. This, though, is a ruse: efficiency is a value of its own.” Indeed, she characterizes the economic style as “a new ideology that would become an alternative to postwar liberalism.” With its emphasis on efficiency as a criterion for good policy, the economic style constrained or pushed aside alternative policy frameworks that incorporate values other than efficiency. “Instead,” writes Berman, “policies that made sense in economic terms came to be seen as the only alternative.”
As defined by Berman, the economic style of reasoning is a debased version of economics. A casual reader might take Thinking Like an Economist to be a broadside against the economics profession. However, it may be more appropriate to understand it as focusing on the consequences of an approach to policy that takes the standard tools of economics and adds two critical assumptions—markets almost always are efficient, and efficiency almost always is an overriding value—that drive policy recommendations. One can and should distinguish the economic style from the careful practice of economics, which does not adopt either tenet of the economic style as a matter of course.
Consider the first tenet. The extent to which markets allocate resources efficiently is an empirical question whose answer will vary from market to market, and a careful economist will recognize it as such. Indeed, economists have long recognized that a variety of failures—e.g., externalities, market power, information imperfections—may result in markets that do not approach allocative efficiency. In such a case, an appropriate response may be to address the failure through any number of policies; for example, imposing a tax to curb externalities, enforcing antitrust law to curb market power, or enhancing incentives to produce more information. However, a belief that markets naturally tend toward efficiency, as assumed under the economic style, obviates the need for any policies designed to overcome (presumably temporary) market failures. A core element of Berman’s argument is that many policy makers over the last several decades have adopted an unfettered belief in the efficiency of markets, which has led policy to focus on removing obstacles to their functioning, and, in turn, diminished antitrust enforcement and regulation.
Even more important is the second tenet: a belief that efficiency is a paramount value. Contrary to practitioners of the economic style, careful economists understand that efficiency may be in tension with other values. Indeed, as Thinking Like an Economist notes, Arthur Okun explored this tension in Equality and Efficiency: The Big Tradeoff, as have many other economists. Moreover, the tradeoff between efficiency and equality is a staple of introductory economics classes and textbooks. Anyone who has received any sort of formal economics training is likely to appreciate that efficiency is only one value among many, and that efficiency may come at the cost of equality, and vice-versa. Whether policy should place efficiency above other values is a normative judgment that economists are no more suited to opine on than anyone else, and a careful economist will recognize that. That is not to say that economists should refrain from debating ultimate values; it is only to say that a careful economist will recognize the limits of economics in informing the debate. Berman’s argument is that many policymakers who have adopted the economic style fail to recognize those limits, and fail to appreciate fully that values other than efficiency have a role to play in the formulation of public policy.
The distinction between careful economics and the economic style is important. Criticism of the latter need not imply criticism of the former, a point that is easy to lose sight of when reading Thinking Like an Economist. Berman’s focus is on the economic style, which is a crude approach to policy that disregards the subtleties that a careful economist will recognize and account for. Unfortunately, the economic style is an approach that seems well-suited to the world of government, where strident and simplistic advocacy often is as likely as careful analysis to carry the day in policy debates.
Whether or not policymakers have engaged in a ruse over the last several decades, as Berman suggests, it seems clear that belief in the value of efficiency and in the efficiency of markets—whether arrived at through an honest consideration of the evidence, justified by an underlying economic or political ideology, or adopted as a matter of strategic convenience—has driven much public policy since the mid-1960s. The most valuable part of Berman’s work lies in its exploration of the role of institutions in adopting the economic style, and its belief in markets and efficiency. As she describes it, institutionalization of the economic style began in the 1950s with the rise of two intellectual communities.
The Economic Style and Policy Choice
The first community Berman considers comprised systems analysts. Initially centered at RAND Corporation, an Air Force-funded research and development organization, systems analysts focused on relatively narrow questions related to military strategy, such as how to best accomplish a particular military objective. An example of RAND’s early work was a 1950 Strategic Bombing Study, which “sought to identify for the Air Force ‘the most efficient way for the United States to deliver nuclear weapons to Soviet territory.’” As Berman notes, it was work like this that led RAND to be forever linked to the movie Dr. Strangelove, which satirized it as the “Bland Corporation.” The work of systems analysts at RAND later incorporated the insights of economics to contribute to the development of cost-benefit analysis.
RAND was tightly integrated with the academic community, and many well-known economists were associated with RAND, including Nobel Prize-winners Thomas Schelling, Kenneth Arrow, Tjalling Koopmans, Wasily Leontief, and Paul Samuelson. Carl Kaysen, a Harvard economist who co-authored one of the most influential antitrust treatises of the 1960s, Antitrust Policy: A Legal and Economic Analysis, also was affiliated with RAND. So too was economist Daniel Ellsberg, who would become famous for other reasons in the 1970s. The economists at RAND eventually realized that their decision making frameworks might be applied to areas other than defense strategy, and they began to use CBA to address such issues as whether the government should fund certain water projects, and to assess the efficacy of education policy.
The first step toward the widespread use of CBA in government came through the Department of Defense (DOD). Analysts at RAND had a natural connection to the defense establishment, and their ideas on policy choice via CBA gradually infiltrated DOD during the Kennedy Administration. A key point in the institutionalization of the economic style was the Johnson Administration’s mandate that all government agencies adopt the DOD’s Policy Program Budget System (PPBS), which incorporated CBA into government budgeting decisions. The government-wide adoption of PPBS was less than effective, and it was abandoned within a couple of years, but it resulted in the establishment of policy planning offices around the government—including at the White House and in Congress—that housed advocates of CBA, who promoted its use as a policy tool.
The government’s demand for the types of analyses required by CBA contributed to the formation of public policy schools, which turned out graduates conversant with CBA who could staff policy planning offices. According to Berman, the new public policy schools, with faculty largely staffed by Ph.D. economists, “were producing ‘RAND lite.’” The curriculum was grounded in economics, statistics, operations research, and decision analysis, with public policy programs producing analysts “comfortable with the economic style of reasoning; focused on choice among alternatives, cost effectiveness, and quantitative analysis.” Demand for new graduates was further enhanced by the new policy schools themselves, which promoted the use of CBA-related skills in policy analysis. As a result, graduates had no trouble finding government jobs. The resulting widespread adoption of CBA as a policy choice tool, grounded in concerns about efficiency, altered the terms of the debate about many policies.
The debate about how to address poverty in the 1960s and 1970s illustrates the shift in perspectives precipitated by the economic style. Community activists called for alleviating poverty by enhancing political participation by the poor. Advocates of social insurance preferred to alleviate poverty through universal programs, such as unemployment or health insurance, that benefitted all, not just the poor. Advocates of the economic style, on the other hand, proposed a relatively simple solution: give the poor money via a negative income tax. Popularized by economists on political left (James Tobin of Yale) and right (Milton Friedman of Chicago), a negative income tax was a more direct approach than encouraging political participation, and it was a more cost-effective approach than implementing universal programs. Although President Nixon endorsed a negative income tax, it eventually fell to the wayside. Nonetheless, the debate illustrates how the logic of the economic style, advocated for by economists on the left and right, crowded out potential solutions grounded in values such as democratic participation and universal rights.
The Economic Style and Market Governance
The second intellectual community that facilitated the rise of the economic style comprised industrial organization (IO) economists, whose work contributed to the intellectual underpinnings of policies to enhance competition in the interest of enhancing efficiency.
Thinking Like an Economist recounts the rise of IO economists at Harvard in the 1950s and their focus on the functioning of markets. Their primary contribution to antitrust was the development of the structure-conduct-performance (SCP) paradigm, which implied that more concentrated markets were likely to be less competitive and more susceptible to the exercise of market power. Harvard’s Carl Kaysen (an economist) and Donald Turner (a lawyer and economist) employed the SCP framework in their 1959 treatise, Antitrust Policy, which argued for antitrust policies that limited market concentration. At about the same time that Harvard IO scholars were developing the policy implications of the SCP framework in the 1950s, lawyers and economists at Chicago were undertaking their own study of markets, which they grounded in a microeconomic framework. Chicago scholars—notably Robert Bork in The Antitrust Paradox—generally believed that (non-governmental) entry barriers were not substantial, and that market concentration typically reflected business efficiency, not an improper exercise of market power, undercutting policy recommendations grounded in the SCP paradigm.
The Chicago-Harvard antitrust debate played out in the 1960s and 1970s, with Chicago-oriented scholars advocating less aggressive antitrust enforcement and their Harvard counterparts arguing for more aggressive enforcement. Berman, however, emphasizes their similarities rather than their differences. Chicago scholars (generally on the political right) and Harvard scholars (generally on the political left) agreed that antitrust should not address social or political concerns; rather, it should be used to enhance competition, which would, in turn, enhance efficiency. Consistent with developments in other policy areas—such as education, environment, and health—policymakers began to see antitrust through the lens of the economic style of reasoning, with efficiency, as embodied in the consumer welfare standard, becoming an overriding concern.
So, how did the economic style spread throughout the antitrust policy world? Unlike systems analysts, IO economists did not have an obvious connection to the government; rather, the spread of the economic style took place indirectly, through three sets of institutions.
First, IO economists introduced the study of economics into law schools, primarily in the areas of antitrust and regulated industries. Aaron Director, an economist on the University of Chicago law faculty, played a key role in facilitating the growing influence of economics on market governance issues in the 1950s. Because of his efforts and those of others, a growing number of law school graduates, many of whom would go on to staff various regulatory agencies in the 1970s and 1980s, would have an appreciation of the economic style of reasoning.
Second, beginning with the Johnson Administration, presidents of both political parties appointed agency heads at the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice who had an appreciation of IO economics. A key development in the evolution of antitrust toward a more economic approach was LBJ’s appointment of lawyer, economist, and Harvard law professor Donald Turner to head the Antitrust Division in 1965. Under the influence of Turner and likeminded lawyers and economists, the antitrust agencies began to institutionalize the economic style by creating offices to house Ph.D. economists, who played an increasingly important role in formulating antitrust policy.
Third, IO economists established a network in Washington that initially centered on the Brookings Institution, an organization that helped launch or sustain the work of several influential center-left policy makers who would go on to play important roles in government throughout the 1960s and 1970s. Among the key policymakers associated with Brookings was Charles Schultze, who helped oversee the government-wide rollout of PPBS as President Johnson’s budget director, and who later chaired the Council of Economic Advisors under President Carter. Schultze viewed economists as ‘partisan efficiency advocates,’ and while at Brookings he wrote The Public Use of Private Interest, an influential work that argued for the use of markets and market-like incentives in place of command-and-control regulation. As the Chicago School gained influence in the 1970s and 1980s, the American Enterprise Institute (AEI), a conservative counterpart of Brookings, helped spread the work of scholars who would play important roles in government policy in the 1980s. The AEI’s Center for the Study of Government Regulation, established in 1975, was headed by James Miller, a Ph.D. economist who became Chair of the FTC in 1981 during the Reagan Administration. Justice Scalia, then a Chicago law professor, served an editor of the AEI’s policy journal, Regulation, which targeted a popular audience.
Although many readers likely will be familiar with the basic elements of Berman’s story of the growing influence of economics on antitrust, they may not be aware of the story she tells about the largely parallel, but sometimes overlapping, growth of the deregulatory movement. At the same time that Kaysen and Turner were writing Antitrust Policy, which would lay the groundwork for the application of the SCP paradigm to antitrust, economists at Harvard were writing The Economics of Competition in the Transportation Industries, which called for the deregulation of large parts of the economy that traditionally had been regulated. John Meyer, Joe Peck, John Stenason, and Charles Zwick argued that industries such as trucking, pipelines, and traditional utilities were structured such that, absent regulation, they could be “relatively competitive.” Although the authors recognized that deregulation was “out of step with political reality” at the time, their views would become the consensus view two decades later. In the years ahead, Stephen Breyer—Harvard law graduate, assistant to Donald Turner at the Antitrust Division, Congressional counsel, Brookings-affiliated scholar, and future Supreme Court Justice—would become one of the most vocal and influential advocates of deregulation. Once again, lawyers and economists associated with the political center-left were in the vanguard, this time advocating greater reliance on market forces to oversee industries that the government regulated in the public interest.
Although Thinking Like an Economist is very good at identifying commonalities across schools of thought and policy areas, it does not fully recognize the ways in which policymakers have used cost-benefit analysis to justify market governance policies that rely more on market forces and less on government intervention. One of the most influential works in the history of antitrust is Frank Easterbrook’s The Limits of Antitrust, which employed a form of CBA to argue for less aggressive application of antitrust. Fundamental to his argument is a belief that markets are more effective than courts or agencies at identifying and remedying anticompetitive practices. Easterbrook uses an “error-cost” framework which assumes that overly aggressive antitrust can chill beneficial procompetitive (i.e., efficient) practices, and unduly passive antitrust can lead to more harmful anticompetitive (i.e., inefficient) practices. He adopts the two fundamental tenets of the economic style—a belief that markets are efficient and that efficiency is an overriding value—to argue that the net costs of interventionist antitrust, in areas other than naked horizontal restraints, are greater than the costs of an approach that relies more on market forces. That is, his version of CBA led him to conclude that courts and agencies should apply antitrust less aggressively, largely relying instead on market forces to curb anticompetitive (i.e., inefficient) business practices. The Limits of Antitrust is a perfect example of the ways in which Easterbrook, and many other policy advocates, incorporated the two key tenets of the economic style (which often have been adopted uncritically) into a form of CBA to justify less aggressive antitrust enforcement in the pursuit of efficiency rather than broader social or political goals.
Conclusion
As thoughtful as Thinking Like an Economist is, neither it nor any single work can fully capture all the factors that influence the evolution of antitrust policy. Berman does an admirable job of explaining the role of institutions in spreading the economic style of reasoning, and the consequences of its spread. However, institutions alone do not completely explain the spread of the economic style. Despite Berman’s insightful work, we still do not have a very good sense of why the economic style seems to have been so appealing to policymakers for such a long time in so many areas.
In antitrust, one possible (albeit partial) explanation for the appeal of the economic style, as embodied in the consumer welfare standard, is that it facilitated the formulation of easily understood and implemented decision rules. In crude terms, one can reduce the consumer welfare standard to a consideration of whether output falls or price rises because of a business practice. A challenge for antitrust reformers now seeking to replace the consumer welfare standard will be to develop such simple, administrable, and appealing rules that advance their preferred goals, whether those are to protect the competitive process, small businesses, labor, or democracy, or something else. Even if reformers clear that hurdle, Thinking Like an Economist reminds us that displacing the consumer welfare standard will require meeting the even greater challenge of overcoming its decades-long institutionalization in courts, agencies, academia, and elsewhere.
