THE WELFARE ECONOMICS PARADIGM RECOGNIZES REALITY.

Donald "Cafe Hayek" Boudreaux reviews Elizabeth Berman's Thinking Like an Economist.  The review makes for interesting reading, and the book might merit consideration the next time I add to the already groaning library.  A sociologist's perspective on thinking like an economist is intriguing: apparently constrained optimization and making tradeoffs become optional.

From the administration of Franklin Delano Roosevelt through that of Lyndon Johnson, Americans on the political left—and not least those in elective office—were motivated by ideals that precluded any utilitarian weighing of costs and benefits. These ideals, as frequently listed by Berman, are “universalism, rights, and equality.” To put these ideals into practice, the U.S. government adopted policies to protect minorities, the poor, the sick, consumers, workers, the environment, and democratic participation itself. Designers of these policies intended them to be implemented without regard to costs. But despite the designers’ intentions, these policies, starting in the 1960s and gaining steam in subsequent decades, were increasingly guided by economic considerations. These economic considerations—above all, the use of cost-benefit analyses—in most cases limited government’s ability to right the wrongs that were targeted by the policies.

Yes, I was in college and graduate school at the apex of the Welfare Economics Paradigm, and that approach surely included cost-benefit analysis, which, along with such concepts as optimal taxation, provided technocrats, with the advice of the proper team of academic economists, with Pareto-improving outcomes along the desirable dimensions.  Professor Boudreaux's summary is consistent with the book learning I got at the time.

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

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

But, alas, the claim to be value-free is in fact a statement of a value. (Postmodern skepticism has its uses, doesn't it?)

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

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

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

That "government reliance" also offered me opportunities to apply my research on behalf of assorted policy initiatives, primarily in energy use.

It appears, though, that to Professor Berman, those mean economists are telling the brains trusters there are no unicorns.

Berman reveals explicitly that she’s a progressive who hopes that the economic style of reasoning will be supplanted by the ideals—or, as she calls them, “logics”—of “universalism, rights, and equality.” Her sympathies are with “those who want to restore an ambitious vision of how government might work differently”—a vision in which progressives’ pursuit of “values like equality, racial justice, rights, and community” is no longer “frustrated by the political restraints of the economic style.”

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

That sort of logic, however, is precisely the sort of logic where a careful regard to cost-justification is most important.  Does your right to a clean environment mean I have to give up cooking fires?  (Impound in ceteris paribus for the moment whether I'm clearing brush for a campfire, putting brats on a grill, or turning on the gas stove.)

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

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

Indeed, even if no particular individuals explicitly complained about this or that program’s cost, because government cannot grow without someone paying for it, the negative effects of such growth inevitably show up in some form.

Yes, and replacing responsive politicians with ideologues more sympathetic to that so-called progressive platform will not make reality go away.