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Thinking like an Economist

• Elizabeth Popp Berman

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Thinking like an Economist: How Efficiency Replaced Equality in U.S. Public Policy

The story of how economic reasoning came to dominate Washington between the 1960s and 1980s—and why it continues to constrain progressive ambitions today

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For decades, Democratic politicians have frustrated progressives by tinkering around the margins of policy while shying away from truly ambitious change. What happened to bold political vision on the left, and what shrunk the very horizons of possibility? In Thinking like an Economist , Elizabeth Popp Berman tells the story of how a distinctive way of thinking—an “economic style of reasoning”—became dominant in Washington between the 1960s and the 1980s and how it continues to dramatically narrow debates over public policy today. Introduced by liberal technocrats who hoped to improve government, this way of thinking was grounded in economics but also transformed law and policy. At its core was an economic understanding of efficiency, and its advocates often found themselves allied with Republicans and in conflict with liberal Democrats who argued for rights, equality, and limits on corporate power. By the Carter administration, economic reasoning had spread throughout government policy and laws affecting poverty, healthcare, antitrust, transportation, and the environment. Fearing waste and overspending, liberals reined in their ambitions for decades to come, even as Reagan and his Republican successors argued for economic efficiency only when it helped their own goals. A compelling account that illuminates what brought American politics to its current state, Thinking like an Economist also offers critical lessons for the future. With the political left resurgent today, Democrats seem poised to break with the past—but doing so will require abandoning the shibboleth of economic efficiency and successfully advocating new ways of thinking about policy.

Awards and Recognition

• A Choice Outstanding Academic Title of the Year

"Indispensable. Deeply researched and powerfully argued, it is easily one of the most important studies of American governance in many years."—Simon Torracinta, Boston Review

"Berman is well worth reading for deeply researched detail on how market-fundamentalist economics colonized the administrative state and thus weakened progressivism."—Robert Kuttner, American Prospect

"The historical account in Thinking like an Economist , which makes up the bulk of the book, is an original, insightful, and persuasive story. . . . Berman provides a fresh perspective emphasizing a wide variety of microeconomic topics, including antitrust law, antipoverty policy, health care, and the environment."—Jason Furman, Foreign Affairs

"Berman is at her best as an archeologist of ideas, digging through archives to excavate the origins of the economic style of reasoning and its takeover of federal policymaking."—Idrees Kahloon, The New Yorker

"As a non-economist who writes about economics, I felt seen by Berman."—Peter Coy, New York Times

"The import of her book is clear to me. It’s OK to believe there’s value beyond markets and competition, and while efficiency can be a useful goal in many cases, sometimes we should embrace deeper values around fairness, and dare I say it, right and wrong."—John Warner, Chicago Tribune

"This outstanding work is highly recommended. . . . Essential."— Choice

"It turns out this kind of thinking—what Berman calls ‘the economic style of reasoning'—has taken over not just environmental policy but the entire US policy bureaucracy, to dismal results. It’s as much something Democrats have done to themselves as anything forced by the right. One always enjoys having one’s priors validated by scholars of much greater distinction than oneself, so I was delighted to read the book."—David Roberts, Volts

"A captivating and detailed historical account of the rise of economics and economists’ influence within the US Administration during the 1960s and 1970s."—Cléo Chassonnery-Zaïgouche and Aurélien Goutsmedt, Oeconomia

"An engaging account of the role that economists and government advisors with an economics training played in shaping public policy in the US during the post-war period. . . .Very well written and extremely erudite."—Giulio Zanella, Oeconomia

“In what is sure to become a classic, Berman unravels how economists, and their way of thinking , came to exert such a powerful influence on the institutions that shape U.S. policymaking. Her sharp analysis shows how the resulting fixation on efficiency, a single-minded focus on market-oriented solutions, and the abandonment of political claims based on universalism, rights, and equality has undermined our ability to solve major social problems.”—Pamela Herd, Georgetown University

“This book deserves to make waves. It is original, finely written, provocative, and right. Fragments of this story have been told before—but Berman has done the hard work of crafting a compelling new narrative about where some of the most crucial aspects of our modern world have come from. Thinking like an Economist deserves a wide readership, not just among sociologists, but political scientists, economists, and everyone interested in how the economic approach came to dominate American policy debate.”—Henry Farrell, Johns Hopkins University

“If you want to understand modern policy debates in economics, you need to go beyond the shopworn neoliberalism narrative and explore what economists really are thinking. Elizabeth Popp Berman’s book provides a wonderful guide for doing just that.”—David Colander, Middlebury College

“The compass by which a nation sets its public policy tells us a good deal about its values and priorities. In this remarkable book, Elizabeth Popp Berman tells the story of how, for the United States, efficiency became the North Star with the economist as navigator. Less a partisan story than one of a shift in the culture of governance, this book sheds important new light on how economic thinking has infused both our policy priorities and the mechanisms for attempting to implement them.”—Steven G. Medema, Duke University

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Thinking like an Economist

How efficiency replaced equality in u.s. public policy.

• Elizabeth Popp Berman
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• Language: English
• Publisher: Princeton University Press
• Copyright year: 2022
• Audience: College/higher education;Professional and scholarly;
• Main content: 344
• Other: 1 b/w illus.
• Keywords: Economist ; Economics ; Competition law ; Governance ; Keynesian economics ; Economic interventionism ; Competition (economics) ; Economic ideology ; Council of Economic Advisers ; Law and economics ; Economic indicator ; Economic Policy Institute ; Office of Economic Opportunity ; Institutional economics ; Neoclassical economics ; National Bureau of Economic Research ; Economic policy ; Regulation ; Market power ; Economic efficiency ; Efficient-market hypothesis ; Output budgeting ; Economic power ; Economic statistics ; Profit (economics) ; Policy ; Economic impact analysis ; Legislation ; Macroeconomics ; Structuralist economics ; Consumption (economics) ; Monetary policy ; Cost–benefit analysis ; Market (economics) ; Economic surplus ; Price fixing ; Price controls ; Neoclassical synthesis ; Economic Theory (journal) ; Chicago school of economics ; Economy ; Welfare economics ; Economic law ; Supply (economics) ; Business ethics ; Fiscal policy ; New Economic Policy ; Mathematical economics ; Economic cost ; Great Society ; The Journal of Law and Economics ; Economic recovery ; Cost accounting ; Income ; Capitalism ; Econometric model ; Microeconomics ; Economic data ; Allocative efficiency ; Quantitative analyst ; Liberalism ; Emissions trading ; Depression (economics) ; Economic development ; Marginal cost ; American Economic Association ; Comparative advantage ; Ecological economics ; Price mechanism ; American Enterprise Institute
• Published: April 5, 2022
• ISBN: 9780691226606

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The Quants in the Room

How much power do economists really have, by jason furman.

Thinking like an Economist: How Efficiency Replaced Equality in U.S. Public Policy

By elizabeth popp berman.

In 1962, Kenneth Arrow, one of the greatest economists of the twentieth century, joined the U.S. Council of Economic Advisers, which had been created a decade and a half earlier to provide impartial economic analysis to the president. John F. Kennedy had recently won the White House, and the Democratic Party was engaged in a debate about whether and how to expand access to health insurance. It was a discussion in which Arrow was well positioned to participate. Arrow was an expert on market behavior and failures, and the next year, he would publish a landmark paper in the American Economic Review that established the discipline of health economics. It argued that the health-care market was riddled with bad information and bargaining power asymmetries that made fair pricing extraordinarily difficult: a foundational idea that has since shaped how health-care experts think about their field.

Three years after Arrow entered the White House, Congress established Medicare and Medicaid: government-run health insurance programs for people older than 65 and for the very poor, respectively. These represented the largest changes in health policy in U.S. history, and given Arrow’s position and work, it would be natural to think that he had a part in their creation. But when I asked him in 2015 what role he played in the establishment of these programs, his answer surprised me: essentially none. Arrow, who would eventually win a Nobel Prize for his contributions to economics, hadn’t been consulted on Medicare and Medicaid in any way—when he was in government or out of it.

In retrospect, his absence from these efforts is astonishing. Today, it is inconceivable that such a monumental change, or even a minor change, in almost any federal policy could happen without the involvement of economists. If Congress set out to further expand health care now, for example, the Brookings Institution, Harvard University, and a welter of other think tanks and universities would churn out policy papers and ideas. The Urban Institute and the RAND Corporation would scrutinize any government proposal. The corridors of the White House and the Congressional Budget Office would be filled with economists, and government staffers in both the executive and legislative branches would pore over their analyses.

But as the University of Michigan sociologist Elizabeth Popp Berman shows in Thinking Like an Economist , for much of modern U.S. history, economists held little sway over policymaking. It wasn’t until the 1960s that the discipline began playing a serious role in regulation and rule-making. From then through the mid-1980s, government agencies established economic and policy offices to conduct cost-benefit analyses of proposals. To support these offices, educational leaders and academics developed a network of public policy schools and master’s degree programs, as well as new think tanks and policy evaluation companies. Judges started using economic analysis in their opinions. Eventually, the discipline was not just part of policymaking; it was central to it.

Today, it is inconceivable that changes in federal policy could happen without the involvement of economists.

The historical account in Thinking Like an Economist , which makes up the bulk of the book, is an original, insightful, and persuasive story. Avoiding the well-known macroeconomic debates between the Keynesians (who emphasized the importance of government spending) and the monetarists (who focused on controlling the money supply), Berman provides a fresh perspective emphasizing a wide variety of microeconomic topics, including antitrust law, antipoverty policy, health care, and the environment. She also shifts the focus away from the role of the free-market right at places such as the University of Chicago. Instead, she argues that the increasing political power of economics was driven by the center-left. According to Berman, proponents of a bigger, more active government believed that economic analysis could help ensure that an expanded state would more efficiently achieve their goals, from reducing poverty to increasing access to transportation to keeping markets competitive.

It is to Berman’s credit as a social scientist that she separates her own value judgments from her historical analysis, and a reader who skips the first and last chapters of her book would be mostly unaware that Berman disapproves of the developments she chronicles. Yet these chapters make clear that she deeply dislikes the rising power of economics, which she asserts has elevated efficiency above social and environmental equity and narrowed the ambitions of policymakers, curtailing the progress they could otherwise have made on single-payer health care, college-debt forgiveness, and other policies the progressive left favors. Berman argues that “Democrats’ apparent lack of ambition” under Presidents Bill Clinton and Barack Obama was at least partly due to “the rise of a distinctive way of thinking about policy”—what she calls “the economic style of reasoning”—now prevalent in Washington.

In an era when free-market orthodoxy is under fierce attack, that charge is potent. Ultimately, however, Berman’s case against economics is longer on assertion than proof. She underestimates the degree to which economic thought evolves as a result of genuine improvements in understanding, instead assuming that it is simply a projection of power and interest groups. She argues for focusing on rights, not consequences, yet she ignores the multitude of rights-based approaches that would go against her values, such as the libertarian view that high earners have the right to low taxes. Finally, she believes that economists and their style of reasoning are more influential than they actually are. I should know: while serving as chair of the Council of Economic Advisers, I could only dream of having the power she ascribes to people like me.

POWER OR PRESTIGE

According to Berman, economics first began its march to prominence during World War II , when governments relied on a field called “operations research” to figure out the best way to accomplish specific objectives, such as which array of planes to use for bombing missions. Operations research, the act of using quantitative methods to improve decision-making, has always been intertwined with economics, and its analytic success during the war prompted the U.S. Air Force to continue its funding even after the Allies won. To that end, in 1948, it established the RAND Corporation—one of the United States’ first major think tanks.

RAND developed the Planning-Programming-Budgeting System, which, according to Berman, began “specifying the broad goals of an agency or office; identifying the various programs that might be used to achieve those goals; quantifying, to the extent possible, the cost-effectiveness of those alternative programs; and then using that information as a guide to budgeting.” At first, this system was largely used by the armed forces. But in 1965, President Lyndon Johnson extended the PPBS to the entire executive branch, advancing the “economic style of reasoning” into domestic policy. Soon, agencies throughout the federal government began setting up offices to undertake this economic analysis, often headed by economists, such as Alice Rivlin and Alain Enthoven, who applied it to a range of budget-related domains. The offices were staffed with people with policy training. As the federal government began collecting more data on itself and on U.S. society, these offices and their employees could conduct increasingly sophisticated calculations. The growing demand for all this work was met by universities across the country, which established policy schools and launched new degrees involving economics.

Eventually, economists’ work expanded from government budgets into the regulatory sphere, where they moved from cost-effectiveness analysis (which searches for the cheapest way to achieve a goal) to cost-benefit analysis (which asks whether the goal is worth pursuing in the first place). They began shaping major policy decisions. Economists persuaded President Jimmy Carter to deregulate the airline industry in 1978 and the trucking industry in 1980 by showing that, according to cost-benefit analysis, open airline and trucking markets would more efficiently and effectively transport people and goods. By the time President George H. W. Bush left office, cost-benefit analysis was an essential part of all regulatory policy.

Berman’s account is more flattering to the power of economists and their ideas than they deserve.

During the same period, through economic research, academics and lawyers began to shift away from the presumption that big companies were necessarily bad and to study the practical tradeoffs that mergers and corporate conduct have on consumers. In studies, economists showed that consolidation was far from uniformly negative, and their findings became increasingly influential at the Justice Department, the Federal Trade Commission, and, ultimately, in courts—greatly reducing the ambition of antitrust enforcement.

Today, economists have an office in the White House complex where they analyze how the economy will evolve in response to policy changes and who will win and lose as a result. They play similarly critical roles in most government agencies. They are deeply embedded in the budget process, in the regulatory process, and at enforcement agencies such as the FTC. Berman laments this development. “One might ask whether Medicare would have ever been created had the CBO [Congressional Budget Office] existed in 1965,” she writes.

But her account is more flattering to the power of economists and their ideas than they deserve. Economics certainly has much more prestige in policymaking than does history, psychology, or other disciplines—there is no Council of Sociological Advisers—but very often, economics is still something policymakers use to find support for their existing ideas rather than to illuminate and better understand issues and debates. Indeed, officials frequently use economic analysis simply to rationalize decisions that they have already made. During a White House meeting, one person with a very important policy job applying the types of cost-benefit analysis Berman critiques leaned over to me and, referring to the president’s deputy communications director, whispered, “Is he by far the most important person in this room? Or just narrowly the most important?”

Berman might see it as good that economic analysis is subordinate to political decisions. But economists often lose policymaking fights for causes that she would support, including more regulation. In 2014, when the Council of Economic Advisers analyzed emissions limits on power plants for the Clean Power Plan, a governmental initiative to cut carbon emissions, we found that the marginal benefits of stricter limits so greatly exceeded the marginal costs that the Environmental Protection Agency’s proposed regulations were too weak. But the EPA rejected our support for more ambitious targets. Understandably, the agency’s staff was more attuned to the possibility that our ideas would be vulnerable in the courts—a judgment that we fully accepted.

Climate change is, more generally, an example of an area where the problem is not that economists are too powerful but that they are not nearly powerful enough. To my knowledge, the largest open letter ever written by economists—eventually garnering more than 3,500 signatories from across the political spectrum—was the one published in The Wall Street Journal in 2019 arguing that the United States needed a carbon tax and dividend. The emissions reductions associated with this proposal would have been substantially larger than what Congress considered last year as part of the Build Back Better plan. That plan, by contrast, included a set of climate ideas that was developed mostly without the type of economic reasoning that Berman disapproves of.

Berman, of course, wants aggressive emissions reductions—along with a host of other left-leaning policy shifts. But she argues that governments should make these changes through a process that’s based on fundamental human rights and universality rather than arriving at them by wallowing through the details of quantitative analysis and tradeoffs. She advocates for more command-and-control regulation in climate policy: “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.” This type of regulation, she bemoans, “was not even discussed” during the Obama administration.

Although foregrounding fundamental rights may make for appealing political slogans—and sometimes those rights may indeed win the day—it can be a poor way to design economic policies that make people’s lives better. Take pollution . Berman writes favorably about rules grounded in the “implicit belief that pollution was morally wrong and therefore punishable.” That concept sounds attractive, but it is an impossible basis for public policy. The world cannot immediately eliminate all carbon emissions, and attempts to do so would run up against a different set of principles: that it is morally wrong to destroy jobs for low- and moderate-income workers or to raise the cost of everything they buy. To properly phase out carbon emissions , states have to engage in some cost-benefit research and distributional considerations. In other words, they need economic analysis.

Economic research is invaluable in other areas of policymaking, such as social welfare spending. Many activists support universal payments to a society’s residents, regardless of wealth, both on moral grounds and because they believe it increases the political sustainability of policies. But both of these rationales have shortcomings. For the same amount of money, the U.S. government could either give $10,000 to the bottom quarter of households or give $2,500 to all households. The former would do much more to reduce poverty, and it may be even more politically secure. Contrary to popular belief, more targeted programs have, if anything, proven hardier than universal ones over time. Low-income programs such as the Earned Income Tax Credit, Medicaid, and those that provide nutritional assistance have all been expanded multiple times under both Democratic and Republican presidential administrations, while universal programs, such as unemployment insurance, have languished. Even Social Security and Medicare—the United States’ two most famous universal welfare programs—have experienced budget cuts.

ON THE LEVEL

Part of Berman’s skepticism of economic policy stems from her belief as a sociologist that the evolution of economic thinking is driven not by advances in theory and evidence but by the interests of the powerful. When discussing the evolving ways economists think about issues such as curbing pollution, reducing poverty, or understanding the consequences of larger businesses, Berman keeps a strong focus on the institutions that developed and advanced these ideas and the interests those institutions served. For example, she quotes a lawyer trained at the University of Chicago who fundraises for a summer program that instructs judges on antitrust issues. “The [corporate] world knew that Chicago economics was the only thing that could possibly save them from an antitrust debacle,” the lawyer says. “Of the eleven [major corporations] I wrote to, within a few weeks I had $10,000 from ten of them, and the last $10,000 came in a few weeks later.”

Although economics has major limits as a science, a lot of the changes in its principles really do reflect improvements in research. Many of the first advances in antitrust regulation, for instance, resulted from the genuine progress of ideas. The discipline’s initial approach to competition policy, developed in the 1930s, held that regulators could look at the number of firms in an industry (which was taken as fixed and given) and neatly infer the impact it would have on prices and consumers. As a rule, then, economists concluded that consolidation would clearly lead to higher prices, a line of thinking that inspired vigorous antitrust enforcement.

But in the 1960s, an increasing body of studies found that this theory was incorrect. In some cases, consolidation created more efficient and more competitive firms, resulting in lower costs for consumers. It turned out that overzealous antitrust enforcement sometimes increased prices. (One particularly notorious example came in 1967, when the Supreme Court held that national bakeries could not sell inexpensive frozen pies in Utah because they undercut the state’s main pie company.) As the evidence poured in, economists began to discard “the Brandeisian approach,” named after the legal theorist Louis Brandeis, which views big companies as inherently problematic and understands the goals of antitrust policy to include protecting small businesses and democracy more broadly. Instead, they embraced a more lenient philosophy that would help consumers. The federal government and judiciary followed suit, allowing mergers and acquisitions to proceed with renewed pace.

To properly phase out carbon emissions, states need economic analysis.

Now, however, it is clear that regulators and the courts overcorrected, growing too lax about antitrust enforcement, which led to an overly permissive attitude toward everything from hospital mergers (which have increased medical costs) to technology mergers (which have stifled innovation). But the problem in these cases was not the influence of economics. It was that policymakers did not take economics seriously enough. Powerful interests had greatly oversimplified nuanced economic research—always replete with examples in which the mere threat of a new company entering a market and competing with the dominant incumbent was not sufficient to protect consumers from abuses—to train a generation of judges in an excessively narrow, free-market approach. More recent economics research has made it even clearer that there are limits to the efficiency gains from mergers, that vertical integration (in which one company takes control of multiple parts of a single supply chain) has costs for consumers, and that too little competition can reduce quality and innovation. These are all critical findings, ones that policymakers should heed and that give progressives ammunition. These findings suggest that rather than blame economists for bad competition policy, liberals should team up with them.

Indeed, critics of the economic approach would be surprised by just how progressive the field can be. Economics itself has a strong radical tradition, grounded in something that Berman correctly describes but mistakenly laments: its “unrepentantly utilitarian and consequentialist” theoretical underpinnings. At their core, these philosophies hold that the best societal outcome is one in which everyone is equal—so long as the process of achieving equality does not result in people being much worse off—and they have been critical to advancing liberal causes. These schools of thought are what led the economist Adam Smith to oppose slavery and support labor unions, the political theorist John Stuart Mill to champion women’s right to vote, and the philosopher Jeremy Bentham to be an early strong proponent of LGBTQ rights in 1785. No wonder utilitarian consequentialism has been the basis of peer-reviewed articles in leading economics journals that endorse a top marginal tax rate of 70 to 95 percent.

Consequentialism is also what forces people to take the side effects of a policy seriously—to look at how climate regulation affects not just carbon emissions but costs for consumers or how a universal program and a targeted program may affect poverty differently. Perhaps the best example of how consequentialists think about side effects is economists’ comfort with putting a statistical value on human life (currently about $10 million in U.S. regulatory analysis). This strikes noneconomists, including Berman, as abhorrent. But if governments fail to consider the cost of lives, they can’t save as many people as possible when making life-or-death decisions. Numbers may seem cold and brutal, but they can be a tool for tremendous good in a world where tradeoffs are inevitable. If policymakers aren’t explicit about these tradeoffs and their respective costs, they will make choices that are too costly in either blood or treasure.

GETTING REAL

Berman’s critique is not entirely off base, however. She is right that powerful interests can sometimes capture economic policy, as in the overcorrection of antitrust policy. As a discipline, economics needs to do a better job of influencing public policy so it reflects unbiased analysis—not whims and power relations. Economists must also keep their recommendations up to date and rigorous rather than rely on whatever was in the textbooks 50 years ago. For example, instead of endorsing financial programs for the elderly, economists should advocate for more investments in children, including through more unconditional cash payments, based on the reams of newer empirical evidence showing very high returns on these investments. Expenditures that improve children’s health, for instance, increase economic growth by more than enough to cover their initial budgetary cost.

Economists must also do a better job of evaluating political realities when assessing and pushing policies. The best ideas are often simply not feasible, and although economists must make sure they present regulators and lawmakers with the strongest overall concepts, they must work hard to devise effective policies that are also politically tenable. Just like progressive purists, who prefer glorious losses to pragmatic compromises, too many economists also choose to oppose imperfect ideas instead of soiling themselves with the task of crafting the politically achievable second best. In climate policy, for example, it is clear that a carbon tax is the best way to curtail emissions. But it is also politically impossible in the United States, and U.S. economists must focus on proposals that can actually become law.

To understand the political dynamics of policymaking, economists can learn from sociologists. Economics tends to focus on outcomes, but sociology has shown that processes are also tremendously important for determining how people and communities handle and understand policy changes. Economists need to better recognize that humans care deeply about their personal stories and histories, and they must learn that communicating policy decisions in a way that makes people feel valued, heard, and cared for is just as important as the policy decision itself. Economists must also more broadly understand that their discipline is only one way of thinking about the world. When I teach my students about discrimination, I use bloodless technical terms like “taste-based discrimination” (bias that stems from personal preferences) and “statistical discrimination” (bias that stems from one’s assumptions about a group of people). But I also tell them to study the issues through the prisms of history, political science, literature, art, and, of course, sociology. These subjects all also offer tremendous findings and insights that my colleagues and I should take seriously.

That doesn’t mean the world needs less economic analysis; the discipline remains critical. Economists should certainly highlight what critics like Berman get wrong, including the presumption that their field is simply a tool of the powerful, or that it is all-powerful. But economists can also prove their value by working collaboratively and doing less to provide opponents with ammunition. Economic analysis alone is not enough—either for devising the right policies or for bringing those policies into existence.

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• JASON FURMAN is Aetna Professor of the Practice of Economic Policy at Harvard University. He served as Chair of the U.S. Council of Economic Advisers from 2013 to 2017.
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What it Takes to Think Like an Economist

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Thinking like an economist can seem like a skill limited to solving problems of the marketplace, but this type of thinking can be applied in many areas outside the field of economics. Thinking like an economist can help avoid irrational decision-making, can aid professionals in improving the decisions that affect their lives and can help you better understand the world around you. Once you learn to think like an economist, you will see how virtually all decisions—from something as small as where to go to dinner to whether to begin a new career or go back to school for a master’s degree—become clearer.

What does thinking like an economist mean?

Assembling an intellectual toolkit similar to that of the economist can help you make smarter decisions in your professional and personal life. There are three basic concepts that form the foundation of economic thinking:

• The Cost of Something is What You Give Up Opportunity cost is a fundamental economic theory and one of the most important to understand if you want to think more like an economist. Opportunity cost teaches that nothing in life is free, even if it doesn't cost money. Understanding opportunity cost can help those who want to think like an economist to decide, for example, if going to graduate school is worth the cost. If getting a master's degree is something you are considering, think like an economist and weigh the costs and benefits of that decision. Some of the opportunity costs of obtaining a master’s degree may be less time to spend on hobbies or leaving the workforce for a couple years; compare these opportunity costs to the benefits of having a master’s degree to make a rational, economist-like decision.
• Incurred Costs Cannot Be Recovered Sunk cost is one of the most pervasive fallacies that an economist’s mindset can help you overcome. Simply stated, a sunk cost is any cost that has already been incurred and therefore cannot be recovered regardless of future outcomes. Think of this example: You buy a ticket to a movie and settle in only to realize halfway through that the movie is terrible—what do you do? Most people will sit through to the end, thinking if they leave their money will have been “wasted.” But if you think like an economist, you know sunk costs are already gone. Furthermore, you now understand the opportunity cost of giving up more valuable time watching a movie you don’t enjoy. The sunk cost bias is often talked about by economists as, “throwing good money after bad,” but it’s important to remember that it isn’t just about money; any type of investment you make—money, time, effort—is subject to this type of thinking.
• People Respond to Incentives In An Introduction to the Economics of Information: Incentives and Contracts , by Inés Macho-Stadler and David Peréz-Castrillo, there is a brief mention of the Ukrainian pole vaulter Sergei Bubka, who broke the world record in pole vaulting 35 times from 1986 to 1995. By any measure that is an incredible feat, but it becomes more rational (and more apropos to the subject of thinking like an economist) when you understand Bubka's incentives. The Soviet Union at the time was offering athletes $30,000 every time they broke a world record. Bubka thought like an economist and decided instead of breaking the world record once, by a larger margin, he would break it 35 times, earning himself more than $1 million. This incentive theory plays out in daily life all the time. Evaluating how you respond to incentives in the world you and thinking about how other people respond to incentives you offer is an essential part of thinking like an economist.