Edward Harrison Crane III, a clean-cut Californian with the broad-shouldered bearing of an airline pilot, leans forward in his high-backed leather chair and proclaims, "We are the think tank for yuppies."

And simply as real estate, the Cato Institute is a young-upwardly-mobile-ist's well-furnished fantasy: a brick town house just down the road from the Capitol, stuffed with oriental rugs, English hunting prints, colonial furniture, burnished wood floors and bronze busts of venerable patriots. The surroundings hardly suggest the political goal of the place -- the introduction of new and often radically libertarian views of public policy to a new generation of voters and political players.

Crane, 41, Cato's founder and president, does not flinch at using the despised "Y-word," a term that assumes a uniformly naive and prosperous generation born between the end of World War II and the Beatles' first appearance on "The Ed Sullivan Show," a generation with an inordinate taste for pesto pasta, blackened redfish and the Uniform Tax Code. For Crane, it is also a group in search of an ideology, and Cato is trying to provide something more than just a material trope for its audience.

Crane and the institute's chairman, William Naskanen, believe fervently in unhindered markets, freedom from government, a nation "of Jeffersonian democracy." Cato scholars argue for an American withdrawal from the NATO alliance, a withdrawal of major military support for South Korea and other countries that presumably could defend themselves, the privatization of Social Security, severe reductions in social welfare programs, a "live-and-let-live" attitude toward social and sexual issues.

Like all of this town's idea markets, the principal product here is paper; and at Cato, the freedom of the individual, at all turns, at all costs, prevails, at least on paper -- libertarianism unchained.

"I think there is a broadly defined libertarianism among yuppies," says Crane. "They have a broadly tolerant view on social issues, a deep skepticism of government control of the economy and a concern about the United States' role as the world's policeman. The parties split those concerns. So where do you go?"

Naskanen adds, "So far, there's no place in the American political spectrum for yuppies. Which party will appeal to them? That could be the most interesting political question of the decade."

John Anderson in 1980 and Gary Hart last year tried to capture the imagination and votes of young independents but, says Crane, "Most of their 'new ideas' just meant more government." Crane pronounces the word "government" with the same loathing as a child saying "brussels sprouts."

At times Cato's insistence on the value of the individual above all other values has the ring of religious fervor. Nat Hentoff, a liberal writer who has lectured on First Amendment issues at Cato seminars, says, "My contact with them was strange. They're ideologues, like Trotskyites. All questions must be seen and solved withinthe true faith of libertarianism, the idea of minimal government. And like Trotskyites, the guys from Cato can talk you to death."

Founded eight years ago in San Francisco, the institute gets its name from "Cato's Letters," a series of pamphlets distributed by two Englishmen named Trenchard and Gordon during the early 18th century denouncing colonialism and big government.

Cato scholars are partial to Jefferson, as opposed to Hamilton. They admire Adam Smith, not John Maynard Keynes. Robert Nozick, a libertarian philosopher at Harvard; F.A. Hayek, a Nobel laureate in economics from Austria; and Bruce Epstein, a professor of law at the University of Chicago, are all well regarded.

The conservative establishment is no more in favor at Cato than its liberal counterpart. This is no Tory hotbed; some of Crane's angriest missives are directed at George Will. Among current politicians there are things Cato scholars admire about Jack Kemp, Bruce Babbitt, Bill Bradley and Bob Packwood, but, says Crane, "we're still waiting for someone to pick up the banner."

As a student at Berkeley in the mid-'60s, Crane ran for student government on a platform calling for the elimination of student government. He lost. Crane smiles in the knowing way of someone who thinks the world has finally caught up to his way of thinking: "Jefferson said the natural progress of things is for liberty to yield and government to gain ground. And that's proved to be true." In the midst of a successful career as a financial analyst, first at Scudder, Stevens and Clark and then at Alliance Capital Management Corp., Crane suddenly decided it was time to develop the politics he had stumped for at Berkeley:

"I was a vice president at Alliance Capital, working on profit-sharing funds, managing money for wealthy people, perfectly interesting work, but I gradually concluded that I probably could do more for people like my clients through working on the exogenous political circumstances in the country than what I was doing at the time. I was particularly frustrated by Wall Street's attitude to public policy, which is pretty complacent. I looked at the highly leveraged influence of places like Brookings Institution and it made me wonder.

"We started out in 1977 with seed money from the Fred C. Koch company a Wichita chemicals fortune . We began Inquiry magazine and I was editing that until we gave it up. That went under last year. We moved Cato to Washington in 1981 and we have around 45 adjunct scholars now who are all working on various books and articles that we find fascinating. We're living at a point in history now when basic paradigms of 'liberal' and 'conservative' can be challenged from outside. That's what we're trying to do at Cato."

Washington, to be sure, is home to think tanks. The Brookings Institution generally assumes moderate-to-liberal stands on policy, the American Enterprise Institute is moderate-to-conservative, and the Heritage Foundation and California-bred Hoover Institute are on the right. Crane says the think tank that most resembles Cato is the left-wing Institute for Policy Studies, "because, like them, we're interested in stretching the boundaries of the debate, of changing our assumptions about politics and economics."

The ideas coming from Cato are nothing if not radical:

*NATO and Defense: Earl Ravenal, a professor at Georgetown University's School of Foreign Service and an adjunct scholar at Cato, argues that the $129 billion that the United States spent this year to help defend Western Europe is the result of outdated strategy. He says that while Europe may have needed the help immediately after World War II, the combined population, gross national product and technology of Western European countries now are greater than those of the Soviets. Ravenal calls for a phased American withdrawal from the NATO alliance and for Western Europe to create "self-reliant military forces." David Boaz, editor of the Cato Policy Report, calls for Japan to spend far more money in its own defense.

*Social Security: "A prime yuppie issue," says Crane. "Most younger people believe they probably will not get out of the system what they put in." Peter Ferrara, a former senior staffer at the White House Office of Policy Development, is Cato's front man on the issue, arguing that the government should issue bonds to guarantee the benefits of today's recipients and offer younger workers the option of investing in "super IRAs," which, he says, would offer a better return than Social Security and provide a retirement protected from future Social Security and tax crises.

*Lee Iacocca and All That: Protectionism, industrial policy and projects such as the Chrysler bail-out are anathema to libertarians. Crane has written against "Japan-bashing" and against the "cigar-chomping" Chrysler Chairman Lee Iacocca as "an unreconstructed New Dealer who would reassemble most of FDR's Depression-era programs under the rubric of national industrial policy."

Cato scholars would allow import quotas to expire and they would eliminate the minimum wage. They have called for an end to the regulation of cable television, an end to farm and business subsidies and the repeal of many antitrust and labor laws. They would consider an end to all restrictions and taxes on goods entering or leaving the United States "except in case of war." The idea of "comparable worth" legislation is, to Cato, unspeakable.

Doug Bandow, a senior fellow with Cato and a former special assistant to President Reagan for policy development, calls for the repeal of legislation mandating air bags in automobiles in order to "save consumers money and preserve the values of individual freedom and federalism that Reagan has been spouting for two decades."

*Immigration: In a new book published by Cato, "The Economic Consequences of Immigration in the United States," Julian Simon contends that by historical standards current immigration levels are low. He argues that immigrants pay more in taxes than the cost of public services -- including welfare and schooling -- that they consume. He believes that immigration raises the standard of living and has no negative effect on the national unemployment rate.

*Social Issues: Cato's scholars generally regret the growing influence of the religious right in the ranks of the Republican Party. Cato takes the sort of attitudes on homosexuality, abortion and other issues associated with a traditionally "liberal" viewpoint. Since 1980 Crane has been on the board of advisers for the National Organization for the Reform of Marijuana Laws.

The success of a think tank can be measured not only on the quality of its research and ideas, but also on the distribution of those ideas, their propagation and influence. Heritage, for example, has been adept at placing numerous articles in high-profile journals, magazines and newspapers.

Cato, with 47 adjunct scholars and a 1984 budget of $1.3 million, is still relatively small. Nearly 50 major corporations contribute to Cato. The principal benefactor, according to Crane, is still Koch. But it is trying to expand its influence by advertising its books in nonacademic magazines such as The New Republic.

Libertarian politics are not new to the U.S. political scene. David Bergland ran for president on the libertarian line in the last election, and the Libertarian Party and campus libertarian clubs have their adherents.

"The Libertarian Party is pretty decimated by now and we don't take it seriously," says Crane. "They are unrealistic. They think the only reason for government to exist at all is for the national defense. They're more like an incestuous social club than a real party. Frankly, I don't think Americans really look to third parties. They somehow believe the two-party system is written into the Constitution."

Cato's scholars and organizers are careful to present a serious and accessible brand of ideology to the world. The Libertarian Party, which peaked in popularity when it won 1 percent of the presidential vote in 1980, is clearly not the model in style or substance.

The Cato libertarians are by no means alone in trying to attract the votes of the young. President Reagan constantly appeals to the "entrepreneurial spirit" and Hart's challenge in 1984 was an attempt to make neoliberalism a major factor in national politics. Neoliberalism has come to stand for a retention of New Deal values but a revision of various policies. Neoliberals often call for industrial policy, a national health care program, a more critical view of labor unions and a more streamlined defense.

Curiously, neoliberals and Cato's libertarians often express some admiration for the same politicians -- Hart, Joseph Biden, Bill Bradley, Bob Packwood -- but that admiration may be more hope than affection, a desire that a national figure will adopt either group's thinking.

Randall Rothenberg, author of "The Neoliberals," says he has been "impressed by a lot of the work that's come out of Cato" but says, "They're a bunch of knee-jerk libertarians who disguise their radicalism by putting out some very good books and studies. You have to be careful not to get sucked in by the overall ideological bias, which is extreme.

"They want to snooker the baby-boom generation into becoming hard-core libertarians. But they forget to tell everyone that things like markets are not perfect . . . They forget to say how entrepreneurial, risk-taking Apple Computers is getting crushed by big-business conglomerate IBM. It's really appealing and easy to be a libertarian until some larger force, an employer, a local government, some force tries to ream through you."

Of all the books sponsored by Cato, "Beyond Liberal and Conservative," an analysis of the current political spectrum by two scholars from the University of Central Florida, William S. Maddox and Stuart A. Lilie, may be the most influential. Instead of dividing the American political world into liberals and conservatives, Maddox and Lilie make a convincing case for adding two groups to the equation: populists and, of course, libertarians. They argue that the libertarian group is growing, especially among the young, the educated and westerners. Even Rothenberg praised the book as "refreshing."

Lee Atwater, a key political strategist in the last Reagan campaign, told Fortune magazine, "There's no question that the appeal of libertarian views is the fastest growing political phenomenon. There's a consensus out there that's going to bite people in the ass." D. Quinn Mills, a professor at Harvard Business School, writes in "The New Competitors," a new book about baby-boom executives, that 60 percent of young managers have libertarian views, while 35 percent classify themselves as conservative and 5 percent are liberal.

Crane, for his part, wants badly "to attract both liberals and conservatives to our ways of thinking." But for now, most of Cato's scholars came from either a conservative or a libertarian background. Overall, more libertarians are Republicans (34 percent) than Democrats (17 percent), according to Maddox and Lilie. There are very few repentant New Deal liberals walking the institute's colonial floors.

"I hope one day we'll be drawing people from all sides," Crane says. "We want our ideas to reach everybody and make a tremendous difference in the world."