Streetwise Professor

January 22, 2024

Viva Javier Milei, Market Maximalist

Filed under: Economics,Politics,Regulation — cpirrong @ 2:23 pm

Javier Milei gave a remarkable speech at Davos last week. I won’t say it was a stemwinder, because unlike in his media and campaign appearances, here Milei’s mien was that of an academic delivering a paper at a conference, rather than that of a chainsaw wielding revolutionary. On substance, however, it was extremely provocative–and indeed an anathema to the assembled “elites” in Davos.

Milei robustly advocated the primacy of freedom, and made the moral as well as the utilitarian case for capitalism, and presented a trenchant criticism of socialism, collectivism, and statism. Apostasy–hell, heresy–at Davos. So three cheers!

A good part of Milei’s speech channeled Deirdre McCloskey: he recapitulated McCloskey’s account of the economic miracle of market capitalism that caused a manyfold increase in living standards in a few centuries after millennia of stagnation.

Indeed, Milei presented a maximalist case for the market. Milei is a trained economist, and many who are not trained economists may have missed the import of some of his more arcane and academic arguments. I’ll try to summarize them, and offer some commentary.

As his foil, Milei chose neoclassical economics–the economics of Alfred Marshall, and indeed of two economists (Milton Friedman and Robert Lucas) whom Milei obviously admires given he named three of his beloved dogs after them. Specifically, he took aim at the concept of “market failure” in the vein of Pigou and innumerable economic textbooks since.

Milei is a market Panglossian: he says flat out that there is no such thing as “market failure.” Full stop. Economic failures are solely the responsibility of the state and destructive public policies. Another full stop.

This strongly echoes the Coasean critique of the Pigouvian concept of “market failure.” Neoclassical economics largely ignores transactions costs. What is sometimes referred to as the New Institutional Economics, of which Transaction Cost Economics is a subset, introduces transactions costs as a fundamental concept. When transactions costs are considered, no wealth improving transactions remain unexploited. In this sense it can be said that the market never fails.

Where this argument becomes tenuous is when one considers what determines transactions costs, and whether government regulation can reduce transactions costs and therefore increase the gains from trade and exchange available to be realized through market processes. For example, diffuse harms from air pollution make negotiated deals to maximize welfare challenging. There are free rider problems and large number bargaining problems and asymmetric information problems that make pure “market” arrangements challenging. Perhaps government regulation is a welfare-improving way of overcoming these challenges.

That is, it is possible that sometimes governments can reduce transactions costs, or can be viewed as a transactions cost economizing way of allocating scarce resources. In a transaction cost free world, the allocation of property rights doesn’t matter. With transactions costs, this allocation can affect welfare. By defining property rights, governments might allow the market to reach a better allocation of resources.

But of course, as Milei correctly notes, governments can hardly expected to be altruistic and omniscient, so they are also quite capable of implementing destructive measures rather than constructive ones.

Milei’s market Panglossianism may be exaggerated, but it has the great virtue of pointing out the fundamental analytical problems with textbook “neoclassical” invocations of and treatments of “market failure,” and like Coase did, directing attention at the vitally important consideration these analyses ignore–transactions costs.

Milei also gave a stirring defense of monopoly. In some respects this can be viewed as a specific example of transactions costs in action: as the answer to an old Chicago econ prelim question (maybe it is still used–dunno) demonstrates, in the absence of transactions costs, the “deadweight loss” from monopoly power in the textbook analysis would not exist. Instead, “monopoly power” or “market power” would have only distributive rather than efficiency effects.

But Milei’s defense was somewhat different. The textbook analysis of monopoly is a static one. Following Schumpeter, and certain strands of modern growth theory, monopoly is the engine (or the effect) of the innovation that has driven the massive expansion of wealth and the widespread elimination of poverty that Milei rightly focused on in the beginning of his speech.

This is another maximalist position, but yet again it identifies and amplifies an important consideration that is far too often ignored in public and policy debates.

I would note, however, that it sits somewhat uncomfortably with his view that all failures are government failures. One of the primary dangers of large business enterprises generally, including those that could be characterized as “monopolies,” is that they exercise undue power over governments, and cause them to implement wealth-destroying policies that help these enterprises. How does one reap the benefits of innovation that results from (or may cause) large enterprises without incurring the costs from rent seeking by these enterprises?

As an economist I can quibble with the extent to which Milei pushed some of his economic arguments. But this is mainly a matter of identifying exceptions to the rules he lays down: I definitely see the rhetorical and persuasive benefits of stating the maximalist case, especially to an echo chamber of anti market and anti freedom “elites” who themselves routinely make maximalist claims. It is a challenge to a “smelly orthodoxy,” and such a challenge must be vigorously and provocatively issued in over to stand out against the droning Davos hive.

Once the debate shifts to where Milei went too far, the fundamental truths of his arguments are at least implicitly accepted. And the fundamental truths are these: emergent market orders, including “failures” such as monopoly power, are and have been for centuries the main engine of human progress, and that governments have been the main obstacle to human flourishing .

And this, in turn, will shine a bright light on the dark truth of Davos and the Davosians. Namely, that they are fundamentally anti-humanists who believe that there are too many humans, and humans are too rich. That is, Milei embraces a view of progress that is antithetical to modern misanthropic progressives.

Too many normal people don’t understand that about the Davosians. Attempting to counter Milei’s arguments forces them to reveal that fact. When the only answer to “capitalism made us rich” is “being rich is a bad thing” the battle is all but won.

So, Viva Milei!

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15 Comments »

  1. Could you fit your blog better for big screens? I find myself having to open it in a window to make it comfortable to read.

    Comment by K — January 22, 2024 @ 7:19 pm

  2. “One of the primary dangers of large business enterprises generally, including those that could be characterized as “monopolies,” is that they exercise undue power over governments, and cause them to implement wealth-destroying policies that help these enterprises.”

    Surely this neatly reinforced Milei’s thesis: the above example demonstrates clearly why government fails — and the tendency to pander to large donors… ahem… businesses is just one example.

    His point, surely, is that the very existence of government is a failure, and that it largely fails in every area that it touches. Which is why government should be very tightly constrained (minarchist libertarian position).

    DK

    Comment by Devil’s Kitchen — January 23, 2024 @ 12:45 pm

  3. Great Blogpost! I was hoping you would blog about him. When I did my MBA at Chicago it was toward the end that it dawned on me that if you built a company, your goal was monopoly. Peter Thiel echoed it in his book Zero to One. We watch how it works in theory, and in practice (see Facebook, Google). It’s the regulated monopolies that are the problem.

    When I watched his speech, I was reminded of Economics of a POW Camp (RA Radford).

    Comment by Jeff Carter (@pointsnfigures1) — January 23, 2024 @ 1:57 pm

  4. Wooowww! We’re all rich, we’re all living in the great enrichment, we’re just not aware of it they say…

    I’ll stop working tomorrow, I’ll tell them ‘found out I’m rich…’. Going to hang out with my new trans friends (not talking about McCloskey) and tantra teacher Milei…¨

    …wow, going to set myself up as libertarian, because that’s what made us rich, wasn’t it?

    The role model for the Libertarian: composer Jean-Baptiste Lully (1632-1687), I like his music. But now I start to understand, his music was maybe the least interesting. He was a homosexual, pederast, but happily married to a ‘female wife’ with kids, had some mistresses also, a real estate investor and successful entrepreneur AND two times a monopolist (!).

    And he met with libertarians, well seemed to always also have been about screwing male teens in their secret meetings…this I did not understand quite, with a young fine lady you just couldn’t be considered a libertarian…the church managed to have the death penalty legislated for homosexuality…but were many times also homosexuals and pederasts…but they probably felt they’ve got the better cover…only people as backwards as the sun king (who reportedly thought he was the state) were interested in mistresses.

    ‘A good part of Milei’s speech channeled Deirdre McCloskey: he recapitulated McCloskey’s account of the economic miracle of market capitalism that caused a manyfold increase in living standards in a few centuries after millennia of stagnation.

    Indeed, Milei presented a maximalist case for the market.’

    Question: does anybody really believe these simplified charts with a line meant to show exponential growth starting around 1800 are meaningful and scientific? Does anybody really believe it’s possible to measure the living standard of the ordinary man during the last 2000 or more years IN USD?

    McCloskey tells us that it’s not about accuracy anyway, or in her words ‘The exactitude, of course, is inessential.’

    Question: does McCloskey stand for the ‘economic miracle of market capitalism’ (acc. to Prof here)?

    I just can’t read that out of McCloskey (https://www.deirdremccloskey.com/docs/pdf/McCloskey_HowGrowthHappens.pdf ) – ‘What matters is human creativity liberated by liberalism. Innovism, not tricky proposals for utilitarian nudging, should be the focus of economics. Economics should become “humanomics,” that is, economics with the philosophy, history, literature left in.’ – or as wiki en reads: ‘The second, Bourgeois Dignity: Why Economics Can’t Explain the Modern World, was published in 2010, and argued that the unprecedented increase in human welfare of the 19th and 20th centuries, from $3 per capita per day to over $100 per day, issued not from capitalist accumulation but from innovation.’

    What I also don’t understand, why does Milei try to delay ejaculation for up to three months? Because when you read books about sex, the first thing they tell you is to distinguish between an ejaculation and orgasm. And when you didn’t go through sexual reassignment operation and your willie stills stands after ejaculation, what’s the point with delay? Well, I hope for him it did eventually go off in bedroom or bathroom, not during, say, aehem…

    …yeah, what they did not tell you about liberalism…

    Let’s end the post with Marche pour la ceremonie des turcs, Jean Baptiste Lully (cover by Silver Clouds): https://www.youtube.com/watch?v=59drhdXho-4

    (let’s see whether this post lands in limbo, even thought it’s seemingly a libertarian blog…)

    Comment by Mikey — January 23, 2024 @ 2:51 pm

  5. @K — Most desktop browsers will increase font size with CTRL+. As blogging sites go, our favored SWP is delightfully light on obnoxious client-side scripting. It renders legibly even on the text-mode elinks broswer.

    Comment by M. Rad. — January 23, 2024 @ 10:04 pm

  6. About monopolies or ‘against collectivism’:

    Prof writes: ‘But Milei’s defense was somewhat different. The textbook analysis of monopoly is a static one. Following Schumpeter, and certain strands of modern growth theory, monopoly is the engine (or the effect) of the innovation that has driven the massive expansion of wealth and the widespread elimination of poverty that Milei rightly focused on in the beginning of his speech.’

    Here the quote of McCloskey from my previous commentary again:
    ‘What matters is human creativity liberated by liberalism. Innovism, not tricky proposals for utilitarian nudging, should be the focus of economics. Economics should become “humanomics,” that is, economics with the philosophy, history, literature left in.’

    Neither, maximalist positions on the market, nor monopolies can assure/cause ‘liberated human creativity’, innovation, and ‘economics with the philosophy, history, literature left in’.

    There is also the idea of clusters, of eco-systems now, they’d needed to be taken into account, e.g. why couldn’t a ‘cluster’ function as ‘engine…’?

    Furthermore, this is a very typical Western black-white view on ‘freedom/utilitarian capitalism’ vs. ‘collectivism’:

    Charles Hampton-Turner and Fons Trompenaars write in ‘Mastering the infinite game – How East Asian Values are Transforming Business Practices’ that the Asian tiger countries could get into boom economy mode with playing a different game than the West.

    From the executive summary:

    ‘East Asian tiger economies have moved…
    -Beyond the scarcity of specific things, like profits and property, to the abundance of diffuse processes, like knowledge generation.
    -Beyond the ‘level playing field’, where one side vies with the other, to clusters of players whose joint contributions improve the ‘game’, or industry, for all players.
    -Beyond competitive rivalry towards cooperative competing, a process in which all players learn cooperatively from studying the better plays.
    -Beyond straight-line reasoning in which persons reach logical ‘conclusions’ (and hence stop!), to reflecting after the fact, to create a process of continuous and infinite improvement…
    -Beyond achievement to discovery of and inquiry into what is most worth achieving and then achieving it…
    -Beyond strict adherence to contract terms to a dynamic reciprocity of relationship…contracts are finite, relationships are infinite.
    -Beyond time and (sequential) motion, wherein finite games are won by the fastest mover, to redesign of the game itself so that all sequences are synchronized just in time, thereby shortening ‘the racecourse’ and initiating infinite improvements.’

    Collectives consists of individuals. What if both ‘don’t think right’ (‘So go to hell if what you’re thinking isn’t right…’)?

    Okay, don’t ‘they try to create monopolies and disown traditional farmers in order to do farming in a more industrial style? Have you seen their ‘visions’: square monoculture fields, monitored with drones, gen-crops, chemicals…owned by ‘Gates&Co.’ – does the rolling out of industrial linear-square monocultures as monopolies improve nutrition and nature?

    Or, that ‘they’ worked together (‘operation light speed’ etc.) to roll out so-called ‘covid-vaccines’, it made ‘them’ big profits’, was it the right thing, did it improve society, general health?

    Also, the West applies a ‘either-or/vs.’ view, but ‘as well as’ is also possible…

    …but still, one needed another sphere, individuals as well as collectives/societies can ‘think/want the right or the wrong’, or? What makes individuals and collectives tick & tock the way they do? It’s ‘another level’…

    Comment by Mikey — January 24, 2024 @ 3:44 am

  7. @Mikey
    “Beyond competitive rivalry towards cooperative competing
    Beyond straight-line reasoning… a process of continuous and infinite improvement
    Beyond achievement to discovery of and inquiry
    Beyond time and (sequential) motion

    I don’t know what any of this means but I suggest you spend less time in airport bookshops.

    Comment by philip — January 24, 2024 @ 3:51 pm

  8. Thanks Prof, good explanation.

    And congrats on having reached a level of fame that attracts incoherent Gonzo commentators to the site.

    Comment by Ex-Global Super-Regulator on Lunch Break — January 24, 2024 @ 6:16 pm

  9. @Philipp: Thank you for reading. Well, I’d have to probably retype here complete chapters of the book…but I’ve mentioned the source. It’s their 1997 book (and not currently published yet to my knowledge, bought mine also used, belonged to St. Mary’s University College London). They’re main work is on intercultural communication.

    @Ex_GSR: Thank you for reading. With ‘Gonzo’ you mean to say “feels free wheeling when you read it [but] it doesn’t feel accidental. The writing is right there, on the page—startling, unprecedented and brilliantly crafted”? Then thank you again, but it would still just apply for a part of my first comment, the bigger part obviously has arguments and sources. But the Gonzo part still has it’s point…

    Apart from this, this is just blog comments. And it happens all of the time, somebody just doesn’t like a blog comment and then tries to debunk it in comparing it to a standard that would be applicable to a master’s thesis…but be reminded, also Prof’s blog article doesn’t match this standard (and no blog article really can). And if you’d ask me: it’s not about a scientific topic anyway, it’s religious. But he shares your religion and you call you’re applause coherence.

    Comment by Mikey — January 25, 2024 @ 3:17 am

  10. And about being rich, cause we’ve got now a living standard of 100 USD a day: in Switzerland 100 USD a day just pays for a moderate rent, what you get from it depends on the part of the country. In Zurich or Geneva not much. But in order to pay 3000 bucks net a month you have to make rougly 4000 gross…

    …just for a moderate rent. And guess depending on where you live in the US, it’s not so different, just more spread in the numbers.

    Just to say, as this is the argument that McCloskey and Milei make, and nobody seems to notice how far from reality it is…

    Comment by Mikey — January 25, 2024 @ 11:37 am

  11. PS. Prof it’s ‘Viva Milei CARAJO’.

    Comment by Ex-Global Super-Regulator on Lunch Break — January 26, 2024 @ 6:36 am

  12. On being rich and the great enrichement:
    Last year an architect told me, in Switzerland nowadays in order to buy and finance a house one needs a yearly gross income of minimum 180.000 CHF. This assumes one has min 300.000-500.000 CHF Equity to invest and that one will need to take up a loan of min 1.000.000 CHF on top. This is anectodal, but is a correct description in a nutshell.

    At the current exchange rate 180k CHF is 195 USD, divided by 365 that’s 536 USD per calendar day. And one has just an average house, nothing special at all, 1 Mio Debt min, and at Swiss living costs not at all the impression one would be rich…

    Needless to say that 70% or more ain’t got that equity, nor income…

    So, great enrichement for whom?

    And you know what? No matter how much money onw has, it’s many times impossible to find a traditional bakery…it’s the big cultural and nuritional poverty…

    So, Milei & Co say we’re rich through free market capitalism because we’ve got 100 USD living standard per day. For a lower mid-income living style in CH one needs min 536 USD a day, but many just have the 100 USD even in CH…

    Comment by Mikey — January 27, 2024 @ 5:14 am

  13. Could it be that the “poor” Swiss got priced out of their real estate by all those billions that assorted dictators like to park there? Methinks such idiosyncratic problems hardly invalidate the gist of Milei’s message. Anyway, the Swiss are always just a referendum away from changing their policy on real estate. Reaching modern living standards after recovering from the disease of socialism is rather more difficult, so good luck to Milei.

    Comment by Ivan — January 28, 2024 @ 5:30 pm

  14. @12, Ivan:
    Switzerland: Real estate prices were always relatively high and an real estate ownership ratio low. Still is the lowest in the OECD. The country is small, spaces many time scarce. The population and work places are centered in the low lands and cities. Ownership in apartments was only introduced 1965 (women’s right to vote was introduced only 1971…). There was money printing and low interest rates. There is stricter financing rules: min. equity, no equity insurance as in the US, monthly costs incl. annuity should not exceed 33% of income (e.g. because of high living costs). But housing prices just soared to an insane level. It’s also an investment scheme for pension funds here and they’ve got a court ruling that allows min. 3% performance on invested real estate (‘high rents also in zero interest environment’). Switzerland was never a example case for democracy, it’s an example case for privileging those who own. E.g. also no capital gains tax. But the Swiss don’t know better, they are kept in believe they’d be all privileged compared to other countries. Only in recent years it went clearer and clearer, that the mix reached out of high living costs (also in the supermarket), taxes, social security, housing prices, employment income not rising the same as real inflation etc. became extreme.

    Other countries: it’s just that one hears this development from EU countries, the US, UK as well, plus more real poverty elsewhere, e.g. in UK…

    Socialism vs. Capitalism: there is no such thing as e.g. ‘THE ONE capitalism’. Is ‘privatizing profits and socializing losses’ (as is standard in the Western World capitalism or socialism)? The distribution of wealth is a pyramid, getting less equally distributed everywhere, capitalism went though different stages and now has little to do with physical economy and the common good.

    Actually, people in Switzerland get educated more to be collectivists than individualists. But here there is very strong working ethics (too much even). And such cultural elements will not be addressed just with cheering for ‘capitalism vs. socialism’. Isn’t it funny and strange in itself, that here Milei should have promoted capitalism against the socialism THAT THE WEF WOULD REPRESENT?

    Maybe the situation in Argentina has ‘idiosyncratic problems’ more so then the average country. Funnily, a country that is already named after silver or moneys…

    Comment by Mikey — January 30, 2024 @ 3:13 am

  15. @Ex-Global Super-Regulator on Lunch Break–Yes, it’s a badge of honor to know that the site is sufficiently important to attract trolls.

    Comment by cpirrong — February 4, 2024 @ 4:09 pm

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