There has been a lot of discussion of newly elected Argentine president Javier Milei’s proposals for economic reform. Much of that discussion has been on how successfully he will implement his ambitious proposals for freeing Argentina’s highly statist economy. He has proposed getting rid of the central bank and putting Argentina on the US dollar standard that, if successful, would bring Argentina’s inflation rate down from triple digits to single digits. He has proposed slashing government spending by as much as 15 percent of GDP. To put that in perspective, if the US federal government did that, it would cut spending from about 24 percent of GDP to about 9 percent of GDP. He has proposed eliminating eleven government ministries and agencies and privatizing many of Argentina’s government-owned enterprises.
What he will achieve is difficult to know. As Danish physicist Niels Bohr said, in a famous line often also attributed to baseball legend Yogi Berra, “Prediction is very difficult, especially if it’s about the future.” But what we can say is that Milei has a highly developed understanding of the most important ideas in economics. He will almost certainly make better decisions and more-thoughtful trade-offs than if he had the low-level, or even zero, understanding that is typical of politicians. A look at some of his pronouncements in interviews shows a sophisticated analytic mind at work.
Labor-saving technology
In a television interview in which he discussed Henry Hazlitt’s book Economics in One Lesson, Milei made the point, which many of us economists make, that one difference between a bad economist and a good economist is that the bad one looks at only the short-run effects of various economic actions and policies while the good one looks at the longer-term effects.
Milei gave an example that has been widely discussed in recent years, and when reading the subtitles, I felt as if he had cribbed from some of the things I used to tell my students. Of course, he didn’t. He asked his interviewer to consider what would happen if he had a factory in which he replaced humans with robots, thus eliminating jobs. Milei noted that that’s not the end of the story. He might take the money and buy items to consume. If he did that, he would create jobs in the businesses that produce those consumption items. If, instead, he invested it, he would create new jobs himself and improve the quality and reduce the prices of goods, “making everyone’s life better” because they would have more money to spend on other things. If he saved it by putting it in a bank, that would become an investment somewhere else. Notice that he almost exhausted the options. But Milei remembered to point out the only other option left: burying the money. My version, when I taught this point, was hiding it in a mattress. Burying the money would, he noted, cause less money to circulate in the economy and so prices would fall somewhat. Of course, the price drop would be tiny even if he buried one million dollars, but his point remains. Then Milei added a bonus that I hadn’t thought of. In an income tax system for which tax brackets are not adjusted for inflation, people’s tax increase from inflation would be somewhat lower.
Subtle effects of increasing the money supply
Ask modern economists to tell you what Cantillon effects are, and I would bet that at least half of them would not know the term. Milei does. They are the effects on prices of an increase in the money supply as it works its way through the economy. The effects are named, not surprisingly, after an eighteenth-century Irish-French economist named Richard Cantillon.
In a recent television interview, Milei explained the effects in understandable terms. He called them the “Hume Cantillon effect” and it turns out that Milei was right: both David Hume and Richard Cantillon had the insight at about the same time.
Milei started by stating that the first people who get to spend the money are politicians. This means that he implicitly assumed that the government sells newly issued bonds to the central bank, which uses newly printed money to buy the bonds. That’s not the only way for money to enter the system; the central bank could instead simply print money to buy bonds from the general public. But the point is that in an economy like Argentina’s, where the federal government runs a huge budget deficit—in 2022 it was 3.85 percent of GDP—the odds are that most of the increase in the money supply is used to buy newly issued bonds that fund government spending.
Milei continued. The politicians benefit because they get to spend money today at yesterday’s prices. Then retail prices rise, followed by wholesale prices. Who gets it at the end, according to Milei? Workers. So, in his view, the Cantillon effects mean that workers, because they receive the money at the tail end, lose from inflation.
Milei’s view is plausible. But Cantillon effects can occur in other equally plausible ways. Say, for example, that the government spends the newly printed money on military equipment. That would then drive up the demand for many specialized workers who work in the defense industries. Those workers could gain from Cantillon effects.
My point in highlighting Milei’s discussion is not that he got it right for all cases. It’s not even that I think it’s a good idea for a politician to explain that subtle point to a general audience, although, given how clearly he explained it, it could make sense for Milei to do so. My point, rather, is the simpler one that Milei is a politician who has a deep knowledge of monetary policy that will serve him well in his current job.
Freedom and equality
In an interview highlighted by Elon Musk, Milei quoted, in summary form, one of the best statements Milton Friedman made in his ten-part TV series, Free to Choose. Friedman said, “A society that puts equality before freedom will get neither; a society that puts freedom before equality will get a good degree of both.” The late Bob Chitester, who produced the TV series, once told me that this was his favorite part of the series. In his explanation that followed, Friedman noted that a government strong enough to take away freedom will redistribute resources to the politically powerful. But a government that respects freedom will unleash people’s energies so that they can pursue their dreams. Milei understands that.
The externalities imposed by politicians
In one of the leading economics textbooks written in the early 2000s, New York University economist William J. Baumol and Princeton University’s Alan S. Blinder gave the following definition of an externality:
An activity is said to generate a beneficial or detrimental externality if the activity causes benefits or damages to others not directly involved in the activity, and no corresponding compensation is provided to or paid by those who generate the externality.
Their use of “beneficial” and “detrimental” is somewhat idiosyncratic; the usual adjectives are “positive” and “negative.” Nevertheless, their characterization of externalities is one that economists, including me, have typically accepted.
In the bestselling economics textbook of this century, Harvard University economist N. Gregory Mankiw gives a more succinct definition: “the uncompensated impact of one person’s actions on the well-being of a bystander.”
The usual example economists give of a negative externality is air pollution. When a factory gives off smoke as a byproduct of its production process, that can cause damage, typically uncompensated, to hundreds of thousands or even millions of people who are downwind.
The vast majority of economists use the term “externality” to refer to the results of actions by firms and individuals but never use the term to refer to the results of actions by government officials.
But notice that neither of the above two definitions excludes government officials as causes of externalities. Government officials often make decisions that cause harm, or provide benefits, to millions of people. They might, for example, start an unnecessary war that kills some of their own people and kills some people in the country on which they make war. Even if no one is killed, the government uses tax money to pay for the war. That’s a clear example of a negative externality. (I’m assuming that there is no benefit from the war; thus, my use of the term “unnecessary.”) Or, to take a domestic example, a government official might use taxes to subsidize a private-sector project that has little chance of succeeding and goes broke.
UCLA economist Harold Demsetz was one of the first to use the term to refer to actions of government. In his 1967 classic, “Toward a Theory of Property Rights,” published in the American Economic Review, Demsetz argued that the government’s use of the draft was a negative externality because it imposed costs on draftees. He wrote, “It has always seemed incredible to me that so many economists can recognize an externality when they see smoke but not when they see the draft.” As I wrote in a blog post on that article, “The biggest externalities, in fact, occur in the government sector. Think of Stalin, Hitler, and Mao. Or, even in less dramatic terms, think of the huge costs to the world due to Woodrow Wilson getting the United States into World War I.”
We can now count Javier Milei as an economist who understands this point. In a speech filled with fiery rhetoric, Milei pointed out that politicians often get special privileges paid for by Argentine’s citizens. He stated that if he were to take power in Argentina, politicians “will have to internalize their externalities.” In other words, politicians would have to bear at least some of the costs that they impose on others. I have followed politicians’ pronouncements on economics for over half a century and Milei is literally the first politician I have ever seen make the point that Demsetz made but make it more generally: politicians create externalities.
Conclusion
Argentina’s economy and Argentina generally are in bad shape. That’s the result of decades of policies that follow the playbook of Juan Perón, the president of Argentina from 1946 to 1955 and again from 1973 to his death in 1974. Those policies consisted of heavy welfare spending, government nationalization of selected industries, and making the government the monopoly purchaser of grain, to name three. Various scholars have referred to Peron’s policies as fascistic. That charge is probably overstated. As Sheldon Richman wrote in his article on fascism in The Concise Encyclopedia of Economics, “fascism is socialism with a capitalist veneer.” Richman explained, “Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners.” Perón didn’t go nearly as far as Mussolini did. Think of Peronist economics as “fascism light.”
Javier Milei wants to move in the opposite direction, by freeing Argentina’s people from government control of their economic activities. The uncertain news is that we can’t know how successful he will be. The good news is that, not surprisingly for someone who has been an economics professor, Milei shows a deep understanding of economics that will serve him, and Argentina, well.
