During the fall 2023 election that brought Javier Milei to power as president of Argentina, 108 economists signed a statement opposing the bulk of Milei’s economic proposals. Among these critics were French economist Thomas Piketty, author of Capital in the Twenty-First Century, a 2014 book that made a case for much higher tax rates on high-income and wealthy people. (I reviewed his book here.) The signers criticized free markets in general and Milei in particular. Both because they repeated so many of the common criticisms of free markets and because they criticized Milei’s policies specifically, their claims are worth a response.
Their criticisms of free markets and support of government intervention showed little understanding of either. And because Milei has been in power for more than a year, we can compare some of their predictions with actual results. What they feared for the poor did happen in the very short run; but already the lot of Argentina’s poor has improved.
Does cutting government spending make poor people worse off?
Here’s their first major criticism:
The economic vision underlying these [Milei’s] proposals supposedly advocates minimal government intervention in the market, but actually relies heavily on state policies to protect those who are already economically powerful. Reductions in tax rates and public spending push many essential goods and services away from public provision to private commercial providers, which enriches them but reduces the access of ordinary citizens, especially the poor.
Why the “but”? Nothing after the “but” in the above quote justifies the word. Reductions in tax rates and public [government] spending” certainly do reduce government intervention, so that can’t be the reason for the “but.”
To see their reason, you need to look at the next sentence.
Tax cuts and reductions in government spending, they wrote, “push many essential
goods and services away from public provision to private commercial providers, which enriches them but reduces the access of ordinary citizens, especially the poor.” Even in the worst case where this claim is true, that doesn’t justify the “but.” Milei advocated minimal intervention and moved in that direction, whatever the consequences for “essential goods and services.” On their substantive point—that moving from government to private provision makes goods and services less available to the poor—they give no evidence. Maybe it’s because they can’t. When goods and services are privately provided, providers have a strong incentive to care about what customers want and to be careful in keeping costs down. Government officials have neither incentive.
Moreover, economists have a wealth of data showing that private competitive provision of goods and services is substantially less costly than government provision. University of Virginia political scientist Steven E. Rhoads, in his excellent book The Economist’s View of the World, cites numerous studies that compare the cost of government provision with the cost of private provision for garbage collection, medical claims processing, firefighting, utility billing, and many other services. In every case, private provision was substantially cheaper. This information is public, and economists often reference Rhoads’s book. Are the 108 economists not aware of the literature?
Note the implication of these comparisons between private and government provision. If the government cuts taxes and the spending that these taxes paid for, people can pay less for goods and services and get more of them.
Milei has been in office long enough that we are now seeing good results from his 30 percent cut in government spending. One way to test the economists’ claims is to look at the amount of poverty in Argentina. After all, if cutting the size of government makes goods and services less available to the poor, the poverty rate should rise. In the first six months of 2024, after Milei had been in power for only a few months, the poverty rate did rise—from 41.7 percent in the second half of 2023 to 52.9 percent by the end of June 2024. But by the last quarter of 2024, it had fallen to 36.8 percent, five percentage points below the rate in 2023.
Market failure versus government failure
The signers also made a criticism that we often hear from critics of the free market: the idea of market failure. They wrote:
The laissez-faire model assumes that markets work perfectly if the government does not intervene. But unregulated markets are not benign—they reinforce unequal power relations that worsen inequality and hinder the application of key developmental policies—including industrial, social, and environmental policies.
Whose laissez-faire model? No economist I know of who believes in laissez-faire or something close to it also believes that “markets work perfectly.” We understand that they work imperfectly. Our argument is more sophisticated: markets work imperfectly and so do governments. Moreover, the imperfections of government, due to bad incentives, poor information, and poor incentives to get information, are typically much worse than the incentives of for-profit providers.
The economist critics also wrote:
In Argentina as in most other countries with complex economic structures and challenges of income and asset inequality, inflation, and external debt, the need is for nuanced and multifaceted policies that recognize the needs of different social groups.
Who could disagree with that? I would go further. In every country, “the need is for nuanced and multifaceted policies that recognize the needs of different social groups.” That’s what a free market or even a semi-free market is so good at handling. You want bacon. I want steak. She wants tofu. In a relatively free market, we can all get what we want. If you doubt that, then try this experiment. Next time you’re standing in line at a supermarket, check, without being too obvious, what the person in front of you and the person behind you have in their shopping carts. You already know the results of this experiment. What they have in their carts has at most a slight overlap with what you have. In the kind of Venn diagram that Vice President Kamala Harris has said she loves, the area that the three circles have in common is very tiny and might even be a null set. Now compare that to government provision. Governments, partly out of laziness, partly out of lack of information, and mainly due to lack of incentives, tends to favor “one size fits all” provision.
The critics continued their critique of free markets, writing:
Markets are also prone to failures, driven by externalities (when all benefits or costs cannot be ascribed to individual agents) and information asymmetry (when some players on a market know more than others).
It is true that markets are prone to failures. That’s the bad news. The good news is that when there are externalities, people often have an incentive to internalize them. Private property is one way of doing so.
Consider the major mistake Walt Disney made in the early 1950s when he built Disneyland. He created huge value for the surrounding land but didn’t get to collect on it. Those who gained were landowners who sold to entrepreneurs who built restaurants and hotels. In economists’ jargon, Walt Disney created positive externalities. But Disney learned from its mistake. In preparation for building Walt Disney World in Orlando, Disney secretly bought thousands of acres of surrounding land so that it could collect much of the value it created with Disney World. As my former co-blogger Arnold Kling has put it, “Markets fail. Use markets.” His point is that markets are often the solution to market failure.
And when information asymmetry causes problems, private actors who are disadvantaged have an incentive to get more information. In 1970, University of California, Berkeley, economist George Akerlof, who later was a co-winner of the 2001 Nobel Prize in economics, published a famous article titled, “The Market for Lemons.” He argued that used car markets don’t work well because a high percentage of used cars sold will be lemons. Someone selling a used car that is not a lemon, therefore, will get a price that reflects the probability that the car is a lemon. As a result, few people will sell good used cars. In 1975, when fellow economists and I at the University of Rochester held a seminar to discuss the article, a number of us agreed with Akerlof’s logic but immediately started thinking about free-market institutions that might arise to handle the problem. We now have such a way. It’s called CARFAX.
Or consider another area where critics of the free market point to the bad effects of asymmetric information: health insurance. In this case, the potential buyer of insurance has better information about his health than the insurance company. If that were the end of the story, in a free market many healthy people would refrain from buying health insurance because the premiums would need to cover the unhealthy people who buy. But that’s not the end of the story. An obvious solution is for the health insurer to get more information—about the potential buyer’s health history, smoking, weight, and parents’ health, for example—and health insurers in many states have done that. But ObamaCare has made it illegal to price according to most risks. That’s not market failure: it’s government failure.
Did insufficient regulation cause the 2008 financial crisis?
While there is much more to criticize in the economists’ statement, I’ll mention only one more claim. They write:
The 2008 global financial crisis showed that inadequate market regulation can have disastrous consequences.
What the 2008 crisis actually showed is that heavy regulation, combined with bad monetary policy, had disastrous consequences. The degree of regulation, and the problems it caused, were thoroughly treated in the 2010 book What Caused the Financial Crisis, edited by Jeffrey Friedman. I reviewed the book in Policy Review, a former publication of the Hoover Institution. As for the deep recession that followed, monetary economist Scott Sumner, who studied under Milton Friedman at the University of Chicago, has made a strong case that the main cause was tight monetary policy.
Conclusion
One good effect of the 108 economists’ criticisms of Milei’s economic policies is that we got to see how they think about free markets. Their understanding of how markets work and of how governments work is superficial. I wonder if any of them, seeing the apparent success of Milei’s policies, are questioning their prior views. We can always hope.
