Deconstructing Mileinomics

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Octavio Bermudez
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Javier Milei, economist and president of Argentina, is a complicated character whose background and views have deserved heated discussion. This article will look briefly at Milei as an Austrian economist — the question of his libertarianism was settled elsewhere. One further point before starting: This is an article about economic thought. An assessment of his policies will be touched only shortly in the closing remarks and hopefully in another article.

Milei, Smith and development economics

We shall begin, where Milei and most of the economics profession start in mainstream economic thought, with Adam Smith (1723-90). Milei celebrates Smith as the Gauss of economics, the “father” and “mother.” Milei’s praise of Smith comes from his treatment of the division of labor, which is key to Smith’s implicit theory of economic growth. In his latest book “Capitalismo, Socialismo y la Trampa Neoclásica” (“Capitalism, Socialism and the Neoclassical Trap”) Milei discusses this topic. Argentine economist, the venerable Juan Carlos de Pablo, summarized the discussion the following way: “The ‘line’ formed by Adam Smith, Joseph Schumpeter, Allyn Young and Paul Romer is much more useful than the one formed by Francis Edgeworth, Vilfredo Pareto, Kenneth Arrow-Gerard Debreu and Robert Solow.”

As an expert in growth theory, Milei holds Smith in high esteem as the “father” not only of economics but specifically of the endogenous growth model, which Milei favors. With a focus on the accumulation of capital, technological innovation within the economic system and the division of labor, the endogenous growth model tries to break out of the limit of diminishing returns proposed by Robert Solow.

Two points can be made here, one about the history of economic thought and another about contemporary economics. First, Adam Smith: In the words of economic historian Alexander Gray, “In no sense was he a pioneer.” Generally, Smith’s alleged contributions were predated by others, and even Smith’s presentation of them is highly truncated.

In regard to what Milei celebrates about Smith (the division of labor), Smith restricts it to the division in a single factory and passes over a division of labor among industries. Earlier thinkers had treated the question of the division of labor, so Smith’s analysis only shows the different importance that he attributed to it and not the originality of his theory. James Mill and David Ricardo would develop more thoroughly how the division of labor plays a crucial part in the development of nations.

Contemporary new (endogenous) growth theory presents a framework closer to sound economics. Yet, mainstream development economics is still far from the insights of the Austrian School. The mainstream conception of knowledge allows for arguments in favor of patents and copyrights in order to make knowledge less of a “public good.” Furthermore, they neglect that even with the important factors of knowledge and the division of labor, if due to high time preference present satisfaction is valued more than future satisfaction, then there will be no saving for future increases in production. Moreover, all of these factors are not really quantifiable; their meaning is lost in mathematical symbology. Only the verbal formalism of the Austrian School can offer real-world understanding of social and economic phenomena.

The Austrian aspect of Milei (which we will discuss in the next section) makes him look beyond and overcome some of the limits the mainstream has. He does not accept the existence of “market failures” and understands the intertemporal nature of interest rates, so in some sense, we are saved from the “neoclassical trap.”

Milei, Walras and Austrian economics

Several times Milei has championed general equilibrium analysis, both on print and TV. He has talked about the “beauty” of mathematical models and how economic questions are answered that way. This brings us to Milei’s second connection with economic thought: Javier Milei and Léon Walras (1834-1910). Although Walras is considered one of the three pioneers of marginalist economics, his mathematical methodology and equilibrium analysis have dominated microeconomics for almost a hundred years, which makes the latter contributions more significant than his theory of marginal utility (also troublesome).

In all his books, Milei uses mathematics to arrive at his conclusions. His methodology is decisively Walrasian and not praxeological. Although Milei has criticized models like the ones of Wassily Leontief (1906-99) for being robotic, his own methods and analysis seem to be stuck still in the same vein. Let us hope that these methodological concerns do not lead him to see wisdom in policies such as inflation targeting (advocated by one his ministers, economist Federico Sturzenegger, who failed to apply this sort of inflation “gambling” during his time as central banker, 2015-18) or any other monetary engineering schemes.

Although Milei scorns “market failures,” it is the Walrasian framework that allows economists to target the real economy for failing to fit in their models. If Milei is familiar with the Austrian concept of real-world activity, which is dynamic and always changing, he doesn’t apply it. Mental constructs like the evenly rotating economy are used to help understand the economy, but in no way does the real world arrive at a state of equilibrium, much less one of general equilibrium.

Looking closely at Milei and Austrian economics, we can see that his encounter with the Austrian School began when he read the chapter “Monopoly and Competition” of Murray Rothbard’s book “Man, Economy, and State.” When talking about “market failures,” he regularly cites Rothbard in his analysis of monopolies. Milei does not argue that the monopolist price is indistinguishable from the competitor, but rather that the monopolist is actually a social benefactor who has served the public better than any other competitor.

However, this argument admits the existence of monopolists in the unhampered free market; whereas, determining who is a monopolist (or a cartel) and who’s not is actually impossible. In a market with free entry of competition, the wannabe monopolist is always competing with new entrepreneurs and potential competitors. In contrast, in the intervened economy, the monopolist or cartel privileges are granted by the state through patents, copyrights, licenses, regulations and other barriers to competition. Thus, the only possible monopoly is the one mandated by the state. This is curious, since Milei endorses the definition of monopoly that points to government monopolies as the only ones possible, but his argument excuses monopolies in an unpersuasive fashion.

Contrary to common beliefs and Milei’s own words, he seems to still hold on to Neoclassical economics, both historically and professionally. His connection with the Austrian School has shaky grounds and looks more like a labels game than an adherence to Austrian economics and identification with economists who have sacrificed a lot for teaching sound economics.

Economic thought and policy

With Milei’s economic plan entering “Phase 2,” the question of the basis of such a plan deserves discussion. Are Milei’s officials too afraid to follow principles due to immediate backlash from public opinion? Or are they basing their plan on what they think is sound economics? Their program for reducing inflation is more attuned to Robert Lucas Jr.’s model of rational expectations. Milei for years has stressed the connection of fiscal deficit to price inflation. Having achieved a fiscal surplus, Milei and his main economic officials, minister of economics Luis “Toto” Caputo and central banker Santiago Bausili, are trying to anchor inflation expectations with the fiscal surplus.

Stretching the anchor from fiscal to monetary policy can only have short-run effects, even if people expect lower inflation due to the fiscal surplus. If the real macroeconomic variables like the quantity of money keep expanding, then expectations will be anchored only in the immediate future. A fiscal anchor cannot last forever. Even a monetary anchor has its problems, and the question of the viability of rescuing the peso is even more complicated. That is because the peso is either dead under any economic paradigm or in a constant state of hyperinflation.

A sort of anxiety toward more radical reforms that are deemed necessary yet are not executed seems to have taken hold of Milei. We could be facing a political neurosis; Milei knows what he wants to do but does not execute it. Despite Milei’s limitations (presented in this article), he has the tools and knowledge for fundamental reforms that Argentina needs, but the advice of those whose analysis favor state engineering may be preventing the Argentine people from the liberty they need. Of course, this does not take away responsibility from President Milei. Even eminent economists have pointed out that he knows full well what the right way is, but if he doesn’t apply such necessary policies, then what goes on in his head is irrelevant.