“He is like the most earnest grad student I ever knew.”
Those were the words of a longtime professor and economist upon listening to Javier Milei’s speech at the World Economic Forum (WEF). It was full of fire. But it also included some long and intricate dives into the world of microeconomics, which is Milei’s field of specialization.
His passion for his political agenda of routing Argentina’s deep state is matched by his theoretical fire for rethinking the methodological and political structures of his own academic field. Implausibly, he used his speech in Davos to lash out at an enemy that hardly any of those who heard him knew that they had, namely the neoclassical consensus within the economics profession.
Milei touched on a number of issues, including industrial organization and monetary theory but here we will address what seems to be an obscure topic. At least it must have come across that way to mainstream listeners. He got seriously exercised about the topic of market failure, and concluded that there is no such thing as market failure. Instead, he said, markets succeed in every way we can think of what that means.
To understand his point, let’s get this much clear. He is not saying that markets are perfect. They are not omniscient. They are not infallible. They are not godlike. They do not reveal at all times the perfect truth and cleanse the world of all inefficiencies, vice, and evil. That is not his point at all. Anyone who watches Wall Street’s fits of frenzy this way and that, based on nothing more than the most implausible rumor, knows this.
So if not that, what did Milei mean?
There is this category of mainstream economic theory called “market failure.” You will find it about two-thirds of the way through any introductory textbook. It comes long after supply and demand, opportunity cost, the division of labor, pricing, capital and investment, and the function of money and financial markets. In case you the reader are growing too comfortable with the idea that economics is nothing other than a description of a self-operating system, the textbook is here to tell you otherwise. Markets fail in particular ways.
Here we plunge into some industry-specific language that has little to do with normal English. The kinds of market failures are grouped into categories such as public goods, time-inconsistent preferences, information asymmetries, monopolies in industrial organization, principal-agent problems, and externalities.
In every case, the supposed problem is that the market produces outcomes that are said to lack “Pareto efficiency;” that is, not everyone is benefiting from the system as it is without some changes that could be imposed from without, the presence of which will maximize social welfare, we promise.
The classic example concerns the non-excludable good. You might like a street lamp outside your house but then you would be the only payer while all your neighbors would benefit (“positive externalities”). The costs to you personally are far higher while the benefits are broadly available to everyone who doesn’t pay. You might be the kindest person in the world but economically speaking this is not viable for the long term. The high cost of installing and operating the light falls exclusively on you while everyone else is living off your incredible generosity.
In these situations, everyone might like the light but there is no system in place that would rationally allocate the services it provides to everyone, which is to say that a market is not likely to produce the optimal solution. Answer: municipal lighting.
It’s the same with so-called negative externalities. Consumers in a nice suburb might benefit from a big-box store like WalMart and the producers too, but maybe people would be negatively impacted by the traffic, the arrival of riff-raff, the tacky signage, and so on, and this might drive down property values. The market would approve of such things but many people are made worse off, so this too is supposed to be an example of market failure. Answer: zoning.
We can keep going through the list. With “time-inconsistent preferences,” you might adore donuts and many others too, thus inspiring a plethora of shops all over town. The trouble is that people eat and eat and then feel regret once the town is overcome with obesity and heart disease and dies. What was a short-term market solution ends up as a disaster. Why can’t people just think about the future? They can’t, so government needs to intervene.
With “information asymmetries,” you are drawn to a model of a car as a buyer but you are completely unaware of the poor repair record after 50K miles so you pay more than you should. The salesperson knows this but is under no obligation to report this. Buyer beware is a good rule but when buyer and seller possess different information sets, as they nearly always do, this is said to be a failure. Answer: forced disclosure laws.
Under monopoly theory, things get crazy. Supposedly businesses get too big and reduce competition. This allows them to dictate price, supposedly exploiting consumers. Or they collude instead of compete. Or they unfairly undercut prices of others and gain a market advantage. In the real world, however, truly free markets do just the opposite: they generate ever more competition. History proves that genuine monopolies that exploit are more often the result of government regulation and artificial barriers to entry.
Under the principle-agent problem, which has been known since the mid-20th century, the people making the choices over the use of property are different and have misaligned priorities relative to the actual owners. The publicly owned corporation is a good example, as when management betrays stockholders but nonetheless benefits with a high salary, a golden parachute, career advancement, and so on. Answer: massive regulation.
Once you start thinking this way, you begin to look at the whole market economy as a giant disaster in action, crying out for a fix. Without fully realizing it, the student of market failure theory comes to exalt himself and his intelligence above the choices of thousands, millions, and billions of people, even to the point of believing himself in possession of a toolkit to cry foul over the existence of freedom and choice itself.
The next step is inevitable: let’s get the government to patch everything up with schemes, nudges, taxes, subsidies, regulations, and outright compulsion. It’s in everyone’s interest, say the intellectuals. The state gains ever more power over liberty and property and the people who enact the cockamamie schemes can sit back with the cocktails full of cocky and proclaim it to be a job well done.
If you think about it, the whole of the COVID response was a big effort to overcome perceived market failures. The market won’t produce a vaccine for everyone even though everyone would benefit from an end to the pandemic. Let’s enlist the taxpayers! So too, while everyone would benefit from flattening the curve, people in the moment want to go to concerts and travel but that only spreads disease. Let’s impose forced human separation!
Nearly everything government does to interfere with your life represents an outpouring of fixes that are said to be an improvement over what the market would otherwise achieve. Milei taught all this stuff for years as a college professor but encountering the Austrian School blew up the whole paradigm with a few insights.
First, every market transaction is necessarily mutually beneficial to the parties involved, else it would not have occurred, and therefore naturally all parties have every reason to scope out failures and prevent them. Second, the benefit that accrues to market traders is not inconsistent with the long-run benefit to everyone else. Third, all the problems perceived as market failures rely on theorizing and observation by intellectuals who themselves are not part of the market; if they can see solutions, why can’t market actors themselves? Fourth, the institution tasked with fixing the supposed problem faces its own interests and constraints. Fifth, the cure can always be worse than the disease.
Let’s be clear what this is not saying. He is nowhere claiming that everything the market produces is beyond reproach in every respect and never in need of tweaking, fixing, or even being overthrown through innovation. But here’s the key: when the market discovers its own failures, it has also created a market opportunity for fixing them. The fix may not be obvious to intellectuals but market actors themselves have every incentive to find a way.
This is how the old paradigm of market failure started crumbling on deeper historical investigation. Situations where you would think markets don’t perform have indeed performed very well. The classic case is the lighthouse, which seems to suffer from a public-goods problem and thus must be provided by public services. Economist Ronald Coase looked at actual history and documented a long account of private ownership. This realization kicked off some much-needed skepticism toward the high theory that is forever finding fault with voluntary actions and investments in real life.
There is vastly more to say but let’s leave it as this: Milei recognizes that “market failure” theory sounds fancy and intellectual but it has provided a gilded cover for a vast expansion of tyrannical controls over the human population. This is why he blasted it. As an economist, he is just fed up with the whole racket of intellectuals working with government under the cover of models that presume to know what’s better for people than the people themselves know.
