What Did Javier Milei say to the World Economic Forum?
Updated: Sep 22
EconBuff Podcast #51 with Rex Pjesky.
Check out the episode on Spotify: https://podcasters.spotify.com/pod/show/econ-buff-podcast/episodes/What-Did-Javier-Milei-say-to-the-World-Economic-Forum----EconBuff-Podcast-51-with-Rex-Pjesky-e2fmqbc
Dr. Rex Pjesky talks with me about Javier Milei’s speech to the World Economic Forum in January of 2024. Dr. Pjesky explains the importance of the World Economic Forum. Dr. Pjesky highlights how unusual it is to have a professor of economics in a political office. We explore Milei’s use of the arguments that echo great economists of the past such as Miltion Friedman and Israel Kirzner. Dr. Pjesky lays out how Milei argues for decentralized economies and why the field of economics believes collectivism is ineffective for economic policy. Dr. Pjesky discusses the “hockey stick” of economic growth and exponential growth is tied to the industrial revolution. Finally, we explore what economists call the discovery process in markets and the importance of economic freedom to a citizenship.
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Transcript:
LEE STITZEL: Hello and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is our favorite guest, Dr. Rex Pjesky. Rex is a professor of economics at West Texas A&M University. Rex, welcome.
REX PJESKY: Thank you very much. I'm glad to be here.
LEE STITZEL: So, Rex, today's topic is a speech that Argentinian President Javier Milei gave at the World Economic Forum. It's interesting because, as far as I know, and I'm no history buff, we're at an interesting point in history because we don't see real-deal economists being civic leaders very much, much less ones who then go on and say the kinds of things that we see him say. So tell us why this speech that he gave at the World Economic Forum is so important and interesting to us.
REX PJESKY: The speech interests me, and Milei interests me, because, as you say, he's not someone who simply studied economics. We've had lots of world leaders who have studied economics. He is an academic economist, which, I don't want to say has never happened, but it is extremely odd that someone who is legitimately a professor of economics, has peer-reviewed publications, teaches economics, is a professor of economics at an Argentinian university, is elected president.
It's also interesting for him to go give a political speech that is saturated with the kinds of things that academic economists talk about, and he talks about them in a way that academic economists talk about them. So this was an incredibly unique speech that he gave to the World Economic Forum, and it's very, very interesting. I thought it would be a good idea to get on tape and pull out some of the hardcore economics that existed in this individual speech that some listeners might be interested in.
LEE STITZEL: Before we get into that, let's back up. What is the World Economic Forum, and why is it interesting or important?
REX PJESKY: The World Economic Forum is a group that has met for a long time. It's gone through a couple of different names and such in the past, but the World Economic Forum, as I understand it, is a group that meets frequently to talk about exactly how society should fit together.
Again, it's many things, but what's interesting about the World Economic Forum to me is that it has some particular ideas about the role business should take in society, and it's the antithesis of what someone like Milton Friedman would think in terms of what the role of a business should be.
Milton Friedman is extremely famous for many things, but in this context, Friedman thinks that a business basically should be beholden to its shareholders. So under a Friedman view, a business, say they make widgets, it doesn't make any difference what they make, should be primarily focused on making the best widgets that it can. It knows that it's making the best widgets it can, in the best way it can, based on its profit.
The profit motive that economics is famous for was best fleshed out by Friedman's ideas and Friedman's writings. If a business is profitable, it's good. If a business is not profitable, then it's bad. The only dimension that we can judge that on objectively is the profitability of the business.
Of course, that leads into a lot of nuance and detail. What do you have to do to be profitable? You have to make a product that customers want. It has to be sold at a price that customers are willing to pay and can afford. You can get even deeper into that idea and think about things like a business is going to have to be responsive to its workers. If a business is going to be profitable, it's going to have to be an environment in which its workers can be productive, and it's going to have to attract workers.
So a business has to attract good shareholders to invest their money. It's going to have to attract good workers to come and actually do the business of the company. The stakeholders of a business, in a broad sense, in Friedman's world would be the shareholders, the owners, the workers, and the consumers. A business that sells widgets, or whatever, must respond to those groups. Those are the stakeholders in Friedman's world.
The World Economic Forum economists have a broader view of who the stakeholders should be. The World Economic Forum views that there are many other stakeholders. Society as a whole is a stakeholder. So a business is not only responsible to its owners, not only responsible to its workers, not only responsible to its customers, but would also be responsible for various other social activities and cultural activities.
That's basically why it exists, and every year they go and talk about those kinds of things. The World Economic Forum is famous for thinking, for example, that a company should be environmentally friendly. A company has certain ecological goals that it should fulfill. A company should make sure that its product is socially responsible beyond just satisfying its customers. So you've got the World Economic Forum view sort of opposed to the Friedmanite view.
LEE STITZEL: If I could have Milton Friedman on the podcast and I said, "What do you think of the notion that the stakeholders a business has are much wider than the classic Friedman view?" and then pressed on that point of, surely you can see how a business would have the potential to do damage to the environment and none of their stakeholders directly care about that. There's a problem. What might Friedman respond in that case?
REX PJESKY: Far be it from me to speak for Friedman, but I'll try. If I was going to channel him, I think one of Friedman's concerns from this view of stakeholder capitalism, which might be a generic term for what the World Economic Forum would call this, and I don't want to speak for them either, is that when you're focused solely on profits and the things that are very closely related to the profitability of the company, then the company becomes supremely focused on just that.
Because they are focused on those things, those stakeholders and the company have a very tight relationship. There's feedback there. If customers stop liking the company's product, the company will know and respond accordingly. If a company becomes a very poor place to work, the company will know immediately because it will have a hard time retaining and attracting workers. If the company loses its profitability, then shareholders will flee.
So the managers, or the owners, but managers would be the better word in this context, will very quickly be able to assess and respond to what the problem is. In Friedman's world, that's what makes a firm such a good thing, because it's got an incentive to respond to all of these different stakeholders in a way that, at the end of the day, makes the product excellent, given all of the conditions in which it's made.
When you broaden the goals of a company beyond those simple things, then those feedback loops become very, very muddled. What exactly does it mean for a company to be socially responsible in terms of its environmental behavior? It's not that we can't define those things, but all of a sudden it becomes extremely muddled. It becomes extremely subject to the subjective opinions of all of the people involved.
The individuals or the groups that have input into those decisions of the company suddenly don't have a real stake in it anymore. If I'm not a worker, an owner, or a customer of a company, and I go say, "You should be doing this," there's really nothing there. There's no basis for me to make those kinds of statements or those kinds of demands to a company.
If I'm a customer of a company, then it's like, "Hey, this is what I want. If you don't give it to me, then I will take my business somewhere else." That's a real signal from me to them because it's got certain obligations on me, and it sort of imposes certain obligations on the company itself. It's real.
But if I just go tell a company, "Well, you should recycle more," I'm not really exactly sure that that means very much. Keep in mind, I'm not saying that environmental goals and recycling, or anything else that we might say in this context, are bad cultural goals. The question that would put the Friedmanites and the World Economic Forum in opposition with one another is: are businesses, under these kinds of mechanisms, the best way for society to achieve those goals?
LEE STITZEL: Let me say this another way and see if you like it. What Friedman is saying is a firm is a good institution for doing very specific things, which is producing and cost-minimizing a particular product or service targeting a particular customer group. They'd be very bad at doing things that are outside that purview. If somebody comes from outside of that mechanism, like you're saying, a non-customer, the firm doesn't have any way to evaluate either side of the problem: is this a good goal or target for us to be pursuing, and how do we weigh the costs and benefits against each other? That's because it's outside of that commerce mechanism.
REX PJESKY: Yeah. That's an exact, precise statement of what I think Milton Friedman would say. That's one of the many problems that Friedman would have with the World Economic Forum's ideas.
LEE STITZEL: Okay. So let's turn back then. You're saying Milei is an example of somebody who not just would have read Friedman, but would have been academically trained by the field in a way that would be influenced by Friedman's thought.
REX PJESKY: Yes.
LEE STITZEL: So it's interesting then that the World Economic Forum would basically say, "We come from this stakeholder perspective," and we're going to have somebody come and speak who would be from, I mean, you called it the antithesis, quite an opposite position. So what is it that Milei goes on to say in this speech that makes it so interesting to us in that context?REX PJESKY: I think Milei's speech was remarkable for the reasons I gave a few minutes ago. It's also kind of remarkable that he was invited to speak to this group because they had to have a pretty good idea of what he would say.
If I was going to encapsulate Milei's 20-minute speech, or however long it was, into a single thesis point, it's that it is very, very dangerous to make firms agents of the political process. You don't want to use the firm structure, the commercial structure that firms exist within, to achieve political goals that are outside the firm's responsibility to produce and distribute goods and services at prices that customers want to pay.
That is generally not what the World Economic Forum thinks. The World Economic Forum thinks that firms should be agents of the political process in addition to their responsibilities in the market process. His speech basically starts out by explaining the difference between that kind of centralized economic system and what economists would call a decentralized economy, or a decentralized market system, for making commercial decisions.
LEE STITZEL: It's interesting, right? I think your average listener would think there's a sense in which a political system touches so many places, some people might even say basically all the places, of your life in terms of being able to regulate and legislate. A market economy, commercial activity, falls under that. I don't think economists would say it should be completely separate from the political system. With that in mind, how do you define what's centralized versus what's decentralized, since neither camp is really going to argue for a pure-anarchy type of situation?
REX PJESKY: Right. Neither of these views represents pure anarchy. I've heard a lot of people say that Milei is an anarcho-capitalist, and I'm not really exactly sure what that term means, but I do know that he doesn't advocate no government at all.
A decentralized economy would be one where businesses and households basically are tasked to satisfy their own ends, or to try to satisfy their own ends. In a decentralized economy, a person or a group of people, you might even call them a group of investors, would be free to form an association and try to buy or sell basically whatever they want to sell.
If you and I want to go try to start a fast-food restaurant here in Canyon, then we're free to do that. We don't need permission from anyone to do so if we can come up with the money to buy the equipment, hire the workers, and, if we're doing a franchise, get the franchise agreement and all that. We're free to do that.
Under a centralized economic system, we wouldn't be free to do that. In other words, the political process would basically have to say, "Yeah, Canyon actually could use another place for people to go buy chicken sandwiches or tacos," or whatever it is that we were looking to sell. It would involve a lot of permission and a lot of coordination with whatever the political process was. In some instances, maybe the people in Canyon might vote on whether or not we want a restaurant, maybe vote on what kind of restaurant we were going to have.
So, in a nutshell, that's the difference between a centralized economy and a decentralized economy. In a centralized economy, you have economic or commercial decisions that flow extensively through the political process. In a decentralized economic system, on the other hand, you have these kinds of commercial decisions made by households and made by firms. They flow through purely market mechanisms.
Milei's speech basically thinks that centralized economies have been the root of all of Argentina's economic problems. It's why he ran for president. The people of Argentina apparently bought his case, and they must think that too, because I don't really think he ran on much else. They too thought Argentina's economic problems, which are extensive and longstanding, were the result of their various flirtations with centralized economies and the ideas behind making economic decisions flow through the political process.
In his speech, he gave lots of facts and figures in support of what he thought. In the 1860s, which is a very long time ago, he said that Argentina was a world power. In the last generation or so, it's become not a world power. He actually says that Argentina is 140th among all the nations in the world. In his speech he didn't say 140th in what, but certainly going from a world power to 140th is not good. He very starkly and very clearly blames collectivism for Argentina losing so much ground, relatively speaking, to the rest of the world.
LEE STITZEL: There's a sense in which there's not a really clean bifurcation between what's decentralized and what's centralized. You could have, all the way over here on the decentralized end, what you said, anarcho-capitalism, where the political process is able to have no say whatsoever in that area of society, the activity of trade and commerce.
On the other end, you might have something fully deterministic where the government actually owns and operates all the means of production. Then you can have everywhere in between. We live in a society where you and I could absolutely go and put our money together and open a business, but we're going to have to get a license to do that. That's some boundaries on what it is we can and cannot do. There would be certain types of businesses, for all manner of reasons, where you're not going to be able to just go and open a facility where you make nuclear weapons or something. Let me pick out certain things, right?
REX PJESKY: Yeah. Again, that's an interesting point. A system doesn't have to be purely decentralized for it to be called decentralized because, as you say, there are licenses and permissions that you have to get from various government agencies. You can't build a house without a permit to build a house. You can't build a building to put a business in without a permit for that. If you make profits or an income, you have to pay taxes on that. When you go buy something, you have to pay taxes on that, and et cetera.
But none of those things, in the United States at least, anywhere near reaches a threshold where I would say that the United States doesn't have a decentralized economy. In the United States, there are 350 million or whatever of us who live here. Of course there's going to be some kind of coordination among that many people using something that we would call a political process. That doesn't mean that we live in a centralized economy.
The people who think that one single thing that you have to go to the government for permission for, or one single thing that the government won't let you do, means that we're living in a centralized economy, I don't buy into that kind of thing. The United States does have a free-market economy. We are free to do a vast number of things, and certainly we are free within the bounds of what the political process allows us to do.
The political process in the United States does put some bumpers on us. In other words, we can't set up a shop to sell cocaine openly in the United States. You cannot do that. There are some commercial activities that the political process has said, no, you can't do that. You do have to get permits for buildings and stuff like that. That's oftentimes a very innocent way that society has decided we're all going to coordinate our activities with one another, not through the end result of commerce, but we have to have water hookups and stuff like that.
So there is some degree of planning that the political process can undertake which doesn't nullify the fact that we live in a decentralized economy. But I don't think it's that way in Argentina, at least according to Milei.
LEE STITZEL: That's kind of where I was going. The idea isn't that you're either an on-off switch, decentralized or centralized. You have this spectrum where you go from more decentralized to more centralized. As you slide further toward centralized, you're going to have more and more economic ramifications, right?
I'm blanking on the name, but there's a think tank that produces the economic freedom indices. They're looking, on some spectrum, at comparing relatively free countries on the number of regulations that will stand between you and making a business. On the margin, the more of those you have, the less economic activity and innovation, and all the things we would like to have our economy be doing, the less of that you will have. As you start sliding toward more and more centralized, you have less and less of that.
We could spend a lot of time arguing about the different relationships there, but Milei's case is that Argentina has been on the centralized side, and as it has seen more and more centralized activity, it's suffered in terms of its economic output.
REX PJESKY: Yeah. Not by name, but Milei mentions that index. He gives some data. His speech is also very data-rich, which is kind of interesting. You don't see that much from world leaders, to give the kind of data that an academic might give in what amounted to be a political speech at the end of the day.
Countries that rank higher on the economic freedom scale have much less poverty, starkly less poverty. There's a strong relationship between the amount of both poverty and abject poverty in a society and a country's rank on these various economic freedom indexes that are proxies for the centralized-decentralized economic scale.
People in freer societies live longer was another thing that he mentions. It is remarkable how strong the correlations are when you put all of these indexes for human flourishing, things like how much poverty there is, how long you live, which would be the ultimate human flourishing measure, against the economic freedom indexes that these places have.LEE STITZEL: One of the things that struck me when you sent this to me, I ended up watching the speech. Other than having a similar reaction to what you said, like, this sounds like the sort of speech I would give were I a political leader, since I'm an economics professor, he gives a lot of historical evidence. He says these things about collectivism and talks about centralized versus decentralized systems straight out of what the field of economics would want you to approach these kinds of things with.
But then he goes into kind of the classic cases for why these things are important using historical evidence broader than just Argentina's case. Can you talk to us about that a little bit?
REX PJESKY: Yeah. When you look at the broad strokes of world economic history over vast periods of time, it is astonishing what you see. I think that a lot of people who haven't looked at the data, without exception, when people see this data for the first time, it astonishes them.
I'm going to use Milei's figures here. I'm going to assume that they're correct. There may be ways of measuring this that are different from Milei, so they might not be correct down to the decimal of what the real figures are, but they're certainly representative of what's going on.
If you look at economic growth, which would be a measure of the material status and choices of the average human being living on the planet, from the year zero, which is what Milei uses, up to the year 1800, growth averaged 0.22% a year. So basically no growth.
When you go from the year zero to 1800, the average material condition of humans didn't change hardly at all. What makes that so remarkable to me, and what made it so surprising to me the first time I saw it, is that I know that there was technological advance from the year zero to the year 1800. It's not like the tools that people had at their disposal in 1600 were the same as the tools that people had in the year 200 across the world.
There were many advances in shipping and transportation, engineering, and agriculture during this time. The printing press was invented hundreds of years before 1800. But these technological advances did not produce economic growth in a way that made the average person living in the world during that vast swath of time any better at one point than at other points during that time. That's remarkable to me, and it would be remarkable to anybody who saw it.
But in 1800 things started happening. During the 19th century, growth was about 0.66%. Growth accelerated during the 19th century, so during that century, approximately, per capita income in the world doubled. It didn't move at all before 1800, going back to the dawn of human history, and then in that 100 years incomes doubled.
From 1900 to 1950, growth was about 1.66% a year, so during the first 50 years of the 20th century, incomes on average almost doubled again, approximately doubled again. Then from 1950 to 2000, growth was 2.1%. So far in the 21st century, growth in the world is about 3% a year.
By every measure, the Industrial Revolution was an economic success. What happened around 1800 would be the natural question. Not only did we have this technological explosion, but it also happened on the backdrop of what we call the Industrial Revolution. The Industrial Revolution was a technological explosion that is absolutely unquestionable.
If someone learned in a history class that the Industrial Revolution was caused by the steam engine, or cotton technology, or whatever might have happened, that's true. But the world had had technological innovation before. The world had new ways of doing things, new ways of communicating, new ways of transporting stuff before 1800.
Something was unique about what we call the Industrial Revolution that was able to translate these technical innovations into things that produced economic growth for the average person living in the world. That was this new way of organizing people, new ways of coordinating people in the act of doing economic activity. Milei calls this capitalism, basically.
The Industrial Revolution did represent a technological acceleration that human beings experienced, but it also was a period where human beings found new ways to coordinate their activities with one another, found new ways to trade, new ways to organize production and consumption and transportation, and all of those other things.
Starting around 1800, using Milei's timeline, that's when growth really started to explode. According to Milei, by every measure the Industrial Revolution was an economic success. Incomes since 1800 have increased by 15 times, and 90% of an exploding population was lifted out of poverty.
When you go back to 1800, approximately 95% of human beings who lived in 1800 lived in what would be considered extreme poverty. Five percent didn't. Today, it's approximately 5% of people who live in extreme poverty and 95% of the people on this earth don't. That happened at the same time there are many, many times more people on the planet right now.
The Industrial Revolution and the tools that humans learned, both in engineering and science and in human organization, all of those tools fit together in a way that has lifted almost everyone out of poverty at a time when there are more people. There's a lot more people now than there were 200 or 225 years ago. It is extraordinary. Milei states that the evidence that capitalism lifts people out of poverty is "unquestionable." That's the word that he used.
LEE STITZEL: I'm interested in that because I think most people's reaction, if you said, "What causes economic growth?" would be a fixation on technology. Economists don't really disagree with this in any sense. It's in all of our models whenever we're trying to model how an economy grows. We certainly agree that that is a factor.
But in terms of this kind of regime change that you're discussing here, and I shouldn't use that word in a podcast because to you and me that would be a normal term, I don't mean regime change in a political sense, I mean just this very large shift in the way that economies organize and therefore the results of that, it obviously can't be technology that was the fundamental shift.
I think you made an excellent case historically for why that would be. There are all these technological changes that lead up to that, and then we have engines and steam engines and railways and things like this that all happened in the 1800s. A history professor might say, well, those were just the ones that really mattered. The road and the wheel and crop rotation, or whatever kinds of things happened before that, it turns out relatively weren't that important.
The problem with that explanation would be, what about flight, light, computing, and artificial intelligence? All these things technologically seem like they would dwarf the things that happened in the Industrial Revolution, and yet no economist would characterize anything since 1800 as a second Industrial Revolution that then put us on a completely different path.
You quoted a lot of important and interesting numbers, but we could easily imagine a hypothetical change where, instead of doubling income over 100 years, it increased tenfold. If it were technological changes, and it weren't computing and flight, what could possibly cause us to have a second industrial evolution that put us on a completely new path of growth?
I'd say you almost have to go to something other than technology, not only because of the case that you presented but also because of the case of what technological growth has looked like since the Industrial Revolution.
REX PJESKY: That's an extremely good point. Now we're on this growth path, but nothing has happened in the last 200 years that has put us on a third growth path, which is basically the point you're making.
The social organization that Milei calls capitalism, that's what happened. Different economists have different theories about what caused that to happen. There are economists who say, well, it is just simple technology. I personally find that explanation to be extremely insufficient.
What was special about the new ways of human organization? Let's take for granted that it wasn't just technology, because I think Milei does. Milei makes that assumption, that it had to be something other than technology that caused this explosion. It's something that really hasn't been replicated in the last 200 years. It was like a single event or a single change in social organization that created, not the new growth path, but the growth path to begin with. The third wave would be the new growth path, if we ever find something like that.
Milei actually gives an answer to this. He cites a sort of obscure author, maybe not to economists, but to people who haven't studied economics you probably haven't heard of Israel Kirzner. He cites Israel Kirzner's ideas of market discovery as a process, and he credits this process of market discovery and market competition, written about by this economist, Israel Kirzner.
Kirzner thought that markets were a process and not an end state. In this part of the speech, Milei really gets into some pretty hardcore advanced economics. It's very specific to what we would call academic economics. He's not talking business here. He's not talking generic social theory. He's actually talking very advanced economics, the kind of stuff that we would talk about in class.
Given his audience, I guess that's not too surprising because a lot of people at the World Economic Forum are going to be trained as economists. There are going to be a lot of people who are extensively well-read in what we would call academic economics.REX PJESKY: Kirzner's idea is basically this: the market is a discovery process, and at the center of Kirzner's world is what we would call entrepreneurs. We're not talking about entrepreneurship in the sense of somebody who just wants to open a chicken stand or something like that. Kirzner's idea of entrepreneurship would have been someone who actively seeks new ways of organizing human beings into production that will produce things that customers want to buy.
An entrepreneur in Kirzner's sense would be someone who is not just a businessperson, but someone who is actively involved in finding not only new products, but new ways of organization. A more modern person, and one who is well-read and sort of expresses Kirzner's ideas, would be Peter Drucker. The management professor talks extensively about entrepreneurship, and Peter Drucker defines entrepreneurship in roughly the same way that Kirzner would define it.
Peter Drucker is one of my favorite non-economist thinkers. He's a management guru, and he would be one of the most widely read management people in management classes and in the management discipline.
Milei says that the prosperity of the people is going to rest on the fact that entrepreneurs are able to go through this discovery process. Milei says that the state, and when anyone outside of the United States says "state," they're not talking about Texas, they're talking about a political organization. Germany is a state. Argentina is a state. The United States is a state. He's using the word "state" in the European sense as opposed to the United States sense.
Milei says the state should not punish actors in the discovery process. By extension, Milei would say that one of the hallmarks of a decentralized economy is that, in a decentralized economy, you have an environment where people who want to engage in the discovery process are allowed to do so by the state.
This gets back to what we talked about 20 minutes ago or so about the United States. Even though we do have government rules, you have to get licenses and pay taxes and stuff like that, this might be a criterion for whether or not something is a decentralized economy or a centralized economy.
In the United States, sure, we have to follow these rules and laws. A lot of them are great. Some of them aren't. We could debate that on a different podcast. But none of those things, or few of those things, is a meaningful impediment to someone participating in product discovery.
If someone wants to invent a new product, invent a new way to organize people into the production process, or try to figure out new ways to use old ideas, there's nothing in the United States that even remotely stops people from doing those kinds of activities. If I were going to make a case for the United States, or any economy, being centralized or decentralized, I think that's the line of thought that I would go through to determine that.
Apparently in Argentina that is not the case. Milei thinks Argentina is a centralized economy, with what he considers to be collectivism being sort of the rule of the day. Apparently people in Argentina are not free to engage in that discovery process.
Since Milei thinks that discovery process is the ultimate source of human prosperity, any nation that interferes with that discovery process, interferes with people finding new ways to organize the commercial aspects of society, is going to miss out on the prosperity.
Milei's goal and Milei's message to the World Economic Forum is very clear: whatever policies you advocate, whatever ways you think corporations should have relationships with government and larger society, you must keep this discovery process, or the ability for businesses large and small to engage in the discovery process, intact. Because if you don't, you will make the world fall back into poverty.
LEE STITZEL: Let me synthesize and see if you like the synthesis of it. The discovery process is what has actually created prosperity, and the discovery process is the activity of entrepreneurs, any economic actor who wants to take this on in producing new products or services or new ways to produce them. The idea is things that we didn't know before. It's not just honing the knife edge, it's blazing a new trail.
If you're decentralized, then regardless of the impediments or how many hoops you have to jump through to do that, it is possible to do it. That would be the demarcating line between those two things.
REX PJESKY: Yes.
LEE STITZEL: In this situation, then, you're not saying, as in the case that I made before, that there's some marginal impact to how much of that happens or not, but whether that sort of process is possible at all.
REX PJESKY: Yes.
LEE STITZEL: Okay. Milei's case, and I'd like you to comment on how the field would broadly agree or disagree with this, is that it's not technological innovation, but it's the discovery process, of which technological innovation is a subset, I would argue. I don't think he says that exactly, because he's talking about the discovery process, and you and I have reframed this in terms of anticipating one objection, which would be: what about technology? That's the thing that really put us on this new growth path, that put us on the second trend of the hockey stick. Is that fair?
REX PJESKY: Yep. I think that's entirely fair. A very precise way of describing the role of technological change in this process would be that technological change is a necessary component to economic growth, but is not sufficient for economic growth.
LEE STITZEL: So, Milei saying the state shouldn't punish people who are part of the discovery process, is that important on the grounds that that is economic freedom, or is it important because that will then lead us to economic growth and will end up in a better world because of that?
REX PJESKY: Again, not speaking for Milei, I don't think you can really distinguish between those two things. I think the empirical case for what Milei is advocating in this speech is very, very strong. But whether or not, if I understand your question correctly, the freedom is good as an end in itself, I don't think Milei addresses that.
Is economic freedom good for its own sake as a sort of morality, or is economic freedom good because we know that it leads to all of this prosperity, which is an unambiguous good in and of itself? I'm not sure what Milei would say about that. He doesn't mention it in this particular speech one way or another.
LEE STITZEL: Let's tie where we're at now back to the beginning. The World Economic Forum says there are all these stakeholders and there are all these important things that are outside what we would consider the normal purview of a firm's activity. We've talked about what the Friedman response to that would be. Now we've laid out Milei's basic argument and this idea of economic freedom.
You've mentioned all the extraordinarily important markers, poverty, quality of life, life expectancy, all these things that Milei has talked about. Is the idea that the World Economic Forum is saying, "Right, but you're missing these other important things," and Milei is saying to them, "You need to prioritize these things"? Or is it a process question where the World Economic Forum says, "We think we can get to the best economic outcomes this way," and Milei is saying, "No, look at history. This is the path that has led us to the best economic outcome"?
REX PJESKY: I mean, that's almost certainly true. The World Economic Forum, to the extent that it would disagree with Milei, it's a legitimate disagreement. I don't think the World Economic Forum thinks, "Yeah, Milei is right. This is the way for economic prosperity, but we're not going to do that because we don't want economic prosperity." I don't think that's what the World Economic Forum is saying.
We've just got two approaches to get us into the future economically with prosperity. You've got one vision that is the World Economic Forum, and then you've got Milei's vision, which is completely different in terms of what it thinks the role of commerce, firms, and government should be.
LEE STITZEL: Let me see if I can steelman the World Economic Forum position, and then you can respond from the Milei position. I hear you. These are all great arguments. I agree: economic growth, life expectancy, quality of life, those things are all important. I agree with you exactly.
The problem is you're omitting all these other important factors. We, as World Economic Forum economists, are saying: what about environmental damage and these social things that we might care about? Those are things that we should make economic tradeoffs for. We should hamper the discovery process, and we should be involved with what the outcomes are for actors that are involved in the discovery process in order to attain these ends, like the environment and socially desirable goals.
REX PJESKY: I think that's exactly what the steelman position of the World Economic Forum would be. Because the stakeholders in this discovery process appear to be very limited, obviously you are going to lose ground on these other goals that society thinks are important.
The World Economic Forum might say, "Yeah, we've done pretty well, but we can actually do better. We can do better because now we're going to bring the political process in on this, and we are going to consider all of these other factors. We are going to force these outcomes through the political process that the market, or decentralized process, has ignored for the past 200 years or so."LEE STITZEL: I'm still steelmanning the World Economic Forum, which goes against my very Friedmanite and Kirznerian proclivities. There's a part of me that would say, one, I disagree that you would get those outcomes. I fundamentally think if you're tinkering with, if you think you're going to take the free market away from the process, you're going to kill the discovery process and then get better outcomes. I would just disagree with that.
I think your worst offenders in terms of what's happening in the environment, for example, are going to be the countries that are more centralized, not the ones that are less. Different economists, I think maybe Andrew McAfee might be one who says stuff like this, maybe you have to go through a phase, maybe it's a path-dependent kind of thing. Again, discussion for another time.
The other thing I would say is I don't think you're going to do well on social-outcome approaches by taking away freedom, just as a general approach to that. Saying, "We want better social outcomes, so you will be less free," is just generally not a good idea. Thoughts on that?
REX PJESKY: I agree with you entirely. If I were going to put myself on one side of this debate, I'm firmly in Milei's camp, firmly in Friedman's camp, firmly in Kirzner's camp. I think all that stuff is true.
I do think that the capitalist social-organization structure, again to use the math term, is sufficient for economic growth. I think if you have that, then the technology needed to propel material economic growth will happen endogenously. That's another model of growth that economists have. So I think capitalism is sufficient for growth, period, full stop.
LEE STITZEL: Since we've mentioned Kirzner a couple times, I do want to say why I think, and again, as you've said earlier on, this would be the sort of thing that academic economists would be really interested in and maybe the rest of the world wouldn't find so interesting, Kirzner is important because his idea is that it's the discovery-process part that's important, not competition.
If you take Micro 101 and then go out into the world, like you said, not an academic economist, not a professor of economics, but somebody who's interfaced with economics, you're going to correctly learn the importance of competition. Your idea of competition is going to be basically that the market disciplines its actors. I can't just charge any price because somebody else will come in and undercut me on price, and then we're going to cost-minimize. That has good outcomes for being able to get people the most resources, the best bang for their buck kind of problem.
That's competition. That's important. But you and I would say that's second order, and that's because of Kirzner's work. What Kirzner says is it's actually this process by which we go into uncharted territory, that discovery process, that's really the important thing.
So that's, I guess, not really an aside to what we're talking about here. I just don't get too many opportunities to comment on Kirzner. What do you think about that assessment?
REX PJESKY: I don't think it's an aside to Milei's speech at all, because at this point, and we're kind of going chronologically through Milei's speech, he really shifts gears. The next thing that he addresses in his speech is a massive criticism of what is known as neoclassical economic theory.
Milei thinks that it is the interpretation of neoclassical economic theory, sort of in contrast to what Kirzner would think, which is what your point was, that basically has given license to the world's governments to have all of these interventions that punish and interfere with the discovery process itself.
At the foundation of neoclassical economic theory is competition. When I say competition in this sense, I'm using the jargon of economics. In the jargon of economics, competition is a situation where you have good information, maybe complete information, but good information. You have many buyers, you have many sellers. According to neoclassical theory, if these conditions are met, then you will have economic efficiency.
The flip side of that is that if these conditions are not met, you have economic inefficiency and you have a justification for what Milei calls government intervention, not Milei, everyone calls it government intervention.
If you don't have enough sellers and you have monopoly power, then you have a justification for the government to come in and do something about the monopoly. If you have incomplete information, if in a meaningful sense buyers and sellers have different amounts of information, then you have a justification for the government to come in and intervene in these situations.
In intervening in these situations, what Milei says, and what I think Kirzner would say, and what a bunch of economists sort of in the Friedmanite tradition might say, is that, yes, you're intervening in these and your intentions are good, but you're actually short-circuiting the discovery process.
If there is monopoly in the economy, if you just look at the math that you might learn in an intermediate micro course, you could mathematically prove that that's bad, that the equilibrium you reach in terms of price and quantity for goods is not the best one and you can reach a better one. How do you do that? The government passes this tax or does this antitrust action or regulates this market in one way or another, and you reach a better price-quantity equilibrium than you had under the one with the monopoly power.
But if you view competition not as an end state, like neoclassical economics does, but look at it as a process, like the more Kirzner-type tradition does, then you realize that monopoly is basically an entrepreneurial opportunity on one hand. A monopoly also might be the result of extreme entrepreneurial success.
Why would a firm get to the point where they have tremendous market power? Maybe it's because they're serving the customer best. Maybe you have one firm or a few firms that dominate the market, not because of some problem in the marketplace, not because of the other things that might lead to a concentration of sellers, but maybe because the best firms have basically won and customers in that market are being served.
If the firm is making monopoly profits, then that's an opportunity for somebody to come along and do it better. It's within those monopolies, it's within not the equilibrium situation, but within the disequilibrium situation that exists in markets, again according to the Kirzner tradition, that these entrepreneurial opportunities are created. Without those, we're not going to progress.
If, in a static sense, we ever reach a point where everything's perfect, then you don't have any reason to change at that point. Another way of looking at entrepreneurship under the Kirzner tradition is that entrepreneurs are the individuals who are constantly looking for new processes and new products, not for their own sake, but for profit opportunities.
These profit opportunities exist in dynamic and imperfect markets, not perfect competition but imperfect competition, as representations of profit opportunities that entrepreneurs will come along and exploit.
So when you look at various market failures, which in the neoclassical tradition would basically be any deviation at all from the assumptions of the model of perfect competition that everybody who's had a principles or intermediate micro class has learned very well, if you've got any deviation from that, if you've got public goods, if you have monopoly, if you have externalities, whether positive or negative, someone studying the neoclassical model will look at those situations and say these are all opportunities for some sort of collective, government, or political process to make improvements on the state of society.
The Kirzner tradition will say, "Well, not so fast." Market failures, in the Kirzner tradition, and Milei says this expressly in his speech, don't exist. What is called a market failure is actually a situation where a market has not yet materialized in the first place.
If you have an externality of pollution, just as an example, that's not a market failure. For whatever reason, institutionally, we've not had a situation yet where a market has developed to sort of internalize that externality, to inappropriately combine the language of neoclassical economics with what Kirzner might think about the situation. That may be inappropriate, it may not be.
Monopoly is the same way. Monopoly isn't an economic problem that needs to be corrected as a market failure. Monopoly is just a temporary circumstance where a market to, quote, "deal with" the bad effects of the monopoly hasn't materialized yet.
Markets aren't static. Markets are dynamic. These problems, and again I would put "problems" in air quotes here, will be dealt with through market processes if we allow the discovery process, the market process, to exist.
Milei really takes neoclassical economics to task because, in his view, neoclassical economics has been the justification for the kinds of centralized and political-process interventions that short-circuit the discovery process to begin with. He's very strong in these terms.
To listen to those kinds of statements in a political speech, it's almost like he's giving a speech to a bunch of economists. Maybe it is. It is called the World Economic Forum, so maybe it is a bunch of academic economists sitting in his audience and he's speaking to them.
Again, that's one of the reasons why I wanted to talk about this in a podcast like this, because it was just a really extraordinary political speech to have that much pure economics in it. He wasn't talking about tax rates and stuff like that, like, "Lower your taxes and raise these other taxes." He's talking about deep divides and deep questions about the methodology of the economics profession, the economics discipline, that you just don't see from world leaders, like, ever.
It was a very interesting speech. I encourage everybody to go listen to it.
LEE STITZEL: My guest today has been Rex Pjesky. Rex, thanks for joining us on the EconBuff.
REX PJESKY: It's been great. Thank you.
LEE STITZEL: Thank you for listening to this episode of the EconBuff, where we find applications of economic thought in a variety of topics and fields. If you enjoyed today's discussion, be sure to check out our previous episodes on YouTube, Spotify, and Amazon Podcasts under the title EconBuff Podcast, and be sure to like and subscribe. For updates and information, visit our website at econbuffpodcast.wixsite.com. If you have any questions, comments, or suggestions, we'd love to hear from you. Drop us an email at econbuffpodcast@yahoo.com.
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