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This is the Human Action Podcast where we debunk the economic, political and even
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cultural myths of the days. Here's your host, Dr. Bob Murphy, everybody. Welcome back to the Human Action Podcast. Today I'm going through Javier Millay's recent address to the World Economic Forum. So he's given these before, but this is the 2026 version that happened several weeks ago at this point, because it really is remarkable that the head of state is giving such a talk which blended Austro libertarian theory with neoclassical economics to give a pretty robust defense of the free market economy. So before I dive in, let me acknowledge within Austro libertarian circles there's a controversy over, you know, how should we feel about mlay? You know, he, he campaigned as an outright anarcho capitalist and cited the work of Murray Rothbard and Hans Hoppe, for example. And then Hoppe was asked at a, at his conference in Turkey, you know, how do you feel about Melaye? And Hoppa had, you know, some praise, but some harsh criticism in terms of his stance toward the central bank. And then Milei hit back pretty hard. He was doing some interview with these younger guys. Seemed like, kind of like a podcast session and he had some choice words for Hoppa as well. So I'm not talking about any of that stuff in this episode here. I'm just going to go through and explain the Austrian and or neoclassical economic theory that Millay references in this speech. The WF I have, though previously here on the Human Action podcast addressed the Hapa Malay feud, if you want to call it that. And then also because like Guido Holzman and Philip Bagas, for example, also had an exchange in, in written form@mises.org where they were hosting, you know, their, their exchanges. So I do have a previous episode of the Human Action podcast going through all that stuff, if you want to see it. Right. So we'll link to that in the show notes page. So without further ado, let's go through here and I'll play several clips from Milei's recent speech at the WEF and comment upon it. Okay, so this first clip is his opening and he kind of sets the stage.
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Good afternoon, everyone. I stand here before you to state categorically that Machiavelli is dead. For years our thinking was distorted by the presentation of a false dilemma in the design of public policies, one in which we were supposedly faced with a choice between political efficiency on the one hand and respect for the ethical and moral values of the west on the other. As Professor Jesus Huerta de Soto points out, in his work on dynamic efficiency. From that perspective, efficiency is not compatible with various schemes of equity or justice, but rather arises solely and exclusively from one of them, the one based on respect for private property and the entrepreneurial function. Therefore, the opposition between the dimensions of efficiency and justice is false and erroneous. That is to say, what is just can't be inefficient, nor can what is efficient be unjust. Actually, from the standpoint of dynamic analysis, justice and efficiency are two sides of the same coin. Without a doubt, the thinker who previewed this most clearly was Rothbard. When he articulated the connection between the dynamic conception of economic efficiency and the realm of ethics. Rothbard considered it essential to establish in advance an adequate ethical framework to foster dynamic efficiency, given our lack of knowledge regarding the ends, means and utility functions that exist in reality. So according to Rothbard, and I subscribe to this view even in my role as president of the great Argentine nation, only the ethical principles underlying Western culture can serve as efficiency criteria when it comes to making public policy decisions. Put bluntly, when public policies are designed, it is unacceptable from the standpoint of ethics and morality to sacrifice justice on the altar of efficiency.
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Okay, so here he's, as he acknowledges, mimicking what Murray Rothbard's take was. And also, Juro De Soto says this explicitly in his book on money and credit and business cycle. So in that context, Doto is talking about what we call fractional reserve banking, and Doto is very much opposed to it. And he says, I'm paraphrasing, but words, the effect that, as we'll show in both, you know, legal theory and ethics, 100% reserve banking for demand deposits is the right thing to do, but also that avoids the business cycle and that lines up with masses and, you know, the boom bus theory from Ludigan Mises. And De Soto says, again, I'm paraphrasing, but this is definitely the spirit of what he said. This shouldn't be surprising to the analyst that when bankers deviate from, you know, ethical norms as handed down in our, you know, from, from ancient Rome up through the present, that bad things happen. Okay? And so then, in a similar vein, Rothbard argues, like, I think one of the strongest arguments that he gives for anarcho capitalism is to say, look at, we're not against morality and we're not even against law, despite what some people might think in the sense of the term anarchist, actually, what we're doing is we're saying the employees of the state shouldn't be exempt from the standard Moral code that applies to everybody else, right? So if you're at the, at the playground and your kid comes up to you and says, hey, you see that bike over there? I want to take that, what do you say as a good parent? Well, no, that's not yours. You got to figure out whose bike is that? And then go ask that kid, can I use your bike? You certainly don't say, well, I count up, there's 10 people, there's 10 kids here at the playground. So go have a vote. And if at least six of you vote that you should be able to use that bike, then you can. You wouldn't, it wouldn't even occur to you to say that because that would be theft, right? So why all of a sudden can we do that? If we see some guy who's got a billion dollars in his assets and the, you know, residents of California say, well, I think we should be able to take some of that. That, that doesn't follow. He said, no, you got to ask the billionaire, can we have your money or your wealth? Okay, so that's, I like Rothbard's approach there just to, you know, lay that foundation. And so as we see as we're going to go through this, that's going to be the entire theme of Millay's talk. He's going to say that obeying standard moral and legal principles in what, you know, in this speech, he's, he's framing as the Judeo Christian heritage of the West. He's, he's saying that's what also promotes long run economic prosperity. And so there actually is no tension between doing, quote, the right thing in doing what's quote, good for the economy, even though ostensibly there does seem to be this divide. Okay, and again, so that's, I like that framing that he gave because that's the tack that I take, for example, like in my booklet Chaos Theory, which you can get@mises.org, the PDF of that for free as you can get anything the Mises Institute puts out where it's sort of a two pronged attack, and here I'm just again following in Rothbard's footsteps, is to say, hey, wouldn't it be great if we could live in a voluntary free society? And on paper, most people agree with that. They say, yeah, it'd be great if we didn't have taxes, you know, like, ethically. They say, yeah, if, if each person had to give consent before some institution took his money to go spend it on some important social end, that would be good. But Most people think in reality, if we insisted upon that, it'd be disaster because we couldn't have a military to defend us, we wouldn't have roads, poor people would be starving to death. Right, that, so they think, oh, we can't adhere to a strict literal defense and you know, obedience to the property rights and ethical norms that apply to us at the individual level, because that would, for some reason they claim, spell disaster. And, and so part of one's job as an Austro libertarian, especially if you're an anarcho capitalist, is just to show. No, that like you're just factually incorrect. Right. So it's both a normative and a positive argument, if you're familiar with those terms. Okay. And I think they're both important that it's not merely enough to say, hey, the free market's more efficient. You also have to show it's more ethical too. But again, it's not enough just to say, oh, it's the most ethical thing. Because neoclassical economists are going to say, no, it isn't. That if you have certain interventions according to our rubric, then we're going to have even higher GDP per capita. You know, that kind of stuff. Okay, why don't we go ahead then and play the next clip where he talks about Israel Kner.
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As Israel Kersner points out, today's socialists do not deny capitalism's superiority in terms of productivity. They challenge capitalism on the grounds that it's unjust. Therefore it's not enough for the system to be more productive. Because if its roots were unjust, capitalism should not be defended. Today I will demonstrate that free enterprise capitalism is not only more productive, but also that it's the only just system.
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Okay, so here Mullay, you know, acknowledges the sort of one, two punch that the interventionists make. So it's interesting that they're actually two completely separate arguments. And the defender of laissez faire capitalism is getting hit from both sides. So again, on the one hand, the interventionist mainstream economists are saying, oh, you can't just have an adherence to standard property rights. You can't say, as a household, I'm entitled to 100% of my income. How dare you try to tax it? Because that's just going to lead to, to all sorts of inefficiency, that we can have a higher degree of prosperity with funding of so called public goods, including military defense and you know, public literacy and things like that, if there's at least some role for the state, which means it has to violate what at the individual household Level would be clear. Crimes or property rights. Commit crimes by violating property rights. Okay, so that's the one sort of attack on the free market. But then as Kirzner is saying, the, the other attack coming from the outright socialists, especially after the failure of, you know, the, the major experiments in outright communism in the 20th century. Because originally they were, they were saying, oh yeah, people will have a higher degree of prosperity under socialism without, you know, the wastes of advertising and crazy things like that that are silly. If we have experts in charge of planning the use of resources, everything will be more rational and everybody will be wealthier or the average person at least will be wealthier. So after the various experiments, the socialists largely have abandoned that and they retreated to, oh yeah, sure, GDP is higher in a capitalist system than a socialist one, but there's extreme wealth inequality. And most people, I think, you know, don't you agree, would rather live in a world where everybody lives in a modest two bedroom house. Yeah, there's no mansions, but there's also nobody sleeping on the street. And so yeah, total, you know, wealth will be lower, total output will be lower under socialism, but it will just be more equitable. And so that's really why, you know, so that's kind of the fallback position they went to. And that's why Kirzner is saying it's not enough for free market oriented economists to just focus on efficiency and, you know, maximizing output from a given stockpile of resources. Because then the socialists are just going to play a trump card and say, yeah, but our system is fair emotionally. Doesn't this seem like a better world, the one we're painting, rather than this dog eat dog world where, you know, hey, everybody just gets what they earn. And even if it were true empirically that that kind of a system means most people have a higher standard of living still, that just seems icky to some people, like, oh no, you should have a basic, you know, shelter and food and degree of medical care. That should just be a human. Right, right. A lot of people think like that. Okay, so notice it's this interesting one, two punch where the defenders of capitalism are getting hit from both ends. And so that's why Milei's arguing here, citing the great Austrian writers, that fortunately there is no trade off in this respect, that the system that is most consistent with ethical norms, you know, as laid down by the great thinkers and philosophers and religious figures in the Western tradition, the society that lives up to those ideals the most also will be the wealthiest. Okay, so that's what he's arguing here. All right, let's go ahead and get into some of the more technical claims. Again, the reason this speech was so intriguing to me was that it was almost poetic in terms of the structure. It was a well crafted. He has a nice thesis and then he defends it with points. I mean, if this were an essay that some undergrad turned in, he'd probably get an A depending on the course, right? But also he gets into some pretty technical economics as far as world leaders talking to the WF go. So here we're getting the first example of that.
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Therefore, from all of this it follows that one of the defining characteristics of free enterprise capitalism is that it is a just doctrine. Given the emergent institutional framework, which we have also shown to be just, it is now time to demonstrate that it is also efficient. The first formulation in this regard was put forward by Adam Smith, who by using the argument of the invisible hand, posited that each individual, in pursuing their own interest, maximize social welfare. Later, the neoclassicals, guided by an idea of the invisible hand based on the Pareto optimum, derived the first fundamental theorem of welfare economics, namely that every competitive equilibrium is Pareto optimal. However, this required embracing a mathematical structure that left the door, door open to state intervention under the well intentioned goal of correcting market failures, which from my perspective do not really exist.
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Okay, so here I think everybody gets the idea of Adam Smith and the invisible hand, but what he's talking about, in case you're not familiar with the first fundamental welfare theorem of economics. Before I explain that, let me first spend a moment on what's called the Pareto criterion. Okay, so economists in the 1800s dabbled with utilitarianism, right? And so one way of trying to justify a certain social order would be to say it maximizes total happiness, right? But they realized, particularly as the tools of economic science developed, that really certainly what utility had come to mean in economics, in order to explain consumer prices, or I should say market prices in general, and the way you would use utility in that context there, to compare the utility of one person to another was meaningless. Okay? And a lot of people view this ideologically. And I mean, yeah, there's ideological implications, but just factually it doesn't make sense. The analogy I've often used is to say, look to, to explain that, oh, this guy here, the reason he picked that apple over that orange when he was offered with a choice is because the apple gave him more utility than the orange. And that's kind of how you start explaining individual Choices. And if you use the same framework to explain some lady's choices with her, you know, decisions in the marketplace, you couldn't then compare those statements interpersonally. It just doesn't even make sense. In the same way that if I say, oh, Jim, you know, his best friend is so and so, his second best friend is so and so, and his third best friend is so and so, and this guy over here, his best friend is so and so, and his second best friend is so and so. And then if I said, oh, what if we swapped the friends there, would we increase the total friendship units in society? Or if we took somebody's 10th best friend and had him go be friends with somebody who only had two friends, would we have increased the total friendship units in society? You see how it's not just that that would be wrong, it's that it doesn't even make sense. Like, yeah, you can talk about ranking an individual's friends, but even there you're not actually using cardinal units. And it doesn't even mean that in principle there are cardinal units of friendship. To say that guy's my best friend, that person's my second best friend doesn't mean you're implicitly assigning friendship units to them and that you're giving more such units to the first guy than to the second person. That it doesn't mean that, okay? And that's the sense in which economists developed consumer theory, okay? And they can talk about, oh, you know, this basket of goods gave more utility than this other basket. That's why the consumer spent his money this way. But it doesn't mean that the underlying units of you, that there are cardinal units of utility, okay? So that's kind of how economics progressed from its original, you know, from the original marginal subjective utility revolution, the early 1870s up into the early 1900s, that they had. It had stripped itself from any notion of cardinal utility, okay? But then the problem was if, if utility isn't comparable among people, how can you give any kind of judgment as an economist on what type of social arrangement or market structure is better or worse than another, right? If everything is subjective and everything just depends on each individual point of view, it doesn't seem like you can say too much. Whereas if, if utility were cardinal, and especially if you could then compare units among people, maybe you could make statements like, oh, well, doing something this way increases total utility. And so in that sense, it's better, okay? Even there it wouldn't necessarily follow, but at least it could make sense. Whereas it seemed like GEZ if, if utility is just ordinal and it's subjective to each person and it doesn't even make sense to compare them across people, then what are you going to do? So that's where Pareto comes in and he said, all right, if, if people have different views about something, like if some people think outcome A is better than outcome B, but other think outcome B is better than outcome A, we as external outside economists can't really, you know, weigh in on that except with our own idiosyncratic personal views. He said, however, surely we can agree if every single person in society thinks outcome A is better than outcome B and the social. And outcome A, let's say, is feasible, right? Like we could have outcome A. It's, it's possible, but our social institutions make us end up at outcome B. And again, unanimously, society agrees outcome B is inferior to outcome A. He said, well, then clearly can't we agree that outcome B is intolerable and that's a bad outcome? Okay, so that's kind of the motivation of what Pareto was getting at. And so in that context, then he said you can define allocations of resources, like, you know, various ways that we can use society's scarce resources and technology at any given moment to figure out what's a feasible outcome. And then among the feasible outcomes, the particular outcome is Pareto inefficient. If there exists at least one alternative feasible outcome that every single person agrees is superior to it. Or to put it in other words, if by moving from one outcome to another one, every single person would be better off, or I think actually technically be, if at least one person would be made better off and nobody else would be made worse off, then we say, that's a Pareto improvement, okay? And so a Pareto efficient outcome is one for which there does not exist a Pareto improvement. Okay? So, for example, in this framework, you could argue the reason tariffs are inefficient or quote, bad, if you want to use that kind of language, is that it's, it's not because you have to get in and say the, that the consumers are more important than the producers. Right? You put a tariff on foreign cars, that's going to help Detroit auto workers, but it's going to hurt us car consumers because now cars are more expensive and their options are reduced. Right? But it definitely helps the American car producers if you restrict foreign competition. Right? So you can't get in and referee in a Pareto framework and say, oh, these people's preferences are more important than these Other people's right. However, because using standard economic analysis, when you impose a tariff, the gains you're giving to the car producers are smaller than the losses you're imposing on the car consumers. That's why you want to say it's inefficient in a prio sense, because in principle, you should be able to come up with a way to make every single person better off. Right. Like if you got rid of the tariff and then the car consumers contributed to a little fund that funded the car producers, then everybody could be better off than the, the tariff scenario. Right. That's, that's kind of the idea. All right. Or another way of seeing it just in general, like having an income tax. Right. So there's a worker and there's an employer, and if there were no taxes, the worker would sell whatever, 50 hours a week to the employer and they would both be better off. But now, because of the income tax, the worker only sells 45 hours a week. And so those extra five hours that there's mutual gains from trade there where the employer and the employee would have benefited from selling the, you know, the 46th through the 50th hours per week, and they both would have been made better off. And just the employee working more isn't going to hurt anybody else. And so the fact that those voluntary win win trades aren't happening now because of this tax, that's promoting inefficiency. All right. That's sometimes called a deadweight loss. All right. I'm mixing a few different concepts together, but these all kind of are interrelated. All right, so that's the idea. So again, the point was Pareto was saying, yeah, we can't engage in picking winners and losers in terms of whose utils are more important than others. But surely if we have unanimous unanimity, then that's, you know, a reasonable criteria. Okay, a bonus question here for you. Now that I've run through what these definitions are. I used to say this when I would teach this stuff at the undergrad level to make sure you really understand the definitions. It is possible for you, for society, to move from a Pareto suboptimal outcome to a Pareto optimal outcome or a Pareto inefficient outcome to a Pareto efficient outcome and hurt somebody. Okay. So I won't explain it now because if you think through it, it'll be better, you know, for your learning. But anyway, if that seems like I just contradicted myself, I didn't. And like I said, I'll try to Remember to check in the YouTube comments at this for this episode and give you guys a hint if, if the suspense is killing you. Okay, so now that I went through all that just to real quickly fill in the gaps. So what the first fundamental welfare theorem of economics says, it doesn't have anything to do with welfare. Like soup kitchens meet welfare, meaning like human well being. So the first fundamental welfare theorem says with appropriate conditions, any competitive equilibrium is Pareto optimal. Right. So that's kind of incredible. That kind of codifies formally the Adam Smith's notion of the invisible hand that you just let people, you let, you know, businesses maximize profits and households maximize their individual utilities or get as high as they can on their preference scales if you're doing it ordinally. And lo and behold, in that competitive equilibrium, you know, in a neoclassical formal mathematical framework model, you can demonstrate with certain assumptions that, and the competitive equilibrium also is Pareto optimal. And so that's the sense in which, oh look, it just let people go out and just let capitalism rip. And that will, you know, people acting in their narrow self interest will also promote the general welfare. Right. So that's the interesting result. So it's a double edged sword though on the one hand that seems like, oh yeah, that's cool, capitalism for the win. But the problem is, in order to make that proof go through mathematically, you have to make some assumptions. You have to assume, for example, that there's no, what's called externalities, all right? So that if a firm is taking natural resources and hiring workers, whatever, to make TVs and then selling TVs to customers in order for the firm to be producing the socially optimal number of television sets, that's consistent with a Pareo optimal outcome. It can't be that the firm is dumping pollution into a river and that that's hurting people downstream and that the firm isn't, you know, being held accountable for that because then it would be producing too many TVs. That's the idea. Okay, so, and that's what Milei was getting at, that, yeah, the first fundamental welfare theorem of economics and the neoclassical framework with mathematical modeling of the economy and whatever, had to make some assumptions in order for it to be true that any competitive equilibrium is Pareto optimal. And then that opened the door to mainstream neoclassical economists as the 20th century went on to say, oh yes, as a general rule, markets are pretty good at allocating resources. But look at all these exceptions, look at all these cases where in the real world the actual capitalist economy doesn't satisfy all of these assumptions we had to make for that first fundamental welfare theorem to hold. So as a matter of logic, that's. That's faulty, right? That's a non sequitur right to. Just because we can have a model and say, oh, if consumers had perfect information and if firms had no market power and if there were no externalities, you list a bunch of stuff and then said under these conditions, it is. It follows that a competitive equilibrium is Pareto optimal. It does not follow from that that if we say, oh, if a firm does have market power or if there is a positive or negative externality, therefore government intervention improves upon the competitive equilibrium. You would need more to prove that in A lot of mainstream economists think that that's all they got to do. Okay, so now let's play another clip from Malay where he's gonna quote Hoppa and then talk about the second fundamental lover theorem.
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To address this, the proof developed by Hans Herman Hopper based on property rights, in line with Locke's principle of original appropriation, together with the non aggression principle, not only proves satisfactory in establishing optimality, but also leaves no room for intervention in this regard, Hopper states, any deviation from this set of rules implies by definition a redistribution of property titles and thus of income from producer users and contracting parties to non producer users and non contracting parties. Consequently, any such deviation implies that the will be relatively less original appropriation of resources whose scarcity is known, and therefore there will be less production of new goods, less maintenance of existing goods, and fewer contracts and trades that are mutually beneficial. This naturally implies a lower standard of living with respect to goods and services that change hands. Moreover, the postulate that only the first user of an asset acquires property rights over it, not the last one, ensures that productive efforts will be as high as possible at all times. Likewise, the notion that only the physical integrity of property and not its value must be protected guarantees that every owner will undertake the greatest possible value producing efforts, that is to say, efforts to promote favorable changes in the value of property and and to prevent or counteract any unfavorable change in its value. Therefore, any deviation from these rules entails a reduction in productive efforts at all times. Note that by relying on private property rather than on excess demand functions derived from optimization exercises, this approach allows an optimum to be reached without the need to use esoteric assumptions that later serve as justification for state intervention. This also avoids falling into the empirical absurdity of the second theorem of welfare economics, which posits independence between production and distribution, as if choosing between capitalism and communism were Neutral in terms of outcomes.
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Okay, so again, I don't think I need to expound too much upon Hoppe's framework there. It's what I'm trying to showcase for you. And what's interesting again is Malay telling this to the WF crowd that in the Austrian tradition, the way they justify private property is not liable to the same exceptions or loopholes that the mainstream neoclassical framework is. Okay, so in the mainstream neoclassical approach, even though you have that first fundamental welfare theorem that we talked about, the second fundamental welfare theorem kind of flips it and that says any Pareto optimal outcome can be supported with certain, you know, you make certain assumptions, can be supported as a competitive equilibrium after you redistribute the initial property titles accordingly. Okay, so again, the first fundamental welfare theorem in mainstream economics says that, you know, people start out with their endowments and things, right? Households start out with whatever, a certain amount of labor or it doesn't even have to have. You don't even have to have labor. You can just have a pure exchange economy where people start out with stuff like some guy starts out with all the tomatoes and somebody else starts out with all the bananas and you let them trade. Right? It could be that simple. But the point is people start out with their initial endowments, then you let trade happen at market prices and then you look at, you know, afterward, you look at the situation where everything settles once all the trades occur. And then you're talking about those post trading outcomes and whether or not they're Pareto efficient. Okay, so again, if it's Pareto inefficient, it means, oh, there was another possible way of redistributing all of the resources, possibly including production, such that every single person would have been better off than what the competitive outcome gave us. Okay, so again in that framework then the first fundamental webfield theorem says any competitive equilibrium also happens to be Pareto optimal, again given the assumptions. But the second fundamental web says look at all the possible outcomes and grab one of them. And if that is Pareto efficient, we can on the front end rearrange who starts out with what and then go ahead and let capitalism rip and it will end up at that pre selected Pareto optimal outcome. Okay? And so even though that's interesting mathematically, you can see how that is very dangerous from an Austro libertarian point of view, because then that is saying, oh yeah, we can still rely on the allocated efficient properties of the market economy. We all agree that, you know, capitalism is the best way to mobilize resources and to Harness people's innovation and blah, blah, blah, and work ethics and line incentives properly and stuff. But if we don't like the outcome that the original endowment of property is going to lead to, all we have to do is engage in some redistribution of wealth on the front end and then we let capitalism rip, right? So we're not central players, we're not socialists, right? So that's kind of where that leads. And that's, that's one of the things that Millay was getting at there. And I guess the broader point. Well, here, let's play the next clip because it ties, right? It's related what he just said there. But I'll just play the next clip because it says it more explicitly.
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This latter criterion of efficiency is of fundamental importance for the study of economic growth because unlike a static model that considers only What Robert Lucas Jr. Defined as deep parameters, I.e. preferences, technology and initial endowments of resources, in the dynamics sphere, both technology and initial endowments can vary, and in fact they do so continuously as a result of entrepreneurial creativity. Moreover, the institution of private property deserves a separate chapter. By pivoting on it, the Austrian school of economics, from Mises, Hayek, Rothbard, Koester and Hopper to Jesus Huerta de Soto, has demonstrated the impossibility of socialism, thereby dismantling the go see idea of John Stuart Mill that postulated independence between production and distribution, a form of academic deafness that led to socialism and cost the world the lives of 150 million human beings.
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Beings. Okay, so again, even some of the giants in classical economics, like John Stewart Mill and others, they had this gaping hole where they thought that production and distribution were separate things that you could set up, you know, the institutions of private property and so on, and, you know, let business people decide where the factories are going to be and stuff like that, and get that all up and running to produce the biggest pile of stuff. And then as a separate matter, now that we've got the biggest pile of stuff because we have the right incentives and institutions set up now, we can come in and redistribute it according to our, you know, tenets of social justice, which don't necessarily line up with saying, oh, well, whatever the capitalist process produces, that's the ethical outcome, right? And so Millay is saying here that that is untenable, that distinction. And that's one of the things that came out of the socialist calculation debate that you can't, it doesn't work. You can't. As like the central planners can't tell the comrades, hey, we want to have the same level of total output as a capitalist country, but then we want to come in and give the spoils to people based on some other criteria, not just, you know, what do they contribute. So here you go ahead, pretend like you're a plant manager, right? Because we want you guys to mimic the efficiency of capitalism. So pretend that you're just trying to maximize shareholder value. But actually once you produce everything and make your decisions, we're going to come in as the state and then redistribute everything. And part of the issue that Mises and Hayek raised when they were arguing with these guys back in the 20s and 30s was to say, that doesn't work. You can't play market, you can't tell people, go pretend that you're in a capitalist system in order to reap the advantages that it offers. If you know, at the end of the day you're not going to get to keep what you produced, right? So it's not like, hey, pretend you're an entrepreneur in a capitalist system and go found a billion dollar company, but then at the end of the day we're just going to give you enough food based on how many kids you got, that it's like, well, why would I do that? That? No. Part of the reason a capitalist system has more billionaire entrepreneur founders is because if it's billions of genuine capitalism, if you are, you know, if you found a company that ends up being worth a billion dollars and you maintain a large percentage of the stock, then that's your personal worth, right? You, you control that, you have that. But why would you go to all the trouble of doing that if you know that that's not gonna have anything to do with your standard of living? Okay, okay, I got one more clip for you guys. Here we go.
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This ministry is inspired by the evolution of per capita GDP since the beginning of the Christian era. And it is in the shape of a hockey stick. This figure arises from the fact that until the year 1800, per capita GDP remained almost constant. And from that point onwards it increased 15 fold in a context in which the size of the population increased tenfold. In parallel, as GDP grew, extreme poverty fell from levels of 95% to 10%. However, this marvel implies the existence of increasing returns, which in economics are associated with concentrated market structures. And this is where the public policy dilemma between Pareto efficiency and justice arises. In Pareto analysis, increasing returns entail the existence of non convexities and with them economic growth. Consider the effects caused by regulation around the world. The values based view of capitalism holds that if such a position has been achieved through discovery, voluntary exchange, and without violating the non aggression principle, there is no justification for intervention. Indeed, intervention constitutes a violation of property, property rights. And by punishing profits, the economy's potential growth declines. So intervention and regulation are dynamically inefficient.
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B
Okay, so here, as far as the, the hockey stick, if you've never seen that before, it, it's really amazing, right? So it, there's various charts showing this stuff, but basically per capita output was roughly flat for thousands of years. The record has, yeah, like certain elites, you know, the princes and the barons or the pharaohs of Egypt or whatever, lived well above the average standard of living. But most people lived basically the same for hundreds and hundreds and hundreds of years. And then it was only around what we call the Industrial revolution that all of a sudden living standards just started skyrocketing. And it wasn't just that per capita output went through the roof, but population started growing too. And so I think it's, I think the causality is the other way around that historically population couldn't grow very much because that would, you know, push people below the subsistence level. Right? So something happened and then people argue about what it was. And obviously fans of the market economy think that, oh, it was the codification of property rights and this like the social acceptance of what we might call bourgeois values associated with Europe and primarily, you know, Britain in the 1700s, that really was the inflection point. And that's why you see that in the charts. Okay, so that's what Milei is referring to. And now this, again, it's a very technical point, this issue of increasing returns. So what increasing returns means is if you're doing a mathematical model of like a firm and its production technology, increasing returns says that. There's different ways of putting it. But like if you want to double output, you don't have to double your inputs. All right? And one of the ways maybe that you can model this is that if there's like certain fixed costs and then only other things that are variable costs, right? And so the point is again that if you're increasing your output, your unit costs fall is another way of putting it. So that would give you what's called increasing returns, right? As you scale up output, your unit costs go down. Or a different way of putting it is if you double your inputs, your output more than doubles. Right? That's probably more intuitive to understand this idea of increasing returns. Okay. And so you might think that would be good, right? Like in general, if, you know, you find a genie lamp and the genie giving you the power to say, of all the technology that humans stumble upon, do you want it to be increasing returns, constant returns to scale, or decreasing returns of scale? You'd probably pick increasing, right? Like, wouldn't that be better for humanity if as we scale we get more and more stuff more than proportionally increases? But ironically, in a mainstream neoclassical mathematical modeling framework, increasing returns lead to problems, they prevent economic efficiency. So I'm not going to get too deep in the weeds here. But the issue is if you have increasing returns, that means one firm is going to be the monopoly producer in a given industry, right? Because that's the way you're going to achieve the lowest cost. In other words, whatever the equilibrium number of units in an industry is going to be if you have increasing returns, if firms merge with each other so that instead of 10 firms producing 1/10 of the output, let's say five of them merge, now there's one firm producing half the output, well, now its unit costs are lower than that of the other five competitors. And so it's going to, you know, going to keep gaining market share that way because it can undercut them, right? So again, in an industry with increasing returns, there's a tendency for market concentration. And then that is ostensibly a problem in a mainstream neoclassical framework, because one of the conditions in order to get Pareto optimality in a standard framework is that each individual firm is what's called a price taker that thinks it doesn't have much influence over the market price. And that's the way you get, oh, when the firms maximize profit, then they set price equal to marginal cost and that's great and blah, blah, blah, and you don't have any deadweight loss. Whereas if a firm thinks it faces a downward sloping demand curve, well then its marginal revenue and the price curve are different. And the idea is, oh, if a firm increases output a little bit and that pushes down prices, well, then the firm loses that revenue not just on the extra units, but also on all the earlier units too. And so because of that, the idea is in this framework the firm doesn't produce enough, right? Because it's worried about losing the revenue on all those in from marginal units. And so again, I'm just kind of giving some of the intuition as to why this happens. It's like, it's like a mathematical result. And Rothbard shows this in Man Economy and states a cool little demonstration he goes through to say this is largely just from geometry. And like the Smooth curves that the mainstream economists assume. It's nothing about economics. But in any event, in that standard framework, again, increasing returns spells a problem and then it opens the door to government intervention. And so that's why, for example, if you ask a normal mainstream economist, how come the government regulates things like water and electricity and you know, sewage systems and things like that, but we don't expect them to come in and regulate cars in the same way? Like why are there so called public utilities for things like electricity and the phone or whatnot? And so historically the answer was, oh, because those are, those industries are what are called natural monopolies. That if you're going to give like electricity to all the houses in a certain neighborhood, it would be crazy to have 10 different companies all building power lines and that you could choose from one of 10 companies that would be really inefficient. That if one firm came in and just bought out all its competitors and just had one set of power lines, then it could undercut everybody else. Right. And so that's why the market wouldn't have such competition. You would just have one or maybe two suppliers. But then the idea is, oh, then we would have monopoly pricing and electricity. We can't have that. Right. So that's the idea. So what Malay is saying here is in contrast to this framework where increasing returns is supposed to be a boogeyman, in the Austrian framework, that's great. That means we can produce more stuff with a given stockpile of resources that's consistent with the explosion in prosperity unleashed by the Industrial Revolution. Austrian economics standard, you know, Greco Roman, Judeo, Christian heritage, ethical norms for the win. That's kind of where he was going with all this stuff. Okay, well I think that's a good place to wrap it up. I hope I've shed some insight into Malay's remarks and of course we'll put a link to the full speech at the Show Notes page. Thanks for your attention, everybody. See you next time.
- [50:27]
A
Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content like this on nieces.org
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B
SA.