A Review of Milei’s New Book: Capitalism, Socialism and the Neoclassical Trap

Milei’s book reframes Hayek’s “Road to Serfdom” case to the current political and economic scenario.

Javier Milei stands out in the political arena with his unconventional approach. So, it is no surprise that he released a book while in office and offered an analysis that would require at least classes in intermediate micro and macroeconomics to fully grasp his argument. Perhaps one of his most remarkable political attractions is that he does not underestimate people’s cognitive capacity and treats them as equals.

In “Capitalismo, Socialismo y La Trampa Neoclásica: De la teoría económica a la acción política” (Capitalism, Socialism and the Neoclassical Trap: From Economic Theory to Political Action), Milei narrates his intellectual journey from his Keynesian beginnings to his shift towards a neoclassical perspective, eventually becoming one of the most ardent proponents of Austrian economic thought. He critiques the neoclassical school, arguing that neoclassical economists often become unwitting allies of statism instead of true supporters of market economies. By creating flawed economic models and predicting market failures, they advocate for policy interventions that expand the state apparatus and hinder economic efficiency. Finally, in the second session of his book, he extensively analyses macroeconomic models, especially growth theory.

Fundamentally, Milei’s critique of neoclassical economics builds on Hayek’s views on the corruption of democracy through socialism. In his classic book, “The Road to Serfdom,” Hayek analyzed the economic system emerging in the Great Depression, characterized by central planning and public ownership of numerous economic sectors. Hayek argued that increased government control over the economy translated to increased government power over individual decisions, representing a fundamental threat to democracy. He warned that as collectivist ideals overshadowed individual rights, societies headed towards totalitarian systems. This warning suggested that the Soviet, Nazi, and Fascist systems could be reshaped and persist in post-war democracies subverted by socialist thinking.

Milei essentially reframes Hayek’s case to the 21st century. After all, with the downfall of the Keynesian paradigm in the 1970s and the collapse of the Soviet Union in the 1990s, the way governments manage the economy has changed. Most advanced economies have privatized their State-Owned Enterprises (SOEs) and scrapped most central planning policies. Yet, governments continue to exercise significant influence over their economies through regulations.

In Milei’s view, the neoclassical school, despite being a conceptual ally of the market economy, unintentionally contributes to its demise by advocating for state intervention to correct market failures. Milei argues this is a fundamental mistake. In his view, market failures do not exist because voluntary exchanges of private property preclude such failures. He contends that natural monopolies are not market failures since they result from consumer choice. Issues of asymmetric information, he claims, can be effectively addressed through contracts. Furthermore, he argues that negative externalities can be resolved by assigning property rights to those affected. For example, in a scenario with two roommates—one who smokes and one who does not—assigning the property right to smoke to the non-smoker allows for the establishment of the optimal price and quantity for smoking. Milei goes on over the list of market failures, from coordination to distribution problems, refuting their existence or the need for government intervention.

To some extent, Milei is correct in highlighting that economists often overestimate the necessity of government intervention to correct market failures. Government failures can often be more detrimental than the market failures they aim to address. Additionally, the proliferation of regulations burdens businesses and hampers economic growth in many countries. However, it would be reckless to deny the existence of market failures entirely or to dismiss the state’s role in addressing them. The state is sometimes the only entity with the coercive power to effectively settle disputes. As a counterargument to Milei’s smoking scenario, which affects only two individuals, we could imagine the impact of a coal-fired power station on a neighboring community of 100,000 inhabitants. In this case, how would the coal-fired power station coordinate with 100,000 inhabitants an agreement that would please all of them? I could not think of a practical solution that does not involve some government coordination.

One of the pitfalls of the anarcho-capitalism advocated by Milei is similar to those of communism: both are utopian ideologies that have never been successfully tested. An important lesson from the communist experiment is that implementing a utopia is impossible and often worsens society’s condition. Cuba, Venezuela, and the Soviet Union are critical examples of those catastrophes. However, this does not invalidate Milei’s calls for economic freedom. Statism has devastated Argentina’s economy, and liberating it from an oppressive state that stifles growth is crucial. The most prudent path, however, would be to strengthen the country’s institutions to foster stability and reduce uncertainty—two key elements for attracting capital and investment. This approach has been the foundation of success for many nations. The Nobel laureate Douglass C. North’s work has shown that capitalism flourished first in the Netherlands and England because those countries had a weak regulatory state but strong property rights. In other words, those countries had a small but strong government that allowed businesses to flourish.

Milei envisions himself as more than just the President of Argentina; he sees himself as a global leader of a libertarian movement, aiming to spread his ideas beyond the pampas. He has achieved remarkable success in this endeavor, though not without causing some diplomatic tensions, as seen recently with the leaders of Brazil, Colombia, and Spain. His book is a key part of his agenda to wage a global cultural battle, encompassing economic theory, his career as an economist, and his political vision. It is a must-read for anyone seeking to understand Milei’s thoughts and Argentina’s current economic and political developments, which is a fascinating case study.