Free-market economics is working surprisingly well

Which economic approach works depends a lot on where you start from.

Photo by Gage Skidmore via Wikimedia Commons

One area of seeming bipartisan consensus in America over the past decade is the idea that free-market economics — or “neoliberalism” — has failed, and that our economic system needs to be overhauled. Leftists have always believed this, of course, and in recent years they’ve been joined by more mainstream progressives like the folks at the Hewlett Foundation. On the right, thanks to Trump, tariffs and immigration restriction have overthrown free trade as the reigning orthodoxy. And the GOP in general seems to want to put their thumb on the scale for fossil fuel industries and other traditional sectors.

And in case this wasn’t clear, I have been one of the voices calling for a new economic system! For years I criticized free-market ideology, fretted about the decline of the Rust Belt, expressed suspicion about free trade, and called for industrial policy to revive manufacturing. I wrote many times that the Biden Administration’s industrial policies represented a needed break with the dogmas of the past, and that Trump had enabled that needed shift by destroying the political consensus for free trade. I’m constantly warning that without attention to strategic industries, America and its allies will lose a war to China. There’s a good chance I’ll end up advising the Hewlett Foundation in some capacity on what our next economic ideology ought to be. Despite being elected “Chief Neoliberal Shill” in a humorous online poll back in 2018, I was never an actual neoliberal or a free-markets kind of guy.

So to be clear, when I say that criticism of free markets has been overdone, I’m partly talking to myself. A couple of months ago, horrified by Trump’s tariff policies, I wrote an apology to libertarians, admitting that I had failed to see the political usefulness of their project in terms of maintaining economic sanity on the Right:

I owe the libertarians an apology

But it’s not just the political benefits of free markets that have been undersold; I think the purely economic advantages are also too often ignored.

Exhibit A is Javier Milei’s track record in Argentina. A year and a half ago, when Milei was elected President of Argentina, a bunch of left-wing economists warned darkly that his radical free-market program would lead to economic devastation:

The election of the radical rightwing economist Javier Milei as president of Argentina would probably inflict further economic “devastation” and social chaos on the South American country, a group of more than 100 leading economists has warned…[S]ignatories include influential economists such as France’s Thomas Piketty, India’s Jayati Ghosh, the Serbian-American Branko Milanović and Colombia’s former finance minister José Antonio Ocampo…

The letter said Milei’s proposals – while presented as “a radical departure from traditional economic thinking” – were actually “rooted in laissez-faire economics” and “fraught with risks that make them potentially very harmful for the Argentine economy and the Argentine people”…[T]he economists warned that “a major reduction in government spending would increase already high levels of poverty and inequality, and could result in significantly increased social tensions and conflict.”

“Javier Milei’s dollarization and fiscal austerity proposals overlook the complexities of modern economies, ignore lessons from historical crises, and open the door for accentuating already severe inequalities,” they wrote.

Milei won anyway. His first big policy, and the one the lefty economists fretted about the most, was deep fiscal austerity. Argentina’s long-standing economic model, created by dictator Juan Peron in the 1950s, involved a large and complex array of public works projects and subsidies for various consumer goods like energy and transportation. Milei slashed many of these, as well as cutting pensions, civil service employment, and transfers to provinces. Overall, he cut public spending by about 31%, resulting in a near-total elimination of Argentina’s chronic budget deficit:

Source: CEIC Data

The point of all this cutting wasn’t just to remove state intervention in the economy — it was to stop inflation. Basically, macroeconomic theory says that if deficits are high and persistent enough, then they convince everyone that the government will eventually inflate its debt away by printing money (which becomes a self-fulfilling prophecy).¹ And most or all countries that experience hyperinflation end up escaping it only when they get their fiscal house in order. Perpetual deficits were part of Argentina’s “Peronist” system, and it’s probably a good bet that this has been responsible for the periodic bouts of hyperinflation that it experiences.

So Milei’s austerity shock therapy was as much about macroeconomics as about micro. So far, it seems to be working. Inflation, which was spiking dangerously before Milei took office and looked like it was headed back into “hyper” territory, has plunged:

Source: Bloomberg

Now, this is still a level of inflation that would have Americans up in arms; 2.4% monthly inflation translates to a 33% annual rate! But for Argentina, this is an incredible relief.

Milei also did a bunch of deregulation, privatization, anti-union stuff, and other libertarian policy, mostly by executive order. He made it easier to hire and fire workers, made it harder for unions to strike, took steps toward privatization of state-owned industries, and deregulated finance, health care, and air travel. He also scrapped rent control.

Finally, Milei made some changes to currency policy. Argentina is primarily a commodity exporter, and like many other commodity exporters, it has long kept its currency (the peso) overvalued.² Keeping the currency overvalued required maintaining a bunch of restrictive laws that keep people — both Argentinians and foreign investors — from exchanging their pesos for U.S. dollars (which would drive down the price of the peso against the dollar). Those laws let Argentinians overconsume, but only by hampering banks and discouraging foreign investment. Milei scrapped some of these rules, and promised to scrap others, and allowed the currency to depreciate by over 50%.

The lefty economists thought that all this was going to be a disaster for regular Argentinians. Austerity represents temporary pain — it destroys aggregate demand in the short term, raising poverty and unemployment. Cuts to social programs and consumption subsidies hurt. Lifting rent control could raise rents. And in fact, for the first year of Milei’s term in office, the poverty rate did soar, from an already sky-high 42% to 53%. Unemployment went up too, to over 7%, as the economy went into recession in 2024.

Then a funny thing happened. The recession ended, and Argentina bounced back:

Argentina's economy grew year-on-year for the second consecutive quarter and by the most since 2022 as the economy recovers from last year's recession…Gross domestic product expanded 5.8% in the first quarter…Monday's data showed signs of recovery at the consumer level, with private consumption growing 11.6% from a year ago.

The poverty rate is falling too, as growth picks up:

Argentina’s poverty rate dropped to 38.1% in libertarian President Javier Milei ‘s first year in office. The decline in poverty for the second half of 2024 — from July to December — marks an improvement from the 41.7% that Milei’s left-wing populist predecessors delivered for the second half of 2023.

Leftists dispute the reality of the poverty drop, but they are going entirely on anecdotes instead of data. Unemployment is still high, but continued growth should bring it down again — J.P. Morgan is forecasting Argentina’s economy to continue accelerating next year.

Is this a huge victory for free-market economics? It’s tempting to declare it one, but the reality isn’t so simple. Austerity isn’t fundamentally a free-market policy; socialist countries can run fiscal surpluses, and the most capitalist countries in the world can run deficits. As Tyler Cowen has pointed out, Milei’s macro policies look more like orthodox IMF stabilization policy than libertarianism. Any microeconomic benefits from shrinking the Argentinian state will be slower to materialize; right now, the main effect has just been to tame inflation.

Also, it’s worth mentioning that the lefty economists who were terrified of Milei were also worried about a plan he didn’t carry out — a scheme to let Argentinians use U.S. dollars instead of pesos for domestic transactions. This wouldn’t have worked; there just weren’t enough dollars in the country. Fortunately, Milei didn’t have the political capital to enact the plan.

But still, Milei’s success so far should make us somewhat more confident about free-market policies — especially when we evaluate them against the new socialist ideas that have been gaining currency in the U.S. In the past, socialists and other left-leaning economic thinkers advocated central planning and nationalization of industry; in recent years, they have taken to calling for expansion of the state through fiscal policy, mixing macroeconomic justifications with micro. At all times, they call for deficit-financed expansion of social programs; when fiscal hawks want to tame the deficits, the lefties warn of the short-term macroeconomic harms of austerity.

If you’re always more terrified of austerity than you are of deficits, expansion of the state — and of the deficit — becomes a one-way ratchet. This approach is very different than Keynesianism, which advocates stimulus to overcome recessions, followed by austerity during boom times. You’ll recognize it as bearing a distinct similarity to MMT; that pseudo-theory has largely fallen out of favor, but there are plenty of more respectable progressive types whose ideas nonetheless have a lot of this “macroleftist” flavor.

Milei’s success in bringing down Argentina’s inflation, while also restoring growth after one painful year, show that the macroleftists’ constant dark warnings about austerity are at least sometimes overblown. Fiscal conservatism isn’t always desirable, but Milei is showing that the costs often aren’t as high as many progressives believe.

Meanwhile, Milei’s microeconomic policies — the deregulation, the moves toward privatization, the anti-union policies — are the dog that didn’t bark here. With poverty now falling and consumption rising in Argentina, it doesn’t appear that those free-market policies have crushed the middle class. So far there’s no sign that inequality has increased substantially either, with the Gini coefficient looking stable.

And in a few cases, we can see Milei’s free-market policies actually getting results. The scrapping of national rent control seems to have created such a big housing supply boom that it has actually driven rents down. Here’s Newsweek with some numbers:

Milei also ripped up Argentina's rent-control law in late 2024, removing limits on lease terms and rent increases that had discouraged landlords from renting. Within months, the supply of rental housing in Buenos Aires jumped by 195 percent, according to the city's real estate observatory, and median asking prices fell by about 10 percent as more apartments returned to the market.

Some leftist and socialist organizations, including the Socialist Workers' Party (PTS) and the Workers' Left Front, criticized the move at the time, arguing it favored landlords at the expense of tenants. But the reality has so far borne out the opposite: supply has soared. On Zonaprop, one of Argentina's largest real estate platforms, traditional rental listings surged from about 5,500 before the reform to over 15,300 — a 180 percent increase — with a third of that rise happening in just the first month after deregulation.

It’s too early to know the full effects of all of these policies. Perhaps inequality will eventually increase as a result of all Milei’s deregulation, or perhaps poverty will stabilize at an unacceptably high level. But as of now, things are looking a lot better than even many libertarians hoped.

And when we compare Milei to the Latin American regimes that socialists and progressives have endorsed in recent years, there’s just absolutely no comparison. In the 2000s, Joe Stigliz was overflowing with praise for Venezuela’s Hugo Chavez:

In 2006, Nobel Prize–winning economist Joseph Stiglitz praised the economic policies of Hugo Chávez. The Venezuelan president ran one of the “leftist governments” in Latin America that were unfairly “castigated for being populist,” Stiglitz wrote in Making Globalization Work…In fact, the Chávez government aimed “to bring education and health benefits to the poor, and to strive for economic policies that not only bring higher growth but also ensure that the fruits of the growth are more widely shared.” In October 2007, Stiglitz repeated his praise of Chávez at [a] forum in Caracas, sponsored by the Bank of Venezuela. The nation’s economic growth rate was “very impressive,” he noted, adding that “President Hugo Chávez appears to have had success in bringing health and education to the people in the poor neighborhoods of Caracas.” After the conference, the Nobel laureate and the Venezuelan president had an amicable meeting.

We all know how that turned out; Venezuela suffered one of the most catastrophic economic collapses ever recorded outside of wartime. But in 2022, Stiglitz praised Milei’s Argentinian predecessors for resisting calls for austerity after the pandemic. Two years later, Argentina’s annual inflation rate hit 1500%.

These dramatic failures of judgement have never been called to account. But when libertarian approaches to economic policy are faring so much less disastrously than leftist approaches in Latin America, that should tell us that we’ve overcalibrated ourselves too far in the direction of anti-neoliberalism.

In truth, Milei is hardly the only example of neoliberal success in recent years. Although China is nominally communist and now engages in a lot of industrial policy, from the 1980s through the early 2000s its approach was almost entirely one of privatization. India got a big growth expansion from liberalization in the 1990s and 2000s, as did Vietnam. Poland’s development miracle is largely a neoliberal one — its industrial policy has focused mostly on simply promoting foreign direct investment, while its other policies have simply been a mix of institutional improvements and free trade.

Does this mean that hardcore libertarians are right, and that countries all over the world should slash government and unleash market forces? Well, no. The more complicated, nuanced truth is that which economic policies are best depends a whole lot on where you start. Argentina before Milei was a Peronist mess; China before Deng was a Maoist disaster. Plenty of government expansions throughout history have reduce poverty without wrecking economic growth; witness the New Deal, or Korea’s industrial policy push in the 1970s.

The boring truth is that the ideal economy is a mixed one; it’s built on the foundation of markets, but also contains a significant amount of redistribution, public goods provision, and industrial policy. The exact optimal balance depends on the country, and on the times; even if you happen to get it exactly right for a while, the optimal mix will change over time as countries develop, as technology changes, as trading patterns shift, and so on. Someday, if Argentina over-indexes on Milei’s early successes, they might very well become too laissez-faire.

Instead of picking one ideology and sticking to it, countries should recognize when they’ve veered too far in one direction, and take steps to change course. If some of your people are suffering in poverty while others prosper, you should establish a social safety net. If you’re choking on pollution from unregulated industry, you should establish some environmental protections. If you’ve nationalized your industries and they aren’t doing well, you should privatize them. If you’re falling behind technologically, you should try some industrial policy. If you’ve shackled your economy with inefficient subsidies and entitlements, then you should do some deregulation.

Evolution isn’t as sexy as revolution; it’s fun to wave around a chainsaw and shout about how your ideology will send your enemies to the graveyard of history. But evolution is what works.

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1. Some economists believe that fiscal policy is actually the only important long-term determinant of inflation. This is almost certainly way overstated.

2. Commodity exporting countries tend to do this because the political incentive to let consumers buy more imported goods outweighs the political incentive to keep the currency cheap in order to help domestic manufacturers sell more products. In this way, the U.S. behaves more like a commodity exporter than an export manufacturer.