Javier Milei: Rein in regulators, not big companies

UNTIL THE Industrial Revolution, population and income had been virtually constant for several millennia. Income per head moved from around $1,100 (in current dollars) in Roman times to just $1,500 at the end of the 18th century. People lived roughly the same life generation after generation. Then came all those new machines and manufacturing processes. In the following 200 years, global wealth exploded. Population increased six-fold and income per head ten-fold. Poverty receded dramatically. Today artificial intelligence (AI) is about to do it again. If the Industrial Revolution freed the world from the constraints of human muscle, AI will free it from the constraints of the human brain.

Today it is not a lack of technology or wit that hampers economic growth prospects, but politics, government intervention and, alas, bad economics. In “The Wealth of Nations” Adam Smith used the example of a pin factory to illustrate that growth was possible thanks to the increasing returns to scale embedded in technology and free markets.

Large and dominant firms emerge from superior technology and economies of scale. It should be unquestionable that exploiting these increasing returns to scale is socially beneficial: if we can produce more cheaply, we should want to do so. But economic theory has led policymakers astray. Neoclassical theory labels concentrated market structures as market failures that need to be disciplined, even broken apart. We, conversely, view them as a natural outcome of technology and crucial to growth. If market-leading companies are forced to downscale, not only will costs increase but the incentives to innovate will be dulled, harming growth.

Under this light, consider the two broad traditions in antitrust practice: the American approach, which focuses on exclusionary practices that restrict competition, and the European Union’s approach, which targets “exploitative abuse” (ie, excessive pricing by dominant firms). We find the first useful but the second problematic, even if regulators can identify when prices are excessive (a big if).

Here’s why. Suppose an airline is the only carrier on a new route and charges an exorbitant fare. It is, obviously, a dominant firm and is overcharging. But is there a competition problem here? Actually not, as long as anyone can enter the market to offer that route. If they can, by definition there can be no competition issue. On the contrary, the high prices and profits of this dominant firm are precisely the signal that needs to be given to attract competitors.

History offers many examples: Nokia once dominated mobile phones, then BlackBerry, until Apple’s iPhone displaced them both. It would have been a terrible mistake to restrain the growth of these firms simply because they enjoyed high market shares at certain moments. The crucial question is not whether some firm currently has a large share, but whether entry is blocked—and, more often than not, it is the government itself that blocks entry with licences, quotas, exclusive rights or administrative barriers.

Too much energy is put into chasing large firms operating in contestable markets, too little into tackling the many regulations that restrict competition. There is an uncomfortable paradox here: governments that create legal barriers to entry are a more important enemy to competition than firms that win temporary dominance by innovating (not to mention that these barriers also move resources to less efficient firms).

This is why we believe deregulation is so important for growth. Take AI as an instructive example. In Argentina, we want to keep the industry deregulated. We want companies to know they can explore, produce, sell and profit from that technology unmolested. This may lead to large firms, but we believe that regulating the industry to stop dominant players from emerging is growth suicide.

We trust deregulation and markets so much that we have designed a mechanism to impose some market discipline on regulators themselves. Regulators traditionally hold a monopoly on regulation, and quickly develop a tendency to abuse their authority: they pile on requirements, ask for documents unrelated to any alleged market failure and impose endless delays.

How to subject the regulator to market discipline? One way is to allow regulated and unregulated segments to coexist in the same market. If the regulator solves a real problem, people will operate in the regulated portion, for example by using firms authorised by the regulator. If the regulator does not add value, we allow people to ignore it and use firms not supervised by the regulator. In this framework, responsibility for choosing which market to operate in rests with the consumer. The only rules needing to be applied are to ensure transparency—so that everyone knows which segment they’re operating in.

We tried this approach in Argentina with several financial instruments. The result was a blossoming of the unregulated market and fee compression in the regulated market as competition forced the regulator to become more reasonable and less bureaucratic. European capital markets provide analogous examples, such as the coexistence of regulated offerings and “unregulated” boards on the Vienna Stock Exchange, the latter being popular with investors in smaller equity and bond issues because of lighter administrative requirements.

We believe such radical thinking would help in reassessing other areas of government meddling. Let us mention two: public goods and externalities. We are taught that non-rival and non-excludable goods should be government-provided. However, Ronald Coase, a Nobel-prizewinning economist, challenged this view when he showed that British lighthouses were privately provided, financed by nearby ports that internalised the benefits via port fees. May policymakers have over-extended the domain of public goods? Let us share a case that surprised even us: infrastructure in our national parks, such as trails and amenities—another textbook case of a public good. We started off thinking it should be supplied by the state. Yet when we experimented with concessions in which private operators had to build the public infrastructure at their own expense, it turned out not to be a problem. Firms solved the free-rider problem by co-ordinating among themselves and scaling up the infrastructure capacity in incremental steps to keep it profitable. Our point is that you don’t need to be an anarcho-capitalist to conclude that it may be worth reassessing the reach of public goods.

Externalities are another standard justification for regulation. However, once an externality becomes sufficiently valuable, property rights tend to emerge, either spontaneously or by design. Take the example of honey and fruit production, important sectors in Argentina. To internalise the externality (that fruit producers help honey producers and vice versa), a local firm, Beeflow, developed a technology that offers targeted pollination services by conditioning bees to visit only the blossoms of a particular crop. In short, the market found a solution that was probably more efficient and more growth-enhancing than government regulation. In the market solution bees can be moved around and used in many orchards. Regulation would have forced (or subsidised) close proximity between the two industries, a less efficient outcome. This is just an example, but it shows that markets can also provide a solution, even a better solution, to externality problems.

Free markets—the core of the deregulation agenda—made the world rich, massively reducing poverty in just two centuries. It is time to double down on our trust in capitalism. Let us get the government out of the way and give people back their freedom, stolen from them by politicians and regulators. ¡Viva la libertad, carajo!■