Executive Summary

Argentina has been in the news lately: first, for its string of foreign debt defaults and hyperinflation, now for Javier Milei, the bold libertarian president attempting to turn the country’s economy around. Contemporary Argentina and its economic challenges are the result of centuries of Argentine history. Over the last several centuries, Argentina has gone through cycles of chaos, economic freedom, and central planning – with the expected economic results. The eighth-richest country in the world in 1910, Argentina gradually fell, becoming the IMF’s greatest debtor by the early twenty-first century. Argentina serves as a case study for the relationship between institutional environments and economic growth, as reality matches the theoretical predictions: economic freedom is a necessary condition for economic growth.

Key Points

• Argentina’s contemporary struggles have roots in a century of central planning.
• Argentina has gone from central planning and misery to economic freedom and prosperity, and back.
• Argentina serves as a case study to illustrate the relationship between institutional environments and economic growth.
• Economic freedom is strongly linked to economic prosperity.

Introduction

Javier Milei – the libertarian, chainsaw-wielding, eccentric, self-proclaimed anarcho-capitalist president of Argentina – has been making headlines. The mainstream press, confused by a president who would slash budgets and restore economic freedom, relishes the string of inaccurate adjectives it uses to describe him, from far-right to neoliberal, or even “ultraliberal.” He inherited an economic disaster and promised a rollback of government spending with a wide array of deregulations to reinvigorate the economy. He has already delivered on those. He also promised dollarization, but as of February 2025 has not yet delivered on it.

To understand Milei’s challenge, we need to step back and examine five centuries of Argentine history, particularly of its institutions. In the tradition of the Austrian economics of Ludwig von Mises and F.A. Hayek, the New Institutional Economics of Douglass North, and the more modern operationalization of those theories in the form of the Economic Freedom of the World index, Argentina’s story of splendor and misery is an institutional story.^[1]

Section 1 establishes the institutional prism, with a review of the academic literature on the relationship between institutional environments and economic growth. Section 2 summarizes Argentine history (1500-2023), viewed through an institutional lens. Section 3 describes Milei’s challenge. The final section draws conclusions.

Institutions

1.1 Institutions^[2]

Economic theory offers a powerful toolkit for understanding human behavior and economic growth. Much of the standard theory, however, (known as “neoclassical theory”) makes important simplifying assumptions and largely sidesteps some big questions. Douglass North, who won the Nobel Prize in economics in 1993, founded the school of New Institutional Economics to address such problems.

North worried that neoclassical theory was incomplete, because it ignores the importance of transaction costs and property rights for exchange.^[3] He feared that “we have paid a big price for the uncritical acceptance of neoclassical theory. Although the systematic application of price theory to economic history was a major contribution, neoclassical theory is concerned with the allocation of resources at a moment of time, a devastatingly limited feature to historians whose central question is to account for change over time”.^[4] Neoclassical economic theory is static, whereas “the central puzzle of economic history is to account for the widely divergent paths of historical change” and for economic growth (or stagnation).^[5]

North also recognized a need for a better framework to understand intertwined economic, political, and social change.^[6] Enter the study of institutions, the “rules of the game” within which economic activity takes place.^[7] North explained how institutions determine the transaction costs faced by economic actors. (Transaction costs are the costs necessary for an economic exchange to happen, but not directly related to it. Think of search costs, working with an agent and going through due diligence to sell real estate, hiring a lawyer to review a contract, or paying a bribe to a government official).^[8] Institutions also “reduce the uncertainties involved in human interactions” – uncertainties arising from the complexity of the world in which humans operate, but also from the cognitive limitations of economic actors.^[9] Institutions, in sum, are “a mixture of informal norms, rules, and enforcement characteristics [that] together [define] the choice set and results in outcomes.”^[10] North addressed this methodological gap by examining transaction costs and the importance of constitutional constraints.^[11]

1.2 Institutions and Growth: The Theory^[12]

F.A. Hayek, another Nobel laureate in economics (1974), also studied institutions.^[13] Hayek concluded that “good” institutions provide good knowledge and good incentives (and “bad” institutions do the opposite). In the realm of knowledge, we can think of prices. In a free market, prices provide knowledge to entrepreneurs about consumer wants, but also about the relative scarcity of inputs. This allows for sound economic calculation and profit-maximization. Conversely, price controls or subsidies distort information, leading to market disequilibrium. Likewise, institutions that shield economic actors from responsibility will lead to moral hazard. Think of banks in the lead-up to the 2007 housing crisis; they responded rationally to bad incentives, making subprime loans to pocket the origination fees and avoid punishment from federal regulators, then promptly sold the toxic mortgages to Freddie Mac and Fannie Mae.^[14]

The theoretical bridge between institutional environments and economic growth comes from William Baumol’s “Entrepreneurship: Productive, Unproductive and Destructive.”^[15] Baumol argued that the institutional environment affects the incentives of entrepreneurs, and will affect the kinds and outcomes of entrepreneurship. With the correct institutions, entrepreneurship will be productive (a positive-sum game, conducive to economic growth and innovation, and contributing to efficient allocation of scarce resources among competing wants; think of Jeff Bezos getting rich by making goods easy to purchase with rapid delivery through Amazon). With the wrong institutions, entrepreneurship can be unproductive (a zero-sum game; think of hiring compliance officers or facilitators who create no value, but are necessary for making business happen). Worse yet, entrepreneurship can be destructive (beyond a redistributive wash, there is a net loss to the economy; for example, entrepreneurs might lobby to reduce competition, enriching themselves at the expense of consumers and competitors, but also hurting innovation). Alas, many governments have not heeded the lessons: most countries in the world suffer from either too little government, or too much.^[16] Ineffective governments are incapable of providing the basic governance, rule of law and defense of contracts and property rights required for productive entrepreneurship; overbearing governments are actively involved in picking favorites and redistributing resources to them, thus fostering unproductive or destructive entrepreneurship.

In more blunt language, Peter Boettke summarizes the problem by likening the economy to a race among three horses: “one named Smith (for gains from trade)”; the “second one named Schumpeter (for gains from innovation)”; and the “third one named Stupidity (for… government-imposed obstructions).” He concludes with optimism: “as long as the Smith and the Schumpeter horses were running ahead of the Stupid horse, tomorrow will be better than today.” He then invites us to consider an alternative scenario: “what if the Smith and Schumpeter horses were able to run freely, without that Stupid horse biting at their heels and bumping into them rather than staying in his lane?”^[17]

1.3 Institutions and Economic Growth: The Practice

A rich academic literature has explored the link between institutional environments and economic growth.^[18]

The late Gerald Scully was a pioneer of measurement. He found empirical evidence for the theory: politically open societies grew at 2.5 percent per annum versus 1.4 percent for politically closed societies; countries that followed rule of law grew at 2.8 percent per annum  versus 1.2 percent for those that didn’t; and countries that respected property rights and market allocation grew at 2.8 percent per annum versus 1.1 percent for those with central planning and limited property rights. These differences may seem small. But consider, with compound growth, that a mere difference of 2 percent annual growth versus 2.5 percent annual growth amounts to a 20 percent difference over a generation, 75 percent over 50 years, and 400 percent over a century. Considering that countries with political and economic freedom start at an advantage, we see an already vastly larger economy growing vastly faster.^[19]

More recently, the late James Gwartney and his collaborators picked up the research agenda on economic freedom, with the Economic Freedom of the World Index.^[20] The index measures the level of economic freedom for each country, using a five-point measurement.^[21]

Area 1: Size of Government

Almost all government spending is financed through either current taxation, future taxation (debt), or inflation. When a government spends money, therefore, it necessarily expropriates resources from its citizens, limiting their economic choices. Countries with lower levels of government spending, lower marginal tax rates, less government investment, and less state ownership of assets earn higher ratings in this area of economic freedom.

Area 2: Legal System and Property Rights

When a person and his rightfully-acquired property is not secure, others (both private individuals and the state) may limit his economic choices. Jurisdictions that operate under the rule of law, that ensure the security of property rights, that have independent and unbiased judicial systems, and that impartially and effectively enforce the law, earn higher ratings in this area of economic freedom.

Area 3: Sound Money

Money is involved in nearly every transaction in an economy. If a government’s monetary authority creates significant and unexpected inflation, it makes money less valuable and expropriates property from savers. Conversely, if the government creates significant and unexpected deflation, it makes money more valuable and expropriates property from borrowers. Thus, high and volatile inflation and deflation interfere with individuals’ economic choices. Those jurisdictions that permit their citizens access to sound money — i.e., currencies that maintain their value over time — earn higher ratings in this area of economic freedom.

Area 4: Freedom to Trade Internationally

When a government imposes taxes or regulations at the border, it limits its citizens’ ability to engage in voluntary exchange with people from other countries. Those jurisdictions with low tariffs, easy and efficient customs clearance, a freely convertible currency, and few controls on the movement of physical capital and labor earn higher ratings in this area of economic freedom.

Area 5: Regulation

When government regulations restrict entry into a market, limit or dictate the terms of certain types of exchange, or otherwise dictate how people and businesses may engage in economic activity, they limit individuals’ economic choices. Jurisdictions that impose fewer and less burdensome restrictions on credit markets, labor, business activity, and competition earn higher ratings in this area of economic freedom.

Not surprisingly, the Economic Freedom of the World index finds a clear correlation between economic freedom and economic growth.

Similarly, The Economist recently reported on the stalled decline in international poverty, after 30 years of progress from globalization.^[22]

This regress is no coincidence. Freedom House reports that we are in the eighteenth year of democratic decline around the world.^[23] This has two consequences. First, as explained above, politically open societies grow faster than politically closed societies. Second, drops in political freedom are often associated with drops in economic freedom. Indeed, in parallel to the world’s drop in political freedom, a decade of growth in economic freedom was erased in 2020, as governments around the world addressed the pandemic with spending and regulation (which were supposed to be emergency measures).^[24] Although the world’s politicians are increasingly enamored of central planning, a basic understanding of institutions leaves us completely unsurprised that the recent decline in economic and political freedom would lead to a decline in alleviation of world poverty.

1.4 Conclusion: Institutions Matter

Economic activity does not exist in a vacuum. Growth, capital accumulation, and innovation don’t just happen. Entrepreneurs must have the right incentives and knowledge to find better ways to serve the consumer and drive the economy. The space within which they operate is the institutional framework. In its (successful) quest to develop powerful tools to explain and predict human behavior, mainstream economics has simplified away the institutional foundations of economic activity. Without jettisoning the powerful insights of economic analysis, we can add a rich layer of explanatory power by returning to a study of the underlying institutional environment.

I close this section with a note of caution. Governments can indeed play a “negative” role when it comes to institutions: they can provide rule of law, property rights, defense of contracts, and economic freedom – then get out of the way. But it will be tempting for governments to play a “positive” role. They might do this by picking favorite industries or enterprises and financing them with taxpayer money. Or they might do so by engaging in comprehensive attempts to redesign society and its institutions. Such attempts, because of problems of knowledge (as described by the Austrian school) and incentives (as described by Public Choice theory) usually end with negative unintended consequences. To wit, as we will see below, Argentina’s founders blithely assumed that they could import the US constitution and graft it onto the Argentine tree, without considering culture and other factors; the gamble worked – magnificently – for a while, but the constitution failed to constrain the growth of the state.^[25]

A Brief History of Argentina (Through an Institutional Lens)^[26]

This section will briefly review 500 years of Argentina history, through an institutional prism. As we will see, in lockstep with institutional change, Argentina went from poor (before its constitution of 1853) to rich (thanks to the economic growth fostered by that constitution) to poor again (because of the Peronist, interventionist betrayal of the constitutional order).

2.1 Prelude: 1500-1853

Argentina was the poor backwater of the Spanish colonial empire. It had no gold, and no widespread indigenous population to exploit as labor. The fertile soil, the port of Buenos Aires, and smuggling were the region’s only major resources. It was not until 1776 that the Spanish crown created a separate viceroyalty of La Plata, with its seat in Buenos Aires. Importantly, the province of Buenos Aires was not just prominent, economically and politically; it was essentially the only game in town. Other cities existed, and there were regional caudillos (strongmen). But none could compete with Buenos Aires. Imagine the thirteen colonies (of the future US) in 1776. Now, instead of thirteen roughly balanced colonies, imagine an overwhelmingly powerful New York. Instead of merely holding the greatest economic power, New York City (capital of a powerful New York State) would be the only significant port on the Eastern seaboard, controlling the customs loot from all transatlantic trade. It would also be the only major city in the thirteen colonies. This sets the stage for understanding the century-long conflict between the province of Buenos Aires and the other provinces. We must also recall that Washington, D.C. was a post-constitutional creation, whereas Buenos Aires (the province, and not just the city) was already a power seat.^[27]

By the beginning of the nineteenth century, Argentina was still a poor backwater, with a mere 400,000 inhabitants for an area of just over one million square miles.^[28] In 1808, the Spanish throne fell to the Napoleonic wars, as Napoleon replaced the King of Spain with his brother Joseph. Uncertainty followed in the Spanish colonies, which were divided between continued loyalty to the deposed King of Spain, allegiance to the new crown, and independence. Buenos Aires proclaimed a half-hearted independence, pledging loyalty to the deposed king, for itself and in the name of the other provinces of La Plata (but without consulting them).^[29] The Proclamation of 1810 was neither revolutionary nor independentist, but merely a stopgap measure to fill a power vacuum.^[30] After six years of civil war between loyalists and secessionists, the provinces formally proclaimed their independence in 1816.

The next half-century was marked by instability and bloodshed, in a cycle between anarchy and leviathan.^[31] This instability came from a lack of vision, structure, or guiding principle in the 1810 Proclamation; some wanted a constitutional monarchy, others a republic. The status of Buenos Aires and its relationship with the other provinces was up in the air. The 1816 Proclamation also lacked a political vision.^[32]

1810 to 1829 was a period of anarchy, as described in its horrible detail by fiction author and future president Domingo Faustino Sarmiento.^[33] Regional caudillos fought each other in their quest for power; Buenos Aires continued its attempts to control the other provinces. Out of this chaos emerged a stronger caudillo, Juan Manuel Rosas, who gained control of Buenos Aires, through which he ruled over all the provinces from 1829 to 1852. The Rosas dictatorship began “not by force or coup, but by the consent of the legislature and the acquiescence of a society exhausted by war and anarchy.”^[34]

Rosas enjoyed massive popular support. Because he quashed the criminal power struggles and tamed the local caudillos, Rosas was known as El Restorador de las Leyes (the restorer of the laws). As a dictator, though, he was more concerned with imposing his will and supporting his cronies than about restoring economic freedom or rule of law. Rosas gave Argentina a respite from the chaos, but not a constitutional order.^[35]

As institutional economics teaches us, neither anarchy nor leviathan is propitious for economic development. Argentina lacked stability, rule of law, predictability, or defense of basic rights. Consequently, it remained poor during the first half of the nineteenth Century.

2.2 The Constitution of 1853

Argentina’s founding father and constitutional drafter, Juan Bautista Alberdi, examined Argentina’s problems and proposed solutions in his 1852 Bases y Puntos de Partida para la Organización Política de la República Argentina (foundations and points of departure for the political organization of the Argentine republic).^[36] As he saw it, the problem was rather simple: tyranny and lack of economic development. He proposed a strong presidency and US-inspired checks and balances to prevent tyranny, thus fostering economic growth.

Alberdi believed many of Argentina’s difficulties could be traced to constitutional choice.^[37] He argued there were two constitutional phases in Latin America.^[38] The first, immediately following independence, was backward-looking and sought to clean up the shortcomings of earlier systems, rather than addressing fundamental problems. Furthermore, the earlier driving goal was independence from the Spanish crown, not economic development.^[39] In the second phase of constitutionalism, there was no longer a need for independence, but for economic development through better institutions.^[40]

Economic growth was to take place based on three factors. First, immigration to populate the country, and provide a labor force.^[41] Second, sound and stable institutions, to attract foreign capital investment.^[42] Third, an active state role in developing the economy – not only by providing a favorable institutional environment, but also by actively guiding and encouraging investment.^[43]

Such was Alberdi’s admiration for his northern neighbors that the Argentine Constitution of 1853 was an almost-verbatim translation of the US constitution of 1787 – with a few exceptions. The Argentine constitution of 1853 established a federal system under an entrenched constitution, with united provinces and a federal government (to balance protection of local interests with the fear of local tyranny). The federal government enjoyed enumerated powers, divided among three branches, like the US. The first and most important difference lies in the role of the presidency: fearful of the post-independence cycle of anarchy and tyranny, Alberdi explained that “strong public power is indispensable in Latin America.”^[44] He thus proposed a powerful executive, one who could “assume the powers of a king the instant that anarchy disobeys him as republican president.”^[45] He concluded that it would be better to give despotism to the law than to a man, because the constitution would check presidential tyranny.^[46] This presidential strength is most visible in the power of “intervention,” i.e. a federal overruling of provincial laws and elections. Unlike the US, the Argentine constitution explicitly granted the federal government an activist economic role.^[47]

Splendor: 1853-1930

Dissent began to grow against the Rosas dictatorship. By the early 1850s, there emerged a competing caudillo, José Justo Urquiza, who challenged Rosas’s power. The other provinces, keen on overthrowing the hegemony of Buenos Aires, rallied behind Urquiza, who defeated Buenos Aires’s forces in 1852. As part of the peace treaty, Buenos Aires agreed to join the other provinces in a confederation under Alberdi’s proposed constitution.

But Buenos Aires almost immediately backed out of the agreement. The province seceded from the confederation, refusing to submit itself to the other provinces or regional caudillos. There followed an awkward period with two de facto countries (the United Provinces and the Province of Buenos Aires). In 1859, Buenos Aires attempted to invade the other provinces, but was defeated. A compromise was reached, in which Buenos Aires proposed amendments to weaken the constitution’s federalist elements, and thus protect its own interests. In 1860, Buenos Aires ratified the amended constitution, and the country was reunited.^[48]

In the ensuing half century, Argentina grew into the eighth richest country in the world (in total wealth), thanks to stability and institutions that promoted economic activity.^[49]

Alas, from 1860 into the early twentieth century, Argentina also suffered from deep pathologies under the veneer of constitutional success. Power transfers were peaceful, but relied on fraudulent elections and a self-perpetuating oligarchy; suffrage was not universal, and the president was said to be selected at the elite Jockey Club, rather than through open democracy. Regional caudillos were checked by the national government – at the price of a strong presidency and weak institutional counterweights. The opposition, boosted by the universal suffrage law of 1912, finally broke the oligarchy’s hold on power in 1916. There followed fourteen years of populist rule, a period distinguished by wealth redistribution and social laws that violated the letter and spirit of the Argentine constitution. The constitutional order behind the economic miracle had begun to erode.

2.3 Misery: 1930-2023

Within just a few years, Argentina’s power dynamic had changed suddenly. Presidents had been picked privately by the elites in the proverbial smoky back rooms; that practice was changed with universal suffrage. Adding insult to injury, the post-1860 constitutional order of economic freedom was replaced by increasing interventionism and redistribution. The patience of the economic and political elites grew thin. In 1930, they backed a military coup that ousted the president. This was to be the first of 11 military coups (and six military dictatorships) in the twentieth century. Argentina never recovered from the twin onslaught of populism and militarism.

In 1930, the generals left quickly, after having re-established the conservative oligarchy. In 1943, the military returned, this time as part of a populist swing. A relatively junior officer, Colonel Juan Domingo Peron, participated in the coup, and was rewarded with a ministerial portfolio. As minister of labor, he created an Argentine version of Mussolini’s fascism, combining populism, clientelism, redistribution of public funds to buy votes, and corporatism among the country’s various economic and political power groups, with a balance brokered by a powerful state. In 1946, he was elected president, then re-elected in 1952.

The economy suffered terribly from Peronist redistribution and populist control of the economy. By 1951, Peron had to dampen his policies in order to revive a stagnant economy. Labor, unhappy about losing its privileges, rebelled and supported an attempted coup. In 1955, Peron resigned to avert open civil war. The military stepped in to replace him. (After two decades in exile, Peron returned to Argentina and its presidency in 1973. He died a year later, but still casts a shadow on Argentine politics.)

After 1955, Argentina suffered from a waltz of unstable civilian regimes and military coups. After a counter-coup in 1956, the military allowed elections to take place in 1958, but the new government was thwarted by labor interests when it tried to cut public spending. In 1962, the military canceled the election, overthrew the government, then allowed elections to take place in 1963. The military returned in 1966, this time implementing bureaucratic-authoritarianism. Labor unrest and subsequent violent crackdowns in 1969 heralded the beginning of Argentina’s infamous “dirty war,” with full suspension of due process and constitutionally protected rights. In 1971, a military coup ousted the sitting military government. The 1973-1976 civilian government was weak. Peron died within a year of regaining office, and was replaced by his second wife. The government was soon overwhelmed by the rise of domestic terrorism. Again, economic reform was thwarted by strikes. The dirty war continued, and the economy suffered. In 1976, the military returned to power, and escalated the dirty war to unprecedented heights. Between 1976 and 1983, an estimated 30,000 Argentines were “disappeared” by the military dictatorship.

Five-year economic plans, heavy labor and economic regulations, and a redistributive state all contributed to Argentina’s steady decline. Through the twentieth century and into the twenty-first, Argentina’s economy was slowly suffocated by Peronism.

The military defeat against the UK in the Falkland/Malvinas Islands, combined with hyperinflation, depression, and debt default, all eroded the military’s support. In 1983, the country returned to civilian rule. The army rebelled four times between 1987 and 1990, albeit unsuccessfully. Whereas the coups that occurred between 1930 and 1976 enjoyed overwhelming popular support, the post-1983 rebellions encountered a different response. Tens of thousands of civilians descended into the streets, and refused to leave until the military returned to their barracks.

Though Argentina returned to civilian rule in 1983, Peronism and interventionism continued, and the country– once the eighth richest in the world – has suffered from stagnation and hyperinflation throughout the decade.

The situation improved in the 1990s, as structural adjustments and privatizations attracted foreign investment. Argentina seemed to have recovered from its political and economic woes, and was hailed as an IMF poster child. Then foreign debt and domestic spending spun out of hand, and Argentina defaulted on its obligations in 2001 (it would default again in 2014 and 2020). In 2001, Argentina endured a sharp economic crisis; in the face of civil unrest and economic disaster, it suffered a string of five presidents in less than two weeks.

Argentina returned to stability for a decade. Then, from 2013 to 2023, Argentina saw a renaissance of Peronism. Institutional counterweights were destroyed, as the Supreme Court was packed with presidential allies; a nominally independent central bank became a financing instrument for massive redistribution; statistics were cooked so profoundly that The Economist simply stopped reporting them for several years. Deficits soared, and hyperinflation, which had been beaten in the 1980s, returned, with rates pushing 300 percent. Poverty grew from 10 percent to 45 percent of the population.

The following graph shows Argentina’s steady decline, as it fell from 80 percent of US GDP in its 1910 heyday to about 30 percent when Milei was inaugurated in December 2023.^[50]

Milei’s Challenge: Hope for Argentina?

Javier Milei was elected on a classical liberal platform of reform, and inaugurated in December 2023. He faced deep macroeconomic, structural, monetary, and regulatory challenges – along with deeply entrenched political interests and state clients – all of which have asphyxiated the economy over the past decade and impeded Argentina’s prosperity.

Milei immediately promised he would cut public spending, while raising a few taxes (on imports and exports, notably) to attack the ballooning budget deficit. His most ambitious policy has been implemented through an emergency decree (as authorized by the constitutional amendments of 1984, in case of emergency, the president can impose certain measures, without prior authorization by the legislature). The emergency decree of December 2023 contains 366 articles aimed at saving Argentina’s economy.^[51] These articles can be summarized in 30 bullet points. Most of them involve deregulation: of labor markets, healthcare, consumer protection, price controls, impediments to contracts, labor markets, and more. In sum, Milei is engaging in a frontal assault against 80 years of interventionism, populism, and clientelism.

Two things are worth noting. First, Milei inherited an awful dilemma. The recent Peronist acceleration increased national poverty from 10 percent to 45 percent of the population in a single decade. In the long run, the solution is obvious: follow the lessons of institutional economics, roll back corporatism and intervention, and let the economy grow. In the short run, however, the poorest (fully half the population) will suffer even more as they lose palliative public welfare. To remedy this, as the economy suffers before it grows, the Milei administration immediately doubled welfare and food aid to children. Second, Milei is slowly re-establishing rule of law to end the blackmail by the Peronist labor unions. Contrary to four decades of practice, any person blocking entry or egress from factories, or blocking roads during a strike action, will be fired or arrested, and will lose all government benefits. The right to strike, due process, and habeas corpus remain. Argentina was in the bottom quartile of world economic freedom during the latest rankings – but it continues to enjoy high levels of political freedom.^[52]

On the monetary side, Milei was quickly caught in a difficult reality. He gave up on the immediate closing of the Argentina central bank, as well as on the dollarization he had promised. Milei likely worried about Argentina’s weak official dollar reserves and feared the consequences of a drastic reduction in the country’s money supply, which would have led to further poverty and the possibility of social unrest. Inflation has decreased, as the Argentine state is no longer printing pesos to cover its lavish spending and budget deficits. Milei has reduced inflation from a high of almost 300 percent p.a. when he took office to about 166 percent at the close of 2024. Work remains, but progress is visible, thanks to both macroeconomic and microeconomic reforms.

Milei did not immediately dollarize, but he did take a step in the same direction by partially suspending legal tender laws, and allowing private contracts to be made in foreign currencies, as well as cryptocurrencies.

Sadly, Argentina, which has already suffered so much under Peronism, is set to suffer even more during the austerity period (Milei, ever the political showman, warned Argentines of a very precise 17 difficult months). We are reminded here of the parallel F.A. Hayek drew between the recovery from the boom-and-bust cycle of monetary expansion, and withdrawals after overconsumption of alcohol. Faced with a hangover, we face a difficult choice: accept the consequences of last night’s joy, or postpone the suffering by reaching for the bottle on the nightstand… then rinsing and repeating tomorrow, with an even worse hangover. Argentina is facing the consequences of a twenty-year binge. It periodically wakes up with a hangover (in the form of a debt crisis or inflation). Instead of reforming its ways, Argentina keeps relying on outside loans or monetary expansion to get itself out of crisis; but this is always a temporary measure, at best. The cycle has continued. Milei is attempting to break that cycle, but there will be more short-term pain during withdrawals.

Beyond macroeconomic stabilization, Milei faces an uphill battle. He was elected with more than 50 percent of votes cast (rather than a mere plurality). But he is facing deeply entrenched interests that are not keen to lose their privileges and their place at the public trough. (As of February 2025, Peronists controlled 31 of 72 Senate seats, 102 of 257 seats in the Chamber of Deputies, and 11 of 24 provincial gubernatorial mansions.) Even though a majority of the people support Milei, he is facing pushback from Peronists, labor unions, public employees, and others who have lived for so long on the proceeds rent-seeking. Milei is victim of a classic Public Choice story, which reaffirms that individuals do not magically turn into public-spirited angels when they are employed by the state or are reminded of the common good.

Public Choice theory explains political coalitions, elite collusion beyond party lines, and much more. The theory of concentrated benefits and diffuse costs developed by economist Mancur Olson applies here.^[53] Inefficient and unfair policies will persist if the cost is spread out over much of the population, while the benefits are concentrated on few recipients. Those who bear the cost will likely not be aware of the problem, and the cost of organizing to end the redistribution will be higher than the cost paid. Those who receive the benefit will be politically organized and have resources to secure continued goodies. Politicians love such schemes, as the beneficiaries will support their re-election, and the payers won’t complain effectively.

For example, Americans pay, on average, $10 per year to support an inefficient American sugar industry, with an estimated loss of 20,000 jobs per year in the food industry which uses sugar as an input. But it’s not worth organizing politically to end a $10 annual cost. In sum, though, this translates to $4 billion annually for the sugar industry, which deftly ensures they will lobby for a continued subsidy.

How much time Milei has is unclear. An emergency decree stays effective for one year, unless both chambers oppose it. Since 1994, the political tradition has been for the legislature not to oppose emergency decrees; however, under Peronism, decrees always expanded public spending, with concentrated benefits and diffuse costs. Milei’s cost-slashing is a threat to those who receive concentrated benefits, and to their political allies. The Senate rejected the decree in March 2024, but the lower chamber accepted it. As a result, Milei continues to face the dilemma of working with Peronist legislators and state governors (the latter were irked that the federal government suspended payments to them, as part of the deficit-slashing).

Time will tell if Milei can turn Argentina around in 17 months, as promised. He must tame hyperinflation, continue to cut public spending, and lower poverty, as he jump-starts the economy – or technically, as he removes state fetters from an economy already eager to surge forward.

Dollarization presents an interesting institutional question. Indeed, it is not, technically speaking, economically necessary; following the model of F.A. Hayek, denationalization of currency is an alternative to dollarization or the free emission of money (free banking).^[54] This would happen with full abolition of legal tender laws. But ending the central bank is institutionally crucial. Milei’s deregulation and cost-cutting could be overturned by the next legislative majority or presidential decree, but it would be much harder to re-establish in the absence of central banking. Without a central bank to print money, Peronist largesse would be impossible. Ending the central bank is the credible commitment required for Argentina’s long-term growth and recovery.^[55]

In the summer of 2024, Milei moved in this direction, declaring an amnesty on dollars held in Argentina and abroad – partly as a show of good faith, and partly to measure the quantity of dollars already in the country. Dollarization is thus on the path to happening de facto. But the central bank must go.

History teaches us that growth and stability flow from institutions – institutions, such as rule of law, respect for property rights and contracts, space to innovate and exchange, stability, trust, and predictability. Milei’s challenge thus remains, fundamentally, a challenge of institutional reform.                    

Conclusion

Argentina provides a case study for a fundamental lesson in economics. Institutional environments are inextricably linked with economic growth. Policymakers can try all manner of redistribution, international aid, investment, macroeconomic reforms, and bold ideas, but growth will not happen if institutions do not support it. For growth to happen, entrepreneurs must be able to innovate and drive the economy. Entrepreneurs must be allowed to operate within a predictable institutional environment that provides them (or at least does not destroy) with incentives to do so.

Javier Milei has taken to hearing the lessons of institutional economics. By ending the deficit, cutting spending, and decreasing inflation, he has provided the macroeconomic foundations for microeconomic reforms of deregulation and increased freedom of contracts and commerce. In just one year, he has made great strides, but he has had little time to address eight decades of Peronist interventionism. He enjoys the support of an Argentine population that is so fed up with Peronism that it will endure some austerity. Milei still faces an uphill battle against the interest groups that benefit from redistribution and state power.

His initial successes are a source of hope; poverty, under Milei’s austerity program, soared past 50 percent but has already fallen to 37 percent. Inflation has fallen. A static real estate market has already shown the vibrancy of liberation. While the Argentine economy is still sputtering, it has exited recession under Milei. The key will be long-term strengthening of institutions that ensure economic liberty.

Endnotes

^[1] This paper draws on and updates Nikolai Wenzel, “Matching Constitutional Culture and Parchment: Post-Colonial Constitutional Adoption in Mexico and Argentina,” Historia Constitucional No. 10 (2010), 321-338.

^[2] This section borrows from Andrés Marroquin and Nikolai Wenzel, “Introduction”, in A Companion to Douglass North, ed. Andrés Marroquin and Nikolai Wenzel (Universidad Francisco Marroquin, 2020), 5.

^[3] Douglass North, Institutions, Institutional Change, and Economic Performance (Cambridge University Press, 1990a), 11.

^[4] Ibid, 131.

^[5] Douglass North, Understanding the Process of Economic Change (Princeton University Press, 2005), 11. See also North 1990a, 6-7.

^[6] North 2005, vii.

^[7] North 1990a, 3.

^[8] Ibid, 6.

^[9] North 1990a, 25 and chapter 3. See also North 2005, 83 on the importance of mental models in limiting human behavior, but also in the process of institutional change).

^[10] North 1990a, 53.

^[11] North 1990a, 3. John Joseph Wallis and Douglass North, “Measuring the Transaction Sector in the American Economy,” in Long-Term Factors in American Economic Growth, ed. Stanley Engerman and Robert Gallman (University of Chicago Press, 1986), 95-162. North examined the importance of transaction costs in Douglass North, “A Transaction Cost Theory of Politics,” Journal of Theoretical Politics 2, No. 4 (1990b), 355–367.

^[12] For the sake of simplicity, I am leaving out informal institutions (such as trust, time preferences and propensity to save, culture, social capital, or ideology) and the mental models that drive decisions. North himself recognized the importance of informal institutions.  On informal institutions, see Claudia Williams, “Informal Institutions Rule: Institutional Arrangements and Economic Performance,” Public Choice 139, No. 3/4 (2009), 371-387 or Deirdre McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press, 2006). On mental models, see North 2005, F.A. Hayek, “The Facts of the Social Sciences,” in F.A. Hayek, Individualism and Economic Order (University of Chicago Press, 1948), 57-76, or Nikolai Wenzel, “An Institutional Solution for a Cognitive Problem: Hayek’s Sensory Order as Foundation for Hayek’s Institutional Order” in ed. William Butos, The Social Science of Hayek’s “The Sensory Order” (Emerald, 2010,) 311-335. For a scathing attack on New Institutional Economics, see Deirdre McCloskey, “Austrians Should Reject North and Acemoglu: Some Critical Reflections on Peter Boettke’s The Struggle for a Better World,” Review of Austrian Economics (forthcoming).

^[13] See, notably, F. A. Hayek, The Constitution of Liberty (University of Chicago Press, 1960).

^[14] See Alexandra Mussler and Nikolai Wenzel, “The Financial Idea Trap: Bad Ideas, Bad Learning, and Bad Policies after the Great Financial Crisis,” Cosmos + Taxis 8, No. 2 (2020) and Steven Horwitz and Peter Boettke, “The House that Uncle Sam Built: The Untold Story of the Great Recession of 2008” (Foundation for Economic Education, 2009)

^[15] William Baumol, “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Political Economy 98, No. 5, Part 1 (1990), 893-921. See also Nikolai Wenzel, “Editorial: Three Intellectual Debts and the Three Horses of Entrepreneurship: The Journal of Entrepreneurship and Public Policy Celebrates Ten Years,” The Journal of Entrepreneurship and Public Policy 12, No. 1 (2023), 1-5.

^[16] See James Buchanan, The Limits of Liberty: Between Anarchy and Leviathan, in The Collected Works of James M. Buchanan, Volume 7 (Liberty Fund, 1975[2000]). See also James Gwartney, Richard Stroup, Russell Sobel, and David MacPherson, Economics: Private and Public Choice, 16^th edition (Cengage Learning, 2017).

^[17] Peter Boettke, “Imagine a Horse Race Between Smith, Schumpeter, and Stupidity,” The Daily Economy (American Institute for Economic Research, 2020).

^[18] See Randall Holcombe, “Entrepreneurship and Economic Growth,” Quarterly Journal of Austrian Economics 1, No. 2 (1998), 45-62; Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000), Peter Boettke and Christopher Coyne, “Entrepreneurship and Development: Cause or Consequence?,” Advances in Austrian Economics 6 (2003), 67-88; Christopher Coyne and Peter Leeson, “The plight of Underdeveloped Countries,” Cato Journal 24, No. 3 (2004), 235-249; or Russel Sobel, “Testing Baumol: Institutional Quality and the Productivity of Entrepreneurship,” Journal of Business Venturing 23, No. 6 (2008), 641-655. See also Gwartney et al. (2017).

^[19] Gerald Scully, “The Institutional Framework and Economic Development,” Journal of Political Economy 96, No. 3 (1988), 652-662. Gerald Scully, Constitutional Environments and Economic Growth (Princeton University Press, 1992).

^[20] www.freetheworld.org

^[21] https://www.fraserinstitute.org/sites/default/files/economic-freedom-what-is-it-how-is-it-measured.pdf

^[22] https://www.economist.com/finance-and-economics/2024/09/19/the-worlds-poorest-countries-have-experienced-a-brutal-decade

^[23] https://freedomhouse.org/report/freedom-world/2024/mounting-damage-flawed-elections-and-armed-conflict

^[24] https://www.fraserinstitute.org/studies/economic-freedom

^[25] Wenzel (2010). See also Peter Boettke, Christopher Coyne, and Peter Leeson, “Institutional Stickiness and the New Development Economics,” American Journal of Economics and Sociology 67, No. 2 (2008), 331-358.

^[26] This section draws from Wenzel (2010) and my 2007 doctoral dissertation. For the history, see also Thomas Skidmore and Peter Smith, Modern Latin America, 5^th edition (Oxford University Press, 2000).

^[27] Arthur Whitaker, The US and the Southern Cone (Argentina, Chile, Uruguay) (Harvard University Press, 1976), 28

^[28] Armando Ribas, Argentina, 1810-1880: Un Milagro de la Historia (VerEdit, 2000).

^[29] Nicolas Shumway, The Invention of Argentina (University of California Press, 1991), 21.

^[30] Ribas 2000, 38.

^[31] This borrows from the title of Buchanan (1975).

^[32] Ribas 2000, 44, 46.

^[33] Domingo Faustino Sarmiento, Facundo, O Civilización y Barbarie en las Pampas Argentinas, (Emecé Editores, S.A., 2000[1874]).

^[34] Shumway 1991, 118.

^[35] Sarmiento 2000[1874], 252-258.

^[36]Juan Bautista Alberdi, Bases y Puntos de Partida para la Organización Política de la República Argentina (Academia Nacional de Derecho y Ciencias Sociales de Córdoba, 2002[1852])

^[37] Ibid.

^[38] Ibid, 13.

^[39] Ibid, 14.

^[40] Ibid, 38.

^[41] Ibid, 57.

^[42] Ibid, 57.

^[43] See Juan Bautista Alberdi, “Sistema Económico y Rentístico de la Confederación Argentina, según su Constitución de 1853,” in Obras Escogidas de Juan Bautista Alberdi, Volume 4 (Editorial Luz del Dia, Buen1954 [1855]).

^[44]Alberdi 2002[1852], 35.

^[45] Ibid, 124-125.

^[46] Ibid,129.

^[47] This happened in the US also, of course. However, the US constitution does not explicitly grant vast powers of economic development to the federal government. Those came later, with executive overreach and compliant courts. See Robert Levy and William Mellor, The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded Freedom (Cato Institute, 2010). See also Nikolai Wenzel, and Allen Mendenhall “Towards a Return to Constitutional Government: an Economic, Post-Romantic Argument for Ending the Bifurcation of Rights,” Journal of Law & Civil Governance at Texas A&M 1, No. 1 (2024), 1-34.

^[48] Shumway 1991, 227.

^[49] See Ribas 2000 and Jonathan Miller, “The Authority of a Foreign Talisman: A Study of US Constitutional Practice as Authority in Nineteenth Century Argentina and the Argentine Elite’s Leap of Faith”, American University Law Journal 46, No. 5 (1997), 1483-1572. For context, Argentina’s wealth was on par with that of the first industrialized countries, including the US. See https://www.mercatus.org/research/working-papers/rise-and-fall-argentina

^[50] These are dollars adjusted for purchasing power. Data is from Maddison, Angus, Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD

^[51] Herald, Buenos Aires. “Milei’s Controversial Mega-Decree Officially Takes Effect.” Buenos Aires Herald, 29 Dec. 2023.

^[52] See www.freetheworld.org and https://freedomhouse.org/country/argentina

^[53] Mancur Olson,The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale University Press, 1984).

^[54] F.A. Hayek, Denationalisation of Money (Institute for Economic Affairs,1976).

^[55] Emilio Ocampo and Alfredo Romano, Argentina Dolarizada: Perspectivas para una nueva Economía (Galerna, 2024).. A static real estate market has already shown the vibrancy of liberation. While the Argentine economy is still sputtering, it has exited recession under Milei. The key will be long-term strengthening of institutions that ensure economic liberty.                        

Download this Paper

President Donald Trump and Department of Governmental Efficiency (DOGE) Director Elon Musk have called for a full audit of the US gold reserves at Fort Knox, reigniting long-standing debates about the transparency and security of America’s bullion holdings. Framed as a move for government accountability, the proposal has found support from free-market skeptics concerned about the integrity of federal institutions and conspiracy theorists who believe the vaults contain little to no gold, or even counterfeit bullion. However, the timing of this initiative has raised broader questions about the role of gold in US financial strategy.

Speculation is growing that an official audit could be the first step toward a formal revaluation of America’s gold reserves, which are still recorded at an outdated $42.22 per ounce despite the market price approaching $3,000 per ounce. The potential implications of such a move are far-reaching — not only for the Federal Reserve’s independence and monetary policy, but also for inflation expectations, global gold markets, and the reserve status of the US dollar. Additionally, Treasury Secretary Scott Bessent has hinted at the possibility of monetizing the asset side of the balance sheet, a move that some analysts suggest could pave the way for financing the newly announced US Strategic Crypto Reserve Fund, which includes Bitcoin, Ethereum, and three other tokens.

In recent weeks, physical gold and silver inflows into COMEX warehouses have surged to levels not seen since the early days of the COVID-19 pandemic, reflecting what appears to be an escalating supply squeeze in global bullion markets. The London Bullion Market Association (LBMA), the world’s largest hub for physical gold trading, has seen its inventories plummet, while gold lease rates — analogous to repo rates in bond markets — have soared, indicating a scarcity of deliverable metal.

A growing number of traders holding long gold futures contracts are now demanding physical delivery instead of rolling over their positions, exacerbating the strain on already tight supplies. This shift has contributed to a self-reinforcing price rally, as rising futures prices encourage more long positioning, widening the spread between futures and spot prices, and further pressuring bullion banks to meet delivery obligations. Traditionally, these banks offset their exposure through leasing arrangements, but with gold reserves flowing eastward to emerging markets, the available supply has dwindled significantly.

Emerging market central banks have been a major force behind this tightening supply. Nations such as India, Poland, Turkey, and Hungary have not only expanded their gold reserves but have also begun repatriating their holdings from Western vaults. Historically, central banks stored gold in London and New York, where it could be leased into the market, adding liquidity and generating income. However, in recent years, a growing number of these nations have opted to store their reserves domestically, removing them from the lendable supply and deepening the disconnect between physical and paper gold markets.

At the same time, gold has been flowing into COMEX warehouses in the US, likely to compensate for the shortfall in London. This has coincided with an uptick in speculative activity, particularly from hedge funds and momentum traders, further fueling price momentum and intensifying pressure on bullion banks. Meanwhile, China’s Shanghai Futures Exchange, which provides limited transparency on inventory levels, appears to be absorbing additional supply, further constraining availability in Western markets.

Against this backdrop, speculation over a potential US gold revaluation has intensified. The US Treasury currently values its official gold holdings at just over $11 billion, based on the outdated $42 per ounce benchmark. However, at current market prices exceeding $2,900 per ounce, those reserves would be worth over $750 billion. Given the clearly demonstrated potential for unpredictable policy shifts under Trump and Musk’s leadership, a gold revaluation scenario should not be dismissed.

One mechanism involves reissuing new gold certificates at a revised market price, which the Federal Reserve would be required to exchange for existing ones. This accounting maneuver would result in an immediate increase in the Fed’s balance sheet, creating the potential for the Treasury General Account (TGA) at the Fed to be expanded by hundreds of billions of dollars. 

Such a move could serve multiple purposes, including:

1. Strengthening the Fed’s balance sheet by increasing the proportion of hard assets relative to riskier holdings.

2. Providing fiscal flexibility for the US government to finance new initiatives — potentially even the strategic crypto reserve fund.

3. Triggering a surge in physical gold demand, as market participants attempt to hedge against the implications of such a move.

The potential effects of a gold revaluation on the US dollar ultimately remain uncertain. It could, even if not economically justified, bolster confidence in the dollar, particularly as the purchasing power of the dollar has eroded over time. If revaluation increases the weight of gold relative to other holdings, it could support the dollar’s status as a global reserve currency after years of the Fed warehousing lower-quality assets on its balance sheet.

On the other hand, the move could be perceived as backdoor quantitative easing (QE), further undermining confidence in the dollar. If the market views this as a reckless monetary expansion, it could accelerate concerns that the US is deliberately allowing the dollar’s reserve status to decline, potentially in line with the “Mar-a-Lago Accord” scenario (in which a renegotiation of its debt obligations is accompanied by dollar devaluation).

A gold revaluation would also have major implications for the paper gold market. The last time the US government officially revalued gold, in 1933, no gold futures market existed. If the US were to suddenly revalue gold, it could create a physical metal squeeze, forcing those short the futures market to scramble to meet delivery obligations, pushing prices higher. Given that major bullion banks — such as JPMorgan — often take short positions in gold futures, the government would likely need to intervene to prevent a systemic crisis in such a scenario. 

One potential response could involve forcing all long futures positions into cash settlement, preventing a market meltdown. But such an action could significantly erode trust in the paper gold market, leading to a massive shift in demand toward physical metal, further exacerbating supply constraints.

While a formal US gold revaluation remains speculative, its potential consequences are profound. The combination of physical gold shortages, rising lease rates, and aggressive accumulation by emerging market central banks suggests that gold’s role in global finance is already undergoing a major transformation. Whether this shift results in higher gold prices, greater fractures between physical and paper markets, or an eventual restructuring of the global monetary system, remains to be seen. 

With the call for an audit of Fort Knox, though, speculation about the US gold reserves is no longer confined to theoretical debates or conspiracy circles. It is now a question with real-world policy implications, as gold again takes center stage in the evolving landscape of global finance, monetary policy, and geopolitical strategy.

Last week, climate activists took the stage to interrupt a lecture by economist Larry Summers at Stanford Law School. The activists, who reportedly are members of Climate Defiance and apparently are not students, chanted and shouted over Summers for a full 10 minutes, preventing him from delivering much of his speech. 

Summers, the former president of Harvard and an economist who served as Secretary of the Treasury during the Clinton Administration, told the protestors that he would respond to their comments if they could sit quietly until the Q&A portion of his talk, but no dice: they continued yelling that Summers was a “climate criminal” and chanting “Tax the rich!” 

These kinds of disruptions are common, unfortunately. 

On campus after campus, protestors — often, but not always, students — are employing what’s called the “heckler’s veto” to disrupt events and prevent speakers they dislike from speaking. In 2024, the Foundation for Individual Rights and Expression (FIRE) tracked 21 campus speeches, commencement speeches, or performances in which protestors caused so much ruckus that the events were suspended or canceled.

Here’s where the Stanford story gets interesting: in this case, the students didn’t take the disruption lying down. Nor did they side with the protestors and form a mob to heckle Summers off the stage. Instead, they condemned the protestors, yelling at them to “get off the stage” and “let [Summers] speak.”

These students were right to fight back. Shout downs like the one organized by Climate Defiance don’t actually hurt the speakers. Summers, as a famous economist and former president of Harvard, will probably find that his career is just fine after this latest interruption. It’s not like he’ll have to forfeit his speaking fee. The real victims of the shout down were the Stanford students themselves.

Summers was invited to speak as part of a series titled “Democracy and Disagreement,” in which scholars on opposite sides of certain hot-button topics meet to debate and to model civil disagreement. The protestors who interrupted Summers were primarily harming students, who showed up to the lecture on a Tuesday afternoon hoping to learn something from a respected economist and were instead treated to the childish antics of the protestors. Shout downs are an example of what Tim Urban calls “Idea Supremacy:” the notion that if the protestors don’t like what a certain speaker has to say, then no-one should be allowed to hear that speaker. They are inherently selfish.

The great free speech champion and former slave Frederick Douglass once said that, “To suppress free speech is a double wrong. It violates the rights of the hearer as well as those of the speaker.” He could have had the Climate Defiance disruption in mind when he spoke.

While shout downs like this are a common tactic, the fact that the students were willing to stand up for their right to hear Summers is an encouraging sign. In any such disruption on campus, the protestors are almost always a small minority. Students pay good money to attend university, along with a lot of time they could be spending working. Most students want that investment in time and energy to be repaid. They come to campus to learn. When these students stand up to the protestors, the protestors are left to scuttle off in defeat and lectures can go on.

The same Idea Supremacy animates campus disruptions, attempts to deplatform or disinvite speakers who have the wrong views, and cancellation mobs in the real world. In each case, a small number of ideologies tries to bully the silent majority into going along with their desires. When this majority refuses — when they instead stand up for their rights — they can change the culture of not just their campuses but also their communities, workplaces, and beyond.

When protestors try to disrupt an event, it’s essential that students speak up for their rights for another reason as well. 

Many protestors insist that what they’re doing is actually engaging in free speech. The argument goes that, in the same way that Summers has a right to speak to a lecture hall that invited him, they have the right to invade that lecture hall and yell over Summers.

In reality, the heckler’s veto is not an exercise of free speech. Preventing someone else from being heard is not engaging in the marketplace of ideas; it’s just bullying.

But making this distinction is essential, because these students are in their intellectually formative years. As Urban writes in What’s Our Problem?, “According to a comprehensive study, people are at their most politically and ideologically impressionable between their mid-teens and mid-20s — so what they’re taught in college can stick with them forever.” It’s not just that young people who become liberal or conservative in college tend to stay that way as they age. It’s also that their ideas about bedrock American values are shaped during this time. 

If no one pushes back on the idea that the heckler’s veto is just another form of free speech, then students are liable to leave campus thinking that it’s true. If these students think that shout downs and other forms of disruptive protest are in line with America’s august tradition of free speech, then they’re likely to come to one of two conclusions. First, that they should engage in shout downs themselves the next time someone speaks on a topic with which they disagree. Or second, that free speech is actually a bad idea because it creates too much chaos. 

Neither conclusion is a good one for our society.

So, three cheers for the Stanford students who wouldn’t let a band of illiberal protestors rob them of their rights without a fight. 

The greatest danger to free speech isn’t that our country will overturn the First Amendment; it’s that our culture will change to stop valuing free speech in the first place. As Greg Lukianoff, the president of FIRE, warns, “Free speech culture is more important than the First Amendment.… It’s what informs the First Amendment today — and it is what will decide if our current free speech protections will survive into the future.” 

Stanford students just did their part to preserve that culture.

Imagine that a longtime friend complains that you’ve repeatedly tracked mud into his house and threatens to trash your house in return. You endeavor to wipe your feet, perhaps even taking your shoes off altogether, yet the threats continue. Eventually, you have to question the friendship. This is where the US stands with Canada and Mexico, our closest trade partners, as the threat of tariffs continues to erode generations of economic goodwill. 

Despite both Canada and Mexico attempting to accede to US demands, they are now faced with renewed saber-rattling. While both countries will likely try to placate, it is becoming clear that both countries have begun questioning the role they want the US to play in their economies. 

Canada’s Trade Minister, Mary Ng, continues to pursue a “trade diversification strategy.” In an interview, she noted that she was recently in Europe and has plans to visit “Australia, Singapore, and Brunai” and is bringing “hundreds of Canadian businesses… with [her].” She’s even encouraging Canadian businesses to find sources for “[parts] or whatever it is that you need for your business” other than the United States, in countries “where Canada has a trade agreement.” Mexico, by comparison, has a new free trade deal with the European Union and President Sheinbaum has met with leaders from powerhouses like China and Japan. Both Canada and Mexico are also partners of the Trans-Pacific Partnership – which President Trump withdrew the US from in 2017 – which is looking to add as many as nine new members, including China and Taiwan. 

This is a massive shift in US international relations. 

For context, Canada sends over 75 percent of its exports to the US. Mexico, 84 percent. The US receives 29 percent of its imports from these two countries alone. Canada’s diversification strategy has been long in the making, but its intent has changed. Now, they are less focused on supplementing US trade, but to supplant it. Mexico’s efforts belie similar logic. Neither country wants to be held hostage by American whims. 

Tariffs have been sold to the American people as a means of boosting the US economy and as a panacea for virtually all our ills, from our grotesque national debt to our opioid crisis. Unfortunately, they stand to backfire spectacularly, not least the recent plunge in stock prices. Tariffs drive costs and uncertainty up for American businesses, particularly in manufacturing, which relies heavily on raw materials and intermediate goods imported for their production processes. This, in turn, reduces job growth and the number of jobs available in this important sector. The deleterious effects of this are already evident, with stock markets plunging immediately following their implementation. It is only a matter of time until the labor market catches up with the stock market.

Tariffs also raise prices for consumers, who are already beleaguered by high prices thanks to the high inflation following the pandemic. Higher prices and lower job prospects are not a recipe for economic success. Now, we’re seeing two of our major trading partners actively trying to do less business with the US overall. 

The economic damage of higher prices and reduced job growth can be reversed pretty easily. But the damage to trade relationships, like with friendships, can take years to rebuild and is often never quite the same. The Canadian (and Mexican) people have placed tremendous faith in the continuation of free trade between the three North American countries. That faith, as some have come to realize, may have been misplaced. As Justin Trudeau said, “Today the United States launched a trade war against Canada, their closest partner and ally, their closest friend.” The events of the last six weeks have already put a strain on the friendship between Canada and the US; Trudeau told reporters, “This is a time to hit back hard and to demonstrate that a fight with Canada will have no winners.” The same will be realized with Mexico, with President Sheibaum announcing retaliatory measures on Sunday. 

Once Canada and Mexico secure new trading partners, they will be less likely to come back in force with the first olive branch from the US. China stands ready to fill the gap left behind in both countries from reducing their trade with the US.

It’s time to put the hammer that is tariff policy to bed once and for all. Instead, we should be seeking bilateral reductions in overall trade restrictions where possible and unilateral reductions where they are not. Doing so would boost domestic manufacturing, lower prices for all Americans, and create new, viable jobs for all Americans – exactly what President Trump promised on the campaign trail.

The Consumer Financial Protection Bureau (CFPB) has undergone massive changes in the past month. Contrary to what many members of Congress and bureaucrats are saying, it’s great news. Reining in the CFPB means reducing uncertainty in the financial world from excessive regulation and costly regulatory agencies’ bloated budgets. 

Unfortunately, the measures have been stalled in court. Reducing the CFPB’s size and scope would greatly reduce a large amount of uncertainty in financial markets that stem from regulation. 

The CFPB: An Appetite for Power 

Since the CFPB began operating in July 2011, it has been eager to intervene in financial markets. QuantGov, which measures restrictions across federal agencies and industries, estimates that between 2012 and 2022 the CFPB increased its restrictions anywhere between 491-545 restrictions per year. The restrictions per year are shown in Figure 1. 

Figure 1: Cumulative Restrictions for the CFPB

The CFPB’s own website also boasts active enforcement. Figures 2 and 3 highlight the CFPB’s enforcement actions since 2012.  

Figure 2: CFPB Enforcement Actions by Year

While those numbers may appear modest, the CFPB has managed to get enforcement targets to shell out billions of dollars. These payouts come in the form of “consumer relief,” which is compensation paid directly to consumers and “civil penalties,” which are fines that the government issues for legal violations. These payments are shown in Figure 3. 

Figure 3: CFPB Penalties Issued by Type and Year

While that data may appear as government fighting for the everyman, the results of regulation and enforcement tell a different story.  

The CFPB has a long history of abuse of power. Hester Peirce (appointed SEC Commissioner in 2018) noted in 2017 that “business as usual” for the CFPB meant limiting consumer options, threatening privacy through its expansive credit card database, as well as finding ways around legal constraints (including basic due process by ignoring statutes of limitation). 

The CFPB’s eagerness for intervention means that those in the financial sector must always be looking over their shoulder. The threat of regulation, hanging like the Sword of Damocles over them, leaves providers of financial services hesitant to engage in commerce or work with various groups of Americans lest they come under attack. Furthermore, financial service providers must devote time, talent, and resources toward legal compliance that would have otherwise gone toward expanding financial services and finding ways to offer those services at a lower price. The value of all the forgone opportunities that resulted from the CFPB’s existence is difficult to quantify. 

As we outlined in a public comment to the CFPB and in a recent Reason article, the CFPB’s various regulations from payday lenders to mortgage servicing and “junk fees” inevitably result in one outcome: limiting consumer access to credit, especially for the poorest Americans. 

Nevertheless, the Bureau now seems adamant about regulating how medical debt is reported on credit reports. 

Where the CFPB Stands Now 

On January 20, 2025, President Trump issued an Executive Order (EO) freezing all regulations pending a review and approval by the respective agency head. This 60-day freeze halted a Consumer Financial Protection Bureau (CFPB) rule requiring medical debts to be removed from credit reports.  

On February 7, 2025, President Trump appointed Russell Vought to head the CFPB (who was also serving as the head of the Office of Management and Budget). Shortly after, Acting Director Vought announced on X that he notified the Federal Reserve that the CFPB will not take unappropriated funding from them. “This spigot, long contributing to CFPB’s unaccountability,” Vought commented, “is now being turned off.” That did not stop the CFPB from sending letters to various state legislatures urging policymakers to pass laws that enacted their desired policy wishes. As in years past, the CFPB sees constraints as obstacles to be circumvented, not rules to be followed. 

These actions, however, were halted by a federal judge, while the finalized rule prohibiting medical debt from appearing on credit reports was delayed until June by a different Federal Court.

President Trump has now nominated Jonathan McKernan as Director of the CFPB to replace Vought. It seems McKernan, if confirmed, would continue the work of reining in the agency. A key legal showdown began on March 3, as a federal judge began to hear arguments on whether the CFPB may resume its mandated activities—setting the stage for a pivotal ruling on the agency’s authority, obligations, and perhaps its very future. The trial is ongoing.

Imagine finishing high school and realizing that no matter what path you take — college, a job, or starting a business — your money doesn’t go as far as it should. Your car loan is more expensive, rent keeps rising, and groceries cost more monthly. If you go to college, tuition is higher; if you don’t, more of your paycheck disappears in taxes. This isn’t just bad luck — it’s the result of reckless government spending that fuels inflation, drives up interest rates, and makes it harder for everyone to get ahead.

In fiscal year 2023, federal funds to state and local governments totaled $1.1 trillion, nearly one-fifth of all federal spending and 4 percent of US GDP. This money doesn’t come free — it’s taken from taxpayers, borrowed from future generations, or printed by the Federal Reserve, creating inflation.

Even states that claim to be fiscally conservative are hooked on federal money. Texas took in $102 billion for its 2024-2025 budget, nearly one-third of its total budget. That means Texas, like all states that average 36 percent of their budget from federal funds, is highly tied to federal mandates for what it wants to do.

The biggest driver of this dependency is Medicaid, which received $616 billion in federal spending in 2023, over half of all federal funds to states. Many states expanded Medicaid with temporary federal funds, but when Washington inevitably pulls back, states will be forced to raise taxes, cut services, or both, burdening many families. The same pattern applies to federally backed education and transportation spending. 

The more states rely on Washington, the less control they have over their policies.

This isn’t just about wasteful spending — it directly hits American households. More deficit spending contributes to higher interest rates, making mortgages, student loans, and car payments more expensive. The Fed buying Treasury debt to keep interest rates lower by increasing the money supply creates inflation, forcing families to stretch their scarce budgets further. 

Every dollar the federal government spends on state programs is taken from the economy, where businesses and individuals could have put it to far more productive use. The ongoing budget fight in Washington makes one thing clear: states can’t count on federal funds forever. 

Through the Department of Government Efficiency (DOGE), President Trump and Elon Musk have started freezing wasteful grants and unnecessary spending — steps that should have happened long ago. Critics claim this is an overreach, but the real issue is decades of reckless spending leading to a $36 trillion national debt and a Congress unwilling to act.

The Keynesian idea that government spending fuels growth is a myth. Milton Friedman warned that spending is a cost, not a benefit. Every dollar Washington spends is taken from the productive private sector, where real wealth and innovation are created. More government spending crowds out private investment, reduces productivity, and leaves taxpayers with higher costs.

States that are the most dependent on federal aid — Louisiana, Alaska, and New Mexico, where over 50 percent of revenue to cover their budgets comes from Washington — also tend to have some of the weakest economies. The more states rely on federal funds, the less incentive they have to keep taxes low, cut regulations, and encourage private investment.

Trump’s spending freezes have upset politicians who depend on federal funds to prop up bloated budgets, but the real issue is that states allowed themselves to become dependent.

Excluding federal funds, state spending has grown by 61.1 percent from 2014 to 2023, far outpacing the 31 percent in compounded population growth plus inflation. But of course, much of that state spending increase is matched by as much, if not more, in federal funds, creating perverse incentives for states to spend more. But excluding federal funds from state spending over that decade helps to remove much of the increase in federal funds to states for those states that expanded Medicaid. Ultimately, had states kept their spending in check, they could have saved taxpayers $454 billion in 2023.

With Washington facing a growing debt crisis, states must act now to prepare for less federal funding. 

That starts with transparency — understanding exactly how much money comes from Washington, where it goes, and which programs will be at risk when federal dollars dry up. Then, states must rein in spending, eliminate inefficiencies, and take back control over education, healthcare, and transportation so they are not at the mercy of federal strings.

Some states are already moving in the right direction. 

Nearly a dozen — including Oklahoma, Louisiana, Iowa, Texas, and Florida — have launched a DOGE to expose waste and inefficiency. Oklahoma’s Division of Government Efficiency has already uncovered millions in unnecessary spending, providing accountability for spending with taxpayer money.

Long-term spending relief, however, requires Congress and state legislatures to act. While Trump and DOGE are taking steps, only Congress can make these cuts permanent. Without legislative action, future administrations could reverse spending freezes. Lawmakers who claim to be fiscal conservatives must prove it.

Some states have already shown that spending restraint works. Alaska, Colorado, North Dakota, Oklahoma, and Wyoming have kept their entire budget growth below inflation and population growth over the last decade, ensuring taxpayers aren’t overburdened. Others, like Louisiana, Massachusetts, and North Carolina, have slowed state spending growth below this key rate but remain too dependent on federal funds that grew more rapidly.

The Sustainable Budget Project by Americans for Tax Reform found that if governments had capped federal and state spending growth at population growth and inflation, taxpayers could have saved $2.5 trillion in 2023. That money could have been invested in businesses, used to create jobs, or saved for the future. Instead, excessive spending has made our lives more difficult.

Rising interest rates and national debt will eventually force Congress to reduce spending, leaving states with two painful choices: massive tax hikes or severe service cuts. There are no more excuses. Congress must spend less. To prepare for this inevitability, states must spend less, reject federal money with strings attached, and embrace free-market principles before it’s too late.

Federal Reserve officials have warned that the disinflation process would be uneven. The latest data from the Bureau of Economic Analysis (BEA) confirms as much. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at an annualized rate of 4.0 percent in January 2025, up from 3.6 percent in the prior month. PCEPI inflation has averaged 2.6 percent over the last six months and 2.5 percent over the last twelve months.

Core inflation, which excludes volatile food and energy prices, also picked up. Core PCEPI grew at an annualized rate of 3.5 percent in January 2025, up from 2.5 percent in the prior month.  PCEPI inflation has averaged 2.6 percent over the last six months and 2.6 percent over the last twelve months.

Figure 1. Headline and Core PCEPI Inflation, January 2019 – January 2024

The recent uptick in inflation should be evaluated in context. Many prices update each January, which marks the start of a new year. The BEA attempts to account for this by making seasonal adjustments—that is, smoothing the time series by reporting a bit less than measured inflation in January (when actual price increases tend to be larger) and a bit more inflation in other months (when actual price increases tend to be smaller). 

A simple example helps illustrate how seasonal adjustments work. Suppose all prices adjust once per year, in January. Suppose further that prices increase 2.0 percent each January and 0.0 percent every other month. Seasonally adjusting the corresponding price level series would result in a monthly inflation rate of nearly 0.2 percent—or, 2.0 percent annualized—even though the actual inflation rate in eleven of the twelve months is 0.0. Rather than jumping up 2 percent each January, the seasonally-adjusted price level would grow steadily across the year, with prices this year always 2 percent higher than they were twelve months earlier.

Similarly, a simple extension helps illustrate when seasonal adjustments do not work so well. Suppose, once again, that prices adjust once per year and that, in normal times, inflation averages 2 percent per year. Next, consider what the seasonally-adjusted series would look like in an abnormal year, when inflation is actually 6 percent. The seasonal adjustment moves roughly eleven twelfths of the usual 2 percent inflation from January to the other months, even though no actual price changes occur then. But it does not move any of the unusual inflation—the additional 4 percentage points in January.

Of course, reality is much more complicated than these simple examples. Some prices adjust many times per year, whereas others adjust just once or twice. And the trend rate of inflation is not known. It must be estimated based on the historical data. Still, at risk of oversimplifying, the BEA essentially accounts for the average price change for a typical month in light of the average price change for a typical year. This works well in normal times, when prices are growing more-or-less as usual. It does not work so well when prices are persistently growing faster than average, as has been the case over the last few years. 

Since the price increases across the year have been larger than usual over the last few years, the seasonal adjustments have generally removed too little in high-inflation months like January and added too little in the low-inflation months. The resulting seasonally-adjusted series is both more volatile than usual, though still less volatile than an unadjusted series would be. A better seasonal adjustment would spread some of the big January 2025 increase over the prior six months and subsequent six months, further reducing the volatility of the seasonally-adjusted series. Alas, we do not have a better seasonal adjustment. Instead, we must evaluate the data in light of the additional volatility. 

One way to look through the less-than-ideal seasonal adjustment is to look exclusively at the January data. Inflation averaged 6.1 percent in January 2022. It averaged 6.3 percent in January 2023; 5.2 percent in January 2024; and 4.0 percent in January 2025.

Another way is to look at twelve-month inflation rates. Over the twelve-month period ending in January 2022, the PCEPI grew 6.3 percent. It grew 5.5 percent over the twelve-month period ending January 2023; 2.6 percent over the twelve-month period ending January 2024; and 2.5 percent over the last twelve months.

Both approaches indicate inflation has fallen. Moreover, imperfect seasonal adjustments means the underlying—or, average—rate of inflation is probably less than the rate recorded in January. So long as twelve-month rates continue to fall, we should not be concerned about an inflation resurgence.

Lately, Donald Trump (and Elon Musk) have agreed to consider returning at least some of the money that DOGE saves to the American people. Estimates vary on how big of a check could be going to Americans and there is, of course, debate as to which Americans should get the money and, if so, how much money. Some reports indicate that it could be as much as $5,000.  Giving this to all 340 million people would cost $1.7 trillion. Restricting it to the 258 million adults in the US would cost $1.29 trillion. If instead we only gave these dividends to the 153.8 million taxpayers, it would cost $769 billion. All of these represent a great wodge of the $2 trillion that DOGE originally promised to save and that Musk is now walking back. 

This discussion highlights an important debate in the administration of government and the provision of civilized society. What is the role of and justification for taxation in society?

Two Contrasting Visions: Remittance versus Expropriation

From John Locke, we get the idea that a government is constituted by the people and that it derives its power from the consent of the governed. In this scheme, any and all income that is justly earned is owned fully and completely by the people who earnx.ced it. To the extent that taxation is legitimate, it must be done by the consent of the people being taxed. Any takings of justly earned income beyond this would be tantamount to expropriation and could be referred to as legalized plunder. Under this approach, the legitimate forms of taxation would be, as Oliver Wendell Holmes once wrote, “the price we pay for civilized society.” Here, citizens have an incentive to produce in order to provide not just for themselves, but also to provide the base from which (legitimate) taxes may be voluntarily remitted.

Less sanguinely, from Mancur Olson, we get the idea of government as a “stationary bandit.” Olson points out that “under anarchy, uncoordinated competitive theft by ‘roving bandits’ destroys the incentive to invest and produce, leaving little for either the population or the bandits.” Rather than rove around attempting to prey upon the people, some bandits decide to settle in an area and “[monopolize] and [rationalize] theft in the form of taxes.” The late, great Walter Williams summarized this view best, saying, “the difference between government and thievery is mostly a matter of legality.” 

For Olson, the stationary bandit was preferred to the roving bandit if only because it would decrease the amount of plunder. The stationary bandit would endeavor to provide “national defense” in order to keep its victims safe from the plunder of other, (roving) bandits. Doing so would preserve the incentive for people to invest in and produce the resources from which the stationary bandit then expropriates. 

Applications to Today

DOGE and President Trump have alleged that there is widespread “waste, fraud, and abuse” in federal spending. That tax dollars are going to support activities that are “ridiculous — and, in many cases, malicious — pet projects of entrenched bureaucrats.”

Insofar as there is truth to the claim that there is government waste, even if the specific examples cited turn out to be false, this spending would be viewed as illegitimate by Olson, certainly, but also by Locke. As such, the tax dollars spent on these would be expropriated from the citizens, not remitted by the citizens. It would seem clear that these dollars should be returned to the citizens, in much the same way that stolen property that is recovered is returned to its original owner or that an aggrieved party may seek recompense from the perpetrator.

Complicating this, however, is the simple fact that the federal government presently finds itself over $36 trillion in debt and with a planned deficit for this year of $1.9 trillion. National debt of this magnitude cannot be repaid overnight as it constitutes 133% of total US national income. Insofar as we plan to pay this off, it will have to come at least in large part by future generations of American people, many of which either have not reached voting age or have not even been born yet. It would seem manifestly unjust to foist the bill for the “sins of the past” on these people without their consent.

Trolley Problems and Public Finance

So now we are left with a quandary. Do we return the expropriated tax dollars to the people from which they have been unjustly collected? Or do we use any savings that DOGE collects to pay down the national debt and reduce unjustly confiscating future tax dollars from people who had no voice in the creation of the debt in the first place? 

Thinking in these terms, it is clear that we find ourselves within a version of Philippa Foot’s now-famous Trolley Problem. As it stands right now, the trolley is barreling toward future generations of taxpayers. If no action is taken, it is them who will suffer. On the other track is the current generation of taxpayers. Should the switch be flipped, it would be them who suffer. Making this even more complicated is the fact that it is the current generation of taxpayers who must decide whether to flip the switch. Given that inheritances exist, we can plainly see that parents are able to flip the switch when it is their children on the tracks. But does this extend from one generation (writ large) to another generation? 

The unfortunate reality is that someone must pay for the profligacy of decades of spendthrift politicians in Washington, DC. But the question of who must pay is an important one, and one that we need to be wrestling with.

What is the Federal Reserve’s job? The standard answer is to maintain full employment and stable prices. This is what economists and commentators mean when they talk about the “dual mandate.” But there’s a problem—as a matter of law, the Fed’s mandate has three parts, not two.

The Federal Reserve Reform Act of 1977 established the Fed’s objectives as we know them today. In addition to job promotion and price stability, the central bank is responsible for “moderate long-term interest rates.” It’s supposed to conduct monetary policy with all three goals in mind.

You almost never hear about the interest rate plank. There’s a tacit agreement among policymakers that this portion of the mandate is redundant. The Fed does all it can for interest rates when it achieves its employment and price stability goals.

As a matter of economic theory, this is a strong argument. Interest rates are prices for capital. These ultimately depend on the supply of and demand for loanable funds. We want markets to price capital such that the last additional amount supplied is just as valuable as the last additional amount demanded. This is a standard efficiency result from basic economics. Markets are good at pricing and valuation. Besides maintaining price stability, meaning a stable value for the monetary unit—prices are denominated in dollars, after all—there’s not much monetary policy can do to improve it.

But there’s a problem here. The law of the land requires the Fed to care about interest rates. Even if economists are right about the redundancy of the interest rate plank, nobody elected them to write the nation’s laws. You can’t substitute the judgment of a few macroeconomic experts for that of elected legislators without violating the democratic process.

Furthermore, the reasoning behind the alleged irrelevance of interest rates proves too much. The same arguments also imply the Fed shouldn’t care about employment! Everything we said about capital markets also applies to labor markets. Supply and demand for labor finds the right balance between additional benefits and costs of working. The Fed does all it can for workers by focusing on price stability. If we truly believe the interest rate plank is redundant, logic compels us to come to the same conclusion about the employment plank.

The Fed has just as much reason to start ignoring the employment plank as it has for ignoring the interest rate plank in recent decades. If the central bank announced it would henceforth interpret the employment and interest rate parts of its mandate as fully covered by the price stability part of its mandate, you can bet economists, public intellectuals, and policy experts would raise a stink. For some reason, everyone views promoting employment as more important than stabilizing interest rates. Something tells me this reflects political biases more than reasoned reflection.

Fortunately, there’s a way around this dilemma. We can improve Fed policymaking while also respecting basic democratic norms. The solution is to amend the Federal Reserve Act once more. The economists are, in fact, right about the irrelevance of the interest rate plank. They would also be right about the irrelevance of the employment plank if they would only follow their logic to its necessary conclusion. It’s time to end the capital-labor asymmetry by striking these parts of the Fed’s mandate. 

But economic theory, even good economic theory, does not deserve citizens’ obedience. Duly ratified law does. Hence, democratically accountable legislators should narrow the Fed’s goal to price stability only.

This shouldn’t be a hard sell, politically. We’re less than three years out from crippling inflation. Prices during the summer of 2022 were rising at almost 10 percent per year. Even now, Americans are hopping mad about high prices. Eggflation, anyone? While many of these prices reflect non-monetary factors, the overall level of prices is much higher than it would have been had the Fed not overreacted to COVID-19. Frankly, it’s an indictment of our elected representatives—especially the Republicans, who campaigned on this—that they haven’t already refocused the Fed on one of the few things it can control.

Central banking as a matter of law conflicts with central banking as a matter of policy. Resolving the tension is hopeless unless we both change the relevant statutes and stop selectively applying the economic way of thinking. Let’s fix both problems by making the Fed responsible for stable prices alone.

I hadn’t thought of Follies and Fallacies in Medicine for years, but it caught my eye at an auspicious time. The book, written by doctors Petr Skrabenk and James McCormick, opens with a story on what a British medical journal described as the latest trend in medicine: clinics injecting patients with horse blood and pig embryos to “boost people’s energy and restore virility.” 

The authors made it clear they saw these treatments as a modern version of snake oil, but the practice was quite lucrative. The clinical specialist, who drove a BMW and had recently purchased “a large house in a fashionable neighborhood,” was charging £1,500 a pop ($6,500 USD in 2024). 

“The history of medicine is full of similar and equally extraordinary events,” write Skrabenk and McCormick.

Their book, which was written in 1990, goes on to explore “why otherwise rational people” put their faith in bad science and junk medical procedures.  

COVID Madness, Five Years Later

We are approaching the five-year anniversary of the COVID-19 pandemic, a period that saw governments around the world shut down economies and embrace authoritarian policies in the name of public health and The Science. It was Hayek’s fatal conceit played out before our eyes. 

Economic hubris, bad science, and raw state power unleashed a period of madness. It wasn’t just that the state’s non-pharmaceutical interventions didn’t work. They often didn’t even make sense.

“Non-essential” businesses were closed, but liquor stores were left open. Politicians ignored their own orders. Masks were required in restaurants when you walked to your table, but could be removed once you were seated. Wrestlers were allowed to wrestle, but were prohibited from shaking hands. Children, who were all but impervious to the virus, were banned from playgrounds, even though there was no evidence of outdoor transmission. 

The list goes on. Many policies continued well into 2021, even though it had become clear they were damaging and ineffective (though they were temporarily suspended in May 2020 to accommodate social justice protesters). 

The damage of these policies will be felt for decades, and we know today the reason they were so ineffective: many of the government’s COVID policies weren’t even based on science. 

To offer but one example, consider “social distancing” — the rule that required people to stay six feet apart in public. Dr. Anthony Fauci, the architect of the US government’s COVID response, acknowledged to lawmakers in sworn testimony in 2024 that the guideline “sort of just appeared” without a solid scientific foundation.

In their book, written thirty years before the arrival of COVID-19, Skrabenk and McCormick identify a slew of fallacies that pollute the field of science. The authors aren’t talking about intentional deceit, fraud, or misinformation, but erroneous reasoning. 

One stood out to me above all others: The Fallacy of Authority.

‘It Must Be True, the Lancet Published It’

Many of the scientific fallacies the authors describe can be identified during the COVID pandemic, but it was the Fallacy of Authority that reigned supreme during the period. The authors describe it as the idea that something is true because it came from an authoritative source. 

“It must be true because I read it in the paper, saw it on television, the surgeon said so, the Lancet published it,” Skrabenk and McCormick write.

The fallacy is persistent in science and medicine because respect for authority underpins scientific inquiry and education. The authors explain that it’s customary for students, who memorize vast quantities of information, to fall pretty to the mistaken belief that what they are reading is “truth,” particularly when the source is authoritative. Challenging the status quo becomes difficult even for bright, independent-minded thinkers. 

This baked-in respect for authority helps explain why so many of the greatest scientific breakthroughs were initially met with skepticism. 

Skrabenk and McCormick point out that scientists initially sneered at William Harvey when he published his work on blood circulation. Hans Krebs and Enrico Fermi both won Nobel Prizes, but their research on citric acid cycles and beta-decay was first rejected by Nature. 

“There are good reasons for distrusting the opinion of authority, not only in medicine but in science proper,” Skrabenk and McCormick observed. 

The authors do not advocate intellectual anarchy. But their point about questioning science and those in authority was clear. 

 “We should be kind to all people, even those who are vested with authority,” they wrote, “but we must be ruthless in seeking and criticizing the evidence on which their beliefs are founded.”

One Fallacy to Rule Them All

Dr. Fauci saw things differently. When public blowback began to gain momentum in early 2021, Fauci responded with indignance. 

“Attacks on me, quite frankly, are attacks on science,” Fauci said. “All of the things I have spoken about, consistently, from the very beginning, have been fundamentally based on science.”

This statement was not true, as Fauci’s own statements later made clear. But even worse, Fauci was treating criticism of his policies as attacks on science. 

In a sense, Fauci was embracing the Fallacy of Authority, and it was a strategy adopted by others. 

CNN host Brian Stelter ran segments mocking people who did “their own research,” comparing them to QAnon conspiracy theorists. “Follow the science” became a popular rallying cry, a phrase that the Washington Post noted often simply meant “follow the scientists.” 

The mantra, which embodied the Fallacy of Authority, runs counter to the very ethos of science, which is not a person or a group of people 

Science is a process, the methodical study of the structure and behavior of the physical and natural world. 

“There isn’t a thing called ‘the science,’” Michael D. Gordin, a historian of science at Princeton, told the Post in a deep-dive story on the phrase. “There are multiple sciences with active disagreements with each other. Science isn’t static.”

Gordin is correct. During the pandemic, people on all sides of the COVID debate argued “The Science” was on their side. 

For example, the Food and Drug Administration said ivermectin, an antiparasitic drug often used to treat humans for tropical diseases, should not be used as a COVID treatment. Doctors across the country were prescribing the drug, but critics of the treatment were mocking it because ivermectin is also used on livestock.  

“You are not a horse. You are not a cow. Serious y’all. Stop It,” the FDA tweeted.

The tweet, which generated more than 106,000 likes before it was deleted, was a response to Joe Rogan, who had posted a video during his COVID recovery praising ivermectin. 

Yet those who took the off-label drug were also quick to claim the authority of science was on their side. 

“Even people who took a horse tranquilizer when they got COVID-19 were quick to note that the drug was created by a Nobel laureate,” Gordin told the Post. 

While this author has no opinion on the efficacy of ivermectin as a COVID treatment, it was the FDA who was forced to settle a lawsuit in 2024 over its ivermectin posts. 

The Purpose of Science

Five years later, it’s worth asking why the Fallacy of Authority exploded during the COVID years. The simplest answer, I think, is that everyone was arguing over public policy and everyone was seeking the best arguments. To make their case, people set out to find the most authoritative research that supported their views. 

Though this helps explain the phenomenon, it’s not the best answer, or at least not a complete one. A better explanation for the explosion of the Fallacy of Authority is the growing influence of authorities in science.

In the twenty-first century, we’re increasingly asking science to do something it’s not designed to do and is incapable of doing.  

The purpose of science inquiry. It’s a tool to help us understand the world in which we live, to expand human knowledge and explain natural phenomena. Giving orders does not fall within the realm of science. Indeed, as the economist Ludwig von Mises observed, science is woefully unequipped to tell us what we should do. 

“[T]here is no such thing as a scientific ought,” Mises wrote, echoing the philosopher David Hume. “Science is competent to establish what is.”

This view of science is not held by everyone, particularly the state.  During the pandemic, public health bureaucrats appeared as comfortable giving orders as making recommendations. 

This invites an important question: what moral authority grants one the right to give orders to others? 

The answer to this question has changed throughout history. Viking warlords were often given the power to command by their prowess in combat. The ancient Egyptians said their pharaohs were chosen by the gods. The moral authority of the modern bureaucratic state stems from The Science. 

This arrangement of relative authority serves not just those in public health, but those in the private sector who cooperate with them. Albert Bourla, the CEO of Pfizer, was recently asked why vaccine makers need liability shields if their products are safe and effective. 

“If the product is not safe and effective we’ll never get approval from the FDA,” Bourla answered. 

Bourla didn’t present data or cite a study. He didn’t need to. The FDA’s authority was enough. 

It was an answer that would have served just as well if the product he was offering (or mandating) was horse blood and pig embryos.