Imagine a scenario where the federal government decreed how many dollars could be acquired. Foreign companies wouldn’t know for sure when, or even if, their profits would be repatriated. People would need special government authorization to invest abroad or acquire dollars. Foreign investment would stagnate, and dollars would appear on the black market at inflated prices.

This Orwellian and dystopian scenario for any American citizen is the reality for Argentinians since 2011, when President Cristina Fernández de Kirchner introduced currency controls known as the cepo cambiario. The measure was a response to the growing capital flight, the steep decline in international reserves, and pressure on the Argentine peso. In practice, it was a restriction on access to dollars and one of the greatest exchange rate distortions in the modern world.

During this period, the Argentine government did what governments are highly likely to do: create a problem and then create an even bigger one to try to solve it. Kirchner’s administration, deeply interventionist, initiated a cycle of nationalizations, price controls, and policies that logically undermined any potential for growth. Argentina no longer offered an attractive environment for investment.

Citizens’ trust also naturally faded, even institutions like the National Institute of Statistics and Census (INDEC) were accused of manipulating the truth about inflation data in an apparent attempt to preserve the government’s official narrative.

As is natural, Argentines began trading in their pesos for dollars as a form of protection, leading to a collapse of the Central Bank’s dollar reserves. This phenomenon initiated the government’s decision to fix the exchange rate, rather than letting the peso float against the dollar, a policy that generated significant pressure on the reserves.  Desperate, the government introduced the cepo, which involved bureaucratic controls over imports, foreign currency purchases, or the ability to repatriate profits.

The cepo became a permanent fixture in Argentina, present through one presidency after another. Even when Center-Right President Macri temporarily eliminated it, he reintroduced it after three years, due to the deterioration of international reserves, budget deficits, rising inflation, and the loss of confidence in the markets, which pressured the exchange rate and the banking system. His successor, Alberto Fernández, reinforced currency controls, turning personal access to dollars into an absurd bureaucratic and economic process, but above all, an intolerable attack on economic freedom, which is ultimately inseparable from individual freedom.

In practice, the cepo meant the Central Bank sold dollars at an official rate far below the free market rate. Until recently, it sold dollars for 400 pesos, while the parallel market, the “blue dollar,” sold them for around 1,000 pesos. This created a distortion and an obvious incentive for arbitrage.

If the Central Bank had enough reserves to meet all demand at the official rate, the market would naturally adjust, but the reserves were exhausted. In this situation, the Argentine state had only two options: either devalue the peso by raising the official exchange rate or ration dollars, restricting who could buy and how much, thus maintaining the cepo.

In recent years, Argentina has done both: devaluing the currency and maintaining exchange controls.

Milei’s victory represented both an unprecedented and radical shift from a society with strong intervention to a classical liberal approach. Naturally, Javier Milei promised to eliminate the cepo.

Eliminating the cepo, however has not been as immediate as some of his ideological supporters would like. Figures like Gabriel Zanotti and Larry White, linked to the Austrian school, have criticized what they consider an excess of gradualism.

Milei, however, had reason to be cautious. He feared that the Central Bank’s fragile finances and high peso inflation could trigger a bank run. As a result, he preserved most cepo controls, recognizing that the shift from an interventionist model to a liberal one had to be gradual.

On Monday, Milei’s long game came to an end when the administration announced it was eliminating the cepo. The announcement came on the heels of agreements that saw Argentina strengthen reserves through deals with the International Monetary Fund, China (a $5 billion swap), and other international institutions, amounting to about $28 billion. This allowed for the elimination of the cepo for individuals and the implementation of a floating exchange rate regime, with a band of 1,000 to 1,400 pesos per dollar.  

Through patience, Milei appears to have escaped Argentina’s currency trap. This is no small feat. 

Milei inherited a macroeconomic situation far worse than that of his predecessors, one that demanded a phased-in approach despite the ideological pressure. Before eliminating the cepo, Milei needed to devalue the peso, fix the Central Bank liability and money emission scheme, enact deregulations, and slash government spending, or he would have had the same miserable fate as the former President Macri. Only once reserves were sufficient to prevent a bank run could the currency controls be lifted. 

It’s also important to bear in mind that Milei governs with a fragile and fragmented parliamentary base. The President of Argentina faced the challenge of balancing ideological coherence with institutional responsibility and the tough, but necessary, realities of political negotiation. 

Milei’s success is a reminder that gradualism is not incompatible with institutional responsibility. From a careful handling of these forces, the path to economic freedom will emerge not as a rhetorical ideal, but as the only credible path to lasting prosperity and stability. 

Milei’s plight is only necessary after the country, once considered one of the richest in the world, fell into deep economic instability, poverty, and decadence, a warning to Americans. Wealth is created; it is not guaranteed, and can be destroyed by bad economic policies.  

A trade war derived from protectionism, excessive spending, and mismanagement of the money supply are all paths to the same fate as Argentina.

Victor David Hansen, a noted military historian turned prolific pro-Trump commentator, said, on the Megyn Kelly Show, he “can’t think of a tariff that caused a major recession or depression.”

“[T]hey keep talking about tariffs, tariffs, tariffs, tariffs, recession, depression,” Hansen exclaimed. “I can’t think of a tariff that caused a major recession or depression. It didn’t cause it [in] 2008 — that was Wall Street.”

Regarding the recession of 2007-2008, I don’t know any economist who says that recession of or the subsequent hard times was caused by tariffs. Denying what no economist asserts is a cheap debater’s trick.

As to what was the main cause of that recession, it wasn’t the left-wing and populist bogeyman of Wall Street as Hansen asserts, although Wall Street contributed to that recession by inventing complex mortgage-backed securities.

The main cause of the recession of 2007-2008 was the promotion of home ownership by the federal government. The government (a) reduced down payments for FHA guaranteed-loans to zero, (b) doubled the amount of the government guarantee, (c) relaxed verification of income and employment history, (d) was permissive with regard to cash-out refinancing, and (e) maintained low interest rates and allowed the money supply and credit to increase faster than the long-run growth rate of the economy.

The housing bubble set into motion by the promotion of home-ownership by the government eventually burst, as it had to.

Returning to Hansen, “Anti-Trump corporate media and their pundits … cite the Smoot-Hawley Tariff Act of 1930 as having caused the Great Depression of 1929 – despite the fact the depression started prior to the Act being implemented.”

The only economist I know that says that the (main or initial) cause of the Great Depression was the Smoot-Hawley Tariff is Jude Wanniski (in his 1978 book, The Way the World Works). All the others who include the Smoot-Hawley Tariff in their analysis of the Great Depression say the tariff made the recession that followed the Stock Market Crash of October 1929 worse, adding to its depth and duration.

Wanniski says that the Stock Market Crash coincided with certain actions in the Senate concerning the Smoot-Hawley Tariff. The House had passed a tariff bill in May 1929, but the Senate debated the bill until the next year. Furthermore, support for a tariff bill was problematic in the Senate. Passage in the Senate was therefore crucial and dependent on deal-making and such. The final bill only passed in the Senate in March 1930 on a vote of 44 to 42. Thus, as Hansen says, the effective day of the tariff came after the Stock Market Crash.

But, as pointed out by Wanniski, the key to passage in the Senate was certain actions coinciding with the Stock Market Crash. On October 22, 1929, the Washington Times headlined “Senate coalition confident of rewriting tariff bill.” And, on October 23, 1929, “Bloc resumes tariff war.” (Here, “bloc” refers to the coalition of Senators promoting the tariff bill.) This news item concerns additional Senators joining in the coalition in return for higher tariffs on goods produced in their home states.

Then, on October 24, 1929, the Washington Times featured the front page headline “Stocks’ Crash Gets Worse.” The problem with Wanniski’s argument is that there was no mention of the tariff bill in this front-page article. Nor was there any mention of the tariff bill on the financial pages of that newspaper.

Surveying commentary from October to December 1929 in the Commercial and Financial Chronicle, none of the prominent economists of that time mentioned the tariff bill as a cause of the Stock Market Crash. Irving Fisher, for example, mentioned “unstable credit.” Indeed, economists generally did not anticipate a long or particularly severe recession. The Cleveland Trust investment advisory merely said that 1930 would have a poor start but would finish well. Guaranty Trust said the fall of inflated prices might be helpful.

Nor did the petition of the American Economic Association urging President Hoover to veto the tariff bill include on its list of probable consequences a long and severe recession. While tariffs might disrupt business, they are generally neutral with respect to jobs. Tariffs don’t increase or decrease the number of jobs; they shift jobs from employment in which countries have their comparative advantage to other other employment. Tariffs affect the productivity of jobs, not the number of jobs.

The petition was prescient with respect to the consequences it forewarned. The tariff would hurt our farm regions as agricultural products were a major export. There followed the dust bowl of the 1930s, and bankruptcies of numerous farms and rural banks.

The tariff would also hurt debtor nations that needed to export to earn the funds with which to repay their debts. Although not named in the petition, Germany was the main debtor nation of the world at that time (due to the Treaty of Versailles). Default and repudiation by Germany, and the collapse of world trade and finance, contributed both to the ensuing economic hard times and the rise of radical politics in the world.

As to why the Stock Market Crash was followed by the Great Depression, as opposed to being followed by a merely ordinary recession, following Milton Friedman, most economists say because the Federal Reserve allowed the money supply to collapse after the bank panics of November 1930-January 1931 and afterward.

The Smoot-Hawley Tariff, along with increases in ordinary taxes and the regulation of business were, thus, other contributors to the depth and duration of the Great Depression.

Again, in saying that economists say the Smoot-Hawley Tariff was the cause of the Great Depression, Hansen is misrepresenting economists. With a single exception, economists don’t say the Smoot-Hawley Tariff was the cause of the Great Depression. Those economists that include the tariff in their analysis of that troubled time generally say it made the recession worse.

Isaiah Berlin and Friedrich Hayek were both knights of classical liberalism in the twentieth century — an age dominated by statism. Scholarly work has often focused on the differences in their views on liberty. Their contrasting definitions of liberty are significant for anyone interested in liberal theory. In a famous 1958 lecture, Berlin distinguished between positive and negative liberty. Negative liberty, in his view, is the absence of obstacles to human action, whereas positive liberty is the freedom to act on one’s will and pursue one’s goals. Hayek, on the other hand, defined liberty as the absence of arbitrary coercion and “independence of the arbitrary will of another.” They also differed in their views on the importance of economic freedom. For example, Berlin, in his letters, criticized Hayek for placing too much emphasis on economic freedom. 

Despite these differences, however, they shared a common definition of what constitutes totalitarianism.

Where These Two Meet

What is the root of communism, fascism, or, more broadly, any modern totalitarian ideology? This is the question on which Hayek and Berlin, two giants of classical liberalism, agreed. This shared insight is so crucial that it merits emphasis — the very reason for writing this piece.

Berlin, in his article Democracy, Communism and the Individual (PDF), argues that the root of communism lies in “the belief that all questions, including those of morals and politics, can be answered with absolute certainty, like those of science and mathematics, by correct use of reason or correct observation of nature.” Anyone familiar with Hayek’s critique of the abuse of reason will notice the similarity. In The Counter-Revolution of Science, Hayek discusses the origins of scientistic hubris. In the second part of the book, he addresses the root of the ideologies that dominated the twentieth century and brought civilization to the brink of collapse. 

Hayek echoes Berlin’s concerns, writing: “Any general refusal to accept existing moral rules merely because their expediency has not been rationally demonstrated … is to destroy one of the roots of our civilization.”

The belief that rules should be rational is important, but assuming that society can be reconstructed based purely on rationally derived principles is the root of totalitarianism. The constructivist desire to remake society based on logic, while disregarding traditions and rules that have evolved through an organic process, often leads to unintended consequences beyond the planners’ comprehension. This skepticism toward social engineering is where Hayek and Berlin converge.

Fighting Against the Engineers of the Human Soul

Berlin and Hayek lived in a time when the temptation to organize society was popular among intellectuals — from visions of a “deliberately organized society” aimed at improving human conditions through “superior knowledge” to Marxist fantasies of ending capitalist “anarchy of production” and achieving a rational economic order. At that time, defending a society in which free individuals pursued their own goals, rather than those imposed by the state or nation, seemed irrational.

But history remembers the contrarians. 

Christopher Hitchens, in Letters to a Young Contrarian, describes what makes a great intellectual: “Great men are most frequently not honored in their own time or country.”. Few fit this description better than Hayek and Berlin, two champions of classical liberalism who resisted the urge to engineer human society — or, worse, in Stalin’s terminology, to engineer the human soul.

Joshua Cherniss, in his work on Berlin, argues that Berlin traced the intellectual roots of elite-driven social engineering back to Auguste Comte and Henri Saint-Simon. Interestingly, Hayek made a similar argument in The Counter-Revolution of Science. Both thinkers saw the social physics of Comte and the positivism of Saint-Simon as laying the foundation for modern socialism. In their perspective, the attempt to apply the methods of natural sciences to human society reflected the naïve utopianism of French intellectuals. To appreciate the gravity of their argument, one must grasp the distinction between the conscious direction of society and spontaneous order.

The Conscious Direction of Society

Hayek warned against the assumption that “processes which are consciously directed are necessarily superior to any spontaneous process,” calling it an “unfounded superstition.” This insight aligns with the Scottish Enlightenment view of institutions. Thinkers like Adam Ferguson and Adam Smith emphasized that many institutions are not the product of conscious human design, but rather of human action.

One might initially question why society should not be rationally planned and social outcomes designed. The answer lies in the nature of human society: it is not a technical problem to be engineered, but a complex, organic system that continuously adapts and generates new knowledge. Unlike machines, society consists of millions of subjective minds interacting in unpredictable ways. The crucial task is not to dictate outcomes, but to allow for the free discovery of new possibilities. The limits of human knowledge, coupled with the tacit and subjective nature of information, make the conscious direction of society impossible. When planners confront this impossibility, they often resort to coercion to impose their preferred outcomes. The result has been unthinkable violence and cruelty in pursuit of human perfection. 

Liberalism and the Pursuit of Happiness

The root of fascism, communism, and all totalitarian ideologies lies in the naïve belief that there is only one correct way to live and that intellectuals can determine it with the certainty of natural sciences. Liberalism, by contrast, does not prescribe a singular way of life and this is its strength. It enables individuals with diverse beliefs, goals, and ambitions to coexist. This principle is embodied in the Declaration of Independence, which proclaims the “pursuit of happiness” — a pursuit meant for individuals to discover, not for the state to dictate. This is the core belief of liberalism.

Last month, the new Federal Trade Commission chairman Andrew Ferguson announced a new task force aimed at investigating behavior that harms workers. Although much of the focus seemed like a retread from previous chair Lina Khan, a renewed scrutiny of occupational licensing is welcome news.

Occupational licensing directly affects more than one in five workers, but costs all of us in terms of less choice, higher prices, and reduced service innovation. By making it a crime for aspiring workers to enter a new profession without completing state-mandated minimum levels of education and training (nearly always established by existing professionals without rigorously considering consumer safety or welfare), consumers pay the price of this artificial reduction in service provider supply.

In addition to these significant costs borne by both aspiring workers and service consumers, occupational licensing also restricts mobility from state to state. Unlike driver’s licenses, which typically transfer easily when US citizens move to a new state, occupational licenses typically do not transfer. Nurses, cosmetologists, librarians, architects, therapists, landscapers, and millions of other professionals will be unable to work their new home state unless they complete additional training, pass new exams, and pay required fees. Research by Janna Johnson and Morris Kleiner finds clear evidence that licensed workers in occupations with state-specific requirements are seven percent less likely to move than their peers.

Policy Solutions

Addressing this friction has been a priority of administrations going back to President Obama, who deserves credit for bringing renewed attention to this often-overlooked issue. How can state policymakers fix this barrier to mobility and full employment?

The best approach is simply eliminating unnecessary licensing. While necessary to some extent, licensing in the US today goes too far. Licensing is very costly to consumers and aspiring workers and should only be used as a last resort and to prevent serious harms. If a state uniquely licenses an occupation, the license should be eliminated. Although it was laughable that Louisiana required florists to have state licenses, the law had real consequences for real human beings. Louisiana rightly eliminated florist licensing last year, but remains one of only a handful of states to license interior designers. Licensing seems an awfully heavy-handed regulatory approach for, say, the hairstyling industry. Where is the proof that more than a thousand hours of training is necessary to cut and style hair?

States should conduct regular and independent sunrise and sunset reviews of occupational licensing. States should place the burden of proof on professional groups that are lobbying for costly and burdensome new licensing laws, or to retain existing laws. Licensing should only be considered if there is real and substantial harm that cannot be prevented in any other way other than licensing. More often than not, other regulatory approaches will solve any concerns. Take the beauty industry. If cleanliness is a concern, simply require professionals to complete a short training on cleanliness, and perform random inspections of establishments. Market mechanisms are also very effective: providers of poor quality service will not be in business for very long.

If licensing is deemed to be absolutely necessary, then the next best approach is universal recognition. Recognition is a unilateral legislative action by a state. Some states simply accept another state’s license without the typical bureaucratic hurdles. Most states today already have some version of this universal licensing recognition, and several more are pursuing similar legislation.

Compacts: a Wolf in Sheep’s Garb

The worst and least desirable approach of addressing this issue is an interstate compact. Although they were writing about metropolitan areas and not individual states, this approach might have also been described by Vincent Ostrom and his coauthors as “gargantua.” In other words, let’s solve the problems created by too many bureaucracies, by adding a new layer of bureaucracy.

Here is how an interstate compact works. A new quasi-government entity is created — an interstate compact commission. Participating states must pass model legislation. It is a large, multilateral mess that purportedly seeks to address the mobility problem one occupation at a time. All of this is overseen by the professional association, who has all of the wrong incentives when considering the welfare of consumers or aspiring workers.

If compacts are examined carefully, they are not really designed to address the friction workers encounter when they move from state to state. A quick reading of how the nurse licensure compact works, for example, makes clear that when nurses move from state to state they still have to apply for licensure by endorsement. Newer compacts are just bad policy. Take the physical therapist licensing compact, requiring applicants to pay a separate fee for each state in which they obtain compact privileges. Even worse, the massage therapist licensing compact that mandates massage therapists complete 625 hours of education and training in total to utilize compact privileges. Most states currently require that massage therapists complete 500 hours of education and training. How are these silly provisions helping workers? I fail to see how all of the cost of new bureaucracy is justified by the small benefits workers may receive from compacts.

As the new FTC task force takes shape, here’s hoping that some sanity prevails in state licensing reform. Eliminating unnecessary licensing should always be the top priority. If licensing is deemed to be necessary, universal recognition is the best approach for easing the friction workers encounter when they move from state to state. Compacts have almost nothing to do with enhancing worker mobility. They are a very costly and overly bureaucratic means of allowing workers to obtain licenses in multiple states. Simply allow states to address this issue directly, rather than providing even more power to professional associations to dictate and enforce national licensing standards.

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The division of labor depends upon the extent of the market, but the extent of the market also depends upon the division of labor. The division of labor is limited not merely by the size of the population but by the size of the market, and the size of the market is itself a function of the division of labor. The process is cumulative and self-reinforcing.

–Allyn Young, “Increasing Returns and Economic Progress” 1928

Imagine you’re a T-shirt producer.  You make clothing for your town’s local boutique and work from a garage. You have a basic sewing machine. You cut fabric by hand. You might even use your kitchen scale to weigh packages. It’s labor-intensive, but manageable. And you can stop at any time. 

But now imagine you’re making T-shirts for a global retailer. Tens of thousands of units. Sold in dozens of countries. That garage and home sewing machine no longer cut it. 

You lease a warehouse. You install industrial cutters and multi-head embroidery equipment. You set up automated folding and tagging systems. You purchase the most advanced design software and hire a small team of creatives. You don’t box shirts by hand — you contract with a fulfillment center.

Suddenly, you’re no longer just “making T-shirts.” You’ve become a node in a vast, global production and exchange network. Your operation — its warehouse, machinery, and specialized tools — only makes economic sense at scale. It is predicated on the expectation that you will serve thousands of customers far beyond your local area. This kind of large-scale, specialized production lowers, rather than raises, the cost of each shirt. In the words of Adam Smith, “the division of labor is limited by the extent of the market.” The more shirts you produce, the more you — and your trading partners — can specialize in specific tasks. In turn, this specialization drives down average production costs. As the market expands, deeper specialization yields further cost reductions. Economists call this dynamic “increasing returns to scale” — as output grows, per-unit costs decline. Not just for you, but for everyone connected to this network, including the end buyer of t-shirts. 

But here’s the kicker: the entire system rests on entrepreneurial expectations — that tomorrow will resemble today. That you will remain tapped into the network of exchange. That sales volumes will continue long enough to pay off your specialized capital investments. Your factory lease, your custom machinery and software, your supplier relationships, your shipping contracts — they all depend on the expectation that you will have access to global markets such that you can keep making and selling shirts at scale.  

Now imagine that some politician in Washington declares — for one reason or another — “we’re shutting down trade.” Tariffs spike. Quotas tighten. Overnight, you find yourself severed from the global network that your business was built to serve. Suppliers withdraw. Buyers cancel. Contracts unravel as partners back away from the new, unpredictably high prices. And there’s no going back to the garage — it’s far too late for that. Your business isn’t a side hustle; it’s a full-scale operation, purpose-built for high-volume production, distribution, and exchange… not handcrafted batches sold at local farmer’s markets. 

Running specialized machines for a handful of local buyers wrecks your margins. Per-unit costs skyrocket. The sunk costs remain, but the global network that justified them is gone. You’re left with infrastructure built for a world of massive integration that no longer exists. It’s like owning a tractor when all you need is a shovel, or running a commercial kitchen to pour a bowl of cereal.  

So, now you face a choice. 

You can’t sell enough T-shirts to cover the cost of your existing capital. But those buildings and machines can’t easily be repurposed, either. They are highly specialized; built for a specific kind of production at a specific scale. 

What to do? 

You could try to sell the equipment — but who would buy? Firms that once might have bought from you to expand their operations are facing the same retreat. Their market has contracted, too. You could let the machines sit, hoping the policy reverses and global trade recovers. But every day they gather dust and bleed losses. Payments don’t simply halt. The creditors will eventually come knocking.  

You might repurpose the warehouse, auction off assets, or scale down and rebuild — but these are costly fallback strategies, not recovery plans. No matter what, you lose.  

And this loss is not confined to just your business. The whole world shares in this loss of productive potential. Those machines, in the right context, could have created real economic value for countless others: meaningful jobs, lower prices, greater variety, etc. But this utility wasn’t intrinsic to the gears and needles — it was contingent upon their place within the global division of labor. The operation holds value only so long as it remains situated within a vast network of exchange.  

Across industries, firms of all kinds face the same dilemma. From logistics hubs to component suppliers, from small manufacturers to global firms, businesses built for scale are finding that their plans no longer cohere in this new world where the scope of exchange has abruptly contracted. 

This is why trade commands so much economic attention. It’s not simply the movement of goods across borders; it’s a system of interdependent plans, capital commitments, and coordinated expectations — each contingent on the health of the network as a whole.  

When trade expands, it enables specialization and scale. Firms make investments, accordingly, building and acquiring capital that only make sense amidst a large network. 

But when the extent of the market contracts, the system doesn’t simply take a brief pause. It begins a process of self-reconfiguration. Its components adjust. Like a muscle deprived of use, where tissues and cells begin to atrophy. The body physically changes and loses strength. When movement resumes, recovery takes time — and the muscle is seldom as strong as it once was. 

Like our bodies, economic atrophy is not ephemeral. Nor is it easily reversed. Entrepreneurs adapt to a contracting trade network by investing in capital better suited to smaller-scale production. If disruption seems temporary, they might hold, picking up where they left off once trade networks re-open. But any prolonged uncertainty forces adaptation. New capital investments — fitted to narrower markets — anchor firms to a reduced capacity of output, as such investments must then be amortized over some length of time. Reinvestment in large-scale capital lags behind policy change, especially when that policy is uncertain. This lag is most damaging in long-horizon ventures (like aged wine or offshore drilling) where economic viability hinges on stable, long-run expectations. 

As scale retreats, efficiency falls. Capital that was once finely-tuned to global integration is retired, repurposed, or scrapped. Thus, if and when trade openness is restored, the system may no longer produce as cheaply — or as abundantly — as it had prior to the restrictive policies.  

The damage done by Trump’s “Liberation Day” tariffs, then, is not some transient dip in output or a blip in prices. It is a structural downgrade in our capacity to create. Trade is not a tap to be turned on and off, a light switch we can flip at will. It is a path-dependent architecture, built slowly over time by enabling entrepreneurs to integrate themselves into the global economic ecosystem. Once dismantled, the cost-reducing forces that global trade enabled — investment, specialization, and the accumulation of knowledge — do not simply resume from where they left off. They must be rebuilt from a diminished base, slowly and often at considerable cost to those who once benefited from, and flourished within, the extent of the market.