Milei’s Fences
G.K. Chesterton, the English writer, is famous for an aphorism known as “Chesterton’s Fence” (here described by Farnam Street):
“Do not remove a fence until you know why it was put up in the first place.”
The rationale is simple. We should be wary of triggering unintended consequences from what Farnam Street refers to as second-order and third-order effects.
When we see a fence and we want to take it down because we don’t see the utility of its continued existence, it is straightforward to understand the immediate consequences of its removal. Getting rid of it means that there will no longer be an obstacle where previously there was one.
Second-order thinking involves reflecting deeply on what the effect of eliminating the obstacle might be. Let’s say that this is a fence between two adjacent grazing fields owned by different people. Cattle from one farm could easily start to feed on land that belongs to someone else.
Third-order thinking attempts to extrapolate what the impact of straying cattle might be. It could mean that the cattle end up poisoned if the availability of the second field leads them to graze on clover planted there. The fence might be in place to avoid such an outcome. The owner of the cattle might sue the owner of the other field for the economic losses associated with poisoned cattle (fourth-order). The owner of the clover field may be forced to file for bankruptcy protection (fifth order). It’s a stylized example, but you get the picture.
Most people don’t think about these higher-order implications. Had they known that the second-order and third-order (and fourth-order and fifth-order) effects of their act would be or could be negative, they may have left the fence untouched.
But it’s too easy to say, “What were they thinking when they put up this fence?” and to conclude that it was a stupid idea in the first place because the first-order consequence doesn’t appear to be that bad.
As Farnam Street points out,
“Chesterton also alluded to the all-too-common belief that previous generations were bumbling fools, stumbling around, constructing fences wherever they fancied. Should we fail to respect their judgement and not try to understand it, we run the risk of creating new, unexpected problems. People do not do things for no reason. We’re all lazy at heart. We don’t like to waste time and resources on useless fences. Not understanding something does not mean it must be pointless.”
This suggests a conservative approach in which change is infrequent and tentative. We make small changes to observe the impact on the broader system. If the impact is positive (or not negative), we might widen the aperture and slightly increase the size of the change, all the while testing to see if anything breaks.
There is a built-up stock of wisdom and experience capitalized in myriad prior decisions that we reverse at our own peril.
The inverse of the Chesterton rule is the Scream Test.
“The Scream Test is simple – remove it and wait for the screams. If someone screams, put it back.”
For example, we might elect for redundancy out of an abundance of caution.
“Old servers that no longer deliver services are a prime candidate, and the most common recipient of the Scream Test. What happens is that the business owner of an application does not really care what happens to the old systems when they are replaced with a newer version (or product), but at the same time, they can’t make a decision if the old system needs to be retained “just in case”. Those old systems are still being backed up, still being patched – to stop them being a risk vector for other parts of the network. As the server team / infrastructure group have a focus to ensure maximum uptime for all systems, they won’t switch something off until they are requested to do so.”
Even when things don’t serve us well, such as a bad habit, ending them can lead to negative outcomes if we replace the original bad habit with a worse one. Farnam Street describes the phenomenon.
“All of us, at one point or another, make some attempt to change a habit to improve our lives. If you’re engaging in a bad habit, it’s admirable to try to eliminate it—except part of why many attempts to do so fail is that bad habits do not appear out of nowhere. No one wakes up one day and decides they want to start smoking or drinking every night or watching television until the early hours of the morning. Bad habits generally evolve to serve an unfulfilled need: connection, comfort, distraction, take your pick.
“Attempting to remove the habit and leave everything else untouched does not eliminate the need and can simply lead to a replacement habit that might be just as harmful or even worse. Because of this, more successful approaches often involve replacing a bad habit with a good, benign, or less harmful one—or dealing with the underlying need. In other words, that fence went up for a reason, and it can’t come down without something either taking its place or removing the need for it to be there in the first place.”
This is not to suggest that change is bad. There are plenty of reasons why change can be good. The status quo is expensive. Or it might be laden with complexity that turns out to be counter-productive. We can envisage a scenario in which other conditions have evolved to the point that the fence is no longer necessary or one in which the fence blocks us from making progress.
All of this makes Javier Milei’s experiment in Argentina interesting.
The newly elected President announced bold steps to reform institutions within days of his inauguration. Here’s the FT:
“Argentina’s libertarian president Javier Milei unveiled a sweeping emergency decree on Wednesday night to rapidly deregulate the country’s economy, sparking protests and setting the stage for a defining political battle.
“The decree included 300 measures, striking down major regulations covering Argentina’s housing rental market, export customs arrangements, land ownership, food retailers and more. It also modifies rules for the airline, healthcare, pharmaceuticals and tourism sectors to encourage competition.
“Employee severance packages will be cut and the trial period for new employees extended, while companies will no longer pay fines for failing to register workers.
“The new rules, which enter into force on December 29, also change the legal statuses of the country’s state-owned companies, which include an airline, media companies and energy group YPF, allowing them to be privatised.”
Milei’s bet is that much of the bureaucracy and regulation is now (or has been) destructive. The economic cost in terms of stagnant growth, rampant inflation, and underemployment is, in his view, a tax imposed upon the people of Argentina to support a public sector and the Peronist political party. Under this view, it is an expression of callous greed, one meant to elevate the interests of a narrow group at the expense of the overall population.
It’s difficult to imagine a more comprehensive set of reforms. To say that his moves are unprecedented is not an inappropriate cliché but an accurate reflection of the uniqueness of his policy.
This comes from a man who faces significant political opposition in the legislature from the Peronists who were responsible for the untrammeled growth of the bureaucratic state Milei descries at every opportunity.
There will be winners. There will be losers.
Like many democratically elected leaders, Milei has chosen to implement this policy by executive order. While this may make it easier for him to get the ball rolling, the political risk of doing this without legislative approval may introduce significant frictions over and above the popular protests he inspires. His policy may not be sustainable, if he can even implement it, at all.
“Opposition politicians accused the president of issuing the new mandates via decree in order to bypass votes on them in congress, where his La Libertad Avanza coalition holds just 15 per cent of seats in the lower house and less than 10 per cent of the senate.
“Under Argentina’s constitution, presidents can issue “decrees of urgency and necessity” on most areas of policy — except tax, penal and electoral matters and rules for political parties — when “exceptional circumstances make it impossible to follow ordinary procedures”. Decrees stay in place until both houses of congress vote to strike them down.
“Margarita Stolbizer, a legislator for the non-Peronist centre-left party Gen, said the decree was “abusive and unconstitutional”. “The legislature will have to analyse every part of this deeply,” she added.”
Here’s Euronews with more on the political risk:
“The opposition — recently ousted from government — has slammed Milei for the decree and sees it as a way to bypass his lack of a majority in Congress.
“Milei's Libertad Avanza party, which is only two years old, has only 40 of the 257 seats in the lower house, and seven of 72 in the Senate.”
To counter large-scale protests that have erupted in Buenos Aires, Milei is forcing the organizing groups to pay for the associated security costs.
“Organisers of a protest against the economic reforms of Argentina's new government will have to cover policing costs, the new government says.
“Security costs for the demonstration reached 60m pesos (£59,000; $75,000) and the "bill [would] be sent to the social movements", a spokesman said.
“Thousands took to the streets of Buenos Aires this week to protest against the policies of new President Javier Milei.”
Without irony, opponents took to X to descry what they called Milei’s “fascism” despite his moves having the effect of removing massive economic and commercial power from the hands of the government.
So, we have the Scream Test results back. Based upon who is screaming and who is not, we have a sense that the worm has turned in Argentine politics. The forgotten men and women who have suffered through dirigiste economic distortions have thrown their lot behind the man with the unkempt hair, giving him what he perceives to be a mandate for radical change. It sounds like the kind of root disruption that only the IMF could coerce a country such as Greece into putting into place. The remarkable thing here is that they are doing it themselves. This is an endogenous phenomenon. Conditions have reached a point of intolerable pain. Desperation suggests no other imaginable path to improved welfare.
If his opponents in the legislature manage to defeat his plan, he can use this as ammunition in the next Congressional elections to obtain a broader writ for change. If he manages to bully his way through, then he will own whatever happens, good or bad. We will have the mother of all tests of Chesterton’s fence.
If nothing significant breaks and he does manage to turn around the Argentine economy, subduing inflation and igniting growth, then Milei will inspire others all over the world to cut bureaucracy and regulation not in incremental steps but in quantum jumps.
Grab your popcorn.