Javier Milei and Demian Reidel · July 2026
Minimum Viable Scale
Extinction and Escape under Increasing Returns
Working Paper · 30 pages. An earlier version was in the Davos 2026 address. Reidel called it the theoretical scaffolding behind the program that is supposed to pull Argentina out of a long stagnation.
JEL C61, C62, C63, D24, E13, O41
The question
Can an economy be too small to survive?
Constant-returns textbooks take absolute scale out of the problem. If labor, capital and production can all be scaled together, a small economy is just a large economy written smaller. Milei and Reidel refuse that invariance.
Give the planner increasing returns and a hard ceiling on labor, and size becomes a theorem. Some capital stocks cannot maintain themselves against depreciation. Some labor capacities can keep capital physically and still cannot deliver the Euler return. Some starting points can reach high scale — but only if middle stagnation and a downward exit are dominated.
The paper is certified theory, not a calibrated forecast. The economies it proves things about are stylized proof-of-concept environments. What it claims, it claims as inequalities that can be re-checked in exact arithmetic. What it does not claim: that Argentina has been fitted to those primitives. The mapping to policy is the authors’ own, made public with the working paper in July 2026.
The reversal
Scarcity used to correct itself. Here it does not.
In a constant-returns world the fewer the machines, the higher their marginal product, and accumulation follows. Under increasing returns with gross complementarity the correction fails at low scale. Capital and labor are productive only together.
Machines without operators produce little. Operators working with a near-empty capital stock add little more. At low capital the marginal product is low precisely where capital is scarce. Scarcity reinforces itself instead of curing itself. The rest of the paper flows from that reversal.
The planner maximizes discounted log utility in consumption and leisure, subject to a production function that is homogeneous of degree greater than one and a hard ceiling on labor. Nobody works infinitely. That bound is what makes absolute size a number instead of a ratio.
The last regulation is not priced in points of GDP. It is priced in whether the economy still exists.
Three notions of scale
Physical, marginal, global. They are not the same object.
01
Physical floor
Maintenance · L̄ min
The least labor capacity at which some capital stock can be kept against depreciation. Below it, every feasible path of capital goes to zero. Scarcity does not correct itself: machines without operators, and operators without machines, produce too little to replace what wears out.
02
Euler floor
Stationarity · marginal return
The least capacity at which the return required by discounting and depreciation is even attainable. Necessary for an interior stationary allocation — not sufficient. A country can keep the lights on and still have no interior rest point worth staying at.
03
Global selection
Escape · high path
From which starting capital does a planner choose the high-scale path rather than middle stagnation or a downward exit? This is the dynamic question. Static viability does not settle it. The paper proves high selection with Bellman barriers, not with a local Euler equation.
In the certified CES family the sustainable set is an interval whose endpoints are geometric-mean conjugates about labor capacity: the extinction threshold times the sustainability ceiling equals L̄ squared. Raise the floor and you lower the ceiling. The two boundaries are reflections of one another.
A map of the demonstration economy
Four regions. Only one is a proof of escape.
Extinction
K below κ ≈ 0.018
Every feasible path of capital goes to zero. The lights go out by arithmetic, not by mood.
Unclassified
(κ, 0.1)
Physically viable. The certificate is silent. The paper does not pretend this band is settled.
Certified high
[0.099, 50]
Every optimal path reaches high scale and stays. Proved as a finite list of inequalities, not guessed from a simulation.
Ceiling
above ≈ 42.7
Even at full labor, capital cannot be maintained. The upper part of the high set is transient.
- Extinction κ
- 0.018
- Steady state
- 5.06
- Golden rule
- 6.92
- Ceiling
- 42.65
Demonstration primitives: β = δ = 0.7, labor ceiling 0.88, productivity near 10. A second certificate is built at annual discounting and depreciation. Both are proof-of-concept environments, not a fit of Argentina.
Two forces
What pushes a country under the floor.
Labor capacity L̄
Culture of work
Labor is bounded. Nobody works infinitely, and a society that will not mobilize effort has an empty sustainable set. The paper does not write a novel about culture. It writes what happens when the labor ceiling falls through the physical floor: no capital stock can be maintained. That is why the cultural battle is, in this model, a survival variable.
Regulation as τA
The wedge
A productivity wedge — a tax, a permit, a destroyed property right — scales both floors as (1−τA) to a negative power. Every wedge condemns a band of previously viable capital to certain extinction. Beyond an explicit critical wedge, no initial condition survives. Near constant returns the critical wedge can be a few percent. The last regulation is not priced in points of GDP. It is priced in whether the economy still exists.
The last percent
Near constant returns, a small wedge is not small.
Scale both floors by (1−τA) to the power −1/(θ−1). When θ sits close to one, that exponent is large. Table 2 of the paper makes the arithmetic brutal. The certified family itself is at θ = 2, far from the floor — collapse is not the live channel there. Losing the high-scale certificate is.
+22.3%
1% wedge, θ = 1.05
Both floors rise
+179%
5% wedge, θ = 1.05
Both floors rise
3.4%
Critical wedge
Twice the labor floor
τ*
Total collapse
Vanishes as θ → 1
Collapse is not a risk. Below the physical floor it is a theorem.
The authors are careful about over-reading. Leaving a certified interval is loss of guarantee, not proven collapse. The model does not claim that any actual economy sits near its floor — locating that is the step the paper does not take. Three statements stay separate: wedges move the closed-form boundaries; inside the certified region high selection is proved; collapse happens by crossing the physical floor, not merely by stepping outside a certificate.
Applied in Argentina
The scaffolding, not the slogan.
Reidel’s sentence on publication day: this is the theoretical scaffolding behind the ideas meant to pull Argentina out of stagnation. The cultural battle and deregulation are not ornaments. In the model they decide which side of the threshold a society lives on.
Deregulation
Remove wedges
Each wedge raises the extinction threshold and lowers the ceiling. The Ministry of Deregulation is, in this language, a ministry of increasing returns: stop forcing the economy into the mold of perfect competition, which is the lamp post the key is not under.
Property rights
Keep A usable
Increasing returns live on appropriation of the fruit of scale. Destroy the right of property and you do not merely redistribute — you kill the returns that make takeoff possible. Milei’s line at Davos: politicians should stop bothering the people who are making a better world.
Fiscal surplus
Accumulate through the band
Saving is how capital crosses the unclassified interval between extinction and high selection. A government that spends the seed corn keeps the country on the wrong side of κ. The surplus is not an aesthetic. It is the accumulation identity.
The cultural battle
Hold L̄ above the floor
If the social valuation of work falls far enough, the sustainable set is empty no matter the capital stock. Celebrating effort is not branding. In the model it is the parameter that decides whether any economy exists at all.
The authors
An economist in office. A physicist at the blackboard.
President of Argentina
Javier Milei
Libertarian economist. In office since 10 December 2023. The 2024 book Capitalismo, socialismo y la trampa neoclásica named the habit this paper refuses: looking for the key under the lamp post because that is where the light is. Davos 2026 heard an earlier version of the argument — the pin factory as the original increasing return, artificial intelligence as its twenty-first-century form.
Physicist and co-author
Demian Reidel
Trained at Instituto Balseiro, with graduate work in economics at Chicago and Harvard. Head of the presidential advisory council in the first stretch of the administration. On publication day he called the paper the theoretical scaffolding behind the ideas meant to pull Argentina out of a long stagnation.
Method
Why they will not look under the lamp post.
Decreasing-returns microeconomics is taught because it is easy to solve. Increasing returns produce thresholds, traps, and destinies that depend on the starting point. Milei named that habit the neoclassical trap, in Capitalismo, socialismo y la trampa neoclásica (2024): looking for the key under the lamp post, because that is where the light is. The paper changes the model instead of changing the country to fit it.
The technical route is a Bellman barrier: a bounded function that dominates every path that stays in the middle, plus explicit high-scale policies that beat every downward exit. A first-passage argument reduces unrestricted selection to four finite families of inequalities, checked in exact rational arithmetic. Construction (value iteration) is untrusted. Verification is the proof.
An earlier version supplied the spine of the Davos 2026 address: the pin factory as the original increasing return, artificial intelligence as its twenty-first-century form, and the warning that regulating toward perfect competition kills the source of growth.
Milei, J. and Reidel, D. (2026). Minimum Viable Scale: Extinction and Escape under Increasing Returns. Working paper. The page restates the public thesis and the authors’ own mapping to policy. It is not a referee report.