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November
17, 2006
Milton Friedman and the Economics of Empire
The
Road from Serfdom
By GREG GRANDIN
Milton Friedman had no idea that his
six-day trip to Chile in March 1975 would generate so much controversy.
He was invited to Santiago by a group of Chilean economists
who over the previous decades had been educated at the University
of Chicago, in a program set up by Friedman's colleague, Arnold
Harberger. Two years after the overthrow of Allende, with the
dictatorship unable to get inflation under control, the "Chicago
Boys" began to gain real influence in General Augusto Pinochet's
military government. They recommended the application of what
Friedman had already taken to call "shock treatment"
or a "shock program" immediately halting the
printing of money to finance the budget deficit, cutting state
spending twenty to twenty-five percent, laying off tens of thousands
of government workers, ending wage and price controls, privatizing
state industries, and deregulating capital markets. "Complete
free trade," Friedman advised.
Friedman and Harberger were
flown down to "help to sell" the plan to the military
junta, which despite its zealous defense of the abstraction of
free enterprise was partial to corporatism and the maintenance
of a large state sector. Friedman gave a series of lectures
and met with Pinochet for 45 minutes, where the general "indicated
very little indeed about his own or the government's feeling."
Although he noted that the dictator, responsible for the torture
of tens of thousands of Chileans, seemed "sympathetically
attracted to the idea of a shock treatment."
Friedman returned home to a firestorm of protest, aggravated
by his celebrity as a Newsweek columnist and ongoing revelations
about Washington's and corporate America's involvement in the
overthrow of Allende. Not only had Nixon, the CIA, and ITT,
along with other companies, plotted to destabilize Allende's
"democratic road to socialism," but now a renowned
University of Chicago economist, whose promotion of the wonders
of the free market was heavily subsidized by corporations such
as Bechtel, Pepsico, Getty, Pfizer, General Motors, W.R. Grace,
and Firestone, was advising the dictator who overthrew him on
how to complete the counterrevolution at the cost of skyrocketing
unemployment among Chile's poor. The New York Times identified
Friedman as the "guiding light of the junta's economic policy,"
while columnist Anthony Lewis asked: if "pure Chicago economic
theory can be carried out in Chile only at the price of repression,
should its authors feel some responsibility?" At his university, the Spartacus
Youth League pledged to "drive Friedman off campus through
protest and exposure," while the student government, replicating
their own version of the Church Commission hearings that was
just then investigating US crimes in Chile, convened a "Commission
of Inquiry on the Friedman/Harberger Issue." Everywhere
in the press the name Friedman was paired with the adjectives
"draconian" and "shock," with small but persistent
protests dogging the professor at many of his public appearances.
In letters to various editors
and detractors, Friedman downplayed the extent of his involvement
in Chile, fingering Harberger as more directly involved in the
mentoring of Chilean economists. While defensive, he nevertheless
reveled in the controversy and the frisson of being ushered
into speaking engagements via kitchens and back doors to avoid
demonstrators. He enjoyed exposing the double standard of "liberal
McCarthyism," pointing out that he was never criticized
for giving similar advice to Red China, the Soviet Union or Yugoslavia.
In recounting an episode when a man was dragged out of the Nobel
award ceremony after shouting "down with capitalism, freedom
for Chile," Friedman delighted in noting that the protest
backfired, resulting in his receiving "twice as long an
ovation" than any other laureate.
Friedman defended his relationship
with Pinochet by saying that if Allende had been allowed to remain
in office Chileans would have suffered "the elimination
of thousands and perhaps mass starvation . . . torture and unjust
imprisonment." But the elimination of thousands, mass
hunger, torture and unjust imprisonment were what was
taking place in Chile exactly at the moment the Chicago economist
was defending his protégé. Allende's downfall
came because he refused to betray Chile's long democratic tradition
and invoke martial law, yet Friedman nevertheless insisted that
the military junta offered "more room for individual initiative
and for a private sphere of life" and thus a greater "chance
of a return to a democratic society." It was pure boilerplate,
but it did give Friedman a chance to rehearse his understanding
of the relationship between capitalism and freedom.
Critics of both Pinochet and
Friedman took Chile as proof positive that the kind of free-market
absolutism advocated by the Chicago School was only possible
through repression. So Friedman countered by redefining the
meaning of freedom. Contrary to the prevailing post-WWII belief
that political liberty was dependent on some form of mild social
leveling, he insisted that "economic freedom is an essential
requisite for political freedom." More than his monetarist
theorems, this equation of "capitalism and freedom"
was his greatest contribution to the rehabilitation of conservatism
in the 1970s. Where pre-New Deal conservatives positioned themselves
in defense of social hierarchy, privilege, and order, post-WWII
conservatives instead celebrated the free market as a venue of
creativity and liberty. Such a formulation today stands at
the heart of the conservative movement, having been accepted
as commonsense by mainline politicians and opinion makers. It
is likewise enshrined in Bush's National Security Strategy, which
mentions "economic freedom" more than twice as many
times as it does "political freedom."
While he was in Chile Friedman
gave a speech titled "The Fragility of Freedom" where
he described the "role in the destruction of a free society
that was played by the emergence of the welfare state."
Chile's present difficulties, he argued, "were due almost
entirely to the forty-year trend toward collectivism, socialism
and the welfare state . . . a course that would lead to coercion
rather than freedom." The Pinochet regime, he argued, represented
a turning point in a protracted campaign, a tearing off of democracy's
false husks to reach true freedom's inner core. "The problem
is not of recent origin," Friedman wrote in a follow-up
letter to Pinochet, but "arises from trends toward socialism
that started forty years ago, and reached their logical
and terrible climax in the Allende regime." He praised
the general for putting Chile back on the "right track"
with the "many measures you have already taken to reverse
this trend."
Friedman understood the struggle
to be a long one, and indeed some of the first recruits for the
battle of Chile were conscripted decades earlier. With financial
funding from the US government's Point Four foreign aid program
and the Rockefeller Foundation, the University of Chicago's Department
of Economics set up scholarship programs in the mid-1950s with
Chile's Catholic and public universities. About one hundred
select students between 1957 and 1970 received close, hands-on
training, first in an apprenticeship program in Chile and then
in post-graduate work in Chicago. In principle, Friedman and
his colleagues opposed the kind of developmental largesse that
funded the exchange program as a market distortion, yet they
took the cash to finance their department's graduate program.
But they also had a more idealistic purpose.
Starting in the 1950s, Latin
America, particularly the southern cone countries of Argentina,
Chile, and Brazil, had become a laboratory for developmentalist
economics. Social scientists, such as the Argentine Raúl
Prebisch from his position as head of the UN's Economic Commission
on Latin America, expanded Keynesianism after John Maynard
Keynes, who elaborated the dominant post-WWII economic framework
that envisioned an active role for the state in the workings
of the market -- beyond its focus on managing countervailing
cycles of inflation and unemployment to question the terms of
international trade. Chronic inflation, according to Prebisch
and other Latin American economists, was understood not to be
a reflex of any given country's irresponsible monetary system
but a symptom of deep structural inequalities that divided the
global economy between the developed and the undeveloped world.
Volatile commodity prices and capital investment reinforced
first world advantage and third world disadvantage. Economists
and politicians from across the political spectrum accepted the
need for state planning, regulation, and intervention. Such
ideas not only drove the economic policies of developing nations,
but echoed throughout the corridors and conference rooms of the
UN and the World Bank, as well as in the non-aligned movement's
1973 call for a New International Economic Order.
It was the Chicago School's
vision of hell, the New Deal writ large across the world stage.
These ideas "fell like a bomb" on those who had long
stood against Keynesianism at home only now to see its authority
spread globally. The Chilean scholarship program was intended
to counter such a vision. "University of Chile economists
have been followers of Keynes and Prebisch more than of Marx,"
wrote former University of Chicago president and State Department
director of overseas education programs William Benton, and "the
Chicago influence" will "introduce a third basic viewpoint,
that of contemporary 'market economics.'"
Students returned to Chile
not just with a well-rounded education in classical economics
but with a burning dedication to carry the faith to benighted
lands. They purged the economics departments of their universities
of developmentalists and began to set up free-market institutes
and think tanks the Center for Social and Economic Studies,
for example, and the Foundation for Liberty and Development
funded, as their counterparts in the US were, by corporate money.
They understood their mission in continental terms, committed,
as Chicago alum Ernesto Fontaine put it, "to expand throughout
Latin America, confronting the ideological positions which prevented
freedom and perpetuated poverty and backwardness."
The program, which brought
up students from universities in Argentina as well, is an example
of the erratic nature of both public and private US diplomacy,
conforming as it does to competing power interests within American
society. At the same time that Kennedy was promoting Alliance
for Progress reform capitalism, he was training and funding the
men and institutions that would constitute the continent's dense
network of death squads. At the same time that Chase Manhattan,
Chemical, Manufacturers Hanover, and Morgan Guaranty were promoting,
through the establishment of the Trilateral Commission, a more
conciliatory economic policy in the third world, they were cutting
off credit to Chile, making, in accordance with Nixon's directive,
its economy "scream." And at the same time that every
American president from Truman to Nixon was embracing Keynesianism,
the University of Chicago's Economics Department, with financial
support from the US government, had turned itself into free-market
madrassa that indoctrinated a generation of Latin American economists
to spearhead an international capitalist insurgency.
Throughout the turbulent 1960s
and 1970s, though, the revolution seemed to be forever deferred.
In the late 1960s, the Chicago Boys had drawn up the platform
of Allende's nationalist opponent in the 1970 election, which
included many of the proposals that eventually would be implemented
under Pinochet. But Allende won, so Chile had to wait. In the
meantime, the military junta in Brazil, which took power in 1964,
had invited Friedman in 1973 down for advice, which it took for
awhile. A severe recession and skyrocketing unemployment followed.
Friedman pronounced this first application of "shock therapy"
an "economic miracle." But the generals, wisely it
seems, demurred, returning to its state-directed program of industrialization
that, while failing to curb inflation, did lower unemployment
and lay the foundations for Brazil's current economic dominance
of Latin America. Richard Nixon too, early in his first term,
showed promise, but then he raised tariffs, introduced wage and
price controls and, with an eye to the 1972 election, declared
himself a Keynesian and opened up the money spout. Nixon was
an "enormous disappointment," reflected Friedman.
That left Pinochet, not the
most reputable of characters but willing to go the distance.
Chile became, according to Business Week, a "laboratory
experiment" for taming inflation through monetary control,
carrying out, said Barrons, the "most important modifications
implemented in the developing world in recent times." American
economists may have been writing "treatises" on the
"way the world should work, but it is another country that
is putting it into effect."
A month after Friedman's visit,
the Chilean junta announced that inflation would be stopped "at
any cost." The regime cut government spending twenty-seven
percent, practically shuttered the national mint, and set fire
to bundles of escudos. The state divested from the banking
system and deregulated finance, including interest rates. It
slashed import tariffs, freed prices on over 2000 products, and
removed restrictions against foreign investments. Pinochet
pulled Chile out of a number of alliances with neighboring countries
intended to promote regional industrialization, turning his country
into a gateway for the introduction of cheap goods into Latin
America. Tens of thousands of public workers lost their jobs
as the government auctioned off, in what amounted to a spectacular
transfer of wealth to the private sector, over four hundred state
industries. Multinationals were not only granted the right to
repatriate one hundred percent of their profits, but were given
guaranteed exchange rates to help them do so. In order to build
investor confidence, the escudo was fixed to the dollar. Within
four years, nearly thirty percent of all property expropriated
not just under Allende but under a previous Alliance for Progress
land reform was returned to previous owners. New laws treated
labor like any other "free" commodity, sweeping away
four decades of progressive union legislation. Health care was
privatized, as was the public pension fund.
GNP plummeted thirteen percent,
industrial production fell 28 percent, and purchasing power collapsed
to forty percent of its 1970 level. One national business after
another went bankrupt. Unemployment soared.
Yet by 1978 the economy rebounded,
expanding thirty-two percent between 1978 and 1981. Though salary
levels remained close to twenty percent below what they were
a decade previously, per capita income began to climb again.
Perhaps even a better indicator of progress, torture and extrajudicial
executions began to taper off. With hindsight, however, it is
now clear that the Chicago economists, despite the credit they
received for three years of economic growth, had set Chile on
the road to near collapse. The rebound of the economy was a
function of the liberalization of the financial system and massive
foreign investment. That investment, it turns out, led to a
speculative binge, monopolization of the banking system, and
heavy borrowing. The deluge of foreign capital did allow the
fixed exchange rate to be maintained for a short period. But
sharp increases in private debt rising from $2 billion
in 1978 to over $14 billion in 1982 -- put unsustainable pressure
on Chile's currency. Pegged as it was to the appreciating US
dollar, the value of the escudo was kept artificially high, leading
to a flood of cheap imports. While consumers took advantage
of liberalized credit to purchase TVs, cars, and other high-ticket
items, savings shrank, debt increased, exports fell, and the
trade deficit ballooned.
In 1982 things fell apart.
Copper prices plummeted, accelerating Chile's balance of trade
deficit. GDP plunged fifteen percent, while industrial production
rapidly contracted. Bankruptcies tripled and unemployment hit
30 percent. Despite his pledge to hold firm, Pinochet devalued
the escudo, devastating poor Chileans who had either availed
themselves to liberalized credit to borrow in dollars or who
held their savings in escudos. The Central Bank lost forty-five
percent of its reserves, while the private banking system collapsed.
The crisis forced the state, dusting off laws still on the books
from the Allende period, to take over nearly seventy percent
of the banking system and reimpose controls on finance, industry,
prices and wages. Turning to the IMF for a bailout, Pinochet
extended a public guarantee to repay foreign creditors and banks.
But before the crisis of 1982,
there were the golden years between 1978 and 1981. Just as the
international left flocked to Chile during the Allende period,
under Pinochet the country became a mecca for the free-market
right. Economists, political scientists, and journalists came
to witness the "miracle" first hand, holding up Chile
as a model to be implemented throughout the world. Representatives
from European and American banks poured into Santiago, paying
tribute to Pinochet by restoring credit that was denied the heretic
Allende. The World Bank and the Inter-American Development Bank
extolled Chile as a paragon of responsibility, advancing it 46
loans between 1976 and 1986 for over $3.1 billion.
In addition to money men, right-wing
activists traveled to Chile in a show of solidarity with the
Pinochet regime. Publisher of the National Review William
Rusher, along with other cadres who eventually coalesced around
Reagan's 1976 and 1980 bids for the Republican nomination, organized
the American-Chilean Council, a solidarity committee to counter
critical press coverage in the US of Pinochet. "I was unable
to find a single opponent of the regime in Chile," Rusher
wrote after a 1978 pilgrimage, "who believes the Chilean
government engages" in torture. As to the "interim
human discomfort" caused by radical free-market policies,
Rusher believed that "a certain amount of deprivation today,
in the interest of a far healthier society tomorrow, is neither
unendurable nor necessarily reprehensible."
Friedrich von Hayek, the Austrian
émigré and University of Chicago professor whose
1944 Road to Serfdom dared to suggest that state planning
would produce not "freedom and prosperity" but "bondage
and misery," visited Pinochet's Chile a number of times.
He was so impressed that he held a meeting of his famed Société
Mont Pélérin there. He even recommended Chile
to Thatcher as a model to complete her free-market revolution.
The Prime Minister, at the nadir of Chile's 1982 financial collapse,
agreed that Chile represented a "remarkable success"
but believed that Britain's "democratic institutions and
the need for a high degree of consent" make "some of
the measures" taken by Pinochet "quite unacceptable."
Like Friedman, Hayek glimpsed
in Pinochet the avatar of true freedom, who would rule as a dictator
only for a "transitional period," only as long as needed
to reverse decades of state regulation. "My personal preference,"
he told a Chilean interviewer, "leans toward a liberal dictatorship
rather than toward a democratic government devoid of liberalism."
In a letter to the London Times he defended the junta,
reporting that he had "not been able to find a single person
even in much maligned Chile who did not agree that personal freedom
was much greater under Pinochet than it had been under Allende."
Of course, the thousands executed and tens of thousands tortured
by Pinochet's regime weren't talking.
Hayek's University of Chicago
colleague Milton Friedman got the grief, but it was Hayek who
served as the true inspiration for Chile's capitalist crusaders.
It was Hayek who depicted Allende's regime as a way station
between Chile's postwar welfare state and a hypothetical totalitarian
future. Accordingly, the Junta justified its terror as needed
not only to prevent Chile from turning into a Stalinist gulag
but to sweep away fifty years of tariffs, subsidies, capital
controls, labor legislation, and social welfare provisions --
a "half century of errors," according to finance minister
Sergio De Castro, that was leading Chile down its own road to
serfdom.
"To us, it was a revolution,"
said government economist Miguel Kast, an Opus Dei member and
follower of both Hayek and American Enterprise Institute theologian
Michael Novak. The Chicago economists had set out to affect,
radically and immediately, a "foundational" conversion
of Chilean society, to obliterate its "pseudo-democracy"
(prior to 1973, Chile enjoyed one of the most durable constitutional
democracies in the Americas).
Where Friedman made allusions
to the superiority of economic freedom over political freedom
in his defense of Pinochet, the Chicago group institutionalized
such a hierarchy in a 1980 constitution named after Hayek's 1960
treatise The Constitution of Liberty. The new charter
enshrined economic liberty and political authoritarianism as
complementary qualities. They justified the need of a strong
executive such as Pinochet not only to bring about a profound
transformation of society but to maintain it until there was
a "change in Chilean mentality." Chileans had long
been "educated in weakness," said the president of
the Central Bank, and a strong hand was needed in order to "educate
them in strength." The market itself would provide tutoring:
When asked about the social consequences of the high bankruptcy
rate that resulted from the shock therapy, Admiral José
Toribio Merino replied that "such is the jungle of . .
. economic life. A jungle of savage beasts, where he who can
kill the one next to him, kills him. That is reality."
But before such a savage nirvana of pure competition and risk
could be attained, a dictatorship was needed to force Chileans
to accept the values of consumerism, individualism, and passive
rather than participatory democracy. "Democracy is not
an end in itself," said Pinochet in a 1979 speech written
by two of Friedman's disciples, but a conduit to a truly "free
society" that protected absolute economic freedom. Friedman
hedged on the relationship between capitalism and dictatorship,
but his former students were consistent: "A person's actual
freedom," said Finance Minister de Castro, "can only
be ensured through an authoritarian regime that exercises power
by implementing equal rules for everyone." "Public
opinion," he admitted, "was very much against [us],
so we needed a strong personality to maintain the policy."
Jeane Kirkpatrick was among
those who traveled to Chile to pay respect to the pioneer, lauding
Pinochet for his economic initiatives. "The Chilean economy
is a great success," the ambassador said, "everyone
knows it, or they should know it." She was dispatched by
Reagan shortly after his 1981 inauguration to "normalize
completely [Washington's] relations with Chile in order to work
together in a pleasant way," including the removal of economic
and arms sanctions and the revocation of Carter's "discriminatory"
human rights policy. Such pleasantries, though, didn't include
meeting with the relatives of the disappeared, commenting on
the recent deportation of leading opposition figures, or holding
Pinochet responsible for the 1976 car bomb execution of Orlando
Letelier, Allende's ambassador to the US, in Washington's Dupont
Circle -- all issues Kirkpatrick insisted would be resolved with
"quiet diplomacy."
Setting aside the struggles
surrounding religion, race, and sexuality that give American
politics its unique edge, it was in Chile where the New Right
first executed its agenda of defining democracy in terms of economic
freedom and restoring the power of the executive branch. Under
Pinochet's firm hand, the country, according to prominent Chicago
graduate Cristián Larroulet, became a "pioneer in
the world trend toward forms of government based on a free social
order." Its privatized pension system, for example, is
today held up as a model for the transformation of Social Security,
with Bush having received advice from Chilean economist José
Piñera, also a Chicago student, on how to do so in 1997.
Pinochet "felt he was making history," said Piñera,
"he wanted to be ahead of both Reagan and Thatcher."
Friedman too saw himself in
the vanguard. "In every generation," he is quoted
in his flattering New York Times obituary, which spares
just a sentence on his role in Chile, "there's got to be
somebody who goes the whole way, and that's why I believe as
I do."
And trailblazer both men were,
harbinger of a brave and merciless new world. But if Pinochet's
revolution was to spread throughout Latin America and elsewhere,
it first had to take hold in the United States. And even as
the dictator was "torturing people so prices could be free,"
as Uruguayan writer Eduardo Galeano once mordantly observed,
the insurgency that would come to unite behind Ronald Reagan
was gathering steam.
Today, Pinochet is under house
arrest for his brand of "shock therapy," and Friedman
is dead. But the world they helped usher in survives, in increasingly
grotesque form. What was considered extreme in Chile in 1975
has now become the norm in the US today: a society where the
market defines the totality of human fulfillment, and a government
that tortures in the name of freedom.
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