an Interview with Michael Hudson on Chile

In acknowledging the recent thirtieth anniversary of the US-sponsored coup that brought to General Augosto Pinochet to power in Chile, a number of articles and opinion pieces have appeared. The Nation recently cast the incident in somewhat sentimental terms. Such efforts to turn Salvador Allende’s death into a martyrdom for democratic socialism obscure the most important legacy of the coup. Not only did it give rise to one of the twentieth century’s most violently repressive regimes, it inspired subsequent financial dictatorships to use privatization schemes to consolidate their power.

As economic historian Michael Hudson pointed out to me, a recent interview in the Moscow Times (October 1, 2003: “Corruption, Chechnya: The Price We Paid for ’93” by Ruslan Khasbulatov) confirms this. Recalling the ten-year anniversary of Boris Yeltsin’s 1993 attack on Parliament and his replacement of its rule by his own diktat carrying out the recommendations of U.S. HIID and AID advisors, Russia’s then-head of Parliament Khasbulatov explained recently:

“Yeltsin’s close advisers at the time were gripped by the Pinochet syndrome. Their strategy was simple. Yeltsin needed to disband Khasbulatov’s parliament, then concentrate all power in the country in his hands. Having done so, the president could easily implement economic reforms, including privatization, and then bestow a new Constitution upon the people. Overjoyed by their newfound prosperity, the people would greet their leader with ovations.”

In the face of falling wage levels the junta’s austerity program involved higher wage withholding that was channeled into the stock market, now a model for efforts to privatize Social Security in the United States. In Chile this process led to a stock market bubble and provided public resources freely to General Pinochet’s supporters, creating an aggressive financial elite-the grupos, a harbinger of oligarchies to come in Russia and elsewhere.

The Chilean experiment originated in an exchange program of economists between the University of Chicago and Chile’s Catholic University in Santiago. In August 1972, more than a year before the military coup, the CIA funded a 300-page economic blueprint which it supplied to the country’s military and some of the most ambitious business families in an effort to hasten the overthrow of Salvador Allende’s socialist government, which had been elected by a small plurality in 1970.

The Chicago-style monetary plan described efforts to privatize industry, reign in government spending to lower inflation, and to create a more active stock market financed by labor’s own forced savings in order to increase stock prices. The hope was that capital gains would suffice to pay off the loans that the government gave its supporters and cronies to buy industrial companies will little or no cash down.

Those privy to the neoliberal plan were able to use the report to make money for themselves and their allies under the military junta that seized power in 1974. Contrary to Augosto Pinochet’s avowed dream of “a nation of entrepreneurs,” their maneuvers led to a consolidation of monopoly power. This was contrary to the stated goals of his economic advisors, “The Chicago Boys,” educated at the University of Chicago and devoted to economists Milton Friedman and Friedrick Hayek. Chile became the first country subjected to “shock treatment,” starting with drastic reductions in social spending, privatization of industry and financial control on concessionary credit terms, and the deregulation of financial institutions. Most notorious of all, however, was the policy of “disappearing” labor and political opposition through the secret police, the DINA.

After Pinochet was installed, the IMF and World Bank restructured Chilean debt on much more favorable terms than those afforded Allende, and foreign banks returned almost overnight. For the economy at large, however, living standards dropped and income inequality became the worst in Latin America. From 1970 to 1987 the proportion of the population falling below the poverty line rose from 20 percent to 44.4 percent.

Despite the regime’s promise that a market economy would eliminate homelessness, the percentage of Chileans without adequate housing grew from 27 to 40 percent from 1972 to 1988. The capital city of Santiago became one of the most polluted cities in the world, while poverty-related disease such as typhoid and viral hepatitis increased. Instead of the promised “nation of entrepreneurs,” Chile got a reign of oligarchs and an unprecedented domestic debt crisis.

Neoliberals call Chile’s 1974-90 period a miracle, but it is best seen as what should have been a warning against imposing similar policies in other countries. Under what became known as the Washington Consensus the economy was subjected to totalitarian libertarian doctrine. Public enterprises were given away of to the junta’s supporters with virtually no money down. The result was mass bankruptcy, economic collapse, and a polarization of wealth and political power that transformed the country that had been one of Latin America’s most stable middle-class democracies.

In the following interview, Michael Hudson elaborates on the Chicago Boys’ economic legacy and its continuing implications.

SS: What was the economic relationship between the US and Chile prior to Allende’s election?

MH: It was positive, reflecting the close linkage between the American mining companies and their banks with Chilean copper production. By the early 1960s, however, Chileans came to see that international commodity markets were structured in a way that exploited them. Under the practice of “producer pricing” the export price to the parent U.S. companies for the copper that their Chilean branches produced was held steady at something like 34 cents per pound, while the open market price in London soared to more than twice this amount. Chile got only a fraction of the market value of its exports, and its politicians understandably wanted to take control of the mines.

U.S. companies saw the handwriting on the wall and wanted to disinvest in Latin America and other third world regions. They worked with their bankers to devise a way in which the mines could be sold and financed in a mutually agreeable way. Chase Manhattan was the banker for Anaconda, and Citibank for Kennecott. They drew up a Chileanization plan and put it in the hands of Eduardo Frei and his government, calling for Chile to take over Anaconda’s Chuquicamata mine and the mines of other U.S. companies. The idea was for the companies to be bought out at a price that would be paid by sales of the increased copper output resulting from investment financed by the Chilean government with funds borrowed internationally.

This was not a hostile nationalization at all. In fact, when I joined Chase in 1964 my major task was to calculate the economics of Chileanization. Based on how much money Chile could expect to gain from its additional copper exports, my job was to calculate how much Chile could afford to pay for the cost of buying out the U.S. companies and expanding their mines.

What the copper companies wanted above all was long-term security of supply. They wanted to keep their customers secure and to convince them not to shift to aluminum and other raw materials for electrical wiring and building. To guarantee supply they were willing to pay the going world price, which rose to nearly a dollar as the Vietnam War created an unprecedented demand for copper. The average U.S. soldier over there used a ton of copper per year. As the military buildup accelerated, it was easy to forecast that the demand would outstrip supply, pushing up prices. In fact there was a question of whether the major copper users ­ companies needing copper for wiring, as well as construction companies needing copper for building materials ­ could get copper at any price.

This is where Allende made a fatal mistake ­ one that most political analysts have missed. He made a grandstand speech that Chile would sell its copper to whomever it wanted, explaining that it was not a matter of price but of national sovereignty. The American companies feared that his anti-Americanism would lead him to prefer to sell Chile’s copper to foreign countries, leaving them with insufficient supplies to meet the needs of their customers. This threatened to spur a shift to rival materials.

Allende could have made a concession that would not have been a sacrifice. He could have put economics first and seen that it was in Chile’s interest, as well as that of Zambia and other copper producers, to hold onto existing copper markets by assuring stability of supply. He could have got the going London market price for exports rather than selling to the U.S. companies at long-term guaranteed prices. But he wanted to control just where the copper would be sold.

SS: One of the mechanisms of leverage over Chile was through the World Bank and the IMF. Can you describe the structural problems built into such institutions that facilitated the squeeze?

MH: The United States emerged from World War II with the lion’s share of gold reserves, and obtained enough shares in the World Bank and IMF to give it a 25% veto power. No other country could afford to com it as much money. America’s veto power has enabled U.S. diplomats to blackball loans to any government with whose policies they disagree. The effect has been to turn the IMF and World Bank (along with regional institutions such as the Inter-American Development Bank) into vehicles to impose economic sanctions on countries taking policies deemed at odds with U.S. national interests.

SS: In Super Imperialism you describe how the United States orchestrated a number of aid packages to countries like Chile that were not at all altruistic. How did the US devise a way to benefit from this aid?

MH:As the Vietnam War forced the U.S. balance of payments into deficit in the 1960s, all requests for foreign aid ­ defined as any loans or gifts to foreign governments for whatever purpose ­ had to be accompanied by a balance-of-payments analysis showing that the U.S. payments position would gain as a result of the policy. This normally required foreign aid and dollar loans be tied to the purchase of U.S. exports, so that U.S. “foreign aid” would not entail a non-dollar cost.

In fact, the U.S. Government received back the cost of “aid loans,” gaining dollars on balance. Even for gifts such as P.L. 480 food aid, the State Department was given “counterpart funds,” a local-currency equivalence of the value of the food. U.S. Government agencies used these funds for whatever they wished. They even sought to sell local currencies to U.S. firms operating in these countries, so that the firms would not have to use dollars to buy these currencies on the foreign-exchange market. The effect was to depress the value of foreign currencies against the dollar, supporting its exchange rate and hence the U.S. terms of trade.

On the broad strategic level U.S. aid promotes loans for raw materials exports, but not for agricultural modernization or any form of economic growth that would displace imports from the United States. The aim of American foreign aid is thus to improve America’s terms of trade on a supply-and-demand basis as well as in the world’s foreign currency markets. Lending for projects to expand raw-materials exports contributed to a global oversupply, depressing prices for commodities which the United States imported. Meanwhile, subsidizing foreign dependency on U.S. food exports helped support grain prices.

This policy is well illustrated by Chile’s experience. The country’s greatest natural endowment is copper, and its second is nitrate, a natural fertilizer in the form of guano ­ bird droppings. The irony is that Chile has long had one of the most backward land tenure systems in the world. Much less noticed than the country’s increase in copper exports is the fact that growth in its copper export earnings has been absorbed entirely by food import costs, mainly from the United States.

The agricultural sections of nearly every World Bank mission report to its client countries have pointed to the backward state of agriculture as a result of concentrated landholding. Chile had the most notorious disparity between great latifundia and microfundia (uneconomic smallholdings) of any country. But prior to 1980 the World Bank said that it could not interfere with the domestic policies of its members in making loans.

The Bank made an about-face as it began to force countries to privatize their public domain, including the land. After 1980, Chile did indeed begin to break up its large landholdings, but in a way dictated by Chicago monetarists emphasizing export crops ­ wine and vegetables ­ rather than grain to feed its population by a policy of import displacement. From the U.S. vantage point this is the perfect pattern of growth: countries become more dependent on supplying the American economy with what it needs, at falling world prices, and buying what U.S. producers can supply, at rising terms of trade.

SS: Regarding land distribution, some historians on both the left and right point out that Allende had attempted land reform, angering owners. Is this the case essentially?

MH:Allende’s attempts at land reform were half-hearted. He focused on urban problems, not agriculture. Chile’s problem was vast underutilized tracts of land ­ the latifundia I mentioned earlier, which were ruining Chile just as Pliny the Elder said that they had ruined ancient Rome. Allende did not have a coherent economic program to provide this land to smallholders who would use them. He was so anti-business that he did not think of opening up rural credit banks to finance agricultural modernization.

It does not seem to have occurred to Allende that rather than threatening to nationalize these estates outright, he could have used the tax system to break them up. He could have proposed a rent tax on the potential value of this land. That would have obliged the large landowners either to use their land efficiently or pay the government a tax as if they had done so. The landowners might have yelled “confiscation,” but a property tax is normal for any country to levy.

Chile’s landowners had a stranglehold on the government that was not much different from that which the Roman Senate had in the closing centuries of the Roman Empire. They had managed to avoid paying taxes, and were quite passionate about holding their property. Allende’s response was a crude one of confiscation rather than using the country’s existing fiscal system to legally accomplish the same end. He seems to have thought that the idea of collective farming or simply redistributing the land would solve Chile’s food production problem.

The problem was that like most politicians, Allende was not sophisticated about economic policy. He took a crude “command economy” approach.

SS: Still, it doesn’t sound like Allende’s nationalist policies should have led to a serious concern that the rest of Latin America would fall to communism in a domino effect, as Henry Kissenger worried at the time.

MH:What seems to have upset Mr. Kissinger was the fact that socialism came to power through democratic election. It was a basic axiom of right-wing “free market” philosophy that socialism could only take over by dictatorship. Allende’s victory showed this premise to be wrong. So a theory of society and doctrine of the global future was being threatened.

A second axiom was that socialist planning could not provide a prosperous economic environment, and especially that prosperity could not be gained by breaking away from what now is called the Washington Consensus. Under Allende, Chile sustained a hefty 8.9 percent increase in its GNP and at first succeeded in reducing the country’s inflation rate. During his nearly three years in office he gained support by providing the poor with better access to housing, education, food and health care than previously.

Kissinger felt that the United States needed to show that socialism was bound to fail economically. Rather than leaving this to the “free market,” America used the famous “invisible hand” ­ not Adam Smith’s invisible hand of free enterprise, but the covert hand of CIA destabilization.

One remaining problem had to be countered. That was the threat that Chile’s army might obey its constitution and promote the country’s independence rather than favoring U.S. policies. The leading Chilean general was a constitutionalist who believed that the army should stay out of politics. He had to be murdered in order to replace him with a more U.S.-oriented general, who turned out to be Augusto Pinochet ­ who quickly became an acolyte of the Chicago Boys.

SS: In 1974 the junta began compensating businesses such as Anaconda and the Oversees Private Investment Corporation for Allende’s partial nationalizations. The IMF, Inter-American Development Bank and World Bank immediately renegotiated Chile’s debt on terms favorable to the junta.

MH:The World Bank and IMF were eager to show that obedience to U.S. economic dictates and Chicago School monetarism brought prosperity rather than dependency, so they tried to make Pinochet’s dictatorship an economic showcase, as they earlier had done with Colombia.

Chile was broke at the time the coup occurred. Its wealthy families had moved much of their capital abroad. Led by Arnold Harberger (who spoke Spanish and had married a Chilean), the Chicago Boys set out to make socialism irreversible by selling off as many state enterprises as possible. But there was little money to buy them, so the government sold them on credit, accepting IOUs instead of money.

As would become the case in Russia in the 1990s, the aim was simply to get property into private hands, regardless of how this occurred. So the government gave away companies for no money down. The idea was that the buyers would pay the government out of their earnings, ending up with the companies without having to put up money but paying money into the national treasury rather than draining it, on the theory that government enterprise was inherently bureaucratic and money-losing.

The theory had no counterpart in reality, but was a figment of the neoliberal imagination. Most of the sales naturally were to cronies of the military, who took over the companies and simply kept the income for themselves. They sent as much of it abroad as they could, and then let the companies go bankrupt. Their objective was a short-term gain, because they lived in the short run. So by 1980, within about five years, most of the companies reverted to government ownership.

The first wave of privatization thus ended in collapse. It was a dress rehearsal for what happened in Russia under Yeltsin ­ what became the Washington Consensus after 1980.

SS: During Pinochet’s privatization of industry he kept control CODELCO, the huge and highly profitable state-owned copper producer. Under Pinochet, it began to produce more than ever before, becoming one of the most profitable companies in the world, according to Fortune magazine. How did this jibe with the neo-liberal ideology?

MH:Chile’s mineral-rents are so high that their privatization would bring a price that would provide the government with so much money that it could not use it productively without becoming essentially a public-sector economy, which is just what the Chicago monetarists do not want to see. They are against seeing governments control vast amounts of money, on the premise that it would be squandered on bureaucracies and insider dealings. In Chile’s post-Pinochet case this fear does not seem unrealistic, given the experience of its privatizations to date.

Meanwhile, even Friedman has noted the difference between economic rent ­ a free ride ­ and profit earned from active investment, when he said that a rent tax is the “least bad” tax. The world market price of copper is substantially above Chile’s costs of production, at least its direct costs before being loaded down with crypto-costs that absorb revenue in tax-deductible ways such as interest, insurance, re-insurance, management fees, dividends and so forth. Privatization would turn over this “free lunch” to private buyers.

SS: During the first stage of the 1975 Economic Recovery Program the IMF offered $7.7 billion in loans, about 3 percent of Chile’s GNP for three years. A number of commentators have argued the Chicago policy makers should have seen that was too large a package. Neoliberal economists say that looking at debt as a percentage of GNP is the wrong way to determine whether it is excessive. Is there a lesson in Chile about how to spot excessive debt?

MH:The first question to ask is what the foreign loans are used for. Most IMF loans in recent decades have been to subsidize capital flight. They enable governments to support their currency’s exchange rate relative to the dollar, enabling oligarchs to exchange it for more dollars than otherwise would be the case. Russia for instance, had to use its oil export proceeds to repay the IMF for the 1996 loan that went into the hands of Yeltsin’s banking insiders.

The debt burden is measured not merely by the volume of debt but by how much needs to be repaid in a given period, relative to the resources to pay. Foreign debt service needs to be compared to the foreign-exchange surplus being generated by exports, tourism and immigrants’ remittances. The IMF would add the inflow of funds on capital account.

In the late 1920s, after Germany’s balance of payments buckled under the burden of reparations, the Young Plan defined the ability to pay as the amount that could be transferred without having to devalue the currency or sell off assets. But creditors prefer not to t recognize any limit to what can be paid. Their approach may be likened to calculating how much blood a person can donate by measuring the total amount in his or her body, without considering how much can be given without falling ill or dying.

If countries have to privatize their public domain and sell off natural monopolies traditionally owned and operated by the state, then they obviously are effectively insolvent and indulging in the equivalent of a bankruptcy sale under distress conditions. Yet countries are sovereign and don’t really have to submit to this sort of financial blackmail. So the debt burden rests ultimately on their own behavior and how they manage their financial diplomacy, subject to coercive measures taken by the creditor nations.

Privatizations leads to Speculative Excesses

SS: In mid-1976 the Chicago Boys celebrated when Chile’s GNP grew by an impressive 6.6 percent. Suggesting this marked a recovery, they lifted nearly every restriction on foreign direct investment and loans. What was the effect?

MH:That depends on how you choose to measure growth. Is it real growth when the increase in output is being exported while living standards fall and Chileans consume and invest less? There was a statistical impression of growth, but property was becoming enormously concentrated through financial means, while the domestic economy ran deeply into debt.

SS: This was corporate debt, not government debt. How did Chile’s shifting of the debt to private interests change the political landscape?

MH: The Chicago Boys main links were not with industry as such but with the emerging financial sector and the conglomerates it facilitated. The resulting privatization policy did not steer money into direct industrial investment but into financial speculation. A few families dominated the administration of industrial and agricultural sectors through banking and finance grupos, which were deregulated and became monopolies.

This contradicted Pinochet’s lip service about wanting Chile to be “a nation of entrepreneurs.” It pushed aside the smaller firms who supported his rise, but wanted protectionist trade policies.


The irony is that a program of financial sector privatization and deregulation led to a de facto subsidy, even more government control, and a ballooning national debt. By 1977, just three years after the coup, interest rates hit 51 percent, the result of an orgy of loans. The financial service sector began to collapse, and by 1985 it was bankrupt and reverted to government hands.

Chile’s ensuing debt crisis differed from that of the rest of Latin America because most of the country’s foreign debt was owed by private companies, not by the government. The fact that the government was not legally responsible for repayment was an important source of bargaining power when it entered into negotiations with the IMF over the conditions attached to new loans to help pay back the old. But as matters turned out, the government needlessly paid back the private debt as the central bank took over many bad loans made during grupo control. Control of the banks again was sold off, this time to foreigners rather than to the military insiders and kleptocrats, but again at bargain prices.

How Labor’s Forced Savings were transferred to the Financial Classes ­ and then wiped out

SS: The rising stock market that resulted from the Chicago Boy’s reforms was seen as a way to inflate asset prices the capital gains of which would be used to pay off debts. Why couldn’t the market sustain this cycle?

MH:Quite simply, as Luders and other participants have described, the reason was that too many individuals who bought companies with no money down took the revenue and ran, or else bought yet more companies on credit. The revenue was not enough to pay the carrying charges on the debts they had taken on.

SS: The stock market collapse destroyed the pensions that were privatized under Pinochet. Can you explain how those pensions related to the speculative excess and transformed the managerial class?

MH:The IMF has done a study of this question but has not made it public, so I cannot give you specific details. The essence is what is happening now across Latin America. Labor’s savings were the only available source of funding for stock purchases. The money was withheld from paychecks and turned over to employers and financial management companies to “endow” a financial class of insiders who moved as much of their money as possible out of the country.

The result was much like telecoms throughout the world in the late 1990s. They bought each other with borrowed credit that was out of proportion to the revenue being generated to pay their debts.

What happened is that the early privatizers bled their companies while selling shares to the workers at prices that were being inflated by the flow of wage set-asides into the stock market. This is just what the U.S. money managers would like to do with America’s Social Security system to create a stock market boom today. In Chile’s case the companies were allowed to collapse after their managers had unloaded their stock holdings to the workers’ pension funds.

Pinochet and his Chicago advisors called this “Labor Capitalism,” and the term was picked up by Mrs. Thatcher in Britain. But of course it was not designed to benefit labor at all. Rather, labor was left holding the bag when the stock market collapsed.

I also should point out that management fees for labor’s forced savings were so high that they absorbed the entire flow of dividends. Thus, labor was not able to reinvest the earnings on its savings to grow and multiply. The financial sector got the benefit of this principle of compound interest, not the employee-contributors.

SS: Can you elaborate on how today’s proposals to privatize Social Security in the United States are kindred to Pinochet’s Chicago version of Labor Capitalism?

MH: The Social Security System’s vast holdings of U.S Treasury bonds are to be sold and the proceeds steered into the stock market. This will create a financial bubble in which Wall Street and foreign institutional investors will reap quick capital gains while management fees absorb the dividends being paid by these stocks. Meanwhile, the Federal Reserve will buy the Treasury bonds being sold, pumping credit into the financial system to fuel asset-price inflation. All this will be called “wealth creation.”

At the point where more workers retire than are being employed, the stock-market inflow of savings will turn into an outflow. Stock market professionals will bail out, leaving workers holding stocks whose price has plummeted.

Politicians will wring their hands and refer to the madness of crowds and the short-sightedness of greed, blaming the hapless workers whose forced savings were mismanaged rather than seeing how the bubble and its collapse were orchestrated from the outset.

SS: In previous interviews you’ve mentioned your preference for the pay-as-you-go pension system in Germany which was like that of Allende’s. The benefit of these systems is that it gives “ownership” to the workers. Can you elaborate on the advantages?

MH:Under Allende the workers’ paychecks were not docked and turned over to their employers to manage (or later to American insurance companies and other foreign financial institutions). This meant that labor could spend its entire wages on current output, creating a thriving domestic market for Chilean output. This is necessary to help the economy grow by the feedback between demand and new investment and employment.

Diverting wage income into the stock market and other forced saving slows the growth of spending. This is antithetical to Keynesian-type market stimulus. It may promote a financial bubble but at the cost of austerity for consumption and direct investment. That is the basic folly which underlies IMF austerity plans and neoliberal Chicago planning generally.

SS: People were given a choice to stay in the public pension system or switch to the private one. Ninety percent switched. But Pinochet’s army and police were allowed to maintain very generous public pensions. What are we to conclude from this?

MH:Most workers, especially the younger ones, were told that if they stayed in the public system they wouldn’t get much. But the military were well aware that what was being created was a bubble, and they insulated themselves from it. The analysis is clear if you take a who/whom approach.

What Chile reveals about Chicago School Theory

SS: According to Chicago-style theory Chile’s soaring equity markets should be seen as providing price signals leading to efficient allocation of capital. Is there any evidence that markets provided signals for meaningful long-term investment under the Chicago Boys?

MH:The Chicago approach ignored the fact that what was pushing up the stock market was not an inflow of funds from intelligent investors evaluating how much money the companies could make. These companies were being bled, so it didn’t make much difference how inherently profitable they might have been.

Chilean stocks rose because labor’s savings were being channeled into a rather small number of stocks in the large companies controlled by the oligarchy. Companies steered the savings of their workers into their own stocks. But these savings were not used to finance long-term capital investment in new plant and equipment, research or development. The financial bubble was decoupled from the “real” economy. That was the essence of Pinochet’s “labor capitalism.”

It is in the nature of financial markets that ready cash is the name of the game. When investors can get something for nothing, they will take it by the path of least resistance. Why go to all the trouble of tying up one’s own capital to produce and market goods and services when you can leapfrog the process by making money in purely financial ways?


SS: You’ve pointed out that Chicago monetarists deny the “free lunch” in relation to natural resources and financial maneuvering. What other things do they overlook?

MH: They are quite willing to see capital assets sold off on the cheap. They also ignore the role of debt leveraging. In Chile’s case they said nothing about the way this transferred risk from the private to the public sector, even though they defended high rates of return as a reward for the private sector ostensibly taking risks.

The effect of their monetarist policy is not to increase competition by a proliferation of small firms as they allege, but to promote large monopolies financed on credit. And the effect of shunning government planning is to put the economy in the hands of foreign finance capital. Planning remains, but it takes place far from the source and at the expense of the middle class and labor.

Something that neither they nor Karl Marx foresaw has occurred. Labor is being exploited by its savings as well as its wages. Chilean wages long remained lower than their 1974 level. Far from being a miracle, Chile was an embarrassment. Yet the neoliberals did not seem to care. They went on to repeat their monetarist program in other countries, most notoriously in Russia.

SS: Despite all the evidence contrary to their theory, how can they continue to argue that Chile was a miracle?

MH:Like lawyers defending a guilty client, the Chicago Boys only look for good things to say about their pet project. They want to portray Chile in as good a light as possible. They really are using a public relations cover story as an excuse to give away government enterprise on the cheap to their backers. This is why they need to censor any criticism or alternative proposals. It also is why the IMF does not release its critical reports on Chile’s Social Security privatization. The policy is generating billions of dollars for financial managers across Latin America. The Chicago Boys don’t care about labor’s savings that are being dissipated.

One of the most time-tested tactics of defense lawyers is to mount a character assassination on the accusers and witnesses. This is what the Chicago monetarists do in claiming that government regulation and taxation lead to serfdom. They repeat over and over again that public planning leads to disaster, as if this implies that the private-sector financial planning that takes its place does not lead even more quickly, more directly and more inevitably to economic disaster, poverty and polarization.

Like stage magicians, such economists distract their audience’s attention from the topic at hand ­ in this case, the tendency for privatizations to turn control over to financial managers and foreign owners ­ to somewhere that they can distract the audience’s attention from the “invisible hand” of corruption and political manipulation.

In this sense Chicago economics remains all about the “invisible hand,” in the sense that their doctrine makes this hand “invisible” to the students that they are turning into “useful idiots” for the financial sector to hire to promote its policies. If they were to permit an open discussion of alternatives, their opponents would point out the shortcomings of their policies. A cloak of invisibility is essential as far as these problems are concerned.

The term “democracy” these days has lost its original meaning of majority rule. It has become a code-word for pro-American policies and hence a dictatorship by the banking and financial interests. To “promote democracy” is what America claims to do in overthrowing elected governments and turning planning over to unelected bankers and money managers. Such is the Orwellian semantics of today’s global political economy.

SS: Despite the Friedmanite proclamations that economic and political freedom are closely linked, the main architect of Pinochet’s policies, Sergio de Castro, is on record as saying democracy never could have been stable nor efficient enough to support the reforms. Was Friedman was being insincere, or did de Castro have an on-the-ground perspective that Friedman could have learned from?

MH:Considering the Chicago School’s behavior in trying to ban any economic theorizing that does not conform to its monetarism, I would say that Friedman and his colleagues either are deliberately dishonest or simply have their heads in the clouds. I went to the University of Chicago as an undergraduate, and I can assure you that those who questioned their agenda were treated as pariahs. So de Castro had it right.

But I don’t think you could say that Mr. Friedman and his students would have “benefited” from this knowledge. They know on just what side their bread is buttered on. It pays well to be a useful idiot in today’s world. Students don’t enroll in the University of Chicago’s business school to make the world a better place and raise living standards. They enroll because they want to make money for themselves. The way they are taught to do this is to make money financially, not by industrial engineering or social reform.

SS: Much of Chile’s financial sector is now foreign owned, so that its profits don’t remain in Chile. What does this suggest about the nation’s economic future?

MH:Chile doesn’t have that much industry or generate profit in the technical sense that economists use the term. What it does generate are economic rents on natural resources and land), monopoly rents, interest, and management fees. With regard to its privatization of social security. U.S. and European banks and insurance companies have gained ownership of these funds, so that the revenue they earn is removed from the domestic economy rather than being part of its circular flow. This slows Chilean growth, which prompts the oligarchs to take their money out of the country by converting it into dollars.

The globalization and financialization of Chile’s economy means that its economic surplus is remitted abroad rather than recycled into domestic investment to increase domestic production and living standards. Instead of finding “profit” in Chile’s national income accounts you will find that globalization transforms it into crypto-costs ­ interest, rent, insurance, reinsurance, transfer pricing to offshore banking centers and “management” fees.

SS: When mainstream economists do admit that Chile was a failure, they often blame Pinochet’s repressive military regime for undermining the political freedom that laissez faire economists espouse. How do you respond? What can we conclude about such economists’ understanding about the nature of freedom?

MH:Chicago-style laissez faire can only be imposed at gunpoint, in conjunction with academic censorship of empirical economic study and history. Political dictatorship is an inherent “externality” of “free markets,” because it is only a rhetorical wrapping for centralized financial and political coercion.

SS:Chile maintains one of the largest national debts in the world and yet remains a darling of the IMF and World Bank. What does this tell us about those institutions and their notion of “austerity”?

MH:Chile has become the test case for the paternalistic Washington Consensus. These institutions want to make Chile an object lesson to show that financial dictatorships run by client oligarchies “work,” and that America was right to save Chile from its voters who elected a socialist regime. It goes hand in hand with U.S. attempts to destabilize Venezuela’s economy under Hugo Chavez, and Cuba after that.

To the IMF and World Bank, “austerity” means cutting back domestic income ­ mainly wages ­ to pay foreign creditors. Their error lies in the failure to recognize that imposing austerity destroys the domestic market. This reduces domestic investment, thereby increasing foreign dependency. This turns out to be inflationary when the currency collapses as a result of a worsening trade balance and capital flight. So rather than stabilizing the economy “austerity” should be seen as a destabilization plan. That is why the English language has been expanded to include the term “IMF riot.” The phenomenon is now recognized as an inherent stage of austerity programs.

SS: When Chile is held up as a success, economists point out the boom of the late 1970s and another boom in the late ’80s. What can we surmise about the role the depressions that preceded these booms?

MH: There was no boom in the late 1970s. Chile’s privatized sector went bankrupt and reverted to state control. Social Security was re-privatized and turned over to large oligarchic firms and U.S. insurance companies to manage. The so-called boom that ensued was a stock-market bubble created by channeling wage withholding into shares of the companies taken over by Chile’s kleptocrats. They got rich at the expense of the rest of society.

The fact that the Chicago Boys called this a boom shows how narrow-minded their set of values is. It was not a boom in the sense of rising output and living standards. Wage levels and social infrastructure spending fell from the levels achieved under Allende or his predecessor, Frei. The economy became unbalanced and polarized.

SS: The Chicago School sometimes defends the Chilean adventure’s unsavory aspects by saying the programs were “born of pain.” Are there examples of economic transformation that do not start with “shock” and end in pain? Isn’t the real question one of how recoveries can be brought about without making things worse?

MH: I guess this is what Stalin meant when he said that “You can’t make an omelet without breaking eggs.” The question is, whose eggs are you going to break? And who’s going to eat the omelet?

If you’re talking about Chicago-style free-market economics, it only can work at gunpoint, by taking total control of the educational system. The doctrine is so narrow-minded that once you permit a non-autistic economic curriculum based on empirical experience and actual history, you are not going to have students accepting the self-destructive financial doctrines of the Chicago Boys. Free enterprise of the type that replaces government planning with that of large global financial institutions requires totalitarian governments to enforce. That’s what Harberger and Pinochet recognized when they closed down the economics departments at every university in Chile except for their bastion at the Catholic University. They drove non-monetarists into exile or arrested or “disappeared” them. This is why Chicago-style anti-government doctrine represents today’s new road to serfdom.

There is no intrinsic need for such shock. At least there would not be if it were not necessary to defend against U.S. and European covert destabilization plans using terrorism. Germany’s Christian Democrats were equally guilty with the Americans in opposing Allende. So the world is being confronted with “painful” transitions not because of their intrinsic character, but because property owners, especially the financial sector, will not tolerate any threat to their position without fighting back violently.

The Roman Republic provides a good parallel. When the Gracchi brothers promoted land and debt reform after 133 BC, the oligarchs fought back and murdered the leading democratic politicians. The problem of violence stems from the counter-revolutionaries much more than from reformers.

Most reformers recognize what Gandhi understood: Property owners control the state and its police. So violence cannot be a winning policy for economic reform. But violence is the last resort of the anti-reformers. It worked in Iran against Mossedegh in 1964, in Guatamala against Arbenz, and in many other countries.

The Pinochet regime is gone as a political and military force, but it has left a residue of unequal wealth distribution. Ownership of Chilean business is now in the hands of an oligarchy rather than being widely distributed. The press and media are owned by the oligarchy. Socially, Chile is plagued with what might be called “wealth pollution” in the form of an economically inequitable society. The “cleanup costs” of these developments have not been calculated.

Chile formerly was Latin America’s most middle-class country, one in which the military supported rather than threatened democracy. But it no longer is socially free. It is the only country in Latin America that does not permit divorce, for instance, as the oligarchy has supported the Catholic Church and vice versa. How do you rebuild a democratic society whose leading intellectuals, artists and other creative people have been driven abroad or otherwise wiped out? Their social traditions have been destroyed and the nation’s culture has been pulled up by the roots. It is a travesty to call this “wealth creation.”

SS:To close, what lessons from Chile seem most relevant today?

MH:Chile still provides the basic privatization model. It provides an object lesson for the fallacy of creating capital by giving public enterprise away to insiders, and of getting rich by merely financial means without underlying industrial investment.

The country’s “Labor Capitalism” is worth studying as a dress rehearsal for neoliberal plans for privatization of Social Security in the United States. The Chicago Boys’ misadventures reveal the folly of trying to create wealth purely by monetary and financial means rather than by tangible investment to produce output and raise living standards. Basically the result was a bubble, but one which had hard economic consequences by transferring wealth to financial insiders and money managers. This was done on terms which deprived the savers of the dividends and interest that were being paid on their savings. This income was taken by the money managers as administrative fees. In the end, the insiders sold out at the top of the market, leaving pension-fund investors with stocks whose prices were falling and bonds that were losing their prospects of being paid off.

This is the failing of most privatization. Chile was the dress rehearsal for Mrs. Thatcher’s privatizations and later for Yeltsin’s. In fact, Harvard’s Institute for International Development first tried to appoint as its head the intellectual butcher of Chile, Harberger. It was only when Harvard’s students raised a passionate protest that a character seemingly without baggage, Jeffrey Sachs, was appointed instead.

The upshot was Russia’s even more devastating privatizations. After the 1996 giveaways Russia’s oligarchs created the Union of Right Forces, the party of Chubais and other kleptocrats who based their program explicitly on Pinochet’s Chilean policies. They were quite open in saying that they wanted to apply the Pinochet model to Russia. Far from being an embarrassment to be swept under the rug, the Chicago School monetarist model remains alive and kicking in Russia today. This very month, I am told, Russia’s Union of Right Forces is financing a visit from Prof. Harberger to teach them how to re-create Chile’s model in Russia.

This model secures its adherents by offering them insider dealings as they carve up the public domain, with the obligatory slice afforded to U.S. companies to join in the free ride. Tax laws then free these nouveaux rentiers from taxation, while borrowing IMF funds to subsidize their capital flight.

Professor Michael Hudson is an independent Wall Street financial economist. After working as a balance-of-payments economist for the Chase Manhattan Bank and Arthur Anderson in the 1960s, he taught international finance at the New School in New York. Presently, he is Distinguished Professor of Economics at the University of Missouri (Kansas City). He has published widely on the topic of US financial dominance. He has also been an economic adviser to the Canadian, Mexican, Russian and US governments. His books include Trade, Development, and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of Super Imperialism.

STANDARD SCHAEFER is a freelance journalist. He can be reached at