From the archive, originally posted by: [ spectre ]

http://www.counterpunch.org/grandin11172006.html

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.

{Greg Grandin teaches Latin American history at NYU and is the author of
the Empire’s Workshop: Latin America, The United States, and The Rise
of the New Imperialism, from which this essay has been excerpted. He
can be reached at: gjg4 [at] nyu [dot] edu}