This essay is a summation of one of the main topics in The Shock Doctrine by Naomi Klein1.
Milton Friedman (1912-2006) was an economist and professor at the University of Chicago. He became a leader of the Chicago School of economics, which in the 1950’s was a bulwark of conservative academics challenging the dominant statist thinking of the day. The Chicago School espoused a radical free market ideology, treating as sacred the forces of supply, demand, inflation and unemployment. A free and balanced market, they believed, would “create just the right number of products at precisely the right prices, produced by workers at just the right wages to buy those products” (p. 61). If the market was out of balance, suffering high inflation or soaring unemployment, then it was not truely free and some deregulation was needed. Unfortunately, there was no way for Friedman and the Chicago School to test their theories in the real world. They had to settle for mathematical equations and computer models.
In 1953 a plan was formed in Santiago, Chile, to educate a select group of Chilean students in Chicago School fundamentals. Turned down by the University of Chile, the planners approached the Catholic University, which readily accepted. The goal of what would become known as “the Chile Project” was to “produce ideological warriors who would win the battle of ideas against Latin America’s ‘pink’ economists” (p. 73). The project was officially launced in 1956, and brought Chilean students to pursue advanced degrees at the University of Chicago at the expense of US taxpayers and foundations. Upon returning home, many took posts as economics professors at the Catholic University, quickly establishing a little Chicago School in Santiago. By 1963, Chilean students did not need to travel to the US; they could get a Chicago School education at home. Students who went through the progam, either in Chicago or Santiago, became known as “los Chicago Boys.”
Salvador Allende won the 1970 election in Chile. His platform called for nationalizing large sectors of the economy run by foreign and domestic corporations. His plans were ardently opposed by the corporate interests and the CIA. A plan for regime change was developed along two tracks, military and economic. The Chicago Boys were firmly in charge of the economic plan, producing “The Brick,” a five hundred page plan to guide the junta from its earliest days. The plan called for “privatization, deregulation and cuts to social spending – the free-market trinity” (p. 94). The Chicago School would finaly have the chance to test its theories.
The coup came on September 11, 1973, lead by General Augusto Pinochet. It was accomplished by mid-afternoon, but Pinochet believed a rein of terror was necessary to consolidate his power. The details are gorey and appaling, and ended with more than 3,200 dead or disappeared, 80,000 imprisoned, and 200,000 fleeing the country (pp. 93-94). On the day of the coup, several Chicago Boys were at the presses of the right-wing El Mercurio newspaper working to get “The Brick” printed. They succeeded, and the General Officers of the Armed Forces had the plan on their desks the next day.
Free Market Experiment
Pinochet inherited an economy in crisis, partly due to corporate sabatoge in opposition to Allende. For the first year and a half, he faithfully followed the Chicago precepts. They did not work. In 1974, inflation reached 375%. The cost of basics was through the roof, while workers lost their jobs because “free trade” brought in cheap imports. Local buisnesses were closing, unemployment hit record levels and hunger became rampant. The only people benefiting were foreign companies and a small group of financiers known as “piranhas.”
Milton Friedman flew to Santiago in March 1975 at the invitation of a major bank. He gave several lectures while there and met briefly with Pinochet. Pinochet asked Friedman to write an advisory letter, which he did. Friedman’s advice included cuts to government spending and expanding free trade. He predicted an “economic miracle,” with inflation and unemployment resolved “in months.” Pinochet fired his economics minister and put a Chicago Boy in his place. They got to work cutting government spending, privatizing govenment assets and removing trade barriers. In the first year, the country fell into recession. The economy contracted 15% and unemployment climed to 20%.
Lessons (Not) Learned
Today, free market enthusiasts hold up Chile as proof that Friedmanism works. However, the period of steady growth held up as a miracle did not start until the mid-1980’s. In 1982, Chile’s economy crashed despite strict adherence to Chicago School doctrine. The main cause lie with the piranhas. This group amounted to an Enron style financial house, and the Chicago Boys had freed them from all regulation. These piranhas had bought up the country’s assets with borrowed money and run up a debt of $14 billion (p. 104). The instability was such that Pinochet, in a complete reversal of policy, was forced to nationalize many of these companies. The only thing protecting Chile from complete collapse was that Pinochet never privatized the state copper mines.
Chile would prove not to be a “pure” free market state, but a corporatist one. It was a place where a small elite could go from merely wealthy to super rich in a short amount of time. The success formula was bankrolled by debt and heavily subsidized with public funds. When necessary, if was bailed out with public funds (p. 104)2.
This time period in Chile was one of all-out war by the rich against the poor and middle class. As of 2007, Chile was still ranked as one of the world’s most unequal countries, placing 116 on a list of 123. To those outside the wealth bubble, the Miracle of Chile looked like the Great Depression. To those inside, the fast and easy wealth became like crack cocaine. The financial markets did not try to learn from the Chile experiment, but rather sought the next fix.