Thursday, March 29, 2012

The Chicago School: Agree or Die

Whether you agree or disagree with Milton Friedman's brand of Laissez-Faire Capitalism one thing that should be pretty obvious is that major investors can see that if his policies were implemented this would really help their return rates. When Friedman joined the University of Chicago in the 40's his views weren't carrying the day. But when the richest people in the world like what they are hearing your chances of carrying the day improve.

Between 1957 and 1970 about 100 select students from Chile received their education from the University of Chicago under Friedman's tutelage. The Rockefeller Foundation, the US Government, and other groups with major corporate interests provided grants to fund it. These newly trained economists returned to Chile and ran the Economics Departments at their respective schools. They of course advanced Friedman's theories in hopes of changing minds. (Source for these claims is this excellent though lengthy article.)

The election of 1970 though made it appear that this effort was waste. The Socialist Salvador Allende was elected. The first year of his presidency saw a GNP increase of 8.9%. Unemployment fell from above 8% to 3.8%. Even inflation was coming down (scroll to the bottom of this article for my source).

Not only had the Chicago Boys failed to persuade, but Allende, who was their economic opposite, was having a lot of success. So pressure was applied to persuade the Chilean people that an Allende administration was not in their best interest. Nixon's famous orders were to "make the economy scream." Edward Korry, US Ambassador to Chile would say "not a nut or bolt will be allowed to reach Chile under Allende. Once Allende comes to power we shall do all within our power to condemn Chile and the Chileans to utmost deprivation and poverty, a policy designed for a long time to come to accelerate the hard features of a Communist society in Chile." In addition to economic warfare massive propaganda was implemented.

The US and corporate economic warfare did have some effect. Inflation soared. The mid term elections arrived in March 1973. The result? Allende gained seats in the legislature.

Persuasion, even via deception and trickery, still hadn't worked. So the next option was violence. On Septermber 11, 1973 the coup was initiated. Soon Salvador Allende was dead. Thousands of unhappy civilians were herded into the stadium. Military walked throughout the stands with hooded collaborators that would point out the various leftists. These people would be taken away and tortured. Dead bodies were strewn about the stadium. Concentration camps were set up throughout the country. Thousands were murdered.

The "pink" economists at the University of Chile, the ones the Chicago Boys were unable to defeat on the field of ideas, were fired. Andre Gundar Frank was one of the 100 students sent to study at the University of Chicago (**Correction on 4/20/12-Gundar Frank was not a Chilean Chicago Boy, but a German that was schooled at Chicago while Chilean Chicago Boys were being trained, and would later move to Chile to see what all the fuss was about.**), but he would later repudiate Friedman's teachings and write angry letters to his former dissertation superviser (see for instance here). He was fired, and would report that during the coup 6 students were shot on sight at the main entrance to the School of Economics as a lesson to the rest.

The military dictator, Pinochet, stocked his ranks with Chicago Boys, who implemented the policies they had learned. Despite the fact that US economic warfare immediately ceased the economy tanked. Friedman was flown in in 1975 with the economy a shambles to try and save them. His advice was to actually apply his free market principles more intensely. And so they did, slashing government expenditures even more and removing government imposed limitations. Unemployment soared, above 20%. Freer capital movements would lead to speculative bubbles not unlike our recent housing bubble. This produced a brief euphoria between 1979 and 1981. But in 1982 the bubble burst and the economy collapsed in ruins and had to be bailed out by the state.

The connection between violence and Friedman's so called "freedom" endorsing economic policies was not lost on many. One such person was Allende's former Ambassador the the US, Orlando Letelier. He made this connection and detailed the state of Chile's economy in this 1976 article for The Nation.

On month later he was assassinated in Washington DC. Three weeks later Friedman's Nobel Prize in Economics would be announced.


HispanicPundit said...

You forgot the most important part: Chile today has the best economy in all of Latin America - being the only country in the southern hemisphere that is part of the OECD.

Oh and, unlike leftist governments, Pinochet actually stepped down, voluntarily. Something to be expected with market oriented economies.

Lastly, since were being sticklers about definitions, how is Milton Friedman's "brand" of capitalism in anyway laissez-faire?

Okay, one more thing: I encourage readers of this blog to check and read through what Jon considers "sources".

Jon said...

I think you should be careful about hasty conclusions based on kind of macro level analysis. For instance, suppose I say that Reagan's policies coincided with a downturn in the US. Would it make sense to say that proves nothing because we are still richer than our neighbors? Where did Chile start? What were the immediate effects of Friedman's policies? What were the neighbors subjected to? As I understand it Brazil, Uruguay, and Argentina were also subjected to coups and subsequent imposition of juntas backed with more Chicago school graduates. So would it prove anything if Chile was today looking better than they are? According to this source (more sympathetic to the regime and neoliberalism generally than I am)

"All the studies that have looked at poverty and income distribution between the 1970s and the 1990s agree, despite disagrement in other areas, that the incidence of poverty was at its highest, and inequality at its most extreme, from the mid-1970's to the mid 1980's (Marcel and Solimano, 1994:219, 251; Scott, 1995). The economy began to recover in 1985." What changed in 1985 and moving forward? What if it was a return to government monetary transfers from rich to poor, re-establishment of trade unions, regulations limiting the ability of employers to fire people, and a general expansion of government expenditures, returning to the Allende level and beyond from a Pinochet/Friedman trough? In other words a direct turn away from Chicago style economics. Would that matter to you?

Jon said...

Tell me why you object to my sources? Andre Gundar Frank received his PhD in economics from the University of Chicago under the supervision of Milton Friedman and went on to teach economics at the University of Chile and other locations. If that's not a satisfactory source for you you are going to have to tell me what would qualify. The Counter Punch article is written by Greg Grandin, professor of Latin American History at New York University. He has a PhD from Yale. Orlando Letelier was a Chilean economist and Chilean diplomat to the US. He accepted several academic positions in Washington DC, where he was a refugee from having escaped the Pinochet military dictatorship. These are my sources. What is your objection?

I encourage you to read the Gundar Frank letter. Copiously documented, you can't believe the misery that unfolded in Chile. He documents the caloric consumption drop, the drop in consumption of wheat and other staples of the diet. He reports the Catholic Church's observations. Kids literally passing out in class for lack of food, vomiting when given a little milk because their stomachs cannot handle it. This despite the fact that international lending agencies totally opened the spigots. Robert MacNamara, former Defense Secretary and now President of the World Bank, overrules his colleagues and sends Pinochet 300 million. Hundreds of millions pouring in from other sources including the US government, IMF, totalling 2 billion. Allende of course was cut off completely. This in just a couple of years, and yet Chile is a shambles. It's astonishing.

Sheldon said...

Hispanic Pundit,

Wrong about the the over generalization of Leftist-Governments.

The Sandinistas after overthrowing U.S. supported Samoza dictatorship of about 70 years, took power and then, held elections in five years, won, and then stepped aside after losing in the next election. Similar economic and military disruption helped them lose as well.

Of course many democratically elected Leftist govs are not given the chance to step down, but are overflown by coups.

HispanicPundit said...

No democracy can keep full Chicago style economics. As Chile moved more towards a democracy, you would expect a pull back.

But Chile is still the most center-right economy in Latin America. By far. They even debate privatized social-security, and are strong free trade advocates etc. We can't even have that discussion here in the USA.

I'm not saying they dont have poverty. Latin America itself is sort of you can't expect too one country to be able to completely withstand that culture. I am making a comparative statement...and on that point, Chile far exceeds its neighbors.

Jon said...

Why wouldn't a democracy keep Chicago style economics? It it works as advertised I would think the assumption would have to be that the people would want it.

Chile has retained a lot of right wing policies, but again take a look at what happened between 1973 and 1985. It was like they'd gone through a war. They had a complete melt down of the banking system of 1982. You know what Pinochet did in 1985? He fired his Chicago Boys. That's precisely when things started to turn around. They re-nationalized many industries and expanded government expenditures, including wealth transfers. Why do you think Friedman should be credited with any success they've had?

Jon said...

One thing to watch for when a nation's economic peformance as treated as if it were successfull. Chile was very successful if your goal is to make rich people much richer. The wealthiest in Chile became very rich in the Pinochet years. The bottom 4/5 of the population was destroyed, but the policies did make financiers very rich. You see that in the US too. Huge applause when the stock market goes up. What does that do for normal people? Not much. But it's great for the rich. So you hear over and over that this is the mark of success.

I read recently a story of Japan and their so called "lost decade." Oh my, their stock market index hadn't done much. Things must be really bad. But then you go there and you look around. The people seem to be doing fine. Sure, there's a lot of equality, meaning the super rich didn't expand their lead like crazy, as in Chile. So Japan is failure and Chile, where unemployment surges from below 4% in the Allende years to a stagggering 25-30% in the Friedman years, that's a success. Success in the media is about how the super rich are doing. That makes sense because the media are owned by and serve the super rich, so naturally their story reflects their interests.

HispanicPundit said...

Why wouldn't a democracy keep Chicago style economics? It it works as advertised I would think the assumption would have to be that the people would want it.

Caplan explains it best here. Overview given here.

Jon said...

Rejection of Chicago style economics, with astronomical unemployment, torture chambers, concentration camps, and starvation is regarded as irrational for Caplan because success for Caplan is astronomical profits for the rich regardless of the suffering. But that's not regarded as irrational for the majority of the population.

HispanicPundit said...


Paul said...

HP -

I know you to are a conservative instead of libertarian. But in a libertarian utopia what prevents monopolies from forming?

Jon said...

I've seen conservatives, like Thomas Sowell, argue that in real world cases the claim of monopoly is a mirage. Competition prevents monopolies. Suppose someone has a monopoly on bread. So what? People can substitute other food for bread. He points to the fact that some industries were under anti-trust investigations and all the while the market was undermining their strength. Like IGA. Once again the formula is to keep the government out of it.

Paul said...


I've seen conservatives, like Thomas Sowell, argue that in real world cases the claim of monopoly is a mirage. Competition prevents monopolies. Suppose someone has a monopoly on bread. So what? People can substitute other food for bread. He points to the fact that some industries were under anti-trust investigations and all the while the market was undermining their strength. Like IGA. Once again the formula is to keep the government out of it.

With the simplified example given I am willing to concede his point as there are readily available and plausible alternatives.

However, why would the bread monopoly not expand into the alternatives? Seems to me that in their interest they ought to.

Also if the airline industry consolidated into a single carrier do you think he would think this a mirage because one could drive, take train, or take the bus.

Jon said...

Yeah, I think that is what he would say. You can drive or take a boat. He'd say that assuming that competitors can also enter the market attempts to control an entire industry would fail.

Paul said...

He'd say that assuming that competitors can also enter the market

Hence my question - what guarantees that this is true? I think the assumption needs defending.

If I hold a monopoly-ish power in in some industry what prevents me from doing my all to ensure I maintain it?

Do you know if his views hold the reverse also true? That is - are his views on a monopsony a reflection of his views on monopoly? Not going anywhere with this, just curious.

Jon said...

He probably won't pretend to guarantee it. He'll just say practically speaking it doesn't happen often due to competition. Invoking government is usually a mistake and only provides bureaucrats with something to do, which wastes tax dollars.

I think people on the right generally understate the effects of concentrated power. Say I'm negotiating a wage with an employer. It's as if we're on equal footing. He really needs my labor and I need a job. He can offer me a wage. If I reject the offer this is an inconvenience for him and for me. We're both on equal footing. No need for the government to step in and provide a means for workers to have stronger bargaining position.

In the same way generally there's no need for a government to check corporate power as it becomes more concentrated. The concern on the left is just overblown.