by Jason Hickel
This economic ideology came to be known as neoliberalism. It is ‘neo’ in the sense that it revived classical market liberalism from the death it had suffered after the Great Depression, but it also added a few new elements. The notion that market freedom is tantamount to individual liberty was a new and distinctive feature of the ideology – and became central to its political success in the West. And neoliberalism abandoned any pretence to neutrality in favour of a more politically charged agenda: it was against subsidies and protections for the working class and regulations that supported unions, but was quite comfortable with subsidies and protections for the rich and regulations that supported large corporations.
During the 1970s, neoliberal ideas were celebrated by the upper classes and the corporate world, who were thrilled to have an academic mouthpiece – in the form of Friedman and the University of Chicago – to lend their economic agenda an aura of legitimacy. Before long, the Chicago School was flush with corporate donations. There was only one problem: there was no way that ordinary citizens were going to buy into it, since Keynesianism had delivered them such monumental gains. It was not possible to acquire the political capital necessary to make these radical changes in the US or Europe.
But it was possible to test these theories abroad, in the meantime.
The Chile Experiment
During the 1950s and 1960s, the United States had become particularly concerned about Chile. As the home of the UN’s Economic Commission for Latin America and figures like Raúl Prebisch, Chile had become the centre of developmentalist thinking in Latin America. The US feared that these ideas would spread across the rest of the continent.
To counter this tendency, the US government launched Project Chile in 1956. The goal was to resist developmentalism by training Chilean economics students – around 100 of them – in the principles of neoliberal theory at the University of Chicago. A decade later, the programme was expanded to include students from across the continent, and eventually led to the formation of the Center for Latin American Economic Studies at Chicago. It was ideological warfare. The idea was to train students to scorn social safety nets, trade barriers, infant industry protection, price controls, public services and many of the other policies being promoted by progressive Latin American economists at the time. Juan Gabriel Valdés, a Chilean minister during the 1990s, has described this operation as ‘a striking example of an organized transfer of ideology from the United States to a country within its direct sphere of influence’. Interestingly, this project was conceived under the Point Four programme inaugurated by Truman, and was conducted by the US International Cooperation Administration (which would later become USAID), with funding from the Ford Foundation. In other words, it was one of America’s first official ‘international development’ programmes.
But despite the millions of dollars that donors like USAID and the Ford Foundation pumped into this project, it was failing miserably. Developmentalism continued to gain pace in Latin America, and many voters wanted yet more nationalisation, land reforms and cooperation among global South countries.
Nowhere was this clearer than in Chile. Developmentalism received a promising boost when voters elected Salvador Allende – a thoughtful, unpretentious doctor with thick-rimmed spectacles who was popular for his progressive views. At the time, much of Chile’s population was still mired in extreme poverty, while a small elite controlled most of the country’s vast land and wealth. Allende was lifted to power on his promise of a fairer society: better wages, public education, healthcare, housing and fairer rents. His victory was an impressive achievement, given that the CIA and US corporations had attempted to manipulate the outcome of the election in favour of Allende’s right-wing opponent, Jorge Alessandri.
Allende’s government delivered. He established a minimum wage, reduced the price of bread, rolled out free school meals, expanded low-income housing and extended public transportation to working-class neighbourhoods. He nationalised the copper mines and capped land ownership at 80 hectares (fully compensating all private owners), ending the colonial latifundia and redistributing land to peasant farmers.
And it worked. Wages rose, poverty rates declined, school enrolment reached record levels. But the United States was not happy. Allende’s nationalisation and land reform programmes appeared to threaten US economic interests; after all, US corporations had $964 million invested in Chile and were earning an average return of 17.4 per cent on it. Allende pledged full compensation for anyone who would lose their property or investments as a result, but this failed to pacify the US, which feared Allende’s popularity would trigger a broader turn to the left in Latin America. At the time, 20 per cent of total US foreign investments were tied up in Latin America, and US firms had 5,436 subsidiaries in the region, with significant profits at stake; they didn’t want to see the rise of more Allende-style governments among Chile’s neighbours.
At first, the United States tried to force Allende to back off his nationalisation programme by applying non-military pressure, doing everything in their power to strangle the Chilean economy. President Richard Nixon famously ordered the CIA director, Richard Helms, to ‘make the economy scream’. The US blocked government loans to Chile and encouraged private banks to do the same. They placed a moratorium on Chilean copper imports for six months, thus depleting Chile’s foreign currency reserves. And the CIA used El Mercurio, a newspaper owned by US multinational ITT, to disseminate anti-Allende propaganda. But all these efforts came to naught: by 1973, Allende was still in power. In fact, his party had gained support during those three years. The US felt it had no choice but to shift to a more aggressive stance, and resorted to the tactic they had used in Guatemala and Indonesia – the good old-fashioned coup. It was executed on 11 September 1973, by General Augusto Pinochet with CIA support under the code name Operation Fubelt.
British-made bombers – sent on the order of the CIA – came in low over the rooftops of Santiago and pounded the presidential palace with mortars and missiles. The rooftops and walls exploded in columns of billowing dust and smoke, putting an end to Salvador Allende and the hopes of his people. In the minutes before his death, Allende delivered his last address to the nation: ‘My words do not have bitterness but disappointment,’ he began. ‘I will pay for the loyalty of the people with my life. I am certain that the seeds which we have planted in the good conscience of thousands and thousands of Chileans will not be shrivelled for ever. Workers of my country: I want to thank you for the confidence you deposited in a man who was only an interpreter of great yearnings for justice. I have faith in Chile and its destiny. Other men will overcome this dark and bitter moment when treason seeks to prevail.’
For his efforts, Allende ended up sprawled on a red couch in his office with half his skull blown off. His spectacles lay shattered on the floor. Richard Nixon, in a similar office 5,000 miles away, nodded with approval.
Pinochet’s rise to power was swift and brutal. According to declassified CIA documents, after bombing the presidential palace he proceeded to arrest and imprison between 80,000 and 100,000 people who supported Allende’s ideas, most of them peasants and workers. Three thousand two hundred people were disappeared or executed, many of them in sports stadiums reconfigured as mass death camps during the early days of the regime. Two hundred thousand fled the country as political refugees.
The coup in Chile was similar in style to earlier US-backed coups, but it had a crucial new element. Instead of simply installing a new leader who would be friendly to US corporate interests, the US sought to totally remake economic policy in line with free-market principles – which was possible only because all opposition had been destroyed. According to a 1975 US Senate Committee investigation: ‘CIA collaborators were involved in preparing an initial overall economic plan which has served as the basis for the Junta’s most important economic decisions.’ The CIA funded a group of Chilean economists – graduates of the University of Chicago known as the Chicago Boys – to advise Pinochet’s
regime, with the goal of instating the prescriptions laid down by Milton Friedman in Capitalism and Freedom. Indeed, Friedman himself was a key adviser to the Pinochet regime.
The results of Friedman’s experiments in Chile were devastating. Hyperinflation set in immediately after the coup, hitting as high as 341 per cent. To quell it the Chicago Boys clamped down on the money supply, which caused a recession and sent unemployment to nearly 19 per cent (it had been 3 per cent under Allende). Over the following years, they set about privatising nearly 500 state companies, including banks, and even sold off the public schools and the social security system. They removed tariff barriers until even the manufacturers’ association that had backed the coup complained about cheap imports undercutting their businesses. They ended subsidies and price controls, which sent the cost of living soaring. And they halved government spending on social services, while the military received an increase. Even The Economist called it ‘an orgy of self-mutilation’.
There was some recovery after 1978, buoyed by speculative finance from abroad, but in 1982 the economy crashed hard: hyperinflation struck again, and unemployment reached 35 per cent. Eventually things got so bad that Pinochet was forced to respond by firing many of the Chicago Boys and renationalising many of the privatised companies and banks. In fact, the only reason the economy didn’t fall apart completely was because Codelco, the state copper mining company, had never been privatised and continued to supply 85 per cent of the country’s revenue. It was not until 1988 that the economy recovered, at which point Friedman and the Chicago Boys finally felt they could declare the experiment a success. But a success for whom? The poverty rate was 41 per cent. Average wages were 14 per cent lower. The minimum wage was 42 per cent lower. And hunger was widespread, with the food intake of the poorest 40 per cent of the population having plunged from 2,000 calories per day to 1,600. Even as late as 1993, GDP per capita was 12 per cent below its pre-coup level. The only people that benefited from the new economic regime were the elite. Banks and foreign investors were having a field day, ‘liberated’ as they were from regulation. And with the incomes of the richest 10 per cent soaring – with their share of the national pie up by 28 per cent – Chile had become one of the most unequal societies in the world.
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The people of Chile were not the only victims of this new tactic. The same economic strategy was applied elsewhere in Latin America, also with backing from the United States. The Chicago Boys were key advisers to the Brazilian government in the 1970s as it presided over economic reforms similar to those inflicted on Chile. In Uruguay, a US-backed military junta took power in 1973 and applied Chicago School principles. In Argentina, a US-backed junta seized power in 1976 and did the same: banning strikes, lifting price controls, privatising state companies and using torture to quell any resistance. Real wages declined by 40 per cent, and more than half the population was pushed below the poverty line. The very countries that had once been a beacon of hope for equitable development in the global South had been radically transformed. Arnold Harberger, the economist in charge of the Latin America programme at the University of Chicago, served as an adviser to each of these regimes, and also consulted for Bolivia’s military dictatorship.
The point to take from this sordid story is that neoliberal economic policies were so obviously destructive to people’s lives that it was very difficult to get them implemented in a democratic government. In most cases, the only way to bring them in was through military dictatorship and a state terror programme that would quash resistance wherever it emerged. In order to aggressively deregulate the economy, you first have to aggressively regulate the political sphere. Total market freedom requires total political unfreedom, even to the extent of mass imprisonment and concentration camps.
Neoliberalism Comes Home
Chile was the first victory in the Chicago-led counter-revolution. But it remained impossible to impose neoliberal policies in the United States and Europe – the Keynesian system was far too popular and, unlike in Chile and other Latin American countries, where democracy had been suspended, voters would quickly reject any attempt to roll it back. Yet this consensus began to change in the 1970s. Keynesianism had delivered high growth rates through the 1950s and 1960s, but by the early 1970s the US and Europe were beginning to face a crisis of ‘stagflation’ – a combination of high inflation and economic stagnation. Inflation rates soared from about 3 per cent in 1965 to about 12 per cent ten years later. According to standard Keynesian theory, when inflation rises, unemployment should decrease. But this time something strange was happening: unemployment was rising along with inflation. This dealt a serious blow to the credibility of Keynesian ideas, and created a golden opportunity for critics to offer up the alternatives they had been formulating – and testing – behind the scenes.
What set off the crisis of stagflation? Most scholars point to a few key events that happened during the Nixon administration. For one, Nixon was engaged in expansionary monetary policy – in other words, he was effectively printing money. On top of this, government spending on the Vietnam War at the time was spiralling out of control. As international markets worried that the US would not be able to make good on its debts, the dollar began to plummet in value and contributed further to inflation. And while all of this trouble was unfolding, another crisis hit. In 1973, OPEC decided to drive up the price of oil. The price of consumer goods suddenly shot up too, because the energy required to produce and transport them was more expensive. And because production became more expensive, economic growth slowed down and unemployment began to rise. It was a perfect storm.
The crisis of stagflation was the direct consequence of specific historical events. But the neoliberals rejected these explanations. Instead, they insisted that stagflation was a product of Keynesianism – the consequence of onerous taxes on the wealthy, too much economic regulation, labour unions that had become too powerful and wages that were too high. Government intervention, they claimed, had made markets inefficient, distorted prices and made it impossible for economic actors to act rationally. The whole market system was out of whack, and stagflation was the inevitable consequence. Keynesianism had failed, they claimed, and the system needed to be scrapped. In the end, this argument prevailed. Not because it was correct, but because it had more firepower behind it – and when it came to swaying public opinion it helped that Hayek and Friedman had both won the Nobel Memorial Prize in Economics for their ideas along these lines, in 1974 and 1976 respectively. The argument held a great deal of appeal for the wealthy, who were looking for a way to restore their class power, and they were more than happy to step in to support it. The crisis of the 1970s became a perfect excuse to dismantle the social contract of the post-war decades.
The upper class got their fix in the form of the ‘Volcker Shock’. Paul Volcker, chairman of the US Federal Reserve, argued that the only way to put an end to inflation was to dramatically raise interest rates, clamping down on the supply of money in order to recuperate its value. During the Reagan administration, Volcker jacked up interest rates from the low single digits to as high as 20 per cent. This caused a massive recession, as it dramatically increased the costs of doing business. As businesses laid off workers, unemployment rates shot to over 10 per cent. This decimated the power of organised labour, which had been the crucial counterbalance to the excesses that had led to the Great Depression. In sum, the Volcker Shock had devastating effects on the working class. It caused wages to collapse, and mortgage defaults tripled. But it cured inflation.
If tight monetarist policy (i.e. targeting low inflation) was the first component of neoliberalism to be put in place in the early 1980s, the second was ‘supply-side economics’. Reagan wanted to give more money to the already rich as a way of stimulating economic growth, the assumption being that they would invest their windfall cash in a productive way and generate new wealth that would gradually ‘trickle down’ to the rest of society. He cut the top marginal tax rate from 70 per cent t
o 28 per cent, and reduced the maximum capital gains tax to 20 per cent, the lowest since the Great Depression. But Reagan didn’t cut taxes for everyone; in order to plug the hole left by tax cuts for the rich, he raised payroll taxes on the working class. A third component of Reagan’s economic plan was to deregulate the financial sector. Because Volcker considered this policy to be too extreme, Reagan appointed Alan Greenspan to take his place in 1987. Greenspan went about unravelling many of the banking regulations that had been established in the post-war era. He even managed to abolish the Glass–Steagall Act, which had been designed to prevent banks from engaging in the sort of reckless speculation that had triggered the Great Depression.
Margaret Thatcher, who drew inspiration from Milton Friedman, implemented many of these same policies in Britain, at exactly the same time: high interest rates designed to clamp down on inflation, regressive taxation such as the ‘poll tax’ of 1989, and aggressive financial deregulation. Thatcher was particularly focused on breaking the labour unions, which she regarded as preventing the economy from operating efficiently. She defeated the National Union of Mineworkers in 1985 after a bruising battle, and introduced legislation to curb workers’ rights. She also made deep cuts to public spending and – the centrepiece of her economic policy – privatised most of Britain’s famous national companies, including British Petroleum, British Airways and Rolls-Royce, along with public utilities including water and electricity.