The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  Like Ewen Cameron’s psychiatric department at McGill in the same period, the University of Chicago’s Economics Department was in the thrall of an ambitious and charismatic man on a mission to fundamentally revolutionize his profession. That man was Milton Friedman. Though he had many mentors and colleagues who believed just as fiercely as he did in ultra laissez-faire, it was Friedman’s energy that gave the school its revolutionary fervor. “People would always ask me, ‘Why are you so excited? Are you going out on a date with a beautiful woman?’” recalls Becker. “I said, ‘No, I’m going to a class in economics!’ Being a student of Milton’s was magic indeed.”3

  Friedman’s mission, like Cameron’s, rested on a dream of reaching back to a state of “natural” health, when all was in balance, before human interferences created distorting patterns. Where Cameron dreamed of returning the human mind to that pristine state, Friedman dreamed of depatterning societies, of returning them to a state of pure capitalism, cleansed of all interruptions—government regulations, trade barriers and entrenched interests. Also like Cameron, Friedman believed that when the economy is highly distorted, the only way to reach that prelapsarian state was to deliberately inflict painful shocks: only “bitter medicine” could clear those distortions and bad patterns out of the way. Cameron used electricity to inflict his shocks; Friedman’s tool of choice was policy—the shock treatment approach he urged on bold politicians for countries in distress. Unlike Cameron, however, who was able to instantly apply his pet theories on his unwitting patients, Friedman would need two decades and several twists and turns of history before he too got the chance to put his dreams of radical erasure and creation into action in the real world.

  Frank Knight, one of the founders of Chicago School economics, thought professors should “inculcate” in their students the belief that each economic theory is “a sacred feature of the system,” not a debatable hypothesis.4 The core of such sacred Chicago teachings was that the economic forces of supply, demand, inflation and unemployment were like the forces of nature, fixed and unchanging. In the truly free market imagined in Chicago classes and texts, these forces existed in perfect equilibrium, supply communicating with demand the way the moon pulls the tides. If economies suffered from high inflation, it was, according to Friedman’s strict theory of monetarism, invariably because misguided policy makers had allowed too much money to enter the system, rather than letting the market find its balance. Just as ecosystems self-regulate, keeping themselves in balance, the market, left to its own devices, 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—an Eden of plentiful employment, boundless creativity and zero inflation.

  According to the Harvard sociologist Daniel Bell, this love of an idealized system is the defining quality of radical free-market economics. Capitalism is envisaged as “a jeweled set of movements” or a “celestial clockwork…a work of art, so compelling that one thinks of the celebrated pictures of Apelles who painted a cluster of grapes so realistic that the birds would come and pick at them.”5

  The challenge for Friedman and his colleagues was how to prove that a real-world market could live up to their rapturous imaginings. Friedman always prided himself on approaching economics as a science as hard and rigorous as physics or chemistry. But hard scientists could point to the behavior of the elements to prove their theories. Friedman could not point to any living economy that proved that if all “distortions” were stripped away, what would be left would be a society in perfect health and bounteous, since no country in the world met the criteria for perfect laissez-faire. Unable to test their theories in central banks and ministries of trade, Friedman and his colleagues had to settle for elaborate and ingenious mathematical equations and computer models mapped out in the basement workshops of the social sciences building.

  A love of numbers and systems is what had led Friedman to economics. In his autobiography, he says his moment of epiphany came when a high-school geometry teacher wrote the Pythagorean theorem on the blackboard and then, awed by its elegance, quoted from John Keats’s “Ode on a Grecian Urn”: “‘Beauty is truth, truth beauty,’—that is all / Ye know on earth, and all ye need to know.”6 Friedman passed on that same ecstatic love of a beautiful all-encompassing system to generations of economics scholars—along with a search for simplicity, elegance and rigor.

  Like all fundamentalist faiths, Chicago School economics is, for its true believers, a closed loop. The starting premise is that the free market is a perfect scientific system, one in which individuals, acting on their own self-interested desires, create the maximum benefits for all. It follows ineluctably that if something is wrong within a free-market economy—high inflation or soaring unemployment—it has to be because the market is not truly free. There must be some interference, some distortion in the system. The Chicago solution is always the same: a stricter and more complete application of the fundamentals.

  When Friedman died in 2006, obituary writers struggled to summarize the breadth of his legacy. One settled on this statement: “Milton’s mantra of free markets, free prices, consumer choice and economic liberty is responsible for the global prosperity we enjoy today.”7 This is partially true. The nature of that global prosperity—who shares in it, who doesn’t, where it came from—are all highly contested, of course. What is irrefutable is the fact that Friedman’s free-market rulebook, and his savvy strategies for imposing it, have made some people extremely prosperous, winning for them something approximating complete freedom—to ignore national borders, to avoid regulation and taxation and to amass new wealth.

  This knack for thinking highly profitable thoughts appears to have its roots in Friedman’s early childhood, when his parents, immigrants from Hungary, bought a garment factory in Rahway, New Jersey. The family apartment was in the same building as the shop floor, which, Friedman wrote, “would be termed a sweatshop today.”8 Those were volatile times for sweatshop owners, with Marxists and anarchists organizing immigrant workers into unions to demand safety regulations and weekends off—and debating the theory of worker ownership at after-shift meetings. As the boss’s son, Friedman no doubt heard a very different perspective on these debates. In the end, his father’s factory went under, but in lectures and television appearances, Friedman spoke of it often, invoking it as a case study for the benefits of deregulated capitalism—proof that even the worst, least-regulated jobs offer the first rung on the ladder to freedom and prosperity.

  A large part of the appeal of Chicago School economics was that, at a time when radical-left ideas about workers’ power were gaining ground around the world, it provided a way to defend the interests of owners that was just as radical and was infused with its own claims to idealism. To hear Friedman tell it, his ideas were not about defending the right of factory owners to pay low wages but, rather, all about a quest for the purest possible form of “participatory democracy” because in the free market, “each man can vote, as it were, for the color of tie he wants.”9 Where leftists promised freedom for workers from bosses, citizens from dictatorship, countries from colonialism, Friedman promised “individual freedom,” a project that elevated atomized citizens above any collective enterprise and liberated them to express their absolute free will through their consumer choices. “What was particularly exciting were the same qualities that made Marxism so appealing to many other young people at the time,” recalled the economist Don Patinkin, who studied at Chicago in the forties—“simplicity together with apparent logical completeness; idealism combined with radicalism.”10 The Marxists had their workers’ utopia, and the Chicagoans had their entrepreneurs’ utopia, both claiming that if they got their way, perfection and balance would follow.

  The question, as always, was how to get to that wondrous place from here. The Marxists were clear: revolution—get rid of the current system, replace it with socialism. For the Chicagoans, the answer was not as straightforward. The United States w
as already a capitalist country, but as far as they were concerned, just barely. In the U.S., and in all supposedly capitalist economies, the Chicagoans saw interferences everywhere. To make products more affordable, politicians fixed prices; to make workers less exploited, they set minimum wages; to make sure everyone had access to education, they kept it in the hands of the state. These measures often seemed to help people, but Friedman and his colleagues were convinced—and they “proved” it with their models—that they were actually doing untold harm to the equilibrium of the market and the ability of its various signals to communicate with each other. The mission of the Chicago School was thus one of purification—stripping the market of these interruptions so that the free market could sing.

  For this reason, Chicagoans did not see Marxism as their true enemy. The real source of the trouble was to be found in the ideas of the Keynesians in the United States, the social democrats in Europe and the developmentalists in what was then called the Third World. These were believers not in a utopia but in a mixed economy, to Chicago eyes an ugly hodgepodge of capitalism for the manufacture and distribution of consumer products, socialism in education, state ownership for essentials like water services, and all kinds of laws designed to temper the extremes of capitalism. Like the religious fundamentalist who has a grudging respect for fundamentalists of other faiths and for avowed atheists but disdains the casual believer, the Chicagoans declared war on these mix-and-match economists. What they wanted was not a revolution exactly but a capitalist Reformation: a return to uncontaminated capitalism.

  Much of this purism came from Friedrich Hayek, Friedman’s own personal guru, who also taught at the University of Chicago for a stretch in the 1950s. The austere Austrian warned that any government involvement in the economy would lead society down “the road to serfdom” and had to be expunged.11 According to Arnold Harberger, a longtime professor at Chicago, “the Austrians,” as this clique-within-a-clique was called, were so zealous that any state interference was not just wrong, but “evil…. It’s as if there is a very pretty but highly complex picture out there, which is perfectly harmonious within itself, you see, and if there’s a speck where it isn’t supposed to be, well, that’s just awful…it is a flaw that mars that beauty.”12

  In 1947, when Friedman first joined with Hayek to form the Mont Pelerin Society, a club of free-market economists named for its location in Switzerland, the idea that business should be left alone to govern the world as it wished was one barely suitable for polite company. Memories of the market crash of 1929 and the Great Depression that followed were still fresh—the life savings destroyed overnight, the suicides, the soup kitchens, the refugees. The scale of this market-created disaster had led to a surging demand for a distinctly hands-on form of government. The Depression did not signal the end of capitalism, but it was, as John Maynard Keynes forecast a few years earlier, “the end of laissez-faire”—the end of letting the market regulate itself.13 The 1930s through to the early 1950s was a time of unabashed faire: the can-do ethos of the New Deal gave way to the war effort, with public works programs launched to create much-needed jobs, and new social programs unveiled to prevent growing numbers of people from turning hard left. It was a time when compromise between left and right was not a dirty word but part of what many saw as a noble mission to prevent a world, as Keynes wrote to President Franklin D. Roosevelt in 1933, in which “orthodoxy and revolution” are left “to fight it out.”14 John Kenneth Galbraith, heir to Keynes’s mantle in the U.S., described the prime missions of politicians and economists alike as “the avoidance of depression and the prevention of unemployment.”15

  The Second World War lent new urgency to the war against poverty. Nazism had taken root in Germany at a time when the country was in a devastating depression, provoked by the punishing reparations imposed after the First World War and deepened by the 1929 crash. Keynes had warned early on that if the world took a laissez-faire approach to Germany’s poverty, the blowback would be ferocious: “Vengeance, I dare predict, will not limp.”16 Those words went unheeded at the time, but when Europe was rebuilt after the Second World War, the Western powers embraced the principle that market economies needed to guarantee enough basic dignity that disillusioned citizens would not go looking once again for a more appealing ideology, whether fascism or Communism. It was this pragmatic imperative that led to the creation of almost everything that we associate today with the bygone days of “decent” capitalism—social security in the U.S., public health care in Canada, welfare in Britain, workers’ protections in France and Germany.

  A similar, more radical mood was on the rise in the developing world, usually going under the name developmentalism, or Third World nationalism. Developmentalist economists argued that their countries would finally escape the cycle of poverty only if they pursued an inward-oriented industrialization strategy instead of relying on the export of natural resources, whose prices had been on a declining path, to Europe and North America. They advocated regulating or even nationalizing oil, minerals and other key industries so that a healthy share of the proceeds fed a government-led development process.

  By the 1950s, the developmentalists, like the Keynesians and social democrats in rich countries, were able to boast a series of impressive success stories. The most advanced laboratory of developmentalism was the southern tip of Latin America, known as the Southern Cone: Chile, Argentina, Uruguay and parts of Brazil. The epicenter was the United Nations’ Economic Commission for Latin America, based in Santiago, Chile, and headed by the economist Raúl Prebisch from 1950 to 1963. Prebisch trained teams of economists in developmentalist theory and dispatched them to act as policy advisers for governments across the continent. Nationalist politicians like Argentina’s Juan Perón put their ideas into practice with a vengeance, pouring public money into infrastructure projects such as highways and steel plants, giving local businesses generous subsidies to build their new factories, churning out cars and washing machines, and keeping out foreign imports with forbiddingly high tariffs.

  During this dizzying period of expansion, the Southern Cone began to look more like Europe and North America than the rest of Latin America or other parts of the Third World. The workers in the new factories formed powerful unions that negotiated middle-class salaries, and their children were sent off to study at newly built public universities. The yawning gap between the region’s polo-club elite and its peasant masses began to narrow. By the 1950s, Argentina had the largest middle class on the continent, and next-door Uruguay had a literacy rate of 95 percent and offered free health care for all citizens. Developmentalism was so staggeringly successful for a time that the Southern Cone of Latin America became a potent symbol for poor countries around the world: here was proof that with smart, practical policies, aggressively implemented, the class divide between the First and Third World could actually be closed.

  All this success for managed economies—in the Keynesian north and the developmentalist south—made for dark days at the University of Chicago’s Economics Department. The Chicagoans’ academic archrivals at Harvard, Yale and Oxford were being enlisted by presidents and prime ministers to help tame the beast of the market; almost no one was interested in Friedman’s daring ideas about letting it run even more wildly than before. There were, however, a few people left who were keenly interested in Chicago School ideas—and they were a powerful few.

  For the heads of U.S. multinational corporations, contending with a distinctly less hospitable developing world and with stronger, more demanding unions at home, the postwar boom years were unsettling times. The economy was growing fast, enormous wealth was being created, but owners and shareholders were forced to redistribute a great deal of that wealth through corporate taxes and workers’ salaries. Everyone was doing well, but with a return to the pre–New Deal rules, a few people could have been doing a lot better.

  The Keynesian revolution against laissez-faire was costing the corporate sector dearly. Clearly what was needed to
regain lost ground was a counterrevolution against Keynesianism, a return to a form of capitalism even less regulated than before the Depression. This wasn’t a crusade that Wall Street itself could lead—not in the current climate. If Friedman’s close friend Walter Wriston, head of Citibank, had come forward and argued that the minimum wage and corporate taxes should both be abolished, he naturally would have been accused of being a robber baron. And that’s where the Chicago School came in. It quickly became clear that when Friedman, a brilliant mathematician and skilled debater, made those same arguments, they took on an entirely different quality. They might be dismissed as wrongheaded but they were imbued with an aura of scientific impartiality. The enormous benefit of having corporate views funneled through academic, or quasi-academic, institutions not only kept the Chicago School flush with donations but, in short order, spawned the global network of right-wing think tanks that would churn out the counterrevolution’s foot soldiers worldwide.

  It all came back to Friedman’s single-minded message: everything went wrong with the New Deal. That’s when so many countries “including my own, got off on the wrong track.”17 To get governments back on the right track, Friedman, in his first popular book, Capitalism and Freedom, laid out what would become the global free-market rulebook and, in the U.S., would form the economic agenda of the neoconservative movement.

  First, governments must remove all rules and regulations standing in the way of the accumulation of profits. Second, they should sell off any assets they own that corporations could be running at a profit. And third, they should dramatically cut back funding of social programs. Within the three-part formula of deregulation, privatization and cutbacks, Friedman had plenty of specifics. Taxes, when they must exist, should be low, and rich and poor should be taxed at the same flat rate. Corporations should be free to sell their products anywhere in the world, and governments should make no effort to protect local industries or local ownership. All prices, including the price of labor, should be determined by the market. There should be no minimum wage. For privatization, Friedman offered up health care, the post office, education, retirement pensions, even national parks. In short, and quite unabashedly, he was calling for the breaking of the New Deal—that uneasy truce between the state, corporations and labor that had prevented popular revolt after the Great Depression. Whatever protections workers had managed to win, whatever services the state now provided to soften the edges of the market, the Chicago School counterrevolution wanted them back.