When was the last time you put air in your tires? I tried to fill mine up a few days ago at the gas station. As I pulled up, I saw that the friendly old compressor—helpfully labeled “AIR”—had been replaced by a new machine, complete with a credit card interface. Previously as free as, well, fresh air, 2 minutes of pumped air now cost 2 dollars. Semi-huffy, I got out my credit card and inserted it. The reader—and thus the machine itself—didn’t work.
When I went inside to tell the attendant and ask for his help, he told me that the machine hadn’t been working for 3 days. He apologized and said that he would have fixed it if he could, but was prohibited from doing so because another business—i.e., a third party that didn’t own the gas station—had bought the compressor. The implication being: “if I touch this and mess anything up, the third party will sue the gas station, and I’ll probably get fired.” While the attendant didn’t say this, he didn’t need to. I thanked him and left, tires unfilled, and low tire pressure gauge beeping away.
In the 1980s, Ronald Reagan might have used my experience—the quotidian problem, the broken machinery, the seemingly sympathetic but possibly uncaring interlocutor, and the non-resolution of said problem—to illustrate the absurdity of life in the USSR. That absurdity, the reason why life in the Soviet Union wasn’t that great, could be summed up in a single word: socialism.
In the 2020s, however, these experiences are an everyday occurrence in Reagan’s USA. And there is a simple, single word explanation for why that is, which popped into my head as I drove away from the gas station: neoliberalism.
I’m not the only one who has had such thoughts—nor is such discontent limited to the United States. Many Chileans, who rioted en masse in 2019, and elected a communist-curious president soon thereafter, claimed that their revolution was one against “neoliberalism.” In a Chilean context, this means terminating or reforming the economic policies originally adopted during the military regime of Augusto Pinochet, which were extended and deepened under his democratic successors.
How did a patchwork of economic reforms, which reduced poverty and made Chile a middle-income country, come to be seen as an ideology? And why did many Chileans blame that ideology for all of the ills of their society, and seek to reverse those reforms? Sebastian Edwards seeks to answer these questions in The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism.
Edwards, an economics professor at UCLA, succeeds on both counts. The odd lapse into academic convention aside—formulaic intros and conclusions, the occasional near verbatim repetition of key points made in earlier chapters—Edwards is an engaging and fluid writer. He is equally at home describing the factional infighting of the Pinochet regime, and explaining complex monetarist theories about foreign exchange rates. For the economic illiterates among us (including yours truly), Edwards supplements his analysis with graphs and charts that are easy for a laymen to understand. His analysis is also dispassionate and fair minded. This is all the more admirable given that Edwards is of Chilean heritage, and personally knows many of the people he is writing about.
The Chile Project deserves wide readership beyond an academic audience. If you are interested in politics, the Cold War in Latin America, and what economic policy may look like in the developed world in the next decade, check it out!
In a special SERIES of THREE posts, I’m going to write a thematic review of The Chile Project. This post will cover Edwards’ correction of popular misconceptions about the Allende government, and the background of Pinochet’s economic advisors. The second will focus on the success of Pinochet’s economic policies, and their retention and expansion under subsequent democratic governments. The third will address the modern reaction against these policies, as people develop status anxiety after satisfaction of their basic material needs.
Dispelling Myths
In the United States and Great Britain, the “narrative” of modern Chile that has achieved popular consensus is one told by leftist intellectuals. It goes something like this.
Chile, like most of Latin America, was a resource-rich, but cash-poor backwater. A cruel ruling elite, aided by the omnipresent and omniscient United States, hoarded wealth while impoverishing the broader population. This all changed in 1970, when the Chilean people elected Salvador Allende to the presidency. Allende was a social democrat, of the same stripe as those of Scandinavia or West Germany. He attempted to enact moderate redistributive policies to improve the living standards of working people. HENRY KISSINGER, outraged by Allende’s mild socialism, sabotaged the Chilean economy, and helped recalcitrant Chilean businessmen and angry military officers launch a coup. General Augusto Pinochet and a military junta deposed (and maybe murdered) Allende. While the military engaged in an orgy of fascist political oppression and mass murder, America sent a team of economists—led by MILTON FRIEDMAN—to Chile to impose “shock therapy” on the economy, destroy social programs, and transfer all wealth to the ruling elite. Chile suffered under Pinochet’s tyrannical rule for 20 years, which only ended because America had no need for his anti-communist regime after the collapse of the USSR.
There is some truth in the above. Pinochet was an autocrat, and his regime did murder, torture, and oppress political dissidents. But Edwards explains that much of this conventional wisdom is lacking in context or inaccurate. We’ll look at three specific instances below.
Allende was actually a communist and his economic policies failed independently of foreign causes.
One of the most compelling parts of the leftist propaganda on Pinochet’s regime is its claim that Salvador Allende was a “social democrat.” To Western ears, this term recalls the social democratic parties of western Europe, and maybe the Labour Party in Great Britain—in both cases, parties that, unlike actual communist parties aligned with the Comintern and the Soviet Union, accepted the democratic political process, and its accordant procedural and legal norms. If Allende was a garden variety social democrat, and not a mean-spirited, evil communist, the coup and his subsequent death take on a decidedly unsavory and authoritarian sheen.
Allende, however, was not a social democrat. He was a communist. People who push the “narrative” described above are aided in their dissembling by a misnomer. While Allende was the leader of the “Socialist Party,” Edwards explains that this organization was actually the most extreme left-wing faction in Chile at that time:
The fact that Salvador Allende was a member of the Socialist Party, and not the Communist Party, has led to confusion among many uninformed authors. At the time—in the 1950s, 1960s, and early 1970s—there were two Marxist-Leninist political parties in Chile. The Communist Party followed the political line developed in the USSR and favored building broad electoral alliances with “petit bourgeois” parties; this was the so-called Frente Popular (Popular Front) strategy, based on a gradual, incremental implementation of socialism. The Socialist Party—the one Allende belonged to—was significantly to the Left, had close ties with Cuba and North Korea, and believed that the move to socialism had to be fast and based on “workers’ power,” a strategy that excluded social democratic and Center-Left parties.
In light of his communist beliefs, it is unsurprising that Allende appointed fellow communists to key governmental posts and instituted communist policies. Allende’s minister of economics was a Marxist university professor. His minister of finance was a “linotype union leader . . . who had no college education.”
To pay for his extensive social assistance and welfare programs, Allende ordered the Central Bank to begin printing massive amounts of money and instituted foreign exchange controls. This approach, which, Edwards notes, is “very similar to those touted by supporters of Modern Monetary Theory,” led to hyperinflation. While out of-control price growth was a bad thing for ordinary Chileans—it wiped out their savings and made them unable to afford basic consumer goods—it helped advance one of Allende’s objectives: seizure of the means of production. His government nationalized and expropriated the “commanding heights” of the economy—banks, mining, insurance, and finance—and printed more money to compensate the former owners.
With inflation approaching 700 percent by 1973, Allende instituted a “surrealistic system of price controls.” Doing so created shortages and corruption at all levels of the economy. Edwards has personal experience of each: as a 19-year-old college student, he was hired as an assistant to the director of costs and prices at the Directorate of Industry and Commerce:
In 1973 . . . prices authorized by the directorate became outdated within a week or so. New requests were immediately submitted, and the directorate promptly denied them. Any first-year student would have predicted the results of this viciously circular process: massive shortages and a thriving black market for all sorts of goods, including such essentials as sugar, rice, coffee, cooking oil, and toilet paper. But the political authorities believed that a strong hand was needed to deal with price gouging promoted by the “enemies of the revolutionary process.” An army of inspectors roamed the city looking for “speculators,” for shop owners who refused to sell at the official price, and for traitors and “antipatriots.” If they found merchandise in a warehouse, the store was closed, the goods were confiscated, a huge fine was imposed, and, sometimes, the owner was sent to jail.”
After 3 years in power, Allende’s policies had completely destroyed the Chilean economy. Edwards accurately notes that the failure of Allende’s approach was self-inflicted—it had nothing to do with external economic “sabotage” (whatever that is) from outside actors:
In September 1973, the Chilean economy was in shambles: inflation exceeded 700 percent, and there were pervasive shortages. Black markets were widespread, the trade deficit was gigantic, and the country had no international reserves. Inflation-adjusted wages had declined by 35 percent relative to the pre-Allende period.
Despite the chaos, Allende did not change course—he instead doubled down on his fiscal and monetary policies. “The opposition,” Edwards notes, “pointed out that, as they had warned, Chile was following Cuba’s step toward rationing, dictatorship, and collapse.”
After Allende’s government ignored numerous court rulings holding its economic and civil policies to be unconstitutional, a majority of the Chilean Congress “accused the government of violating the Chilean Constitution by trying to impose a totalitarian political regime,” and requested that the “armed forces . . .put an end to the ‘illegitimate’ Allende government.” The Chilean military took the invitation, and overthrew the Allende government on September 11, 1973. Allende, besieged in the presidential palace, committed suicide with an AK-47 given to him by Fidel Castro.
The United States opposed Allende’s government but did not support the military coup.
Critics of Pinochet’s regime rightly note that the military overthrew a democratically elected government. But Allende has his own legitimacy problems. While elected in a constitutional manner, he only received 36.6% of the vote—against a combined total of 63.3% for the conservative and Christian Democratic candidates, both of whom supported private property rights. Further, only 40,000 votes separated Allende from the conservative candidate. As such, though he won the election, Allende did not have a popular mandate to make the radical economic and social changes to Chile that he did. When viewed in this light, the military’s intervention, ostensibly made at the suggestion of the Chilean Congress, looks less egregious than it would otherwise.
The coup would seem more dubious, however, had it been encouraged by foreign actors—which is why Allende’s supporters claim the United States was intimately involved in his ouster. Their accusations, however, are not supported by the evidence. Edwards accurately observes that the American government certainly did not like Allende, and materially supported a civilian plot to stop him from taking power in 1970. (This attempt failed, ironically, due to the intervention of a loyal Chilean general whom the plotters sought to kidnap.)
Thereafter, however, American involvement in Chilean affairs was limited to providing financial support to parties that opposed Allende. Edwards cites the conclusion of the Church Committee—hardly a source favorably disposed to the “intelligence community”—that there was no evidence that the CIA was involved in the 1973 coup. The radicalism of Allende’s government, not foreign involvement, caused internal forces to overthrow his administration.
The “Chicago Boys” who ultimately influenced Pinochet’s economic policy were independent of American direction.
Central to the Left’s myth about Pinochet’s economic reforms was that they were instituted at the behest of Milton Friedman and a cadre of like-minded economists. Like paratroopers, they were dropped into Chile in 1973 and instituted radical—and, yes, NEOLIBERAL—policies that caused privation, lowered living standards, and transferred wealth from the common people to a greedy elite.
While there is a grain of truth in the above—Milton Freidman really did have an important influence on Pinochet, which we’ll address in the next post—the rest of it is either smoke without fire, or just nonsense.
The “Chicago Boys” of the book’s subtitle are a group of Chilean economists (we’ll meet them in the next post) who were educated at the University of Chicago in the 1950s and early 1960s. Together, they developed many of the economic policies Pinochet adopted during his administration. Their stay in Chicago was financed by the U.S. State Department and private American foundations—including the Rockefeller Foundation, which participated due to Nelson Rockefeller’s personal interest in Spanish-speaking countries—pursuant to “The Chile Project.” This was one of many State Department programs to provide economic training to officials in third world countries. As part of the program, the Pontifical Catholic University of Chile (Catolica), agreed to hire the students as professors upon their return to Chile.
The Chicago Boys learned a great deal from their time in Hyde Park. Then, as now, the University of Chicago had one of the best economic faculties in the world. In addition to attending lectures by Milton Friedman, the Chileans:
. . . took courses from Martin J. Bailey (in macroeconomics), Lloyd Metzler (in international trade), Gregg Lewis(in labor), Al Harberger (in public finance), and Ted Schultz (in agriculture. The early members of the group also took a course on monetary theory from Gary Becker, who had just obtained his PhD . . .
This faculty certainly had a liberal point of view, especially Friedman, who a student remembered as “rejecting Keynesianism and anything related to planning and dirigisme.”
The Chicago Boys returned to a Chile dominated by dominated by economists at the Unitersidad de Chile, “with its (mostly) structuralist, Keynesian, and Marxist faculty,” and byzantine and outdated statist policies. Prior to their professorial appointments, the economic curriculum at Catolica involved readings from
. . . old notes from a commercial law course developed by a long deceased lawyer. [Students] were also dissatisfied with the capstone course, Merceria (Haberdashery), where blindfolded students had to recognize different types of textiles by touching them. Since, at the time, every kind of fabric had a different import tariff—ranging from 0 percent to 150 percent—this skill was considered essential for anyone involved in international trade.
Edwards notes that the Chicago Boys had limited influence in the 1960s. Their policy recommendations were unpopular with most businessmen and military officials, who viewed their liberal ideas—which would have been unremarkable in the United States or other advanced economies—as radical and antipatriotic. While a trio of Chicago trained economists were asked to write an economic policy for Jorge Alessandri, a former president and Allende’s conservative opponent in the 1970 election, Alessandri rejected their proposals.
So, to recap: a group of Chilean students received money from the U.S. government, went to Chicago, learned about free-market economics, and returned to Chile, where they exerted marginal influence on economic policy for the next decade. While this story involves some classic ingredients of left-wing paranoia—the STATE DEPARTMENT! The ROCKEFELLERS!—the end result is a nothingburger.
The Chile Project ran from 1955 to 1964. Allende was elected in 1970. The State Department has many powers, but clairvoyance isn’t one of them. This time gap makes the Chile Project look like what it actually was: an innocuous (and boring) developmental aid program. And while the Chicago Boys were certainly influenced by their American education, it is hard to fault them for wanting to liberalize Chile’s economic approach, given its sclerotic and statist cast. Further, saying that the policies for which they advocated—and which they eventually implemented as officials in Pinochet’s regime—were products of an “American conspiracy” denies them agency. Doing so also obscures the more important and interesting question: why did the political actors in Pinochet’s government—namely, Pinochet himself and his fellow military officers—became convinced that they had to hire the Chicago Boys to revive the Chilean economy after the disastrous approach of Allende’s government?
This is one of the many questions we will address in the next post, on the institution of “neoliberal” policies during Pinochet’s regime. Live in anticipation until then!
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Great information, thank you. I know nothing about this despite my Latin American studies class in high school.