A Summary

In 1989 Francis Fukuyama famously declared the “end of history,” by which he meant that the modern liberal free-market democracy was the ultimate evolution in human governmental form.  It was the same year that the unfettered free-market economic policies of Milton Friedman were pronounced the “Washington Consensus,” which was interpreted to mean that anyone who was anyone knew that the unconstrained free market was the best of all possible worlds.  But what if an unfettered free market is incompatible with democracy?  What if virtually every economically hard-pressed country that has accepted radical free-market economic policies has been in one way or another forced to do so and has essentially sprung these policies on an unsuspecting, and quickly unsupportive, public?

This is the primary thesis of Naomi Klein’s remarkable new book The Shock Doctrine: The Rise of Disaster Capitalism.  It’s what binds into a comprehensible whole the 1973 overthrow of and Salvador Allende’s government in Chile, the structural adjustment policies of the World Bank, the secession of Russia from the Soviet Union, the 1997 economic collapse of the Asian Tigers (South Korea, Thailand, Malaysia, and Indonesia), the American attempt to impose a free market on Iraq after the American invasion, the aftermath of Hurricane Katrina, and the Asian tsunami of Christmas 2005.   Each of these diverse events (and many other similar disasters) so stunned the populations of their respective countries that their governments were able to force into place—frequently at the insistence of international financial institutions—the radical, and ultimately destructive free-market policies that would never otherwise have been tolerated.  Klein appears to be a meticulous journalist, and she marshals fact after fact to demonstrate to even my skeptical mind that a great deal of the political and historical confusion of the last generation can be clarified by, so to speak, following the money.  “It’s the economy, stupid!”  Following the birth and application of Milton Friedman’s theories of the unfettered free market leads to an important and painful narrative binding together much of the bizarre political, social, and economic history of the last thirty-five years into a comprehensible, if ugly, whole.

Wiping the Slate Clean

Klein begins her exploration of the economic history of the last generation in an unusual place: the 1950s research funded by the United States Central Intelligence Agency (CIA) into human brainwashing by shocking the brain (either with electroshock “therapy” or a panoply of psychoactive drugs) into regression so complete that the individual would be susceptible to a complete reprogramming of the mind, a “wiping the slate clean” to allow the personality to be totally rewired.  It isn’t possible, of course, to wipe the slate of the mind clean without destroying it, and the research was soon terminated and condemned as unethical; nevertheless, the findings formed the basis for what would eventually morph into the “enhanced interrogation techniques” that the United States would export to Central and South American military governments through training programs at the notorious School of the Americas (later renamed the Western Hemisphere Institute for Security Cooperation), techniques that would ultimately turn up in Abu Ghraib, Guantánamo, and clandestine CIA locations around the world.

It seems a bizarre place to begin the exploration into economic history.  What does torture have to do with radical, free-market economics?  A great deal, it turns out. 

In the middle of the twentieth century, the Economics Department of the University of Chicago under its chairman Milton Friedman became the center of what was then a fringe movement in economic understanding: the radically unfettered free-market.  Friedman’s ideas were actually a sophisticated restatement of a very old idea.  The “invisible hand” of capitalist economics works best when unconstrained.  The best thing government can do for the economy is just get out of the way—allow virtually all economic activity to function under the brutal “discipline” of the unregulated free market.  First, governments must remove the rules and regulations standing in the way of the accumulation of profits.  Second, any government assets that corporations could be running at a profit should be privatized, such as health care, the post office, education, retirement pensions, even national parks.  Third, government spending—especially on the social programs that constitute the economic safety net for those who don’t do well in the market—should be dramatically curtailed.  Klein writes:

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 in 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. (p. 51)

In other words, what Chicago School economics was ultimately looking for was to wipe the slate of the economy clean of government interference and reprogram it to run as a “perfect scientific system.”  It would soon become clear that the only way the slate could be wiped clean was by shocks to the economy analogous to the electroshock treatments explored by the CIA in the fifties … and sometimes backed up by the literal, physical shock of “enhanced interrogation techniques.”

There are many problems with this fundamentalist faith, but in practice the major tragedy has been that such radical free-market therapy is itself a brutal shock to the economy from which the poor and dispossessed have difficulty recovering.  Allowing the currency to float on international markets, for instance, usually leads to such inflation that savings are quickly obliterated.  Free trade opens the country to products that can be produced more cheaply elsewhere, shuttering local manufacturers and businesses, forcing people into unemployment.  The industry that does arise because of free trade is usually more mechanized and thus requires fewer people that what it replaces.  Privatizing previously government-owned enterprises means that prices rise to what the market can bear, leaving the poor unable to afford, for instance, water or power or transportation.  And then the cuts in social programs shred the safety nets that had protected individuals from destitution.  Those who have been living near the edge are quickly pushed over into freefall.  The shock is profound.

The Chicago School justified these “necessary” and “painful” “transitions” in the faith that they would soon produce a smoothly functioning economy whose benefits would quickly trickle down to the poor.  While it has sometimes been true that such shocks have led to improvements in the economy as measured by Gross Domestic Product or other yardstick that averages out incomes, large segments of the poor (and often the previous middle class) never see the benefits and remain in increasing destitution.

Friedman promoted this radical free-market system (or “neoliberalism” as it came to be known) as the epitome of freedom and democracy: free markets, freedom from government interference, one-dollar-one-vote democracy.  But why would a majority in any democratic country voluntarily choose to subject themselves to such shock therapy when so few people stand to gain and so many will surely lose?  The hidden-in-plain-site story of the last thirty years of economic history is that democratic countries don’t choose such a system voluntarily.  (The United States might appear to be an exception, but we have become more of a “corporatist state” [where large corporations and government fuse] than the ideal Friedman envisioned.)  Ordinarily, radical free-market economics must be imposed upon an unwilling population by a dictatorial government, IMF or World Bank demands, or (more recently) by the globalized, free market itself.  The most usual path has been that national leaders (whether autocrats or democratically elected) have had to plan the shift to an unfettered free market in secret and then impose it upon a population that has recently been so shocked by a political upheaval, economic calamity, or natural disaster that it no longer has the will or capacity to resist.  Naomi Klein calls it “disaster capitalism.”

In the minds of most economists during 1950s, the notion of an unfettered free market existed only at the extreme fringe of economic thought, only in the theories of a small group of radical economists, many affiliated with the “Chicago School” of Milton Friedman.  The world had just come through a severe global economic depression and a world war, and it seemed self-evident that government intervention economic markets was necessary: government spending to stimulate the economy, social safety nets to protect the most vulnerable, government ownership of key industries, government regulation of businesses and the overall economy.  But powerful economic and political forces saw potentially enormous profits in Friedman’s ideas and began advocating for them. 

In the 1950s the US government instituted an exchange program between American and Latin American economists.  Ordinarily, such professional exchanges brought students to a range of schools and ideas.  Why this program sent all of its up-and-coming young Latin American economists to a single, decidedly at the fringe of economic thought is not clear.  What is clear is that a generation of Latin American “Chicago Boys” was gradually trained in the economic theories of Milton Friedman, a generation that would eventually transform the economics and  politics of Central and South America in the last decades of the twentieth century.

Chile: Assassination and a Military/Economic Coup

It began with the 1973 assassination of Salvador Allende and the coup lead by General Augusto Pinochet in Chile.  American CIA involvement in the coup, it later turned out, was largely prompted by the economic losses that US multinationals were sustaining under the socialist president Salvador Allende, who had strong popular support within his country.  Coup planners recruited several of Friedman’s disciples (known throughout the world as the “Chicago Boys”) in secret to devise an economic blueprint for the new government.  (According to later US Senate investigation, the CIA provided over three-quarters of the funding for this planning.)  In the shock and dislocation of the coup, the slate could be wiped clean and a new economics instituted.  Twenty-four hours after Allende’s assassination a new 500-page economic plan was on the desks of the country’s military government.

It didn’t work out well.  Inflation soared to 375%, the economy contracted by 15%, and unemployment went from 3% under Allende to 15% under the new regime.  Small business leaders began to realize that free trade was wiping them out and turned against the plan; only the foreign nationals and small groups of Chilean financiers were benefiting, but Pinochet and the Chicago Boys persisted, cutting social services even more, further privatizing national industries.  The economic devastation mobilized the insidious connection between this radical free-market capitalism and the torture methods investigated by the CIA.  Beginning in Chile and then in country after country, the terror of torture was needed to suppress the majority whose suffering was virtually inevitable under the Chicago School theories.  In Chile 3,200 people were ultimately killed or disappeared, at least 80,000 were jailed, and 200,000 fled the country.  There were, of course, other political reasons the terror was necessary, but the “bitter medicine” of the new economy would not go down without force.  A Chicago-trained Chilean economist who had defected from neoliberalism’s “harsh orthodoxy” wrote an angry open letter to Friedman, arguing that the new economic measures were so wrenching that they could not “be imposed or carried out without the twin elements that underlie them all: military force and political terror.” 

Chile is sometimes held up as an “economic miracle,” a tribute to neoliberal theories.  But that myth overlooks key realities.  “In 1982, despite its strict adherence to Chicago doctrine, Chile’s economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent—ten times higher that it was under Allende.”  Had Pinochet earlier hewed completely to Chicago School doctrine and privatized even the state copper mine that generated 85% of Chile’s export revenue, Chile’s economy would have collapsed utterly.  Ultimately, even Pinochet retreated from the orthodoxy, renationalizing many of the companies.  Still in 2007 the United Nations ranked Chile one of the most unequal societies in the world … hardly an economic miracle.

Similar events took place in Brazil, Uruguay, and Argentina—all countries that had previously been doing quite well economically—where military juntas imposed Chicago School economic practices … with similar devastating results.

The World Bank and the International Monetary Fund

During the 1980s another mechanism was used to force Chicago-style economic policies on other countries, particularly in South and Central America, that were in economic crisis: debt relief.  The highly industrialized countries of the North offered debt relief through the World Bank or IMF in exchange for the imposition of free-market policies.

During the early 1970s Western banks had encouraged low-interest loans in the developing world.  Some of the billions loaned went into legitimate industrialization projects, but much went into the purchase of police and military equipment to keep military governments in power and the rest went directly into the pockets of corrupt government officials. 

As countries were incurring these debts, however, oil-price increases generated by the Organization of Petroleum Exporting Countries (OPEC) caused a world-wide recession that sent interest rates skyrocketing.  Suddenly the indebted countries found themselves unable to pay even the interest on the loans and had to borrow more money just to pay the interest.  And so country after country around the world found itself with rising debt and no way to pay it back.

Enter the World Bank and the IMF.  These international financial institutions had been formed shortly after World War II to ensure that countries never again found themselves in the same economic straits as Germany in the 1920s that had led to Nazism and World War II.  The intention was that the industrialized countries would loan money to the World Bank and IMF, which would, in turn, lend them to countries in economic need to prevent economic collapse.  That was the theory.

By the 1980s, however, Friedman’s radical free-market theories had taken root in much of American academia, training those now in charge at the World Bank and IMF.  The shock therapy prescribed by Milton Friedman to fix ailing economies was now institutionalized in policies of “structural adjustment.”  To be eligible for loans, a country had to agree to privatization and free-trade policies as well as to slashing government spending, which meant shredding whatever provisions had been in place to keep the poor from utter destitution.  In order to pay their debts, countries had to take on the unfettered free markets and minimal government of the Chicago School ideology.

It should be emphasized that the international lending institutions’ economists were conscious at the time that the policies requiring free trade and privatization were not necessary to stabilize the country and create sound economic conditions; rather, as some of their officials later admitted, they were using the carrot of the loans to impose conditions to which they were ideologically committed. 

The Fall of Communism

The process in Poland, Russia, and other Eastern European countries after the fall of communism was somewhat different.  The “shock” in these cases was the new governments’ inheritance of the disastrous economic choices of their previous communist regimes.  “Authoritarian regimes have a habit of embracing democracy at the precise moment when their economic projects are about to implode,” writes Klein.  “Poland was no exception.”  The new Solidarity government believed that the fall of communism would be a chance to convert state-owned factories to worker-run collectives or at least to develop the economy gradually along the lines of the strong public sectors of Scandinavia.  But first there was the little matter of debt relief to stabilize their economy.  As the first Eastern Bloc country to oust its communist government, Solidarity leaders could understandably have expected Western help along the lines of the post-World War II Marshall Plan. 

Poland, however, also presented an extraordinary economic opportunity for international capital: “All of its most precious assets were still owned by the state—prime candidates for privatization.  The potential for rapid profits for those who got in first was tremendous.”  The US government made it clear that Solidarity was expected “to pay the debts accumulated by the (communist) regime that had banned and jailed its members—and offered only $119 million in aid, a pittance in a country facing economic collapse and in need of fundamental restructuring,” conveniently forcing Poland to accept free-market discipline … and Western multinational corporations.  The IMF and some Western countries did agree to an economic bailout—debt relief and $1 billion to stabilize the country—but only on the conditions of shock therapy.

Poland became a textbook example of Friedman’s crisis theory: the disorientation of rapid political change combined with the collective fear generated by an economic meltdown to make the promise of a quick and magical cure—however illusory—too seductive to turn down.

The Polish finance minister in charge later admitted that

capitalizing on the emergency environment was a deliberate strategy—a way, like all shock tactics, to clear away the opposition.  He explained that he was able to push through policies that were antithetical to the Solidarity vision … because Poland was in what he dubbed a period of ‘extraordinary politics.’  He described that condition as a short-lived window in which the rules of ‘normal politics’ (consultation, discussion, debate) do not apply—in other words, a democracy-free pocket within a democracy.

The process in Russia was little different, except for the disastrously worse economic outcome.  The Soviet premier Mikhail Gorbachev had hoped for a gradual transition toward a Scandinavian-style social democracy, but his political rival Boris Yeltsin led Russia’s secession from of the Soviet Union, precipitating the economic crisis.  Polls at the time showed Russians staunchly in favor of workers’ cooperatives, a strong government hand in the economy, wealth redistribution, and full-employment policies, so Yeltsin knew he would not be able impose free-market economics on the Russian people democratically.  So, he asked for and was given a year’s autocratic power to remake the Russian economy and invited Russia’s own “Chicago Boys” to design it, hoping thereby to win Western economic aid.  As Joseph Stiglitz, at the time the chief economist for the World Bank later wrote: “Only a blitzkrieg approach during the ‘window of opportunity’ provided by the ‘fog of transition’ would get the changes made before the population had a chance to organize to protect its previous vested interests.”

However, due to the lingering Cold War rivalry, the expected Western aid never materialized.  A year later, everything collapsed.  Russians lost their life savings as the value of the currency plummeted; abrupt cuts to industry subsidies meant that millions of workers went unpaid.  A third of the population moved below the poverty line.  Parliament rebelled and Yeltsin declared a state of emergency that dissolved Parliament.  The West supported Yeltsin against the democratically elected Parliament, despite a Russian Supreme Court decision against Yeltsin.  The IMF suspended a $1.5 billion loan and Yeltsin dissolved Parliament.  Still, the US supported him.  Yeltsin ordered his military to storm the Russian Parliament building and set it on fire. 

Yeltsin privatized the massive state industries but, unlike in many other countries, transnational corporations were not allowed to bid.  Instead, a small number of entrepreneurs—frequently former communist apparatchiks—bought these companies at fire-sale prices, often with cash fronted by the government itself. 

Some idea of the stakes involved when government industry is privatized can be gathered from the following examples from Russia’s experiment in neoliberalism:

·   A company producing 20% of the world’s nickel, was sold for $170 million; its profits alone were soon $1.5 billion annually. 

·   The state oil company Yukos was sold for $309 million; controlling more oil than Kuwait, its income is now more than $3 billion a year. 

·   Over half of the oil giant Sidanko was sold for $130 million; within two years that investment was worth $2.8 billion on the international market. 

·   A huge weapons factory sold for $3 million.

The new owners needed cash infusions and quickly invited Western investors in who frequently made 2000% on their investments within a few years.  Soon $2 billion every day was flowing out of Russia as the country’s resources were pillaged and stored somewhere else.

The transition to a free-market economy was lucrative for a very few but a disaster for the Russian economy.  Over 80% of Russian farms went bankrupt.  70,000 state factories closed causing massive unemployment.  Poverty (living on less than four dollars a day) went from two million in 1989 to seventy-four million by the mid-nineties.  

South Africa: Trapped in a Free-Market Economy

If neoliberal economic policies are so disastrous to the majority, wouldn’t real democracies just change them once it became obvious?  As the history in South Africa demonstrates, it’s not so easy to get the wolf out the door.

Nelson Mandela’s African National Congress (ANC) came to power in 1994 intending to nationalize state industries and redistribute the wealth.  In negotiations with the outgoing Apartheid government, however, the ANC leaders concentrated on the political transition without realizing that parallel negotiations on the economic transition would undermine many of their goals.  The outgoing government of FW de Clerk had a two-pronged attack.  First, they argued that the consensus of international economists was that an economy could only be run according to neoliberal principles and that the major economic decisions were really “technical” or “administrative.”  Second, they negotiated to hand over those economic decisions to supposedly impartial experts—the World Bank, the IMF, and others.  The plan was agreed to by ANC leaders who were worrying about gaining control of Parliament and did not recognize the implications of the economic agreements.

The ANC government accepted the now-dominant neoliberal logic that foreign investors would create the wealth that would trickle down to the masses.  Once they controlled parliament, they believed, they could control distribution of wealth.  They hadn’t counted on the volatility of international markets that yanked money out of the country at the least mention of something that sounded like redistribution.

Want to create jobs for millions of unemployed workers?  Can’t—hundreds of factories were actually about to close because the ANC had signed on to the GATT (General Agreement on Tariffs and Trade), the precursor to the World Trade Organization (WTO), which made it illegal to subsidize the auto plants and textile factories.  Want to get free AIDS drugs to the townships, where the disease is spreading with terrifying speed?  That violates an intellectual property rights commitment under the WTO. …  Need money to build more and larger houses for the poor and to bring free electricity to the townships?  Sorry—the budget is being eaten up servicing the massive debt, passed on quietly by the apartheid government. … Want to impose currency controls to guard against wild speculation?  That would violate the $850 million IMF deal ….  Raise the minimum wage to close the apartheid income gap?  Nope.  The IMF deal promises “wage restraint.”  And don’t even think about ignoring these commitments—any change will be regarded as evidence of dangerous national untrustworthiness … which will lead to currency crashes, aid cuts, and capital flight. 

Regardless of the effects on the population the ANC had promised to free, the government itself was now trapped in an economic web from which it couldn’t escape.  They had acquired “the keys to the house but not the combination to the safe.”  

Creating a Free-Market Economy in Iraq

There are multiple other examples of free-market policies sprung on an unsuspecting public after a disaster: in Sri Lanka after the 2005 tsunami, the highly privatized Homeland Security apparatus in the United States after 9/11, private charter schools in New Orleans after Katrina.  But for audaciousness nothing can match the United States’ government attempt to wipe the economic slate clean in Iraq after the 2003 invasion for an unfettered free market.

There are undoubtedly many reasons for the Iraq invasion, but it is remarkable how quickly the Bush Administration moved to impose free-market shock therapy after the fall of Saddam’s government.  What distinguished Iraq from other attempts, however, was that both the war itself and its reconstruction were also privatized, usually by firms—such as Halliburton or Blackwater—that had political connections to the Bush Administration.  The shock therapy in Iraq has been, according to former World Bank economist Joseph Stiglitz, even more radical than in Russia. 

L Paul Bremer was the head of Iraq’s Coalition Provisional Authority and had virtual autocratic power over Iraq’s policies.  His plan was to integrate the economic plan directly into the country’s constitution so that future Iraqi governments would not be able to change it.  He attempted to lower Iraq’s corporate tax from 45% to a flat 15%.  Although limiting foreign corporations to only part-ownership of major industries would have made sense if the real purpose were to encourage the economic redevelopment Iraq, Bremer pushed to allow them to own 100% of Iraqi assets.  Unlike the Marshall Plan that helped in Europe’s economic restoration after World War II, there was no requirement to use Iraqi workers or Iraqi materials in the reconstruction.  Investors would not only be able take 100% of the profits from Iraq, untaxed and without requirements to reinvest, but they would also be able to sign leases and contracts that would last for forty years, again saddling future elected governments with free market policies.  Fortunately, the Iraqi government did their homework and knew enough to keep these provisions out of the constitution, but the intent of the US government was clear enough.  At least one goal of the war was to impose free-market policies on this middle-Eastern country so rich in oil.  Instead the Bush Administration has had to satisfy itself with the many billions of US government dollars transferred to large US corporations from the privatization of both the war and its reconstruction.

The US failure to invest in real reconstruction—that is, reconstruction using Iraqi companies, Iraqi laborers, and Iraqi materials—has been a significant aspect of its failure in Iraq.  The unemployment rate is well over 50%, sending hundreds of thousands of well-armed former soldiers and others into the insurgency.  The failure of the US multinationals to do even the job for which they were hired has encouraged a cynicism in Iraq as people realize that even the “reconstruction” isn’t reconstructing anything of value for them.  And the privatization of many military functions to companies such as Blackwater—whom the US government has indemnified from suit in Iraq but which (at least one judge has ruled) also can’t be sued in US court has created a class of international mercenaries accountable to almost no one.

The Shock Wears Off

The US National Security Strategy of 2002 insisted that unfettered free-market capitalism and democracy were part of the same indivisible project:

The great struggles of the twentieth century between liberty and totalitarianism ended with a decisive victory for the forces of freedom—a single sustainable model for national success: freedom, democracy, and free enterprise.

Fortunately, the countries of the global South (as well as activists from the global North) have increasingly resisted the assertion and become wiser to the devastation these free-market economic policies have wrought, and there is increasing (and increasingly successful) resistance to them.  The string of election (and re-election) victories in Latin America by staunch opponents of neoliberal economic policies is perhaps the most powerful signal.  Venezuela, for instance, has renationalized some of its industries and is using part of its oil wealth to provide loans to other poorer countries without the IMF or World Bank provisions.  (Indeed, since 2004 the IMF’s total loans have gone from $81 billion to $11.8 billion, almost all of which goes to one country, Turkey.) 

In Lebanon, for instance, after the devastation of the Israeli attacks of 2006, international lenders attempted to impose free-market policies as a condition for loans.  The country was in economic shambles and desperately needed funds, but the people of Lebanon had seen the effects of earlier Western “aid” in transforming their economy.  Despite enormous pressure from the US and other parts of the international economic community and the Lebanese government itself, the people of Lebanon resisted.  Hezbollah (probably using money from Iran) became a prime funder for reconstruction and others also involved themselves in parallel reconstruction efforts.  Similar parallel reconstruction has developed in Sri Lanka after the tsunami and in New Orleans after Katrina.

The world-wide resistance to the WTO and other forms of corporate globalization has become increasingly effective.  The annual World Social Forum has become a lightening rod for resistance.  The power and prestige of the United States has waned significantly in the last eight years, lessening its power in imposing its own way.  Military shocks and natural disasters are no longer automatic opportunities for unfettered capitalism.  People are beginning to learn their own way.

This is a significant book.  An understanding of the last thirty-five years of economic/political history will be vital to understanding the economic, social, and political turbulence likely in the next few years.  There is a fundamental conflict between democracy and the radical free market.  Yet the United States has been captured by the neoliberal orthodoxy.  We have privatized vast swaths of our government and almost no one has objected … yet.  But do we really want to give that much power in time of crisis to an institution whose only legal purpose is to make a profit for shareholders?  We have believed—despite virtually all the evidence—that an unconstrained free market is really the best way to help the poor.  As Katrina demonstrated, we have virtually lost the capacity to provide essential government services.  And we tarry far too long in taking the hard steps to control global warming, believing the very convenient fiction that if we just free the market a little more, it will handle the problem on its own.

In most important books I read, it’s usually the introduction and first chapters that really move and educate me, with many other chapters serving as obvious fillers to lengthen what perhaps ought to be a lengthy magazine article.  Many radical critiques of government policy or economic doctrine that I read are long on anecdotes and loosely supported assertions and very short on proof.  Rarely have I come across a book like, The Shock Doctrine in which (with very few exceptions) every chapter brings revelation and power to the argument.  Rarely has a radical critique been so well supported by facts and figures.  Naomi Klein is a superb journalist.  What I’ve shared in this (long) summary is only a smattering of what you’ll learn from the book.  Read it. 

© David Hilfiker, 2008