The Chicago Boys' Deal With the Devil

The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism, by Sebastian Edwards, Princeton University Press, 376 pages, $32

In 1973, Sebastián Edwards was a supporter of Chile's socialist president, Salvador Allende. He was, he recalls, an assistant to the "director of costs and prices" at the Chilean Directorate of Industry and Commerce, where his unit "oversaw every controlled price in the country." After Augusto Pinochet deposed Allende in a coup that year, Edwards "opposed the dictatorship and fled the country in 1977 because of it."

So Edwards is no starry-eyed apologist for the Pinochet junta, and he readily acknowledges the regime's abysmal litany of murder and torture. He also notes that Chile's later democratic governments willingly embraced (and in some ways extended) much of the Pinochet era's economic policies, and he gives those reforms much of the credit for the dramatic post-1983 improvement in Chile's economic performance. But he believes the wholesale "neoliberal economic revolution" that the dictator imposed would "not have been possible under a democratic regime." And therein lies the unfortunately widespread appeal of imposed capitalism.

In the early 1980s, F.A. Hayek embraced what Reason's Jesse Walker has called the "mad dream of a libertarian dictatorship." Hayek wasn't alone: In 1981, when the Mont Pelerin Society met in Chile, Milton Friedman and James Buchanan publicly admonished many participants for—in Buchanan's words—their "naive belief that dictatorships are the only or the best way of establishing a free economy." In the early 1990s, would-be reformers of the Russian economy concluded, as the historian Tobias Rupprecht put it, that "authoritarian capitalism of the Chilean type" would be "the most reasonable and viable path for a post-Communist Russia."

Edwards' assessment is far more measured than that. With The Chile Project, he has written a marvelously wide-ranging and fair-minded account of the rise and fall of the Chilean neoliberal model. There are a few minor errors—for example, Hayek did not attend that late 1981 Mont Pelerin meeting—but this is easily the best book to date on the Chilean experiment.

The book begins with a detailed analysis of the events that unfolded after the U.S. State Department helped forge a link between the Pontifical Catholic University of Chile and the University of Chicago. Starting in the mid-1950s, Chilean students could undertake graduate studies at Chicago; upon returning home, they would "revolutionize the teaching of economics at Católica" and, ultimately, revolutionize Chilean economic policy. This section concludes with an assessment of Allende's early-1970s rule, which featured nationalizations, pervasive shortages, a burgeoning deficit, and an inflation rate that soared past 700 percent.

Edwards then turns to the Pinochet years, and to the role the university's "Chicago boys" played in the era's economic policies. He offers an illuminating and detailed account of the pre-coup origins of the infamous "Brick"—the Chicago boys' "blueprint for Chile's future"—and of the Chilean government's tendency to finance its fiscal deficits by basically printing more money, an inflation-fueling problem that took off under Allende and continued in the early years of the military junta. But Edwards does not give us much substantive detail about the tenor of Chilean economic policy until Milton Friedman and his colleague Arnold Harberger arrived in Santiago in March 1975.

When Friedman advocated a massive fiscal shock in Chile—an immediate "across-the-board reduction of every separate [budget] item by 25 per cent"—he said it would produce a significant but relatively short-lived increase in economic pain. Inflation promptly started to come down, but unemployment wasn't short-lived: The rate was 22 percent in 1976 and stayed at what Edwards calls "extremely high levels until the mid-1980s." Similarly, while shock therapy ensured that the fiscal deficit was all but eliminated by 1978, the average real wage was 23 per cent lower that year than in 1971.

The sequence of events that unfolded between the 1975 adoption of shock therapy and Chile's late-1980s transition to democracy included a series of trade reforms, culminating in a uniform 10 percent import tariff and the creation of an increasingly open economy. More ill-fated was the mid-1979 adoption of a fixed exchange rate between the Chilean peso and the U.S. dollar. This move came shortly before Federal Reserve Chair Paul Volcker imposed disinflation in the United States, which assured that the peso would become increasingly overvalued. That had very bad consequences for the Chilean economy, culminating in the April 1982 currency crisis and the abandonment of the previously "irrevocable" peso-dollar exchange rate.

Edwards provides equally fine accounts of the 1979 Chilean labor law, which rolled back the rights of unions; the 1981 social security reform, which replaced Chile's pay-as-you-go pension system with individual retirement accounts; the increasingly bitter conflict between the Harvard-educated José Piñera and the Chicago-educated Sergio de Castro over the tenor of economic policy; and the emerging influence of a new, more pragmatic generation of Chicago graduates in the wake of the 1982 currency debacle.

The final part of Edwards' narrative examines the fate of the Chilean neoliberal model after the 1988–89 transition to democracy. Changes in economic policy included the reduction of import tariffs to a uniform 6 percent, the privatization of water and sewage companies, the adoption of a freely floating exchange rate, the further liberalization of the regulations governing international capital movements, and a variety of social democratic changes to the pension system. Meanwhile, abortion was legalized under some circumstances, same-sex marriage was recognized, and divorce laws were liberalized. This section of the book contains much fascinating material, and Edwards' detailed discussion of the flaws in the Pinochet junta's much-vaunted pension reforms is particularly enlightening.

The economy generally fared well in this period, but the Achilles' heel of the Chilean model lay in the increasingly widespread perception that it was systematically rigged in favor of the self-anointed Chilean elite. Edwards offers a nuanced and insightful analysis of a sequence of corruption scandals that ultimately culminated in the 2019 protests, the 2021 election of Gabriel Boric to the presidency, the ill-fated (and ongoing) efforts to draft a new social democratic constitution, and what Edwards views as the inexorable demise of the neoliberal model.

Edwards' highly detailed account of Friedman's 1975 visit to Chile will intensify the debate over how much influence Friedman had on the Pinochet junta's adoption of shock therapy a month later. Although he called for shock therapy in his Chilean lectures, Friedman insisted in his 1998 memoir Two Lucky People that the Chicago boys "had already reached the conclusion that a shock therapy was required" and that he and Harberger were there to "check their conclusions," to provide "the stamp of approval," and to "sell it to the public and the military junta." Harberger, similarly, wrote that "my understanding is that our visit was not the precipitating factor in the [adoption of the] program."

Edwards argues that various Chicago boys (and, presumably, Friedman and Harberger themselves) have "systematically diminished Friedman's influence in the preparation and launching of the April 1975 shock treatment stabilization plan." Indeed, while earlier scholarly assessments of Friedman's involvement with Chile (including work by Edwards himself) have claimed the program was in the "design stage before Friedman arrived," Edwards now believes—"based on newspaper records and interviews with many of those involved in the decision-making process"—that the recovery plan was probably not "drafted or even outlined" at the time of Friedman's March meeting with Pinochet.

I would have liked far more detail about the primary sources that persuaded Edwards that "Friedman's visit marked a turning point in Chile's economic history: there is a before Friedman and an after Friedman." But his argument here lends more scholarly weight to New York Times columnist Anthony Lewis' highly controversial 1975 claim that Friedman was "the guiding light of the junta's policy."

Whatever the merits of Chilean economic policy from the mid-1970s through the early 1980s, it is notable that, of the renowned economists who heap dust-jacket praise on The Chile Project, only Deirdre McCloskey sees fit to mention that the Chicago boys (a number of whom learned their economics from McCloskey at the University of Chicago in the 1970s) made a "deal with an authoritarian devil." Unfortunately, far too many self-styled free market advocates would make a similar deal, arguing that Venezuela or Iraq or some other country would be lucky to have "a Pinochet figure who would impose capitalism." Sadly, the mad dream of a libertarian dictatorship has yet to lose its allure.

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