Thursday, April 08, 2010

Military dictatorship and free-market economics in Chile – Sorting out propaganda from reality (Paul Krugman)

It should be too obvious to need emphasizing, but apparently it isn't, that although the capitalist market economy and democracy are certainly compatible, and may even be mutually supportive in various ways, they are not the same thing. Indeed, along with their (potential) compatibility, both theoretical analysis and actual history show that there is also an inherent and inescapable tension between them.

Among other reasons: Democratic self-government entails making conscious decisions about collective outcomes, and many of the purposes for which empowered democratic citizens use the political process--ranging from essentially 'nice' purposes like environmental protection, insuring the safety of food and drugs and drinking water, building codes, unemployment insurance, minimum-wage laws, Social Security, bank deposit insurance, and the like to various forms of more narrowly selfish special-interest measures including unfair and/or dysfunctional protectionism, overt and disguised corporate welfare, rigidifying regulation, and so on--necessarily involve interfering with the pure logic of the self-regulating market. Ditto for unions, of course, which might not be seen as "political" institutions according to some formal definitions but which are a necessary element in any genuinely active and viable democratic political society.

In fact, not only has the capitalist market economy often coexisted in practice with authoritarian or dictatorial political regimes, but policies of radical marketization often require the use of despotic political power, in order to break popular resistance to such policies and to prevent social groups (and some "special interests" that might even include industries lobbying for subsidies and protectionism) from mobilizing to protect themselves against their effects. A classic example, of course, is the Pinochet dictatorship that ruled Chile from 1973-1990, in which the terroristic power of a military dictatorship was used precisely to push through policies of radical marketization (though this marketization was not quite as complete as some of its foreign admirers believe, since the Pinochet regime never considered giving up state control of the crucial mining industry).

One might legitimately agree or disagree about whether, and in what ways, these economic policies were good or bad for Chile in the long run. But what's indisputable is that they were pushed through by a dictatorial regime--which, at the very least, nicely illustrates the analytical distinction between political freedom, in the form of democracy & "human rights," and "free market" economics.

What's also indisputable is the close collaboration between the Pinochet dictatorship and a number of American economic advisers espousing a Chicago-school free-market ideology of the sort that often styles itself "libertarian"--a theoretical and ideological orientation epitomized and celebrated in, for example, Milton Friedman's Capitalism and Freedom. (In the past few decades, this ideological orientation has also been called "neo-liberalism"--a term that sometimes confuses Americans, since in the US a commitment to the self-regulating market is, somewhat peculiarly, called "conservative" economics. But it actually does represent a resurgence of what, in a broader historical perspective, should properly be called economic liberalism. Friedman himself was aware of this, of course.)

If one happens to believe that democracy has anything to do with liberty, then this experience should be enough to make it clear, once again, that there is no necessary or direct connection between free-market-fundamentalist economics and genuine libertarianism. Not only is it mistaken, misleading, and potentially pernicious to simply confuse the two (as Tocqueville, for example, cogently explained almost two centuries ago). Sometimes one even has to choose between them.

=> But let's forget about political liberty for the moment, and focus purely on the Pinochet/Chicago economic policies and their long-term consequences. There, again, the actual story is more complicated than a lot of retrospective right-wing mythology suggests. In a recent piece, Paul Krugman nicely sorted out some of the ways in which this is true.

Yours for reality-based discourse,
Jeff Weintraub

UPDATE: For a follow-up, see Comparing the economic records of dictatorship and democracy in Chile.

Paul Krugman (The Conscience of a Liberal)
March 3, 2010
Fantasies of the Chicago Boys

Ah, Chile. Remember how, during the Social Security debate, Chile’s retirement system was held up as an ideal — except it turned out that it actually yielded very poor results for many people, and the Chileans themselves hated it? Now we have the usual suspects claiming that Chile’s relatively low death toll in the quake proves that — you guessed it — Milton Friedman was right. You see, the Chicago Boys made Chile rich, and that’s what did it.

As a number of people have pointed out, there’s this little matter of building codes. Friedman wasn’t exactly fond of such codes — see this interview in which he calls such codes a form of government spending, because they “impose costs that you might not privately want to engage in”.
[JW: This is an analytical point worth stressing, even though it should once again be obvious, because its implications seem to get lost in a lot of discussions. The tight building codes in Chile played a key role in reducing the amount of death and destruction from the recent mega-earthquake. But as Friedman understood quite well, although some current Friedmanite propagandists might want to obscure it, is that the whole point of building codes is that they are a form of public-interest regulation that necessarily works by interfering with the pure logic of the market and thus modifying--we might also say "distorting"--the outcomes that pure market processes might otherwise produce.]
But there’s another point: the economics of Chile under Pinochet are a lot more ambiguous than legend has it. The way the story is told now, the free-market guys moved in, liberalized, and then there was a boom.

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players.
[JW: By the way, it's true that most retrospective discussions of the Pinochet years do tend to overlook this small detail.]
It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

So: free-market policies are applied, and presto! prosperity follows — fifteen years later.

But remember, Obamanomics has definitely failed after 13 months.