Category Archives: Chile

the Chicago School is dangerously wrong: I’m with Michael Hudson

On Thursday’s episode of the Keiser Report [March 8th], Max Keiser spoke with Dr. Michael Hudson from the University of Missouri, Kansas City. Hudson explained how neo-liberal economic theories have become dominant simply by virtue of the fact that they fail to accommodate any antithetical viewpoint:

We’re the unspeakable ones. We’re the people that liberals like [Paul] Krugman won’t talk about. We’re the people that the University of Chicago – in the magazines that it’s put its editors in – will not permit discussion. So basically the free-marketers are censors; they don’t believe in a free market of ideas. They believe in what they did in Chile. Remember, the first thing the Chicago Boys did in Chile was close down every economics department in the country except the one they controlled…

Hudson also explained to Keiser, how these ideas, which are most associated with Milton Friedman and the University of Chicago (more thoughts on Friedman are provided in an appended article at the bottom of this post), have quite literally inverted the original free market thinking of its founders Adam Smith and J.S. Mill:

The idea of ‘free market’ to classical economics was to bring prices in line with the actual technologically necessary costs of production… Monopolies were either to be regulated to keep their prices in line with the actual costs – like America regulates the bills that electrical utilities can charge – or, that most monopolies would be, as in Europe, kept in the public domain and operated as public utilities. And if there was something basic like education, or roads, these should be provided freely in order to minimise the economy’s cost of production, and make it more competitive. This was the whole philosophy of the industrial revolution, and it was the ‘free market’ idea that the Classical economists had. […]

But [the modern] idea of a ‘free market’ was free for predators. Free for monopolists. Free for landlords to gouge whatever rents they could get, and to free themselves from taxation, so that the government had to tax labour and to tax industry. And the result is that the American economy today under the so-called ‘free market’ has such a high cost of living, and a high cost of production, that labour can’t compete internationally. That’s why America’s balance of trade has moved so far into deficit.

So ‘free market’ is what is killing the American economy and it’s not free at all… not the kind of ‘free market’ that Adam Smith talked about.

You can read more about Michael Hudson’s economic thinking along with the views of his fellows at the University of Missouri-Kansas City (including an insider perspective from former financial regulator William Black) at the ‘new economic perspectives’ blog


Milton Friedman was professor at the University of Chicago. There he helped to found the acclaimed Chicago School of Economics – a group that produced a number of Nobel Prize winners. Friedman himself received the Nobel Prize for Economics in 1976, whilst The Economist once described him as “the most influential economist of the second-half of the twentieth century.”1

It was the economic ideology formulated and promulgated by Friedman and his Chicago School, with its emphasis on market deregulation and free trade, that exercised such great influence during the eighties with the ‘hands off’ economic policies of Reagan and Thatcher. Indeed the legacy of those years has persisted throughout the administrations led by Major, then Blair and Brown, and now Cameron and Clegg (Quelle différence?), and today’s political consensus offers little alternative but the full acceptance of Friedman’s old deal, with economic differences between New Labour and Conservative being merely a matter of degrees. Friedman seems to have won, for the time being at least. So what exactly is the rationale behind his winning formula?

Broadly he came to his theories from two angles. Firstly, he distanced himself from the sorts of social reformers who saw state control as a necessary element of modern civilisation. Regarding welfare legislation, such as minimum wage laws as self-defeating (because they would supposedly prevent those without skills from finding gainful employment), he was equally dismissive of the meddling trade unions, and sought ultimately to banish all social security programmes.

Whereas previously, economists like Keynes, and also Adam Smith, had got themselves all tangled up on what sorts of policies were better or worse for the general welfare, Friedman carefully side-stepped such messy complications. As far as Friedman was concerned, government is mostly a stifling and wasteful inconvenience (which, in fairness, is all too often the case). But here Friedman goes to extremes: left to its own devices, he says, all government must undoubtedly veer toward some form of tyranny. The best thing then is to clip its wings completely. Instead of government making decisions, the people should be left to choose for themselves. But how? Well, by forcing government to give way to the market.

Secondly, and in common with many cool-headed intellectuals, Friedman regarded human beings with a deeply felt suspicion. “Mankind is selfish and greedy,” he said in a television interview. But when asked by the interviewer whether in admitting this, he’s not inadvertently making a good case for more control rather than less, he quickly dismissed such Hobbesian objections, replying: “Therefore, we have to put power into the hands of other selfish and greedy men.”2 It’s an odd and revealing answer for one who purported to be a liberal rather than a conservative, and who always wrapped himself in the flag of Freedom.

So here is Milton Friedman, the high evangelist of a radical lassez-faire “limited government”, fast talking and slick, and preaching ever less intervention, less regulation, and less central control. Less is more. Less interference makes more profits, and more profits equates with more goods, and goods are of course, by definition, good.

Work hard, make money: this was the heart of his doctrine – and leave it to the individual to make all the right choices. Trying to do good with “other people’s money” is simply fallacy – Friedman liked the term “other people’s money” (though nowadays he’d almost undoubtedly say “taxpayer’s money”; same difference):

“If I want to do good with other people’s money I’d first have to take it away from them. That means that the welfare state philosophy of doing good with other people’s money, at its very bottom, is a philosophy of violence and coercion. It’s against freedom, because I have to use force to get the money.” [about 11:30 min into part 1]

Phew, it certainly sounds bad when you put it like that. All that collecting of taxes and then divvying the money out for housing, schools, hospitals and caring for the old folk, sure is some serious violation of our inalienable human rights. Friedman, characteristically, takes such reasoning to its logical and ultimate extremes. Indeed, he is actually prepared to estimate just how many people might reasonably be done-away-with to ensure that we remain free from the sorts of deplorable ‘violence and coersion’ that are all too familiar when it comes to tax collection:

“But let’s look at that a little farther,” he says,”Suppose that five percent of the elderly would not be able to provide for themselves. Does it make sense to impose a programme on a hundred percent of the people in order to do something about five percent? Does that really make sense? You see, that’s the great defect in this line of thinking – ” [about 1:30 min into part 2]

Although why stop at five percent, when it makes economic sense to sacrifice a few more of the useless-eaters…

As for the new role of economists themselves, and with the tricky problem of people dismissed, their attention can be properly focused on complex theories of monetary policy: intricate models of how money and the markets function in and by themselves. Here is enough to be getting on with, says Friedman, and the new economists agree. Why? No doubt in part, because it grants them a legitimacy that previously only attached to the expertise of the scientist. It offers an intellectual purity.

But how can anyone objectively divorce economics from society (even if they would choose to), and draw such clear divisions between money and its effects on people? Economics, if it is a science (and there are extremely good grounds for saying that it isn’t), might conceivably be a science like psychology, but it can never be anything like, say, physics. The reason being that money is inherently a people thing; a human construct, bearing only a superficial resemblance to other kinds of natural phenomenon, which it most definitely isn’t. Nor are markets freely-floating entities immune to all human frailty, but composed of analysts and traders: people who are driven at least as much by fear as by good reason. Constantly jittery; every now and then ‘the markets’ totally crap their pants. Yet Friedman desperately wants to cut all this out of his equation, whilst insisting that all other economists eventually join him in his perfect economic bubble.

And following Friedman’s prescription has led us to a perfect economic bubble. A debt bubble that has swollen to such an extent that it currently exceeds the value of everything else on earth.3 We should not be surprised. This is what’s likely to happen when you entirely decouple economics from social needs. When money becomes the main ‘product’ in the world. When high frequency trading involving the use of computer algorithms forces commodity and share prices to rise and fall in fractions of second, whilst outside in the real world nothing about those commodities or businesses has altered in anyway – the values being driven instead by feedback loops of speculation. When markets are also rigged by insider knowledge – an anathema to the ‘free market’ and yet, thanks to deregulation, easier than ever. And when ‘the markets’ in themselves are bloated by the never-ending creation of ‘financial products’, quite apart from any judgment of how all these new paper contracts might blight the real economy. No value judgments are allowed. No distinction between profits earned from the supply of real goods and services as opposed to profits made by profiteers and financial predation. Money making more and more money being an inherent good.

In truth, Friedman was never really a liberal, but a libertarian of sorts (and saying this does a disservice to the better half of libertarianism). The neo-con intellectual apologist Francis Fukuyama is another libertarian of a similar sort, and Fukuyama undoubtedly derives a great deal from Friedman. Liberty, in the eyes of both men, is inextricably tied to the freedom to buy and sell. Indeed, Friedman once claimed that: “underlying most arguments against the free market is a lack of belief in freedom itself.”4

In defence of this extremist position, Friedman has often pointed to history. History, he tells us, has long been constructed along collectivist principles, which is indeed the normal state of humankind. The trouble is that collectivism doesn’t work, and so, although the system of minimal collective intervention may appear, at least on the surface, to be crueller and more selfish, the results it yields are for the betterment of most, if not all. We should judge much better by the consequences rather than from the objectives, he always insisted, looking at the ends rather than the means. Okay then let’s do just that. And let’s be fair here, and judge Friedman on the basis of his most acclaimed success.

On September 11th of 1973 the democratically elected government of Salvador Allende was overthrown by a CIA backed military coup and replaced by a junta government led by Augusto Pinochet. What immediately followed is common knowledge. Imprisonment of political opponents, torture, and the “disappearance” of thousands of innocent victims. The record of atrocities committed by the Pinochet regime is well documented. But perhaps what is less well remembered is the parallel economic measures imposed by the so-called Chicago Boys during Pinochet’s reign of terror.

Sweeping deregulatory reforms that involved the abolition of the minimum wage, the removal of food subsidies, the suppression of trade union activity, and the privatisation of just about everything in sight. The pension system, the banks and assets of state-ownership, all greedily seized and sold off. This kind of “shock treatment”, as Friedman unflinchingly referred to it, resulted in a real wage drop of more than forty percent, a doubling in levels of poverty, and a staggering one in five of the working population (a five-fold increase within a decade) forced into desperate unemployment and left to fend for themselves .5 Yet Friedman regarded all of this as merely the price of success, and described the transformation from Allende’s democratic socialism to Pinochet’s hard-line, totalitarian capitalism as “the miracle of Chile”. Individual suffering was simply a small price for Friedman’s greater ‘liberty’, and back in 1975, in the discussion with Heffner, he staked out that position too, albeit a little clumsily:

“I want people to take thought about their condition and to recognize that the maintenance of a free society is a very difficult and complicated thing. And it requires a self-denying ordinance of the most extreme kind. It requires a willingness to put up with temporary evils on the basis of the subtle and sophisticated understanding that if you step in to try to do them [do what? the temporary evils?], you not only may make them – [hesitation as he corrects himself] – to do something about them – you not only may make them worse, but you will spread your tentacles and get bad results elsewhere.” [about 6:00 min into part 2]

Milton Friedman spread his own tentacles pretty much everywhere, and the world has long been poisoned by his ‘free market’ phoney liberalism. Friedman’s Chicago School branch of economics having not merely served as justification for the continued exploitation of workers, but also, and by virtue of its mantra for deregulation, encouraged the rampant, cancerous growth of a crony capitalist elite. Fundamentalist ‘free market’ thinking isn’t just cruel, it has been calamitous. Milton Friedman, its high priest, was so very dangerously wrong.

1 From an article entitled “Milton Friedman, a giant among economists” published November 23rd, 2006, The Economist.

2 All otherwise uncredited quotes in this section have been drawn from an interview with Richard D. Heffner, broadcast on Sunday December 7th, 1975 as part of the TV series “Open Mind” , produced by WPIX, Channel 11, New York, in cooperation with Saturday Review (based on a transcription found at

Friedman’s full answer to Heffner’s question is this: “Therefore, we have to put power into the hands of other selfish and greedy men. Now I want to apologize for what I said. The great bulk of mankind. There are always conspicuous exceptions, not everybody. And also for each person there is an exception. People are selfish and greedy in one aspect of their activity. They are unselfish and generous in another.” [about 8:00 min into part 2]

3 The underlying cause of the current crisis is the worldwide trade in “derivatives”. It is currently estimated that in the order of a quadrillion US dollars (yes, that’s with a qu-) has been staked on derivations of various kinds. We can compare this with the entire world GDP which turns out to be a mere 60 trillion US dollars [According to IMF economic database for October 2010, World GDP is $61,963.429 billion (US dollars)]. One quadrillion being more than twenty times larger. Or we might compare it against the estimated monetary wealth of the whole world: about $75 trillion in real estate, and a further $100 trillion in world stock and bonds. So one quadrillion is a number exceeding even the absolute monetary value of the entire world! Warren Buffett once described derivatives as “financial weapons of mass destruction”, and he should know because he trades in them.

4 “A major source of objection to a free economy is precisely that it … gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.” Taken from chapter 1 of “The Relation Between Economic Freedom and Political Freedom“, 2002 edition, page 15.

5 From 1973-83 unemployment rose from 4.3% to a staggering 22%, whilst by all measures, the average worker was worse off in 1989 than in 1970, labor’s share of national income having fallen from 52.3 to 30.7 percent. Statistics courtesy of James Petras and Fernando Ignacio Leiva with Henry Veltmeyer, from “Democracy and Poverty in Chile: The Limits to Electoral Politics“, Boulder: Westview Press, 1994.

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