The Shock Doctrine: Milton Friedman's Legacy of Death and Destruction

Milton Friedman, Nobel Economics Prize winner, has left a trail of death and destruction wherever he, his students or admirers advised countries to implement his plan that involved privatization, government deregulation and deep social spending cuts. Advocating a free market economy, he thought that an unregulated market would maximize freedom and prosperity. Although he wrote a book in 1962, Capitalism and Freedom, he found no democratically elected government, including President Richard Nixon’s administration, would implement his program. The Keynesian model including a safety net, unions, workers protections and government spending helped the United States and other countries recover from the Great Depression and continue prosperity after the Second World War. Milton Friedman and his Chicago Boys (former students at the University of Chicago economics department) found that they could only persuade dictatorships or democracies in crisis to adopt his planned misery program.

Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism analyzes the Friedman program and its results. The Friedman program has a three part formula: 1) removing any regulations that inhibit business growth, 2) selling any public corporation that runs a profit, and, 3) making deep cuts in social spending. Taxes must be low and everyone (rich and poor) pays the same flat rate. Governments would make no effort to protect their industries or citizens. Market forces would set all prices. There would be no minimum wage nor any use for unions. Friedman offered health care, the post office, education, retirement pensions and national parks as privatization targets. In the United States, this would mean a completely reversing the New Deal.

She presented the universal ghastly results for countries forced into the Friedman program:

“…an urban bubble of frenetic speculation and dubious accounting fueling superprofits and frantic consumerism, ringed by ghostly factories and rotting infrastructure of a development past; roughly half the population excluded from the economy altogether; out-of-control corruption and cronyism; decimation of nationally owned small and medium-sized businesses; a huge transfer of wealth from public to private hands, followed by a huge transfer of private debts into public hands.”

Western governments and banks colluded with this pauperization. Our corporate media portrayed dissidents as reactionaries, old guard, Russians who preferred Stalin or Iraqis who preferred Saddam Hussein and did an excellent job shooting the messenger. The corporate media ignored the people who were being pauperized to enrich an elite. Western governments and banks gave virtually no assistance to countries recovering from dictatorships or Communist rule, unless they submitted to shock therapy. For example, Gorbachev was moving to a mixture of a free and socialist market with a strong safety net. All he got at the 1991 G7 meeting was a demand for shock treatment.

Chile’s Turn

Friedman found his first chance to remake an economy in the 1970s when he was an advisor to the Chilean dictator General Augusto Pinochet. More than 3,000 people were executed, at least 80,000 were imprisoned and 200,000 fled the country. Following this violent coup, a severe hyperinflation engulfed the country. Friedman’s formula – tax cuts, free trade, privatized services, social spending cuts and deregulation were supposed to bring prosperity. In 1974, Chile’s inflation rate was 375%, the highest in the world, almost twice as high as under the murdered President Salvador Allende. Hunger was rampant, unemployment reached record levels and free trade (cheap imports) demolished the economy. Seventy four percent of an average family’s income went to buy bread. People had to cut “luxury items” such as milk or a bus ride to work.

Free marketers still tout Chile’s experience as poster child evidence that Friedman’s prescriptions work. In fact, in 1982, nine years into strict conformity with Friedman’s measures, Chile had hyperinflation, 30% unemployment and a $14 billion debt. What saved Chile’s total collapse was that Pinochet never nationalized the state copper mine company.

By 1988, when the economy stabilized, 45% of the population was living in poverty. In 2007, The United Nations ranked income inequality in 123 nations. Chile ranked 116th, or the 8th most unequal nation on the list.

Bolivia’s Turn

In 1985, Bolivia’s debt exceeded its national income. A year earlier, President Reagan’s funding of an attack on coca farmers turned much of Bolivia into a military zone. The effort suppressed the coca trade and reduced about half of the country’s export revenues. Out going President Hugo Banzer called in unknown young economist Jeffrey Sachs to hammer out an anti-inflation program. The Keynesian solution to a severe recession is government spending to stimulate the economy. Keynesian or developmentalist economic tradition relies on popular support with sacrifice shared by all. Sachs, a Friedman admirer, implemented the shock doctrine which shifted all the social cost to the poor. He proposed raising oil prices tenfold eliminating food subsidies, junking price regulations and budget cuts.

The new president, Paz Estenssoro, had to impose a 90 state of siege with tanks patrolling the capital and a strict curfew to enact this program. Two years later, real wages were down 40%. Later, the real wages dropped by 70%. In 1985, the average per capita income was $845. By 1987, per capita income dropped to $789. There was supposed to be prosperity. Sachs still considers his recommendations as a success.

Russia’s Turn

When Russia was going through a transition out of Communism, there was no help from the West. All the Russians got were demands for shock therapy – budget cuts, eliminating prices controls on food items and privatization. The average Russian consumed 40% less in 1992 than in 1991. One-third of the people lived in poverty.

Boris Yeltsin imposed a state of emergency to impose a shock therapy that would make him, family members and some others very rich. President Bill Clinton and other Western leaders supported Yeltsin. The Western press dismissed Yeltsin’s opponents as “Communist hardliners”, ignoring that the same opponents in the Russian Parliament supported Yeltsin and Gorbachev coup attempt by true hardliners, voted to dissolve the Supreme Soviet and up until recently had supported Yeltsin.

Russians who would become oligarchs bought state industries for a song with public money. Instead of depositing funds that should have gone into the national bank or treasury, some of Yeltsin’s ministers transferred money into private banks that the future oligarchs had hastily formed.

By 1998, the shock treatment results were catastrophic. Eighty percent of Russian farms had gone bankrupt and roughly 70,000 state factories had closed, creating massive unemployment. In 1989, before the shock treatment, two million people in the Russian Federation lived in poverty, making less than $4 per day. By 1996, 74 million Russians lived in poverty. This programmed misery is made worse by the extravagance shown by Moscow’s elite that is equaled only in a few oil emirates.

Iraq’s Turn

America’s chief envoy, L. Paul Bremer, issued decrees that lowered Iraq’s corporate tax rate from roughly 45% to a flat 15% rate, allowed foreign companies to own 100% of Iraqi assets, required no reinvestment and extended criminal and civil immunity to all foreigners. He enforced mass privatization, free trade and downsized the government. President Bush talks about Iraq as being on the road to freedom in the face of corruption, torture, death squads, crime, nearly 5 million refugees and pervasive press censorship.

Argentina’s Turn

During Argentina’s junta rule, external debt soared from $7.9 billion to $45 billion. About $10 billion went to military purposes. Most non-military expenditures are unaccounted for. The World Bank $35 billion of the junta’s borrowed funds and discovered that $19 billion moved offshore. Swiss banks confirmed that much of the $19 billion wound up in their numbered accounts. Such corruption is commonplace in shock therapy.

Something New

I learned a few things in reading The Shock Doctrine. I discovered that non-recovery in New Orleans and Iraq are planned that way. Bush incompetent cronies’ goal is to enrich corporations, especially donors to Republican causes. Jeffrey Sachs who recommended shock therapy for Poland and Russia and Milton Friedman had no thought to but to help the rich and disenfranchise the poor. The same goes for the globalization promoters.

The solution will come from forming a debtors cartel and a substitute for the International Monetary Fund and the World Bank. Well respected religious people, union members, farmers, teachers and scholars from the poor countries would serve on the board of directors. Some countries have stopped dealing with the IMF and World Bank. Nicaragua is leaving the IMF. Argentina and Venezuela have already left. In 2005, Latin America made up 80% of the IMF’s total lending portfolio. In 2007, the area represented just 1% - a remarkable change in just two years. The Latin America trend applies worldwide. Within three years, the IMF’s worldwide lending portfolio had shrunk from $81 billion to $11.8 billion, with almost all that going to Turkey.

When I started this article, I had the idea that this effort would delay writing a book about achieving war abolition. After a while, I realized that this article will be the basis of a chapter in the future book. The poverty inducing policies following by the IMF, the World Trade Organization and the World Bank guarantee violence and terrorist recruitment. American colonists turned to violent measures to counter far less grievous unfairness in 1775. May the new American president pursue a path following the United Nations Millennium Development Goals to eradicate abject poverty by 2015.

Main source:

Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism, Picador, Henry Holt and Company, 2007, 701 pages.

Ed O’Rourke is an environmental accountant in Houston, Texas.
www.eorourke.com