The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  And it wanted more than that—it wanted to expropriate what workers and governments had built during those decades of frenetic public works. The assets that Friedman urged government to sell were the end products of the years of investment of public money and know-how that had built them and made them valuable. As far as Friedman was concerned, all this shared wealth should be transferred into private hands, on principle.

  Though always cloaked in the language of math and science, Friedman’s vision coincided precisely with the interests of large multinationals, which by nature hunger for vast new unregulated markets. In the first stage of capitalist expansion, that kind of ravenous growth was provided by colonialism—by “discovering” new territories and grabbing land without paying for it, then extracting riches from the earth without compensating local populations. Friedman’s war on the “welfare state” and “big government” held out the promise of a new font of rapid riches—only this time, rather than conquering new territory, the state itself would be the new frontier, its public services and assets auctioned off for far less than they were worth.

  The War against Developmentalism

  In the United States of the 1950s, access to those kinds of riches was still decades away. Even with a hard-core Republican like Dwight Eisenhower in the White House, there was no chance of a radical right turn like the one the Chicagoans were suggesting—public services and workers’ protections were far too popular, and Eisenhower was looking to the next election. Although he had little appetite for reversing Keynesianism at home, Eisenhower proved eager to take swift and radical action to defeat developmentalism abroad. It was a campaign in which the University of Chicago would eventually play a pivotal role.

  When Eisenhower took office in 1953, Iran had a developmentalist leader in Mohammad Mossadegh, who had already nationalized the oil company, and Indonesia was in the hands of the increasingly ambitious Achmed Sukarno, who was talking about linking up all the nationalist governments of the Third World into a superpower on par with the West and the Soviet Bloc. Of particular concern to the State Department was the growing success of nationalist economics in the Southern Cone of Latin America. At a time when large portions of the globe were turning to Stalinism and Maoism, developmentalist proposals for “import substitution” were actually quite centrist. Still, the idea that Latin America deserved its own New Deal had powerful enemies. The continent’s feudal landowners had been happy with the old status quo, which supplied them with steep profits and a limitless pool of poor peasants to work in the fields and mines. Now, they were outraged to see their profits being diverted to build up other sectors, their workers demanding land redistribution, and the government keeping the price of their crops artificially low so food could be affordable. American and European corporations doing business in Latin America began to express similar complaints to their governments: their products were being blocked at the borders, their workers were demanding higher wages and, most alarmingly, there was growing talk that everything from foreign-owned mines to banks could be nationalized to finance Latin America’s dream of economic independence.

  Under pressure from these corporate interests, a movement took hold in American and British foreign policy circles that attempted to pull developmentalist governments into the binary logic of the Cold War. Don’t be fooled by the moderate, democratic veneer, these hawks warned: Third World nationalism was the first step on the road to totalitarian Communism and should be nipped in the bud. Two of the chief proponents of this theory were John Foster Dulles, Eisenhower’s secretary of state, and his brother Allen Dulles, head of the newly created CIA. Before taking public posts, both had worked at the legendary New York law firm Sullivan & Cromwell, where they represented many of the companies that had the most to lose from developmentalism, among them J. P. Morgan & Company, the International Nickel Company, the Cuban Sugar Cane Corporation and the United Fruit Company.18 The results of the Dulleses’ ascendancy were immediate: in 1953 and 1954, the CIA staged its first two coups d’état, both against Third World governments that identified far more with Keynes than with Stalin.

  The first was in 1953, when a CIA plot successfully overthrew Mossadegh in Iran, replacing him with the brutal shah. The next was the 1954 CIA-sponsored coup in Guatemala, done at the direct behest of the United Fruit Company. The corporation, which still had the ear of the Dulles brothers from their Cromwell days, was indignant that President Jacobo Arbenz Guzmán had expropriated some of its unused land (with full compensation) as part of his project to transform Guatemala, as he put it, “from a backward country with a predominantly feudal economy into a modern capitalist state”—apparently an unacceptable goal.19 Soon enough Arbenz was out, and United Fruit was back in charge.

  Eradicating developmentalism in the Southern Cone, where it had taken far deeper root, was a much greater challenge. Figuring out how to achieve that goal was the topic of discussion between two American men as they met in Santiago, Chile, in 1953. One was Albion Patterson, director of the U.S. International Cooperation Administration in Chile—the agency that would later become USAID—and the other was Theodore W. Schultz, chairman of the Department of Economics at the University of Chicago. Patterson had become increasingly concerned about the maddening influence of Raúl Prebisch and Latin America’s other “pink” economists. “What we need to do is change the formation of the men, to influence the education, which is very bad,” he had stressed to a colleague.20 This objective coincided with Schultz’s own belief that the U.S. government wasn’t doing enough to fight the intellectual war with Marxism. “The United States must take stock of its economic programs abroad…we want [the poor countries] to work out their economic salvation by relating themselves to us and by using our way of achieving their economic development,” he said.21

  The two men came up with a plan that would eventually turn Santiago, a hotbed of state-centered economics, into its opposite—a laboratory for cutting-edge free-market experiments, giving Milton Friedman what he had longed for: a country in which to test his cherished theories. The original plan was simple: the U.S. government would pay to send Chilean students to study economics at what pretty much everyone recognized was the most rabidly anti-“pink” school in the world—the University of Chicago. Schultz and his colleagues at the university would also be paid to travel to Santiago to conduct research into the Chilean economy and to train students and professors in Chicago School fundamentals.

  What set the plan apart from other U.S. training programs that sponsored Latin American students, of which there were many, was its unabashedly ideological character. By selecting Chicago to train Chileans—a school where the professors agitated for the near-complete dismantling of government with single-minded focus—the U.S. State Department was firing a shot across the bow in its war against developmentalism, effectively telling Chileans that the U.S. government had decided what ideas their elite students should and should not learn. This was such blatant U.S. intervention in Latin American affairs that when Albion Patterson approached the dean of the University of Chile, the country’s premiere university, and offered him a grant to set up the exchange program, the dean turned him down. He said he would participate only if his faculty had input into who in the U.S. was training his students. Patterson went on to approach the dean of a lesser institution, Chile’s Catholic University, a much more conservative school with no economics department. The dean at the Catholic University jumped at the offer, and what became known in Washington and Chicago as “the Chile Project” was born.

  “We came here to compete, not to collaborate,” said Schultz of the University of Chicago, explaining why the program would be closed to all Chilean students but the few selected.22 This combative stance was explicit from the start: the goal of the Chile Project was to produce ideological warriors who would win the battle of ideas against Latin America’s “pink” economists.

  Officially launched in 1956, the project saw one hundred Chilean students pursue advanced degrees at
the University of Chicago between 1957 and 1970, their tuition and expenses paid for by U.S. taxpayers and U.S. foundations. In 1965, the program was expanded to include students from across Latin America, with particularly heavy participation from Argentina, Brazil and Mexico. The expansion was funded through a grant from the Ford Foundation and led to the creation of the Center for Latin American Economic Studies at the University of Chicago. Under the program, there were forty to fifty Latin Americans studying graduate-level economics at any given time—roughly one-third of the department’s total student population. In comparable programs at Harvard or MIT, there were just four or five Latin Americans. It was a startling achievement: in just a decade, the ultraconservative University of Chicago had become the premier destination for Latin Americans wanting to study economics abroad, a fact that would shape the course of the region’s history for decades to come.

  Indoctrinating the visitors in Chicago School orthodoxy became a pressing institutional priority. The head of the program, and the man in charge of making the Latin Americans feel welcome, was Arnold Harberger, a safari-suit-wearing economist who spoke fluent Spanish, had married a Chilean and described himself as “a seriously dedicated missionary.”23 When the Chilean students started arriving, Harberger created a special “Chile workshop” where University of Chicago professors presented their highly ideological diagnosis of what was wrong with the South American country—and offered their scientific prescriptions on how to fix it.

  “Suddenly, Chile and its economy became a topic of daily conversation in the Department of Economics,” recalled André Gunder Frank, who studied under Friedman in the 1950s and went on to become a world-renowned development economist.24 All of Chile’s policies were put under the microscope and found wanting: its strong social safety net, its protections for national industry, its trade barriers, its controls on prices. Students were taught disdain for these attempts to alleviate poverty, and many of them devoted their PhD theses to dissecting the follies of Latin American developmentalism.25 When Harberger would return from his frequent trips to Santiago in the fifties and sixties, Gunder Frank recalled that he would lambaste Santiago, Chile’s health and education systems—the best on the continent—as “absurd attempts to live beyond its underdeveloped means.”26

  Within the Ford Foundation, there were concerns about financing such an overtly ideological program. Some pointed out that the only Latin American speakers invited to address the students in Chicago were alumni of the same program. “Although the quality and impact of this endeavor cannot be denied, its ideological narrowness constituted a serious deficiency,” wrote Jeffrey Puryear, a Latin American specialist with Ford, in one of the foundation’s internal reviews. “The interests of developing countries are not well-served by exposure to a single point of view.”27 This assessment did not stop Ford from continuing to fund the program.

  When the first group of Chileans returned home from Chicago, they were “even more Friedmanite than Friedman himself,” in the words of Mario Zañartu, an economist at Santiago’s Catholic University.*28 Many took up posts as economics professors in the Catholic University Economics Department, rapidly turning it into their own little Chicago School in the middle of Santiago—the same curriculum, the same English-language texts, the same unyielding claim to “pure” and “scientific” knowledge. By 1963, twelve of the department’s thirteen full-time faculty members were graduates of the University of Chicago program, and Sergio de Castro, one of the first graduates, was appointed faculty chairman.29 Now Chilean students didn’t need to travel all the way to the U.S.—hundreds could get a Chicago School education without leaving home.

  The students who went through the program, whether in Chicago or its franchise operation in Santiago, became known throughout the region as “los Chicago Boys.” With more funding from USAID, Chile’s Chicago Boys became enthusiastic regional ambassadors for ideas Latin Americans call “neoliberalism,” traveling to Argentina and Colombia to set up more University of Chicago franchises in order to “expand this knowledge throughout Latin America, confronting the ideological positions which prevented freedom and perpetuated poverty and backwardness,” according to one Chilean graduate.30

  Juan Gabriel Valdés, Chile’s foreign minister in the 1990s, described the process of training hundreds of Chilean economists in Chicago School orthodoxy as “a striking example of an organized transfer of ideology from the United States to a country within its direct sphere of influence…the education of these Chileans derived from a specific project designed in the 1950s to influence the development of Chilean economic thinking.” He pointed out that “they introduced into Chilean society ideas that were completely new, concepts entirely absent from the ‘ideas market.’”31

  As a form of intellectual imperialism, it was certainly unabashed. There was, however, a problem: it wasn’t working. According to a 1957 report from the University of Chicago to its funders at the State Department, “the central purpose of the project” was to train a generation of students “who would become the intellectual leaders in economic affairs in Chile.”32 But the Chicago Boys weren’t leading their countries anywhere—in fact, they were being left behind.

  In the early sixties, the main economic debate in the Southern Cone was not about laissez-faire capitalism versus developmentalism but about how best to take developmentalism to the next stage. Marxists argued for extensive nationalization and radical land reforms; centrists argued that the key was greater economic cooperation among Latin American countries, with the goal of transforming the region into a powerful trading bloc to rival Europe and North America. At the polls and on the streets, the Southern Cone was surging to the left.

  In 1962, Brazil moved decisively in this direction under the presidency of João Goulart, an economic nationalist committed to land redistribution, higher salaries and a daring plan to force foreign multinationals to reinvest a percentage of their profits back into the Brazilian economy rather than spiriting them out of the country and distributing them to shareholders in New York and London. In Argentina, a military government was trying to defeat similar demands by banning the party of Juan Perón from running in elections, but the move had only radicalized a new generation of young Peronists, many of whom were willing to use arms to retake the country.

  It was in Chile—the epicenter of the Chicago experiment—that defeat in the battle of ideas was most evident. By Chile’s historic 1970 elections, the country had moved so far left that all three major political parties were in favor of nationalizing the country’s largest source of revenue: the copper mines then controlled by U.S. mining giants.33 The Chile Project, in other words, was an expensive bust. As ideological warriors waging a peaceful battle of ideas with their left-wing foes, the Chicago Boys had failed in their mission. Not only was the economic debate continuing to shift leftward, but the Chicago Boys were so marginal that they did not even register on the Chilean electoral spectrum.

  It might have ended there, with the Chile Project just a minor historical footnote, but something happened to rescue the Chicago Boys from obscurity: Richard Nixon was elected president of the United States. Nixon “had an imaginative, and on the whole effective, foreign policy,” Friedman enthused.34 And nowhere was it more imaginative than in Chile.

  It was Nixon who would give the Chicago Boys and their professors something they had long dreamed of: a chance to prove that their capitalist utopia was more than a theory in a basement workshop—a shot at remaking a country from scratch. Democracy had been inhospitable to the Chicago Boys in Chile; dictatorship would prove an easier fit.

  Salvador Allende’s Popular Unity government won Chile’s 1970 elections on a platform promising to put into government hands large sectors of the economy that were being run by foreign and local corporations. Allende was a new breed of Latin American revolutionary: like Che Guevara, he was a doctor, but unlike Che, he looked the part of the tweedy academic, not the romantic guerrilla. He could deliver a stump speech as fiery
as any by Fidel Castro, but he was a fierce democrat who believed that socialist change in Chile needed to come through the ballot box, not the barrel of a gun. When Nixon heard that Allende had been elected president, he famously ordered the CIA director, Richard Helms, to “make the economy scream.”35 The election also reverberated throughout the University of Chicago Economics Department. When Allende won, Arnold Harberger happened to be in Chile. He wrote a letter home to his colleagues describing the event as a “tragedy” and informing them that “in rightist circles the idea of a military takeover is also sometimes broached.”36

  Although Allende pledged to negotiate fair terms to compensate companies that were losing property and investments, U.S. multinationals feared that Allende represented the beginning of a Latin America-wide trend, and many were unwilling to accept the prospect of losing what was a growing portion of their bottom line. By 1968, 20 percent of total U.S. foreign investment was tied up in Latin America, and U.S. firms had 5,436 subsidiaries in the region. The profits that these investments were able to produce were staggering. Mining companies had invested $1 billion over the previous fifty years in Chile’s copper mining industry—the largest in the world—but they had sent $7.2 billion home.37