Pinochet meets Polanyi? The curious case of the Chilean embrace of "free" market economics.

Author:Cypher, James M.
Position:Karl Polanyi

A sweeping experiment with University of Chicago-style "free" market economics began in Chile in 1973 with General Pinochet's coup d etat (Pinera 1992). Presently, it is commonly held that the restructured--Chicagoized--Chilean economy is a uniquely successful model to be emulated by other Latin American nations. This paper argues--within the context of Karl Polanyi's work--that the common view of Chile is doubly misconstrued: First, Pinochet's neoliberal economists were not successful in purging the Chilean socioeconomic system of most of the social safeguards and safety nets constructed prior to 1973. Further, much of the unconditional "opening" to the free market proved to be both economically and socially devastating--necessitating new safeguards in conformance with Polanyi's hypothesis as presented in The Great Transformation. Thus, it is a myth that the Chilean economy is truly operating in an ultra-free market form.

Second, while portrayed as a great success due to an average GDP growth rate of 7 percent from 1986 to 1997, the elements of the Chicago-style model that were introduced in 1973 constitute the fundamental source of Chile's growth recession since 1997. (1) Further, the underlying causes of Chile's success in the 1986-97 period have their origins not in the "free" market concepts of the Chicago School but rather in the many programs fostered by the State during the 1938-73 period (Cypher 2003).


Events since the end of the dictatorship (1989) tend to confirm Polanyi's hypothesis in The Great Transformation (1957; discussed in the following section) while at the same time negating the Chicago School's view that a "free market" society could be built--even under a dictatorship. With seventeen years to construct such a "free market" economy it is not possible to accept a standard caveat of the Chicago School--"our ideas did not have time to work" or the common corollary--"we were unable to properly implement our ideas."

The Chicago School routinely takes--and is given--credit for the strong economic performance of the Chilean economy in the 1986-1997 period: In 1982 Milton Friedman pronounced the market-driven policies of the military dictatorship "an economic miracle." Arnold Harberger (who began in the 1950s to recruit the right-wing Chilean graduate students that designed the dictatorship's economic policies) stated in the American Economic Review in 1993: "Chile has had the longest and most successful economic modernization process of any Latin American country" (345). (2) Harvard economist Robert Barro asserted that Chile's "outstanding performance derived from the free-market reforms instituted by ... Pinochet" (2000, 22). Even Joseph Stiglitz, a strong critic of Chicago School/International Monetary Fund policies, treated Chile as a successful exception in Globalization and Its Discontents (2002, 18).

Inserting Polanyi

In broad outline, Polanyi made the compelling argument against Manchester-style economics (now known as neoliberalism): In their struggle to organize processes of production human societies have found it necessary to construct collective institutions that safeguard and insure socioeconomic stability for members of society. Polanyi argued the historical case of the Industrial Revolution and its aftermath in England: The breakdown of feudalism and the imposition of the "free market" as an instrument of socioeconomic self-regulation did not, and could not, last. As the safeguards and underlying support mechanisms of feudalism were swept away, the British working class and the middle class commenced a long and successful struggle to create institutions under capitalism which would grant a degree of social stability and security to the human participants in the new capitalist society. Thus, through the creation of trade unions and political organizations--and through the successful evocation of safeguards such as the minimum wage, health and safety conditions in industry, worker's compensation, public health care, social security, public education, regulation of industry in terms of product safety and predatory pricing, and so on--many of the most egregious excesses of early capitalism were curbed. Polanyi set out to demonstrate that it was a "utopian endeavor of economic liberalism to set up a self-regulating market system," arguing that believers in such a thesis "seem[ed] to invest that system with almost mythical powers," finding that such a thesis "appears extreme, if not shocking in its crass materialism" (1957, 29-30). Belief in the attainment and stability of such a "utopia" spread with a religious-like fervor in the nineteenth century. Yet, just as quickly, it was possible to trace "the rise and fall of market economy" (30).

In Chile from September 1973 onward through 1989, the Chicago School-inspired economists known as the Chicago Boys engaged in what would appear to be the most determined "utopian endeavor of economic liberalism to set up a self-regulating market system." It is the hypothesis of this paper that the Chicago School failed spectacularly in this effort and that the credit they have widely received for successfully "remaking" the Chilean economy properly belongs to the antithesis of the Chicago School--successful State-led efforts to restructure the economy and foster...

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