The Chicago Boys and the Revival of Classical Liberal Economics in Chile.

• Author: Kaiser, Axel

According to a persistent narrative on the free-market revolution led by the so-called Chicago Boys in Chile in the 1970s and 1980s, (1) the country was purely "a laboratory for cutting-edge free market experiments" imported from the United States (Klein 2007, 59). In the words of Juan Gabriel Valdes, "The ensemble of neo-liberal ideas that evolved in Chile after 1975 had no precursor in the nation's public life" (1995, 13). Thus, the Chicago Boys "introduced ideas into Chilean society that were completely new, concepts entirely absent from the 'market of ideas' prior to the military coup" (Valdes 1995, 13).

This paper argues that the laboratory narrative is wrong. Classical liberal economics of the sort promoted by the Chicago Boys and thinkers such as Friedrich Hayek and Milton Friedman had been a substantial part of Chile's intellectual and institutional tradition long before the emergence of the Chicago School of economics. Moreover, for more than half a century of democratic regimes, free-market economics was the most accepted economic philosophy by Chile's political and intellectual elites. To a large extent, this acceptance was due to the influence of French classical liberal economist Jean Gustave Courcelle-Seneuil. Another decisive and lasting classical liberal influence was the Venezuelan-born intellectual Andres Bello, who is arguably the most prominent thinker in Chile's history. A follower of Adam Smith and the Scottish Enlightenment, Bello created a system of private law in Chile (2)--along the lines of free-market philosophies--that has endured until this day.

Chile and the Early "Neoliberal" Hegemony

The ideas usually referred to as "neoliberalism" and so often related to the Chicago School of economics and to thinkers such as Friedrich Hayek are the natural successors of classical liberalism. This fact becomes evident when the history of a central force in the development of the neoliberal identity, the Mont Pelerin Society (MPS), is examined (Plehwe 2009, 4). When this organization was founded in 1947, classical liberalism was at its lowest point in terms of influence on intellectuals, politicians, and society in general (Higgs 1997, 623). In this context, Hayek decided to create an organization that would revive classical liberalism in order to preserve what he believed were the intellectual foundations of Western civilization. Among the group's cofounders were figures such as Lionel Robbins, Michael Polanyi, Karl Popper, Ludwig von Mises, Walter Eucken, and several Chicago economists, including Milton Friedman, Frank Knight, Aaron Director, and George Stigler. In their purpose statement, the founders argued that the central values of civilization were in danger and that the position of the individual was "progressively undermined by extensions of arbitrary power." These threats, declared the founders, were bolstered by the growth of a historical perspective that denied "all absolute moral standards and by the growth of theories which question the desirability of the rule of law." Most importantly, those ideologies had been fostered "by a decline of belief in private property and the competitive market," which guaranteed a diffusion of power and initiative and without which it was "difficult to imagine a society in which freedom may be effectively preserved" (Mont Pelerin Society 1947). To be sure, there were relevant intellectual differences among the MPS founders, but, overall, there is little doubt that their aim was to promote a free society along the lines of classical liberalism. As R. M. Hartwell notes, the goal of the MPS was to discuss classical liberalism "and its decline, the possibility of a liberal revival, and the desirability of forming an association of people who held certain common convictions about the nature of a free society" (1995, 26). Milton Friedman would later declare that the society sought to "promote a classical, liberal philosophy, that is, a free economy, a free society, socially, civilly and in human rights" (1992). For Rachel Turner, "the neo liberal project strove for a new understanding of the state, economy and society within an ideological framework of traditional liberal tenets" (2008, 4).

It is within this philosophical framework of a modern liberalism derived from classical liberalism that the Chicago Boys' worldview of limited government and free markets has to be understood. In other words, the Chicago Boys' free-market philosophy was a direct successor of classical liberal economics. And in Chile, this philosophy of limited government and free markets was not new. Indeed, classical liberalism had achieved a profound impact in the second half of the nineteenth century and the early twentieth century. This was the period when the formal economic institutions and the intellectual base for the economic policy of the newly created Chilean republic were defined. Despite the dominance of protectionist ideas in the Spanish-speaking world, the economy in Chile was in many respects freer than in most developed countries. (3) Although far from hegemonic, classical liberalism had started to gain influence in Chile's political and intellectual spheres already in 1819. That year, Jean Baptist Say's work Traite d'economie politique (1803), a cornerstone of economic liberalism, became the basis of a course on political economy at the emblematic National Institute (Instituto Nacional) high school and was compulsory reading for all law students (Will 1964, 4).

In the early 1850s, classically liberal theories developed in the industrialized world had already become a major influence in Chile. One of the most outspoken critics of economic liberalism in the first half of the twentieth century, Leonardo Fuentealba, complained that due to the influence of this new approach, "the solution to any kind of economic problem was left to private hands" so that "the government should under no circumstances have to hinder the free play of individual interest" and its role was limited "to secure personal safety and property rights." Moreover, the Chilean state, according to Fuentealba, became a "night watchman state" (1946, 10).

Essential to the sweeping liberalization of Chilean economic policy and the intellectual shift from protectionism to classical liberalism was economist Jean Gustave Courcelle-Seneuil, a follower of Adam Smith and John Stuart Mill. Born in 1813, Courcelle-Seneuil would become one of the most distinguished proponents of French classical liberalism. He became the editor of the influential Journal des economistes and a member of the prestigious French Academy for Moral and Political Sciences (Academie des sciences morales et politiques). Charles Gide described Courcelle-Seneuil's liberal engagement in the following terms: "He was virtually the pontifex maximus of the classical school; the holy doctrines were entrusted to him and it was his vocation to denounce and exterminate the heretics. During many years he fulfilled his mission through book reviews in the Journal des economistes with priestly dignity. Being Argus-eyed, he knew how to detect the slightest deviation from the liberal school" (qtd. in Hirschman 1992, 184). Cited by Karl Marx in his work Capital in 1867, Courcelle-Seneuil would be praised by Joseph Schumpeter in 1954 as someone who had a "clear grasp of economic affairs that comes from firsthand experience" but that was rather absent in modern literature ([1954] 2006,473).

Under the presidency of Manuel Montt, the Chilean government hired Courcelle-Seneuil in 1855. His task consisted in creating and teaching the subject of political economy at the University of Chile and the National Institute as well as in serving as an adviser to the minister of finance. From those positions, Courcelle-Seneuil engaged in the teaching and application of free-market economics and classical liberal philosophy. As an adviser to the Chilean government, he participated in passing several laws that liberalized the economy. His most emblematic reform was the establishment of a free-banking system. For the libertarian economist Murray Rothbard, "the law of 1860 created a free bankers' paradise in Chile. Anyone or any group could set up a bank and issue notes. There were no reserve requirements, no limits on loans to directors, and no inspection by government agencies" (1989, 2). As Jere Behrman observes, the free-banking legislation devised by Courcelle-Seneuil was "an important symbol of the acceptance of laissez faire by the Chilean body politic" (1976, 8). Along the same lines, in the early twentieth century the leading protectionist economist Guillermo Subercaseaux argued that as a result of Courcelle-Seneuil's influence, the classical liberal doctrine had achieved a "complete triumph" in Chile, resulting in the adoption of the principle of liberty "without any restrictions," particularly with regard to banking. Moreover, according to Subercaseaux, the current of classically liberal ideas was so "powerful" that the finance commission of the Chilean House of Representatives (Camara de Diputados) even complained that there was insufficient freedom or flexibility in the banking law (1924, 43).

Courcelle-Seneuil's substantial influence over policy making in Chile went hand in hand with an overarching libertarian influence on the intellectual climate of opinion and academia. As Juan Pablo Couyoumdjian has observed, "Courcelle-Seneuil's mentoring implied the creation of a unique liberal tradition in the Chilean academy," underscoring "a period of liberal dominance in public policy" (2008, 294). Indeed, as the first professional professor of political economy in Chile, Courcelle-Seneuil could spread classical liberalism more than anyone before him. He was nothing less than the founding father of the discipline of economics in Chile. Before the arrival of Courcelle-Seneuil, political economy there was reduced to a few empiric axioms without any coherence...