85.

About Friedman and his

theories

This chapter explains who Friedman was, about his life, the essence of his
theories, and how they were applied around the world to the applause of the
rich and with terrible consequences for the poor.

Who was Friedman?

The answer depends on who you are, and which side you're on.
There are those, and they are many worldwide, who praise Friedman as the most
influential economist of the 20th century, a 1976 Nobel Prize Laureate in Eco-
nomics, a man who has developed economic models for a free market capitalist
society without any state regulation and with free competition worldwide. He
laid the groundwork for what is now known as "Neo-liberalism", "Reaganom-
ics" or "New Conservatism", or in other words: the economic policy that has
gained ground during the last 30 years worldwide, which is at the core of the
capitalist movement called globalization, and the economic policy that has been
advocated by the IMF and World Bank for 25 years.

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Friedman, who died in 2006, saw himself as a champion for human freedom,
since in his view it is only where free market capitalism thrives that human free-
dom can flourish.
Among his friends, admirers and followers Friedman could count: Ronald Rea-
gan, Margaret Thatcher, General Pinochet, Donald Rumsfeld, Richard Nixon,
G.W. Bush, Dick Cheney, Boris Yeltsin, several Latin American dictators, many
right-wing politicians and economists, presidents and prime ministers, several
founding families of big US corporations and big multinational companies in
general.
There are others, and they are many, worldwide, who see Friedman as totally inter-
twined with the big American companies and their biggest shareholders, and with
the most conservative politicians in the USA and around the world, giving voice
to their interests and promoting their economic world order, disguising cynical
self-interest and the quest for economic and political power as scientific economics
taught at universities worldwide, and promoting unregulated free market capital-
ism as the only possible way to create prosperity for all and freedom from totalitar-
ian dictatorship known from the Soviet Union and Eastern Europe.

* They know that Friedman from the 1950s,

when he became head of the Economics
Department at the University of Chicago,
was instrumental in starting an education
of economists from Latin America, funded
by the US government and the car company
Ford, in order to secure American invest-
ments and interests. Carefully selected, these
young men, "the Chicago Boys", studied Milton Friedman became head of the
economics department of the Univer-
economics under Milton Friedman, went sity of Chicago in the 1950s, laying
back to their countries to teach at local uni- the ground work for neo-liberalism.

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 About Friedman and his Theories

versities, and were ready to step in

when military rulers took power – be
it in Chile, Argentina, Brazil or Uru-
guay – ready to implement capitalism
without any restrictions. And they are
still there.
* They also know that in the 1960s and
1970s, when free market economics, The University of Chicago Economics De-
without any state regulation, in general partment.
was seen as identical with big business interests and as an attack on the welfare
state, which many workers’ unions had fought for, and which social democrats
and socialists in Europe and USA stood for, and when these ideas spread to Latin
America, where successful economies were developing in the southern part of
the continent, improving living standards at large, Friedman started to express
his conservative capitalist ideology with a vengeance – becoming a mouthpiece
for big business, who tried to change the course of history in their favor.
* They know that third world countries, trying to build an economy of their
own, have been under pressure from the IMF and the World Bank. The de-
mands of these international institutions have to a great extent followed Fried-
man's principles, always having some Chicago Boys in high positions.
* They know that people in many countries where free market economics were
implemented were against this policy, and that in many cases it was only pos-
sible for the government to implement such policies in extraordinary situations,
when democracy or the popular forces were weakened or disorganized or para-
lyzed – in the aftermath of political power struggles or upheavals, or during or
after war, or during or after dictatorships, or after natural disasters, or by elected
governments under pressure from IMF or the World Bank or other international
forces, or by elected governments staging a coup d’état. Everywhere where free
market economics have been implemented without mercy, the experience has

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been a dramatic and devastating setback in living standards for many people,
even when economic growth rates have soared. The examples are many. From
Chile under Pinochet, Argentina under different dictatorships, England under
Margaret Thatcher, Bolivia in the 1970s, Poland after communism, Russia un-
der Boris Yeltsin, to Iraq as of now.

Milton Friedman's life

Friedman was born in 1912 in Brooklyn, New York. His parents had emigrated
from Carpatho Ruthenia, now Ukraine.
Friedman's mother ran a small retail store, his farther took different jobs. Often
the family had very little money, but they never went hungry.
Friedman went to public schools and landed a scholarship to Rutgers University,
where he started to study Mathematics.
He studied and worked at different universities.
From 1946-1977, he taught economic theory at the University of Chicago, and
soon he became the head of the Economics Department. At the same time, he
worked for the National Bureau of Economic Research from 1937 and for some
other government institutions.
For several years, he worked with monetary economics and the importance of
the quantity of money for inflation and business cycles. Over the years, Fried-
man wrote articles in newspapers and magazines, and he wrote several books as
well.
Since the 1960s, Friedman was economic adviser to politicians and presidents
in USA. In 1964 to Barry Goldwater, from 1968-1972 to Nixon and from
1980-1988 to Ronald Reagan.
He gave direct and indirect advice to presidents, prime ministers and central
bank directors worldwide.
In 1976, he was awarded the Nobel Prize in Economics. In 1988, he was award-
ed the President's Medal of Freedom by Ronald Reagan.

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 About Friedman and his Theories

From 1977 until his death in 2006,

he also worked as a senior research fel-
low at the Hoover Institute at Stanford
University.

The essence of Friedman's theories

Friedman's theories are based on free
market economics. In essence, the the- Milton Friedman was awarded the No-
ories proclaim that the economy of any bel Prize in Economics and the Medal of
given society, and of the world at large, Freedom by Ronald Reagan. Others hold
him responsible for disastrous consequences
will find its own equilibrium if free caused by his theories.
market forces are left to work on their
own with no state involvement in controlling for example prices, wages, em-
ployment rates, monetary policy and foreign trade; with no state ownership of
resources and means of production; with free trade and no import regulations;
and with only a small flat tax to cover a minimum of government spending.
According to Friedman, free competition and people's "self-interest" will then
regulate all functions, to the benefit of the consumers and to the society as
such.
According to Friedman, free market economy brings with it "human freedom",
the right to choose – as opposed to the totalitarian socialist and communist
states, where there is no freedom.

Actually, Friedman's theories were not new.

However, they had been out in the cold for many years, especially after the Great
Depression and World War II, but they were "reinvented" by Friedman and put
to use from the 1970s, and up until now.
* The theories were partly formulated by Adam Smith, a philosopher from the
Enlightenment, who died in 1790.

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* Free market economics became identical with the interests of the ruling classes
from the early years of industrialization and colonialism, when rich landown-
ers and industrialists had nearly free hands to run production and economy in
Europe and USA, and to drain resources from the colonies.
* It was exactly these theories that Karl Marx described and opposed in the
Communist Manifesto from 1847.
* Unrest among workers and poor people in Europe and USA started to grow.
They organized together to protect their life and livelihood, and later when
unions, socialist parties and communist parties were being formed, and the Rus-
sian Revolution took place, a new force had entered the scene of history, a force
that the industrialists had to count in. The capitalists were willing to give some
concessions – such as better wages, shorter working hours, some safety measures
in dangerous workplaces, etc. – as long as the private ownership of the means
of production was in their hands, and as long as they were in charge of the state
and the basic order was not challenged.
* The Great Depression, which started in 1929 and continued into the 1930s,
deepened the economic and political contradictions in Europe as in the USA.
John Maynard Keynes, English economist and politician, warned early on after
World War I that if the world took a
laissez-faire approach to Germany's
poverty, and the market was left to
regulate itself, the blowback would
be disastrous. "Vengeance, I dare
predict, will not limp!"
Keynes advocated hands-on govern-
ment to regulate markets and to re-
The Great Depression – years of bitter poverty,
distribute wealth via taxes and better
widespread unemployment and financial melt-
down in all developed countries from 1929 to wages, to secure better living condi-
1935, caused by uncontrolled speculation. tions for the workers and the poor.

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 About Friedman and his Theories

Keynes was seen as the architect behind the New Deal and the social democratic
welfare state. He argued that dignified living conditions were paramount to fend
off fascism on its march forward in Germany, and to fend off socialism and com-
munism building up in the Soviet Union.
* In USA, the government of Franklin Roosevelt implemented the New Deal
according to the policies of Keynes – an extensive set of laws with the aim to
secure employment, minimum wages, social security, taxation of profits, aid to
farmers, etc.
This was contrary to the conservative policy of the ruling classes, who wanted
a free market economy with no government interference, and the conservatives
succeeded in dismantling many of the programs during World War II.
* However, Keynes's ideas were also behind the Marshall Plan, launched to re-
build Europe, especially Germany and Japan, after World War II. USA together
with the other winning parties developed the plan and provided the money. The
Great Depression and the rise of fascism in Germany were by many politicians
and governments seen as the result of laissez-faire policy. It meant an end to un-
regulated markets, and the basis was made for the creation of the social democrat
welfare states with their "disciplined" or more decent form of capitalism, with
social security, public health care, workers' protection and education for all.
* By the 1950s, social democrats in the rich Western countries and develop-
mentalists in the third world – in Chile, Argentina, Uruguay and Brazil, who
followed the same economic policies – could boast a series of impressive results.
The economic development continued more or less along the same lines through
the 1960s, often described as the "Golden Sixties".
* But the big US and European multinational corporations were not satisfied.
On the one hand the economy was growing fast, and enormous wealth was
being created, but on the other hand owners and shareholders were forced to
redistribute a great deal of that wealth through corporate taxes and workers'

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salaries. The unions became more demanding, and nationalist movements in the
developing world threatened their interests.
All the restrictions cost them dearly. They wanted a return to a form of capital-
ism from before World War II.
But they knew they could not lead such a movement on their own. It would
have been too obvious and too unpopular.

Enter: Milton Friedman.

Friedman was a mathematician, an economist and a skilled debater. Presented
by him, the arguments for an unregulated free-market economy took on an aura
of scientific objectivity.
Friedman did not defend the right of factory owners to pay low wages, he advo-
cated for "participatory democracy", and he promised productivity, prosperity
and "individual freedom".
The arguments were aired in newspapers, magazines and on television, and soon
a global network of right-wing think tanks was established.
In his book, "Capitalism and Free-
dom", published in 1962, Friedman
laid out what would become the
global free-market rule book and the
economic agenda of the neo-conser-
vative movement.
First, government must remove all
rules and regulations standing in the
way of the accumulation of prof-
Crisis theory by Milton Friedman: “Only a
its. Second, they should sell off any crisis – actual or perceived – produces real
assets they own that corporations change.” The devastation of New Orleans by
Hurricane Katrina became another example
could be running at a profit. And
of how capitalism uses a crisis to carry out its
third, they should dramatically cut agenda.

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 About Friedman and his Theories

back funding of social programs. Within this three-part formula of deregulation,

privatization and cutbacks, Friedman had plenty of specifics. Taxes, when they
must exist, should be low, and rich and poor should be taxed at the same flat
rate. Corporations should be free to sell their products anywhere in the world,
and governments should make no effort to protect local industries or local own-
ership. All prices, including the price of labor, should be determined by the mar-
ket. There should be no minimum wage. For privatization, Friedman offered up
health care, the post office, education and retirement pensions.
He was waging war on the "welfare state" and "big government".
Later, Friedman became preoccupied with "crisis" and "shock", and the window
of opportunity such situations created for his economic principles to be realized.
In 1982, he wrote: "Only a crisis – actual or perceived – produces real change.
When the crisis occurs, the actions that are taken depend on the ideas that are ly-
ing around. That, I believe, is our basic function: To develop alternatives to existing
policies, to keep them alive and available until the politically impossible becomes
politically inevitable."

The theories playing out in the real world

• Chile as an example – Chile and its neighbors in the 1950s and 1960s
In the 1950s, a rapid economic development took place in the southern part of
Latin America, in Chile, Argentina, Brazil and Uruguay.
Economic reforms were inspired by the "developmentalist" movement, support-
ed by United Nations' Economic Commission for Latin America, based in San-
tiago de Chile, and headed by the economist Raul Prebisch from 1950-1963.
Prebisch trained teams of economists in developmentalist theory and sent them
out to act as policy advisors for governments across the continent.
Governments in the region invested public money in infrastructure projects
like highways and steel plants, subsidized local business to build new factories,

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and protected national industry and

farm production with high tariffs.
Prices were controlled, especially on
basic goods. Workers formed strong
unions and negotiated higher wag-
es. Education was free for all, also
at universities. Health care systems
were established. The middle class
Chile, Argentina, Uruguay and southern Brazil
of local consumers was growing. In- developed during the 1940s and 1950s along
equalities between the poor and the European standards, with regulated capitalism,
rich were diminishing. social welfare and strong trade unions.

The Southern Cone, comprising Argentina, Chile, Paraguay, Uruguay and the
south of Brazil, began to look more like Europe and USA than the rest of the
third world, and many new countries were inspired by the development in Latin
America.
The continent's feudal landowners had been happy with the old status quo.
Now, poor peasants, who used to work in the fields and mines, demanded high-
er wages and land. The reforms restricted the landowners’ profitmaking capa-
bilities and reduced their political power. US companies had 20% of their total
foreign investments placed in Latin America. They saw profits shrinking because
of higher wages and higher taxes, they envisioned coming nationalizations, and
they were afraid of the ripple effect in other countries.
The Chicago Boys, of which a hundred were trained from 1956-1970 with the
aim to become economic leaders in Chile and elsewhere in Latin America, had
had no influence whatsoever. They seemed backward.
In the early sixties, the main economic debate in the Southern Cone was not
about free market economics contra developmentalism, but about how the de-
velopment could be taken to the next stage. The left argued for nationalization

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 About Friedman and his Theories

and land reform, while liberal nationalists wanted to build a strong Latin Ameri-
can economic trade bloc to rival Europe and USA.
In Brazil, a US backed military coup in 1964 ended a government headed by
Joao Goulart, which had started land redistribution, raised salaries and forced
multinational companies to invest part of their profits in Brazil. The coup gener-
als’ aim was to reverse the policies of Goulart and open the country for foreign
investment. They set out to do this without using brute force, but popular un-
rest grew, and after big demonstrations in 1968 against the military junta and
the declining living standards in Brazil, the military showed its true face, and
thereafter thousands of people were killed or disappeared.
In Argentina, a military government, also backed by the US, was trying to stop
similar popular demands by preventing Juan Perón from taking part in parlia-
mentary elections.

• The coup in Chile

In Chile in 1970, when Salvador Allende's Popular Unity won the election, the
country had moved so far to the left that all three major political parties were in
favor of nationalizing the world's largest copper mines, which were then con-
trolled by US mining companies.
Salvador Allende had promised to nationalize a large part of the economy that
was run by foreign and local corporations.
When President Nixon heard that Allende had won, he ordered the CIA director
to "make the economy scream".
Some big US corporations, the CIA and the US State Department and some lo-
cal industrialists and landowners formed a committee to overthrow the govern-
ment. They blocked US aid funds and international financing to Chile. The US
did not buy copper but used their stocks, and they took care that nothing was
purchased from Chile and that no investments were made.

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At the same time, the same forces pre-

pared for a military take-over. Local
businessmen formed a war structure,
which worked together with the mili-
tary, and they engaged several Chicago
Boys to prepare a program along neo-
liberal lines that would be passed on to
Salvador Allende won democratic elections the armed forces.
in 1970 and his government nationalized In spite of the economic warfare against
the copper mines. These mines produced Allende's government, the popular
50% of the world’s copper. USA wanted
to keep copper production under its control support was bigger at the mid-term
and planned for the removal of Allende. parliamentary election in 1973 than in
1970. The country was headed in a more and more socialist direction.
On September 11, 1973, General Pinochet and his supporters staged the long
planned military coup. The Chicago Boys had prepared a 500 page detailed eco-
nomic program, known in Chile as "the Brick". The military junta received it
the day after the coup in 1973. Chile's population was forced to "accept" a new
government and a new economic policy.
Though the military met no armed resistance, they waged a war against the
people of Chile. They preemptively destroyed all known opposition, and they
spread death and terror throughout the country. In a few weeks, more than
3,200 people disappeared or were executed, at least 80,000 were imprisoned,
and 200,000 fled the country for political reasons.

• Economic policy after the coup

The Chicago Boys became aides to General Pinochet.
Without any opposition present, their economic proposals could now be real-
ized. Pinochet did not understand economics, but he was assured that the eco-
nomic policies would work.

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 About Friedman and his Theories

From the start, Pinochet privatized state-owned companies (though not all),
allowed new speculative financing, opened the borders for foreign imports, did
away with barriers that had protected local manufacturers, and cut public spend-
ing by 10%, except for the military, which received a significant increase. Price
controls on essentials such as bread and cooking oil were also eliminated.
Already one and a half years after the coup, inflation was 375%, the highest in
the world. Cheap imports flooded the market, local businesses closed down, and
unemployment figures soared. More and more people lived under the poverty
line. The cost of basic foods was so high that hunger had become widespread – in
a country that one year earlier had Latin America's best social security system.
The Chicago Boys tried to convince Pinochet that the problems could only be
overcome if the last "distortions" were eliminated, and that the principles should
be applied with more strictness.
But the country's business elite thought it was enough. They had supported the
coup, but now they were out of business. They declared the economic policy a
failure, and they wanted the money that was now invested in speculative opera-
tions by the "piranhas", a small financial group who became rich on unregulated
speculation.
With their program in danger, the Chicago Boys called in Friedman himself and
his partner Arnold Harberger, who had been in charge of the "Latin American
Project". Friedman was welcomed by the junta-media, he gave televised speeches
and interviews, and he met Pinochet.
He explained to Pinochet that the crisis could only be overcome by a "shock
treatment". It was the only medicine for a long-term solution.
After the meeting, Friedman wrote to Pinochet urging him to cut government
spending much further, by 25% within six months, and to adopt a pro-business
policy towards complete free trade. Friedman predicted that the hundreds of
thousands who would be fired from the public sector would quickly be em-

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ployed by the private sector. Friedman repeated the importance of a shock treat-
ment several times.
Pinochet was convinced. He fired his economic minister and handed over the
job to one of the Chicago Boys, Sergio de Castro, who later became finance min-
ister, and who appointed the Chicago Boys to government jobs, among them
the head of the central bank. The local business association got a new supportive
leader. And new more radical reforms were carried out: In 1975, spending was
cut by 27%, and by 1980 it was 50% of what it had been under Allende. De
Castro privatized nearly 500 state-owned companies and banks and removed
more trade barriers, resulting in the collapse of more local businesses. Between
1973 and 1983, 200,000 industrial jobs were lost.
In the first year of Friedman’s prescribed shock therapy, Chile's economy con-
tracted by 15%. Unemployment, only 3% under Allende, reached 20%. In
1976, 80% of Chile's political prisoners were workers and peasants.
The public school system was replaced by vouchers and charter schools. Even the
social security system and the health care system were privatized.
Newspapers and business magazines and free market enthusiasts followed the eco-
nomic "experiment" in Chile. Many praised it. Even today, Chile is still seen as an
economic miracle by free-market pro-
ponents, and as a proof of how effective
Friedmanism is.
When Pinochet died in 2006, several
newspapers praised him for having
"transformed a bankrupt economy
into the most prosperous one in Lat-
in America." However, during his 17
With the help of the CIA General Pinochet years in power, Pinochet had to change
made a coup d’état in 1973, killed Salva-
dor Allende and introduced dictatorship in course several times.
Chile.

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 About Friedman and his Theories

In 1982, Chile's economy crashed,

though Friedman's prescriptions
had been followed. The debt explod-
ed, Chile faced hyper inflation once
again, and unemployment hit 30%.
The main cause was that the "pira-
nhas", a small financial group who
became rich on unregulated specu- In 1982 the Chilean economy crashed because
the rich had acquired all the companies that
lation, had bought up the country's were for sale during the privatization, with
assets with borrowed money, and cheap loans which they could not pay back.
had accumulated a debt of US$ 14 billion.
Pinochet was forced to nationalize most of the companies, and fired the Chicago
Boys. Some of them had partnered with “the piranhas” and were accused of
fraud. The only thing that protected Chile from total collapse was that Pinochet
had never privatized the big copper mines, nationalized by Allende. The mines
provided for 85% of Chile's export revenues, and secured income for the state.
By 1988, when the economy had stabilized and was growing rapidly, 45% of
Chile's population was living below the poverty line. The richest 10% had seen
their income increase by 83%. Even in 2007, Chile remains one of the most
unequal societies in the world.

• Great Britain as an example

For many years, Friedman and his movement would have liked to see their eco-
nomic agenda implemented in the first world, but even with Ronald Reagan
and Margaret Thatcher in charge of governments in the USA and Great Britain,
politicians were reluctant to follow Friedman's advice, as they were not ready to
take unpopular measures.
In 1979, Thatcher had run under the slogan: "Labour isn't working!", but in
1982, unemployment figures had doubled, and so had inflation. She had tried

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to install "the ownership society" in the housing market, by auctioning off flats
in public housing and giving incentives to the new owners, who were expected
to turn conservative in the next election. However, polls held in 1982 showed
that only 18% of the population approved of her government's policy. It looked
like the days of the Tory government would soon be over.
Her good friend, Friedrich Hayek, one of the founders together with Fried-
man of the Department of Economics at the University of Chicago, wrote to
Thatcher in 1981 after a visit to Chile. He was impressed by general Pinochet
and the Chicago Boys, and he urged Thatcher to follow the same model in order
to transform the British economy.
In February 1982, Thatcher answered in a private letter to Hayek, that "in Brit-
ain with our democratic institutions and the need for a high degree of consent, some
of the measures adopted in Chile are quite unacceptable. Our reforms must be in line
with our traditions and our constitution, though at times the process seems painfully
slow."
In April 1982, Argentina invaded the Falkland Islands. The war took 11 weeks,
had no historic impact, and was used by both sides for political purposes in
their respective countries. The military junta in Argentina was facing increasing
economic problems and popular un-
rest because of rising prices, and they
knew they could curb the unrest and
gather the population around anti-
imperialist sentiments.
Thatcher used the war to demon-
strate that she and her government
were able and effective in handling
The Prime Minister Margaret Thatcher a crisis. Critics claimed that Thatch-
needed a crisis to implement her neo-conser-
er only used the military to further
vative policies – The Falklands War against
Argentina came in handy. her own political goals. She did not

1404
 About Friedman and his Theories

try to negotiate a solution, set aside

the United Nations, and sent in the
troops. A "Falklands spirit" was creat-
ed in the UK, and soon Thatcher was
treated like a war hero. The polls shot
up to a 59% approval rate. Thatcher
won a second term in the 1983 elec-
tions. What Thatcher could not do
Mine workers just before the picket line. The
during her first term in office, she strike in 1984 was met with unheard of
could do after the Falklands War. police brutality and lasted until the workers
When the coal miners went on strike gave up after 11 months. The power of trade
unions in Britain was reduced.
in 1984, they were met by an iron
fist. Margaret Thatcher had just fought an "enemy without". Now she rallied
the country around fighting "the enemy within" – the strong unions that would
undermine the British economy, and which threatened the country's liberty.
Union demonstrations and picket lines were met with riot police. In order to
break one of the first picket lines, Thatcher ordered 8,000 riot police in, some
on horses. The result was 7 people killed and hundreds injured. During the
long strike, thousands of workers were injured. The union was infiltrated, union
leaders' telephones and houses were bugged, and one of the biggest surveillance
campaigns in British history was tried out on the miners. There was no attempt
at a negotiated agreement.
In 1985 Thatcher won, the coal miners could not hold out, and their families
went hungry. It was a devastating defeat for the strongest union in the UK, and
a clear message to the labor movement as such.
During her second term, between 1984 and 1988, the Thatcher government
privatized, among others, British Telecom, British Gas, British Airways, British
Airport Authority and British Steel, and it sold its shares in British Petroleum.

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 History Front

Thatcher implemented the first mass privatization in a Western democracy. She

proved that with a large enough political crisis to rally around, a limited version
of Friedman's prescriptions could be realized even within a democracy.

• Poland as an example
In 1980, workers went on strike in a shipyard in Poland to protest against higher
prices. This was unprecedented in Poland. The country had been controlled by
the Soviet Union since World War II, and unions and strikes were not allowed.
The whole country followed the incident closely, and so did the Western media,
which broadcast pictures and interviews of striking workers.
During the strike, the workers formed a union, called Solidarity. Their leader
was Lech Walesa, an electrician who had lost his job. Not only did he lead the
strike, but also the Catholic prayers, so the movement had followers in many
camps.
The Solidarity movement became a peaceful revolt against the Soviet-controlled
government. It spread through factories, mines and shipyards, and after just one
year, it had 10 million members, more than half of Poland's working popula-
tion. At the same time, the Communist Party was shrinking.
In 1981, Solidarity published its political program. It demanded "a self-gov-
erning and democratic reform at
every management level and a new
socio-economic system, combining
the plan, self-government and the
market." The vision for the state-run
companies, where millions of Soli-
darity's members were employed,
was to bring them out of govern-
In Poland the workers of the shipyards formed
ment control and change them into
a trade union in 1980, “Solidarity”, which
workers' cooperatives. protested against the rising food prices.

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 About Friedman and his Theories

Walesa opposed this program as too

radical, and he warned of a crack-
down from the state. Others wanted
to move forward, and the program
was approved by a majority and
published.
In December 1981, martial law was
declared, tanks surrounded the facto-
The Polish government could not control “Sol-
ries, workers' protests were crushed, idarity” and declared martial law in 1981 to
and many were arrested and impris- keep the country under control.
oned. Solidarity was forced underground, but the support – in Poland as well as
internationally – grew during the coming years of police-state rule in Poland. In
1983, Lech Walesa was awarded the Nobel Peace Prize.
In 1988, the Polish economy was in crisis, and Polish workers went on strike
again. This time – with a more moderate government in Moscow under Gor-
bachev – the government gave in, legalized Solidarity, and agreed to hold elec-
tions.
Solidarity formed a political party, which won 260 out of 261 seats in the parlia-
ment. Walesa stayed on as a leader of the union, but played a big role in the new
government behind the scenes.
When Solidarity took office, the national debt was US$ 40 billion, the infla-
tion was at 600%, there were severe food shortages and a thriving black market.
Many factories produced, but did not sell the products. Paychecks were worth-
less. People were lining up to buy sugar or bread.
Now suddenly Solidarity was in charge, without enough money for the payroll
and with no clear economic policy.
Solidarity was divided. Some wanted to turn the state-run factories and mines
into workers' cooperatives. Some wanted a gradual transition to market econ-

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 History Front

omy along the lines of Gorbachev, with a strong public sector and state regula-
tions like in the Scandinavian countries.
However, Poland needed debt relief and financial aid.
IMF, the World Bank, and an economist, Jeffrey Sachs, were ready to fill the
vacuum of indecision with harsh realities. Jeffrey Sachs had been praised by the
Western media for his miracle cure of the Bolivian economy since 1985. He had
already been presented to the communist government and the Solidarity move-
ment long before the elections by the billionaire George Soros, who guaranteed
financial support of US$ 3 billion and to renegotiate Poland’s debt, as he had
done for Bolivia, on the condition that the new government agreed to Sachs's
plan for introducing a free-market economy. This plan became known in Poland
as "the Sachs Plan" or "shock therapy".
Sachs’ plan prescribed: Eliminating all price control; slashing all subsidies; sell-
ing off the state-owned mines, factories and shipyards to the private sector; cre-
ating a stock exchange and capital markets; a convertible currency; a shift from
heavy industry to consumer goods production. It was a plan transforming a so-
cialist economy into a capitalist mar-
ket economy with one blow. Sachs
argued that the Polish economy
was so bad that only shock therapy
would help, however much it hurt.
If Solidarity did not follow the plan,
hyperinflation and a total economic
collapse would be the result.
The newly appointed finance min-
ister was a secret admirer of Milton Jeffrey Sachs became advisor to Solidarity after
Friedman, and he also joined ranks it won elections in Poland. The economy was in
ruins. The advice from Chicago school econo-
with Sachs. Some of Solidarity’s lead- mist Jeffrey Sachs was “shock therapy”.
ers were against this policy, as it was

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 About Friedman and his Theories

totally against what they had promised

the striking workers, but they had no
alternative economic policy prepared.
Earlier, Walesa, on American televi-
sion, had explained: "Poland is going to
find a third way, a mixture.... It won't be
capitalism. It will be a system that is bet-
ter than capitalism that will reject every-
thing that is evil in capitalism." How-
ever, the new government started to
implement Jeffrey Sachs's free-market In 2003, 13 years after the transformation
economy, claiming that it had no other of the Polish economy, unemployment was
still the highest in Eastern Europe, where
choice. before there had been no unemployment.
The shock therapy caused an economic
depression. During the first two years, the industrial output fell 30%. Unem-
ployment reached 25% in 1993, in a country where employment had been a
guaranteed right by the state. Even today, Poland has an unemployment rate of
20%, and 40% of young workers are unemployed – twice as high as in any other
European country. The dissatisfaction was growing. In 1990, when workers still
hoped that the shock therapy would result in a prosperous economy, there were
250 strikes, but by 1993 there were 7,500 strikes.
In 1992, 60% of the population was still against privatization of state-owned
factories, mines and shipyards.
At the elections in 1993, a coalition of parties, including the Communist Party,
won 66% of the votes, a fractionalized Solidarity got 5%, and a new party under
the former Solidarity prime minister got 10%.
Different political coalitions have won elections since 1993. Lech Walesa was
also president at a certain point in time. Now, a right-wing nationalist party, the
Law and Justice Party, won elections by a big margin in 2005.

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 History Front

In 1989, 15% of the population lived below the poverty line, and in 2003,
World Bank statistics showed that 59% of Poles lived below the poverty line.

• The International Monetary Fund and the World Bank

These two institutions were founded after World War II as part of the Bretton
Woods agreement with the aim to prevent economic crisis and secure economic
stability worldwide. The World Bank should make long-term investments in
development to pull countries out of poverty, and the International Monetary
Fund should act as a kind of global shock absorber, providing stabilizing grants
and loans when a country was falling into a crisis.
The two banks were organized, not like the UN where one country has one vote,
but so that the different countries would vote according to their economic size.
It meant that USA de facto had a veto, and that the richest countries decided
the policy.
The two institutions had always made policy recommendations when they hand-
ed out loans, but during the years, recommendations turned to demands, and
during the 1970s and especially from the 1980s, IMF and the World Bank have
become tools in the hands of the effort of the neo-liberal movement to change
the economic world order.
Though the functions of IMF and
the World Bank are contrary to
Friedman's unrestricted free-market
economics, there are no institutions
better positioned to implement his
crisis theory.
In 2003 IMF elected Agustin Carstens as The Chicago Boys have held numer-
Deputy Managing Director. He was educated
at the University of Chicago and says about ous posts and many high positions in
himself: “I am a genuine Chicago boy in every the two institutions throughout the
sense of the word”. years, and when countries have come

1410
 About Friedman and his Theories

to the two banks, they have been met

with clear conditions: In order to ob-
tain debt relief or new financing, the
government must implement radical
free-market reforms. Many countries
were pressed to privatize state-owned
natural resources and companies,
open up for foreign trade and invest-
ments, cut social spending, and cut “Structural Adjustment Programs” in Africa
taxes, in order to get new loans. The supply financing on the condition that social
spending is reduced. In Kenya school attendance
consequences have been dire: Grow- fell 10% from 1990 to 2000. Also the quality
ing inequality, more people living of teaching and the facilities deteriorated.
in poverty, crippled local industry
and farming, growing unemployment, foreign control over natural resources
and infrastructure, smaller state revenues, increased foreign debt, and a govern-
ment without economic power, and therefore with no political power.
The IMF issued its first "structural adjustment" program in 1983. Though the
IMF always has claimed that it worked to prevent crises and to stabilize the
economy, what was taking place was nothing less than using the international
debt crisis to force the world open for an unregulated capitalist economy.
Many countries in the third world had staggering high debts that ran into bil-
lions, sometimes greater than the country's GNP, and the interests so high that
government spending for education and health care had to be minimal.
The debt crisis of the 1980s forced many countries to turn to the World Bank
and to the IMF.

• The crisis was the result of two main factors

1) The first was the banks' insistence on carrying on debt that had been amassed
by military rulers or other types of corrupt governments, and which the IMF,

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 History Front

the World Bank and international, especially US, banks had supported with
gracious loans. When new governments trying to cope with an economy after
years of dictatorship, war or corrupt mismanagement claimed that the debt was
not the people's debt, and that they would not pay, new credits were denied,
not only from the IMF and the World Bank, but from the international banks
as well.
2) The second factor was the decision of the US Federal Reserve in 1981 to in-
crease interest rates in the USA up to 21%. The consequences were fatal to many
third world countries with high foreign debts. Brazil's debt doubled in six years
from US$ 50 billion to US$ 100 billion, and the tendency was the same all over.
Countries had to borrow more in order to pay interests.
In 1989, the chairman of the IMF, John Williamson, unveiled his "Washington
Consensus" economic principles, which the two institutions regarded as "the
common core of wisdom embraced by all serious economists", and which the
two institutions considered as the minimum for economic health.
The principles are more or less identical with Friedman's principles from his
book "Capitalism and Freedom".

Freedom to the masses – the aim justifies the means

In an interview in 2005, Friedman said:
“What matters for me is human freedom. That people can decide what to do, who
they want to deal with, who to love, who to hate. The great virtue of the free market
is that it enables people, who would otherwise hate each other, to talk together, to
deal with each other.
The masses have only escaped poverty where capitalism and free trade have unleashed
productivity and creativity.
Look at immigration, people do not go from USA to Cuba. People do not choose
socialism. Look at Venezuela, even with their oil-income, they are already running
out of milk and bread.

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 About Friedman and his Theories

I want my legacy to be, that my eco-

nomic principles will still be useful in
30-40 years from now, that I will be
remembered as a technical and pro-
fessional economist, and I want to
believe, I have contributed to human
freedom.”
After Milton Friedman's trip to Milton Friedman said he was not responsible
Chile in 1975, the New York Times for the oppression in Chile, that he was only
and others asked: If the pure Chi- giving technical advice. But drastic economic
changes that cause widespread hardship can
cago economic theory can be carried only be carried out by oppression.
out in Chile only at the price of re-
pression, shouldn't its authors feel some responsibility?
For a brief period, Milton Friedman and the neo-liberals were discredited due to
their collaboration with the military juntas in Latin America. Even at the Uni-
versity of Chicago, some students and professors compared Chile to Germany
under the Nazis, and drew parallels between Friedman's support for Pinochet
and the technocrats collaborating with the Third Reich.
Friedman himself wrote: "Despite my sharp disagreement with the authoritarian
political system in Chile, I do not regard it as evil for an economist to render technical
economic advice to the Chilean Government."

Orlando Letelier, who served as Chile's ambassador to the US under Allende,

and was jailed by the junta immediately after the coup, escaped Chile, and, back
in USA, exposed Pinochet's crimes and defended Allende's record against CIA's
propaganda.
Worldwide condemnation was building against Chile's military junta.
In August 1976, Letelier published an essay in which he wrote: "The violation of
human rights, the system of institutionalized brutality, the drastic control and sup-

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 History Front

pression of every form of meaningful dis-

sent is discussed (and often condemned),
as a phenomenon only indirectly linked,
or indeed entirely unrelated, to the clas-
sical unrestrained 'free market' policies
that have been enforced by the military
junta.....This particularly convenient
concept of a social system, in which 'eco-
Monument for Orlando Letelier, who was
nomic freedom' and political terror co- killed together with his assistant Ronni K.
exist without touching each other, allows Moffitt in Washington D.C. by a car bomb.
these financial spokesmen to support their
concept of 'freedom' while exercising their verbal muscles in defense of human rights."
He wrote that Milton Friedman, as the intellectual architect and unofficial ad-
viser for the team of economists running the Chilean economy, shared respon-
sibility for Pinochet's crimes. He dismissed Friedman's defense that he was just
offering "technical" advice. Letelier wrote, "The economic plan has had to be en-
forced, and in Chilean context that could only be done by the killing of thousands,
the establishment of concentration camps all over the country, the jailing of more
than 100,000 persons in three years....Regression for the majorities and 'economic
freedom' for small privileged groups are in Chile two sides of the same coin."
Less than one month after Letelier published his article, he was murdered by a
bomb placed underneath his car while driving to work in downtown Washing-
ton D.C.

Friedman's legacy continues, even to this day, when his theories are used in Iraq
under the leadership of men he helped to foster.

1414