Tags

On a recent jaunt to the end of the world, I found myself in one of those situations awkward for an Austrian economist, which is that of defending the Chicago school and Milton Friedman. As a result of my discussions with Chileans regarding economics and politics—especially the persisting divide in Chile between Allende and Pinochet supporters—I reached my quota for Friedman defenses.

To that end, I’m glad to be home.

As most know, Salvador Allende was the Marxist president of Chile, elected by a narrow plurality and a fluke in 1970, and deposed in a military coup three years later, with the support of the US spy agencies (as well as the intelligence operations of several other countries). At the end of the day, concern that a Cuba-like police state was being introduced to South America, with Santiago becoming a new Havana, leading to a military revolt, the Chilean Air Force bombing La Moneda (Chile’s version of the White House), and Allende’s committing suicide with an AK-47.

For the next 17 years, General Augusto Pinochet ruled Chile and proved the rule that those who resist an evil like communism often assume their enemies’ worst traits in the process. While Allende endeavored to create an infrastructure of Fidel-ism in Chile (with the triple-digit inflation to prove it), Pinochet actually constructed such an infrastructure that brought torture and death—first to Allende’s supporters and acolytes, and then to anyone his secret police might have arbitrarily thought fell into that camp. Tens of thousands were imprisoned, tortured, and murdered by men who claimed to be restoring the rule of law to Chile.

Nonetheless, a corrupt Pinochet allowed a vote on a new constitution and later, a plebiscite on his rule which led to his giving up power 20 years after Allende’s election. Now, almost three decades later and Pinochet long-dead, Chile’s left-right ideological divide resembles that found in the US. Most everyone I spoke with in Chile would agree that the divide is characterized by well-meaning people who view Allende or Pinochet favorably to the extent they consider each man to be the lesser of two evils.

The above is hardly even a Cliff Notes summary of a lamented history. Nonetheless, three lessons spring from it. These are:

Ideologues elected on a fluke should not govern as though given a mandate. Doing so sparks reaction and overreaction.

Pinochet’s decision to relinquish power is admirable and quite against the dictatorial grain. His doing so allowed Chile to become one of the most stable democracies in the Americas.

Pinochet deserves credit for allowing the development of economic institutions in post-Allende Chile to be constructed by “the Chicago Boys,” a group of economists who studied at the University of Chicago and influenced by its mainstream free-market principles. They are credited with liberalizing the economy and opening it up to global trade, privatizing state-run industries, and stabilizing inflation.



This last point is the basis for my unusual defense of Milton Friedman, who was an odd type of popular libertarian: an arch-positivist, a champion of fiat money and state control of interest rates (which are among the most important and essential prices in any free market), and one of the intellectual founders of tax-withholding and the earned income tax credit. These contributions to present-day monetary and fiscal institutions should trouble Friedman’s libertarian supporters.

They trouble me, and yet to many Allende partisans, free market economics is itself tainted because of its association with the Pinochet regime. My argument in response was the case for economic science is separate from any given regime promoting it, and that while I would agree that Friedman’s contributions to state power are troubling, his influence in creating free market institutions in Chile was key to its incredible economic performance since 1990.

When Pinochet left the presidency, Chile was at a crossroads. It could have embraced the Keynesian populism of other Latin American countries, or it could have continued along the path of lowering taxes, making the country safe for capital investment, and inserting and extending itself in the global division of labor. It chose the latter, and as a result Chile should be the model for all of Latin American economic development, over and above the relatively more corrupt and crony-enriching economic models found in countries like Argentina, Brazil, and Venezuela.

When I mentioned this to a Chilean ex-pat from Australia whom I met — his family emigrated in the 1970s out of fear of Pinochet’s secret police — he thought I overestimated the value of free market institutions to Chile’s present economic situation. Chile, he told me, still had a great deal of income inequality relative to developed countries.

It seemed to me that this is a bad comparison. Chile’s level of income inequality is comparable to Australia’s when the Australian market economy was at a similarly nascent stage. However, as Chile continues to attract capital and employing it in ways that increase the productivity of its working poor, it too will continue to develop a middle class comparable to Australia’s, and income inequality will fall.

Besides, comparing the Chilean economy to the Australia or the US borders on committing the Nirvana Fallacy. A better comparison would be to Argentina or Brazil, and while I would admit that Chile may not always compare favorably to these countries, it mostly does. Chile has been spared the periodic economic and political crises that plague those countries. While too dependent on the price of copper, the diversification of the economy has made this dependency less of a factor than it had in the past.

Chileans with whom I spoke had never heard anyone criticize Friedman as one who compromised free market principles. Yet, Friedman’s intellectual concessions to state expansion must have surely adversely affected Chile’s present economic situation in the same way they adversely affect the US economy. There, as here, central bank inflation finances the state to an extent larger than would be possible without the inflation tax, and these funds then go to finance politically well-connected individuals, firms and industries that would otherwise receive less favor if capital flows were directed by market forces. There, as here, constantly increasing levels of price inflation reduce purchasing power of the currency (especially hurting the poor) in order to finance these wealth transfers.

As strong and even miraculous as has been Chilean economic performance over the past two decades, one wonders where the country would be today if Pinochet and his advisors were more smitten by the uncompromising Mises instead of the conceding Friedman, but there were no Misesean Ph.D. programs in the 1950s and 1960s to send their future leaders. Credit them for choosing the next best alternative.