Fifteen Worthy Reads from October 25, 2018

Milton Friedman (1982): Free Markets and the Generals: Weekend Reading

Milton Friedman* (1982): Free Markets and the Generals: "The adoption of free-market policies by Chile with the blessing and support of the military junta headed by General Pinochet has given rise to the myth that only an authoritarian regime can successful ly implement a free-market policy. The facts are very different. Chile is an exception, not the rule. The military is hierarchical, and its personnel are imbued with the tradition that some give and some obey orders: it is organized from top down. A free market is the reverse. It is voluntaristic, authority is dispersed; bargaining, not submission to orders, is its watchword; it is organized from the bottom up...

...Military juntas in other South American countries have been as authoritarian in the economic sphere as they have been in politics. So were General Franco and the Greek colonels. Some have introduced free-market elements to meet an economic crisis—but so did Russia in the 1920s with its new economic policy and so has China in recent years. However, to the best of my knowledge, none, with the exception of Chile, has supported a fully free market economy as a matter of principle.

Chile is an economic miracle. Inflation has been cut from 700% a year in mid-1974 to less than 10% a year. After a difficult transition, the economy boomed, growing an aver age of about 8% a year from 1976 to 1980. Real wages and employment rose rapidly and unemployment fell. Imports and exports surged after export subsidies were eliminated and tariffs were slashed to a flat 10% (except for temporarily higher rates for most automobiles). Many state enterprises have been denationalized and motor transport and other areas deregulated. A voucher system has been put into effect in elementary and secondary education. Most remarkable of all, a social-security reform has been adopted that permits individuals to choose between participating in the government system or providing for their own retirement privately.

Chile is an even more amazing political miracle. A military regime has supported reforms that reduce sharply the role of the state and replace control from the top with control from the bottom. This political miracle is the product of an unusual set of circumstances. The chaos produced by the Allende regime that precipitated the military takeover in 1973 discredited central economic control. In an attempt to rectify the situation, the military drew on a comprehensive plan for a free-market economy that had been prepared by a group of young Chilean economists, most, though not all, of whom had studied at the University of Chicago. For the first two years, the so-called “Chicago boys' participated in implementing the plan but only in subordinate positions, and there was little progress in reducing inflation. Somewhat in desperation, the junta turned major responsibility over to the Chicago boys. Fortunately, several of them combined outstanding intellectual and executive ability with the courage of their convictions and a sense of dedication to implementing them—and the economic miracle was on its way.

Chile is currently having serious difficulties—along with much of the rest of the world. And the opposition to the free-market policies that had been largely silenced by success is being given full voice—from both inside and outside the military.

This temporary setback will likely be surmounted. But I predict that the free-market policy will not last unless the military government is replaced by a civilian government dedicated to political liberty—as the junta has announced is its intention. Otherwise, sooner or later—and probably sooner rather than later— economic freedom will succumb to the authoritarian character of the military. A civilian government, too, might destroy the free-market—after all, Allende was doing so in Chile when he was overthrown by the military.

A civilians government, too, might destroy the military—after all, Allende was doing so in Chile when he was overthrown by the military. Yet it is no accident that the spread of the free market in the nineteenth century was accompanied by the widening of political liberty and that although politically free societies have moved in the direction of collectivism, none has gone all the way except through the force of arms.

I have long argued that economic freedom is a necessary but not sufficient condition for political freedom. I have become persuaded that this generalization, while true, is misleading unless accompanied by the proposition that political freedom in turn is a necessary condition for the long-term maintenance of economic freedom.

#economicgrowth #politicaleconomy #weekendreading #2019-10-27