Capitalisn’t: Key Lessons from the ‘Chicago Boys’ Chile Experiment

Luigi: In the United States, the date of 9/11 is indelibly associated with the terrorist attack in 2001. For Chilean people however, 9/11 is associated with another tragedy: the Pinochet military coup, which took place exactly 50 years ago. On 9/11/1973, Pinochet’s tanks overturned the democratically elected government of Salvador Allende and seized the presidential palace. With no way out, President Allende committed suicide. The coup started 16 years of dicta-torship characterized by brutal violations of civil rights, massive repressions of liberties, and thou-sands of dissidents killed.

After the coup, Pinochet called to his economic cabinet some young Chileans who had studied at the University of Chicago, the so-called “Chicago Boys.” The relationship between Chile and the University of Chicago started in the mid-1950s, when some students of the Catholic University were sent to study at the University of Chicago economics department. On returning to Chile, these young assistant professors changed the way economics was taught there.

In 1969, they tried to advise the conservative candidate in the presidential election, but they were pushed away because they were considered too crazy. Their ideas became influential only after the coup, starting an experiment in neoliberalism.

On the occasion of the 50th anniversary of the coup, we thought it was interesting to review this controversial legacy. In the rest of the podcast, we’re going to focus only on the economic as-pect of the Pinochet regime, where our expertise lies. But first, we wanted to honor the innocent victims of the regime.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capital-ism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: Today we have a big announcement. Bethany has finally finished her new book, The Big Fail: What the Pandemic Shows About Who America Helps and Who It Leaves Behind, which will come out in October. We’re looking forward to discussing it on the show. Actually, we need to think about how to do something special for the occasion, so we invite all the listeners to send us suggestions.

Speaking of books, you have written many books, Bethany. I’m sure you had even more ideas for a book that you did not develop because you didn’t have the time or because you thought that you were not the right person.

Bethany: I can answer that question better when it comes to stories. I’ve always felt that certain journalists who have first written about something have a claim on a story that I don’t. Even if I think the story is really interesting and great, and something that would oth-erwise be up my alley, if I weren’t the one to break the original news about it, I’ve always had a harder time straying into what I view as somebody else’s territory.

Luigi: I think you’re much more disciplined than I am because a few times, I had some ideas, and then I decided for various reasons not to pursue them. One of the instances where I finally saw somebody doing what I decided not to do, but doing it much, much better, is this book called The Chile Project: The Story of the Chicago Boys and the Downfall of Neolib-eralism by Sebastian Edwards.

As you know, in 1973, after the military coup, Pinochet called a number of Chilean students who studied at the University of Chicago to direct the country’s economic policy. And many of the recipes they introduced remained in place even after the end of the dictatorship, so much so that in Chile, this set of policies is known by the nickname El Modelo, the model.

On the one hand, this model had fantastic results in term of economic growth. Per-capita in-come grew by more than six times in the last 40 years, making Chile the richest or the second-richest country in Latin America. The fraction of people living below the poverty line dropped from more than 50 percent to less than 5 percent.

On the other end, the country’s economic inequality remains astonishingly high. Twenty-eight percent of the total income is concentrated among just 1 percent of the population, making Chile one of the world’s most unequal nations. Even in 2015, I could see signs of what is now called the malaise, or in Spanish, malestar, that brought the revolt that took place in 2019.

Chile is a very stark example of both the positive and the negative effects of neoliberal policies. And now, neoliberal policies have led to a populist backlash. In a sense, Chile is the purest form of something that has happened in the entire Western world, not to mention the fact that there is a super interesting moral dilemma. Are you willing to help a brutal dictator like Pinochet? Or should you not and leave the country to fall apart?

Bethany: I’m also struck by how much of the discussion about the book or how much of what floats around . . . how much of the discussion of Chile and how much of what floats around in the ether is, indeed, ideological. You had George Schultz say, I guess at one point, which somebody quoted in a review of Edwards’s book: “Our Chicago Boys produced the only really good economy in Latin America in the 1980s. It was sensational.”

And then you have, on the other hand, the sense that something really bad happened in Chile and that the takeover of the economy by the Chicago Boys is a negative. And I guess that was the assumption that I had, that Chicago had done something really terrible to Chile.

Anyway, we’ll get to all of that. But Luigi, why didn’t you write the book if you were so excited about this idea?

Luigi: Honestly, being from the University of Chicago, you can’t win because you say something positive, and people immediately say, “You are saying something positive be-cause you’re defending the University of Chicago.”

You say something negative, and then people say, “Oh, you’re trying to trash the University of Chicago, your employer, in order to sell books.” There is no upside.

For this reason, I was very happy when I saw that Sebastian Edwards wrote the book that I wanted to write. Sebastian, number one, is Chilean. Number two, he studied at Chicago. Now, he’s a professor at UCLA, but he’s a close friend of the real father of the Chicago Boys, which Arnold Harberger, who by the way, is still alive at the age of 96 or 97.

Now, in case this was not enough, Sebastian had the credibility of somebody who opposed Pi-nochet as a young student in Chile. In fact, he went to study at Chicago in 1977 because he was persecuted by Pinochet.

Last but not least, he’s also an acclaimed author of a spy book, El Misterios de Las Tani-as.

Bethany: I think I’m going to have to read his spy book.

Definitely, it’s impossible to match his credentials, and I think you and I are both lucky, what-ever led us not to write this book, I think this is a book that definitely should have waited for him.

But even not knowing his credentials, I was really, really eager to read this book because it seems to me that this question of neoliberalism, what it is, what its successes are, what its failures are, is an important question. And that Chile is the canary in the coal mine, perhaps, but a very telling explication of some of the successes and failures of neoliberalism. And it’s a big question for the world going forward.

Luigi: You are absolutely right. The most valuable contribution in the book is to describe what went wrong with the application of neoliberal policies in Chile, but more general-ly, I think, in the Western world.

But before we enter into this discussion, I think we need to define neoliberalism because this has been used very loosely as a term, and it seems to apply to most economists these days, from Milton Friedman to Larry Summers. So, I think we should really use the book to define neoliberal-ism.

Bethany: I think that’s a great idea because . . . I’m actually relieved to hear you say that even in your field of economics, it’s been loosely used, because I think journalists toss it around—and I will include myself under that label—without having a clue what it actually means. And so, I was really excited to read his definition and think through it, and some of the history of it, as well.

Anyway, Sebastian defines neoliberalism as “a set of beliefs and policy recommendations that emphasize the use of market mechanisms to solve most of society’s problems and needs, including the provision and allocation of social services such as education, old-age pensions, health, support for the arts, and public transportation.”

Wow, pretty all-encompassing, indeed. Luigi, do you agree with this definition?

Luigi: Yeah, but I prefer his second definition, which is that neoliberalism is the marketization of almost everything. As Sebastian points out, the crucial aspect is really in the term “almost.”

However, I disagree with Sebastian because he claims that this definition is able to distinguish a lot in the economic space. It would distinguish between, for example, Larry Summers and Milton Friedman. I don’t think so. I think that both definitions would put everybody from Larry Summers to Milton Friedman under the same tent.

Bethany: And do you think that’s right? They should be under the same tent?

Luigi: For what purpose? It depends on what you want to define and what you don’t want to define. I think that there is an element they have in common. They have in common a very strong belief in market rules. I also would like to say they have in common a great distrust of the need to give more power to ordinary people in influencing the shape of the econo-my. There is a form of elitism that is present in both and is present in most economies these days.

Bethany: That’s interesting. Well, I’m really curious to hear what Sebastian has to say on a lot of these questions. So, let’s bring him in.

Luigi: Can we divide the period into the Pinochet era and afterwards? If we look at the 16 years of the dictatorship, the economic record is not that great.

Sebastian Edwards: No, the economic record is actually very poor. When the military takes over, inflation is moving towards 2,000 percent. And the first task that the Chicago Boys get from the military—before they join the cabinet, they are just advisors—is to make sure that we get rid of inflation. So, they reduce inflation. And inflation gets stuck in ’74, early ’75, at 400 percent. Why was it at 400 percent? It was at 400 percent because the military was very re-luctant to privatize the most important companies, firms, industries that had been nationalized by Allende.

The military are nationalistic—the armed forces are in most countries—and they loved the fact that they were now running the refrigerator plant, they owned it. And they thought, if we have a war with Argentina, we will produce tanks in these companies, which was, of course, a little ab-surd. So, they were owning these companies and they were running a huge deficit at that level, which was financed by the central bank by printing money.

What basically happened then is that Pinochet sides with the Chicago Boys after a big fight, and he stands against the more nationalistic members of the military, and he privatizes all these firms, basically for zero, for very little pay. Why? Because they are money-losing companies. And he tells the government to cut down on government expenses. So, the shock treatment comes in. And that triggers privatization and the reduction of inflation.

If that had not happened, Chile would be today like Ecuador. The dictatorship, if you look at the record, which is in the book, it’s poor, very poor, except that it starts to take off towards the end, after ’85, ’86. There are four good years. And that is what Alejandro Foxley and his team, when they take over the economic leadership during the first democratic regime, they realize that this takeoff may last. And the Chilean miracle, in terms of the statistical record, takes place during the Concertación governance, under democratic rule. And it is a true miracle.

Let me give you just one example. When I was growing up in Chile in the 1960s and early ’70s, we thought that it was totally, utterly impossible to surpass or even get close to Argentina on any-thing. Obviously, soccer, it was impossible—it still is impossible—but on anything. And by 2002, Chile had surpassed Argentina on everything except soccer. Higher income per capita, higher life expectancy, better health, better results in education, tests. Anything that you look at, Chile sur-passed Argentina. And that is, regionally, a miracle. But two Achilles’ heels. It was created under dictatorship, which was an issue, and income distribution continued to be very unequal.

Luigi: But we know that pressure . . . especially exchange-rate devaluation, et cetera, pressures countries to do stuff. In Italy, there was a huge privatization wave in ’92, ’93, precisely following a currency crisis and so on and so forth. So, many of these things you could get without a dictatorial regime. What were the unique decisions, besides the craziness of pegging the exchange rate, which led to a disaster?

In many situations, Milton Friedman and company were not particularly caring about institu-tions and how institutions work. They were very much macroeconomists who understood very lit-tle of the financial system. For them, banks were something that existed, but they didn’t under-stand what they were. The fact that if you borrow in dollars and you lend in pesos, if there is a mas-sive devaluation, you’re in crisis, you don’t need a PhD to figure it out.

Sebastian Edwards: Right? That’s like Mickey Mouse economics. But no one had thought about it, at least not in Chile, right?

Luigi: The biggest problem, in my view, is nobody had thought about it in the Chicago econ department. Who was suggesting that they pay attention to that?

Sebastian Edwards: No one was suggesting to them to pay attention to that. Maybe Harberger told them, “Be careful.”

But you asked a very important question, which is, besides the fixed exchange rate, what else were big mistakes? What the military did is that they privatized the banks first. And they privatized them in a layer wave fashion. You could buy a bank, a big bank, paying down a million dollars, and you use your profits in the future to pay the rest very slowly.

But what people did, the groups that bought those banks, is that they self-dealt credit to them-selves. And they used the banks to buy the other firms that were being privatized after the banks had been privatized. There were these conglomerates that were based on almost no equity. Every-thing was a pyramid of paper companies.

And so, the order of privatization became a very important topic. When do you privatize the banks? And if you do, how much do you regulate them? And the Mexicans learned about that, and they privatized the banks at the end. In Eastern Europe, they learned about that. They privatized the banks, in some countries at the end, in some in the middle. In Russia, they privatized them right away. As in Chile, it was the basis of the oligarchs building these huge conglomerates and em-pires. So, that was another mistake. And I agree with you they did not properly regulate the banks. But in addition to that, this issue of sequencing of reform is very important.

Bethany: That’s fascinating. I was going to ask you whether the problems in Russia with privatizations, what lessons they took away from Chile? And if they took away the right lessons. And it seems that the answer is no. When you think about the mistakes that happened in Chile, how profound is this issue of crony capitalism that the privatization question leads into? Is that the founding sin?

Sebastian Edwards: It’s a very serious sin. And it’s based on very simplistic economics. The notion was, if we open the economy, and we lower import tariffs from 500 per-cent, which basically meant that you could not import anything . . . If you lower them to 2 percent, or 3 percent, or 5 percent, you have foreign competition.

Then the notion was, if anyone inside the country, two companies want to collude, someone will import the good from abroad, and the collusion could not take place.

What they didn’t realize is that you need a very complicated, complex supply-chain structure to import. If you’re going to import TV sets, you have to have warehouses, distributors, retail hous-es. And who became the importer of Japanese TV sets, and then Korean, and then Chinese? The same guys who owned the TV factories in Chile. So, yes, there was foreign competition, but the margin was appropriated by the same people.

There was a very simplistic view of the world. And I think Luigi is right. No Chilean or Latin American economists, I would say, that studied in Chicago during those years, took any courses in industrial organization. No one took Sam Peltzman, no one even took George Stigler. And if they took him, they took a very simplistic view of the world from George.

Yeah, regulations, and understanding collusion, and crony capitalism, all of that was absent. But that added into what I talk about in the book at the end, all the abuses that paved the way to the demonstrations in 2019, and what I call the downfall of neoliberalism that we are observing now, as we speak.

Bethany: You note that the founding definition of neoliberalism actually did explicitly encompass some social goals and some social good. How did those two things separate? How did neoliberalism in practice come to be so rigid and not to include any social good?

Sebastian Edwards: That’s a great question, but I think that the answer is complicated. You are absolutely right. The early neoliberal conversation is around Walter Lipp-mann’s book The Good Society. And what Lippman says is, if capitalism doesn’t take care of some social concerns, we are going to be taken over by the Nazis or the Fascists.

And he’s writing in 1937. Now, the Lippmann Colloquium, there were, I think, 36 people, all men, all white—two Spanish philosophers were invited, but they didn’t come. No one was invited from Latin America. There were two camps. One was Lippmann, who wanted to put in place these social programs. And then the other one was Hayek and Mises, who were more about, no, we need just to improve competition.

Lippmann then loses at the end, although there are no follow-ups to that meeting because of the war, the Second World War. And the new group that reassembles is the Mount Pelerin Society in ’47, and it’s only the right-wing, the more conservative, the more extreme, if you wish.

Now, in the case of the Chicago Boys, what happens is that they are worried about social con-cerns, but only about poverty. They want to eliminate poverty, but they don’t care about income distribution. And that, I think, is a crucial distinction. It turns out that income distribution is very important. And in societies, your relative position is crucial. Not only, as I say in the book, relative to income, but also the way you are treated, and that I call horizontal inequality.

There is a lot of class distinction in a country like Chile. And also, racial distinction, although it’s not made that explicit, but people who are white and tall and have blue eyes are at a great premi-um relative to the average Chilean, who is a mestizo or mestiza.

Luigi: Sebastian, you, as a young student, were trained in Marxism, right?

Sebastian Edwards: Yes.

Luigi: What I’m surprised by is that you attribute everything to the battle of ideas and very little to the battle of economic interests. All the Chicago Boys, before they were Chicago Boys, they were part of the country club in Chile. And we know that there is a very small country club that runs the country. Whether you are from the so-called right or the so-called left, you belong to the country club.

My question is, to what extent is this Chicago Boys story a façade? At the end of the day, they picked up what was in their interests. What these guys wanted was to push the interests of a small elite that controls 99 percent of the wealth in Chile. And they did it, very successfully, and they used the flag of Milton Friedman, but actually, they didn’t even follow Milton Friedman rigorously, because de Castro pegged the interest rate when Milton Friedman was saying no. I think that it’s not really that these guys were ideological. These guys were pushing their interests.

Sebastian Edwards: No, I don’t think that that is accurate, Luigi. At some lev-el, you are correct. But once you start digging, several components of what you said require some qualifications.

The country club, as any country club, had cliques. There were the old aristocratic landowners. The Chicago Boys had almost none in that group. There were mostly new migrant families, not very old in Chile. So, Fontaine, Rolf Lüders, Pedro Jeftánovic. Only one person belonged to the landed gentry, for instance.

There were these cliques who were fighting with each other. You have to remember that the Chicago Boys wrote an economic plan for the right-wing candidate in 1970, the fellow who lost against Allende. And this candidate, who had been the head of the manufacturing association, threw them out of the office because he said, “You guys are crazy. You want to free prices, whereas we are very comfortable with controlled prices because we have, in our pocket, the people who control the prices. You want to free interest rates. We own the banks and we self-deal to our-selves. We don’t want to do that. You want to reduce import tariffs? No, we are protected by these huge tariffs because we own all the manufacturing factories.”

They were not liked by the traditional conservatives, the leaders of the country. So, I think that that’s not exactly the case.

And the other thing where I would qualify what you said is that, at the end, poverty incidence was reduced from 58 percent to 8 percent. The benefit was very generalized. It was not only lining the pockets of the rich. They did very well, don’t get me wrong, and they became much, much wealthier, and income distribution improved, but very, very little, very, very, very little. And that is and was a very serious problem.

Bethany: On that note, how did you come away thinking about this issue of income distribution versus the goal of reducing poverty? We had Phil Gramm on the podcast re-cently, and we were talking about some of these same issues. If you had to advise someone who is starting from scratch with a society, what would you say is important? Is it income distribution, or is it poverty?

Sebastian Edwards: Well, it’s like the old SAT question: all of the above. I spend a weekend with Phil Gramm every year in Mexico. We talk economics and drink a lot of te-quila. And I’ve debated him on this issue. I think that his book is full of interesting facts, but from a policy perspective, I think that he’s not correct.

I think that reducing poverty, of course, is very important. Once you accomplish that or get close to it, then income distribution is crucial. And not only income distribution, but also horizon-tal equality, that people are treated with respect, that they are treated in a dignified way, that they get the same amenities.

There is also the issue of . . . Luigi will understand. In Romance languages, there are two ways of treating people, either tú or usted. Vous or tu in French. I don’t know what the articles are in Italian. And so, you see that young people who are from wealthy families treat in the familiar way, the tú, people who work there, the housekeeper and so on. And the housekeeper has to reply in the more respectful fashion. So, it goes on and on and on and on. And income distribution is essential for stability. And that’s why, today, in Chile, we don’t know where it’s going.

Bethany: You write at the end of the book that free-market proponents have really lost control of the narrative in Chile and elsewhere, that they’ve been silent, while others have been far more outspoken. Yet you also, obviously, detail all the mistakes that happened in Chile during the time of, I don’t know, I’ll call it an experiment. What’s the relationship between the narrative and the reality? Or maybe a different way to ask that is, which pieces of the narrative should the free-market types still celebrate and claim?

Sebastian Edwards: Well, I think that the narrative was clearly lost. And the left, as I say in the book, after having lost this battle, they regrouped, they licked their wounds, and read Gramsci. Basically, they read Antonio Gramsci. It’s all happened through Italians, as usual. They read Gramsci and Judith Butler and Habermas and Ernesto Laclau, and they realized that it had to do with the ideology, in the end.

And then they created this narrative that the Chilean experiment was a failure. And I think that the main aspect of that narrative that has to be captured is that it was not a failure. It had run out of steam and had to be changed, and more regulation should have been introduced, a better role for the state, more distributive policies, anti-collusion measures, and so on and so forth. But the narrative that everything was a failure just does not stand up to the data.

And even if you go to the extreme of accepting Thomas Piketty’s data, it doesn’t stand up to the data. Yes, income is very unevenly distributed. But the fact that the country moved from being the number 10 in Latin America—10 out of 18, not 10 out of 200, right? From below the median to being number one by a wide margin is indisputable. The fact that poverty disappeared is indis-putable. The fact that in human-level indicators, human-development indicators, Chile is the best country in Latin America, better than Argentina, better than Cuba . . . Many people say that Cuba has such a great health system, no. Chile is number one in everything except soccer. That is indis-putable.

So, that part of the narrative, accepting that it had run out of steam. You have to go to the next step, and the next step is to adopt all of these more social-democratic policies with a greater role for the state—in an efficient way, but a greater role. And that is what the right did not understand. And the left took advantage of the fact that they now control the narrative.

Luigi: I think you’re a little bit too generous by saying it had run out of steam because I think they planted some seeds that are difficult to change. As you describe in the book, a lot of people, for example, were sold the hope that through a university education they would im-prove their wellbeing.

But as we know from the paper you cite, and as my ex-colleague, Seth Zimmerman, documents, that in Chile, what matters is not the degree you have but who you are with that degree. And if you come from the upper class and you go to the University of Chile, you have all the contacts and you do very well in life.

If you are an inquilino and then you make it into the University of Chile, you don’t make a huge amount of money. They were sold a fake dream, a dream that pretends to be egalitar-ian, but it’s not. And I think that this is a fundamental problem. It’s not just running out of steam. I think it crashed against the limits that were intrinsic.

Sebastian Edwards: I think that we agree on the facts. . . . We agree that the old-boy network is important. It determines the network and how well you do. But I think that you can call the inquilinos not earning as much as running out of steam. And you don’t have to go back to a highly regulated, protectionist, price-control regime to deal with that. There are many, many ways you can do it, including what we do at the universities.

For instance, we don’t allow people to send a photo of themselves when they apply anymore. In a country like Chile, this is very important, because as I said, light skin is different from dark skin. You may want to have a regulation where firms cannot ask about high school. Almost no one knows in this country, the US, which high school you went to. It’s not an issue; it’s not a question. You look at people’s vitae, they don’t say where they went to high school.

In Chile, it is the first thing they tell you, those people who are part of the network. They tell you, “I went to this high school—German priests, or French priests, or Holy Cross priests, or no priests,” but they tell you.

Luigi: E spirito santo, yeah.

Sebastian Edwards: In 10 years, higher education in Chile tripled in numbers. You could very well put in place regulations that make it more difficult to have the old-boys net-work operating. And I call that running out of steam. As you get to these higher stages, you need to put in place more regulations that make the system more meritocratic and work better.

Luigi: Let me push back a bit on your previous answer, because putting in some affirmative action or more blindness in admissions is certainly useful, but it’s not going to fix the problem that if the economy is controlled by five families, if you went to school with those families, it is good for you. If you didn’t, you are at a huge disadvantage. And that’s the end of it.

And even if you put in place all the blind admissions tests, et cetera, at the end of the day, if I need to choose my board members, if I need to choose my next CEO, et cetera, do I prefer the guy I went to school with, or do I prefer the guy I never met? I end up preferring the guy I went to school with. And so, all the intellectual class in Chile is basically dependent on the 10 families that run the country. And because it’s also a small country, they are all together, and it is very difficult for anybody who is an outsider to come up.

Sebastian Edwards: Luigi, we’re not going to disagree much on that. It is diffi-cult but not impossible. There are measures and policies that are being discussed, you rightly point out, about the elite.

But let’s talk about the role of women. There is a notion that there should be quotas for wom-en on boards, right? And I think that that’s the right direction. And once you do that, you may say, “Oh, they’re going to put in women from the elite.”

Well, not necessarily, right? And the more advanced companies have been adding women and have half of the board, or 40 percent, of the members being women. Many of them are not coming from the elite. But it’s a slow process.

And at the end, it’s a question of costs and benefits. And I think that if the three of us get to-gether, and we add maybe two more people over drinks, and we drink some wine and eat some cheese, we can come up with a list of policies that would make sense. And I would, in general, not oppose them.

What I would oppose is throwing all the progress overboard in order to try to solve those is-sues. I would rather have the problems, which are, in some sense, an embarrassment of riches that you are talking about, Luigi, than having Ecuador’s income per capita right now, which is one-half. Right? And I think that we can do this. And all we have to do is put our minds together to figure it out.

Now, whether the elite will gladly accept it is a different issue, and of course, they will resist it.

Bethany: What are the broader implications of the Chilean story? To some degree, some of the problems you talk about are present in the United States. And to some de-gree, there are differences. From a two-tiered healthcare system—or multiple-tiered healthcare system, maybe—to crony capitalism to some of the problems with higher education and the lack of opportunity, and students having these monstrous overhangs of debt, you have some of the same loss of the control of the neoliberal narrative taking place here. What would you say the lessons are for the US and for other countries?

Sebastian Edwards: I think that one of the very important lessons, clearly, for the US has to do with something that may seem trivial, but I think it’s not, which is that income distribution matters. If you look at the Gini coefficient in Chile, it is, I don’t know, 48, and in the US, it is 42. And in most of Western Europe, it is 32. And in Eastern Europe, it’s 28. Income distri-bution matters. It’s like a pressure cooker. The pressure builds, and then it explodes.

That’s what happened in 2019 in Chile. People did not understand it. It’s a paradox. How come the No. 1 country in Latin America goes up in flames, and they burn out 25 metro stations in one night, and so on and so forth?

Income distribution is of essence. And corporate abuses, crony capitalism, create a loss of faith in the system that is very difficult to get back. You build in all this resentment that, at the end, may result in a much worse system.

There is, for instance, the danger that we end up in a highly protectionist system. Why? One of the bases of the neoliberal model was joining globalization. And if we think that the whole system is bad, the whole model is atrocious, then you put in import tariffs, and Chile with 18 million peo-ple starts producing seven different brands of automobiles, each of which will cost $70,000, which is where we were 30 years ago.

Luigi: Now, Sebastian, the last question. You were, as you said, a bit too young to be among the Chicago Boys that really changed Chile. Suppose you had been born a few years earlier and you had gone to Chicago, and you were asked by Pinochet to do what de Castro and other people did. Would you have done it?

Sebastian Edwards: Never. My generation . . . We were 20. I had just turned 20 when the coup came. And my generation, we were between 19 and 20. And the dictatorship was for 16 years. Many of my comrades in arms from the left ended up taking jobs with the Pino-chet government because it was very long . . . if you worked for the government, you had to work for . . . and accepting money to go to grad school.

I never accepted or received a single peso or dollar or anything from the Pinochet government. I would never, ever, ever have done it. There were other Chicago-trained economists of the first generation that also stayed out and were part of the opposition to Pinochet. So, I would not have been the only one. But I am very proud of the fact that I was always on the other side of the road.

Luigi: Sorry, I know you’re ready to go, but I wonder, it’s too hard not to ask you a follow-up question, which is, how do you judge the people who did it, and was it worth it?

Sebastian Edwards: It’s very hard for me to do that. I have a whole section in the book which asks the question, did the Chicago Boys know about the violations of human rights? They say they didn’t.

They knew something, because when the Pinochet agents killed, assassinated, former ambassa-dor Orlando Letelier in Washington by blowing up his car, of course they knew, because it was in the papers everywhere. And they knew of other things.

It’s tough to justify. It’s tough to justify. The way they justify it, including Friedman, is, we are doctors, and this was a patient that was about to die, the Chilean economy, with GDP declining by 10 percent during the last Allende regime, inflation of 200 percent, shortages, black markets, and so on. And we were called in, and we worked like doctors.

I find that difficult, but I prefer not to judge them. But my position is I never did it. I would never have done it. Never, ever, ever, ever.

Luigi: Thank you. This was fascinating.

Bethany: This was great. Thank you so much.

Sebastian Edwards: OK, thank you.

Luigi: Overall, I think that he is very compelling as an author and as a speak-er.

Bethany: I thought so, too. I had trouble putting the book down, actually. I thought it was fascinating. I think it’s incredibly topical today, not just because it’s topical to what’s happening in Chile, but it’s topical to what we’re all talking about, which is, what are the limits of neoliberalism? And I think, while Chile may offer extreme examples of a lot of these problems, they’re present in a lot of countries, including the United States. And there are absolutely lessons to be learned from this.

One of my favorites of his observations is this notion of malaise or malestar, that economic success isn’t just about the actual numbers, but about emotions, like the relationship between blue-collar workers and elites, and about the shame and humiliation that capitalism con-nects to poverty. And that had some interesting connections to our discussion with Michael Sandel about meritocracy, that when you’re told that if you succeed, it’s only due to your own steam, and if you fail, it’s all your fault, that you create these fault lines in society. I thought it was really in-teresting and should be almost required reading for our Congress or for anybody who’s shaping economic policy in the US.

Luigi: Absolutely. And what I found particularly fascinating is the episode that he shares about Arnold Harberger, who is the father of the Chicago Boys. One of the first times he goes to Chile, he ends up in one of the fancy clubs of the Chilean elite. And then he asks the ques-tion, “How many people here are children of what are called inquilinos, that tend to be, basically, farmers who don’t own any land?”

In 1956, or whatever was the first time, they fell off their chairs because they couldn’t even think about the possibility that somebody could emerge from being a simple farmer to actually be-ing an owner and a wealthy man.

Now, he asked the same question again, I think, 10 or 15 years ago, and people fell out of their chairs a little bit less, but the answer is still, nobody.

Bethany: I also thought what was really interesting is, not just that income distribution is really key to whether a society is stable or not—whether or not you’ve succeeded in eradicating poverty. I think that’s a really, really, really key observation—but also, that the way in which poverty was addressed in Chile left the people who are right on the margin of poverty in constant fear because they couldn’t feel stable because they had no support.

And I think that broader sense of instability, of slippage, of the possibility of making one wrong step and falling off a cliff is also part of what went wrong in Chile. And part of what worries me about where we are in the US right now, there’s that same feeling of fragility, and I think it perme-ates all aspects of society. That if you make a misstep, if your child doesn’t get into the right school, your fragile hold on this thing called the economic ladder is going to slip, and you’re going to fall and crash and never be able to pick yourself back up again. I just think it’s really fascinating to think about that malaise as an emotion that exists in a society, regardless of how well the numbers might say that the overall society is doing.

Luigi: Yeah, I think you’re raising a good point. I don’t know to what extent it is the result of him being part of the Chilean elite or the result of him being trained as a macroe-conomist and not really knowing the more micro mechanisms that drive many of these results. Be-cause he was very clear in saying that all the Chileans who were coming to study here were study-ing macroeconomics.

I can sympathize with that, because all the Italians who were going abroad up to my generation were studying macroeconomics. Why? Because you come from a country with enormous macroe-conomic instability. So, the first order of magnitude is that. If you are having inflation at 2,000 per-cent, then anything else becomes second order, right?

And so, all the Chileans have been trained as macroeconomists, and they have ignored the mi-croeconomic problems. Maybe as a result of this ignorance, they left a lot of rules, or lack of rules, that favor incumbents, or favor here, or favor there, without paying too much attention to that.

The kind of market rules they introduced are market rules without rules. It is an unregulated market that doesn’t work very well. It tremendously favors who is the incumbent, who has an ad-vantage to begin with.

Bethany: I think that’s a fascinating observation, and I liked your observations about that when we were talking to him, and your question for him. I tend, at least simplistically, to think about management of an economy as monetary models.

And you realize, when you look at Chile, how important all these other elements are, like regu-lation and how you privatize. I thought his comments in the podcast about the order of privatiza-tion, when you privatize the banks, were fascinating. And the parallel between Chile and Russia is really, really, really interesting. It just made me think, basically, that if you were going to take an economy and build it from scratch, or you were going to start again with Chile, that, wow, is this complicated, and is there an awful lot to think about. And it really isn’t just as simple as saying, free-market switch, let’s go.

Luigi: Absolutely. And to some extent it is a shortcoming of the profession that we didn’t study the Chilean model fast enough because it would have been very useful for the subsequent privatization in Russia or the Eastern Bloc. There was some understanding but not enough, because as he said, the mistakes were repeated.

Bethany: Is there a trade-off between economic growth and equality? In other words, can you have one without the other? Or does the huge economic success that we saw in Chile, broadly speaking, automatically bring with it a kind of inequality until, basically, society catches up, if society catches up before it blows up, and says, “Oh, no, no, no, we can’t have this?”

But I was thinking about this relative to our conversation as well with Daron Acemoglu about his book and about how we equate free-market policies with this huge, huge, huge economic growth. And maybe it’s just correlation and not causation, and that there are all these random fac-tors that have caused society to catch up.

But I thought, how do you think about that? How do you think about this relationship between economic growth and equality? Can you have one in an extreme fashion without the other? If you have huge economic growth, does it automatically bring with it, at first, at least at first, a dramatic increase in inequality, as well?

Luigi: Certainly, especially on the upper end of the distribution, huge growth creates opportunities for making a huge amount of money. And so, it does create a right tail in the income distribution. It’s very hard to imagine that this doesn’t take place.

However, you can do much better than Chile. And remember, Chile started with very high in-come inequality. The income inequality and wealth inequality went up under the first year of Pi-nochet. And only later it started to improve a little bit, but not very much.

And there is still very little fiscal distribution, because as we discussed with Senator Gramm, there is the pretax income distribution, and there is the after-tax and transfer-income distribution. Chile does badly even in the pretax one, but it does terribly in the after-tax one because there’s very little redistribution at all. And that’s part of the legacy of the policies in place.

I think with a little bit more fiscal distribution, you could have had a better system. But what, at least to me, is particularly offensive, is that there were a lot of mechanisms where people got rich without deserving to be rich. If you make a patent, you have a new business model, you make a lot of money, I am sympathetic to you becoming rich.

But let me tell you that a lot of the people close to the Chicago Boys got rich, for example, by doing a trick around the restriction that universities should be not-for-profit. The law says universi-ties are private but should be not-for-profit. So, what did they do? They bought a bunch of real es-tate, then they created a university that was renting from that real estate, and then they were ex-tracting all the profits as real-estate owners rather than as universities. And so, they did become rich, basically, bypassing the law, and taking advantage of the fact that they knew ahead of time much of the regulation so that they could do it before anybody else. I don’t see that as a particular-ly entrepreneurial activity.

Bethany: No, I completely agree with you. I’ve always had much the same set of beliefs, which is that if somebody actually creates a business, something new that provides jobs to other people, and provides goods that people want, I have no problem at all with that person making an enormous amount of money. The problems in society come when people make money through unfair mechanisms, through crony capitalism.

I was thinking about, do you remember the piece Matt Stoller wrote about called the Cantillon Effect? I’m probably mangling the pronunciation of it. You might be able to define it for our listen-ers better than I can, but I think it basically means that if you’re close to the source of the money, you can get rich.

Basically, you want to position yourself close to the source of the redistribution, and that ena-bles you to succeed in a way that has nothing to do . . . speaking of meritocracy, nothing to do with a meritocracy. It just happens to be due to your positioning in the economy or the social struc-ture.

Did I mangle that and do you agree that the Cantillon Effect-

Luigi: No, I think you described it perfectly. It’s Cantillon in French. But be-sides that—

Bethany: I’m an ugly Midwesterner, Luigi.

Luigi: But besides that—

Bethany: My Minnesota tongue cannot not do it.

Luigi: —I think you described it perfectly. And I think you’re right that Matt Stoller uses it for monetary policy, but it’s true for any policy. How much wealth depends on where you are, not what you do, I think is scary. And to this point, you know that nine of the 10 wealthiest counties in the United States are in the suburbs of Washington, DC.

Bethany: Wow, that is quite appalling. That is quite appalling. More broadly speaking, do you think that when we talk now about the downfall of neoliberalism, is Chile the ca-nary in the coal mine for neoliberalism, as a whole? And if it is, is that a good thing?

Luigi: Let me redefine it because, in my view, it is a narrow version of liber-alism where you don’t factor in the need for regulation. You don’t factor in the fact that markets are not automatically competitive, and you need antitrust, and so on and so forth.

Let’s call it the old Chicago version of liberalism. The old Chicago version of liberalism works very well in improving income for a while, but there is a very strong limitation, especially as you move out of the traditional business sectors, and you want a more complex economy. If you are basically producing wine grapes and copper and fish, which is mostly what Chile is about, that works perfectly well.

If you are in the more advanced technologies, I don’t think that that simple system works so well. And even a more traditional economy like Chile’s shows all its limitations and needs to be addressed. In that, Sebastian is right, that is showing that you should change the model, but not change it completely.

So, my preferred thing is to say you should have policies that are promarket and not probusi-ness in the way that most of the traditional, old Chicago School policies were about. And I think, in that sense, Chile is the canary in the coal mine.

Bethany: I think that makes total sense. I think you also have to build in safe-guards, though, because I think as became clear in our discussions about meritocracy, and is clear here, too, the advantages conferred upon a certain group of people by a market-based society will lead them to entrench those advantages for themselves through crony capitalism, for their kids through what we might call crony education. And I think the challenge is that not only do you have to set up the system in the first place so that it’s promarket and not probusiness, but you also have to constantly revisit it.

And I really liked that quote. I don’t have it in front of me right now. I’m going to have to try to pull it up. But I really liked that quote from Sebastian’s book about how people who win the battle of ideas think they’ve won, and they don’t realize that they’ve only won in the moment, and that the battle of ideas is ongoing. And you can have won it in one moment, and you can lose it in the next moment. And that’s certainly true of neoliberalism.

But I think it’s also true that you can think you’ve put in place a structure that makes sense and works, but within any structure is the seeds of its own demise, or the seeds of its own failure. And so, you have to revisit that structure all the time. It’s not enough to have done it. You have to keep doing it.