Deconstructing Neoliberalism: The Role of the Chicago School in the Development of Neoliberalism and its Propagation in the Economies of Chile and Argentina

Introduction

It can be argued that neoliberalism reached its peak in the 1960s to 1980s when the Chicago School influenced the evolution of neoliberal policies and led to their propagation in the United States of America. Under the influence of the US and Chicagoans, neoliberal structural adjustment was implemented in many former communist or developing countries such as Chile and Argentina; this set of neoliberal policies later became known as the Washington Consensus (Stedman Jones, 2014). Despite the belief that it would lead to increased competitiveness, optimized resource allocation and, thus, increased economic growth, the outcomes of neoliberalism differed from country to country. It is hence interesting to deconstruct the resurgence of neoliberalism and study the economic aftermath of the implementation of practices salient in the Global North, in the countries of the Global South. This paper will give an overview of the Chicago School of Economics as well as explain its role in the propagation of neoliberalism, demonstrating its three phases of evolution. Furthermore, it will explore the implementation of neoliberal policies in Chile and Argentina and their long-term economic consequences.

The Overview of the Chicago School of Economics

Prominent economists such as Frank Knight, Henry Simons, Jacob Viner, George Stigler, and Milton Friedman were all affiliated with the Chicago School of Economics, established in the 1930s. Knight, Simons, Viner, and Mints were the first generation of members of the Chicago School, which was then replaced by the next generation – Friedman, Stigler, Becker, and Lucas (Reder, 1982). The Chicagoan viewpoint is distinguishable from most other schools of economic thought based on the public policies the school considered advantageous for the common good as well as the ascription of different importance to problems that are most fundamental in economics (Miller Jr, 1962). Chicago economics can be divided into positive and normative aspects, the positive being focused primarily on the Tight Prior Equilibrium concept and the normative being focused mainly on the political economy and issues associated with the role of the government (Reder, 1982). The Tight Prior Equilibrium theory implies an efficient allocation of resources such that any of the decision-makers are unable to increase their utility without decreasing the utility of another decision-maker (Reder, 1982). Its use involves four assumptions: firstly, the prices of commodities transacted are independent of the quantities bought or sold during that transaction; secondly, the prices of transactions clear the market; thirdly, marginal cost is equal to price; and finally, neither the government nor the monopoly can affect prices such that the marginal cost and price do not equate (Reder, 1982). This theory can be applied when solving problems encountered in the short run, issues with the types of market, market failure, and cost of information as well as other macro- and micro-analytic studies (Reder, 1982). In terms of normative economics, Chicagoans have always agreed that the government’s market interventions should be very limited. This view has intensified over time; for example, Friedman opposed governmental regulations as he believed that their effects were notoriously challenging to reverse (Reder, 1982). 

Combining the positive and normative economic aspects, the Chicago School supported a private-enterprise, individualistic and neoclassical economy. Moreover, it supported limited government interventions, hypothesis-testing, distrust of power aggregates, and discretionary authority in government (Miller Jr, 1962). That is because they argued that the private-enterprise economy is the most productive, meaning that it ensures full employment (Miller Jr, 1962). The Chicago School’s emphasis on privatization and Friedman’s interests in the neoliberal policies that were gaining momentum is what drove neoliberalism from Europe to the United States after WWII (Miller Jr, 1962). 

Three Phases of Neoliberalism

Neoliberalism is defined as “the free market ideology based on individual liberty and limited government that connected human freedom to the actions of the rational, self-interested actor in the competitive marketplace” (Stedman Jones, 2014). The history of neoliberalism can be divided into three phases. The first one focused on the return of laissez-faire economics in Europe, which centred around free markets combined with limited government interventions and lasted approximately from the 1920s to 1950 (Stedman Jones, 2014). However, the term neoliberalism was chosen to remind others not only about the return to laissez-faire but also to suggest its connection to transformed liberalism (Stedman Jones, 2014). During that period, Hayek, Mises, Friedman, and other American and European economists formed the Mont Pelerin Society. At their meetings, they discussed further developments in the theory of liberalism, therefore this society is thought of as the origin of neoliberal thought (Stedman Jones, 2014). Indeed, it was Hayek and Friedman who devised the first set of policies which involved the use of neoliberal theories (Stedman Jones, 2014). 

In 1951, Friedman published an essay Neo-Liberalism and its Prospects, in which he argued that nationalization does not lead to better economic output and that the collectivist philosophy is subject to errors as it does not recognize the multifaceted nature of economic problems, leading to mistakes, such as attempts to reject the price system without any viable alternative. He believed that neoliberalism would solve these issues, as it would help establish competition among producers to avoid the exploitation of consumers and the possibility of a monopoly (Friedman, 1951). The state would have a limited role revolving around establishing the proper conditions for the existence of competition (Friedman, 1951). For that to be possible, the state should engage in two important functions. Firstly, it should be focused on maintaining freedom so that each person could freely choose a profession and freely establish any enterprise. Secondly, it should be focused on maintaining monetary stability (Friedman, 1951). At the same time, consumers would be protected from the government by the free private market (Friedman, 1951). The first of these two tasks require the guarantee that no market-entry regulations be introduced, and the second requires the elimination of the possibility to privately create money through monetary and banking system reform (Friedman, 1951). Moreover, Friedman argued against the minimum wage as he believed that it would increase unemployment (1951). Neo-Liberalism and its Prospects connects the first phase of neoliberalism with the second, and most importantly, it can be considered a resurgence of neoliberal thought in the United States of America, as earlier, it was mostly focused on problems concerning Europe (Stedman Jones, 2014).

The second phase of neoliberalism started in 1950 and continued until the 1980s (Stedman Jones, 2014). During that period, neoliberal adherents were focused on promoting free-market reforms (Stedman Jones, 2014). Furthermore, the Chicago School also played a significant role in that phase due to Friedman’s reintroduction of monetarism, as well as Stigler’s theory of regulatory capture, which assumes that regulatory agents, being dominated by the industry they are responsible for regulating, may act in the benefit of that industry and not the public (Stedman Jones, 2014). Both of these fields constitute a part of the positive aspect of Chicagoan economics. This view, however, differed from that of European supporters of neoliberal thought. That is because the Chicago School assumed that the existence of a monopoly is improbable, being inconsistent with the Tight Prior Equilibrium, while Europeans disagreed (Reder, 1982; Stedman Jones, 2014). 

During the third phase, which started in the 1980s, neoliberalism acquired global influence, being adopted by prominent institutions, such as the International Monetary Fund, the World Trade Organization, and other transnational establishments (Stedman Jones, 2014). At that point, it became evident that Hayek, Mises, Friedman, Stigler, and Buchanan were considered the main representatives of neoliberal thought (Stedman Jones, 2014). Furthermore, neoliberal impact expanded onto many of the former communist as well as developing countries in the form of structural adjustment policies (Stedman Jones, 2014). Such reforms focused on privatization, liberalization of trade as well as on deregulation (Stedman Jones, 2014). Despite having many adherents, neoliberal structural adjustment has also incurred a lot of criticism from well-known economists such as Paul Krugman (Stedman Jones, 2014). The economic consequences of implementing neoliberal policies in countries such as Chile and Argentina are still visible today, which will be explored in the next paragraphs.

The Comparison of Chilean and Argentine Economics and the Introduction of Neoliberalism

Before implementing neoliberal structural adjustment, Chile and Argentina struggled with similar economic and social problems in the early 1970s (Undurraga, 2015). In Chile, until the introduction of neoliberalism, the state played a dominant role in society through the promotion of collectivism and strict market regulations (Clark, 2017). Moreover, the government was facing public discontent induced by high taxes, inflationary pressure, high unemployment, high frequency of state market interventions, low market competitiveness, and little economic growth (Clark, 2017; Winn, 2004). Argentina also struggled with inflation and collectivism, which led to stagnant growth of GDP (Undurraga, 2015), while at the same time, it was fighting with structural heterogeneity (Ormaechea, 2021). This instability was caused by the industrialization of the country, which had been conducted under government control (Ormaechea, 2021). Argentine and Chilean regimes desired to achieve similar goals, both intended to increase the economic output and put an end to social disorder through the implementation of “market relationships as the predominant form of social organization” (Undurraga, 2015, p. 15). The promise of eliminating collectivism, increased competitiveness, efficient market allocation and hence, increased economic growth—which neoliberalism entailed—appealed to the society of Chile and Argentina. As a result, in the late 1970s, both governments started to introduce neoliberal policies; although Chile and Argentina were similar in economic terms, the evolution of the neoliberal structural adjustment was different in each country.

In Argentina, neoliberalism started in 1976; however, at that time, the transformation was not aggressive and was mainly focused on privatization, competition, technological innovation, and further development of the financial sector instead of the productive one (Ormaechea, 2021). Despite these changes, inflationary pressures still rose, unemployment increased along with governmental deficits, and inequality deepened (Ormaechea, 2021). As a result, the state was blamed and lost its credibility as the Argentine society thought the government was unable to solve any economic problems (Ormaechea, 2021). In 1991, Argentina introduced the Convertibility Plan to stabilize inflation by pegging the peso to the USD (Teubal, 2004). Then, under the influence of the United States of America, Argentina introduced another round of neoliberal reforms called the severe structural adjustment program (SAP) (Teubal, 2004). It was focused on limiting governmental interventions, deregulating the economy, decreasing spending on the public sector, and introducing new regulating agencies responsible for enforcing neoliberalism (Ormaechea, 2021). 

In Chile, a group termed the ‘Chicago Boys’ were responsible for the neoliberal transformation. They were affiliated with the University of Chicago, and thus with the Chicago School of Economics and with the liberal Gremialista movement (Clark, 2017). Due to these ties, they gained political influence in the 1970s and 1980s, which allowed them to introduce the set of neoliberal reforms (Clark, 2017). The Chicago Boys’ policies bore visible signs of the influence of both Friedman’s economic theories and Hayek’s social theory focused on catallaxy to remember that society is not only built on exchanges but also on acceptance into the community (Clark, 2017). Moreover, the Chicago economists influenced Chile to a much greater extent than Argentina due to it removing traditional Chilean economists and substituting them with monetarists (Undurraga, 2015). In contrast to the gradual implementation of neoliberal reforms in Argentina in the 1970s, the Chicago Boys believed in a more aggressive approach to avoid social dissatisfaction (Undurraga, 2015). They decided to open the economy by selling approximately two hundred public enterprises and implementing the monetarist approach (Undurraga, 2015). At first, similarly to Argentina, it led to the financial collapse of 1982 combined with higher unemployment and deepened inequality (Undurraga, 2015). The government had to intervene as the real GDP per capita decreased by 15%, and so the state decided to assume control of the financial sector to socialize losses (Clark, 2017). After this deviation from the path of neoliberalism, the state focused on privatization once again (Clark, 2017).

Economic Consequences of Neoliberal Transformation in Argentina and Chile

Argentina and Chile differ to a large extent in terms of the consequences induced by the neoliberal policies the Chicago School propagated. While the Chilean GDP significantly rose between 1990 and 2010 (Undurraga, 2015), the Argentine GDP has stagnated since 1998 (Teubal, 2004). Moreover, while in Chile poverty decreased by 25 percentage points and employment increased, in Argentina poverty grew to more than 50% while unemployment rose to 25% (Undurraga, 2015; Teubal, 2004). According to Thomas Undurraga, Chilean society gained better access to education as a result of an increase in the number of universities; however, since those universities are private, along with the increase in the level of education in the country, the amount of private debt also increased (2015). As a result, the inequality in Chile became more visible, which led to dissatisfaction and criticism of neoliberalism in 2011 (Undurraga, 2015). Argentina, however, had to deal with the much worse economic consequences of neoliberalism. After the high increase in output from 1991 to 1997 and the enlargement of the business sector, a period of stagnant and eventually falling GDP began after 1998 (Undurraga, 2015). Due to international competition, many local companies had to close and foreign businesses were raising higher profits in Argentina than domestic businesses leading to social inequality and a sense of injustice (Undurraga, 2015).Moreover, as foreign debt increased to US$132 billion, Argentina had to default on it. All these aspects led to the 2001-2002 recession and to an end to the Convertibility plan leading to the depreciation of the peso by 70% (Undurraga, 2015). It is therefore clear that the significant difference in outcomes of neoliberal reforms between Chile and Argentina was caused by the different paths chosen when implementing the structural adjustments and due to different regimes in both countries.

Conclusion

In conclusion, the Chicago School had a significant influence on the propagation of neoliberal policies around the world, especially in developing as well as former communist countries, as it was believed that neoliberalism was the perfect recipe to propel the country’s development. In the example of Chile and Argentina, despite both countries having similar economies before implementing neoliberal structural adjustments, the long-term outcomes of such implementation differ to a large extent. Therefore, further investigation into other factors such as political influence is needed to definitely determine the economic success of neoliberalism in Chile and the lack thereof in Argentina. Moreover, this example proves that there is not one ideal set of economic policies which will always lead to positive outcomes, but rather other aspects specific to the country must also be considered.

By Julia Formejster for ECON 461: History of Thought II

Edited by Matthew O'Boyle, Romain Perusat, & Tahsin Kabir

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