Book recommendation: Chomsky’s "Profit Over People"

Noam Chomsky’s recent book on neoliberalism is truly in the must-read category (I read it in about two weeks in e-book format).

Here’s an excerpt:

Neoliberalism And Global Order
“I would like to discuss each of the topics mentioned in the title: neoliberalism and global order. The issues are of great human significance and not very well understood. To deal with them sensibly, we have to begin by separating doctrine from reality. We often discover a considerable gap.

The term “neoliberalism” suggests a system of principles that is both new and based on classical liberal ideas: Adam Smith is revered as the patron saint. The doctrinal system is also known as the “Washington consensus,” which suggests something about global order. A closer look shows that the suggestion about global order is fairly accurate, but not the rest. The doctrines are not new, and the basic assumptions are far from those that have animated the liberal tradition since the Enlightenment.

The Washington Consensus

The neoliberal Washington consensus is an array of market oriented principles designed by the government of the United States and the international financial institutions that it largely dominates, and implemented by them in various ways — for the more vulnerable societies, often as stringent structural adjustment programs. The basic rules, in brief, are: liberalize trade and finance, let markets set price (“get prices right”), end inflation (“macroeconomic stability”), privatize. The government should “get out of the way”–hence the population too, insofar as the government is democratic, though the conclusion remains implicit. The decisions of those who impose the “consensus” naturally have a major impact on global order. Some analysts take a much stronger position. The international business press has referred to these institutions as the core of a “de facto world government” of a “new imperial age.”

Whether accurate or not, this description serves to remind us that the governing institutions are not independent agents but reflect the distribution of power in the larger society. That has been a truism at least since Adam Smith, who pointed out that the “principal architects” of policy in England were “merchants and manufacturers,” who used state power to serve their own interests, however “grievous” the effect on others, including the people of England. Smith’s concern was “the wealth of nations,” but he understood that the “national interest” is largely a delusion: within the “nation” there are sharply conflicting interests, and to understand policy and its effects we have to ask where power lies and how it is exercised, what later came to be called class analysis.

The “principal architects” of the neoliberal “Washington consensus” are the masters of the private economy, mainly huge corporations that control much of the international economy and have the means to dominate policy formation as well as the structuring of thought and opinion. The United States has a special role in the system for obvious reasons. To borrow the words of diplomatic historian Gerald Haines, who is also senior historian of the CIA, “Following World War II the United States assumed, out of self-interest, responsibility for the welfare of the world capitalist system.” Haines is concerned with what he calls “the Americanization of Brazil,” but only as a special case. And his words are accurate enough.

The United States had been the world’s major economy long before World War II, and during the war it prospered while its rivals were severely weakened. The state-coordinated wartime economy was at last able to overcome the Great Depression. By the war’s end, the United States had half of the world’s wealth and a position of power without historical precedent. Naturally, the principal architects of policy intended to use this power to design a global system in their interests.

High-level documents describe the primary threat to these interests, particularly in Latin America, as “radical” and “nationalistic regimes” that are responsive to popular pressures for “immediate improvement in the low living standards of the masses” and development for domestic needs. These tendencies conflict with the demand for “a political and economic climate conducive to private investment,” with adequate repatriation of profits and “protection of our raw materials”–ours, even if located somewhere else. For such reasons, the influential planner George Kennan advised that we should “cease to talk about vague and unreal objectives such as human rights, the raising of the living standards, and democratization” and must “deal in straight power concepts,” not “hampered by idealistic slogans” about “altruism and world-benefaction” — though such slogans are fine, in fact obligatory, in public discourse.

I am quoting the secret record, available now in principle, though largely unknown to the general public or the intellectual community.

“Radical nationalism” is intolerable in itself, but it also poses a broader “threat to stability,” another phrase with a special meaning. As Washington prepared to overthrow Guatemala’s first democratic government in 1954, a State Department official warned that Guatemala had “become an increasing threat to the stability of Honduras and El Salvador. Its agrarian reform is a powerful propaganda weapon; its broad social program of aiding the workers and peasants in a victorious struggle against the upper classes and large foreign enterprises has a strong appeal to the populations of Central American neighbors where similar conditions prevail.” “Stability” means security for “the upper classes and large foreign enterprises,” whose welfare must be preserved.

Such threats to the “welfare of the world capitalist system” justify terror and subversion to restore “stability.” One of the first tasks of the CIA was to take part in the large-scale effort to undermine democracy in Italy in 1948, when it was feared that elections might come out the wrong way; direct military intervention was planned if the subversion failed. These are described as efforts “to stabilize Italy.” It is even possible to “destabilize” to achieve “stability.” Thus the editor of the quasi-official journal Foreign Affairs explains that Washington had to “destabilize a freely elected Marxist government in Chile” because “we were determined to seek stability.” With a proper education, one can overcome the apparent contradiction.

Nationalist regimes that threaten “stability” are sometimes called “rotten apples” that might “spoil the barrel,” or “viruses” that might “infect” others. Italy in 1948 is one example. Twenty-five years later, Henry Kissinger described Chile as a “virus” that might send the wrong messages about possibilities for social change, infecting others as far as Italy, still not “stable” even after years of major CIA programs to subvert Italian democracy. Viruses have to be destroyed and others protected from infection: for both tasks, violence is often the most efficient means, leaving a gruesome trail of slaughter, terror, torture, and devastation.

In secret postwar planning, each part of the world was assigned its specific role. Thus the “major function” of Southeast Asia was to provide raw materials for the industrial powers. Africa was to be “exploited” by Europe for its own recovery. And so on, through the world.

In Latin America, Washington expected to be able to implement the Monroe Doctrine, but again in a special sense. President Wilson, famous for his idealism and high moral principles, agreed in secret that “in its advocacy of the Monroe Doctrine the United States considers its own interests.” The interests of Latin Americans are merely “incidental,” not our concern. He recognized that “this may seem based on selfishness alone,” but held that the doctrine “had no higher or more generous motive.” The United States sought to displace its traditional rivals, England and France, and establish a regional alliance under its control that was to stand apart from the world system, in which such arrangements were not to be permitted.

The “functions” of Latin America were clarified at a hemispheric conference in February 1945, where Washington proposed an “Economic Charter of the Americas” that would eliminate economic nationalism “in all its forms.” Washington planners understood that it would not be easy to impose this principle. State Department documents warned that Latin Americans prefer “policies designed to bring about a broader distribution of wealth and to raise the standard of living of the masses,” and are “convinced that the first beneficiaries of the development of a country’s resources should be the people of that country.” These ideas are unacceptable: the “first beneficiaries” of a country’s resources are U.S. investors, while Latin America fulfills its service function without unreasonable concerns about general welfare or “excessive industrial development” that might infringe on U.S. interests.

The position of the United States prevailed, though not without problems in the years that followed, addressed by means I need not review.

As Europe and Japan recovered from wartime devastation, world order shifted to a tripolar pattern. The United States has retained its dominant role, though new challenges are arising, including European and East Asian competition in South America. The most important changes took place twenty-five years ago, when the Nixon Administration dismantled the postwar global economic system, within which the United States was, in effect, the world’s banker, a role it could no longer sustain. This unilateral act (to be sure, with the cooperation of other powers) led to a huge explosion of unregulated capital flows. Still more striking is the shift in the composition of the flow of capital. In 1971, 90 percent of international financial transactions were related to the real economy — trade or long-term investment — and 10 percent were speculative. By 1990 the percentages were reversed, and by 1995 about 95 percent of the vastly greater sums were speculative, with daily flows regularly exceeding the combined foreign exchange reserves of the seven biggest industrial powers, over $1 trillion a day, and very short-term: about 80 percent with round trips of a week or less.

Prominent economists warned over 20 years ago that the process would lead to a low-growth, low-wage economy, and suggested fairly simple measures that might prevent these consequences. But the principal architects of the Washington consensus preferred the predictable effects, including very high profits. These effects were augmented by the (short-term) sharp rise in oil prices and the telecommunications revolution, both related to the huge state sector of the U.S. economy, to which I will return.

The so-called “Communist” states were outside this global system. By the 1970s China was being reintegrated into it. The Soviet economy began to stagnate in the 1960s, and the whole rotten edifice collapsed twenty years later. The region is largely returning to its earlier status. Sectors that were part of the West are rejoining it, while most of the region is returning to its traditional service role, largely under the rule of former Communist bureaucrats and other local associates of foreign enterprises, along with criminal syndicates. The pattern is familiar in the third world, as are the outcomes. In Russia alone, a UNICEF inquiry in 1993 estimated that a half-million extra deaths a year result from the neoliberal “reforms,” which it generally supports. Russia’s social policy chief recently estimated that 25 percent of the population has fallen below subsistence levels, while the new rulers have gained enormous wealth, again the familiar pattern of Western dependencies.

Also familiar are the effects of the large-scale violence undertaken to ensure the “welfare of the world capitalist system.” A recent Jesuit conference in San Salvador pointed out that over time, the “culture of terror domesticates the expectations of the majority.” People may no longer even think about “alternatives different from those of the powerful,” who describe the outcome as a grand victory for freedom and democracy.

These are some of the contours of the global order within which the Washington consensus has been forged.

The Novelty of Neoliberalism

Let us look more closely at the novelty of neoliberalism. A good place to start is a recent publication of the Royal Institute of International Affairs in London, with survey articles on major issues and policies. One is devoted to the economics of development. The author, Paul Krugman, is a prominent figure in the field. He makes five central points, which bear directly on our question.

First, knowledge about economic development is very limited. For the United States, for example, two-thirds of the rise in per capita income is unexplained. Similarly, the Asian success stories have followed paths that surely do not conform to what “current orthodoxy says are the key to growth,” Krugman points out. He recommends “humility” in policy formation, and caution about “sweeping generalizations.”

His second point is that conclusions with little basis are constantly put forth and provide the doctrinal support for policy: the Washington consensus is a case in point.

His third point is that the “conventional wisdom” is unstable, regularly shifting to something else, perhaps the opposite of the latest phase — though its proponents are again full of confidence as they impose the new orthodoxy.

His fourth point is that in retrospect, it is commonly agreed that the economic development policies did not “serve their expressed goal” and were based on “bad ideas.”

Lastly, Krugman remarks, it is usually “argued that bad ideas flourish because they are in the interest of powerful groups. Without doubt that happens.”

That it happens has been a commonplace at least since Adam Smith. And it happens with impressive consistency, even in the rich countries, though it is the third world that provides the cruelest record.

That is the heart of the matter. The “bad ideas” may not serve the “expressed goals,” but they typically turn out to be very good ideas for their principal architects. There have been many experiments in economic development in the modern era, with regularities that are hard to ignore. One is that the designers tend to do quite well, though the subjects of the experiment often take a beating.

The first major experiment was carried out two hundred years ago, when the British rulers in India instituted the “Permanent Settlement,” which was going to do wondrous things. The results were reviewed by an official commission forty years later, which concluded that “the settlement fashioned with great care and deliberation has unfortunately subjected the lower classes to most grievous oppression,” leaving misery that “hardly finds a parallel in the history of commerce,” as “the bones of the cotton-weavers are bleaching the plains of India.”

But the experiment can hardly be written off as a failure. The British governor-general observed that “the ‘Permanent Settlement,’ though a failure in many other respects and in most important essentials, has this great advantage, at least, of having created a vast body of rich landed proprietors deeply interested in the continuance of the British Dominion and having complete command over the mass of the people.” Another advantage was that British investors gained enormous wealth. India also financed 40 percent of Britain’s trade deficit while providing a protected market for its manufacturing exports; contract laborers for British possessions, replacing earlier slave populations; and the opium that was the staple of Britain’s exports to China. The opium trade was imposed on China by force, not the operations of the “free market,” just as the sacred principles of the market were overlooked when opium was barred from England.

In brief, the first great experiment was a “bad idea” for the subjects, but not for the designers and local elites associated with them. This pattern continues until the present: placing profit over people. The consistency of the record is no less impressive than the rhetoric hailing the latest showcase for democracy and capitalism as an “economic miracle”–and what the rhetoric regularly conceals. Brazil, for example. In the highly praised history of the Americanization of Brazil that I mentioned, Gerald Haines writes that from 1945 the United States used Brazil as a “testing area for modern scientific methods of industrial development based solidly on capitalism.” The experiment was carried out with “the best of intentions.” Foreign investors benefited, but planners “sincerely believed” that the people of Brazil would benefit as well. I need not describe how they benefited as Brazil became “the Latin American darling of the international business community” under military rule, in the words of the business press, while the World Bank reported that two-thirds of the population did not have enough food for normal physical activity.

Writing in 1989, Haines describes “America’s Brazilian policies” as “enormously successful,” “a real American success story.” 1989 was the “golden year” in the eyes of the business world, with profits tripling over 1988, while industrial wages, already among the lowest in the world, declined another 20 percent; the UN Report on Human Development ranked Brazil next to Albania. When the disaster began to hit the wealthy as well, the “modern scientific methods of development based solidly on capitalism” (Haines) suddenly became proofs of the evils of statism and socialism — another quick transition that takes place when needed.

To appreciate the achievement, one must remember that Brazil has long been recognized to be one of the richest countries of the world, with enormous advantages, including half a century of dominance and tutelage by the United States with benign intent, which once again just happens to serve the profit of the few while leaving the majority of people in misery.

The most recent example is Mexico. It was highly praised as a prize student of the rules of the Washington consensus and offered as a model for others — as wages collapsed, poverty increased almost as fast as the number of billionaires, foreign capital flowed in (mostly speculative, or for exploitation of cheap labor kept under control by the brutal “democracy”). Also familiar is the collapse of the house of cards in December 1994. Today half the population cannot obtain minimum food requirements, while the man who controls the corn market remains on the list of Mexico’s billionaires, one category in which the country ranks high.

Changes in global order have also made it possible to apply a version of the Washington consensus at home. For most of the U.S. population, incomes have stagnated or declined for fifteen years along with working conditions and job security, continuing through economic recovery, an unprecedented phenomenon. Inequality has reached levels unknown for seventy years, far beyond other industrial countries. The United States has the highest level of child poverty of any industrial society, followed by the rest of the English-speaking world. So the record continues through the familiar list of third world maladies. Meanwhile the business press cannot find adjectives exuberant enough to describe the “dazzling” and “stupendous” profit growth, though admittedly the rich face problems too: a headline in Business Week announces “The Problem Now: What to Do with All That Cash,” as “surging profits” are “overflowing the coffers of Corporate America,” and dividends are booming.

Profits remain “spectacular” through the mid-1996 figures, with “remarkable” profit growth for the world’s largest corporations, though there is “one area where global companies are not expanding much: payrolls,” the leading business monthly adds quietly. That exception includes companies that “had a terrific year” with “booming profits” while they cut workforces, shifted to part-time workers with no benefits or security, and otherwise behaved exactly as one would expect with “capital’s clear subjugation of labor for 15 years,” to borrow another phrase from the business press.”