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Everything You Need to Know about the Difference Between Free Enterprise and Socialism
I’ve written critical columns about the failure of Venezuelan socialism and I’ve written laudatory columns about the success of Chile’s free markets reforms.
Today, let’s compare and contrast what has happened to these two countries.
Here are two maps of South America showing per-capita economic output. Amazingly, Venezuela was more than twice as rich as Chile in 1980 but now Chile is more than three times as rich as Venezuela.
At this point, I normally would pontificate about the meaning of these two maps.
But there’s no need for me to write anything because the person who shared them on Twitter (X) nailed the obvious takeaway.
Game, set, and match. Economic liberty trounces statism.
The same message that you see in this chart.
P.S. If you want to learn about Milton Friedman and Chile, click here.
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Free Markets and the Chilean Miracle
There are certain topics that seem to be slam-dunk wins for those who favor free markets and limited government, and one reason I make this assertion is that folks on the left don’t even bother to make counter-arguments.
Here are just a few examples:
- Nobody on the left ever tries to produce an alternative explanation for the IRS data showing that rich people paid a lot more tax
after Ronald Reagan lowered the top income tax rate from 70 percent to 28 percent. - Nobody on the left ever tries to produce an alternative explanation for the success of Switzerland’s spending cap.
- Nobody on the left ever tries to produce an alternative explanation for why there’s much-faster long-run growth in market-oriented nations.
Prior to today, I also would have included this example:
- Nobody on the left ever tries to produce an alternative explanation for Chile’s amazing jump from poverty to prosperity after the country shifted to pro-market policies such as private social security.
But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.
As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.
After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth.
Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.
But now let’s consider whether this alternative explanation is accurate.
Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.
But if that’s the case, why did per-capita living standards begin to climb much earlier?
As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.
(There is a separate measure of economic freedom for the years before 1970, so the orange and blue lines are discontinuous.)
One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.
Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.
We’ll close with some bad news and good news.
The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.
But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.
P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinian–style decline.
P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.
P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.
P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity.
Improving Bad Government: The Case of Chile and Milton Friedman
I’ve written many times about the spectacularly positive impactof pro-market reforms in Chile.
The shift toward free markets, which began in the mid-1970s, was especially beneficial for the less fortunate (see here, here, and here).
But it’s quite common for critics to assert that Chile is a bad example because many of the reforms were enacted by General Augusto Pinochet, a dictator who seized power in 1973. And some of those critics also attack Milton Friedman for urging Pinochet to liberalize the economy and reduce the burden of government.
Are these critics right?
To answer that question, I very much recommend the following cartoon strip by Peter Bagge. Published by Reason, it accurately depicts the efforts of reformers to get good reforms from a bad government.
It starts in 1973, with a group of Chilean economists, known as the “Chicago Boys,” who wanted free markets.
In 1975, they invited Milton Friedman to help make the case for economic reform.
This 1982 strip shows some of the controversies that materialized.
But by the time we got to the 21st century, everything Friedman said turned out to be true.
Chile had become an “improbable success.”
This cartoon strip is great for two reasons.
- First, I’ll be able to share it with people who want to delegitimize Chile’s transition to a market-oriented democracy (ranked #14 according to the most-recent edition of Economic Freedom of the World). Simply stated, it was bad that Chile had a dictatorship, but it was good that the dictatorship allowed pro-market reforms (particularly when compared to the alternative of a dictatorship with no reforms). And it was great that Chile became a democracy (a process presumably aided by mass prosperity).
- Second, we should encourage engagement with distasteful governments. I certainly don’t endorse China’s government or Russia’s government, but I’ve advised government officials from both nations. Heck, I would even give advice to Cuba’s government or North Korea’s government (not that I’m expecting to be asked). My goal is to promote more liberty and it would make me very happy if I could have just a tiny fraction of Friedman’s influence in pursuing that goal.
P.S. Here’s Milton Friedman discussing his role in Chile.
P.P.S. While I disagree, it’s easy to understand why some people try to delegitimize Chile’s reforms by linking them to Pinochet. What baffles me are the folks who try to argue that the reforms were a failure. See, for instance, Prof. Dani Rodrik and the New York Times.
P.P.P.S. Critics also tried to smear Prof. James Buchanan for supporting economic liberalization in Chile.
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José Niño
José Niño is a graduate student based in Santiago, Chile. A citizen of the world, he has lived in Venezuela, Colombia, and the United States. He is currently an international research analyst with the Acton Circle of Chile. Follow@JoseAlNino.
40 Years Later: Milton Friedman’s Legacy in Chile
“Chilean Miracle” Struck a Blow against Communism When Needed Most
EspañolThe power of ideas to help shape political movements has been grossly underestimated over the years. In truth, some of the largest political transformations in human history have come from ideas that were developed in the secluded confines of an intellectual’s home or in obscure academic institutes. Regardless of the origins, ideas can snowball into powerful vehicles of social change.+
As Friedrich Hayek noted in one of his most powerful works, Intellectuals and Socialism, the triumph of socialist ideas can largely be attributed to the ideas first put forward by various intellectuals. They began with relatively well-off intellectuals and then made their way to “second-hand dealers” — journalists, scientists, doctors, teachers, ministers, lecturers, radio commentators, fiction writers, cartoonists, and artists — who then spread those ideas to the masses.+
Intellectuals like Milton Friedman took it upon themselves to reverse this trend and create an environment that was more favorable to free markets. Steadfast in his beliefs in the power of ideas, Friedman knew that big changes usually start out in small venues.+
It was in Chile where Friedman’s vision was first implemented on a large scale. The results were nothing short of spectacular, as Chile was able to escape a veritable economic collapse and experience an unprecedented boom.+
Chile’s economic success was no mere coincidence; it was the product of ideas that Milton Friedman put forward in the 1950s. To understand how such a radical change was brought about, one must first look at the origins of the Chicago Boys, the group of Chilean economists that played a pivotal role in the transformation of Chile’s economy during the 1970s and 1980s.+
The Chicago Boys
Under the tutelage of the United States Agency for International Development (USAID), the University of Chicago signed a modest agreement with the Pontifical Catholic University of Chile in the 1950s to provide a group of Chilean students training in economics.+
In exchange, the University of Chicago would send four faculty members to help the Catholic University build up their economics department. Of these four faculty members, Arnold Harberger would serve as the Chicago Boys’ principal mentor.+
What at first looked liked just another exchange program between universities would play a substantial role in Chile’s economic rise.+
A Country Mired By Statism
At the start of this program, Chile’s economy was in the doldrums. Another victim of Raúl Prebisch’s Import Substitution Industrialization (ISI) policy, Chile had a very loose central banking policy, featured 15 different exchange rates, heavy tariffs, and a number of import and export controls. Subsequent governments maintained the same neo-mercantilist structure up until the 1970s.+
During this era of economic malaise, the Chicago Boys constructed El Ladrillo (The Brick), a text primarily shaped by economist Sergio de Castro which advocated for economic liberalization in all sectors of the Chilean economy. Sadly, this text was largely ignored at that time.+
It wasn’t until the presidency of Salvador Allende that the Chicago Boys’ talents would be desperately needed.+
On the Road to Cuba 2.0
Though democratically elected by a narrow margin in 1970, Salvador Allende was determined to turn Chile into the next Cuba by undermining all of its democratic institutions. Through price controls, arbitrary expropriations, and lax monetary policy, Allende put the Chilean economy on the verge of collapse. By 1973, inflation reached 606 percent and per capita GDP dropped 7.14 percent.+
Under the command of General Augusto Pinochet, the military deposed Allende’s government. Despite this tumultuous change, the military ruler did not have a clear economic vision for Chile.+
Enter Milton Friedman
Milton Friedman’s visit to Chile in March 1975 proved to be quite fateful. Friedman was on a week-long lecture tour for various think thanks. Eventually, Friedman sat down with the general himself for 45 minutes. Right off the bat, Friedman recognized that Pinochet had very little knowledge of economics. After their meeting, Friedman sent Pinochet a letter with a list of policy recommendations.+
Friedman was blunt is his diagnosis of Chile’s economy: for the country to recover, it had to truly embrace free-market measures.+
Ideas Put in Action
Cooler heads prevailed and Pinochet let the Chicago School disciples occupy various posts in the military government. In April 1975, El Plan de Recuperación Económica (The Economic Recovery Plan) was implemented. Soon Chile curbed its inflation, opened up its markets, privatized state-owned industries, and cut government spending. By the 1990s, Chile was experiencing the largest economic boom in its history.+
The numbers don’t lie:+
A Freedom Fighter
A principled libertarian, Friedman criticized Pinochet’s repressive political measures. Friedman understood that economic and political freedoms are not mutually exclusive. The principles laid in Friedman’s book Capitalism and Freedom inspired José Piñera, a notable Chilean reformer, to become a part of Chile’s classical liberal revolution.+
Like Friedman, Piñera understood the link between economic and political freedom. This motivated him to help ratify the Chilean Constitution of 1980. The most classically liberal constitution in Latin America’s history, it established the transition towards free elections and Chile’s return to democracy.+
Additionally, Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This model has been exported to dozens of countries abroad and has served as a market-based alternative to government-run pension systems.+
The “Chilean Miracle” represented the first major triumph against communism during the Cold War. Chile’s classical-liberal revolution subsequently inspired the Thatcher Revolution of 1979 and the Reagan Revolution of 1980. These ideas had resounding effects all over the globe and marked the beginning of the end for Soviet-style models of economic organization.+
There is still much work to do, as the illegitimate children of Marxist and Keynesian thought still run loose these days throughout Latin America. But one thing is absolutely certain: an idea whose time has come is unstoppable.+
RIP Milton Friedman
Milton Friedman is the short one!!!
“The Power of the Market” episode of Free to Choose in 1990 by Milton Friedman (Part 5)
Milton Friedman The Power of the Market 5-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]
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The Daily Hatch 