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Monday, January 28, 2008

BOOK REVIEW: The Shock Doctrine

The Shock Doctrine: The Rise of Disaster Capitalism -- Naomi Klein -- 466 pages (558 with notes)

The term "Irish fact" was coined by writer Hugh Kenner to describe an anecdote or idea that sounds so good, it deserves to be true, even if it isn't. Naomi Klein's book The Shock Doctrine is a thorough analysis of the origins and consequences of the ideas and policies promoted by Milton Friedman and the "Chicago School" of economic theory. The nutshell summary of the Chicago school of thinking is that limited government and free trade are the explanation for all economic successes in the past fifty years and the sole prescription for all economic problems we still face. The core of Freidman's theories were developed and packaged in the 1950s but became more widely known in the 1980s as Ronald Reagan's policies seemingly resurrected a stagnant American economy and stock market and in the 1990s as Communism collapsed.

Klein's analysis in The Shock Doctrine makes a convincing case that the theory of free markets being the key to producing free democratic societies may in fact be the mother of all Irish facts -- the story fits so many of our assumptions and sounds so good, but the facts speak otherwise. Klein has produced a well written narrative, organized a long 50+ year story in a logical and coherent fashion and has provided numerous quotes and citations from the players themselves to back up her conclusions. Without any exaggeration, The Shock Doctrine qualifies as a must-read for followers of economics, business or politics, regardless of your philosophical leanings.


Shared Terminology

The book begins with what at first would appear to be a sidebar discussion of how use of the term "shock therapy" or "shock and awe" became so commonplace in both military planning and economic policy. In the introduction, Klein wrote she began researching the book after the Iraq invasion and tsunami relief efforts hoping to find an explanation for what appeared to be a sudden rise in the use of disasters (of one kind or another) as an opportunity to impose massive changes in economic policy. Her initial research quickly identified a common set of players and patterns of policymaking dating back to the 1950s, primarily to the economic theories of Milton Friedman and research into shock therapy and torture performed on behalf of the CIA. Klein's analysis makes it clear that use of shock and torture terms for both military and economic plans isn't the result of opponents attempting to cast those policies in a negative light. Use of the terms began from within the groups pushing the strategies because the terms accurately conveyed physically and symbolically their aims.

Klein's narrative on shock therapy essentially begins on June 1, 1951 when the CIA began supporting research performed at the Allan Memorial Institute at McGill University on electroshock therapy and its potential use in brainwashing captured soldiers. The research was led by Ewen Cameron, who applied shock treatments and a variety of drugs to patients who entered his clinic with relatively mild conditions such as anxiety or depression and left completely destroyed. Klein interviews a woman named Gail Kastner who was admitted In Cameron's own words as "a hitherto reasonably well balanced individual". (page 29) By the time she left his care, notes in her file describe her as "unable to count to six" and "schizophrenic … with marked hysterical features." (page 30).

The clinical regression to child-like states and inability to think and function experienced by many unwilling victims of this "research" into shock therapy and torture was carefully noted by the CIA. After the use of torture in Honduras by forces trained by the US military became public in 1988, a Freedom of Information suit filed by the Baltimore Sun against the CIA eventually resulted in the disclosure of a training manual entitled Kubark Counterintelligence Interrogation. As Klein notes, the "Kubark" itself makes specific reference to information learned from the McGill research and makes it clear the intent of the procedures described in the manual is to "take a resistant source and 'destroy his capacity for resistance.'" (page 39)

The analysis of torture techniques and their impact on behavior was not lost on economists either. The merging of terminology between the economists and spooks began with the preparation for the coup in Chile. Klein quotes a US Senate Intelligence document which found "CIA collaborators were involved in preparing an initial overall economic plan which has served as the basis for the Junta's most important economic decisions" (page 71) and another document stating that 8 of the 10 principle authors of that document studied at the University of Chicago.

Friedman's theories focused on creating policies to maximize productivity, profitability and choices of products. At the core of the Friedman philosophy is an absolute faith in the efficiency and perfection of the market. Klein summarizes the core of the philosophy this way:

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Like all fundamentalist faiths, Chicago School economics is, for its true believers, a closed loop. The starting premise is that the free market is a perfect scientific system, one in which individuals, acting on their own self-interested desires, create the maximum benefits for all. It follows ineluctably that if something is wrong within a free-market economy -- high inflation or soaring unemployment -- it has to be because the market is not truly free. There must be some sort of interference, some distortion in the system. The Chicago solution is always the same: a stricter and more complete application of the fundamentals. (page 51)
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As Friedman was formulating and promoting his "School" centered around less government, less business regulation and less interference with trade, the use of more active government approaches for stabilizing and improving large economies was well underway and enjoying noticeable success. Obviously, the Marshall Plan provided billions in aid to Europe to rebuild infrastructure, create jobs and stabilize currency. More interestingly, another area where this type of Keynesian intervention was having success was South America -- in Chile, Argentina, Uruguay and Brazil. Despite the progress by approaches promoted by Keynesian thinkers in that region, the University of Chicago created a partnership with the Ford Foundation lasting from 1956 to 1970 that brought 100 students from South America to the University of Chicago to train them in the theories of the "school" and take them back to South America where they could take root.

The only problem? Virtually zero interest in the ideas of Chicago style economic policies, either on the part of governments (democratically elected or otherwise) or their citizens. The economies were doing well enough that the only debates underway involved ways of tuning the Keynesian approaches already in use, not rejecting them for a new "truth."

Try Try (Try Try Try) Again

As Klein summarizes the application of the Chicago solution in each "laboratory", she carefully documents the changes in tactics used to impose the changes. Despite the tinkering with the exact sequence of events, the results were equally disastrous.

* Brazil in 1964 -- military coup, then economic changes, then small scale brutality leading to widespread secret killings

* Indonesia in 1965 -- CIA backed coup, Suharto seizes power, over 500,000 killed in one month, then economic policies drafted by students from Berkeley funded by the Ford Foundation

* Chile in 1973 -- democratically elected President Allende killed in a CIA-backed coup, Pinochet seizes power, 3200 killed, 80,000 imprisoned, economic changes imposed last to disastrous effects lasting over ten years

* Argentina in 1976 -- a coup, adoption of the same policies from neighboring Chile, targeted brutality and "disappearances", formal knowledge sharing of torture techniques and candidates between neighboring countries using US-provided computers ("Operation Condor")

* Bolivia in 1985 -- a democratically elected President, modified shock therapy proposed by Jeffrey Sachs with an emphasis on debt relief and foreign aid, employment increased from 20 to 30 percent, real wages dropped 40 percent and two years later, the primary savior of the country's economy was a resurgent coca crop providing cocaine for export

* Poland in 1988 -- Communist government collapses, new democratically elected government puzzles for three months over next steps while economy free falls, a plan is adopted with advice from Sachs counting on debt relief, none is provided and the economy continued to melt down, even after a second round of shocks were applied in 1993

* Russia in the 1990s -- Yeltsin wins power by defending Parliament from a Communist coup attempt, adopts harsh reforms that cripple the economy, citizens and Parliament fight back, then Yeltsin attacks Parliament to dismantle opposition and continue the "reforms"

After reading the book, it is this thorough, well researched chronology of the application of the Chicago School in the wild that drives home the most important points about the so-called Chicago solution:

1) it has been tried MULTIPLE times with MULTIPLE approaches / sequences
2) it has NEVER been selected voluntarily by a properly functioning democratic government
3) it has ALWAYS been applied through either military or economic coercion
4) it has NEVER delivered economic stability and equitable economic growth
5) it has ALWAYS produced gross concentration of wealth and massive increases in poverty


The Butterfly Effect

One of the most fascinating aspects of the book is the background Klein provides about the interrelation between various historical events resulting from the "meddling" of the Friedman theorists. A few examples:

Margaret Thatcher -- Thatcher was three years into her first term as British Prime Minister and tremendously unpopular. She had zero success in implementing any of her conservative economic solutions to that point. When Argentina invaded the Falkland Islands in an attempt to distract its own citizens from local economic problems still unsolved from its own Chicago intervention in 1976, it boosted British "patriotism" while giving Thatcher the chance to use a war footing to crack down on striking British coal miners, eventually breaking their strike much like Reagan broke the PATCO strike. Thatcher eventual privatized national interests in gas, oil, telecommunications, steel and airlines -- all polices that had limited support prior to the war. One troubling quote Klein includes in the book from Thatcher at the time: We had to fight the enemy within, which is much more difficult but just as dangerous to liberty. Categorizing your own citizens as "enemies within"?

Tiananmen Square and the Rise of China -- Tiananmen Square took place at a time when Communist governments in Poland and Russia had collapsed under relatively peaceful circumstances, leading most Americans to view the student protests in China as the next domino in the chain. Young students simply decided they had enough of communism and wanted democracy. Klein writes that in reality, most of the protest focused on the impacts of sweeping economic reforms Deng Xiaping had adopted in order to open the country to foreign investment while preserving communism. The student protests were threatening the progress of the economic reforms and put the leadership in a difficult position of choosing between tolerating the dissent and risking delays in their economic reforms or clamping down and accelerating their economic reforms. They chose the latter and the press reported the story it wanted to hear, citing the massacre as a blow to democracy. This isn't just Klein's theory. She interviewed Wang Hui, one of the key leaders of the movement who stated the key motivations for the protests were falling wages, unemployment and rising prices brought on by Deng Xiaping's capitalist reforms. Those reforms directly led to the trade patterns we are currently seeing.

Russian Democracy and Middle East Peace Prospects -- Within three weeks of the signing of the Oslo peace accords, Boris Yeltsin used tanks to attack the Russian Parliament which had been thwarting economic "reforms" desired by Yeltsin and outside economic interests. The attack on the Russian Parliament essentially eliminated any real democracy in Russia and led to nearly one million Russian Jews heading for the exits and arriving in Israel in the 1990s. At the time of the Oslo accords in 1993, Israel was to some extent economically dependent on the people in the occupied territories and a majority of citizens believed changes were required to ease travel to the territories and begin improving the economic picture. Precisely at the time its government acted on that new understanding by signing the accord, refugees from the shock therapy in Russia began providing some of the human capital Israel had lacked, making it less dependent upon people in the occupied territories and more willing to revert to the draconian "lock down" policies that led to the intifada and eventual collapse of realistic talks between Israel and the Palestinians.


Iraq and Katrina

Klein cited the similarities between the post-invasion Iraq recovery efforts and post-Katrina recovery efforts as her original motivation in writing the book. The first 283 pages of the 466 page narrative cover events prior to September 11, 2001 and the book would be worth the cover price for that work alone. By the time events after 9/11 are covered, you feel like you can practically write the book yourself -- you know where the story is going. However, Klein still uncovers a few interesting connections between players, incentives and consequences in the post-9/11 era.

Rumsfeld -- Klein highlights the inflammatory speech Rumsfeld delivered to Pentagon employees on September 10, 2001 in which he literally declared the Pentagon employees themselves as America's most dangerous enemy. Perhaps this adversary sounds like the former Soviet Union, but that enemy is gone; our foes are more subtle and implacable today. The adversary's closer to home. It's the Pentagon bureaucracy. (page 286). Note the chilling similarity between his words declaring Pentagon employees as the "enemy" and those of Margaret Thatcher declaring British coal minors the enemy. Unlike the book Cobra II, which simply cites this speech as the beginning of the tactical errors that complicated the Iraq effort, Klein puts it in the larger context of Rumsfeld's prior background and support for Chicago style gutting of the government. As Klein puts it, he wasn't trying to save taxpayers money, he was trying to put more of an 11 percent increase in defense spending into private corporations.

Conflicts of Interest -- Klein analyzed stock holdings of Rumsfeld, Cheney and others in the Bush Administration and found (surprise!) much of interest. Rumsfeld may have sold his direct shares in defense firms but held his ownership share in private equity firms invested in those same firms over six months into his tenure. He also NEVER sold his stock in his former firm Gilhead, maker of avian flu vaccines and his holdings rose over 800 percent in value during his tenure, in large part because the Pentagon and Health and Human Services signed contracts worth over one billion dollars to buy Gilhead's products. Cheney likewise still holds nearly 200,000 shares of Halliburton which have risen 300 percent in value directly because of Cheney's advocacy of war against Iraq and outsourcing of the military.


Explaining the Reality Gap

If the Chicago theory is so wrong, why has it continued to be applied with such disastrous results? One key argument of Klein's book is that while Chicago School adherents have not learned the key lesson that their solutions failed to achieve any of their goals, they HAVE learned ONE thing from the failures. They learned democratic societies will not voluntarily accept the consequences of Chicago school policies, at least if accurately described beforehand to the citizens. Klein addresses the question throughout the book from three related perspectives -- coercion by force, coercion by international financial institutions and a flawed philosophy of the human rights movement. The coercion by force and by international economic means are easy to explain -- vested interests of those benefiting from the disruption. The roots of the failure in the human rights arena are more subtle.

Although exact numbers and identities of people kidnapped, tortured or murdered in the initial "laboratories" were not known, officials throughout the world at the time clearly did know the brutality was taking place. So why wasn't it stopped? Klein traces the disconnect to one major backer of the mid-70s human rights movement -- the Ford Foundation -- the very same foundation which supported the education of those implementing the policies that required the threat of terror to complete the solution. Klein's insight is that the conflict of interest within a key backer of the emerging human rights movement produced a movement with an inborn blind spot. While fixating on the details of the abuses taking place all over the world, the human rights movement seldom if ever took the larger view to ask the simple question -- WHAT is the motivation to perform the abuse? By failing to ask questions about the motivation for the abuse, the relationship between the abuse and political and economic policies that made the abuse necessary in the eyes of those conducting it was never addressed by governments or the media. Perhaps the best quote in the book states:

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Just as there is no kind, gentle way to occupy people against their determined will, there is no peaceful way to take away from millions of citizens what they need to live with dignity -- which is what the Chicago Boys were determined to do. Robbery, whether of land or a way of life, requires force or at least its credible threat: it's why thieves carry guns, and often use them. Torture is sickening, but it is often a highly rational way to achieve a specific goal; indeed, it may be the only way to achieve those goals. Which raises the deeper question, one that so many were incapable of asking at the time in Latin America. Is neo-liberalism an inherently violent ideology, and is there something about its goals that demands this cycle of brutal political cleansing, followed by human rights cleanup operations?
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Of course, one other approach for suppressing the truth was a bit more traditional. Klein writes about Orlando Letelier, who once served as former ambassador to the United States for Chile under the to-be-deposed and murdered President Salvador Allende. Letelier was jailed for a time under Pinochet then returned to Washington DC in 1976 and published an article directly tying the events in Chile to the policy recommendations of Milton Friedman. It raised attention levels briefly… Briefly, until September 21, 1976 when Letelier was killed by a car bomb later traced by the FBI to members of Pinochet's secret police who had entered the United States with forged passports with the concurrence of the CIA.


Conclusions

If you think you agree with limited government theories because YOU have enough saved and won't need government services such as unemployment, social security income, public schools, etc., THINK AGAIN. -- The policies espoused by this school of thought have CONSISTENTLY produced mass unemployment (20 to 40 percent), extreme concentration of wealth, massive increases in poverty and collapsed currencies - events that can destroy YOUR nest egg and put you back in steerage with the rest of the unwashed masses.

If you think we have learned our lesson in Iraq and Katrina, THINK AGAIN. -- They weren't the first attempts at shock therapy, only the latest in a series of "experiments" (Argentina, Indonesia, Chile, Bolivia, Poland, Russia) which followed the Chicago prescription to the letter and produced identical failures and misery. Despite those failures, the true believers offer no mea culpas. They only believe the solutions weren't pure enough, not that they were the wrong solution. Milton Friedman and his followers demonstrated incredible patience. Their think-tank driven strategy was to have their theories and policies fully formed and waiting on the shelf for the right time, or more appropriately the wrong time, when citizens and leaders would be in enough shock or panic to try solutions they would never consider under any other circumstances.

Disaster capitalism isn't a Republicans versus Democrats or conservatives versus liberals issue. -- Klein's analysis addresses identifies proponents ranging from Jeffrey Sachs, Madeline Albright, Bill Clinton and publications ranging from The New York Times, Time, The Los Angeles Times and The Atlantic who all cheered on the carnage while blaming the citizens who suffered under the prescription for not "getting" the pro-democracy benefits of the medicine, despite obvious, repeated evidence to the contrary. The use of shock therapy, whether initiated by economic means followed by military force or the other way around has proven INHERENTLY anti-democratic everywhere it has been applied. Klein provides one quote from a South American writer that expresses this quite succinctly: People were in prison so prices could be free. (page 116)

Pay very close attention when conflicts of interest are raised. -- People entering government with tens of millions of dollars in investments are highly unlikely to handle decisions involving those investments at arm's length. The players advocating policies to "free markets" and "open trade " have consistently sat on both sides of the bargaining table and profited from the changes handsomely. When the concept is expanded to gutting government, outsourcing wars and outsourcing recovery, players with conflicts of interest can literally hit the trifecta: profiting from the destruction, profiting from the reconstruction and calling the shots for their own benefit throughout.

Watch your charitable contributions. -- The incentives facing governments, central bankers and large corporations make it difficult, if not impossible even for non-government organizations to provide relief without inadvertently (or actively) aiding and abetting policies likely to hurt "victims" featured in fundraising. In the case of tsunami relief in Sri Lanka, $80 million in funds raised for "victims" in fact supported construction of new hotels on the former grounds of their beachfront huts wiped out by the tsunami, forcing the victims to relocate inland far away from the ocean that provides their income.

Enough with the conspiracy theories. -- If you think shock therapies would only be considered AFTER a country or region has already dissolved into chaos by other means, Klein provides several examples where "proactive" creation of a disaster to justify shock therapy was calmly, analytically considered, including a January 13, 1993 conference in Washington DC in which one of Freidman's true believers, John Williamson, stated:

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One will have to ask whether it could conceivably make sense to think of deliberately provoking a crisis so as to remove the political logjams to reform. For example, it has sometimes been suggested in Brazil that it would be worthwhile stoking up a hyperinflation so as to scare everyone into accepting those changes.. Presumably, no one with historical foresight would have advocated in the mid-1930s that Germany or Japan go to war in order to get the benefits of the supergrowth that followed their defeat. But could a lesser crisis have served the same function? Is it possible to conceive of a pseudo-crisis that could serve the same positive function without the cost of a real crisis? (page 256)
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To reiterate, this is one of the most interesting and enlightening books I can suggest to followers of economics, business or politics. The Shock Doctrine is perfectly aligned in its focus on the players and policies affecting the entire planet and the particular financial problems we face right now.