Introduction
[1] Free markets harness the power of free minds and convert ingenuity into wealth. However, for most of history political constraints on markets produced centuries of poverty separated by periodic episodes of economic growth. In The Shock Doctrine, Naomi Klein blames global poverty and inequality on "disaster capitalism," which she describes as the strategy by which free-market ideologues foist unpopular reforms on the unwilling while they are distracted by disasters and crises. She offers several hypotheses: first, she argues that unpopular neoliberal reforms require disasters if they are to be implemented. Second, human rights violations are necessary to break popular resistance to liberalization. Finally, neoliberal reforms have concentrated wealth and power in the hands of a select few while creating a "permanent underclass" in the countries that have liberalized. All three claims are lacking.

[2] On her website, Klein refers to The Shock Doctrine as "a direct attack on the intellectuals and institutions that have disseminated corporatist ideology around the world." It is an attack, to be sure, but it is an unsuccessful attack that discredits both the author and her intellectual program. The villain in Klein's drama is Milton Friedman, winner of the 1976 Nobel Prize in economics, economic theorist extraordinaire, and to many the foremost popularizer of libertarian ideas in the late twentieth century. Klein's treatment of the Friedman legacy is impressive in its vitriol if not its veracity: Klein attributes to Friedman views which he does not hold, posits relationships between Friedman and others which did not exist, and leaves readers with impressions which she later disavows during an ensuing debate with the Cato Institute's Johan Norberg.

[3] Klein goes to great lengths to document her claims, providing the reader with 74 pages of endnotes and putting some of her primary sources on her website. This is commendable, and discourse would no doubt improve if others would follow her lead and go to such lengths to make their sources and their data available to other scholars and commentators. However, amassing references and telling an impressionistic story is not the same thing as providing a clear, compelling hypothesis and then evaluating that hypothesis in light of the best available evidence.

[4] The Shock Doctrine has received plaudits from her supporters and there is no doubt that it will galvanize the radical leftist base. However, before crediting her with "speaking truth to power" it behooves us to know whether she has her facts straight. She doesn't. First, her intellectual history is incorrect. Second, her use of data is suspect. Third, preliminary evidence suggests that the relationship between human rights violations and economic liberalization on which her "disaster capitalism" thesis rests is precisely incorrect. Finally, her economic reasoning is practically nonexistent. Once this is stripped away, it is unclear what remains that is of lasting value. The Shock Doctrine caused me to read a lot of things I wouldn't have otherwise read, it inspired a couple of research projects, and it caused me to think more carefully about my own work. While this is the case, I expect that as time goes by Klein's book will be reduced to a footnote in the history of twenty-first century progressivism.

[5] Two aspects of The Shock Doctrine are treated here. First, there is Klein's treatment of the intellectual history of Chicago School Economics, which is hardly the narrow-minded haven of free-market zealotry that emerges from her caricature. Second, we can test Klein's claims about the processes of economic development against the best available data.

II. Milton Friedman, F.A. Hayek, and Chicago
[6] Klein’s criticism is founded on an erroneous intellectual history of Chicago School economics. Her claim that the Chicago economics department was home to a dangerous ideological crusade rather than a scientific movement—and, therefore, her claims that this dangerous ideological crusade is responsible for “shock”—is undermined by her inability (or unwillingness) to get her intellectual history straight. According to Ebenstein (2007:129-130), there are no mentions of a distinct Chicago School until the 1950s even though Paul Samuelson said that the term "Chicago School" had entered the vernacular by 1935. Friedman is the most visible face of the Chicago School, but the tradition’s roots reach back to the University's founding.

[7] There was already a viable and identifiable "Chicago School" before Friedman bloomed intellectually; this was exemplified through the writing, research, and teaching of Frank Knight and Jacob Viner (Friedman and Friedman 1998:34-35). Friedman's ideas were shaped by his experiences at Chicago in the 1930s when some of the most important names in Chicago-School economics included Knight, Viner, and Henry Simons. This in no way suggests ideological dogmatism. Friedman's wife, Rose (then Rose Director, sister of Chicago economist Aaron Director), argued that Knight and Viner "could hardly have differed more from one another" (Friedman and Friedman 1998:35).

[8] Friedman describes the intellectual atmosphere of the University in the 1930s as one characterized by "an atmosphere of a search for truth" unencumbered by social niceties or deference based on anything other than "the cogency of an argument" (Friedman and Friedman 1998:35). The Chicago School described by the Friedmans and by other scholars is an environment characterized by scholarly rigor and supreme tolerance, where the only price of admission was a cogent and robust argument. Rose Friedman describes this with respect to Jacob Viner's approach: "In Viner's hands, economic theory was a coherent set of tools, to be used with care and the utmost attention to logical rigor, but to be judged primarily by its usefulness in understanding and interpreting economic events" (Friedman and Friedman 1998:36).

[9] Where Klein sees the intellectual rigor and fundamentalist fervor of a tent revival, others who were closer to the scene remember a dynamic intellectual environment in which there were no sacred cows. The University of Chicago's intellectual diversity was exemplified in a remark made by George Stigler during the 1964 Presidential election and quoted in Friedman and Friedman (1998:192): "The Chicago department was the only department in the country that could readily staff a Council of Economic Advisers for either Johnson or Goldwater. Many others could do so for Johnson; a handful could do so for Goldwater; but no other for both."

[10] Klein's mishandling of the history of the Chicago School is most evident in her treatment of 1974 Nobel Laureate F.A. Hayek. She argues that Hayek was Friedman's "mentor" (p. 17) and as "Friedman's own personal guru" (p. 53), but Friedman himself describes Arthur Burns as his "teacher at Rutgers, and thereafter my mentor, guide, and surrogate father" (Friedman and Friedman 1998:xi). The influence from Hayek claimed by Klein was minimal through Friedman's early intellectual development even though he was later very enthusiastic about Hayek's contributions on knowledge and the liberal program he laid out in The Road to Serfdom. While Friedman and others at Chicago were enthusiastic about Hayek's intellectual program, Hayek was never appointed to a position in the economics department in no small part because of fundamental methodological disagreements. Nonetheless, Klein refers to Hayek as the "patron saint" of the Chicago School (p. 131). These errors suggest fundamental problems of interpretation. Klein's treatment of the relationship between Hayek and Friedman does not suggest that her thesis lacks merit, but it does little to support her argument.

III. Theories of Economic Development
[11] Klein's thesis is that free-market reforms are unpopular and hard to implement through democratic channels because they cause unemployment, uncertainty, social disruption, and dislocation. Embedded in her claim is an implicit model in which a social democracy is on a sustainable growth path that leads to prosperity and equality. The point raised by Friedman, Hayek, and others was that central planning and all of its mixed-economy variations are unsustainable. Short run gains come at the expense of long-run growth and stability, and the "developmentalist" reformers in Latin America in the 1960s enjoyed seeming short run success by mortgaging their countries' futures.

[12] The chaos that Klein identifies as "disaster capitalism" has little to do with neoliberal economics per se and more to do with the difficulties of undoing unsustainable mixed-economy programs and with the problems of institutional change more generally. The costs of transition are tragic, but the long-run results would have been worse in their absence. To use Chile as an example, Salvador Allende had already hinted at the use of military force to suppress labor unrest. If his critics were correct and Allende wished to turn Chile into a South America Cuba, the human rights disaster likely would have been worse than under Pinochet.

[13] Klein draws heavily on the views of Orlando Letelier, a Chilean economist and critic of Pinochet and the Chicago Boys who was assassinated in Washington, DC. Letelier argued that the human rights abuses of the Pinochet regime and the prescriptions of neoliberal economics were linked (Letelier 1976:137), suggesting that Pinochet's government required human rights abuses in order to implement the neoliberal program. He argues that "those who impose unrestrained 'economic freedom' would also be held responsible when the imposition of this policy is inevitably accompanied by massive repression, hunger, unemployment, and the permanence of a brutal police state" (Letelier 1976:137).

[14] Implicit in Letelier's (and Klein's) models of economic growth are the assumption that the disruptions caused during transition are a function of neoliberal policies specifically and that prosperity--or at least stasis--would continue unabated in the absence of capitalist intervention. This isn't true. Friedman's criticism of the monetary policies pursued by Allende and Pinochet recognized that an increasing rate of monetary expansion was unsustainable.[1]

[15] They espouse a naive model in which Allende's reforms would have worked if everyone had played along. Unsurprisingly, Chilean elites were unenthusiastic about "bargaining" with a government at gunpoint, and Allende’s price controls took no account of the law of demand (when price falls, quantity demanded rises) or the law of supply (when price falls, quantity supplied falls). Letelier (and Klein) seem similarly oblivious. The predictable responses to the changing incentives under Allende--the development of black markets and reductions in goods available for sale--were attacked by Letelier as "illegal hoarding of goods by the rich" and "attempts to disrupt the entire economy in such a way as to create the conditions needed to justify the military coup" as part of the "broad and systematic campaign of sabotage and terror" waged against the democratically-elected Allende (Letelier 1976:138).

[16] Letelier argues that high inflation in 1975 was a result of the Chicago program (Letelier 1976:140-141), but the Chicago Boys were an effect of this inflation rather than a cause. As Friedman and others well understood, it takes time to commit to a low-inflation regime. He then contradicts himself: "The inflationary process, which the junta's policies stimulated immediately after the coup, was slightly reduced in 1975 as compared to the unbelievable rate of 375.9% in 1974" (Letelier 1976:141).

[17] Stopping an inflationary spiral necessarily causes a recession because mal-invested resources have to be liquidated. Ludwig von Mises and F.A. Hayek argued that resources would be "mal-invested" because monetary injections alter relative prices and therefore lead people to invest in wasteful lines of production. This can be masked in the short run if the government simply prints money, but accelerating inflation creates what Mises called “a crack-up boom.” This is precisely what happened in Chile during the 1970s just as it happened in the United States in 1981 and 1982 (Friedman and Friedman 1998:405). The key is that the monetary authority has to establish a credible commitment to fighting inflation. The "shock treatment" in Chile led to a massive depression in 1975, but inflation fell and GDP growth proceeded at 7.5% per annum for the next half-decade (Friedman and Friedman 1998:405). In 1982, Chilean inflation had fallen from a 700 percent annual rate during the middle of 1974 to an annual rate of under ten percent (Friedman and Friedman 1998:407).

[18] Friedman favored gradualism where practical and advised Pinochet to keep people as informed as possible (Friedman and Friedman 1998:592). In his notes on the meeting, Friedman points out that Pinochet "was sympathetically attracted to the idea of a shock treatment but was clearly distressed at the possible temporary unemployment that might be caused" (Friedman and Friedman 1998:399). A swift end to inflation was probably the only way it could be done with minimal political interference, and Friedman questions whether gradualism would have even been possible, to say nothing of its attractiveness (Friedman and Friedman 1998:400n). Pinochet did not follow Friedman's advice in all matters as the Chilean Central Bank pegged the Chilean peso to the dollar, which was the opposite of what Friedman has recommended. When they dropped the peg, however, growth returned (Friedman and Friedman 1998:405-406).

[19] In his letter to Pinochet, Friedman was clear about his ignorance of the specific policies that would be needed because he knew little about Chile (Friedman and Friedman 1998:593-594). He also did not view the transition through rose-colored glasses, arguing that "to benefit from this opportunity Chile must first surmount a very difficult transitional period" (Friedman and Friedman 1998:594). This was one of the main reasons Friedman supported the shock treatment: he felt that the proposed reforms were doomed to failure if they were exposed to political pressure.

IV. Friedman and the Chicago Boys in Chile
[20] In the 1950s and 1960s, USAID funded a program whereby Chilean graduate students were brought to Chicago to study economics at the graduate level. Friedman was, according to Letelier and later Klein, their intellectual puppetmaster. However, his role was more limited, and the central Chicagoan in the drama was Arnold Harberger. Friedman's interaction with the Chileans who became "Los Chee-Ca-Go Boys" was limited to his role teaching them price theory and to his interactions with those who participated in his money and banking workshop.

[21] The center of controversy surrounding the Chicago influence in Chile concerns the role of Chicago-trained economists in crafting the economic policy of the post-Allende regime. Salvador Allende, a Marxist, was elected with 36.8% of the vote in 1970. He immediately set about turning "Chile into a communist state" (Friedman and Friedman 1998:397). The world noticed because "(f)or the first time in history a society attempted to build socialism by peaceful means" (Letelier 1976:142). Previous revolutions in Europe and Latin America had been violent. All eyes were on Chile because of the prospect for a peaceful transition to socialism or social democracy (cf. Friedman and Friedman 1998:397-398).

[22] Allende's policies were disastrous. van Overtveldt (2007:349) reports that Chicago economist Larry Sjaastad remembers it as follows:

Allende's militia conducted a vicious war against its adversaries, including the economists at [Universidad Catolica de Chile]. “The situation was totally insane,” Larry Sjaastad, the Chicago economist who was in Santiago in those days, remembers, “with, for example, the salaries being blocked for all economists thought of as anti-socialist.”

Allende's regime nationalized numerous industries. Civil unrest created conditions in which a violent overthrow was possible. Allende's reforms ignored predictable responses to incentives. Letelier (1976) referred to the predictable emergence of hoarding and black markets as "sabotage" even though artificially low prices naturally lead to hoarding and black markets. Pinochet led a violent revolution that overthrew the Allende government and installed a military junta. However, it was only after the junta's policies failed that they turned to the Chicago Boys (Friedman and Friedman 1998:398).

[23] Friedman's role as an "advisor" to Pinochet has been overstated by Klein and others, and he was himself very self-conscious about perceptions of his relationship with the Chilean government. He turned down two honorary degrees from Chilean universities because he felt that they could be interpreted as support for Pinochet's government (Ebenstein 2007:189). Friedman spent six days in Chile giving lectures and attending meetings with the assistance of a private foundation. He met with Pinochet for approximately 45 minutes and wrote him a letter detailing what Friedman would recommend to end the hyperinflation. For a government that was financing its expenditures with increasing monetary expansion, there was no easy, painless way to prevent long-run catastrophe (Friedman and Friedman 1998:399).

[24] In his 1967 Presidential Address to the American Economic Association, Friedman argued that the supposed relationship between inflation and unemployment--the "Phillips Curve" relationship whereby a monetary authority could trade higher inflation for lower unemployment, was mis-specified. Friedman argued that eventually market participants would adjust their expectations and the expansionary effects of monetary policy would disappear. The Chicago program was also criticized because it revealed inflation. However, in Friedman's letter to Pinochet he noted that eliminating price controls would not create inflation; rather, it would reveal existing inflation that would show up in the official data as additional inflation (Friedman and Friedman 1998:592). The "trade-off was strictly temporary, and resulted solely from unanticipated changes in inflation," and for a monetary authority to maintain low unemployment required accelerating inflation, which would clearly be unsustainable in the long run (Friedman and Friedman 1998:230). The prescience of Friedman's insights became evident during the "stagflation" of the early 1970s.

V. Conclusion

[25] There is an implicit contract between an author and a reader. An author who makes strong, controversial claims must get the facts straight and tie those facts together with a clear, convincing theoretical framework. Sadly, Klein does not live up to her end of the bargain. Where her claims demand evidence she offers impressionistic associations. Where her claims need critical evaluation of theories of economic development we are treated to moralistic crusading which seem to assume that the "best" model of a virtuous, prosperous society is self-evident and that the only thing standing in the way is a group of blinkered ideologues and evil people shouting quotes from Capitalism and Freedom to one another rather than listening to those who are blessed with Truth. Where her thesis needs plausible, detailed analysis whereby Klein's claims are established, we get the assertion that Margaret Thatcher started the Falklands War so she could crush British unions, one of what Tyler Cowen (2007) called "a series of fabricated claims."

[26] The book was not without value to me. I read a lot of things I would not have read otherwise (the Friedmans' memoirs, for example) and got a handful of research ideas largely aimed at setting the record straight with respect to Klein's arguments. However, our understanding of the processes of economic and political development would have lost little (if anything) if The Shock Doctrine had never been written.

[27] Far more plausible than Klein's claim about disaster capitalism is the thesis that the government intervention rather than free-market capitalism takes hold during times of crisis, and this is explored systematically by Robert Higgs in a 1987 volume that uses both coherent theory and detailed analysis of evidence. Klein adheres to a labor theory of value with respect to scholarship, suggesting that The Shock Doctrine was not an off-the-cuff missive but the culmination of several years of research and holding up her 74 pages of endnotes as proof that the book was exhaustively researched. Without a doubt, the book took a lot of time and energy, but just because someone uses a lot of inputs does not mean that someone is creating value or, to adopt Marxian terminology, not all labor is socially useful. Klein raises a lot of interesting and important points. Her core hypotheses are fundamentally testable, and her criticisms of the corporatization of the Iraq War are likely criticisms with which her nemesis Milton Friedman would have agreed. Her complaints about "disaster capitalism," though, are ultimately crushed under the burden of theory and evidence.

References

Carden, Art. 2008. Shock and Awe: Institutional Change, Neoliberalism, and Disaster Capitalism. Available at SSRN: http://ssrn.com/abstract=1302446

Carden, Art, Joshua C. Hall, and Robert A. Lawson. 2008. Truthiness and Torture in The Shock Doctrine. Preliminary Draft: Rhodes College, Beloit College, and Auburn University.

Cowen, Tyler. 2007. Shock Jock: A Review of Naomi Klein's The Shock Doctrine. New York Sun, October 3, 2007. Online: http://www.nysun.com/arts/shock-jock/63867/.

Dornbusch, Rudiger and Sebastian Edwards. 1991. The Macroeconomics of Populism in Latin America. Chicago: University of Chicago Press and NBER.

Friedman, Milton and Rose D. Friedman. 1998. Two Lucky People. Chicago: University of Chicago Press.

Klein, Naomi. 2007. The Shock Doctrine: The Rise of Disaster Capitalism.

Klein, Naomi. 2008. One Year After the Publication of The Shock Doctrine, A Response to the Attacks.
Online: http://www.naomiklein.org/articles/2008/09/response-attacks, September 2, 2008.

Letelier, Orlando. 1976. Economic 'Freedom's' Awful Toll. The Nation, August 28, 1976, pp. 137-142.

Norberg, Johan. 2008a. The Klein Doctrine: The Rise of Disaster Polemics. Washington DC: Cato Institute Briefing Paper No. 102.

Norberg, Johan. 2008b. Three Days After Klein's Response, Another Attack. Online: http://www.cato.org/pub_display.php?pub_id=9626, September 4, 2008.

van Overtveldts, Johan. 2007. The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate.