The Divide: A Brief Guide to Global Inequality and its Solutions

by Jason Hickel

They were not alone. Today, some 4.3 billion people – more than 60 per cent of the world’s population – live in debilitating poverty, struggling to survive on less than the equivalent of $5 per day. Half do not have access to enough food. And these numbers have been growing steadily over the past few decades. Meanwhile, the wealth of the very richest is piling up to levels unprecedented in human history. As I write this, it has just been announced that the eight richest men in the world have as much wealth between them as the poorest half of the world’s population combined. We

This notion sits at the centre of the usual story that we are told about global inequality. Development agencies, NGOs and the world’s most powerful governments explain that the plight of poor countries is a technical problem – one that can be solved by adopting the right institutions and the right economic policies, by working hard and accepting a bit of help. If only poor countries would follow the advice of experts from agencies like the World Bank, they would gradually leave poverty behind, closing the divide between the poor and the rich. It is a familiar story, and a comforting one. It is one that we have all, at one time or another, believed and supported. It maintains an industry worth billions of dollars and an army of NGOs, charities and foundations seeking to end poverty through aid and charity. But

The divide between rich countries and poor countries isn’t natural or inevitable. It has been created. What could have caused one part of the world to rise and the other to fall? How has the pattern of growth and decline been maintained for more than 500 years? Why is inequality getting worse? And why do we not know about it? *

The story of development – that the nations of the world were simply at different positions along the Great Arrow of Progress – offered a convenient alibi. It allowed them to disavow responsibility for the misery of the colonies, and it was more palatable than the explicit racial theories they had relied on in the past. What is more, it allowed them to shift their role in the eyes of the world: graciously relinquishing imperial power, they would turn to aiding their fellow man. It

Anthropologists tell us that when the structure of a core myth begins to change, everything else about society changes around it, and fresh new possibilities open up that weren’t even thinkable before. When myths fall apart, revolutions happen.

And they’re right. Take hunger, for example. In 1974, at the first UN Food Summit in Rome, US Secretary of State Henry Kissinger famously promised that hunger would be eradicated within a decade. At the time there were an estimated 460 million hungry people in the world. But instead of disappearing, hunger got steadily worse. Today there are about 800 million hungry people, even according to the most conservative measures. More realistic estimates put the figure at around 2 billion – nearly a third of all humanity.4 It is hard to imagine a greater symbol of failure than rising hunger, especially given that we already produce more than enough food each year to feed all 7 billion of the world’s people, with plenty left over for another 3 billion.5 What

Wtf

And that’s according to the lowest possible poverty line. In reality, the picture is even worse. The standard poverty measure counts the number of people who live on less than a dollar a day. But in many global South countries a dollar a day is simply not adequate for human existence, to say nothing of human dignity. Many scholars are now saying that people need about four times that in order to have a decent shot at surviving until their fifth birthday, having enough food to eat and reaching normal life expectancy.7 So what would happen if we measured global poverty at this more realistic level? We would see a total poverty headcount of about 4.3 billion people. That’s more than four times what the United Nations would have us believe, and more than 60 per cent of humanity. We would also see that poverty has become worse over time, with more than 1 billion people added to the ranks of the poor since 1981.

And in early 2017, as the World Economic Forum met in Davos, Oxfam announced that the richest eight people had as much wealth as the poorest 3.6 billion.

Given the new rules of global democracy, the North seemed powerless to stop the rise of the South. But in the early 1980s that suddenly changed. The United States and Western Europe discovered they could use their power as creditors to dictate economic policy to indebted countries in the South, effectively governing them by remote control, without the need for bloody interventions. Leveraging debt, they imposed ‘structural adjustment programmes’ that reversed all the economic reforms that global South countries had painstakingly enacted. In the process, they went so far as to ban the very policies that they had used for their own development, effectively kicking away the ladder to success. Structural adjustment – a form of free-market shock therapy – was sold as a necessary precondition for successful development in the global South. But it ended up doing exactly the opposite. Economies shrank, incomes collapsed, millions of people were dispossessed and poverty rates shot through the roof. Global South countries lost an average of $480 billion per year in potential GDP during the structural adjustment period.15 It is now widely acknowledged by scholars that structural adjustment was one of the greatest single causes of poverty in the global South, after colonialism. But it proved to be enormously beneficial to the economies of the North.

Indeed, some of this damage is caused by the very groups that run the aid agenda: the World Bank, for example, which profits from global South debt; the Gates Foundation, which profits from an intellectual-property regime that locks life-saving medicines and essential technologies behind outlandish patent paywalls; and Bono, who profits from the tax haven system that siphons revenues out of global South countries.31 This is not an argument against aid as such.

Rich countries aren’t developing poor countries; poor countries are effectively developing rich countries – and they have been since the late 15th century. So it’s not only that the aid narrative misunderstands what really causes poverty, it’s that it actually gets it backwards. Just as in Truman’s time, aid serves as a kind of propaganda that makes the takers seem like givers, and conceals how the global economy actually works.

Colonialism and imperialism have not settled their debt to us once they have withdrawn from our territories. The wealth of the imperialist nations is also our wealth. Europe is literally the creation of the Third World. The riches which are choking it are those plundered from the underdeveloped peoples. So we will not accept aid for the underdeveloped countries as ‘charity’. Such aid must be considered the final stage of a dual consciousness – the consciousness of the colonised that it is their due, and the consciousness of the capitalist powers that effectively they must pay up.

When Israel invaded and occupied the West Bank in 1967, with the backing of the US military, it asserted total control over the aquifers beneath the territory. Israel draws the majority of this water – close to 90 per cent – for its own use in settlements and for irrigation on large industrial farms. And as the water table drops, Palestinian wells are running dry. Palestinians are not allowed to deepen their wells or sink new ones without Israeli permission – and permission is almost never granted. If they build without permission, as many do, Israeli bulldozers arrive the next day. So Palestinians are forced to buy their own water back from Israel at arbitrarily high prices.

I tell this anecdote not just as an example of how aid often misses the point, but to illustrate a much larger truth. Poor countries don’t need our aid; they need us to stop impoverishing them. Until we target the structural drivers of global poverty – the underlying architecture of wealth extraction and accumulation – development efforts will continue to fail, decade after decade. We will continue to watch the poverty numbers rise, and the divide between rich and poor countries will continue to grow.

Of course, when the Millennium Campaign pushed the base year back to 1990, the hunger trend appeared to get a little better. And diluting the goal to focus on proportions instead of absolute numbers helped a little bit too. But even with these changes, in 2009 the hunger headcount was still 21 per cent worse than it was in 1990. The UN was forced to concede defeat, publishing a report admitting that the hunger goal was going to be impossible to achieve: instead of decreasing, ‘hunger has been on the rise for the past decade’.14

In light of all this, it is safe to say that the narrative of the Millennium Development Goals dramatically underestimates the scale of global hunger. Again, the idea here seems to be to simply keep people alive, just to satisfy the metrics, while caring little about the kinds of lives they are able to live. And this tragedy persists in the face of what has surely become one of the most repeated facts of our time: that we collectively produce enough food each year to feed everyone in the entire world, at 3,000 calories per day.25 Hunger is not a problem of lack. It is a problem of distribution. A disproportionate amount of the world’s food ends up flowing to rich countries, where much of it ends up as waste. In the US and Europe, consumers bin up to half the food they purchase.26 The UN finds that cutting global food waste by only a quarter and redirecting it to where it is needed most would solve global hunger in a single stroke.27

Shame, how to solve?

Let’s go back to the claim made by the Millennium Development Goals, that 1 billion people live in absolute poverty today. That’s a staggering number no matter how you look at it, and a trenchant indictment of our global economic system. But a growing number of scholars are beginning to insist that the picture is actually even worse than this. They are beginning to question whether the dollar-a-day threshold is the right poverty line to be using in the first place. The international poverty line used by the MDGs – $1.25 per day – is based on the national poverty lines of the fifteen poorest countries. Why should we trust the poverty lines of a few extremely poor countries? Why should we believe that these lines are an accurate reflection of what poverty is really like in those countries? What if the bureaucrats who set the national poverty lines don’t have access to adequate data? What if the numbers are manipulated for the sake of political image?

Take Sri Lanka, for example. In 1990, government authorities conducted a survey that found that 40 per cent of the population fell under the national poverty line. But the World Bank, using the IPL, reported only 4 per cent in the same year.29 In Mexico in 2010, the government reported a poverty rate of 46 per cent using the standard national line, while the World Bank reported only 5 per cent using the IPL. In other words, in many cases the IPL makes poverty seem much less serious than it really is. India offers another example. Using the IPL, the World Bank estimated that India had 300 million people living in poverty in 2011, and claimed that the proportion of impoverished people had been decreasing steadily over time. But empirical research in India at around the same time showed that 680 million people ‘lack the means to meet their essential needs’.

Ludicrous

The present IPL theoretically reflects what $1.25 could buy in the United States in 2005. But the US government itself calculated that in 2005 the average person needed at least $4.58 per day simply to meet minimum nutritional requirements, and that is to say nothing of housing and other costs necessary for basic survival.34 According to British economist David Woodward, living at this level in the UK would be ‘equivalent to 35 people living on a single minimum wage, with no benefits of any kind, no gifts, borrowing, scavenging, begging or savings to draw on (since these are all included as “income” in poverty calculations), and no free health service or education (since these are not generally available to the poor)’.35

There is a strong consensus among scholars that the $1.25 line is far too low, but it remains in official use because it is the only line that shows any progress against poverty – at least when you include China – and therefore is the only line that justifies the present economic order.

This story has the benefit of feeling intuitively right. After all, we’re aware that countries like China and some East Asian economies have made dramatic leaps towards industrialisation, and have produced large and growing middle classes. And indeed that is exactly the key point. As it turns out, the trend towards greater global equality has been driven entirely by China and East Asia. Take China out of the picture, and the good news narrative melts away. In fact, the economists Sudhir Anand and Paul Segal show that if we take China out of the Gini figures, we see that global inequality has been increasing, not decreasing – up from 50 in 1988 to 58 in 2005.45 This is important, because – once again – China and East Asia are some of the only places where structural adjustment was not imposed by Washington.

Here is an example. If a poor country’s income goes up from $5,000 to $5,500 (a 10 per cent increase), and a rich country’s income goes up from $50,000 to $54,500 (a 9 per cent increase), the Gini index will show decreasing inequality because the income of the poor country is growing faster than that of the rich country, even though the gap between them has grown by $4,000. In light of this, many economists reject the Gini index as an overly conservative measure. It is possible to correct for this bias by calculating the absolute Gini index. Sudhir Anand and Paul Segal have done exactly that and estimate that global inequality rose from a Gini index of 57 in 1988 to 72 in 2005 – a dramatic increase.47

Source: World Development Indicators The graph above focuses on the United States, but if we plotted a line for Western Europe, or even for ‘the West’ as a broader category, including Australia and Canada and so on, it would rise more or less parallel to that of the United States. From this perspective, the global inequality gap hasn’t diminished at all. On the contrary, the gap between poor and rich countries has roughly tripled. Over the past few decades inequality has become so bad that in 2000, Americans earned nine times more than Latin Americans, twenty-one times more than those in the Middle East/North Africa, fifty-two times more than sub-Saharan Africans and a mind-popping seventy-three times more than South Asians. These numbers give us a sense of how unfairly the global economy distributes our planet’s wealth.

But scholars have been questioning the methods used to measure poverty and hunger for many years and suggesting more accurate methods. In light of these calls, why doesn’t the UN re-evaluate the data? One likely reason is that if they were to use more accurate measures, then it would become clear that to fix these problems we would need to do much more than just tinker around the edges with a bit of aid here and there. It would require changing the rules of the global economy to make it fundamentally fairer for the world’s majority.

One European witness, Bartolomé de Las Casas, reported startling statistics of the slow-motion genocide unfolding in the Caribbean region: ‘From 1494 to 1508,’ he wrote, ‘over three million people had perished from war, slavery, and the mines. Who in future generations will believe this? I myself writing it as a knowledgeable eyewitness can hardly believe it …’

Mofos

But while Europe benefited from this arrangement, Latin America suffered tremendously. It is estimated that Mexico had a population of up to 30 million indigenous inhabitants before the arrival of the Europeans. The Andean region had a similar number. Central America is thought to have supported around 13 million. The numbers vary by source to some extent, but scholars agree that in 1492 the Latin American region had a combined population of between 50 and 100 million.15 By the middle of the 1600s, however, the continent’s population had been slashed to 3.5 million.16 In other words, around 95 per cent had been killed.

Without the ecological windfall from the slave colonies, Europe would not have been able to shift its economic capacity towards industrialisation. *

Adam Smith, the father of modern economics, called this ‘previous accumulation’ – the initial process of amassing capital that is necessary for capitalism to get going, and without which capitalism cannot exist. Karl Marx called it ‘primitive accumulation’, perhaps to highlight its barbaric nature, for the process of accumulation was violent: ‘The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalled the rosy dawn of the era of capitalist production.24 These idyllic proceedings are the chief momenta of primitive accumulation.’ Colonial extraction, according to this view, was the driver of accumulation, and accumulation is what made capitalism possible. As

Budding capitalists cannot get very far unless there are people willing to work for them in exchange for wages. We take this for granted today, but there was a time, not so long ago, when it wasn’t quite so easy. Up through the Middle Ages, the vast majority of people in Europe – at least outside the city states – wouldn’t have wanted to work for wages. People didn’t need to earn wages in order to live. Most people lived as ‘peasants’ – in other words, as small farmers cultivating the land to provide for their own needs. And for the most part they were quite happy doing so.

When we think of medieval peasants we usually assume that they must have lived rather miserable lives. And this is true, in many ways: disease was common, nutritional standards were not very high and life expectancy was short – as it was for most people living in settled agricultural societies before the late 19th century. But peasants did have the most important thing they needed to guarantee a stable livelihood: they had secure access to land, which they could use for farming crops, grazing livestock, hunting game, drawing water, excavating peat and cutting wood for heating, cooking and shelter. Some had direct rights to their own land, others had the right to use lands owned by lords, and others had access to shared ‘commons’. Peasants may not have been rich, but they enjoyed the basic right of habitation – a right that was protected by long-standing tradition and strong laws, such as the 1217 Charter of the Forest in England. It was unthinkable that anyone should not have secure access to the basic resources they needed for survival. But this traditional security system came under attack in the 15th century – a process that started in England. Wealthy nobles, eager to profit from the highly lucrative wool trade, began a systematic campaign to turn their land into sheep pasture. To do this, they dissolved old feudal obligations and abolished the right of habitation that had protected peasants for so many centuries. They also began to privatise the common land that peopl...

The good life

When we think of medieval peasants we usually assume that they must have lived rather miserable lives. And this is true, in many ways: disease was common, nutritional standards were not very high and life expectancy was short – as it was for most people living in settled agricultural societies before the late 19th century. But peasants did have the most important thing they needed to guarantee a stable livelihood: they had secure access to land, which they could use for farming crops, grazing livestock, hunting game, drawing water, excavating peat and cutting wood for heating, cooking and shelter. Some had direct rights to their own land, others had the right to use lands owned by lords, and others had access to shared ‘commons’. Peasants may not have been rich, but they enjoyed the basic right of habitation – a right that was protected by long-standing tradition and strong laws, such as the 1217 Charter of the Forest in England. It was unthinkable that anyone should not have secure access to the basic resources they needed for survival. But this traditional security system came under attack in the 15th century – a process that started in England. Wealthy nobles, eager to profit from the highly lucrative wool trade, began a systematic campaign to turn their land into sheep pasture. To do this, they dissolved old feudal obligations and abolished the right of habitation that had protected peasants for so many centuries. They also began to privatise the common land that peopl...

Thieves

This final episode in the destruction of the English peasant system exactly coincided with the Industrial Revolution. By the middle of the 19th century it was complete: there was almost no common land left and millions of people had been forcibly displaced.30 The result was a massive refugee crisis, unlike anything we can imagine today – bleaker than our most dystopian science fiction films. Huge portions of England’s population had nowhere to go. They had no homes, no land, no food. It was a humanitarian catastrophe: for the first time in history, a significant proportion of the population had no access to any form of livelihood for survival. By the middle of the 1600s, the word ‘poverty’ had come into common use to describe this new condition, and during the late 18th and early 19th centuries the term became entrenched as a major concept in English-language discourse. This helps us make sense of the extremely low life expectancy found among England’s working class in the early 19th century. The displaced peasants had no way to feed themselves, save for one last option: to sell their labour for wages. Such people were euphemistically referred to as ‘free labourers’, but this term is quite misleading. True, they were not technically slaves, but wage work was hardly a matter of free choice. Some of the displaced ended up working on the new sheep runs or on the capitalist farms. But most of them moved into towns, pouring into cities like London to scratch out a meagre living.

Wtf

The emergence of the landless working class added a final piece to the great transformation of England’s economy: they became the world’s first mass consumer population, for they depended on markets for even the most basic goods necessary for survival: clothes, food, housing, and so on. It was these three forces – enclosure, mass displacement of peasants and the creation of a consumer market – that provided the internal conditions for the Industrial Revolution. The external conditions, as we have seen, had to do with the colonisation of the Americas and the slave trade.

Shortest summary of capitalism

We tend to assume that the emergence of capitalism was a natural and inevitable process – as though its basic logic has always existed in human society and gradually matured into the Industrial Revolution. But the historical evidence suggests a very different story. The emergence of capitalism required violence and mass impoverishment, both at home and abroad – a process that left vast swathes of people dispossessed (in the case of English peasants) or enslaved (in the case of Africans and indigenous Americans). Even in England, people didn’t welcome this new system with open arms. On the contrary, they protested and rebelled against it, for it violated long-standing cultural expectations about people’s basic rights to habitation, to the means of subsistence, to the means of life. The

So, Marx was wrong about history's eventuality

In 1585, English colonisers made their first attempt at reproducing the new system of enclosure and ‘improvement’ in a foreign territory. They forcibly expropriated the land of Irish peasants and resettled it with farmers trained in the methods of agricultural intensification, directly replicating what was already under way back at home. As in England, this process impoverished vast numbers of people, who were forced to retreat on to small plots of marginal land. Many were left with no hope of survival and migrated to England and Scotland to work as wage labourers – something that had never been necessary before. By the early 1800s, once the enclosure movement had run its violent course over two to three centuries, Irish peasants had so little land for their own use that they were planting only potatoes – the one crop that would yield sufficient calories for them to survive on very small plots. This dependency on potatoes proved deadly when the potato blight hit in 1845. Over the next seven years 1 million people died – more than 10 per cent of the Irish population – in what became known as the Great Famine.

Fuckrn rich people

How did the English manage to justify the mass dispossession that ‘improvement’ entailed? For this we largely have the Enlightenment philosopher John Locke to thank. In the late 1600s, Locke – a large landowner in England with stakes in American colonisation – wrote the Second Treatise of Government, which developed a new and very powerful theory of property ownership. He stated that while land initially belongs to all people in common, once you ‘mix’ your labour with it then it becomes your private property. This ‘labour theory of property’ was used to justify the theft of land in the Americas: since it appeared that no one was engaged in agricultural production, settlers could rightfully appropriate the land as long as they were willing to farm it. But of course in many cases there were people farming the land that English colonisers wanted to take, just as in Ireland. In such cases, Locke claimed that what really counted for ownership was not simply the act of farming, but the improvement (i.e. intensification and profit-orientation) of the farming techniques. So settlers who were prepared to apply the principles of English-style agrarian capitalism were justified in appropriating the lands of others. According to Locke, this added to the common good because it would increase overall productivity,

Mofo Locke

population, it just needed to be moved to the right areas. But instead the rail system, obedient to market logic, was used by merchants to ship grain from the hinterlands into central depots where it could be guarded from the hungry and shipped to Europe. Financial speculation on the London Stock Exchange was driving food prices to eye-watering heights, and grain merchants were eager to take advantage of this. In 1877 and 1878, during the worst years of the first drought, they shipped a record 6.4 million tons of Indian wheat to Europe rather than relieve starvation in India. During the period from 1875 to 1900, Indian grain exports increased from 3 million to 10 million tons per year.39

We are not dealing, in other words, with ‘lands of famine’ becalmed in stagnant backwaters of world history, but with the fate of tropical humanity at the precise moment (1870–1914) when its labour and products were being dynamically conscripted into a London-centred world economy.40 Millions died, not outside the ‘modern world system’, but in the very process of being forcibly incorporated into its economic and political structures. They died in the golden age of Liberal Capitalism.

From the perspective of the British, the problem with India was that it had relatively strong industries of its own. India’s textile industries, for instance, produced some of the finest cloth in the world, making it difficult for Britain to gain dominance in the global textile market. To deal with this obstacle, the British Colonial Office did everything in its power to hinder and even dismantle India’s autonomous industrial development, and sought to ensure that Indian manufacturers would not be able to compete with their British counterparts. They prevented Indians from becoming skilled artisans and they gave British firms preferential treatment in government procurement. In one famous episode, the British set out to destroy India’s textile industry by crushing the fingers of the weavers and destroying their looms. But their most potent tool was the use of one-way tariffs, which protected Britain’s markets from India’s exports while ensuring easy access for Britain’s goods into India. It worked: India, once self-sufficient and famous for its exports, was remade into ‘the greatest captive market in world history’.41

it was impossible to find enough labour to work on their farms and, later, in their gold and diamond mines. The African population was quite content with its subsistence lifestyle: under traditional tenure arrangements, most people had access to land on which to graze their cattle and grow food for their families. They didn’t see why they should leave their homes for back-breaking labour on plantations and in mines. Nobody was offering wages high enough to induce such a dramatic shift. The colonisers quickly learned that the only way to get Africans into the labour market was to force them – by destroying their existing subsistence arrangements. Hunger would leave them no choice.

These are known now as the Banana Wars, as in many cases the invasions were designed to guarantee abundant land and cheap labour for American fruit companies. For instance, US marines invaded Honduras seven times between 1903 and 1925 in order to contain progressive political parties and install puppet leaders who would serve the interests of American banana producers. Cuba is another example: the US occupied Cuba on and off from 1906 to 1934, mostly to secure the interests of American sugar companies. But there were other issues at stake too. When the US invaded Colombia in 1903 it was in order to secure control over Panama, to clear the way for the US to dig the Panama Canal. Nicaragua was occupied from 1912 to 1933 largely in order to prevent the Nicaraguan government – or any other nation – from building its own alternative canal. Another key issue was debt. When the Dominican Republic threatened to default on its debts to American creditors, the US invaded and seized control of its ports, channelling the country’s customs revenues directly into American coffers. The occupation lasted from 1916 to 1924, at the end of which the US installed a military dictatorship to rule in its interests.

Simple barbarians

In most undergraduate economics courses, students are taught that the differences between the economies of poor and rich countries can be explained by the laws of comparative advantage and supply and demand. The standard theory holds that prices and wages are set automatically by the market depending on each country’s factors of production. Poor countries have a natural abundance of labour, so their wages are low and therefore their comparative advantage lies in labour-intensive production (first mining and agriculture and later also light manufacturing). Rich countries have a natural abundance of capital, so their wages will be higher and they will specialise in capital-intensive production of higher-order commodities. In orthodox economic theory, this is regarded as the natural order of things. But as soon as we bring history back into the picture, this theory starts to fall apart. Why do poor countries have a comparative abundance of labour in the first place? Because of hundreds of years of colonial rule, under which subsistence economies were destroyed and millions of people were displaced and forced into the labour market, driving unemployment up and wages down. The fact that slavery was used up through the 19th century further contributed to downward pressure on wages, as workers had to compete with free labour. And why do poor countries have a comparative deficit of capital in the first place? Partly because they were plundered of precious metals, and partly becaus...

Shame and plunder

As the Depression continued into the 1930s and the economy failed to recover, conventional views began to crumble and new economic theories emerged from the rubble. The problem, people began to realise, had to do with the internal contradictions of capitalism itself. Capitalists seek to maximise their profits by increasing productivity and decreasing the costs of production. The easiest way to decrease the costs of production, of course, is to push down workers’ wages. But if this process is left unchecked, eventually wages get so low that workers cannot afford to buy the products they produce. Demand goes down, and the market becomes glutted with excess goods with no one to buy them. Goods quickly lose their value, businesses stop producing and the economy slows down. This is what happens when capitalism is left to its own devices: it generates such extreme inequality that the whole system simply seizes up.

One might think that Europe and the United States would be thrilled to watch this success unfold; after all, the new policies that global South countries were rolling out – tariffs, nationalisation, land reform, capital controls – were bringing about real development, and Western governments, in the spirit of Truman, claimed to be in favour of development. But they were not amused. Western states had become accustomed to having easy access to cheap labour, raw materials and consumer markets in global South countries, and the rise of developmentalism was beginning to restrict this access. Import substitution policies meant that Western exporters of consumer goods had to pay high tariffs to sell their products to global South markets.21 Sometimes they found that their products were blocked at customs altogether by nationalist governments intent on protecting local industries. In many cases, Western investors who wanted to operate in global South countries were denied entry. When they were allowed in, they often had to pay higher taxes on their incomes, and capital controls meant they had to pay higher fees if they wanted to repatriate their profits. A growing trade union movement and new constitutional rights meant they had to pay higher wages to the workers they hired. In some countries, they felt stymied by price controls that governments had imposed in order to keep basic goods affordable. In others – and this was their most serious concern – they feared that their land a...

Part of this had to do with the higher taxes levied on the upper classes; in the United States, the top marginal tax rate hovered around 90 per cent during the 1940s and 1950s. (Today, politicians like to claim that higher taxes will slow down the economy, yet historical data shows that the US enjoyed some of its highest rates of growth during the period of 90 per cent tax.) But it also had to do with higher wages commanded by workers who were increasingly empowered – through unions – to bargain for a fairer share of profits. During the 1940s and 1950s, around 35 per cent of workers in the United States were unionised – higher than ever before.

For Friedman and his followers, their great enemy was not only Keynesianism in the United States, but also social democrats in Europe and the developmentalists in the global South. They saw all of these systems as contaminated forms of capitalism that needed to be purified. There was price-fixing to make basic goods more affordable. There were minimum wage laws to protect workers from exploitation. Certain services – like education and healthcare – were kept out of the market altogether to ensure universal access. These policies were improving people’s lives, but Friedman claimed that they were doing hidden harm by disrupting the equilibrium of the market.35 Price controls, subsidies and minimum wage laws should all be abandoned, and the state should sell off any services that corporations could run at a profit, including education, healthcare, pensions and national parks. Governments should cut back social spending so as not to interfere with the labour market. Taxes should be at a flat rate. And corporations should be free to sell their products anywhere in the world. If implemented, he claimed, these policies would lead to unprecedented growth and prosperity. This

Enemies of the people

There was some recovery after 1978, buoyed by speculative finance from abroad, but in 1982 the economy crashed hard: hyperinflation struck again, and unemployment reached 35 per cent. Eventually things got so bad that Pinochet was forced to respond by firing many of the Chicago Boys and renationalising many of the privatised companies and banks.46 In fact, the only reason the economy didn’t fall apart completely was because Codelco, the state copper mining company, had never been privatised and continued to supply 85 per cent of the country’s revenue. It was not until 1988 that the economy recovered, at which point Friedman and the Chicago Boys finally felt they could declare the experiment a success. But a success for whom? The poverty rate was 41 per cent.47 Average wages were 14 per cent lower. The minimum wage was 42 per cent lower. And hunger was widespread, with the food intake of the poorest 40 per cent of the population having plunged from 2,000 calories per day to 1,600.48 Even as late as 1993, GDP per capita was 12 per cent below its pre-coup level. The only people that benefited from the new economic regime were the elite. Banks and foreign investors were having a field day, ‘liberated’ as they were from regulation. And with the incomes of the richest 10 per cent soaring – with their share of the national pie up by 28 per cent – Chile had become one of the most unequal societies in the world.

What set off the crisis of stagflation? Most scholars point to a few key events that happened during the Nixon administration. For one, Nixon was engaged in expansionary monetary policy – in other words, he was effectively printing money.52 On top of this, government spending on the Vietnam War at the time was spiralling out of control. As international markets worried that the US would not be able to make good on its debts, the dollar began to plummet in value and contributed further to inflation. And while all of this trouble was unfolding, another crisis hit. In 1973, OPEC decided to drive up the price of oil. The price of consumer goods suddenly shot up too, because the energy required to produce and transport them was more expensive. And because production became more expensive, economic growth slowed down and unemployment began to rise. It was a perfect storm. The crisis of stagflation was the direct consequence of specific historical events. But the neoliberals rejected these explanations. Instead, they insisted that stagflation was a product of Keynesianism – the consequence of onerous taxes on the wealthy, too much economic regulation, labour unions that had become too powerful and wages that were too high. Government intervention, they claimed, had made markets inefficient, distorted prices and made it impossible for economic actors to act rationally. The whole market system was out of whack, and stagflation was the inevitable consequence. Keynesianism had failed...

During the Reagan administration, Volcker jacked up interest rates from the low single digits to as high as 20 per cent. This caused a massive recession, as it dramatically increased the costs of doing business. As businesses laid off workers, unemployment rates shot to over 10 per cent. This decimated the power of organised labour, which had been the crucial counterbalance to the excesses that had led to the Great Depression.

High interest rates maycause recession

sum, the Volcker Shock had devastating effects on the working class. It caused wages to collapse, and mortgage defaults tripled. But it cured inflation.

With money destruction and recession, it may also cure inflation