Neoliberalism and the Global Order

Noam Chomsky

Excerpted from Profit Over People, 1998

The Washington Consensus

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

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

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


… There have been many experiments in economic development in the modern era, with regularities that are hard to ignore. One is that the designers tend to do quite well, though the subjects of the experiment often take a beating.

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

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

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

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

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

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


How Countries Develop

… In the eighteenth century, the differences between the first and third worlds were far less sharp than they are today. Two obvious questions arise

1. Which countries developed, and which not?

2. Can we identify some operative factors?

The answer to the first question is fairly clear. Outside of Western Europe, two major regions developed the United States and Japan-that is, the two regions that escaped European colonization. Japan’s colonies are another case; though Japan was a brutal colonial power, it did not rob its colonies but developed them, at about the same rate as Japan itself.

What about Eastern Europe? In the fifteenth century, Europe began to divide, the west developing and the east becoming its service area, the original third world. The divisions deepened into early in this century, when Russia extricated itself from the system. Despite Stalin’s awesome atrocities and the terrible destruction of the wars, the Soviet system did undergo significant industrialization. It is the "second world," not part of the third world-or was, until 1989.

We know from the internal record that into the 1960s, Western leaders feared that Russia’s economic growth would inspire "radical nationalism" elsewhere, and that others too might be stricken by the disease that infected Russia in 1917, when it became unwilling "to complement the industrial economies of the West," as a prestigious study group described the problem of Communism in 1955. The Western invasion of 1918 was therefore a defensive action to protect "the welfare of the world capitalist system," threatened by social changes within the service areas. And so it is described in respected scholarship.

The cold war logic recalls the case of Grenada or Guatemala, though the scale was so different that the conflict took on a life of its own. It is not surprising that with the victory of the more powerful antagonist, traditional patterns are being restored. It should also come as no surprise that the Pentagon budget remains at cold war levels and is now increasing, while Washington’s international policies have barely changed, more facts that help us gain some insight into the realities of global order.

… the question of which countries developed, at least one conclusion seems reasonably clear development has been contingent on freedom from "experiments" based on the "bad ideas" that were very good ideas for the designers and their collaborators. That is no guarantee of success, but it does seem to have been a prerequisite for it.

Let’s turn to the second question How did Europe and those who escaped its control succeed in developing? Part of the answer again seems clear by radically violating approved free market doctrine. That conclusion holds from England to the East Asian growth area today, surely including the United States, the leader in protectionism from its origins.

Standard economic history recognizes that state intervention has played a central role in economic growth. But its impact is underestimated because of too narrow a focus. To mention one major omission, the industrial revolution relied on cheap cotton, mainly from the United States. It was kept cheap and available not by market forces, but by elimination of the indigenous population and slavery. There were of course other cotton producers. Prominent among them was India. Its resources flowed to England, while its own advanced textile industry was destroyed by British protectionism and force. Another case is Egypt, which took steps toward development at the same time as the United States but was blocked by British force, on the quite explicit grounds that Britain would not tolerate independent development in that region. New England, in contrast, was able to follow the path of the mother country, barring cheaper British textiles by very high tariffs as Britain had done to India. Without such measures, half of the emerging textile industry of New England would have been destroyed, economic historians estimate, with large-scale effects on industrial growth generally.

A contemporary analog is the energy on which advanced industrial economies rely. The "golden age" of postwar development relied on cheap and abundant oil, kept that way largely by threat or use of force. So matters continue. A large part of the Pentagon budget is devoted to keeping Middle East oil prices within a range that the United States and its energy companies consider appropriate. … one technical study of the topic … concludes that Pentagon expenditures amount to a subsidy of 30 percent of the market price of oil, demonstrating that "the current view that fossil fuels are inexpensive is a complete fiction," the author concludes. Estimates of alleged efficiencies of trade, and conclusions about economic health and growth, are of limited validity if we ignore many such hidden costs.