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# Capitalism-and-Its-Critics-A-History-From-the

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Frank adopted an analytical framework similar to Baran’s, and he used it to analyze the history of individual Latin countries. In a 1966 essay, “The Development of Underdevelopment,” which appeared in Monthly Review, he explained how in Brazil the Portuguese colonists initially developed certain parts of the country—including the northeast and the center-south— turning them into export economies, only to largely abandon them as the markets that they served waned. “Underdevelopment is not due to the survival of archaic institutions and the existence of capital shortage in regions that have remained isolated from the stream of world history,” Frank wrote. “On the contrary, underdevelopment was and still is generated by the very same historical process which also generated economic development: the development of capitalism itself.”41

By this stage, Frank was a committed to expanding the Cuban Revolution throughout Latin America, and he brooked no dissent from his radical approach. In a paper prepared for a conference in Havana in January 1968, he described the structuralists associated with ECLA, including Prebisch and Furtado, as “ideologists for the national bourgeoisie.” He also claimed—without foundation in the case of Furtado—that they failed to analyze the internal class structure of Latin America and said their intellectual approach was “superficially not fundamentally different from the imperialist model.”42 Frank even criticized some “Marxists” (his quotation marks) for unwarranted revisionism.43 The reality, he insisted, was that there were only two policy alternatives, which were expressed in the title of his paper: “Capitalist Underdevelopment or Socialist Revolution.”

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In Europe and the United States, the student and antiwar protests of 1968 marked a high mark of leftist activism. The protests spread to Latin American countries, including Mexico and Brazil, where they led to heightened interest in dependency theory and other currents of anticolonialism. The movement “seemed to offer an alternative response to the orthodox received-wisdom of ‘modernizers’ like Rostow who wanted to bomb Vietnam back into the Stone Age and others who argued that ‘we have to destroy it to save it,’” Frank subsequently recalled.44 The year before the student protests erupted, he became a fellow at the University of Chile’s Center of Socioeconomic Studies (CESO) in Santiago, where a number of neo-Marxist dependency theorists were already in residence. One of them was Theotônio Dos Santos, a Brazilian sociologist whom Frank had taught briefly during a spell at the University of Brasília. Dos Santos hailed from Carangola in the state of Minas Gerais. As a student, he helped to found a radical left-wing party, but he subsequently broke with its members over their conviction that a small vanguard of armed rebels could bring about a socialist revolution.

At CESO, Dos Santos led a research project that examined dependency from a regional rather than a national perspective. He developed a theory of “dependent capitalism” that also harked back to Baran’s approach, but provided a new explanation for how the core countries were able to extract surpluses from the periphery. Whereas many of the early dependency arguments had largely revolved around foreign trade, Dos Santos centered his analysis on production in developing countries and the class struggle there between capitalists and workers. In January 1970 he delivered a lecture at the annual meeting of the American Economic Association, which took place that year in New York City. (Paul Sweezy, who still had some links to the US economics establishment, engineered his invitation to speak.)

In his presentation, which was subsequently reprinted in The American Economic Review, Dos Santos argued that over the course of Latin American history, three distinct types of dependence had developed: colonial dependence, financial-industrial dependence, and technologicalindustrial dependence. Even though these phenomena were distinct, they

★ ★ ★

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shared a key attribute, Dos Santos insisted: the center “carries off part of the surplus generated domestically and leads to a loss of control over their productive resources.”45 Under colonial dependence, Dos Santos said, the process of extracting the surplus was plain to see. The colonist established a monopoly on international trade, which was complemented by “a colonial monopoly of land, mines, and manpower (serf or slave).” Financialindustrial dependence consolidated itself at the end of the nineteenth century, Dos Santos argued, when, with the aid of foreign capital, the nowindependent Latin American countries organized their economies around exports of primary products. The key to surplus extraction in this version of dependence was that wages in the export sector were kept artificially low. This “superexploitation” generated large surpluses for domestic and foreign capital, while also limiting the growth of domestic incomes and restricting economic development.46 Dos Santos’s final category of dependence, technological-industrial dependence, he defined as a largely post–Second World War phenomenon, and he associated it with the ISI approach that ECLA had promoted.

Here was a direct attack on Prebisch’s policy legacy, and one that went beyond Furtado’s earlier critique. Dos Santos emphasized the fact that ISI required the import of complex machinery and other modern technologies, which were very costly. Theoretically, the surplus generated in the primary goods sector could have been used to finance these imports. But since much of this surplus was siphoned off by foreign owners, there was a “foreign financing” gap that had to be filled by overseas capital in the form of investments by multinational corporations or foreign aid, Dos Santos said.47 He argued that both of these sources of financing fostered new forms of exploitation and dependency. The multinationals generated large profits, most of which were repatriated. Citing data from the US Department of Commerce, Dos Santos said that between 1946 and 1967, US direct investments of capital into Latin America totaled about \$5.4 billion, while the transfer of profits from Latin America to the United States totaled about \$14.8 billion. “The ratio of remitted capital to new flow is around 2.7 for the period 1946–67; that is, for each dollar that enters \$2.70 leaves,” he noted.48 Foreign aid also came with drawbacks, Dos Santos said, including pressure to open up markets and balance budgets, as well as requirements that some of the money be used to import technology from donor countries.

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And aid wasn’t a gift. It was provided in the form of loans, which eventually had to be repaid. “The hard truth is,” Dos Santos wrote, “that underdeveloped countries have to pay for all of the ‘aid’ they receive.”49

Based on this analysis, the Brazilian concluded that the policy proposals put forward by agencies like ECLA and the Inter-American Development Bank “do not appear to permit destruction of these terrible chains imposed by dependent development.” Far from bringing an end to backwardness, misery, and social marginalization, the “dependent capitalism” that they fostered reproduced these historical phenomena. “Everything now indicates that what can be expected is a long process of sharp political and military confrontations and of profound social radicalization which will lead these countries to a dilemma: governments of force, which open the way to fascism, or popular revolutionary governments, which open the way to socialism,” Dos Santos concluded. “Intermediate solutions have proved to be, in such a contradictory reality, empty and utopian.”50

★ ★ ★

Dependency theory emerged from a set of historic conditions specific to Latin America. Clearly, though, it had implications for other parts of the developing world, particularly newly independent countries in Africa and Asia. In 1972, Walter Rodney, a young Guyanese historian and political activist, published How Europe Underdeveloped Africa, in which he explored the history and impact of colonialism, including the slave trade and the nineteenth-century land grabs, on the continent. Echoing the Latin dependency theorists, Rodney argued that the oppressive structures and extractive nature of colonial exploitation were directly responsible for the low levels of economic development throughout Africa. “All of the countries named as ‘underdeveloped’ in the world are exploited by others; and the underdevelopment with which the world is now preoccupied is a product of capitalist, imperialist, and colonialist exploitation,” he wrote. “African and Asian societies were developing independently until they were taken over directly or indirectly by the capitalist powers. When that happened, exploitation increased and the export of surplus ensued, depriving the societies of the benefit of their natural resources and labor. That is an integral part of under-development in the contemporary sense.”51

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Rodney had done his doctoral dissertation at SOAS University of London; its subject was the slave trade on the upper Guinea coast. While he was in England, he joined a study group that C. L. R. James, the Trinidadian author of Black Jacobins, had established. Subsequently, he taught at the University of Dar es Salaam in Tanzania and at the University of the West Indies in Jamaica. In How Europe Underdeveloped Africa, which he wrote while he was in Dar es Salaam, he said that much of the economic literature on development and underdevelopment “seeks to justify capitalism.” On a more positive note, he referenced the works of James, Eric Williams, W. E. B. Du Bois, Frank, and Furtado. He also emphasized that colonial activities like mining and cash-crop farming did little to develop the rest of the economy in African countries, and in many cases, the arrival of the colonists led to a decline of native industries, such as handicrafts and small-scale farming. Rodney also criticized the first generation of postcolonial African political leaders, lamenting that too many of them “were frankly capitalists and shared fully the ideology of their bourgeois masters.”52 In political terms, Rodney was a revolutionary socialist and a Pan-Africanist. He insisted that only a united African working class could overthrow the existing system and generate widely shared economic progress. In advance of the Sixth Pan-African Congress, which was held in Tanzania in 1975, he called on the Congress to recognize that “the principal enemies of the African people are the capitalist class in the U.S.A., Western Europe and Japan,” and that “African liberation and unity will be realized only through struggle against the African allies of international capital.”53 (Rodney would be killed in a 1980 car explosion in Georgetown, Guyana, which the country’s national assembly ultimately deemed a “State organized assassination.”)54

★ ★ ★

On September 4, 1970, Chile, the home of dependency theory, held a general election. Salvador Allende, the socialist leader of a left-wing coalition, Popular Unity, received 36.6 percent of the vote, placing him slightly ahead of a center-right candidate. After more than a month of negotiations, vacillations, and the assassination of a top military leader who had rebuffed right-wing entreaties to prevent Allende from becoming president, the Chilean Congress confirmed him to the office. The sixty-twoyear-old former physician vowed to enact the program he had campaigned on, La vía chilena al socialismo (The Chilean Path to Socialism).55 Among its contents were pledges to nationalize the country’s copper mines and big banks; expand educational access to the poor; raise wages; build affordable homes; redistribute land to small farmers; and provide jobs for all.

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Allende’s economics minister was Pedro Vuskovic, an economist who had spent many years at ECLA. As a Keynesian and a structuralist, Vuskovic wanted to raise government spending and workers’ wages, which he believed would increase economic welfare and boost demand. Inflation and the trade balance would be secondary concerns. During Allende’s first few months in office, the new government established a minimum wage, cut taxes for the low-paid and small businesses, provided free milk and lunches for schoolchildren, fixed the price of bread, provided educational grants to Indigenous children, and announced a big homebuilding program. This was just the beginning. In the ensuing couple of years, the government expanded enrollment in primary and secondary schools, made university tuition free, sharply increased social security payments and family allowances, and doubled the length of maternity leave. It also nationalized copper mines, a key sector of the Chilean economy, and seized landed estates, which it proceeded to break up, much to the outrage of the landowners. In an effort to facilitate the management of state-run enterprises, it launched a novel information management system, Project Cybersyn, in which telex machines were used to forward details about production inputs and outputs to a central mainframe computer, which in turn generated automatic alerts to factories and their managers.

For a time, this leap toward democratic socialism seemed to pay off. Allende’s spending programs raised living standards and produced a surge in industrial output and GDP. Between 1970 and 1971, GDP per capita rose by about 8 percent after adjusting for inflation.56 Then things went awry. In 1972 the rate of inflation shot up to more than 150 percent on a yearly basis, swallowing workers’ wage gains and creating economic hardship. The government responded by expanding price controls, but this led to shortages of basic foodstuffs and the emergence of black markets. Adding to the problems, the price of copper, which made up about half of Chile’s exports, plummeted on world markets. That put pressure on the currency, the escudo, and the government was forced to devalue it by 50 percent—a move that raised the cost of imports and added to inflation pressures.

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Another country caught in this situation would have been a candidate for an IMF bailout. But the Nixon administration, outraged at the prospect of Fidel Castro gaining an ally on the South American mainland, ordered a covert economic war on Chile. The US government leaned on the World Bank and other lending agencies to curtail the flow of credit to Santiago. In June 1972, Allende replaced Vuskovic with a new economics minister, but the problems continued. In the second half of 1972, a wave of protests and strikes led by trucking companies, small businesses, and professional organizations paralyzed the country. (It was later revealed that the CIA helped to finance the trucking strike.) In early 1973, inflation rose further— it would eventually reach 500 percent57—and there was another strike. As political tensions rose, the center-right Christian Democratic Party joined the right-wing National Party in accusing Allende of trying to establish oneparty rule. In mid-August the national Congress passed a resolution accusing the government of seeking absolute power and conducting Marxist indoctrination. The resolution called on Chile’s armed forces to direct their efforts “toward the full restoration of constitutional rule.”

Allende offered to hold a referendum on the future of the country. But with two of the three biggest political parties having effectively called for a military coup, events were moving to a grim conclusion. On the morning of September 11, a group of military officers led by General Augusto Pinochet, the head of the army, ordered their forces to occupy key sites in the capital, disable local television stations, and surround the presidential palace. When Allende refused to leave, Pinochet ordered an attack. The presidential bodyguards fought bravely, but they were overrun. Allende refused to be taken alive and shot himself.58

A military junta took power, with Pinochet at its head and the CIA actively supporting it.59 As the new regime tracked down its political opponents, real and imagined, Santiago was no longer safe for left-wing intellectuals. Dos Santos, fearing he was on the wanted list, took refuge in the Panamanian embassy and eventually made his way to Mexico. When the airports reopened, Frank and his family flew to Germany. He was convinced that the dependency movement had come to an end. “General Pinochet decapitated it with his sword on September 11, 1973,” he later wrote. “Then he instituted an ultra-right counter-revolution and counterreform.”60

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“Shock treatment”

Milton Friedman and the Rise of Neoliberalism

On April 23, 1964, Karl Polanyi died in Toronto. He was anything but a household name. The New York Times published a single-column obituary that described him as a “former Hungarian political leader” who taught at Columbia University.1 Polanyi’s death came at a moment when history appeared to have moved on from the free market version of industrial capitalism he had warned about in his 1944 book The Great Transformation. Despite some incipient signs of inflation in Britain and a few other parts of the West, the Keynesian model of managed capitalism was still ascendant in Western countries. Since the end of the Second World War, it had delivered rapid economic growth, rising living standards for the majority, and declining levels of income inequality.

With moderate Keynesian economists—Joan Robinson’s “bastard Keynesians”—holding sway from the White House to Harvard Yard and beyond, supporters of the old laissez-faire religion were reduced to issuing jeremiads and supporting Senator Barry Goldwater’s quixotic 1964 presidential campaign. The most notable of these rightist dissidents was the University of Chicago economist Milton Friedman, who in 1962 had published Capitalism and Freedom, a ringing defense of free markets and small government. Ever since attending high school in blue-collar Rahway, New Jersey, Friedman had been precocious and opinionated. After completing his undergraduate degree at Rutgers in 1932, he did graduate work at the University of Chicago and Columbia, but he initially struggled to get an academic post, a difficulty he later attributed partly to antisemitism. (His mother and father were Jewish immigrants from eastern Austria-Hungary.) Eventually he landed a job in Washington at the National Resources Committee, a New Deal agency, and during the Second World War, he worked at the Treasury Department. Friedman’s stint in the nation’s capital didn’t enamor him of the federal government. After the war ended, he spent a year at the University of Minnesota, then moved back to the economics department at the University of Chicago, which had held out against the Keynesian tide.

22

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In Capitalism and Freedom, Friedman described the concentration of government power as “the great threat to freedom,”2 but his libertarian animus toward federal spending and regulation went far beyond concerns about totalitarianism. He questioned the government’s role in highway building, public education, social security, public housing, banking regulation, and even national parks, such as Yellowstone and the Grand Canyon. “If the public wants this kind of activity enough to pay for it, private enterprise will have every incentive to provide such parks,” he wrote.3 Friedman’s odes to the free market were out of tune with the times, though. Capitalism and Freedom didn’t get reviewed in The New York Times, Newsweek, or Time. Even the Chicago Tribune, his local broadsheet, ignored it. “Those of us who were deeply concerned about the danger to freedom and prosperity from the growth of government, from the triumph of welfare-state and Keynesian ideas, were a small beleaguered minority regarded as eccentrics by the great majority of our fellow intellectuals,” he recalled in the preface to a later edition of his book.4

But Friedman wouldn’t remain an outsider for very long. During the two decades after he penned his free market manifesto, he would become one of the most famous and controversial economists in the world, and a policy adviser to conservative political leaders on three continents, including President Ronald Reagan.

Friedman’s rise to intellectual celebrity status didn’t come out of nowhere. It was part of a conservative backlash against Keynesianism at the domestic and international levels. This counterrevolution was to prove so successful politically that, by the 1980s, when the cult of Friedman was at its height, some observers with a more critical opinion of unmanaged capitalism were digging up the works of Polanyi, his warnings about the destructive impact of an unfettered market economy, and its association with authoritarianism. Finally, forty years after The Great Transformation was published, it would find a wide audience because, indeed, a great transformation was taking place.

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