Sebastian Edwards | Author and University of California professor of international economics

“The Twilight of Neoliberalism Began Long Ago”

Sebastian Edwards, a Chilean-American University of California professor of international economics, discusses the decline of the free market capitalist political approach.

By Danilo Phillipi

In March 1975, General Pinochet, Chile’s military dictator, skeptically met with the American economist Milton Friedman — a professor from the University of Chicago — to discuss potential remedies to the South American country’s sky-high 400% annual inflation rate. This meeting sparked neoliberal reforms that drastically changed Chile, predating similar reforms in Thatcher’s United Kingdom and Reagan’s United States. 

These reforms helped drive roaring economic growth, often known as the “Chilean miracle,” and propelled the country to become the continent’s most developed nation, but they also created soaring levels of inequality. This inequality was a key factor in the widespread social unrest that was sparked in 2019, which eventually led to the creation of two Constitutional Conventions that each drafted a new constitution (although both were widely rejected by voters in national referendums in 2022 and 2023).

Sebastián Edwards explores this in “The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism,” which was awarded Book of the Year in 2023 by the Financial Times. The author is a Chilean-American professor who has served as the Henry Ford II Distinguished Professor of International Economics at the University of California, Los Angeles (UCLA) Anderson School of Management since 2003. He was born into an influential family in Chile’s capital Santiago, and shifted from socialist beliefs to critically analyzing neoliberalism after personal experiences with the country’s political upheaval.

His defiance against the government’s policies put him in danger, forcing his departure to the University of Chicago, which was a hub for neoliberal thought. Despite his academic pedigree, Edwards clarifies he is not one of the “Chicago Boys,” distinguishing his views from the group of technocrats who studied at the university under Friedman and others, and championed Chile’s economic overhaul in the 1970s and 1980s.

In his book, Edwards dissects the term “neoliberalism” — which favors free-market capitalism, deregulation, and reduction in government spending, which have had mixed outcomes in Chile and other countries throughout the Americas. In the following interview, Edwards discusses his personal journey with the Chicago Boys, the dynamics of neoliberalism in Chile, and the nuanced outcomes of economic policies on the country’s development, offering an insider’s perspective on the complexities of Chile’s economic history and its global implications.

The following interview has been edited for clarity and brevity.

Various reports have been made on the subject, books have been written, and documentaries have been produced. What motivated you to tell your own story of the Chicago Boys?

I wanted to explain the paradox that was the Chilean social uprising. I wasn’t in Chile in October 2019 when it began, but I arrived two weeks later, and back in the United States, I wrote two or three articles that were published in economic magazines. But in 2,500 words, you can’t tell the whole story. This story is worth telling because it is indeed a paradox — that the most developed country in Latin America by far experienced an uprising of this nature. 

When you decide to tell this story, the question is where do you start? You could start in 1810 or with the arrival of Diego de Almagro [the Spanish conquistador], or with the Constitution of 1925, and so on. However, as an economist — and given that the outcry of the uprising was to end neoliberalism —  it seemed appropriate to start with the launch of the “Chile Project” by the U.S. State Department [the program launched in 1955 to train Chilean economists at the University of Chicago]. Consequently, the book is an economic history of Chile — obviously with all its political nuances — from 1955 to 2022.

The title is strikingly categorical. Is neoliberalism really in decline? 

Well, to be able to assert that, one first had to define what neoliberalism is. The problem with the term is that it ceased to be useful from an analytical-conceptual point of view, because it first turned into an insult and secondly into a concept so broad that it’s useless. One of the things that José Donoso [a Chilean novelist] taught me in literary workshop classes is that a character doesn’t approach a tree, but approaches a pine or a willow or an oak. There are millions of species of trees, so for a character to approach a generic tree is not of narrative interest. 

The same happens with neoliberalism; it’s too broad a concept and consequently analytically useless. Therefore, as a writer, I had three options to approach it. One was to use it as it is popularly used, as an insult, which is not very useful for writing an academic book. Another was to ignore it and not talk about neoliberalism, which is the same as ignoring reality, because the word is in the newspapers every day, especially in progressive newspapers. So, I opted to go with the third option, giving it my own definition, which is not so much my own either, because it is tied to the historical development of the term, which was coined —  in the way we know it today — in the year 1938.

So, what is neoliberalism?

I argue that neoliberalism is a capitalist economic system where the market is maximally utilized to solve almost all societal problems. Here, the “almost” is crucial because it’s not a caricature system where, if you don’t have children you can buy them, or you can sell a kidney. In fact, in the book, I have a quite lengthy paragraph contrasting my definition with that of Michael Sandel, the American philosopher, who in one of his books states that neoliberalism is the marketization of everything. I say it’s the marketization of almost everything. 

In Chile, starting in 1979, when Pinochet announced the “Seven Modernizations” [a series of radical economic and social reforms], the goal was to introduce the free market to pensions, education, water, health and culture. Bear in mind that until five years ago, Chile was the only country — among those we’re familiar with — that didn’t have public television. National Television [a TV channel] was nominally public, but it had to fend for itself without state funding, and that changed. 

Up until about seven years ago, Chile was the only country in the world without public universities. I’ve been teaching for 40 years at a top-ranked public university in the United States, and we charge a fifth of what private universities do. And it’s the same at Berkeley or any other public university.

Your words suggest a critical view of the model, yet in your book, you strongly defend the outcomes of neoliberal policies.

It’s not an ideological defense, but a recognition of the numbers. My book features two main graphs. The first shows Chile in 1989 had a per capita income identical to Costa Rica and Ecuador, and today it has more than double Ecuador’s and over 50% more than Costa Rica’s. The country went from being ninth in Latin America to No. 1 by a wide margin in 2019. 

The second graph shows poverty dropping from 50% to 8%. So, we can indeed talk about a “Chilean miracle.” The numbers are there. You could say it was thanks to or despite the Chicago Boys, but Chile and Peru, facing identical international variables, had very different outcomes during the same period. Both are major copper producers, but Peru also has gas and oil. Yet, Chile, with similar income to Peru in the late 1980s, now has nearly double Peru’s. This isn’t a defense, just laying out the facts and figures.

What’s the merit of the Chicago Boys in all this?

Replacing a large and inefficient state with competition, among other things, led to an export boom.

In your view, what are the key similarities and differences between the economic policy history of Chile and the United States over the past half-century?

On a superficial level, there are very few similarities between the policies of the two countries. The United States has maintained a market-oriented economy, while Chile experimented with real socialism in the 1970s. After 1973, Chile moved into a pure — or more extreme — form of capitalism than the United States. However, if one looks at the details, there are some interesting similarities, including the attempt in Chile during the past few years to implement the type of welfare policies that were put in place during the New Deal under President Roosevelt.

Has the Chicago School of Economics had any significant impact on U.S. domestic policies?

Yes, it has had through the years a lot of influence on United States policy. Let me give you two important examples, both of them associated with the name Milton Friedman, the most influential figure within the Chicago School. The first one is the adoption of floating, market-determined exchange rates in 1971-73. The United States had a fixed exchange rate, which was at the center of the international monetary system, but Friedman argued in a very strong way that the value of the currency had to be determined by the value of the markets in order to get greater efficiency — and that did happen. A second example is the negative income tax, which consists of providing assistance through the tax system to very low-income working people, and that was adopted in the early 1970s, and it was also an idea originally developed by Friedman.

In what ways have the foundational theories of neoliberalism been adapted or challenged by global economic crises, such as the financial crisis of 2008?

Major financial crises in the global economy have resulted in a number of experts questioning some of the basis of the neoliberal model. In particular, there are two assumptions that have been questioned. The first one is the benefits of the complete free capital nobility, in particular for emerging markets. After the different crises there is a sense that at the very least, cross-border capital movements should be regulated and supervised. 

The second assumption that has been questioned is that market participants are fully rational and very well-informed. A new branch of economics has developed that is called behavioral economics which assumes or takes into account the fact that there are biases in investor’s and people’s decisions, and those are not always rational. What is, however, ironic is that that branch was developed at the University of Chicago, and it has been promoted from that school in the past few years. 

Would you say that neoliberalism is in global decline, and if so what are the implications of this?

If by neoliberalism we understand a purer and more extreme form of capitalism, there has been a retreat during the past few years. There is now an understanding that the markets need to be monitored, regulated and supervised. The question is whether that is done in an efficient and optimal way or whether the pendulum will swing too much in the opposite direction and we will go back to the era of over-regulation and inefficiencies.