Jeffrey Sachs

The Strange Case of Dr. Shock and Mr. Aid

Japhy Wilson

• Publisher: Verso
• Year: 2014
• Print ISBN:
  9781781683293
• eBook ISBN:
  9781781686607
• Topic: Politics & International Relations
• Subtopic: Political Biographies
• Index: Politics & International Relations

Jeffrey Sachs is a man with many faces. A celebrated economist and special advisor to UN Secretary-General Ban Ki-moon, he is also no stranger to the world of celebrity, accompanying Bono, Madonna and Angelina Jolie on high-profile trips to Africa. Once notorious as the progenitor of a brutal form of free market engineering called "shock therapy," Sachs now positions himself as a voice of progressivism, condemning the "1 per cent" and promoting his solution to extreme poverty through the Millennium Villages Project.

Appearances can be deceiving. Jeffrey Sachs: The Strange Case of Dr. Shock and Mr. Aid is the story of an evangelical development expert who poses as saviour of the Third World while opening vulnerable nations to economic exploitation. Based on documentary research and on-the-ground investigation, Jeffrey Sachs exposes Mr. Aid as no more than a new, more human face of Dr. Shock.

1THE RISE OF DR SHOCK

Jeffrey Sachs was born in Detroit, Michigan, in 1954. Detroit at that time was the centre of the American automobile industry, and a hotbed of working-class radicalism. Sachs’s father, Theodore Sachs, was a key figure in the class politics of the city – a prominent labour lawyer and a staunch defender of unionization and workers’ rights, who fought several cases in the Supreme Court.¹ Jeffrey was also engaged in leftist politics in his teenage years, marching against the Vietnam War on Moratorium Day, and attending a rally addressed by the legendary United Farm Workers leader Cesar Chavez.² According to Sachs, the turning point in his life came in his high school sophomore year, when he went on a family holiday to Russia, and met an East German student who told him ‘about the wonders of socialism’.³ They stayed in touch, and following his high school graduation two years later Sachs flew to East Germany to visit his friend. In interviews, Sachs has repeatedly returned to this experience of actually existing socialism as a key moment in his intellectual development, in which he was confronted with fundamental questions about the nature of capitalist society that he found himself unable to answer:

My exposure for a week to socialist society was a big eye-opener. I was absolutely befuddled by the experience … I was besieged with questions from young East Germans. Why do you have unemployment in the US when we do not? Why do you have poor people and inequality in the US? I could not challenge or give satisfactory answers to these questions … I did not even know … what the appropriate framework was to think about these kinds of questions.⁴

Sachs recalls that his initial response to this unsettling experience was to purchase a book by Karl Marx, which he ‘took home and tried to make sense of.’⁵ On his return to the United States, however, Sachs enrolled at Harvard to read economics, and Marx was quickly abandoned. The assigned pre-reading was Joseph Schumpeter’s Capitalism, Socialism and Democracy,⁶ an influential anti-Marxist tract, which celebrates the ‘creative destruction’ wrought by entrepreneurial capitalism. Sachs entered Harvard in 1972, and was placed under the charge of Abraham Bergson, the pre-eminent authority on the Soviet economy in the field of mainstream economics. Bergson conceived of his life’s work as a confirmation of Friedrich Hayek’s protoneoliberal critique of communism as ‘the road to serfdom’, according to which economic planning necessarily leads to totalitarianism and mass impoverishment.⁷ In weekly meetings, Bergson introduced Sachs to the canon of neoclassical economics. In Sachs’s words, ‘I read extensively; we discussed; and I learned about a way of seeing the world.’⁸

Within a year of his arrival at Harvard, the troubling ambiguity of Sachs’s early experience of socialism had been emphatically resolved. He had been fully immersed in the symbolic universe of neoclassical economics, and, to quote a Fortune magazine profile of him two decades later, ‘He had an answer for his East German friend: Socialism was dead.’⁹ Sachs excelled in economics, and rose rapidly through the ranks at Harvard. He graduated in 1976 with the third-highest grade among 1,650 students, completed his Masters in 1978, and received his PhD in 1980. Economics at Harvard underwent a dramatic transformation during this period. Over the previous three decades, Keynesianism had been the dominant economic doctrine of the capitalist world. Harvard and MIT had placed Cambridge, Massachusetts at the heart of this intellectual orthodoxy, while the radical free market theories of Hayek and Milton Friedman at the University of Chicago were largely ignored. In the early 1970s, however, the Long Boom of the post-war era degenerated into global ‘stagflation’ – high inflation, high unemployment, and low productivity growth. Meanwhile, the centre of intellectual gravity began to shift towards the neoliberalism of the Chicago School, which seemed to offer a compelling account of the collapse of the Keynesian compromise, based on a critique of the market distortions resulting from state interventionism and the power of organized labour. Hayek received the Nobel Prize in Economics in 1974, followed by Friedman in 1976, symbolizing the rapid elevation of neoliberalism from relative obscurity to hegemonic status.¹⁰

This transition was also occurring within Harvard and MIT, led by a vanguard of new professors and PhD students, many of whom would become key figures in the neoliberal revolution. Stanley Fischer moved from Chicago in 1973 to become professor of economics at MIT, and went on to serve as managing director of the IMF from 1994 to 2001.¹¹ Alejandro Foxley was also teaching at MIT in the 1970s, and was later appointed finance minister in Chile, where he continued the neoliberal reforms initiated under Pinochet. The PhD students in this group included David Lipton, Larry Summers, Pedro Aspe, Domingo Cavallo, and Jeffrey Sachs. Lipton went on to work for the IMF, and collaborated with Sachs on the shock therapy programmes in Poland and Russia. Summers would serve as chief economist of the World Bank from 1991 to 1993, and as US secretary of the treasury during the Clinton administration, when he unleashed the financial deregulation that led to the Great Recession. Aspe was Mexico’s secretary of finance from 1988 to 1994, masterminding a massive privatization programme and the North American Free Trade Agreement (NAFTA). And Cavallo served as Argentina’s minister of the economy between 1991 and 1996, overseeing the free market reforms that led to Argentina’s crisis and default in 2001.¹²

For a talented young economist like Sachs, intent on making sense of the world, the intellectual atmosphere in Cambridge must have been intoxicating. A theoretical revolution was taking place that was inspiring dramatic political transformations around the world. These transformations began with Pinochet’s coup in 1973, and the implementation of radical free market reforms in Chile under the guidance of Milton Friedman and the ‘Chicago Boys’, which Sachs’s PhD group followed with avid interest.¹³ Margaret Thatcher was elected in 1979, and Ronald Reagan came to office in 1980. Sachs received his PhD in the same year, and immediately joined the Harvard economics faculty, where he continued to excel. ‘As a young faculty member’, Sachs recalls, ‘I lectured widely to high acclaim, published broadly, and was on a rapid academic climb to tenure, which I received in 1983 when I was twenty-eight.’¹⁴

Sachs’s early academic work was focused on the stagflation of the 1970s, and on the policy responses that it demanded. He published extensively in leading economics journals, and contributed numerous working papers to the National Bureau of Economic Research (NBER), a think tank funded by Fortune 500 companies, which specialized in polemical attacks on Keynesianism, social democracy, and the welfare state.¹⁵ Sachs’s work from this period challenged the expansion of state expenditure and the power of organized labour, which he repeatedly identified as the primary culprit in the economic crisis. The fundamental problem, Sachs argued, was that the increase in union membership during the post-war period had driven up the price of real wages, causing them to rise ‘faster than productivity, so that the distribution of income shifted towards labour, while the rate of return on capital was substantially reduced’.¹⁶ The solution was to return capital to profitability by forcing reductions in real wages. Short of direct confrontation with the unions, this objective could be achieved either through currency devaluations or through the disciplinary power of large-scale and prolonged unemployment.¹⁷ Sachs criticized Keynesians for repeatedly intervening in economic recessions to avoid extensive job losses, which had removed the fear of long-term unemployment from the labour force, making it more difficult for employers to convince workers to accept wage reductions.¹⁸

In a paper published in 1983, for example, Sachs argued that Thatcher was to be commended for her unwavering commitment to austerity and high unemployment, as she had succeeded in convincing workers and employers that there would be no swift economic recovery. This had forced workers to take pay-cuts, while pushing employers into firing workers they might otherwise have kept on:

An economic downturn perceived as permanent should raise productivity, as least-efficient firms and workers are booted out of the productivity data … Until recent years, economic downturns were thought to be transient affairs, giving strong incentive to firms to hoard labour during the cyclical trough. Prime Minister Thatcher’s main accomplishment in this regard seems to have been to convince firms that high unemployment and slow growth will be present for the long haul.¹⁹

Sachs’s early work was thus devoted to returning capital to profitability through a variety of mechanisms, including the austerity and high unemployment deemed necessary to break the power of organized labour. This strategy has been central to the class politics of neoliberalism. Since the 1970s, the maintenance of capitalist profits in conditions of low economic growth has been achieved through the dismantling of the welfare state, the stagnation of real wages, and the weakening of labour unions.²⁰ This strategy lies at the heart of the spiralling inequality that has characterized global capitalism since the early 1980s, and that Sachs himself would condemn at Occupy Wall Street three decades later. By providing the economic justification for this class strategy, Sachs had already played a significant role in the history of neoliberalism. Somehow, in the space of a decade, the son of a tireless defender of workers’ rights had gone from reading Marx and marching with Cesar Chavez to fixating on organized labour as the enemy to be defeated in order to increase the profit margins of the capitalist class. This was already a peculiar and unfortunate state of affairs. But things were about to get much worse.

THE INVENTION OF SHOCK THERAPY

In 1985, at just thirty years of age, Jeffrey Sachs was established as a leading macroeconomist of the new free market orthodoxy. Then, suddenly, in his words, ‘my life changed’.²¹ Sachs was invited to attend a presentation at Harvard by a delegation from the Bolivian government concerning the hyper-inflation that was afflicting their country at the time. He disagreed with the delegation’s analysis, and recalls ‘walking to the blackboard with great confidence [and saying] “Here’s how it works”’.²² On the basis of his explanation, Sachs was invited to La Paz to advise the government on their economic reform programme. He accepted the invitation, arriving in Bolivia on 9 July 1985.

The doctrine that came to be known as shock therapy was forged through Sachs’s experience in Bolivia, but was only formalized in his later work on the post-communist transition. Before addressing the specificities of the Bolivian case, it is important to clarify the economic and political logic of shock therapy. According to Sachs, his advice to the Bolivians was based on Milton Friedman’s work on hyperinflation.²³ For Friedman, hyperinflation was less a crisis to be solved than an opportunity to be utilized, as a state of emergency in which radical free market reforms could be rapidly implemented. By justifying the massive reduction of state expenditures in terms of reducing the need to print money, a right-wing ideological doctrine could be presented as a pragmatic response to economic necessity. In 1975, Friedman and the ‘Chicago Boys’ used hyperinflation in Chile in precisely this way, as a means of legitimating an unprecedented neoliberal programme of privatization, trade liberalization, tax reform, deregulation of foreign investment, and fiscal and monetary austerity.²⁴

During his shock therapy period, Sachs praised Friedman for his ‘very clear message’, claiming that ‘his faith in markets, his constant insistence on proper monetary management – is far more accurate than fuzzy structuralist or pseudo-Keynesian arguments one hears a lot in the developing world’.²⁵ Friedman famously argued: ‘Only a crisis – actual or perceived – produces real change. When the crisis occurs, the actions that are taken depend on the ideas that are lying around.’²⁶ Sachs’s own argument for shock therapy was identical:

When is real politics the main push, and when do ideas really count? Most of the time in normal periods it’s the vested interests, it’s the special interests, it’s the normal politics that plays the role. But when things come apart, when societies are in crisis, when new choices have to be made, when the old structures no longer have legitimacy or no longer have the power, that’s when ideas can play a tremendous role.²⁷

Shock therapy was therefore both an economic and a political strategy. In economic terms it entailed the sudden and comprehensive implementation of a set of reforms designed to shock an economy out of crisis and into stability, through a rapid transition from state planning t...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Introduction: The Sachs Conundrum
• 1. The Rise of Dr Shock
• 2. Russia
• 3. The Magnificent Mr Aid
• 4. Development Dreamland
• 5. The Village That Sachs Built
• 6. The World Falls Apart
• Conclusion: The Neoliberal Neurosis
• Acknowledgements
• Notes