Consumer Debt

This past summer's subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn't afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.

Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings announcements alongside mentions of subprime woes.

First Citigroup, reporting a 57% decline in earnings, cited higher consumer credit costs and said it would put aside $2.24 billion in loan-loss reserves to cover future defaults.

In describing the situation to analysts, CFO Gary Crittenden said Citi's credit card holders were beginning to increase the balance on their cards or take cash advances on those cards for the first time - behavior that, in his experience (which includes seven years as CFO of American Express), can translate into future trouble. Citi said the change in loan losses was "inherent in the portfolio but not yet visible in delinquencies."

Then American Express said that it too was seeing "signs of stress" and would boost its loss reserves in its core U.S. card unit by 44%. Capital One, Bank of America, and Washington Mutual all said they are bracing for a 20% or higher increase in credit card losses over the near and medium term.

So are U.S. credit cards going to be the catalyst for the next seizing up of the global credit markets? It depends on whom you ask.

"We are in a heightened state of alert to monitor a potential domino effect," says Michael Mayo, Deutsche Bank's U.S. banking analyst.

Dennis Moroney, an analyst at TowerGroup, expects credit card delinquencies will rise as consumers, who have until now used home-equity lines of credit to pay off their cards, start ratcheting up higher card debt. When housing prices were rising, it was easy for consumers to tap the escalating values of their homes to keep borrowing. With the home-equity spigot turned off, over-leveraged consumers may have trouble keeping up with payments.

The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.

To be sure, there are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.

"This is absolutely not the next one to blow," says Meredith Whitney, banking analyst at CIBC. Christopher Marshall, CFO of Fifth Third Bancorp in Cincinnati, points out that the U.S. has a long history of credit card securitization, "so it's fairly well understood." The securitization of the subprime sector, by comparison, "got blurry, and people didn't focus on what it meant."

Credit agencies that monitor credit cards in the asset-backed securities market share that confidence. "The performance in the core consumer [asset-backed securities] sectors is expected to deteriorate modestly, but not enough to cause substantial downgrades," says Kevin Duignan, managing director at Fitch.

But credit card debt is different from subprime debt in another way: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of 13% in the third quarter, compared with a 2% drop in the previous quarter.

What's more, consumers and the people who market financial services to them may not have learned their lesson. Klaus-Peter Müller, CEO of Germany's Commerzbank, told Fortune he was stunned on a recent trip to the U.S. to see TV ads still aggressively touting no-questions-asked credit. In Germany he's calling for tighter standards.

"I'm speaking out on the ethical questions about consumer lending," he says.

If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.

It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic.

Boycott Diamonds

The English word “diamond” comes from the Greek αδάμας (adamas), meaning “invincible.” The mythical substance of “adamantine”—what Milton’s god bound Satan, and death itself, with—was at one point inspired by the hardness of diamonds. Diamond is the hardest material on earth, made of pure carbon packed into a crystalline structure so tightly that it becomes clear. This gives diamonds some very useful applications with optics, or diamond-edged blades that can cut through anything. What would likely surprise the average person most is to know that diamonds aren’t actually rare at all. Our cultural attitude towards diamonds, and even their supposed “rarity,” have little or nothing to do with the stone itself, and everything to do with one of the most vile corporations to ever afflict the human race—and its campaign to shape our very culture to its own ends.

Cecil John Rhodes, in many ways, epitomized the merciless European exploitation of the colonial era. He colonized Rhodesia, and named it for himself—and made a fortune by exploiting the rich resources of South Africa. He used his fortune to start the Rhodes Scholarship, largely in the hopes of putting the United States into the hands of philosopher-kings who would be wise enough to repent of their country’s ill-considered rebellion and rejoin the glorious British Empire, and once famously declared, “all of these stars… these vast worlds that remain out of reach. If I could, I would annex other planets.” He was a blatant racist who dedicated his life to expanding the empire, in order to serve the great destiny of the Anglo-Saxon race. In his time, the Boers in South Africa were setting up the colonial system of exploitation that would eventually be epitomized in the system of apartheid. Rhodes’ entrepreneurship was a major boon to that enterprise, and much of it was financed by the profits he made from the diamond mining activities he began when he bought a farm where diamonds were showing up. He named his company after the settlers who owned that farm: Nicolaas and Diedrick DeBeer.

In the mid-1890s, Rhodes founded the aptly-named Diamond Syndicate, which eventually morphed into the Central Selling Organization. As Rhodes was discovering in South Africa, diamonds are actually fairly common.

The diamond invention—the creation of the idea that diamonds are rare and valuable, and are essential signs of esteem—is a relatively recent development in the history of the diamond trade. Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value—and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become at best only semiprecious gems.

The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds. The instrument they created, in 1888, was called De Beers Consolidated Mines, Ltd., incorporated in South Africa. As De Beers took control of all aspects of the world diamond trade, it assumed many forms. In London, it operated under the innocuous name of the Diamond Trading Company. In Israel, it was known as “The Syndicate.” In Europe, it was called the “C.S.O.”—initials referring to the Central Selling Organization, which was an arm of the Diamond Trading Company. And in black Africa, it disguised its South African origins under subsidiaries with names like Diamond Development Corporation and Mining Services, Inc. At its height—for most of this century—it not only either directly owned or controlled all the diamond mines in southern Africa but also owned diamond trading companies in England, Portugal, Israel, Belgium, Holland, and Switzerland.

Nature had not provided the scarcity necessary to sell diamonds at such high prices, so Rhodes decided that an artificial scarcity was required.

De Beers has managed the remarkable feat of operating a 17th century economic model in a 21st century world. Fluctuations of supply and demand are not tolerated. Three floors beneath us are a series of vaults that contain the world’s largest stockpile of unpolished diamonds—the best estimates put it at half a billion dollars. To De Beers, they remain much more valuable right where they are. The continuing stability of the diamond industry depends on an artificial scarcity that De Beers has worked hard to create.

Without De Beers’ warehouses, the diamond industry would collapse overnight; if diamonds were fairly traded, their abundance would make them quite cheap indeed. That is why De Beers has put such efforts into buying up all the diamond mines it can find; not to sell them, but to lock them away to make sure than no one else is selling them.

The Syndicate got its first strong competition in the first decade of the 20th century, when new mines were discovered in South Africa and South West Africa (now Namibia). Ernest Oppenheimer’s Anglo-American Corp. began with those mines, and continued acquiring mines in the early 1920s. Oppenheimer bought a seat on the De Beers board in 1926, and became chairman in 1929. The Oppenheimer family still controls Anglo-American and De Beers today.

In the United States, De Beers operates primarily via “Sightholders” who purchase their diamonds from De Beers—thus remaining outside the purview of U.S. anti-trust laws. With the shifting of the post-colonial period, De Beers has adapted as well, but it has remained true to the ruthless, exploitative spirit of its founder. During apartheid, De Beers was one of the few multinational corporations that remained loyal to the South African government despite international pressure, supplying funds that helped the government maintain its programs of repression and torture on the native black majority. De Beers has made arrangements with African governments (as with Botswana’s “Debswana”), as well as rebel factions—and just as often, both. This practice, and De Beers’ artificially maintained high prices, made diamonds the currency of choice among warlords, with “blood diamonds” or “conflict diamonds” financing some of the most cruel atrocities ever committed in Africa. De Beers even played a role in helping to keep the nuclear arms race going.

Most spectacularly, after geologists in the Soviet Union came across a huge field of diamonds in the Siberian tundra in 1956, De Beers made an unprecedented offer: it would buy the entire run at a guaranteed price. The profits—estimated at $25 million a year—bolstered the Kremlin’s treasury and helped fund the buildup of nuclear arms. The Russian gems went into the vaults under Charterhouse Street. When the Soviet Union unraveled in 1990, De Beers went back to Moscow, offering the transitional government $1 billion in exchange for part of the nation’s stockpile of Siberian diamonds.

Through most of the 20th century, De Beers controlled something between 85% and 90% of the world’s diamond supply—Rockefeller’s Standard Oil and Gates’ Microsoft briefly flirted with such astonishing dominance, but De Beers maintained this strangle hold for a full century—making it the most dominant monopoly in history. But in 2000, Ernest Oppenheimer’s grandson, Nicky Oppenheimer, announced that De Beers would be relinquishing its monopoly. Many heralded it as the end of the De Beers’ unprecedented monopoly, but others recognized a reorganization to avoid more stringent European Union laws against monopolies.

Why would a company voluntarily abandon the hegemony it had held for more than 100 years? This is the question I set out to answer over three months of reporting this winter. I traveled through the company’s mining operations in Africa; toured the diamond-laden sorting rooms of its sales and marketing hub in London; and interviewed more than a dozen senior De Beers executives and innumerable other players in the secretive diamond business. And gradually I realized that I needed to ask an altogether different question: Was De Beers really changing at all? Or had it crafted a tale designed to seduce and appease worried antitrust regulators in the U.S. and Europe–a tale that concealed the fact that the company’s new initiative might make it as dominant in the future as it ever was?

My suspicions were confirmed by an announcement on Feb. 1, a shock that caught the industry by surprise: Anglo American PLC, the South African mining giant that is also controlled by the Oppenheimers, was in talks to buy De Beers. …

When Ernest took control of De Beers’ board in 1929, he initiated a cross-holding arrangement that has since grown immensely complicated. Currently De Beers owns 37% of Anglo’s stock, while Anglo holds 33% of De Beers–a setup stock analysts say distorts the earnings of both companies. The Oppenheimer family controls a large percentage of each company’s shares. So even if a buyout goes through, with Anglo American CEO Anthony Trahar as nominal chief of the company, the Oppenheimer family will retain a controlling influence–especially over the diamond business.

The so-called “Supplier of Choice” program may get around anti-trust laws in the European Union, and presents just enough of a legal fiction to make DeBeers no longer technically a monopoly, but the genius of the program is that it actually increases DeBeers’ control of the diamond industry.

From 2002 through the beginning of 2005, DeBeers has reduced the number of sightholders from approximately 120 to 80, as a part of it’s “Supplier of Choice” program. Under this program, DeBeers will try to consolidate the diamond market from rough production through retail, eliminating many of the current participants in diamond production and sales. The impact on the diamond cutting industry and jewelry retailers (among others involved in the diamond trade) could be enormous. Does this mean that the price of diamonds will come down? Not on your life! It means that DeBeers and it’s sightholders will probably make a greater percentage of the total take from the diamond market than it currently does.

Even so, ruthless domination of the market by any means necessary and global price-fixing were only one half of what De Beers needed: the other half was a cultural engineering project on the grandest scale, to reinvent the Western notion of love in its own consumerist image, and to mold an entire culture to suit its needs. The De Beers’ “A Diamond is Forever” marketing campaign is one of the most astonishingly successful examples of demand creation in history.

The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever—”forever” in the sense that they should never be resold.

The techniques used by De Beers are of course quite common now, but De Beers was one of the pioneers in the new field of “public relations,” as Edward Bernays called it, noting that “propaganda” had taken on a negative connotation (which he disagreed with). In his famous book, Propaganda, Bernays wrote, “If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits.” He called this scientific technique of opinion-molding the “engineering of consent.” Bernays was the nephew of Sigmund Freud, and though the psychoanalytic approach Freud advocated has largely fallen out of favor for the theraputic ends he intended it, it has proven fundamental—thanks to Bernays—to the manipulation of mass psychology via marketing. Bernays relied heavily on Freud’s theories, and considered his own work as the application of Freudian psychology to large groups. In fact, much of Freud’s renown in the United States is due to Bernays’ promotion—before him, Freud’s work was not even translated into English. In Propaganda, Bernays not only justified such manipulation, but made the argument that such deceptions were essential to the maintenance of orderly society.
The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our world. … We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. … In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons … who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.

To suggest Bernays’ power, despite the fact that he is almost completely unknown to most Americans, one need only list some of the common tropes he introduced, which we normally take for granted as simply part of American culture: the importance of Sigmund Freud already mentioned, “bacon and eggs,” the cigarette as a symbol of rebellion and independence, the automobile as a symbol of freedom, and even the practice of presidents meeting with entertainment celebrities were all first introduced by Edward Bernays. Bernays was also aware of the formative role his work played for the Nazi party.

Bernays revolutionized the concept of the commercial, from simply informing one’s audience that a product exists, to manipulating subconscious desires to link deep-seated emotional needs unmet by civilization, to the consumption of goods. Many saw through to the madness of such an idea; then Supreme Court Justice Felix Frankfurter wrote to FDR to warn him about Bernays, calling him and Ivy Lee “professional poisoners of the public mind, exploiters of foolishness, fanaticism and self-interest.” Nonetheless, the economic potential of such large-scale manipulation of the public’s emotions was too great to pass up.

Though the first diamond engagement ring was given to Mary of Burgundy in 1477, up until the emergence of De Beers, engagement rings were adorned with any number of gems. It was De Beers’ marketing campaign that created the diamond engagement ring as we know it today.

Oppenheimer suggested to Lauck that his agency prepare a plan for creating a new image for diamonds among Americans. He assured Lauck that De Beers had not called on any other American advertising agency with this proposal, and that if the plan met with his father’s approval, N. W. Ayer would be the exclusive agents for the placement of newspaper and radio advertisements in the United States. Oppenheimer agreed to underwrite the costs of the research necessary for developing the campaign. Lauck instantly accepted the offer.

In their subsequent investigation of the American diamond market, the staff of N. W. Ayer found that since the end of World War I, in 1919, the total amount of diamonds sold in America, measured in carats, had declined by 50 percent; at the same time, the quality of the diamonds, measured in dollar value, had declined by nearly 100 percent. An Ayer memo concluded that the depressed state of the market for diamonds was “the result of the economy, changes in social attitudes and the promotion of competitive luxuries.”

Although it could do little about the state of the economy, N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the “social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of “competitive luxuries.” Specifically, the Ayer study stressed the need to strengthen the association in the public’s mind of diamonds with romance. Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

Since the Ayer plan to romanticize diamonds required subtly altering the public’s picture of the way a man courts—and wins—a woman, the advertising agency strongly suggested exploiting the relatively new medium of motion pictures. Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. Fashion designers would talk on radio programs about the “trend towards diamonds” that Ayer planned to start. The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds. An Ayer memo said, “Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this British industry by wearing diamonds rather than other jewels.” Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer.

DeBeers even worked to promote the notion that the engagement ring should be presented as a surprise—specifically to ensure that there would be no discussion, and no chance for the bride-to-be to say that spending $10,000 or more is unnecessary. Of course, as De Beers’ inventory changed, they needed to update the criteria of what made a diamond valuable—since its value had nothing to do with the stone itself, and everything to do with De Beers’ extensive cultural engineering project.

In the mid-1950s De Beers was overwhelmed by a flood of small diamonds pouring out of recently discovered mines in the Soviet Union. After nearly a decade and a half of convincing America of the importance of larger stones, suddenly the company needed to create a virtue out of the previously disparaged small diamonds.

Where previously DeBeers had convinced people to buy bigger diamonds, the influx of smaller stones from Russia in the 1950s (the Siberian mines that, you’ll recall, helped keep the nuclear arms race going) led DeBeers to start emphasizing “the four C’s” that are still hoisted by jewelers as the primary means of judging a diamond’s worth. Besides its size (carat), DeBeers also promoted cut, clarity and color, in order to convince the public that a smaller diamond (like their diamonds from Russia) could be just as valuable as the larger diamonds they’d previously bought.

In so doing, DeBeers created the perfect currency for every warlord and rebel faction in Africa: valuable, small enough to smuggle (as the gun runner in the movie Lord of War tells the Liberian president based on Charles Taylor, “I’ll take the stones—I don’t think I can fit a tree trunk in my brief case), and not only something that is actually quite common in nature, but is found most easily in Africa itself. “Blood diamonds” first emerged in Angola’s civil war, but have been used in Sierra Leone and Liberia, the Ivory Coast, and the Congo by such butchers as Charles Taylor. In Africa, diamonds are no longer simply financing wars; they are the cause of war themselves.

We must be clear about who is involved. Barbaric, drug-crazed and dragooned by the warlords as they may be, armed and desperate young men could not have brought Unamsil to its knees all on their own. The UN has been ensnared by something different, something newer and more insidious: by a struggle between two rival groups supported by businessmen intent on gaining control of mineral wealth. By refusing to declare an embargo on diamonds from Sierra Leone, or indeed the economic exclusion zone that many experts have been calling for, the Security Council and UN Secretary General have left the field wide open for a mafia-like conflict in which their soldiers have become pawns in the game.

As media attention has grown on the issue of blood diamonds—including a Leonardo di Caprio movie being released this weekend—DeBeers has grown genuinely frightened. After all, with little intrinsic value, the diamond industry is almost entirely a carefully constructed cultural delusion that DeBeers maintains through marketing alone. Comemmorating one’s love with the currency used to pay for atrocities is the kind of revelation that could threaten DeBeers’ house of cards, so they have introduced a number of programs to “prove” to customers that their diamonds were never part of a gun runner’s payment.

While the company seems to be winning this particular PR battle, its uneasy effort to tiptoe through the Angolan minefield exemplifies the problem De Beers faces as it simultaneously tries to open up and to wield the monopolistic powers of the old De Beers. Throughout my trip to Africa, I was confronted with evidence of this schism. Even as the company openly exhibited its expansion plans and granted access to its mining operations, it displayed the secrecy and stifling control for which the old De Beers was famous. Every minute of every day was rigidly scheduled. There was little room to escape, to veer from the confines of De Beers’ yellow-brick road and seek the company behind the curtain.

To counter the release of the movie Blood Diamond, DeBeers has launched a campaign to tout the “Kimberley Process,” a certification program they use to prove that a given diamond has come directly from the mine. Unfortunately, the “Process” is little more than a rubber stamp. While DeBeers has put a great deal of effort into pacifying the conscience of the public, they have done nothing to address the issue itself.

In July 2000, after millions of deaths fueled by diamonds, Global Witness created enormous pressure on the global diamond industry to force their participation with other NGOs, governments, and the UN to create a policy toward “conflict diamonds" called the Kimberley Process Certification System. This system was formally adopted in 2003 to decrease the number of “conflict diamonds" entering the legitimate diamond supply chain. Participating countries belonging to the Kimberley Process claim that rough diamonds originating within their borders are not directly used to finance rebel militias. There is little to no oversight for these “recognized" governments, and often little incentive for governments to claim otherwise. Some estimates say that up to 30% of the rough output of some diamond mines is smuggled out illegally.

The diamond industry also adopted a voluntary System of Warranties with no independent monitoring to claim that their diamonds do not originate from conflicts. These warranties are rarely kept - in a survey conducted in February 2006, Amnesty International found that only 18% of retailers had a policy toward ensuring their diamonds were compliant with the Kimberley Process.

Of course, even if the “Kimberley Process” were effective at its stated aims, it would only ensure that a specific diamond was not actually part of a warlord’s cache at some previous point in its history. It would still do nothing to change the fact that the purchase of the diamond supports the cultural construction of the diamond that DeBeers has so carefully created. Purchasing a diamond—any diamond—adds to the social pressure and prestige that DeBeers created from whole cloth, and in so doing, any diamond purchase increases the value of all diamonds.

Scarcity, Poverty, Apocalypse

DM: I'd like to talk with you about "scarcity" and "catastrophe". On the talk shows there is even discussion of an impending collapse of society due to dwindling oil supply. The concepts of scarcity and collapse are hardly new, and obviously the invasion of Iraq brought the issue of oil into sharp focus. Can we start with the sacred cow of scarcity?

IB: Sure. With respect to oil, we should begin with the observation that the general problem for the petro-barons has always been glut, or to put it another way, how to keep oil scarce. They've done a pretty good job, although all monopolies have to be measured against De Beers, who have the corner on diamonds. They are the world's masters at constructing scarcity, in this case, of crystalline carbon, which is actually rather common in the earth's crust. So one thing to make clear is that the invasion and occupation of Iraq is not about absolute scarcity. For sure, the history of oil is complex, and the fluctuations in the supply of oil have an extraordinarily complicated relation to price, demand, and reserves. But in order to understand scarcity - whether of oil in particular or of commodities under capitalism in general - you have to look at the discourses of scarcity and of poverty. And that means you have to look at the historical moment of the institutionalizing of economics – defined in the textbooks as "the study of choice under scarcity" – as the dominant way of talking about the world, and the relation of these to capitalist modernity. And that story is indeed interesting.

In order to understand "scarcity" as a sacred cow, we have to go back to the Reverend Thomas Malthus. Because, no question, we are living in a Malthusian world. By that I mean that Malthus' way of framing the issue of human welfare has triumphed. And I think it's especially important for the Left to understand this. Particularly those who got drawn into politics through concern about the environment, who count themselves as "green". Scratch an environmentalist and probably you'll find a Malthusian. What do I mean by that? What is it to be Malthusian? Well, it's to subscribe to the view that the fundamental problems humanity faces have their roots in the scarcity of the resources that sustain life, because the world is finite and we are exhausting those resources and also perhaps because we are polluting them. Notice how this mirrors the basic assumption of modern economics – choice under scarcity. In his notorious essay published in 1798, Malthus argued, or rather asserted, that population growth, especially of poor bastards, would inevitably outrun food supply, unless the propertyless were restrained from breeding. He advocated that poor people be crowded together in unhealthy housing, as a way of checking the growth of population. Remember, this is the world's very first economist we're talking about here.

And don't forget that Malthus was in his own time consciously devising a counter-revolutionary science of economics and demography: his essay was a response to a famous best-seller by the utopian anarchist William Godwin, husband of the feminist Mary Wollstonecraft and father of Mary Shelley who later wrote Frankenstein as a warning against the hubris of (male) science. Godwin had written An Enquiry Concerning Political Justice during the euphoric period after the storming of the Bastille in 1789 and the overthrow of the French monarchy. Godwin's optimistic, atheist, rationalism was born of the revolutionary events happening across the Channel – "Bliss was it in that dawn to be alive", in the indelible line of Wordsworth. But as the counter-revolution set in, Thomas Malthus felt emboldened to compose his Essay on the Principle of Population as an explicit response to Godwin's vision of an ample life for all. Malthus invented an "iron law of nature" intended, rhetorically, to put a damper on Godwin and the perfectibilians, and in practical political terms to discourage "idling" and illegitimacy and to cut away the existing welfare system which was a safety net for the poor.

DM: So help us understand Thomas Malthus.

IB: Malthus was born into a well-off family in late 18th century England, and although he was ordained in the Anglican Church, he becomes the world's first paid economist, in the service of the East India Company. The company started in 1600 with a charter from Elizabeth 1 to monopolize trade with Asia, and by Malthus' day agents of the company ruled India, Burma and Hong Kong for the British crown, so that no less than one fifth of the world's population was under its authority, backed by the company’s own armies, who fought under the English flag of St George. It's no coincidence that somebody in Malthus' position, at that time and place, would be involved in devising a science of "economics", and its associated discourses of "scarcity", "laissez faire", and "poverty". The English scene that Malthus is born into was in radical transition from a world of custom and common land to one based on the absolutization of private property, in which the actual producers of food are being cut off from the land as a means of livelihood. And that's a very specific move that the capitalists and landlords in parliament are making.

So here is the essential point: the people of England, I mean the commoners, in 1800 are being literally excluded by fences enclosing the common lands that had sustained them for centuries. They are living the new scarcity that is being produced around them.

This is the same process that is now ruthlessly in train around the globe under the sign of "structural adjustment" and "conditionalities" devised by the IMF and the World Bank, being applied to the global South. But it was first described as long ago as 1515 in a powerful essay by Thomas More called Utopia, because he saw it happening all around him in England five hundred years ago.

George Caffentzis, the philosopher of money, and his colleagues in the Midnight Notes Collective were the first, in the early 1980s, to develop the idea that the neoliberal project is, in its essence, a form of "new enclosures", taking the tactics of the English enclosures to a planetary level and creating this time a fully globalized proletariat.

Expropriation of the commons was, in other words, not a one-time event at the dawn of capitalism. And Malthus was the economist rationalizing and justifying the cutting off, or another way to put it is the rendering scarce, of the means of subsistence for the laboring poor, in the name of thrift and self-control and the efficiency of private property.

So the "dismal" science of economics is being born at the same time as this process of proletarianization is happening. It would be hard to exaggerate the role of Malthus and the way his assumptions are built not just into economics, but into a whole range of modern forms of knowledge, for example, biology, genetics, demography. These disciplines all bear the stamp of Malthus.

In the same way, it's no coincidence that the sixties counterculture, which was to some extent a gift economy and had a kind of primitivist strain, could inspire a book like Stone Age Economics, written by the anthropologist Marshall Sahlins to combat the projection of capitalist scarcity back onto all of human history. It's an interesting counter-myth, that conjures a neolithic world of abundance rather than scarcity. Nevertheless, if you look at the impulses behind the environmental movement of the sixties and events like Earth Day, or back-to-the-landers and their bible The Whole Earth Catalog, you will find the spectres of Malthus – scarcity, overpopulation, famine. The same goes for the Berkeley bumper-sticker "Live Simply, That Others May Simply Live." Or the countercultural manifesto for vegetarians, Diet For A Small Planet. Francis Moore Lappe's book was enormously popular in the 1970s, and it begins with a discussion about "reaching the very limits of the earth's capacity to produce food" and how a vegetarian diet was a way out of the "the earth's natural limitations".

DM: So how do you answer the question of carrying capacity? Are you saying that the earth's resources are infinite? That we're just going to go on and on and on?

IB: No, not at all. I want to make this very clear: I am not in any way saying that the earth's resources should be used up willy-nilly, that societies shouldn't concern themselves with how to live on the planet in the most sane and sustainable way possible. But it's always – historically – an empirical, local, question: How much water is available? How much grazing will a pasture allow? Who's encroaching? How much mast for the pigs or firewood is X entitled to? Will we have to send Y away to work in the city?

What I'm trying to say here is that the vulgar error made by modern Malthusians is to assume that the human story hasn't in fact been about dealing with this problem of the carrying capacity, if you want to put it that way, of particular patches of land. There's a word for it. It's called stinting. Commoners have "use-rights" - say, to pasture animals, to take fodder, to gather firewood, to harvest fruits and berries and nuts - but only if you live there, and only certain amounts, depending on the ecological, historical knowledge of the local community about what would stretch it too far. Action informed by local knowledge, typically, is not going to cause ecocide. I'm not saying ecological destruction hasn't occurred in the human past - the deforestation of the coastal areas around the Mediterranean sea is a classic case, caused by centuries of Imperial Roman overfarming - but it tends to be by non-locals and elites. Let's call it the state. The major culprit in modern times is capitalist farming in private hands.

Despite this reality, the blame is laid at the door of the world's commoners. Take for example Garrett Hardin's famous 1968 essay, "The tragedy of the commons", published in the journal Science. This was an enormously influential text by a Texan zoologist, based on no sociological research whatsoever, and in profound ignorance of the actual history of commoning. Hardin asserted that all common resources (such as pasture, a favorite example) will inevitably end in ruin because of over-exploitation by selfish individuals. Hardin's fable was taken up by the gathering forces of neo-liberal reaction in the 1970s, and his essay became the "scientific" foundation of World Bank and IMF policies, viz. enclosure of commons and privatization of public property. The plausibility of Hardin's Malthusian claims doesn’t survive a moment's scrutiny. Ask yourself - was the disaster of the Dust Bowl a tragedy of the commons or of capitalist agriculture under private ownership?

But the historical facts are irrelevant. The case is an ideological one, and Hardin was holding up a mirror to modern homo economicus. The message is clear: we must never treat the earth as a "common treasury". We must be ruthless and greedy or else we will perish.

Carrying capacity is now very hard to discuss in a context of extensive agriculture under a capitalist regime which by any accounting (by anyone other than a capitalist economist) is extremely inefficient. It is not well known, for example, that by a unilateral act of Congress the navy seized dozens of small islands around the world in the late 19th century to secure supplies of guano, in order to fertilize the US continental soil which was being ruthlessly depleted by the Western farmers. Today instead we are dependent on fossil fuels, and that too goes along with vast subsidies, price fixing, tax breaks, and hidden costs. What would the price of a gallon of gasoline be if you factored in the cost of the Sixth Fleet and all military bases around the world?

So there's no denying that capitalism is now threatening the basis of life on earth. Certainly that's true. But I refuse to cave in to Malthusian assumptions. Why is it not possible to imagine a reorganization of agriculture, and I don’t mean some new technofix from Monsanto. It will surely mean agrarian revolutions, though the content of those revolutions would be contested, to say the least. Marxists have always thrilled to the sight of really big tractors. They don't much like to hear about watersheds and foodmiles and small Kropotkinian communes. I will guess that among the non-negotiable requirements will be a transvaluation of soil (stripped, by the way, of any fascist metaphysic), along with a revolution in biology which will need to find new roots in microbial ecology, while at the same time reviving the disparaged arts of the naturalist.

DM: It seems that a lot of naturalists, by which I mean natural scientists, biologists, and such, tend to weigh in on these debates. They always appear to stand outside or above the realm of politics and economics. They are merely talking about Nature, of which humans are just a part. I'm thinking of Jared Diamond, and how popular he is at the moment.

IB:Yes, Diamond is another good example, a tropical ornithologist turned historian of the fate of human societies. He must be discussed alongside Garrett Hardin, as well as Paul "Population Bomb" Ehrlich and the entomologist E.O. Wilson – they all wrote hugely popular books. Crucially, all of these men see themselves as students of Charles Darwin, himself a brilliant naturalist. Darwin admitted that it was none other than Malthus the economist who provided the final, essential piece to Darwin's picture of the workings of Nature. He sat up one night, so the story goes, when he was reading Malthus' Essay on Population and he says that he realized "It's Malthus! That's how I can explain evolution!" Now evolution was not the invention of Darwin, actually his grandfather Erasmus had been a kind of evolutionist. What was new was his conception of the mechanism, the engine that drives evolution which leads to the formation of new species and the staggering variety of life-forms, in all their beauty and bizarreness. That's what he called "natural selection". The basic, Malthus-style, argument is simple: overpopulation creates competition for the resources available, and favors those offspring better adapted to exploit local conditions and resources. So this is the scenario on which economics and Darwin's account of natural history are founded – a kind of anti-Eden, with too many organisms locked in a war of all against all. So Darwin was projecting Malthus onto the realm of nature.

In Guns, Germs and Steel Jared Diamond rehearses, without knowing it, an old 18th century argument using the accidents of geography to explain, and in fact justify, the colonization of the planet by European powers. The only difference is that he clothes the narrative in anti-racist drag. His conclusion is a (neo)Malthusian message: life is a struggle for survival in a world of scarcity. True enough for millions for people, but not because of any "iron law of nature". Diamond's latest book, Collapse, rams home the same Malthusian message in a series of historical horror-stories of resource exhaustion and societal catastrophe.

One Long Catastrophe

DM: I'd like to talk about why so many Americans, steeped in Judeo-Christian ideology, are attracted to catastrophism in the first place. It seems to me the underlying ideology is ultimately passive, it takes the world out of our control because it's all going to end and there's nothing we can do. But things continue on, and that's a much more difficult problem to deal with.

I think here of Derrick Jensen, who seems to witness the first signs of extreme environmental destruction around him and therefore prophesies the end of civilization. Would that it were that simple! In fact, societies tend to survive catastrophe and persevere, though the result may not be pretty or comfortable.

IB: Again, no one is saying that we aren't facing serious, extremely grave problems. What we are questioning is the millenarianism, the endism, you could call it, which is only part of a general ideology of "catastrophism". This is the idea that the human drama is played out on a finite terrestrial stage. There is an abrupt beginning and an abrupt end, the whole affair lasting in one version just six thousand years. Darwin had to abandon his Christian catastrophism and for that he depended upon the great geologist Lyell who posited the very unbiblical idea of "deep time", and immensely slow, gradual, change. Since Darwin's time, for a hundred a fifty years or so, the predominant view in science has been gradualism.

The politics of gradualism are very important here. Conservative in many ways, and certainly non-revolutionary. a Darwinian world is a natural meritocracy, in which of course only the deserving survive. Perhaps you can see why secularizing Victorian gentlemen – imperialists, really – would believe that competition produces progress and the survival of the superior races of animals and, of course, men.

So for more than a hundred years the earth sciences tended to discount catastrophes, but towards the end of the 20th century, catastrophism begins coming back, big time. Let's call it neo-catastrophism. Part of the explanation is no doubt due to the rising political power of apocalyptic Christians and evangelicals in the United States. But at least as important, in my view, is the catastrophe of Hiroshima and Nagasaki, and the building of a weapon that scientists began to believe could produce the end of everything. Omnicide.

I would say there's been half a century of preparation for what is now a full-blown ideological sea change, from a slow, gradual view of the world to a universe of large scale, rapid changes that shape everything.

DM: But don't both make a certain sense? Gradualism and catastrophism? Long, slow change and rapid dramatic change?

IB: Of course it's both! Both are true, but I'm talking about ideology here. For sure, when you're trying to understand the natural history of earth, you have to have consider sudden violent events as well as wind erosion.

DM: Asteroids hit the planet every once in a while?

IB: Just so. Take the major extinction event at the K/T, the Cretaceous-Tertiary, boundary. Most in the field of earth science now believe there was an impact in the Yucatan 65 million years ago which doomed the dinosaurs, and produced a kind of nuclear winter effect.

DM: And produced the Gulf of Mexico?

IB: And a tsunami which was maybe a mile and a half high. An unimaginably large event. This is not so appealing to the settled Victorian imagination of Darwin, who preferred to contemplate the action of water, and the slow scrutiny of a Malthusian god, selecting out the fitter organisms. Now, as I've said, I take it that we have to investigate the world and our condition, and our history, by examining the reality of catastrophes and extinctions together with those gradualist principles also being at work at the same time.

But one question we must ask is: Why are we so obsessed with catastrophe and "endism" right now?

DM: I propose that it is a symptom of a state in which people in the First World, in the global North, are finally seeing some of the dire results of five centuries of capitalist exploitation. The past five hundred years have seen cataclysmic disasters like famines, plagues, etc. all over the Third World. Now the denizens of the overdeveloped countries are seeing oil wars, which of course are nothing new, and mass extinctions, nothing new either. But it is all causing folks like Jensen to claim that civilization is about to end.

It seems like a book that helps us to understand this is Mike Davis's Late Victorian Holocausts. Prior to that period there had been famine, but nothing on the scale of what happened in the 19th century, in previously healthy societies. The famines in India, and the famines in Africa, were produced by British colonialism. And the landscape there looked like the Apocalypse: Plague, War, Death...

IB: That's a really important point. And Amartya Sen, the sociologist of famine, comes to same conclusion from a different angle. Sen's striking claim is that you don't get famine, really, where there's "democratic" entitlement to food. When you examine starvation in 19th India and Ireland, yes, they have to do more with the history of colonialism. It is also helpful in thinking about contemporary "natural disasters", so-called – I'm thinking about the huge loss of life in earthquakes in the South, and the tsunami that drowned so many Achenese, or closer to home, to contrast post-Katrina New Orleans with the firestorms of Malibu, where state subsidies rountinely rebuild the houses of Hollywood executives.

So what we're saying here is: it's important to notice the ideological move that naturalizes events which are the result of human decisions. It turns disasters that have as much to do with human agency and decision into natural and inevitable events.

DM: The problem is that people confuse states with peoples, empires with humanity. Capitalism is poisoning the earth, no one is disputing that, but the ecological Malthusians see this and claim that the species as a whole is destroying the earth.

IB: Well, I can't say it too clearly. In my critique of scarcity, I'm not saying that there isn't scarcity. But we have to understand why and how scarcity is produced, and it's crucial, I think, to do the work of unpacking the ideology behind scarcity and neo-catastrophism. For one thing, it's interesting to ask: "Why all this talk of scarcity and collapse now?" After all, catastrophes are a permanent feature of history. So when you hear someone say, "The world's food supply is going to run out in such and such a year", well, excuse me! Forty thousand children die each day from the effects of malnutrition. Or perhaps I should say – from the causes of malnutrition. For these souls it's already too late. And there are millions of people - the so-called precariat - for whom catastrophe is always looming. This isn't the future we're talking about. It's tonight, it's happening right now. So it seems a bit naive for Northern environmentalists to be proclaiming apocalypse at this point.

In other words, if we look at the history of the world under five hundred years of capitalism, we should be talking catastrophe. Of course we should. It's been one long catastrophe. But we should refuse to do so in Malthusian terms, blaming the state of affairs on overpopulation, poverty, or lack of restraint in the slums of the world. And we should be aware that catastrophism and apocalypse talk are especially congenial to fundamentalists.

DM: Let's talk about how all of this relates to intervention, by which I mean the perceived need for the West to come to the rescue, with food and medicines, of the starving people of the world, particularly Africa. I think here of the recent calls for international aid to Darfur. It's always a call for intervention very late in the game, with no analysis of the systems that got us here. Isn't Africa as a continent still a net exporter of food, to this day?

IB: Indeed it is. In the global division of labor, Africa's role is to be a source of raw materials, mineral and vegetable; value is added elsewhere. It is true there are a few high value cash crops; for instance, jet airliners full of refrigerated cut flowers fly out of Harare every day bound for Europe, while millions of food-insecure Zimbabweans go to bed hungry. You're right, of course – intervention happens way too far downstream. It only confirms Africa as a hopeless basket case.

DM: And this same tone, this same kind of call, we now hear coming from Al Gore and company, for the world to "do something" about climate change. Again, we must do something, anything, except of course address the causes of what got us here in the first place!

I have an idea to help with climate change: let's start with a global moratorium on highway construction. If this winds up hurting any local economies, Toyota and British Petroleum will gladly pay the costs, as they want to help out with the challenge to stop global warming, right?

IB: Quite typically, BP has just offered a half billion dollars over the next decade to the University of California and the Lawrence Berkeley Laboratory (whose raison d'etre is to design nuclear weapons) to develop GM crops to make alcohol to replace fossil fuel. At one stroke this is supposed to combat global warming and to address the purported scarcity of oil.

What is so poignant is that things could be otherwise. We don't in fact live in a world of Malthusian scarcity. Far from it. Even Malthus himself acknowledged this when he spoke of "nature's mighty feast". And yet the history of modernity is the history of enclosure, of the cutting off of people from access to land, to the common treasury and to the fruits of our own labour. Excluded by fire and sword and now "structural adjustment". Everywhere you look, there nothing much natural about it, this kind of scarcity. It's a story of artifice and force. No wonder the fables offered us by modernity's clerisy are the Prisoner's Dilemma and the Tragedy of the Commons. The premises of the science of economics are a disgrace, and so are all the proliferating offspring of Malthus. Our first task is to kill these sacred cows of capitalist modernity.

The Shock Doctrine

One of those who saw opportunity in the floodwaters of New Orleans was the late Milton Friedman, grand guru of unfettered capitalism and credited with writing the rulebook for the contemporary, hyper-mobile global economy. Ninety-three years old and in failing health, "Uncle Miltie", as he was known to his followers, found the strength to write an op-ed for the Wall Street Journal three months after the levees broke. "Most New Orleans schools are in ruins," Friedman observed, "as are the homes of the children who have attended them. The children are now scattered all over the country. This is a tragedy. It is also an opportunity."

Friedman's radical idea was that instead of spending a portion of the billions of dollars in reconstruction money on rebuilding and improving New Orleans' existing public school system, the government should provide families with vouchers, which they could spend at private institutions.

In sharp contrast to the glacial pace with which the levees were repaired and the electricity grid brought back online, the auctioning-off of New Orleans' school system took place with military speed and precision. Within 19 months, with most of the city's poor residents still in exile, New Orleans' public school system had been almost completely replaced by privately run charter schools.

The Friedmanite American Enterprise Institute enthused that "Katrina accomplished in a day ... what Louisiana school reformers couldn't do after years of trying". Public school teachers, meanwhile, were calling Friedman's plan "an educational land grab". I call these orchestrated raids on the public sphere in the wake of catastrophic events, combined with the treatment of disasters as exciting market opportunities, "disaster capitalism".

Privatising the school system of a mid-size American city may seem a modest preoccupation for the man hailed as the most influential economist of the past half century. Yet his determination to exploit the crisis in New Orleans to advance a fundamentalist version of capitalism was also an oddly fitting farewell. For more than three decades, Friedman and his powerful followers had been perfecting this very strategy: waiting for a major crisis, then selling off pieces of the state to private players while citizens were still reeling from the shock.

In one of his most influential essays, Friedman articulated contemporary capitalism's core tactical nostrum, what I have come to understand as "the shock doctrine". He observed that "only a crisis - actual or perceived - produces real change". When that crisis occurs, the actions taken depend on the ideas that are lying around. Some people stockpile canned goods and water in preparation for major disasters; Friedmanites stockpile free-market ideas. And once a crisis has struck, the University of Chicago professor was convinced that it was crucial to act swiftly, to impose rapid and irreversible change before the crisis-racked society slipped back into the "tyranny of the status quo". A variation on Machiavelli's advice that "injuries" should be inflicted "all at once", this is one of Friedman's most lasting legacies.

Friedman first learned how to exploit a shock or crisis in the mid-70s, when he advised the dictator General Augusto Pinochet. Not only were Chileans in a state of shock after Pinochet's violent coup, but the country was also traumatised by hyperinflation. Friedman advised Pinochet to impose a rapid-fire transformation of the economy - tax cuts, free trade, privatised services, cuts to social spending and deregulation.

It was the most extreme capitalist makeover ever attempted anywhere, and it became known as a "Chicago School" revolution, as so many of Pinochet's economists had studied under Friedman there. Friedman coined a phrase for this painful tactic: economic "shock treatment". In the decades since, whenever governments have imposed sweeping free-market programs, the all-at-once shock treatment, or "shock therapy", has been the method of choice.

I started researching the free market's dependence on the power of shock four years ago, during the early days of the occupation of Iraq. I reported from Baghdad on Washington's failed attempts to follow "shock and awe" with shock therapy - mass privatisation, complete free trade, a 15% flat tax, a dramatically downsized government. Afterwards I travelled to Sri Lanka, several months after the devastating 2004 tsunami, and witnessed another version of the same manoeuvre: foreign investors and international lenders had teamed up to use the atmosphere of panic to hand the entire beautiful coastline over to entrepreneurs who quickly built large resorts, blocking hundreds of thousands of fishing people from rebuilding their villages. By the time Hurricane Katrina hit New Orleans, it was clear that this was now the preferred method of advancing corporate goals: using moments of collective trauma to engage in radical social and economic engineering.

Most people who survive a disaster want the opposite of a clean slate: they want to salvage whatever they can and begin repairing what was not destroyed. "When I rebuild the city I feel like I'm rebuilding myself," said Cassandra Andrews, a resident of New Orleans' heavily damaged Lower Ninth Ward, as she cleared away debris after the storm. But disaster capitalists have no interest in repairing what once was. In Iraq, Sri Lanka and New Orleans, the process deceptively called "reconstruction" began with finishing the job of the original disaster by erasing what was left of the public sphere.

When I began this research into the intersection between super-profits and mega-disasters, I thought I was witnessing a fundamental change in the way the drive to "liberate" markets was advancing around the world. Having been part of the movement against ballooning corporate power that made its global debut in Seattle in 1999, I was accustomed to seeing business-friendly policies imposed through arm-twisting at WTO summits, or as the conditions attached to loans from the IMF.

As I dug deeper into the history of how this market model had swept the globe, I discovered that the idea of exploiting crisis and disaster has been the modus operandi of Friedman's movement from the very beginning - this fundamentalist form of capitalism has always needed disasters to advance. What was happening in Iraq and New Orleans was not a post-September 11 invention. Rather, these bold experiments in crisis exploitation were the culmination of three decades of strict adherence to the shock doctrine.

Seen through the lens of this doctrine, the past 35 years look very different. Some of the most infamous human rights violations of this era, which have tended to be viewed as sadistic acts carried out by anti-democratic regimes, were in fact either committed with the intent of terrorising the public or actively harnessed to prepare the ground for radical free-market "reforms". In China in 1989, it was the shock of the Tiananmen Square massacre and the arrests of tens of thousands that freed the Communist party to convert much of the country into a sprawling export zone, staffed with workers too terrified to demand their rights. The Falklands war in 1982 served a similar purpose for Margaret Thatcher: the disorder resulting from the war allowed her to crush the striking miners and to launch the first privatisation frenzy in a western democracy.

The bottom line is that, for economic shock therapy to be applied without restraint, some sort of additional collective trauma has always been required. Friedman's economic model is capable of being partially imposed under democracy - the US under Reagan being the best example - but for the vision to be implemented in its complete form, authoritarian or quasi-authoritarian conditions are required.

Until recently, these conditions did not exist in the US. What happened on September 11 2001 is that an ideology hatched in American universities and fortified in Washington institutions finally had its chance to come home. The Bush administration, packed with Friedman's disciples, seized upon the fear generated to launch the "war on terror" and to ensure that it is an almost completely for-profit venture, a booming new industry that has breathed new life into the faltering US economy. Best understood as a "disaster capitalism complex", it is a global war fought on every level by private companies whose involvement is paid for with public money, with the unending mandate of protecting the US homeland in perpetuity while eliminating all "evil" abroad.

In a few short years, the complex has already expanded its market reach from fighting terrorism to international peacekeeping, to municipal policing, to responding to increasingly frequent natural disasters. The ultimate goal for the corporations at the centre of the complex is to bring the model of for-profit government, which advances so rapidly in extraordinary circumstances, into the ordinary functioning of the state - in effect, to privatise the government.

In scale, the disaster capitalism complex is on a par with the "emerging market" and IT booms of the 90s. It is dominated by US firms, but is global, with British companies bringing their experience in security cameras, Israeli firms their expertise in building hi-tech fences and walls. Combined with soaring insurance industry profits as well as super profits for the oil industry, the disaster economy may well have saved the world market from the full-blown recession it was facing on the eve of 9/11.

In the torrent of words written in eulogy to Milton Friedman, the role of shocks and crises to advance his world view received barely a mention. Instead, the economist's passing, in November 2006, provided an occasion for a retelling of the official story of how his brand of radical capitalism became government orthodoxy in almost every corner of the globe. It is a fairytale history, scrubbed clean of the violence so intimately entwined with this crusade.

It is time for this to change. Since the collapse of the Soviet Union, there has been a powerful reckoning with the crimes committed in the name of communism. But what of the crusade to liberate world markets?

The desire for godlike powers of creation is precisely why free-market ideologues are so drawn to crises and disasters. Non-apocalyptic reality is simply not hospitable to their ambitions. For 35 years, what has animated Friedman's counter-revolution is an attraction to a kind of freedom available only in times of cataclysmic change - when people, with their stubborn habits and insistent demands, are blasted out of the way. Believers in the shock doctrine are convinced that only a great rupture - a flood, a war, a terrorist attack - can generate the kind of vast, clean canvases they crave. It is in these malleable moments, when we are psychologically unmoored and physically uprooted, that these artists of the real plunge in their hands and begin their work of remaking the world.

Torture: the other shock treatment

From Chile to China to Iraq, torture has been a silent partner in the global free-market crusade. Chile's coup featured three distinct forms of shock, a recipe that would re-emerge three decades later in Iraq. The shock of the coup prepared the ground for economic shock therapy; the shock of the torture chamber terrorized anyone thinking of standing in the way of the economic shocks.

But torture is more than a tool used to enforce unwanted policies on rebellious peoples; it is also a metaphor of the shock doctrine's underlying logic. Torture, or in intelligence parlance, "coercive interrogation", is a set of techniques developed by scientists and designed to put prisoners into a state of deep disorientation.

Declassified manuals explain how to break "resistant sources": create violent ruptures between prisoners and their ability to make sense of the world around them. First, the senses are starved (with hoods, earplugs, shackles), then the body is bombarded with overwhelming stimulation (strobe lights, blaring music, beatings). The goal of this "softening-up" stage is to provoke a kind of hurricane in the mind, and it is in that state of shock that most prisoners give their interrogators whatever they want.

The shock doctrine mimics this process precisely. The original disaster - the coup, the terrorist attack, the market meltdown - puts the entire population into a state of collective shock. The falling bombs, the bursts of terror, the pounding winds serve to soften up whole societies. Like the terrorised prisoner who gives up the names of comrades and renounces his faith, shocked societies often give up things they would otherwise fiercely protect.