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This is the second of a three-part interview with Institute Professor Noam A. Chomsky, conducted in early September by Subrata Ghoshroy, a researcher in the Science, Technology, and Global Security Working Group at MIT. In this part, Ghoshroy and Chomsky discussed the development of the modern tech economy, the current economic crisis, and the power of U.S. propaganda.

Another version of this interview was previously published at Alternet.org.

Noam Chomsky:The New York Times happened to have an article by its economic correspondent in its magazine section [in August] about Obama’s economic programs. He talked about Reagan as the model of passionate commitment to free markets and reduction of the role of the state, and so on.

Where are these people? Reagan was the most protectionist president in post war American history. In fact, more protectionist than all others combined. He virtually doubled protective barriers. He brought in the Pentagon to develop the “factory of the future” to teach backward American management how to catch up on the Japanese lead in production. SEMATECH [“Semiconductor Manufacturing Technology”] was formed.

If it was not for Reagan’s protectionism and calling in of state power, we would not have a steel industry, or an automobile industry, or a semi-conductor industry or whatever they protected. They reindustrialized America by protectionism and state intervention.

All of this is washed away by propaganda as though it never happened. It is very interesting to look at a place like MIT which was right in the center of these developments. My department — you are teaching a course in the Military Industrial Complex — my department is an example of it.

I came here in the mid-50s. I don’t know the difference between a radio and a tape recorder, but I was in the electronics lab. I was perhaps the one person who refused to get clearance on principle. Not that it made any difference; everything was open anyway.

The electronics lab, along with the closely connected Lincoln Labs, was just developing the basis of the modern high tech economy. In those days, the computer was the size of this set of offices and vacuum tubes were blowing all over the place [with] computer printouts, paper running everywhere.

By the time they finally got computers down to the size of a marketable mainframe, some of the directors of the project pulled out and formed DEC [Digital Equipment Corporation], the first main frame producer.

IBM was in there at government expense learning how to move from punch cards to electronic computers. By the early l960s IBM was capable of producing its own computers, but no one could buy them. They were too expensive. So they were bought by the National Security Agency.

Bell Labs did develop transistors. That is about the only example you can think of a significant part of the high tech system which came out of private enterprise. But that is a joke too!

Bell Labs were able to run a great laboratory because they had a monopoly, so they could use monopoly pricing powers to set up a great laboratory. They worked on technology. Their transistor producer was Western Electric, who could not sell them on the market; they were too expensive. So the government bought about 100 percent of advanced transistors.

Finally, of course, all of this gets to the point where you can market them privately. It was not until the l980s after 30 years of development essentially in the state sector that these things became marketable commodities and Bill Gates could get rich.

The Internet was the same thing. I was here when they were starting to work on the Internet. It was not until l995 that it was privatized, after 30 years. If you look at the funding at MIT, in the l950s and l960s, it was almost entirely Pentagon. For a very simple reason, the cutting edge of the economy was electronics based.

A good cover for developing an electronics-based economy was the Pentagon. You sort of frighten people into thinking the Russians are coming, so they pay their taxes and their children and grandchildren have computers.

Through the 70s and 80s funding has been shifting to NIH. Why? Because the cutting edge of the economy is becoming biology-based. So, therefore, the state sector is shifting its priorities to developing biology-based industries.

In the meantime, all of this is going on with accolades to the free market. You don’t know whether to laugh or cry.

The point is, to get back to the new international economic order: it was a serious proposal which was immediately kicked out the window and UNCTAD was reduced to a data collecting agency with no policy initiatives and the new information order was destroyed, along with UNESCO.

What we had were the neo-liberal programs rammed down the throats of the poor. Although the rich did not accept them, and to the extent that they do accept them, it is harmful to them too.

This went along with the great shift to the liberalization of finance. It was a disaster in the making all along, serious economists have been pointing out since the early 70s that the freeing up of financial capital flows is just a disaster in the making, with in fact periodic crises.

Also, Reagan the great free marketer carried out one of the biggest bailouts in American history when he bailed out [and virtually nationalized] a major bank.

Subrata Ghoshroy: This was the Latin American crisis? Brazil?

NC: This was before that. This was Continental Illinois. Later they had the savings and loan crisis; Citibank was overexposed in Latin America. The federal government has to continually step in to insure that the financial institutions that it is letting run wild survive.

SG: Do you see any special characteristics to this crisis?

NC: This is apparently considerably worse, for one thing, because no one seems to understand what is really going on. There was clearly a housing bubble and some of the better, more serious economists began writing about it a couple of years ago.

So Dean Baker, for example, has been regularly pointing out that housing prices are completely unsustainable. Greenspan was saying, “Don’t worry about it.” It is the Greenspan crisis. It has turned into a crisis for the entire credit industry. And a major one.

I don’t think that the banks and the hedge funds even understand the instruments that they are using, but they are very delicate and they could crash. I presume that the financial institutions are strong enough to be able to weather it somehow, but no one really knows. Just like no one knows whether China, Japan and Dubai and Singapore will continue to keep what from their point of view are poor investments in the U.S. economy, treasury securities, etc., or whether they will diversify.

If they diversify, what happens to the U.S. economy? The U.S. has become a low production, high consumption economy. What happens if the Chinese, the Japanese, and Dubai stop funding the American consumers? A lot of things could happen, but unlike poor countries, U.S. does not really have to pay its debts. There are a lot of ways to avoid doing so, but these are real hammer blows to the international economy, the kind that are not understood.

The bailouts of Fannie Mae and Freddie [Mac], was described pretty well by Martin Wolf, the economic correspondent for the Financial Times. He says it is outrageous, a case of the public taking the risks and being forced to pay for the foolishness and incompetence of the private management of the market institutions.

The public takes the risks and pays for the costs.

SG: So, the public debt goes up tremendously.

NC: Yes, enormously; liabilities from these takeovers are, I forget the number, but it is a substantial proportion of the national debt.

SG: They are talking about close to a $200 billion injection from the treasury.

NC: I think, it is something like one-third of the deficit, the public debt. It is huge. That is the public debt, that’s my grandchildren, you know. It is permitting financial institutions to run wild without regulation. So, if you allow unregulated capital, of course you will have corruption and disaster.

Read Adam Smith. He points out if you see two business men talking in the corner, they are probably arranging a conspiracy against the public. That’s their job. It is not that they are bad people. That is just what they are supposed to do.

Just like a corporation is not evil to try to maximize profit. If managers are not trying to maximize profit, they are breaking the law. They are not supposed to be ethical institutions; they are supposed to be operating in the interests of their shareholders.

SG: Because of the integrated nature of the global economy, are there others who would want to keep the American economy vibrant?

NC: Sure that’s why China buys U.S. treasury securities. They want to keep America spending. So, in a way that may be stabilizing, … but it is a very uncertain kind of stability. They might decide to devote their resources to increase purchasing power inside China, for example, instead of inside the U.S. It is conceivable, which would mean a big shift in the international economy.

SG: If China makes a precipitous decision to do something — for example, there is one fund, a Sovereign fund; it is $200 billion dollars — and if they pull money out, will there be military threats from the U.S.?

NC: But what do the military threats mean from the U.S.? Of course, the U.S. outspends the rest of the world in military spending and is more technologically advanced. But what are they going to do? Are they going to bomb Beijing? I mean, they can’t [even] control Afghanistan.

Sure, they have a huge military, but I doubt that the U.S. will use it as a weapon. U.S. capacity to undermine governments by military threats has been declining in recent years.

Take Latin America, a traditional region where U.S. has regularly overthrown governments through military coups and so on, in the last 10 years it has been very hard. U.S. sponsored a military coup in Venezuela, but could not carry it off, had to back down, partly because the military coup was immediately overthrown by popular uprising and partly because of the uproar in Latin America, where they would not tolerate it any longer.

If you look at the history, it is quite a change. U.S. and France did effectively carry out a military coup in Haiti and threw out the government, but you know that Haiti is a desperate country. It was the richest colony in the world and the source of much of France’s wealth, but it has been tortured by France and then the U.S. for 200 years, now it barely survives. Overthrowing the government of Haiti was not that difficult a task.

SG: So, do you see a decline in the military ability of the U.S.?

NC: There is a very serious decline in the ability of the U.S. to undermine and overthrow governments. South America for the first time since the European conquest, 500 years, is moving uneasily, but noticeably, in the direction of independence and gaining sovereignty. The U.S. is unable to do much about it.

One of the main military bases for the United States until recently was Paraguay; the U.S. just lost Paraguay with the last election of a liberation theology priest. That was one of the few remaining U.S. military bases in South America. In Central America, which was devastated by Reaganite terrorist wars, nevertheless, there are beginnings of a recovery. In Honduras, which was the center of the whole U.S. terrorist apparatus, President Zelaya has been moving towards alliances with Venezuela. There is not much that the U.S. can do about it.

[The U.S. is] trying; the training of Latin American officers has risen very sharply. The School of the Americas has been renamed. In fact, if you look at U.S. aid to Latin America, the percentage of military aid, as compared to economic aid, is far higher now than at the peak of the cold war. I think that the U.S. is trying to rebuild some kind of military capacity to deal with its loss of control over Latin America. It used to be able to overthrow governments easily or destroy a country back in the l980s, but now it is harder. …