Transcript for:
Global Economic Thought in the 20th Century

as the 20th century drew to its clothes and our new century began the battle over the world economy intensified some people feared globalization and questioned the benefits others welcomed millions of people a day are better off than they would have been without those transit developments without globalization and very few people have been harmed by it when the terrible events of september 11th seemed likely to drive the world deeper into a recession new questions emerged about the perils of the new world economy how can our now deeply interconnected world cope with a global downturn and rise above other crises and is global terrorism the dark side of the promise of globalization you can't get away from the fact that globalization makes us interdependent so it's not an option to shed it so is it going to be on balance positive or negative this is the story of how the new global economy was born a century-long battle as to which would control the commanding heights of the world's economies governments or markets the story of intellectual combat over which economic system would truly benefit mankind the story of epic political struggles to implant those ideas on the nations of the world [Music] part of what's happened is a capitalist revolution at the end of the 20th century the market economy the capitalist system became the only model for the vast majority of the world this economic revolution has defined the wealth and fate of nations and will determine the future of the planet this new world economy is being driven by technological change and by political change but none of it would have happened without a revolution in ideas tonight the battle of ideas that still divides our world [Music] [Applause] this program was made possible by offering business and technology solutions from strategy and implementation to hosting eds managing the complexities of the digital economy [Music] fedex globality may be new to some but to us it's the way we do business [Music] we're reinventing the energy business as we develop american oil and gas next generation clean fuels and renewables like solar power we're the people of bp additional funding was provided by the pew charitable trusts the john templeton foundation [Music] the smith richardson foundation the corporation for public broadcasting and by contributions to your pbs station from viewers like you thank you world war ii sirens sound the alert german bombers will pound another british city tonight [Music] during the blitz the two most important economists of the age shared air warden duty on the roof of king's college an english gentleman and an austrian exile personal friends but intellectual rivals [Music] how their battle of ideas still shapes our life and society is our story [Music] john maynard keynes helped the allied governments defend freedom by planning their wartime economies friedrich van hayek thought government interference in the economy was a threat to freedom the debate over market forces whether you have an economy that's based upon prices or state planning has been at the very heart of the economic battles of the last hundred years for decades the ideas of john maynard keynes dominated the economies of the western world keynes felt that the market economy would go to excesses and when things were in difficulty the market wouldn't work therefore the government had to step in hayek felt that the market would eventually take care of itself it was only when hayek was a very old man that his ideas began to prevail and the world began to change at the start of the 20th century hayek and keynes had witnessed the first age of globalization every day life was being transformed everywhere technologies like the telegraph and the telephone revolutionized communications steamships and railways made the world a smaller place tens of millions migrated without the need for passports [Music] keynes described this global market in which trade flowed freely the inhabitant of london could order by telephone sipping his morning tea the various products of the whole earth and reasonably expect their early delivery upon his doorstep militarism and imperialism of racial and cultural rivalries were little more than the amusements of his daily newspaper what an extraordinary episode in the economic progress of man was that age which came to an end in august 1914 hayek summed it up more succinctly we did not realize how fragile our civilization was the murder of an austrian archduke by a terrorist triggered a world war it will be almost 80 years before there was once again a truly global economy [Music] world war one destroyed 20 million lives it laid a whole continent to waste there was blood carnage amidst the beauty of the italian alps where the armies of austria and italy were fighting friedrich von hayek served in the austrian artillery he was only 17 years old still a school boy the fighting was ferocious he experienced retreat and defeat the decisive influence was really world war one it's bound to draw your attention to the problems of political organization he vowed to work for a better world the first world war was a cataclysm people were disillusioned people were bitter they were looking for something better socialism communism seem to promise that better world by overthrowing the old order the russian revolution aimed to deliver that better world [Music] inspired by the economic theories of karl marx the bolsheviks sought to smash capitalism lenin the revolution's leader urged the workers of the world to unite against the global economy the revolution made trade commerce and private property criminal acts lenin promised to end the economic exploitation of man by man [Music] the man who was destined to be hayek's great intellectual rival was a brilliant young academic at cambridge university [Music] but john maynard keynes was much more than that he befriended writers and artists one painted these murals for him he was also a familiar figure in the city of london where he made a fortune in the stock market lost it all and made it back again familiar with politicians and prime ministers keynes spent the first world war advising the british government on how to organize its wartime economy [Music] at the end of the war keynes joined the british peace delegation at versailles in france [Music] the victorious allies wanted defeated germany to pay the costs of the war through what were called reparations [Music] all the statesman adversai could think about was how to squeeze money out of an already bankrupt germany keynes felt that the reparations are out of all proportion to what an economy could really take and would have very destructive social and political and economic consequences angry and disgusted keynes resigned back in england he went to stay with his friend the painter duncan grant that summer grant painted keynes writing his prophetic book the economic consequences of the peace if we take the view that germany must be kept impoverished and a children starved and crippled vengeance i dare predict will not limp nothing can delay that final war that will destroy the civilization and progress of our generation [Music] austria had lost the war and its empire vienna was a cold and hungry city [Music] revolution was in the air [Music] socialists and communists were winning the battle for hearts and minds young and idealistic friedrich von hayek enrolled at the university of vienna it was during the war that i more or less decided to do economics i really got hooked socialism seemed to promise a more just society albert zlabinger a former pupil and disciple of hayek he openly said that he at one time was a socialist of the mild sort where concerns for the poor and concerns for fairness and equity would help to determine government policy [Music] much of vienna's intellectual life took place outside the university in the coffee houses across the ringstrasse [Music] there were informal seminars for those who loved discussion and argument hayek joined the circle of a passionate libertarian called ludwig von mises von mises believed markets like people needed to be free from government meddling lurie from mises was the preeminent economist of the austrian school the distinguishing hallmark of the austrian school of economic thought is that markets work and governments don't [Music] von mises predicted that the new soviet socialist economy would never work precisely because the government controlled wages and prices what von mises said is that the great flaw of socialism is that it doesn't have a functioning price system to send all the signals to consumers and producers as to what something is worth that these prices are at the very heart of what makes a functioning economy work you can think of them as traffic signals [Music] and if you don't have them what you get is a system that doesn't work or you get chaos [Music] thomesis argued that free markets do it best why fool with anything else in soviet russia it seemed as if von mises predictions were coming true lenin had abolished what he saw as the chaos of free markets the state controlled the economy wages and prices were fixed but the great marxist experiment was in trouble lenin had an economic disaster on his hands soviet russia was a grim place haunted by cold famine hunger and death lennon knew that he needed a different kind of policy and the institute it would became known as the new economic policy lenin says farmers can sell their own goods and own their own land he says that small businesses can operate and you start to get an economic revival well his comrades on the left attacked him viciously for selling out the principles of bolshevikism and marxism and lenin who by this time had already had a stroke was not well nevertheless pulled himself up on the platform for one of the very last times in his life and he was still the old lenin he was vitriolic he was sarcastic his critics he said were fools were stupid because the state the government the bolsheviks would control the overall economy steel railroads coal the heavy industries what he called the commanding heights of the economy [Music] [Music] within a year lenin was dead the mourners at linden's funeral believed that history was on their side and in less than 30 years not only russia but eastern europe china more than a third of humanity would be living according to the economic tenets of marxist leninism lenin's successor would tighten the communist party's iron grip on the commanding heights of the economy joseph stalin introduced central planning under him the communist party planned and managed every aspect of the economy while communism seemed to be forging ahead capitalism looked to be doomed germany and austria were living with the economic consequences of the peace forced to pay unbearable war reparations the defeated governments simply printed more money the result inflation more inflation hyper inflation it took a basket full of paper money to go shopping you saw people carrying their money on wheels because you had to pay for a piece of bread billions of heisman hayek who was working at a statistical research institute needed 200 pay raises in eight months [Music] money was cheaper than wallpaper [Music] million mark notes lit stoves shoes that cost 12 marks in 1913 sold for 32 trillion marks in 1923. in hitler's favorite beer keller a glass of beer cost a billion marks [Music] hyperinflation wiped out the savings of the middle class and that was one of the reasons for for the success of the nazis of hitler they got support from these people who lost their fortunes hayek would always see inflation as an evil that corroded society and undermined democracy the fight against inflation became a cornerstone of his economic philosophy during the 1920s while europe was continuing to suffer the wounds of the first world war in american cities at least it was a boom time americans were spending money they were dancing they were partying they were buying cars they were buying bathtub gin and they were buying stock lots of stock the stock market the new york stock exchange had become a national pastime and americans couldn't get enough of it [Music] and the favorite stock of the day were in these new radio companies radio was like the internet of the 1920s an industry that had come from nowhere and the number one glamour stock was rca which in just a few years went from a dollar and a half a share to 600 a share americans couldn't get enough of it it was a classic stock market bubble then on black thursday october 24 1929 the bubble burst prices plunged the downward spiral proved unstoppable eight hours after the market had closed the ticker tape machines were still tapping out the bad news the stock market crash started america's slide into despair during the 30s here it was a complete and utter collapse from the people's point of view it was despair as values and prices spiraled ever onward downward it left them with no ability to earn [Music] no ability to repay no ability to spend no ability to consume [Music] everything went down the farm employment cell the clothing store the merchant everything spiraled downward and of course with it went the banks people panicked they rushed to withdraw their hard-earned savings run on a bank means lines through the lobby and out the front door and down around the block people waiting day and night to get up to see if they could withdraw their cash the millions that could not lost everything if you look at the period of time from 29 on about half the banks in the united states closed the government failed to halt the downward spiral in fact it made things worse private construction virtually ceases mills and factories shut down railroads come to a virtual standstill millions of americans men women and children wait in the cold on bread lines in soup kitchens three million americans are ex-wage earners unemployed and the ranks of the unemployed auto soar to 15 million [Music] banks collapsed industry ground to a stop millions were out of work [Music] in britain working men many of them war veterans marched the length of the country to petition the government for the simple right to work in italy spain and germany they marched to a different drone with the failure of capitalism fascism cast its shadow ever wider john maynard keynes saw his nightmare coming true [Music] in cambridge keynes set out to save capitalism from itself by writing a book about what caused the great depression and what to do about it he aimed to rewrite the rules of economics to see a country's economy as a whole as a machine that could be managed keynes was the real inventor of macroeconomics concepts we take for granted today like gross domestic product the level of unemployment the rate of inflation all to do with general features of the economy were invented by him he was writing a book which he thought would revolutionize the way we thought about economic systems but it would also give us the means to make sure that they operated better it was written against the background of not only the collapse of the world economy but the the potential collapse of democratic government hitler became chancellor germany in 1933 democracy has seemed to be losing ground and with democracy the system of liberty so keynes had to produce an answer to the great depression or democracy would be swamped by totalitarianism [Music] the new american president franklin delano roosevelt was staring economic disaster in the face his wife eleanor described inauguration day as very very solemn and a little terrifying this great nation will endure as it has endured will revive and will prosper [Music] roosevelt's voice of confidence rallied the nation [Music] he then embarked on a whirlwind program of reform for roosevelt in the new deal it was a war they were at war with the great depression and they responded with frenetic activity relief programs for the unemployed for the hungry programs to get people back to work they built dams and highways and national parks at the same time they instituted a program of regulating capitalism in a way that had never been done before in order to protect people from what they saw as the recklessness of the unfettered market privately roosevelt feared the market system had failed so he created an entire alphabet of new agencies to regulate banks the stock market capitalism itself new headquarters built for the interstate commerce commission celebrated government regulation which reigned in market forces and curbed capitalism under the new deal industry became subject to a host of new rules and regulations and the airline industry was a very good example of that you'd have people would go into this business be very competitive they'd go bankrupt new people would come in they would go bankrupt it was very unstable so the new deal stepped in and said we're going to stabilize this industry we're going to set the prices that you can charge for tickets we're going to tell you what routes you can fly and with that system they eliminated these very vicious cycles of boom and bust in the aviation industry and in a sense that was what they were aiming to do throughout the american economy [Music] in 1936 john maynard keynes finally published his general theory a brilliant analysis of how to fight the depression by showing governments that it was possible to manage their economies keynes made himself the most influential economist of the age kane's solution to the unemployment was for the government to spend the money and restore and maintain full employment government said keynes should spend against the wind in good times they should reduce their spending and build surpluses in bad times like the great depression they should step up spending run deficits and put purchasing power into the hands of working people he gave people hope that unemployment could be cured without concentration camps harvard university became an intellectual bridgehead for cain's in america john kenneth galbraith was one of cain's leading apostles i've said many times i think had something maybe quite a bit to do with bringing canes across the atlantic i came back to find a whole group of people here who had also read the general theory and this was a breath of hope and optimism in washington kane's ideas would begin to turn economics policy upside down governments would learn to live with a little inflation to keep unemployment low you resisted conservative finance board money and hired people across the country rescuing them from unemployment that was the basic essential [Music] and that you didn't worry about accumulating debt or more precisely you worried about it but did it anyway [Music] kane's ideas began to gain ground it took a world war for keynesianism to become government policy as the u.s government borrowed money and pumped it into the war effort high unemployment ended and the depression disappeared men and women to make the uniforms machinists to make the guns and ammunition auto workers to produce the jeeps and trucks to build the ships and tanks civilian soldiers to turn out the fighters the bombers in charge of wartime wage and price controls john kenneth galbraith saw the economy rebound one could not have had a better demonstration of the keynesian ideas and i think it's fair to say that as a young keynesian in washington in touch with the other keynesians there we all saw that very clearly at the time in a radio broadcast keynes expressed his hope that what worked in war would work in peace if expenditure on armaments really does cure unemployment but the grand experiment has begun good may come out of evil we may learn a trick or two which will come in useful when the day of peace comes now teaching at the london school of economics hayek feared that kane's brave new world was a big step in the wrong direction he attacked the growing consensus by writing the road to serfdom sarcastically dedicated to socialists of all parties it was a popular success there was even a cartoon version of it its message was simple and direct too much government planning means too much government power and too much government power over the economy destroys freedom and makes men slaves for hayek central planning was the first step to a totalitarian state well hayek thought that since freedom was was an absolute you must let a competitive system just work itself out and if at times that meant there was considerable unemployment well that's what you had to put up with hayek always rejected macroeconomics he rejected um any government intervention during the great depression itself whereas keynes was an activist said in the long run we're all dead and in the long run if we allow things to go on without remedy we get lots of hitler's lots of wars lots of stalin's now who was right most people would have agreed with keynes when he wrote this to hayek what we want is not no planning or even less planning we almost certainly want more in the battle of ideas hayek was on the losing side i had a fairly good reputation as an economic theorist in 1944 when i published zero to serve them and it was treated even by the academic community very largely as a malicious effort by a reactionary to destroy high ideals [Music] with the world at war keynes traveled to breton woods and a grand resort hotel here delegates gathered from all over the world to organize the post-war economy the bretton woods conference created the world bank and the international monetary fund they were designed to bring stability to the world economy and prevent the unemployment and the depression of the 1930s kane's idealism and humanity were an inspiration there's never been such a far-reaching proposal on so greater scale to provide employment in the present and increase productivity in the future and i doubt if the world yet understands a bigger thing we are bringing to birth keynes did not have long to live ill and overworked his health gave way but his reputation and influence outlived him my pains died keynes and i were the best known economists then two things happened keynes died and was raised to sainthood and i discredited myself for publishing she wrote to serfdom and that changed the situation completely and for the following 30 years it was only keynes who counted and i was gladly almost forgotten [Music] the war was over and the troops came marching home [Music] [Applause] [Music] the final summit conference of the three wartime allies took place in a palace in the berlin suburb of potsdam truman churchill and stalin came to plan the peace and to redraw the map of europe their different economic systems offered alternative paths to prosperity but the great depression continued to cast its long shadow there's no doubt that at the end of world war ii there was a tremendous loss of faith in the market economy you had a feeling in large parts of the world we don't want to go that way we want to go a better way [Music] in britain the troops were coming home to a general election [Music] well i came back in a troop ship in the summer of 1945 i was a pilot in the royal air force and i was picked as a 19 year old to be the labor candidate [Music] all these soldiers who said never again we're never going back to unemployment great depression to fascism to reality we want to build a new society [Music] during the dark war years britain had been governed by a coalition of conservatives and socialists winston churchill the great wartime leader and head of the conservative party expected an easy victory everywhere he went huge crowds turned out to cheer the nation's hero [Applause] heading the campaign against churchill was clement atlee leader of the labour party atlee argued that britain had planned the war and now planning would win the peace we knew that our people would never have stood the bombardments and the loss of life and the hardship if they hadn't been confident that their government was operating a policy of fair shares we set out to ensure this system of fair shares under planning and controls continued after the war [Applause] churchill who was influenced by hayek's book the road to serfdom opposed planning and controls no socialist system can be established without a political police some form of he got carried away with this gestapo and uh this of course it was carrying things absurdish gestapo atlee a mild-mannered christian socialist gave churchill's gaffe a sinister spin atlee actually went out of his way to refer to this foreign professor with this august federic august von hayek this foreign champ with a slightly german accent [Music] britain went to the polls [Music] the result was sensational here is the state of parties up to three o'clock in detail conservatives 180 labor 364. churchill was out the people had voted for a new socialist prison the labour party swept to power simply because the vast majority of people particularly those men and women in the fighting forces who lived through the dreadful depression years of the 30s just said uh the church has done a fine job before leader but we don't trust him to win the peace what kind of society do you want atlee promised his party that they would build a new jerusalem let's go forward into this fight in the spirit of william blake i will not cease from mental fight nor shall the soul sleep in my hand till we have built jerusalem in england's green and pleasant land william blake's hymn jerusalem became an anthem for the labor movement you know it seemed to people been through a war it seemed to them natural justice why not pool your resources and so they we broke into the concept of the sacredness of private property when labor took power private owners were compelled to sell their businesses [Music] labor created a mixed economy in which newly nationalized industries coexisted with private enterprise now government-owned industries like coal rail and steel no longer enriched owners and shareholders but worked for the common good so it was an act of regeneration of renewal that was the hope and it was a hope that gave us the welfare state gave us the national health service gave us full employment gave us trade union rights really rebuilt the country from the bottom up the welfare state provided care free of charge from womb to tomb nobody rich or poor would need to fear poverty ignorance unemployment ill health or old age and people said this is better than allowing a lot of gamblers to run the world where they're not interested in us but only in profit [Music] russia ended the war as a military and industrial giant with the red army and the secret police stalin imposed his economic system on half of europe the planned economy of lenin and stalin had defeated a fascism scientific socialism seemed to be in the ascendancy socialism was on the march capitalism and free markets were on the retreat so about one third of the world adopted socialism sometimes through internal revolution sometimes through brutal imposition by the red army the world was divided the cold war had begun [Music] hayek loved mountains he said they breathed freedom [Music] but he saw socialist ideals and the planned economy as threats to freedom [Music] and so he organized a conference at a formerly fashionable hotel on the top of montpellera pilgrim mountain well what happened in 1947 was that hayek at last brought off a great dream which was to assemble 36 mostly economists some historians a few journalists a handful of what he regarded as survivors good eggs good intellectuals who understood the market economy and the whole of the case [Music] this was hayek's belief and the belief of other people who joined him there that freedom was in serious danger one of the delegates was a young economist from chicago milton friedman the point of the meeting was very clear hayek and others felt that the world was turning toward planning and that somehow we had to develop an intellectual current that would offset that movement they met downstairs in the cocktail bar the room and its furniture are not much changed [Music] the whole world shadowed by the iron curtain the russian threat by the failure to establish democracies in the eastern european countries and by the prevalence everywhere intellectually of these ideas of collectivism arising from the war the argument always was that democracy is impossible without a free economy you need a free economy free economy is a necessary though not a sufficient condition for democracy the debates were passionate at one point hayek's former mentor ludwig von mises stormed out of a meeting in the middle of a debate on the distribution of income in which you had people whom you would hardly call socialist or egalitarian people like myself uh mises got up and said you're all a bunch of socialists and walked right out of the room but hayek told the meeting that they had one great lesson to learn from the socialists hayek paid enormous tribute to the socialist intellectuals and said that the great strength of the socialist is that they had the courage he said to be idealistic to have a theory to have a project have a vision and to go on working towards that through thick and thin as the meeting came to an end hayek predicted a long fight a battle of ideas that might last 20 years or more before the world changed its mind [Music] in the meantime hayek could see only one gleam of light [Music] the war left germany in ruins its economy had disintegrated markets had broken down shops were empty already the russians occupied east germany and were waiting for the rest to fall into their lap in the american and british occupation zones raging hyperinflation had made the german currency worthless in the winter of 1948 the allies appointed as director of economic affairs a rotund cigar chomping economist named ludwig earhart the staunch anti-nazi erhard was a free-market economist who shared many of hayek's beliefs and ideas he also believed the allies economic rules were making a bad situation worse the occupying authorities had imposed a system under which there were extensive wage and price controls supposedly to control inflation but of course wage and price controls never control inflation and you had essentially a economy that was brought to a halt in this situation in this situation the black markets formed [Music] nobody smoked cigarettes they were for small transactions [Music] cognac was a medium of circulation for large transactions the allies introduced a new currency the deutsche mark to replace the worthless german money but for earhart that was not enough so without informing the allies earhart went on the radio and made a startling announcement legendary man he decided without asking anybody and against the will of the american occupation powers he decided to give up all price controls next day general lucius clay the man in charge of occupied germany demanded to know what earhart thought he was doing was what's clay said what have you done you've changed the allied price controls replied i haven't changed them i've abolished them and clay said my advisers tell me it's a big mistake replied again my advisors tell me the same thing [Music] overnight the black market disappeared people stopped hoarding and goods not seen for 10 years went on sale it started the markets working with free prices instead of nothing being in the windows of the shops everything started to come up and that began the german economic miracle [Music] germany's social market economy combined free markets with a strong welfare state [Music] within a few years germany's social market economy overtook britain's more planned economy [Music] but back then nobody wanted to model themselves on germany most countries prefer to plan their economies [Music] india the jewel in the crown of the british empire the very symbol of imperialism celebrated its freedom mahatma gandhi was the father of independence his economic ideal was a simple india of self-sufficient villages pandit nehru the first prime minister wanted to industrialize and combine british parliamentary democracy with soviet-style central planning in the 1950s india was the mecca of all economists you talk of any economist in the world and they have they were advising the indian government and the advice was you must have a state led model of industrial growth the public sector must occupy what came to be called the commanding heights of the economy and that's why steel coal machine tools capital goods all the areas of heavy industry were in the public sector and not in the private sector nehru put his faith in technology eru was a rational thinker and he wanted to apply science and technologies to solve the great mosque poverty that prevailed at the time of independence under nehru central planning became a form of science nehru was always recruiting intellectuals uh in india on his side in the course of planning and there was this genius statistician mahalanobis who was head of the indian statistical institute nehru asked mahalanobis to think about how to plan an economy the brilliant mahalanobis succeeded in expressing the entire indian economy in a single mathematical formula let yt equal national income ct equal consumption and kt equal investment at time into open bracket open bracket 1 plus lambda k beta k close bracket minus 1 are fractions of investment allocated to industries producing capital goods that is k sector and consumer goods that see sector respectively we shall write people believed this perfect mathematical model could be applied in a less than perfect world and at that time mahalanobis model was hailed as one of the pioneering uh mathematical models for planning in a mixed economy and that main model is very influential india became the model of economic development for newly independent nations across the developing world socialism planning government control regulation and ownership these became the gospel all over africa people looked to socialism to lead them out of poverty across south america governments chose state control as the way to modernize the apparent success of communist countries like the soviet union and china seemed to show the way by 1950 hayek's market economics were so completely out of fashion that when he sought a full-time academic job in the united states only one university was willing to hire him [Music] chicago has always been an exceptional place out of the mainstream [Music] is geographically isolated this affects chicago's intellectual influence in many more areas than economics [Music] the university of chicago's intellectual influence would grow eight professors and another eleven economists from chicago went on to win nobel prizes gary becker is one of them when i came as a graduate student to chicago 1951 i was flabbergasted by how stimulating the atmosphere was i had been a very good student at princeton my first day in friedman's class he raised the question i answered he said that's no answer that's just rephrasing the question that was the example of how blunt people were nobody was very polite and people were interested in ideas and argument and not in making sure you didn't uh ruffle anybody's feathers if you're sitting in a seminar room and somebody up there is saying something which if imbibed by your students who are sitting in that same room is going to lead them astray it's up to you to call that guy right now and not later and that i think is sort of the spirit that prevailed in the chicago workshop system there wasn't that much fighting in the lunches they were pretty cordial lunches at the quadrangle club were famous for the intensity of intellectual discussion and one man came to dominate those debates somehow milton managed to set the agenda of argument and so there was a saying everybody loves to argue with milton particularly when he isn't there because he's a good arguer milton friedman was becoming the most articulate spokesman for the so-called chicago school of economics the chicago school met was a strong belief in minimal government and an emphasis on free market as a way to control the economy you know in many ways milton friedman was a devil figure uh in my youth in a keynesian household of economists because he seemed with his emphasis on individualism freedom and markets to be so unconcerned with fairness liberals may have loathed the chicago school but hayek felt on home ground in an intellectual atmosphere so like the vienna of his youth our vision is that the forces of the market are just that they are forces they are like the wind and the tides if you want to try to ignore them you ignore them at your peril if you find a way of ordering your life which harnesses these forces to the benefit of your society that's the way to go but in washington keynes was still king of the hill 19 years after he died his face was on the cover of time magazine keynes's influence on economics at mid-century can't be exaggerated the economic advice that economists gave to policy makers said the only reason you have bad economic outcomes is because the government's not doing enough it sounds almost like central planning doesn't it washington's keynesians saw the economy not as a force of nature but a sophisticated machine to be fine-tuned by technocrats like themselves [Music] the keynesian consensus was summed up when that most ivy league of presidents john kennedy received an honorary degree from it yale be said now that i have the best of both worlds a harvard education and a yale degree for jfk keynes had won the argument the battle of ideas was over what is at stake in our economic decisions today is not some grand warfare of rival ideologies which will sweep the country with passion but the practical management of a modern economy what we need is not labels and cliches but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead kennedy's council of economic advisors had drafted his speech along keynesian lines [Applause] we thought it was a great day when kennedy decided to give that uh speech at yale and to talk about economic policy that speech suggested that we had uh won over kennedy we had won the heart and mind of the of the president [Applause] for what came to be known as the 30 glorious years keynesian economics had been delivering the goods europe japan and america all saw high economic growth and rising standards of living people enjoyed a prosperity undreamed of at the end of the war so when hayek moved back to his native austria he was depressed the success of mixed economies made his free market theories and hayek himself seem more irrelevant than ever the world was very much a socialist world his ideas were not fashionable nobody seemed to listen to him nobody seemed to agree with him he was alone hayek found his ideas shunned by the academic world or most of the departments who became disliked me so much so that i can feel it to the present day that economists thought very tend to treat me as an outsider he was living in a provincial town and stuck in a rut but the outside world was beginning to change skimming the newspaper in his usual restaurant hayek read how inflation and unemployment were rising at the same time there was a new word to describe it stagflation [Music] after 30 glorious years of growth the american economy was in trouble the economy basically was kind of going nowhere and had inflation which didn't seem to get cured and kind of a malaise in the economy stagflation was the end of naive keynesianism you had two things at the same time which under the keynesian view would have been impossible you had stagnation in the economy a high level of unemployment you had inflation with prices rising rapidly president nixon looked like a chicago economist's dream come true milton friedman was a special advisor and george schultz was in charge of the budget the wholesale price index a moment ago one of the big areas where prices were going up to wholesale very rapidly was lumber and other materials associated with home building but the president wasn't listening he tried to spend his way out of to trouble insult to injury he declared now i'm a keynesian this declaration by nixon horrified his conservative supporters indeed one congressman wrote him said mr president i'm going to have to burn all of my old speeches and nixon wrote back to him i will too nixon decided he hadn't gone far enough so he took his top economic advisers off to camp david for a working weekend ben stein the quiz show host was a junior speech writer in the white house and his father was at the meeting here's my father walking into the president's cabin to meet mr nixon and there's george schultz right behind him i'm not sure but i think it's a fair bet that any one of these meetings they're complaining about something being wrong probably talking about prices at stag place and i'm i'm not sure dick cheney was a young aide at the time i always remember the bait we had during the next administration when the public was convinced that food prices were going up so the political debate was whether or not we should impose a freeze on food prices the supposedly conservative republican nixon opted for wage and price controls nixon was a great one for doing something i think in retrospect we now know it would have been better to do nothing but he was in favor of doing something i was there and i opposed them wage and price controls you could see analytically would get you in a lot of [Music] come trouble a new economic policy for the united states its targets are unemployment inflation at one point president nixon spoke up and quoted nikita khrushchev and he said khrushchev once told me that sometimes in order to be a statesman you have to be a politician for a while [Music] the problem with him was that he was he was willing to sacrifice principle too easily for political advantage the voters liked the president's war on prices nixon was re-elected in a landslide the economy did less well right away the economy went out of whack people couldn't cover their costs ranchers stopped sending cattle to market farmers started drowning their chickens [Music] instead of controlling inflation they were creating shortages [Music] and prices just kept on rising the last time i saw nixon in the oval office was george schultz president nixon said to me don't blame george for this silly business of wage and price control meaning george shultz and i said to him oh no mr president i don't blame george i blame you [Music] britain's mixed economy so widely imitated was in similar trouble it too was facing the deadly combination of unemployment and inflation theory the conservative prime minister ted heath and his cabinet believed in markets in practice like nixon they made a sharp u-turn and used wage and price controls to combat stagflation i was a junior minister in teddy's government and i remember having to attend meetings of three or four other ministers where we would actually decide the the level of charges plumbers could charge next week to repair taps and how much taxi drivers could charge for fares and how much uh hairdressers should get in wages it was absolutely unbelievable it all came to a very sticky end a complete collapse a coal miners strike and an oil crisis plunged the country into darkness voters blamed ted heath and voted the conservatives out of office well we're virtually out of business while the power's off we've got no sense that we can operate at all we were the sick man of europe the english disease was the disease of strikes which we had all over the place and you know it was so bad that hermann khan of the hudson institute wrote a book called the year 2000 and he saw many things but the one thing he did see was that the lower standard of living in europe in the year 2000 would be shared between albania and the united kingdom albania a minister in the defeated government keith joseph may have been an unworldly intellectual but his search for fresh answers would change the way not only britain but the world thought about economics and society keith wore a hair shirt he better beat his breast and said we were to blame we've got it wrong and he did beat his breath she was called a mad monk i thought i was a conservative i thought i was a conservative but all the time i was in favor of i was in favor of shortcuts to utopia i was in favor of the government doing things because i was so impatient for good things to be done and uh when he appeared on television he had a vein in his in his head which kept throbbing and people said oh this is a very strange figure indeed this man it's only to be expected but nonetheless he started the rethink of conservative policy keith joseph's search brought him here where with hayek's encouragement a group of kindred spirits had set up a think tank called the institute of economic affairs the institute started in 1957 you could say as a direct result of the montpellon society of the road to septum of hayek's ideas of freedom and competitive enterprise with the zeal of a convert joseph began to preach the virtues of free markets in a series of pamphlets he went on the intellectual offensive attacking the mixed economy making the case for capitalism mark garnet is a biographer of keith joseph from the middle of 1974 joseph undertakes a crusade to convert the country to his way of thinking [Music] and what he wants to do is to take the battle to the heart of the enemy camp and he believed that the universities were infected with socialist thinking because it was a free society in this country and he was going right into the lines then arguing a case that many people had never heard before joseph felt that it was his duty to fight back on behalf of the free market to revive the economy joseph preached that britain needed more risk-taking which meant more bankrupts and more millionaires and less equality well the audience would sort of gasp they never heard anybody challenging the consensus mild inflation seemed a painless way of maintaining full employment encouraging growth and expanding the social services so the result is that we're now more socialist in many ways than any other developed country outside the communist bloc he used to be smuggled in the back door he was genuinely hurt that the students had reacted to this penetrating argument by chucking flower bombs at him it was almost a badge of honor that he would come away from these meetings with egg yolk running down his suit keith joseph's most significant adherent was an up-and-coming conservative politician named margaret thatcher in parliament and politics thatcher's closest friends agree that keith joseph's influence on her was crucial she relied on him to give her deep intellectual support there's nothing wrong with intuition intuition is reason in a hurry um and keith just supported and reinforced her intuition at the very moment she needed that support margaret thatcher had a gut instinct for market economics her father had been a grosser and when she was a girl she had helped him in the shop hard-working and studious she won a place at oxford university where she became interested in student politics while she was at oxford she read hayek's road to serfdom it made a lasting impression on her years later when she became the first woman to lead the conservative party she once slammed hayek's book down on a table and announced this is what we believe thatcher's office came on and said could she come and drop in to see him and so she called by and there was a period of unaccustomed silence for margaret thatcher as she sat there in tents attending to the master's words by 1974 hayek sensed the world beginning to go his way so far as the movement of intellectual opinion is concerned it is now for the first time in my life moving in the right direction [Music] in the battle of ideas 1974 was a turning point hayek's nobel prize came as a surprise but the balance was now shifting away from keynes and towards higher end i like to say that when i was a young man only a very old man still believed in a free market system when i wasn't in my middle ages almost i myself and nobody else believed in it and now i have the pleasure of having lived long enough to see the young people believe again in it now that is a very important change [Music] the u.s economy was going through the worst downturn since the great depression industry slow unemployment grows the yom kippur war was followed by an arab oil environment americans waited in gas lines and the price of everything kept rising [Music] chicago school economists had always argued that rigid government regulations were keeping prices high and fueling inflation now more people began to wonder if competition could break the inflationary stranglehold what is the effect of regulating the airlines what is the effect of regulating the trucking industry and what is the effect of regulating the railroad industry very often it raises prices instead of allowing competition it suppresses competition is uh in 1962 of juliet monterey tower one two six point enter he had a 43 heavier only three two left at mike he turned left to join bravo so mike ii in the airline industry the host of regulations enacted during the great depression were still in force it was a classic example of regulated capitalism but deregulation was in the air stephen breyer now a supreme court justice then a harvard professor was asked by liberal democratic senator ted kennedy to head a senate investigation of airline regulations you discovered that basically the same firms that had been there in 1938 were still there uh those are the major carriers and nobody knew the hearings began and officials from the civil aeronautics board were called to testify and it turned out that five percent of their time went to stop prices that were too high and 95 percent of their time went to stop prices that were too low but always the effort was to keep the price high and not low naturally the established airlines were quite happy with this arrangement we'd say when was the last time you granted a new route well regulations meant that major carriers like pan am never had to compete with newcomers [Music] but some cut price charter flight operators wanted to break this club leading the struggle against pan am over its profitable transatlantic flights was an exuberant englishman called freddie laker i'm freddie laker i own laker airways and i'm dedicated to low-cost air travel with laker you can fly round-trip to the usa or canada in one of our wide-body dc tents for less than half the price of a normal economy ticket look i've got to give you a better deal i've got my name on every plane and the transportation department said that this may hurt pan am and freddie laker testified and said the cause of this whole thing is panamania so we said what is that and he said well everybody should do everything for pan am the man who was to sweep away airline regulations is a lifelong gilbert and sullivan fan improbably enough the bearded poet is played by fred khan a professor at cornell university khan wanted a leaner meaner regulatory environment in which the market was free to chase profits without the dead weight of bloated government democratic president jimmy carter made khan head of the civil aeronautics board khan had spent years studying government regulation now he had a chance to do something about it and when i got to the civil aeronautics board the biggest division under me was the division of enforcement in effect fbi agents who would go around and seek out secret discounts and then impose fines we we would we would discipline them it was illegal to compete in price that means it was illegal to compete in the discounts you offer travel agents so we regulated travel agents discounts internationally since they couldn't cut rates but they competed by having more and more sumptuous meals we actually regulated the size of sandwiches by the time khan had finished the cab had nothing left to do but close itself down competition's the rule and because of it the consumers are better served than ever airline deregulation led to painful turbulence as new carriers came and went like her father judith hamill works in the airline industry my dad was a jet mechanic with brenna at the age of 59 he found that his skills were no longer desirable or or needed and when brenef came back because of the duty to hire he came back at half the salary that he had made before when you give your life and you live by the rules and then the rules change it's it's sad but 20 years later the industry was employing two times as many people to fly almost three times as many passengers the industry vastly underestimated the demand at for airfare at lower prices and what's happened is that as the prices went down demand went up dramatically [Music] and once they were free to compete you began to get super saver fares and super apex fares and potato fares and peanuts fares and so explosion of discounting and competition well those were dramatic the stage was set for deregulation of the us economy and now these ideas were about to make their entrance in the very homeland of gilbert and sullivan [Applause] what five nobody is it do you think you can win this strike yes i do they called it the winter of discontent it seemed as if everyone was on strike i think it stinks like all the other damn strikes in this country run by the filthy socialist communist unions the garbage men were out so were the ambulances and if you died the gravediggers were out too with the economy in apparently terminal decline the people voted for a new conservative government headed by margaret thatcher margaret thatcher was elected prime minister on the day of my father's birthday so he sent her this telegram from freiburg thank you for the best present to my 80th birthday that anyone could have given me and a few days later she wrote back from 10 downing street dear professor hayek i'm very proud to have learned so much from you over the past few years i am determined that we should succeed if we do so your contribution to our ultimate victory will have been immense you're sincerely margaret thatcher and i'll strive unceasingly to try to fulfill the trust and confidence that the british people have placed in me and the things in which i believe determined and some said strike she would revolutionize the economy the spirit of enterprise had been sat upon for years by socialism by too high tax by too high regulation by too high public expenditure the philosophy was nationalization centralization control regulation now this had to end thatcher squeezed government spending and cut subsidies to business thousands of bankruptcies and higher unemployment followed many saw her as uncaring britain had rarely been so divided [Applause] thatcher had no time for conventional keynesian economists who urged her to use government money to lessen the pain although 364 economists wrote to the times and said this is outrageous you'll put us into a deep depression from a recession 364 were wrong and the half dozen who supported us were right those who urge us to relax the squeeze to spend yet more money indiscriminately in the belief that will help the unemployed and the small businessman and not being kind or compassionate or caring i have only one thing to say you turn if you want to the ladies not for turning in britain the battle lines were drawn in america the fight was already underway [Music] things were at a low point in the united states president carter spoke of malaise and loss of confidence in the country revolution in iran had led to a second oil shock and americans held hostage in tehran despite the beginning of deregulation inflation was still at record heights carter's attempts to follow kane's formula and spend his way out of trouble we're going nowhere jimmy carter was maybe the the high point of keynesian uh behavior and it simply was not working [Music] toward the end of the carter administration with inflation out of control paul boker was made chairman of the federal reserve he understood the problems i am grateful to paul volcker for being willing now to accept the oath of office and then the responsibilities as chairman of the federal reserve system of our country paul [Applause] paul volcker was steeped in the ideas of austrian school economics [Music] [Applause] it's obvious uh to all of you from what's been said today that we're face to face with really unique economic difficulties volcker believed that inflation was one of the worst of all economic evils it came to be considered part of keynesian doctrine that a little bit of inflation is a good thing and of course what happens then you get a little bit of inflation then you need a little more if it peps up the economy people get used to it it loses its effectiveness like an antibiotic you didn't know when you didn't even know and i certainly thought that inflation was a dragon that was eating at our innards so need was to slay that dragon volcker used a blunt weapon he tightened the money supply the economy went into a nosedive facing a presidential election carter was reluctant to back such harsh measures [Applause] carter's rival was the republican ronald reagan reagan shared the same economic philosophy as margaret thatcher for over 20 years he had been campaigning against the keynesian orthodoxy and for hayek and friedman's ideas of free markets and freedom reagan knew hayek personally and he knew milton friedman personally and reagan was in a sense their popularizer so he was the person who could take the these people who were very profound but not very easy to communicate i mean i don't think you'd ever get hayek on the today show [Applause] but you could get reagan explaining the core of hayek with better examples in a more understandable language vote for me if you believe in yourself if you believe in your right to control your own destiny and plan your own life yes and have to say the same with the spending of your own money the president is going to have more government on the backs of the people in the business and of industry the working people in order to try to solve the problems that were created by too much government on our backs we can get government off our backs out of our pockets this kind of indifference to economic disaster must be ended and it will be ended by having a different kind of leader the american people voted for change and reagan became president situation was this the only way you could get the inflation down was by having monetary contraction there was no way you could do that without having a temporary recession obviously who wants a recession but i can remember president reagan using those famous words if not now when if not us who reagan offered volcker his moral support in the fight against inflation as volcker tightened the money supply the economy slowed and contracted unemployment hit 10 percent nobody had realized quite how tough it would be [Music] all across the heartland of america ordinary people were hurting well the interest rates that eats up all your profit it becomes very difficult to keep your business running right 1980s the interest rates were up to 20 percent or better it was very interesting times i remember you know cash flows got very tight as things got tighter and tougher creditors for sales you know come up with the cash or we're going to have to liquidate you it's a hole that almost seems impossible that you can get out of if you had told me in august of 1979 with interest rates the prime rate would get to 21.5 i probably would have crawled into a hole i would have crawled into a hole and cried i suppose but i we live through it [Music] [Applause] [Music] [Applause] it had taken three years three years of growing public anger three years of real hardship for millions of americans by 1982 the dragon of inflation had been slain [Music] what changed drastically in the 1980s and running through today is the kind of presumption that inflation is bad the primary job of a central bank is to prevent inflation that's a very different environment than the 50s and 60s ladies and gentlemen the president of the united states reagan and volcker had set the united states on a new economic course from our very first day we've been working to undo the economic wreckage they left behind they called his policy reaganomics it had four key elements the first was the concept of sound money the second was deregulation the third was modest tax rates and the fourth was limited government spending sounds pretty conventional now but when reagan was elected he was vilified by his opponents as being some radical extremist they just can't accept that their discredited policies of tax and tax spend and spend are at the root of our current problems reagan's tax cuts the biggest in history led to huge deficits our program has only been in effect for some but the economy started to grow steadily again there's no doubt in my mind that those actions of reagan lowering tax rates plus his emphasis on deregulating unleashed the basic constructive forces of the free market and from 1983 on it's been almost entirely up far away in the south atlantic the british expeditionary force was at sea argentina had seized the falkland islands from britain margaret thatcher risked a war to make the islands british once again six eight now set [Music] before the war her popularity was at rock bottom [Music] victory in the falklands ensured the survival of margaret thatcher's government [Music] the falcons saved her the fall clones gave her a new lease of life to implement the policies on which she had embarked which were not yet amusing results in effect she gambled all on portland's and she won decisively and that of course not only greatly bolstered her standing within the tory party boasted her standing in the country and it greatly enhanced her reputation internationally [Music] the falklands war set her up politically to fight the final battle for the soul of the british economy [Music] the impact would be worldwide [Music] in 1945 atlee's labor government had nationalized the commanding heights of the economy bringing core industries into state ownership for thatcher rights these state industries were now the primary target a whole lot of people who were left to center thought nationalization was britain's great gift to the world and one of my phrases at the time was that having exported the disaster and nationalization to the world britain should offer them the antidote it was the decent thing to do to say we're very sorry it didn't work [Music] so the whole efficiency of nationalised industries was running down why should they be efficient they had access to the treasury purse thatcher wanted to end their dependence on government subsidies and submit them to the discipline of the marketplace the nationalist institutes fell to pieces they lost huge sums of money they put the prices up massively and still weren't able to make a profit they were bleeding the nation dry the taxpayer drive and they weren't doing a good job for their customers the coal mines and the miners union became thatcher's biggest challenge the coal miners represented the last bastion of the socialist mindset in the uk one of the most singularly important economic slash political events the world economic system was margaret thatcher's government's confrontation with the coal miners we were quite clear uneconomic pits must close you could have gone pouring money into uneconomic bits it was taxpayers money if you look at our coal industry the coal is very deep in the earth it is hugely expensive to get out 75 percent of britain's coal mines were losing money it took government subsidies of three billion dollars a year to keep them going [Music] but these statistics were seen as irrelevant by men like ken capstick one of the radical socialists who led the miners union what they would say was that in america for instance coal produced at the pit head was cheaper than core produced at the pit idea the union leaders argued that the government's subsidies were money well spent if they kept 180 000 miners at work and able to feed their families miners used to say and i can remember them saying it while ever i've got these i'll always have a job [Music] it was an historic grudge match both sides knew the miners had brought down ted heath's conservative government 10 years earlier the fiery marxist who led the national union of minors said no mine should be closed until the coal ran out the issue before our members is very clear they either accept the policies of the coal board and the government which will result in the loss of 70 000 jobs or alternatively they stand on their feet like men they fight defend their jobs defend their pits and defend their dignity [Music] the strike was an epic clash of values which symbolized the wider battle of ideas socialist against capitals free market against state ownership and it was a question of power who ruled britain [Music] illegal mass picketing outside working miles led to violent clashes with the police it was the next thing to you know to a war we were faced with an enemy and that enemy was out to destroy our livelihoods out to destroy our pits out to destroy our communities and what our communities stood for miners and their families had a set of values that i don't think margaret thatcher could understand values of socialism and christianity the two things went on in andy in many ways for more than a year the miners held out until internal rifts and the desire of many to return to work brought the walkout to an end and then suddenly it collapsed the strike and the most powerful union with the most militant leader had failed [Music] britain has changed today less than 3 000 work in the mines i feel devastated by what i see graham thorpe had considerable reserves of coal and it was closed plenty of work for those miners to continue to do to keep their families you can see the wastelands you can see the social deprivation that it caused the children that are coming along no prospects no future people despairing because they can't find employment and the dignity that employment brings it's market forces gone mad the political consequences of the failure of the strike were incalculable the coal mining strike of the early 1980s was a tragedy for so many of the mining families that were involved in it perhaps the greatest political impact was on the labour party that had all along opposed thatcher's free market policies i came into politics as someone who lived in an area which was an old mining community the problem for the left and the past was the equated the public interest with public ownership and public regulation and therefore they assumed that markets were not therefore in the public interest what we have had to explain both to ourselves and to the country and now i believe it's possible to explain this to the rest of the world as well is that markets are in the public interest one of the most important things that the government of margaret thatcher does is invent this thing called privatization that is taking these state-owned companies these nationalized industries and selling shares to the public [Music] one by one the thatcher government put the commanding heights of the british economy up for sale electricity telephones oil gas coal steel trains and planes even water before long two-thirds of the state-owned industries were removed from government control and sold off into the private sector who should control the commanding heights governments or markets in britain that battle was over what margaret thatcher did in britain and the principles that she introduced imitated were imitated worldwide asia latin america even in africa and to some degree in the middle east the tide had surely swung the thinkers that had kept alive the ideas of markets did play their role at that moment in his lifetime hayek saw fascism rise and fall communism come and go and the end of his years in the intellectual wilderness here was a man who had intellectually changed the world without ever really leaving the university it was the power of his books the power of his ideas as then captured by ronald reagan and margaret thatcher that had changed things you had reagan and thatcher at the same time two what i call idea politicians they had ideas they were convinced they were the right ideas and they put them into effect the coincidence of thatcher and reagan having been in office at the same time was enormously important for the public acceptance worldwide of a different approach to economic and monetary policy the old debates were about what the role of the market was what was the role of the state i think it's now generally appreciated that it's the market that harnesses people's initiative best and the real focus in progressive thinking now is not how to oppose and suppress market forces but how to use market forces to achieve progressive objectives if you look at the whole of the 20th century there's been a huge cycle less government was the orthodoxy at the beginning of the 20th century more government clearly was the orthodoxy for the middle part of the 20th century and now in the later part going into the new millennium we're back to where we were practically at the at the start of the century and you have to give folks like piek and friedman and then later reagan and thatcher they're due for pushing all of this along i remember the foreign minister and finance minister from another country saying to me you're the first prime minister who's ever tried to roll back the frontiers of socialism we want to know what's going to happen because if you succeed others will follow within 10 years governments everywhere would retreat from the commanding heights of their economies in the battle of ideas the pendulum had swung from government to market from keynes to hayek only time would tell what people would ask of their governments in the event of a new recession or a depression or a war [Music] next time on commanding heights throughout the 90s free markets replaced government-controlled economies i watched it unfold one country after another but would it work everywhere garbage began too late and his reforms were too cautious the agony of reform next time on commanding heights watch all of commanding heights online at pbs.org this enhanced netcast links to an interactive time map country reports economic data and important full-length interviews about the future world economy commanding heights video set and book are available from wgbh boston video to place an order please call 1-800-255-9424 [Music] [Music] [Music] [Music] this program was made possible by eds offering business and technology solutions from strategy and implementation to hosting eds managing the complexities of the digital economy fedex globality may be new to some but to us it's the way we do business [Music] we're reinventing the energy business as we develop american oil and gas next generation clean fuels and renewables like solar power we're the people of bp additional funding was provided by the pew charitable trusts the john templeton foundation [Music] the smith richardson foundation the corporation for public broadcasting and by contributions to your pbs station from viewers like you thank you this is pbs