Commanding Heights: The Agony of Reform

The Agony of Reform

Directors:Greg Barker | William Cran
Writer:Greg Barker
Release Date:2002 (USA)
Commanding Heights: The Battle for the World Economy is a book by Daniel Yergin and Joseph Stanislaw, first published as The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World in 1998. In 2002, it was turned into a documentary of the same title, and later released on DVD.

The terrible events of September 11 showed how a whole world might be driven deeper into recession.
(thunder)
(metal clanking rhythmically) Argentina's economic meltdown has raised new fears about the perils of the interconnected global economy.
Bill Clinton: 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.
For much of the 20th century people blamed free-market capitalism for the ills of inflation, recession, depression and mass unemployment.
So governments everywhere sought to curb market forces and rein in their economies.
The first to change direction were Ronald Reagan in America and Margaret Thatcher in Britain.
In the 1980s, markets were deregulated; state-owned industries were privatized.
It was the start of a world revolution.
Sachs: 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.
The world changed its mind.
In the Soviet Union and its satellites...
in the emerging markets of Asia...
and in the state-dominated economies of Latin America, governments everywhere moved away from state control and towards free markets.

This free-market revolution has really led to the new global economy.
It excites some and terrifies others.
That revolution was wrenching.
Tonight on Commanding Heights, "The Agony of Reform.
" This program, with captioning, was made possible by: EDS, offering business and technology solutions from strategy and implementation to hosting.
EDS, managing the complexities of the digital economy.
Globality may be new to some...
but to us, it's the way we do business.
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: and by contributions to your PBS station from: Narrator: Much of the world once modeled itself on the Soviet Union.
Here Lenin's revolution industrialized a backward country within a single generation.
The Soviet system, ruthless and centrally planned, gave birth to vast industrial complexes like Norilsk.
Norilsk symbolized every stage of Soviet economic history, from the original prison camp and the beginnings of Soviet industrialization right up to the collapse of the economy in the 1990s.
So much of its history had been tied up with the fact that it was a prison camp.
Even in the early 1950s, 100,000 political prisoners were working in its mines and factories.
Narrator: Millions rode the slow train to the prison camps.
Vasily Romashkin's crime against the state was to check out the wrong book from the public library.
(speaking Russian) Translator: They sent me to Norilsk after the trial.

The trial lasted about ten minutes.
My wife and I said our good-byes.
Narrator: The prisoners' slave labor became a crucial component of the Soviet economy.
Romashkin (translated): When they took us to work, they'd say, "Attention, you enemies of the people.
"A step to the left or to the right and we will shoot you without warning." A chill went up my spine, and I thought, "You are the enemies of the people." Narrator: The Soviet system of central planning meant that the Kremlin controlled every aspect of the economy.
The aim was to make the Soviet Union strong and self-sufficient.
The Soviet Union became an industrial giant, a military superpower, and a threat to the West.
Shultz: Russia looked very formidable.
The essence of Soviet power was its ballistic missiles.
They could wipe out any country in the world in a 30-minute time, so that's a lot of power.
Thatcher: Communism was gaining the world over, gaining by its main methods- military threat from military might.
Powell: We all thought the Soviet Union was still a vast, powerful economy, a huge military power, a threat to world peace, determined to extend its influence around the world.
Narrator: Soviet influence was everywhere in Eastern Europe.
In Africa...
and Latin America, socialism, planning, state control, government ownership- these became the gospel.
In Asia, the apparent success of Communist China seemed to show the way.
But the truth about the Soviet economy lay concealed behind the "Iron Curtain." Minefields, barbed wire, searchlights and lookout towers sealed the Soviet bloc off from the outside world.

In the 1980s, British intelligence recruited a Russian double agent to penetrate this wall of secrecy.
But Soviet Intelligence, the KGB, became suspicious and put him under house arrest.
News reached London that its top spy was in mortal danger.
Charles Powell was foreign policy adviser to Prime Minister Margaret Thatcher.
Powell: The news of the intention to spring him came to me in Downing Street.
I couldn't tell anyone else because no one else knew about it.
Narrator: It was so sensitive that Powell needed the prime minister's personal approval to activate an escape plan.
Powell: 0leg Gordievsky was perhaps the most valuable agent because he understood the Soviet system from inside.
Narrator: In Moscow, the net was closing in on 0leg Gordievsky.
At that time, I decided to use my secret, long-standing plan of escape.
I sent a signal to the British Intelligence.
Narrator: Gordievsky evaded his KGB watchers and made his way to a forest near the Finnish border.
Gordievsky: In the morning, I started to move toward the site in the woods.
And there I waited.
I waited arrival of car, driven by two British people.
The British picked me up, put me in the boot and drove to the border.
It was a very small car, a very small boot.
0n the border we started to stop: one stop, second stop, third stop.
Narrator: They were approaching the moment of maximum danger.
(dog barking) Gordievsky: The KGB and Soviet customs checks of the cars.
(dog barking) I heard the voices, I heard even the KGB dogs barking.
(dog barking) And to my great luck, it went without any accident.

Narrator: 0ne of the British agents, a woman, threw the guard dogs off the scent by feeding them potato chips.
Narrator: Three days later, Gordievsky was in London and the debriefings began.
Gordievsky: When I was a British agent inside the KGB, the British Intelligence Service didn't have time to ask me about economy, because they were interested about strategic problems.
The arms control questions were so overwhelming, the West neglected the important foundation of the armaments- the economy.
Narrator: Gordievsky told his British spymasters that the Soviet Union was under great pressure, devoting more than a third of its entire economy to military spending.
Gordievsky: And the analyst, he said, "No, I can't put such a huge figure because nobody would believe it." Later, economists realized that the Soviet Union had been spending at least 50% on the military.
Powell: Gordievsky's information was shared with President Reagan and the Americans and he was able to play behind the scenes a role of extraordinary influence.
(march music playing) Narrator: Thanks to Gordievsky's intelligence, Western leaders realized that Soviet military might rested on a crumbling economy.
Gordievsky: The Communist administration reported that the economy was growing.
It was not the case.
The economy started to go down all the time and the deficit was covered only with the help of the oil prices.
And the extra money made it possible to claim that they were successful.
And they were deceiving the world.
Narrator: Soviet satellites circled the world and nuclear submarines prowled the oceans.
But after seven decades of communism, the real story of the Soviet economy was one of empty shelves and a standard of living that was a fraction of Western Europe's.
Soviet economy was neither/nor- it was not a Stalinist economy anymore, but it was not a market economy.
So it was no water, no fire.
It was a mess.

Narrator: An independent-minded young economist, Grigory Yavlinksy wrote a report on why workers in state mines were so unproductive.
The people don't want to work.
The people have no incentives.
The economy inside which the people have no incentives, have no future.
So you can do two things: take a gun and put this gun to his head like it was at the Stalin's time, or you have to give him incentives.
Because he wants to improve the life of his family, and he can't.
Narrator: Factory managers at Norilsk could see the economy was not working because the workers were not working.
(man speaking Russian) Translator: You can't work properly under socialism.
There is no incentive, and sadly, that's the only thing that gets us going.
People come to work and just go through the motions.
They doze off, read papers, do the crosswords.
The state goes on paying them, the state gets poorer, the people get corrupted, then bankruptcy.
And that's what happened: the collapse of a great empire.
Narrator: Like the Soviet Union, India had used central planning to industrialize its peasant economy and conquer poverty.
Now India, like government-dominated economies all over the world, was running into difficulty.
Man: The government of India went into business in a big way and they decided to control whatever was there in the private sector also as firmly and fiercely as they could.
Narrator: The British Raj was gone.
Now people were subjected to the "Permit Raj," because everything needed a government permit.
"India" became a byword for "red tape" and "bureaucracy." Businessmen found it almost impossible to get things done.

Man: It used to take us about 12 to 24 months and about 50 visits to Delhi to get a license to import a computer worth $1,500.
Narrator: Since it was impossible to work with the system, people learned to work around it.
Man: Every license, every permit, was procured by corrupt means.
Interviewer: A bribe? Well, bribe is the simpler word, I suppose.
Narrator: Self-sufficiency was India's ideal.
To protect its own manufacturing industry, India shut out foreign imports.
Because of this protected market, the Indian people were being given shoddy goods and services at very high prices.
Enterprise was stifled and growth was crippled.
The economic environment was simply not conducive to efficiency or profitability.
We were in a shortage economy.
My father waited 15 years to buy a car.
Narrator: Take India's beloved Ambassador car.
It is made by Hindustan Motors, which started manufacturing in the same year as Japan's Toyota.
50 years later, Toyota makes five million cars a year.
Hindustan sells 18,000 Ambassadors and still to the same design.
Man: If you have a controlled economy, cut off from the rest of the world by infinite protection, nobody has any incentive to innovate, nobody has any incentive to increase productivity, to bring new ideas.
Narrator: 0verprotected...
over-administered...
over-planned.
The "Permit Raj" was quite literally a brake on the Indian economy.
(tires screech) In Latin America, radically different leaders shared India's suspicion of the world economy.

In the 1940s and '50s, it was Argentina's Juan Peron and his wife Evita.
In the 1960s, it was Communist Cuba's charismatic Fidel Castro.
And in the 1970s, it was Chile's Marxist president Salvador Allende.
(giving speech in Spanish) Though rich in raw materials, Latin America seemed doomed to perpetual poverty.
The "dependency theory" of economic development seemed to offer a way out.
Yergin: The dependency theory said that if you want to get high economic growth in your country, what you need to do is put up barriers, tariffs, that restrict the flow of imports into the country, develop and build your own domestic industries, and that if you don't do that you're going to be victimized by world trade.
The theory was very attractive.
It said you would develop on your own and you would be more self-sufficient.
The reality is that you cut yourself off from flows of technology, flows of investment, from flows of know-how, and instead of getting ahead, you were falling back.
Because they are not threatened by competition, you create very lazy, noncompetitive companies that produce not very good goods at higher prices.
It may create jobs here and there, but in the long term it may create even more poverty.
Narrator: By the early 1970s, Latin American economies were in trouble.
Chile elected the Marxist president Salvador Allende.
Allende's solution was not less government intervention, but more.
Businesses were nationalized or expropriated.
Price controls were imposed.
Civil unrest grew as the economy spun out of control.

Man: We have a tremendous inflation.
Chilean society became extremely polarized.
It 's true it was polarized before Allende, but during Allende's period, the society was extremely polarized.
Narrator: It all ended in a military coup.
As air force jets strafed the presidential palace, Allende was trapped inside.
This was the last picture taken of him alive.
Allende supporters, union leaders and left-wing students were rounded up in the national football stadium.
Hundreds were never seen again.
(shouting in unison) Narrator: Chile's military junta was led by General Augusto Pinochet.
Many middle-class Chileans saw him as a savior.
Man: I think that Pinochet's plan was basically the plan to manage an army.
He didn't have an economic policy to manage a country.
Harberger: After a year, year and a half of military government, you still had 20% per month built-in inflation that wouldn't go away until something structurally changed.
Narrator: 0ne of those who plotted the coup went to talk to Pinochet face-to-face.
(man speaking Spanish) Translator: I told him, "You've been called Chile's savior, but you will go down in history as the man that buried Chile." (speaking Spanish) Translator: He was very shocked by this, and he said, "0kay, you've got 48 hours to come up with a national plan to fix the economy." (Kelly speaking Spanish) The only people who had a serious blueprint of how to get out of this were this group known as the "Chicago boys." Narrator: The Chicago boys were a group of economists at Chile's Catholic University who had been sent to the University of Chicago as exchange students.
There, they absorbed the ideas of the Chicago School of Economics with its almost revolutionary belief in free markets.
What characterized the Chicago School was a strong belief in minimal government and an emphasis on free market as a way to control the economy.

Narrator: Professors like Arnold Harberger and Milton Friedman taught their students to mistrust state planning and government control.
When the Chicago boys returned to Chile, they brought with them ideas that were a direct challenge to the dependency theory.
Harberger: This small group stayed together through the Allende years and they used to meet, I think, every Tuesday for lunch.
And they would keep kind of a running document which said how they would reform this economy, how this economy has to be reformed, what is to be done to get out of the swamp that they were putting themselves in.
(speaking Spanish) Translator: Unfortunately, due to the idiosyncrasies of the military mind, the generals preferred a controlled economy, that is, an economy that would obey orders.
Narrator: Javier Vial, an influential businessman sympathetic to the junta, was trying to push the military in the direction of the free market.
So I called Milton Friedman and invite him to come to Chile.
Narrator: So Milton Friedman, the most famous free-market economist in the world, came to lecture in Chile.
Friedman: I went down to Chile and spent five days giving a series of lectures on Chilean problem- particularly the problem of inflation and how they should proceed to do something about it.
Narrator: Friedman's first talk was at the Catholic University.
His theme: the inescapable link between free markets and freedom.
The emphasis of that talk was that free markets would undermine political centralization and political control.

Harberger: He said that you cannot have a repressive government for long within a genuinely free economic system.
Narrator: But Friedman was also persuaded to visit the grim conference center, from which Pinochet ruled Chile.
Friedman told Pinochet that he needed to take decisive and immediate action to defeat inflation.
Vial: Friedman say, "Well, I'm going to give you an example.
"If you cut the tail to a dog in pieces, "step-by-step you will kill the dog.
"This is the same as inflation- "you have to cut it at once and then the country will start moving." Harberger: Milton's presence probably helped to stiffen the spine of people who were trying to insist on better economic policies.
That's the period when the takeoff of the Chilean economy really began and major reforms were made.
Narrator: The junta called on the Chicago boys to rescue the economy.
500 state-owned businesses were privatized, government budgets were cut, import tariffs were swept away.
The markets were given free rein.
(brokers shouting) (De Castro speaking Spanish) Translator: The basic thrust was to increase exports and abolish artificial price controls.
Here was the first case in which you had a movement toward communism which was replaced by a movement toward free markets.

Narrator: There was much pain for the poorest.
The cost of living went through the roof.
The gap between rich and poor got wider and stayed that way.
Man: They were starting a very big process of transformation of the economy without any regard of what happened to people.
And we ended up at one point in time with 30% unemployment rate.
Narrator: According to the Chicago boys, the gain was worth the pain.
Chile became the fastest-growing economy in Latin America.
Foxley: They were able to start the process of deregulating the markets, opening up the economy, so that's a contribution.
They were able to anticipate a global trend, and Chile has benefited from that.
Interviewer: But at a price.
At a very high price.
At a very, very- believe me- at a very high human price.
(band playing marching music) Friedman: The Chilean economy did very well, but more important, in the end, the Chilean military junta was replaced by a democratic society.
Free markets did work their way in bringing about a free society.

Narrator: This is the monument to the 2,400 people who died or disappeared during the dictatorship.
The brutality of Pinochet's regime left little enthusiasm for economic change in the rest of Latin America.
Man: The fact that the Pinochet regime was politically unsavory allowed the Left to make an association between market reforms on the one hand and repressive, authoritarian governments on the other, and that was a terribly damaging connection.
Friedman: The intellectual elite, as it were, were on the side of Allende, not on the side of Pinochet.
They regarded me as a traitor for having been willing to talk in Chile.
Friedman then became a figure of hate, and they organized demonstrations against him wherever he went, and this went on for a period of years.
(crowd chanting) Narrator: The protests reached their climax when Friedman was awarded the Nobel Prize in 1976.
(crowd chanting) Friedman: At the Nobel ceremonies in Stockholm, I was subject to abuse in the sense that there were large demonstrations against me.
(whistle blowing) There was a concerted effort to tar and feather me.
Friedman, go home! Friedman, go home! Crook: In the minds of many people, the reforms in Chile were tainted by the political caste of the regime.
That did set back the cause of liberal economics.
It made other countries more resistant to the idea of market reforms than they otherwise would have been.
(funeral dirge playing in distance) Narrator: The economic reforms in Chile may have had little immediate impact on the world, but the ideas behind them were gaining momentum.
In the Soviet Union, where the aged leadership was dying off and the economy was moribund, people were starting to question the system.

Yergin: By the 1980s, it was becoming clear to the better informed that the Soviet system really wasn't working, but they couldn't really talk about it publicly.
They talked about it in their kitchens, they talked about it in small groups; but it was not something that could be talked about in the public.
Narrator: In Leningrad, the cradle of Lenin's revolution, an economics student was asking if the solution lay not in Marxism but in markets.
Man: I'm interested in what has happened in the economy.
I start to feel that there is something wrong.
There is some illness in the economy, but I try to discuss it with my professors, I get no feedback.
You feel that either the world around you crazy or you yourself crazy.
Narrator: Chubias helped to organize seminars far from the prying eyes of the secret police.
0ne of his co-conspirators was a young economist from Moscow.
Translator: We were all in our 30s, researchers or teachers who specialized in the Soviet economy.
We could see how it worked and were well aware of its weak points.
I read books by Friedman and Hayek with great interest.
They were our inspiration.
Chubias: 0n that stage, definitely we do understand that this thing is quite risky.
Gaidar: Some of our sessions took place behind closed doors.
We didn't trust everyone at the seminar, so we kept some people out.
0ur discussions were not revolutionary, but they were far beyond the limit of what was politically permissible.

Narrator: After a day arguing the pros and cons of a market economy, they would sit around the campfire and tell jokes.
Chubias: There was the idea that Gaidar will become prime minister maybe, which sounds at that time absolutely crazy and everybody laughing.
And another guy said that, "Yeah, he will be prime minister or he will be prisoner." Narrator: But by 1985, it was not just economics students who were asking what was wrong.
When Mikhail Gorbachev became leader of the Soviet Union, he was appalled by the economic decay.
(Gorbachev speaking Russian) Translator: There was a government commission to examine the problem of women's pantyhose.
Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't solve the problem of women's pantyhose.
There's no toothpaste, no soap powder- not the basic necessities of life.
It was preposterous and embarrassing to work in such a government.
Yergin: Mikhail Gorbachev was what the Soviet Union had been waiting for- a new young dynamic leader who was going to reform the system.
But that system had been propped up for a decade and a half by high oil prices, and just after he came in, the price of oil collapsed, which meant that the economic problems facing the Soviet Union were even more enormous.
Narrator: Gorbachev's attempt to restructure the economy was called "Perestroika.
" Gorbachev (translated): Perestroika was a reform that aimed at gradual political change to create an infrastructure for market economics.
We had several generations with no experience of markets.
You can't just announce the markets and see them appear overnight.
I was actually saying it will take a generation for it to start working.
He started to allow a certain amount of private enterprise, but it was really a very uneven process.
He ended up removing many of the tools of control of central planning, but didn't really replace them with anything else.

Narrator: Gorbachev faced mounting pressure from the West.
The U.S.president believed in the economic philosophy of Milton Friedman and Chicago.
Woman: Mr.President! Mr.President, Mr.President! Narrator: Ronald Reagan was not alone.
He had a political soul mate in Margaret Thatcher.
Britain's prime minister had already embarked on a radical free-market economic revolution at home.
Thatcher and Reagan were determined to go on the ideological offensive.
Their political rhetoric began to heat up.
(applause) Reagan: Thank you very much.
What I am describing now is a plan and a hope for the long term- the march of freedom and democracy, which will leave Marxism/Leninism on the ash heap of history, as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people.
Thatcher: Up to that time, the whole doctrine had been one of contained communism.
That wasn't enough for Ronald Reagan and me.
And we thought we should make it quite clear to communism that it could and would never win, and that we would go and fight the battle of ideas between what the free world had to offer compared with the dictatorship and tyranny and cruelty of communism.
(cameras whir and click) Narrator: Ever since Gorbachev's first visit to Britain, Margaret Thatcher never missed the opportunity to debate him on the evils and inefficiencies of communism and its system of central planning.
Gordievsky: Speaking to Gorbachev, she said, "Mikhail, you see how your economy is organized, "centralized, entirely led by the Kremlin? "Look at me in Britain and the West.
"We have market economy, and it is running itself.
"I don't have to tell different industries what to do.
"I don't deal with it at all.
"My job compared with your job is much easier.
"And you would be able to enjoy your job "as head of the Soviet Union much more if you had a market economy." (cheering) Narrator: In 1987, President Reagan carried this war of words to the most symbolic stretch of the Iron Curtain: the Berlin Wall.

Reagan: General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate.
Mr.Gorbachev, open this gate.
(cheering) Mr.Gorbachev, tear down this wall.
(cheering continues) (reporter speaking Polish) Narrator: Margaret Thatcher carried the free-market message to Poland in 1988.
Mrs.Thatcher had agreed to meet the Communist leadership, provided she could also visit the port of Gdansk.
Almost a decade earlier, in 1980, shipyard workers here in Gdansk had taken a stand against communist rule.
They had struck against the price rises and food shortages caused by a crumbling economy.
Their leader was an electrician named Lech Walesa.
(Walesa speaking Polish) Translator: The country was so much in debt, with the West refusing to lend us any more, that the whole system was failing.
It was more and more inefficient and everybody, even the communists, knew it.
Narrator: Lech Walesa climbed the shipyard gate to announce a momentous victory.
The workers had forced the government to recognize "Solidarity," the free labor union.
(speaking Polish) (crowd cheering) (Walesa speaks briefly) (man speaking Polish) Translator: I thought they didn't know what they were fighting for.
I thought they were just fighting for a pay rise.
0nly then did I learn it was all about freedom.
Narrator: Ten million Poles joined Solidarity.
Under Walesa's leadership, Solidarity became the main opposition to Communism.
But in 1981, after a year and a half of strikes and unrest, the government declared martial law.
Walesa was placed under house arrest.

When Thatcher visited Poland in 1988, she demanded that the Communist government allow her to meet Lech Walesa.
(Walesa speaking Polish) Translator: You didn't say no to Mrs.Thatcher, No one refused her.
So her noticing us and demanding a meeting with me and the others- that was a crucial event.
Powell: She came into the city of Gdansk onboard a small ship, and as she went past the shipyards, all the cranes and the dockside was lined with shipyard workers, all cheering and waving.
And one began to sense here was an extraordinary experience in the making.
(Jankowski speaking Polish) Translator: The shipyard workers were not only sitting on the gate but they were also on the roofs surrounding the shipyard.
She's a tough lady.
She conquered the hearts of the people of Gdansk.
(crowd chanting "Solidarity" in Polish) Narrator: Solidarity workers escorted Mrs.Thatcher to a church.
(organ playing, woman leading congregation in song) Powell: Great crowds sang the Solidarity anthem, a haunting anthem.
(congregation singing anthem) (Jankowski speaking Polish) Translator: I could see she was very emotional about this visit.
Her eyes registered everything that went on around her.
Powell: It's one of the very few times that I saw tears in Mrs.Thatcher's eyes, as she was so moved by this expression of longing for liberty.
(congregation singing anthem) Narrator: At the house of Walesa's priest, Margaret Thatcher met with the leaders of Solidarity.
A Solidarity cameraman recorded this historic meeting, and Mrs.Thatcher arguing that economic freedom and personal freedom go hand in hand.
Thatcher: If you have a free society under rule of law, it produces both dignity of the individual and prosperity.

Powell: Although it sounds very bossy and interfering, I think they were genuinely grateful.
Good grief! (laughter) "You, Solidarity," she said, "you must have your own ideas and plans worked out.
It 's no good just being popular." How do you see the process from where you are now to where you want to be? Because whatever you want to do, it's not only what you want to do, but how- the practical way- you see it coming about, if you were to write down the ten steps from where you are now to where you want to be.
Powell: And at one point she said to Walesa, "But how do you get your thinking over to the Polish government?" and he laughed and pointed to the ceiling and said, "There's no trouble. They've got this meeting bugged."
Translator: This meeting with Mrs.Thatcher made these future politicians recognize the opportunities within their grasp.
Thank you very much, thank you.
(Walesa speaking Polish) Translator: Without this meeting, there would have been no victory.
That's for sure.
There would have been delay, greater difficulties or even our destruction.
(crowds chanting) Narrator: Thatcher's free-market message seemed to offer an escape from a Polish economy that was debt-ridden and riddled with shortages.
Yergin: As the communist economies got into deeper and deeper trouble, reformers and economists within the Soviet world began to look outside for solutions and for alternative paths.
They looked at the miracle economies of Asia.
They looked at what was happening in the United States and in Western Europe, and they looked even as far as Latin America.
(marching band playing) Narrator: 0ne of the poorest countries in Latin America and with a history of 189 military coups, Bolivia was also one of the most unstable.
Man: When I was going to college in Texas, first question you'd be asked is who's the president of Bolivia this week? Second question down the road was, "You're from Bolivia.
"Ah, Bolivia.
What's the inflation rate in Bolivia this week?" Because we had galloping hyperinflation that destroyed our economic base.
We found that Bolivia was the seventh highest inflation in the history of man.
23,500%.
Prices increased by the hour.

Narrator: The cost of food and clothes kept increasing.
Before it was all over, the total inflation averaged one percent every ten minutes.
Quiroga: Seven out of ten Bolivians live in poverty.
The poor people get hurt even more.
They see their pockets being eaten away by inflation that is galloping around.
Lozada: It's like a tiger- hyperinflation, if you don't kill it and you only have one bullet, it'll eat you.
Narrator: The root of the problem was government finances.
The government was spending 30 times more than it received in taxes.
Across the continent, Latin America's uncompetitive economies had been piling up debt.
In the 1970s, a massive hike in world oil prices left foreign banks awash with petro-dollars.
So here were the international banks with billions of dollars and nowhere to earn interest on it.
They discovered Latin America.
Lozada: We were offered unreasonable amounts of money.
These banks, who were very unwise in their lending policy, came to the happy conclusion that countries don't go broke.
It 's true, but sometimes they don't pay.
Guess what? 0ne day these countries could no longer afford to repay their debts.
(brokers shouting orders in Spanish) Narrator: In 1982, a financial crisis in Mexico triggered a chain reaction that caused the 1980s to be known as Latin America's "lost decade." Bolivia was probably the most severe case of how things had gone wrong in Latin America.
For decades they just printed money.
They collected no taxes.
If you can't collect taxes, you've got to make the money somehow, so they just printed it.

Lozada: Bolivia was a basket case.
We were considered hopeless.
We had help from nobody, we were totally alone.
The World Bank had closed its office, the IMF had pulled out its representative...
and the American government and other friendly nations wouldn't answer the telephone.
(telephone ringing) Narrator: At 29, economist Jeff Sachs had just become one of Harvard's youngest full professors ever.
Sachs: In 1985, some former students sent me a note asking whether I would be ready to come to a meeting with a group of visiting Bolivians.
Narrator: The Bolivians had come to Harvard to take part in a seminar on the hyperinflation that was ravaging their country.
I was absolutely fascinated, made a few observations.
Somebody in the back of the room piped up and said, "Well, if you think you know what to do, you come to La Paz." When I got to La Paz in July 1985, the inflation rate was about 60,000%.
It was an extraordinary and terrifying thing to see, actually.
It was a society at the edge of the precipice.
Narrator: Bolivia's politicians were paralyzed.
0nly one man seemed to know what to do.
I met a man at a cocktail party one of the evenings at work.
I didn't know him at all; I introduced myself.
He said, "What are you doing?" I said, "I'm writing an economic plan for the next government." And I said, "I'm very, very pleased "that you're studying this "because we're going to beat these guys and you can come and work for us." So they all laughed.
(laughter) Sachs: He said, "0h, that's very interesting, What do you have in mind?" And I described a few elements, basically how to stop a hyperinflation.
And he said, "No, no, you have to go much beyond that.
"You don't understand, we need so much more.
"You're just going on the surface.
"This country needs a complete overhaul.

We've got to get out of the mess that we're in." I wasn't sure whether he was provoking me, whether he was kidding, whether he was sober, whether he knew what he was doing.
It turned out that this was Goni- Gonzalo Sanchez de Lozada, a genius.
Narrator: Goni's party did win the election and he became minister of planning.
He told the president that Bolivia was running out of time.
Man: We told him you have 90 days before Bolivia's hyperinflation becomes the highest inflation in world history.
So he told us, "0kay, you have 20 days.
You have to start working now." There was a big discussion whether you could stop a hyperinflation or an inflation period by taking gradualist steps.
In this, Jeff Sachs was influential.
He said all this gradualist stuff just doesn't work.
When it really gets out of control, you've got to stop it.
Like in medicine, you've got to take some radical steps, otherwise your patient is going to die.
Narrator: To avoid leaks, they worked at home.
Every few days, Goni reported to the president.
We said, "Look, boys, you've got one chance "and remember, as Machiavelli said, "'It's all the bad news at once, the good news, little by little.'" So he said, "Get it all done." Shock therapy is get it over, get it done, stop hyperinflation and then start rebuilding your economy so you achieve growth.
Narrator: In August 1985, Goni went public with a program called "shock therapy." It caught everybody by surprise.
It had great credibility- it was a shock.

Narrator: Shock therapy spelled the death of dependency theory.
Government spending was slashed, price controls were scrapped.
Import tariffs were cut.
Government budgets were balanced.
Cariaga: We didn't use highly sophisticated economic theory to deal with hyperinflation.
We just used very simple things such as: From now on the government will only spend what it gets.
You get one peso, spend one peso.
You get two pesos, spend two pesos.
If we don't have it, we don't spend it.
No borrowing from the central bank, and therefore the central bank did not have to print money.
Narrator: Shock therapy meant that the price of essentials- transport, food, fuel- all shot up.
Until then, people had thought that only a military dictatorship like Chile's could impose such tough measures without tearing society apart.
Yergin: Bolivia may be a small country, but it had a very big impact in terms of kick-starting reform throughout Latin America.
In Brazil, a former professor who actually used to teach the dependency theory, launched a program of economic reform that looked a lot like shock therapy.
Argentina was suffering from 20,000% inflation, and the new president of that country said, you know, we've seen this movie before.
Man: Pro-market reforms could be implemented under a democracy.
And we demonstrated that it was possible here in Argentina.
Narrator: All across Latin America, governments began to sit up and take notice.

Lozada: I think the Bolivian experience did have influence.
The fact that we did it in democracy, we did it without great social violence had impact on economic thinkers and on politicians.
Sachs: In late 1985, as we were struggling late into the night with a problem, he said, "You know, this is extraordinarily hard, "but what's happening here, this is going to have to happen, all through Latin America." I watched it unfold, one country after another.
Narrator: It is a curious fact of history that what happened in Bolivia was to have a direct impact on the frozen economies of Eastern Europe.
(foghorn blows) Sachs: I was approached by a Polish government official who had watched the Bolivian reforms and then had seen the work that I had done in Argentina and Brazil.
He finally asked me, well, would I go to Poland and help.
The Poles themselves feared that they were descending into starvation.
The shops were utterly empty for miles.
I would see a woman just standing on the street sobbing: "There's no milk in this city.
"I can't find any milk for my child.
What am I going to do?" It was terrifying.
Narrator: Sachs arrived on the very day that roundtable talks agreed there should be free elections in Poland.
Translator: The situation was more than dramatic.
(speaking Polish) 0ne can change a political system overnight, but an economic system needs years.
(cameras whirring and clicking) Yergin: Whenever Soviet power was challenged in Eastern Europe, the response was very clear- it was tanks, it was the Red Army.

That was the case in Berlin in 1953, Budapest in 1956, Prague, 1968.
But the answer was different in Warsaw in 1989.
Solidarity won 99 out of a hundred seats.
The head of the Polish Communist Party called Moscow for directions.
Mikhail Gorbachev's answer was stunning.
Do nothing- accept the outcome of a free election.
And that was really the phone call that ended the Cold War.
(cheering and chanting) And of course the great symbol of the end of the Soviet empire was the fall of the Berlin Wall.
0ne country after another broke free of communism: Poland, Hungary, Czechoslovakia, Romania.
(crowd roaring in celebration) 1989 was truly a miracle year.
Narrator: Poland was free.
Now Solidarity had to liberate the Polish economy.
Late one night, Sachs met the Solidarity economist Jacek Kuron in a Warsaw apartment.
Sachs: I was trying to explain how you get out of this mess that the communist system had left behind.
Every couple of minutes he'd pound on the table, (imitates pounding): "Yes, yes, yes, rozumie."
I understand.
And we'd go on, and, "Rozumie, rozumie!" and it was very...
you know, it was, it was really exciting.
We went on for a few hours like this.
I was exhausted, the room was filled with smoke.
He said, "0kay, clear." "Write up the plan." We got up, I said, "Well, this will be a great honor.
We'll send you something just as soon as we can." "No! Tomorrow morning, I need the plan." I laughed, and he said, "I'm absolutely serious.

I need this written down now." We wrote up a plan that night and delivered it the next morning.
They distributed it to the Solidarity members of the parliament.
Narrator: Like Sachs, Solidarity's new finance minister, Lescek Balcerowicz, believed transition had to be rapid and massive.
Balcerowicz: Just after breakthrough, there is a short period- a period of extraordinary politics.
By definition, people are ready to accept more radical solutions because they are pretty euphoric of...
freshly regained freedom.
0ne could use it only in one way: by moving forward very, very quickly.
Poland decided to do what Bolivia did, to introduce shock therapy- cut back on government expenditure and try and introduce a market system and see if it could work.
Narrator: Prices almost doubled and shortages didn't end.
All Balcerowicz could do was chew his nails and wait for the law of supply and demand to kick in.
But then, after a few days, farmers began to bring their produce to market.
Balcerowicz: I was going for a walk, and we were looking at the prices in the shops, the prices of eggs.
Narrator: His aides told him to concentrate on the price of eggs.
If eggs appeared, if eggs got cheaper, the market would be working.
Eggs did appear.
And then the price of eggs began to fall.
Balcerowicz: And I remember that very important day when the prices of eggs are falling.
This was one of the signals that the program, the stabilization program is working.
(foghorn blasts) Narrator: But reforming state-owned heavy industries would prove a much bigger challenge.

Balcerowicz: 0nce Poland became free, one of the problems I have to face was a fight about privatization.
Yergin: The big problem was the old industries inherited from the communist past.
And there...
there were wrenching problems of unemployment, of making them efficient, keeping them running, and that's where you saw a lot of...
a lot of the pain.
Narrator: Making over-manned, state-owned industries efficient or profitable meant wide-scale layoffs for Poland's blue-collar workers.
Man: When I became the prime minister, the euphoria of transition was almost over.
We had 20,000 strikes, sometimes organized by my former colleagues from Solidarity movement.
(speaking Polish) Narrator: Solidarity began to lose support as workers felt the pain of reform.
(speaking Polish) Sachs: I was asked to go to some factories, to meet with workers...
...to try to explain what my vision of this might be.
(man speaking Polish) Translator: In the beginning we were made to believe that it wouldn't take long for things to get better.
Sachs gave us a rosy vision for the future of our economy.
We soon found out that the program imposed on us from the outside most harmed precisely those Poles who had contributed so much to political freedom.
Narrator: But elsewhere the market was flourishing.
Tens of thousands of small businesses sprang up and the Polish economy began to boom.

Bielecki: You suddenly had thousands of people trading the same products in front of the state-owned shop but at a much lower price.
This is phenomenal because it shows enormously entrepreneurial drive of the Polish people.
When you have your five minutes, take it.
When the Polish people finally got that opportunity they took the chance, they used the chance.
Narrator: At the Soviet embassy in Warsaw, a special observer from Moscow had been monitoring the economic reform.
The Soviet embassy in Warsaw had a feeling that this is a disaster for them.
They didn't want to send my telegrams to Moscow.
I was describing what's going on there, and they would completely disagree.
I was very supportive, and they were very negative.
I was sending the analysis to Gorbachev.
"Balcerowicz is doing the right thing for Poland." That's what I was saying.
Narrator: Gorbachev asked Yavlinsky to write up a plan for radical economic change.
Yavlinsky: I hoped to do in a year and a half as much as possible to make a transition from the Soviet economy to the market economy.
I understood we should move as quickly as possible.
Narrator: The U.S. threw its moral support behind the free-market reforms.
Baker: We want to learn a little bit more about Mr.Yavlinsky's efforts.
A country is trying to change 70 years of political and economic philosophy and change it in a way that moves it in exactly the opposite direction.

Narrator: But Gorbachev shrank from shock therapy.
The Yavlinsky plan languished on his desk.
(speaking Russian) Translator: Poland was definitely a pilot project, and the fact that reforms started there was very important.
But please understand, no country can repeat the reforms of another country.
Gorbachev was looking at Poland, he's looking at...
he's looking around the world trying to find some formulas that would help the Soviet Union make the transition.
And what more logical place to look than in Communist China, which is marching towards the market? Narrator: In 1989, the year the Berlin Wall fell, Gorbachev visited Beijing.
As he arrived, protesters were gathering in Tiananmen Square.
In China, too, the Communist hold on power looked unsure.
But Gorbachev found the Chinese economy was being transformed under its leader, Deng Xiaoping.
(applause) Yergin: Deng Xiaoping was an old-style communist.
He'd been very close to Mao Zedong, but he had fallen from power and had spent time, when he was under house arrest, pacing around in the courtyard thinking through what had gone wrong.
Why was this communist dream turning into such an economic nightmare? And when he came back to power, he said, "I have two choices: I can distribute poverty or I can distribute wealth." Narrator: Deng had been impressed by the success of the Southeast Asian economies, in which overseas Chinese were so prominent.
Man: They were lucky that after Mao died, Deng Xiaoping opened up China.
He had to fight his own conservatives, the orthodox communists, who were terrified that this meant dismantling the socialist state that they were building.
Deng Xiaoping said, "Don't worry, "we're not pursuing capitalism.
We're pursuing socialism with Chinese characteristics." Stanislaw: The Chinese decided to keep the political system of communism but to get rid of the economic system called communism and go towards market socialism.
With that they could keep their political control, but also have the benefits of the marketplace.

Yergin: By the mid-1980s, China embarked on its era of very high economic growth rates, moving towards a market system, moving towards engaging with the world economy.
(cameras whirring and clicking) Narrator: Under Gorbachev, there had been intense argument whether China's route to the market was right for Russia.
Sachs: The KGB said, "Well, why don't we do what China's doing- "keep political control, but open up on the margin.
"And we'll maintain our political power, we'll maintain the state enterprises, but we'll grow." That's what China did.
Narrator: Tiananmen Square showed how far the Communist Party was willing to go to hold on to power.
Yew: Deng Xiaoping believed in restructuring before opening up.
Glasnost and freedom and transparency and so on- that had to wait.
First, restructure and restructure under the old system by directives so that nobody can say no.
Deng understood that if you released these forces, unless you do it in a controlled way, the system will collapse.
He saved the country from an implosion like the Soviet Union.
Sachs: Many people say, "Why didn't Gorbachev do the China approach?" Without understanding that that, of course, is what Gorbachev tried to do for four years.
They just don't get it.
They don't understand that Russia was an 80% urbanized, heavy industrialized economy, whereas China was a peasant economy with 80% of the population in rural areas.
In Russia, the nonstate sector was 1%, it was nothing.
So, yes, you could get a few restaurants going, but you couldn't get to the core of the problem without addressing the industrial core of the system.
So they had no easy way out.

They had no gradual track like China.
Woman: Gorbachev got stuck with economic reform.
He began too late, and his reforms were too cautious.
He never touched the foundation of the planned economy.
Sachs: This was a society, while on the surface it looked stable, was more like one of those cartoon characters that's run off the cliff, is stationary for the moment, doesn't realize it's about to reach a free fall.
And it did go into that free fall.
(gunfire) Narrator: In August 1991, diehard communists staged a coup.
(man yelling in Russian) Boris Yeltsin became the voice of democratic resistance.
(crowd chanting) (speaking Russian) Narrator: The coup collapsed.
Gorbachev survived the plot, but his prestige was destroyed and the Soviet Union's days were numbered.
(Gorbachev speaking Russian) Yergin: The end of December 1991, Mikhail Gorbachev went on Soviet television.
He told his viewers that the Soviet Union would within a few days cease to exist legally.
After seven decades, the Soviet Union was over.
It was finished.
Fade to black.
Narrator: The president of Russia was Boris Yeltsin.
Unlike Gorbachev, Yeltsin wanted to move fast.
He chose the young reformer Yegor Gaidar as the man to turn Russia into a market economy.

Yergin: For Gaidar, it was a shock.
There was no money in the treasury, there was no gold, there was not even enough grain to get through the winter.
It was unclear who was even in charge of the nuclear weapons.
Gaidar later said that it was like flying in an airplane and going into the cockpit and finding no one at the controls.
(speaking Russian) Translator: It was clear to me that the country was not functioning, the economy was not working, and that if nothing was done- and everyone feared that nothing would be done- it would end in catastrophe, even a famine.
Narrator: Gorbachev's halfway reforms had left the economy in a tailspin.
Every essential was in short supply.
(crowd yelling) (people yelling) You've been queuing everyday to get something- sugar, matches, salt.
The stakes really were very high.
Economic situation was absolutely...
was absolute disaster.
Inflation was about 20% a month.
The shelves stood empty.
The prices were skyrocketing.
Gaidar had to move very fast.
Narrator: Gaidar was now in charge of the entire Russian economy, and he was still only 35.
He assembled a team of youthful free-market reformers, among them 36-year-old Anatoly Chubais.
Communist hard-liners nicknamed them "the little boys in pink shorts." Jeffrey Sachs, now 36, was called on to advise on economic reform.
I of course had the Poland experience in mind.
Russia turned out to be something quite different.

Narrator: The parliament was dominated by Communists and other parties that opposed reform.
Sachs: Gaidar was under remarkable political attack from the first moment.
It wasn't seven days after the start of reform that the head of the parliament called for the resignation of the government, for example.
(no audio) (speaking Russian) Narrator: Gaidar and his team wanted to use economic reforms as a political weapon to smash the old communist system before it destroyed them.
It was more a survival tactic: How can we destroy the communist, centrally controlled economy? Let's destroy the army, let's destroy the KGB, and lets destroy centrally controlled planning.
Rather than, how are we going to build an economy? (fireworks popping, crowd cheering) Narrator: New Year's Eve, 1991- next morning, prices would be freed.
Gaidar's reform would directly affect the man and woman in the street.
(crowd cheering) It would also mean the end of everything the communists had stood for.
Next, Gaidar abolished the Soviet law that made private enterprise a criminal activity.
Gaidar believed that an effectively free market would put an end to shortages.
He didn't have long to wait.
Translator: I was driving to my office on 0ld Square, past Detsky Mir, the children's shop.
And I saw a huge crowd of people.
I sent my aides to find out what was going on.
And they saw hundreds of people with various kinds of goods.
They were holding up the decree on the freedom of trade whilst trying to buy or sell stuff.
So that's when I understood that in 75 years it had not been possible to extinguish this entrepreneurial spirit.
That was one of the pivotal points.
Starting from then, there were no more shortages in Russia.
I felt that we were right and that market forces worked, even in this tortured economy.

Narrator: The market may have been reborn, but for ordinary Russians, reform meant higher prices.
Shevtsova: I hurried to a department store to look- to look at the faces of Muscovites, whether they would revolt looking, you know, at all these skyrocketing prices, because Gaidar thought that they would increase twofold.
They increased twelvefold.
Narrator: Prices kept rising.
The hard-liners who controlled the central bank made it much worse.
Their policies fueled inflation.
In Norilsk, factory workers like Yuri Khamutov were cleaned out.
(speaking Russian) Translator: Chubais talked about reform, but under him and Gaidar, nothing improved.
We lived worse and worse and worse.
So much for Gaidar's reforms.
Many came north to earn the money to buy a house, a flat, a car, to save for a pension.
And then in one day you were left with nothing.
It was so sudden, some people committed suicide.
Inflation came 500%, 600%, 700%.
The money simply went to the ashes, simply to nothing.
The population was simply smashed by that hyperinflation.
And that's undermined all belief to the economic changes.
Narrator:: The collapse of the Soviet Union reverberated around the world.
For India, it was the end of a role model- the ideal of central planning shattered.
This was telling proof that a command type of economy was not as secure as we had thought.
Therefore, the collapse of the Soviet Union was a major factor which influenced thinking on economic reforms in our country as in other countries.

Narrator: Planned by bureaucrats and cut off from world trade, India's economy had grown stagnant, inefficient and indebted.
In 1991, India stared bankruptcy in the face.
We were borrowing heavily.
We had to mortgage our gold deposits.
0ur growth rate had come to virtually zero.
All this added to a very enormous crisis.
Narrator: In the midst of the crisis, the economist Manmoham Singh received an urgent call from the new prime minister.
He found himself appointed finance minister.
Singh: Well, I said to him that we are on the verge of a collapse.
0ur foreign exchange reserves when I took over were no more than a billion dollars- that is roughly equal to two weeks imports.
(reporters asking questions) The argument was quite simple.
We were in the midst of an unprecedented crisis.
It was time to think big.
Narrator: To the horror of his own political party, the prime minister gave the green light for free-market reform.
Chidambaram: Well, the rank and file of the party were simply bewildered.
They did resist the kind of changes that we brought about.
But we presented them the hard facts that unless all this was done the economy would simply collapse.
Narrator: India's "Permit Raj" was ended.
State control was reduced, government subsidies were cut, tariffs and trade barriers reduced and regulatory licenses eliminated.
We got government off the backs of the people of India, particularly off the backs of India's entrepreneurs.
We introduced more competition to release the innovative spirits which were always there in India.

The economy turned around much sooner and much more deeply than I had anticipated.
Indian industry boomed.
We created a record number of jobs, we were able to control inflation and the economy was growing at the rate of seven percent per annum so our critics were completely silenced.
Narrator: In Russia, the commanding heights of the economy were still in the hands of the state.
In a great idealistic move, the young reformers set out to democratize state industries by simply giving them away.
In charge of this program of privatization was Anatoly Chubais.
(speaking Russian) The 70-year communist monopoly was about to be overturned.
Russians citizens were given vouchers which they could use to acquire shares in privatized companies.
Translator: We need millions of property owners, not just a few millionaires.
All Russian citizens, workers, pensioners and small children will be given privatization vouchers worth 10,000 rubles.
Narrator: There was a problem.
Not one company was ready to be privatized.
Jordan: They had distributed 144 million vouchers to the people but had no practical idea on how to get companies through the privatization process and actually into public hands, away from the state.
Narrator: The young reformers asked Boris Jordan- one of the first foreign bankers to set up shop in Moscow- to find a company to privatize.
But they had to move fast.
(man speaking Russian) Jordan: They knew that if they didn't at least launch the program by December 9, 1992, when the Congress of Peoples Deputies was getting together, the Communists were going to kill privatization.
(speaking Russian) Narrator: The young reformers were in a race against time.
Jordan: It was very tight.

If there wasn't going to be privatization there was going to be no market economy.
Narrator: They narrowed the search down to a business on the edge of Moscow.
It was not exactly what Lenin would have called the commanding heights, but the Bolshevik Biscuit Factory did bake Russia's favorite cookie.
Jordan: We had to, I wouldn't say bribe, but incentivize them.
We gave managers of their factories and the employees of the factories about 50% of the stock in the company.
The balance of the equity would be sold in the public markets through these vouchers.
We opened up the first official auction of a Russian company to the public on December 8, 1992.
(men shouting) Narrator: 0n the day of the auction, fury at the economic reforms boiled over in parliament.
(people shouting) Communist hard-liners forced a vote of no-confidence in Gaidar.
I remember it very well.
We'd already opened the auction, and I was sitting in the auction center.
(auctioning in Russian) I was watching the television, and I watched Gaidar get removed.
Narrator: Communist opposition had forced Yeltsin to sacrifice Gaidar.
His replacement, Victor Chernomyrdin, was a product of the old Soviet central planning system.
Sachs: There's no doubt that after Gaidar was thrown out of the prime ministership at the end of 1992 that the level of corruption rose tremendously.
Narrator: State companies were sold off, and the trade in vouchers led to a fledgling stock exchange.
A market economy was taking hold, but it was getting off to a shaky start.

In Moscow, this was the time of "gangster capitalism." Speculation and crime were rampant in what some called "the Wild East." A lot of societies have corruption, but Russia had, uh, an elite that had grown up in such an amoral environment under the Soviet system that they really did believe that property is theft.
"0kay, now we're in a private property system, we'll steal it," and Russia had a lot to steal.
You had the oil, the gas, the nickel, the chromium, the diamonds, the gold.
This extraordinary combination of huge natural resource reserves- and they were in state hands.
Narrator: The biggest companies, the major industries, were still controlled by their all-powerful managers, former Soviet apparatchiks.
Known as the "Red directors," they were utterly opposed to the young reformers and privatization.
The only way to privatize the commanding heights of the Russian economy was to wrest control away from the Red directors.
Yavlinsky: In Eastern Europe, the real democratic revolution happened.
It was a real replacement of the political elite.
In Russia, the same people changed the jackets and changed the portraits in the rooms, and instead of saying "communism" and "Lenin" and "five-years plan," started to say "market," "democracy," "freedom." (men conversing quietly in Russian) Chubias: I do remember one of the first meeting with directors, which was very tough, which was very tough.
(conversations continue) They hate the language we speak, they hate the face we have, they hate everything which was connected with us.

These guys was the real owners of the country.
I was fighting for the real commanding heights in terms of who run the economy.
Who run the economy: market or the Soviet directors? (siren wails) Narrator: The vast factory complex at Norilsk was to become a major battleground between the Red directors and a new kind of Russian.
Vladimir Potanin was a buccaneering businessman who quit his job in the foreign ministry and within a few years built a small trading company into one of Russia's leading banks.
I decided to become a businessman at the moment when I understood that it is possible.
Because, uh, I grew in a country where it was not possible and there existed even a special article in a penal code of the Soviet Union which banished entrepreneuring activity.
Narrator: Potanin's next venture would lead some to see him as an inspired entrepreneur, others as a robber baron.
In 1995, he decided to make a play for Norilsk Nickel, but to take over Norilsk meant going up against one of the most powerful of the old Red directors, Anatoly Filatov.
Jordan: Filatov of Norilsk- the hardest guy, one of the most powerful men in Russia.
Potanin, who was at that time a relatively unknown person in this country, went up against this guy.
Norilsk Nickel was the test case.
Narrator: Potanin needed allies.
These were the richest of the new entrepreneurs.

They came to be known and hated as "the oligarchs." Potanin: By 1995, we had a new business elite who in my opinion were efficient owners and qualified managers, but they had no property in their hands.
That's why it was the struggle between old Red directors and new managers who gained their money let's say themselves.
Narrator: To break the power of the Red directors, the oligarchs needed political support.
It was politically very difficult to withdraw this power from the Red directors.
Even the government and even Chubais were not strong enough to win easily this struggle.
Narrator: It looked as if the Communists were going to win the upcoming 1996 presidential elections.
(crowd chanting) Yeltsin and the reformers had to find a way to stop them.
Shevtsova: In the beginning of 1996, Yeltsin enjoyed only five percent of popularity.
He definitely needed financial assistance, financial resources from the rich people, the oligarchs.
Narrator: The government and the oligarchs needed each other and they needed to move fast.
The government feared a communist comeback.
The oligarchs feared the loss of their fortunes.
The oligarchs hammered out a secret deal that would enable them to acquire key industries at a knockdown price.
Jordan: Potanin proposed a privatization program which today is still viewed as exceptionally controversial, the loan-for-shares program.
That program entailed Russian business giving the government loans in return for taking the shares of strategic assets as collateral.

In fact, what ended up happening is most of these companies ended up getting sold back to the guy that actually provided the loan.
Narrator: The oligarchs' money would help Yeltsin fight the presidential election.
In exchange, they wanted the commanding heights.
The dilemma was not, should we choose this way of privatization or another way which is more transparent, more open, more public? The idea was, should we choose this way or nothing? (speaking Russian) Translator: The point of the loans-for-shares deal was to create a critical mass of powerful and influential businessmen whose primary interest would be to prevent the communists from coming back.
(man singing in Russian) (crowd cheering) Narrator: With their media companies and wealth, the oligarchs backed Yeltsin's reelection campaign.
(crowd murmuring) (crowd cheering) Singing and dancing endlessly across Russia, Yeltsin surged ahead in the polls and to victory.
Potanin entered Yeltsin's cabinet- the oligarchs' direct voice in the Kremlin.
(men speaking Russian) Potanin had won Norilsk Nickel, and with it, a third of the world's nickel.
For a company with annual sales of $2? billion, Potanin paid just $170 million.
Potanin: I felt a great feeling of victory.
Several years before, it was even difficult to think about struggling with Red directors.
The struggle was won by us, by those who came who are younger, who are more active and more prepared for competition.
Many years later came feeling of great responsibility, because when you win, you become responsible for everything what is going on.
But it came a little bit later.

Narrator: To many, the loans-for-shares deal was more than a scandal.
It was the theft of the century.
But it was a price Yeltsin was willing to pay to keep the communists out.
Yavlinsky: The task was not to distribute the property between ten personal friends.
There were no need for that.
The task was to give the property to millions of people.
We can say that it was artificially...
yes, it was cheap, relatively cheap.
It was not transparent- yes.
But, uh...
I think that it was difficult to avoid.
Maybe it was the only way.
Yavlinsky: The goals are justifying the means.
That's how the Bolsheviks made the revolution in Russia and that's why it is disaster.
Always when you are using the formula that the goals are justifying the means, you are destroying the goals.
Narrator: In Yeltsin's Russia, crony capitalism thrived.
For many, reform came to mean corruption, inflation and inequality.
Then in 1998, Russia defaulted on its debts and the stock market crashed.
The Yeltsin era ended with his abrupt resignation on New Years Day, 2000.
(fireworks popping) By the start of the new millennium, the decade of radical change was over.

A world that not so long ago had looked to socialism, central planning and protectionism, now looked to the market.
(squeals) Yergin: It's breathtaking what's happened in the last 20 years or less.
It 's as though the whole world has changed its mind.
Everywhere- in India, China, Asia, in Latin America, in Europe, in North America and above all, in the Communist world, governments have retreated from the commanding heights of the economy.
Narrator: Having thrown off communism, the countries of Eastern Europe continued to embrace free markets.
Poland has flourished.
What's driving Poland are two million small businesses, almost all started after economic reform.
0f all the cases of shock therapy around the world, that in Poland worked just about the best.
It really got the economy going.
Narrator: Businesses like Zofia Bielzycks's gym now employ over half of the country's workforce and produce close to 75% of its total output.
(woman speaking Polish) Translator: After 1990, lots of companies and foreign firms appeared in Poland.
The forecasts were very good, and I think they have come true.
But we Poles need time for everything to fall into place.
Narrator: In Latin America, the result of reform has been mixed.
Chile continues to set the pace.
A democracy, it follows free-market policies, and is one of the world's seven fastest-growing economies.
The first democratic president after Pinochet maintained the reforms and also tried to improve on them.
Lagos: It is not something of the right-wing or the left-wing parties.
It 's simply sound economic policies.
Now, to learn that took some time.

Narrator: Bolivia is still poor, but it has been growing.
Lozada: Many people would say, "Well, we're still poor." I would say to them, Bolivia before we stabilized the economy was a poor country with hyperinflation.
Bolivia after we stabilized the economy is a poor country with stability.
Crook: I think there is some disillusionment in Latin America that they have had problems despite the reforms.
Getting to a steady high rate of growth is a difficult thing.
And it certainly requires more than sorting out your inflation problem.
And now we see a sort of financial collapse in Argentina.
For several years, Argentina looked like the poster boy for economic reform.
But it turned out that the reforms were quite incomplete.
The country ran up huge international debts, and in 2002 it had an economic meltdown.
(crowd chanting in Spanish) At the end of the day, the strains were too much, and now we see a great deal of political turmoil raising all kinds of questions for the future.
(gunshot) (gunshots) Narrator: In India, Narayan Murthy no longer needs 50 trips to Delhi for permission to import one computer.
Instead he has built one of the world's biggest software companies.
India's economy has loosened up and it is growing.
Well, it did work, I think certainly it did work.
And what is interesting is that all the parties that criticized the party that introduced reforms are now taking forward those reforms.
So I think '91 to 2000 has shown that the economic liberalization which started out of compulsion has ended up being a process that is being driven by conviction.

Chidambaram: All this has brought about a sea change.
In fact, nobody in India today would question the correctness of the decision to open up India's economy.
Even the communists grudgingly concede that this is the right path now.
Narrator: In Russia, ironically, the 1998 stock market crash and the default on debts may have been a turning point...
a second chance for Russia's still new market economy.
Under President Putin, the institutions of a market economy strengthened and the oligarchs were reigned in.
Yergin: Russia has changed a lot since the loans-for-shares deal of the mid-'90s.
It 's had strong economic growth over the last several years.
Companies have modernized, and a lot of the reform legislation that should have been done five or six or seven years ago has finally been enacted.
I remain cautiously optimistic.
But even if Russia gets out of this mess, even if democracy survives, even if all market reforms take root- and all of that is possible- the 1990s was so costly unnecessarily that I'll never be able to look at it and feel that, "Gee, it all ended up well in the end." The problems are still there- the problems of inadequate health care all the way to corruption.
But it's a society that's changing.
President Putin sees Russia's future as being part of the world economy.
Shevtsova: I'm looking at my son who is 19 years old and I'm looking at other people and I am amazed.
They are ready to live in this global environment.
These are the people absolutely free of any old stereotypes.
They don't remember communism.

My son is coming home and asking me, "Mom, can you tell me what Marxism is?" We spent only ten years after collapse of communism and my son doesn't know what communism and Marxism is.
Narrator: The world had indeed changed its mind.
Capitalism was now the rule almost everywhere.
The stage was set for a single global marketplace woven together by trade, technology and investment.
The era of globalization had begun.
Next time on Commanding Heights...
Man: Today in the technological world in which we live it's possible to do in Bangalore what is being done in Silicon Valley.
The promise and the perils of a global economy.
Man: All these people who had decided there was no risk anywhere panicked and decided there's got to be massive risk everywhere.
"The New Rules of the Game, " next time on Commanding Heights.
Watch all of Commanding Heights on-line at pbs.org.
This enhanced net-cast 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: Captioned by Media Access Group at WGBH access.wgbh.org 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.
Globality may be new to some...
but to us, it's the way we do business.
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: and by contributions to your PBS station from:

Commanding Heights: The Battle of Ideas

The Battle of Ideas

Directors:Greg Barker | William Cran
Writer:Greg Barker
Release Date:2002 (USA)
Commanding Heights: The Battle for the World Economy is a book by Daniel Yergin and Joseph Stanislaw, first published as The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World in 1998. In 2002, it was turned into a documentary of the same title, and later released on DVD.

As the 20th century drew to its close and our new century began, the battle over the world economy intensified.
Some people feared globalization and questioned the benefits.
Others welcomed it.
Millions of people today are better off than they would've been without those trends and developments, without globalization, and very few people have been harmed by them.
When the terrible events of September 11 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.
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.
This program, with captioning, was made possible by: EDS, offering business and technology solutions from strategy and implementation to hosting.
EDS, managing the complexities of the digital economy.
Globality may be new to some...
but to us, it's the way we do business.
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: and by contributions to your PBS station from: air raid sirens wail in distance Narrator: World War Two.
Sirens sound the alert.
German bombers will pound another British city tonight.
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.
How their battle of ideas still shapes our life and society is our story.
John Maynard Keynes helped the allied governments defend freedom by planning their wartime economies.
Friedrich von Hayek thought government interference in the economy was a threat to freedom.
Man: The debate over market forces, whether you have an economy that's based upon prices or a 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.

Yergin: It was only when Hayek was a very old man that his ideas began to prevail and the world began to change.
Narrator: 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.
Keynes described this global market in which trade flowed freely.
Keynes (dramatized): 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.
Narrator: Hayek summed it up more succinctly: Hayek (dramatized): We did not realize how fragile our civilization was.
Narrator: The murder of an Austrian archduke by a terrorist triggered a world war.
It would be almost 80 years before there was once again a truly global economy.
(doors creak shut, close resoundingly) Narrator: World War I destroyed 20 million lives.
(gunfire) It laid a whole continent to waste.
There was blood and 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 schoolboy.
The fighting was ferocious.
He experienced retreat and defeat.
Hayek (dramatized): The decisive influence was really World War I.
It 's bound to draw your attention to the problems of political organization.

Narrator: He vowed to work for a better world.
Yergin: The First World War was a cataclysm.
People were disillusioned.
People were bitter.
They were looking for something better.
Socialism, communism seemed to promise that better world.
Narrator: By overthrowing the old order, the Russian Revolution aimed to deliver that better world.
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.
(bell tolling) The man who was destined to be Hayek's great intellectual rival was a brilliant young academic at Cambridge University.
But John Maynard Keynes was much more than that.
He befriended writers and artists.
0ne 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.
At the end of the war, Keynes joined the British peace delegation at Versailles in France.

The victorious allies wanted defeated Germany to pay the costs of the war through what were called reparations.
Man: All the statesmen at Versailles could think about was how to squeeze money out of an already bankrupt Germany.
Man: Keynes felt the reparations were out of all proportion to what an economy could really take and would have very destructive social and political and economic consequences.
Narrator: 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.
Keynes (dramatized): "If we take the view "that Germany must be kept impoverished "and her 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." Narrator: Austria had lost the war and its empire.
Vienna was a cold and hungry city.
Revolution was in the air.
Socialists and communists were winning the battle for hearts and minds.
Young and idealistic, Friedrich von Hayek enrolled at the University of Vienna.
Hayek (dramatized): It was during the war that I more or less decided to do economics.
I really got hooked.
Narrator: Socialism seemed to promise a more just society.
Albert Zlabinger, a former pupil and disciple of Hayek: Zlabinger: 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.

Narrator: Much of Vienna's intellectual life took place outside the university in the coffeehouses across the Ringstrasse.
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.
Zlabinger: Ludwig von 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.
Narrator: Von Mises predicted that the new Soviet socialist economy would never work, precisely because the government controlled wages and prices.
Yergin: 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.
And if you don't have them, what you get is a system that doesn't work, or you get chaos.
Zlabinger: Von Mises argued that free markets do it best.
Why fool with anything else? Narrator: In Soviet Russia, it seemed as if von Mises's 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.

Lenin knew that he needed a different kind of policy, and he instituted what 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.
Narrator: Within a year, Lenin was dead.
The mourners at Lenin'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, hyperinflation.
It took a basket full of paper money to go shopping.
Man: You saw people carrying their money on wheels because you had to pay for a piece of bread billions of Reichsmark.
Narrator: Hayek, who was working at a statistical research institute, needed 200 pay raises in eight months.
Money was cheaper than wallpaper.
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.
Hyperinflation wiped out the savings of the middle class.
And that was one of the reasons for the success of the Nazis, of Hitler.
They got support from these people who lost their fortunes.
Narrator: 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.
(jazz tune playing) Yergin: 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.
The Americans couldn't get enough of it.
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 R.C.A., 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.
Narrator: It was a classic stock market bubble.
Then, on Black Thursday, 0ctober 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, no ability to repay, no ability to spend, no ability to consume.
Everything went down.
The farm implements fell, the clothing store, the merchant.
Everything spiraled downward, and of course, with it went the banks.
Narrator: People panicked.
They rushed to withdraw their hard-earned savings.

Man: A 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.
Narrator: 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.
Narrator: The government failed to halt the downward spiral.
In fact, it made things worse.
Announcer: 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 breadlines, in soup kitchens.
Three million Americans are ex-wage earners, unemployed, and the ranks of the unemployed are to soar to 15 million.
Narrator: Banks collapsed.
Industry ground to a stop.
Millions were out of work.
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 drum.
With the failure of capitalism, fascism cast its shadow ever wider.
John Maynard Keynes saw his nightmare coming true.
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.

Skidelsky: 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.
Harcourt: 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 they operated better.
Skidelsky: It was written against the background of not only the collapse of the world economy, but the potential collapse of democratic government.
Hitler became chancellor of Germany in 1933.
Democracy 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.
Narrator: 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." Roosevelt: This great nation will endure as it has endured, will revive and will prosper.
Narrator: Roosevelt's voice of confidence rallied the nation.
He then embarked on a whirlwind program of reform.
Yergin: For Roosevelt and 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.
Narrator: 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 reined in market forces and curbed capitalism.
Under the New Deal, industry became subject to a host of new rules and regulations.
Yergin: And the airline industry was a very good example of that.
You had people that 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.
Narrator: 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.
Skidelsky: Keynes's solution to the unemployment was for the government to spend the money and restore and maintain full employment.
Narrator: Governments, 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.
Narrator: Harvard University became an intellectual bridgehead for Keynes in America.
John Kenneth Galbraith was one of Keynes' leading apostles.
Galbraith: I've said many times I think I had something, maybe quite a bit, to do with bringing Keynes 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.
Narrator: In Washington, Keynes' ideas would begin to turn economics policy upside down.
Governments would learn to live with a little inflation to keep unemployment low.
Galbraith: You resisted conservative finance, borrowed money and hired people across the country, rescuing them from unemployment.
That was the basic essential; and that you didn't worry about accumulating debt or, more precisely, you worried about it, but did it anyway.
Narrator: Keynes's ideas began to gain ground.
Narrator: 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.
Newsreel announcer: 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.
Narrator: In charge of wartime wage and price controls, John Kenneth Galbraith saw the economy rebound.
Galbraith: 0ne 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.
Narrator: In a radio broadcast, Keynes expressed his hope that what worked in war would work in peace.
Keynes (over radio static): If expenditure on armaments really does cure unemployment, a 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.
Narrator: Now teaching at the London School of Economics, Hayek feared that Keynes' 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 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 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 Hitlers, lots of wars, um, lots of Stalins." Now, who was right? Narrator: Most people would have agreed with Keynes, when he wrote this to Hayek.
Keynes (dramatized): "What we want "is not no planning or even less planning...
We almost certainly want more." Narrator: In the battle of ideas, Hayek was on the losing side.
Hayek: I had a fairly good reputation as an economic theorist in 1944 when I published The Road to Serfdom and it was treated even by the academic community very largely as a malicious effort by a reactionary to destroy high ideals.
(train whistle hooting) Narrator: With the world at war, Keynes traveled to Bretton Woods and a grand resort hotel.
Here delegates gathered from all over the world to organize the postwar 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 1930s.
Keynes' idealism and humanity were an inspiration.
Keynes (on recording): There has never been such a far-reaching proposal on so great a scale to provide employment in the present and increase productivity in the future.
And I doubt if the world yet understands how big a thing we are bringing to birth.
Narrator: Keynes did not have long to live.
Ill and overworked, his health gave way, but his reputation and influence outlived him.
Hayek: When Keynes died, Keynes and I were the best-known economists.
Then two things happened.
Keynes died and was raised to sainthood and I discredited myself by publishing The Road to Serfdom.
(Hayek and interviewer laugh) And that changed the situation completely.
And for the following 30 years it was only Keynes who counted and I was gradually almost forgotten.
Narrator: The war was over and the troops came marching home.
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.
Narrator: In Britain the troops were coming home to a general election.
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 Labour candidate.
All these soldiers, they all said, "Never again.
"We're never going back to unemployment, "the Great Depression, to Fascism, to rearmament.
We want to build a new society." (Big Ben's chimes ringing) Narrator: 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.
Heading the campaign against Churchill was Clement Attlee, leader of the Labour Party.
Attlee argued that Britain had planned the war and now planning would win the peace.
We knew that our people would never have withstood the bombardments and the, uh, 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, and the planning and controls continued after the war.

(crowd cheering) Narrator: Churchill, who was influenced by Hayek's book The Road to Serfdom, opposed planning and controls.
Churchill: No Socialist system can be established without a political police, some form of Gestapo...
Man: He got carried away with this "Gestapo." And this, of course, was carrying things to absurdity.
"Gestapo" in Britain! Narrator: Attlee, a mild-mannered Christian socialist, gave Churchill's gaffe a sinister spin.
Harris: Attlee actually went out of his way to refer to this foreign professor with this august "Friedrich," august "Von Hayek"- this foreign chap with a slightly German accent.
Narrator: Britain went to the polls.
The result was sensational.
Announcer: Radio announcer: Here is the state of the parties up to 3:00, in detail: Conservatives, 180...
Labour, 364.
Narrator: Churchill was out; the people had voted for a new Socialist Britain.
Castle: The Labour Party swept to power simply because the vast majority of people, particularly those men and women in the fighting forces who'd lived through the dreadful depression years of the '30s, just said, uh, "Churchill's done a fine job of war leader, but we don't trust him to win the peace." What kind of society do you want? Narrator: Attlee 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 sword sleep in my hand, "Till we have built Jerusalem In England's green and pleasant land." (applause) Narrator: William Blake's hymn "Jerusalem" became an anthem for the Labour movement.
Castle: You know, it seemed to people who'd been through a war- it seemed to them natural justice.
Why not pool your resources? And so the...
we broke into the concept of the sacredness of private property.
Narrator: When Labour took power, private owners were compelled to sell their businesses.

Labour 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.
Benn: 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.
Choir: ? ...built Jerusalem... ?
Narrator: 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.
Benn: 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." Narrator: 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 fascism.
Scientific socialism seemed to be in the ascendancy.
Narrator: 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.
Narrator: The world was divided.
The cold war had begun.

Narrator: Hayek loved mountains.
He said they breathed freedom.
But he saw socialist ideals and the planned economy as threats to freedom.
And so he organized a conference at a formerly fashionable hotel on the top of Mont Pélerin- Pilgrim Mountain.
Harris: 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.
Man: This was Hayek's belief and the belief of other people who joined him there, that freedom was in serious danger.
Narrator: 0ne of the delegates was a young economist from Chicago, Milton Friedman.
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.
Narrator: They met downstairs in the cocktail bar.
The room and its furniture are not much changed.
Harris: 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.
Narrator: The debates were passionate.
At one point, Hayek's former mentor, Ludwig von Mises, stormed out of a meeting.

Friedman: 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- Mises got up and said, "You're all a bunch of socialists!" (chuckling): and walked right out of the room.
Narrator: But Hayek told the meeting that they had one great lesson to learn from the socialists.
Harris: Hayek paid enormous tribute to the socialist intellectuals and said that the great strength of the socialists is that they had the courage, he said, to be idealistic- to have a theory, to have a project, to have a vision, and to go on working towards that, through thick and thin.
Narrator: 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.
In the meantime, Hayek could see only one gleam of light.
Narrator: 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 Erhard.
A 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.
Friedman: 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.
(speaking German) Translator: In this situation, the black markets formed and American cigarettes were its form of currency.
Friedman: Nobody smoked cigarettes.
They were for small transactions.
Cognac was a medium of circulation for large transactions.

Narrator: The Allies introduced a new currency- the Deutschmark- to replace the worthless German money.
But for Erhard, that was not enough.
So, without informing the Allies, Erhard went on the radio and made a startling announcement.
Man: Ludwig Erhard, a legendary man- he decided, without asking anybody and against the will of the American occupation powers, he decided to give up all price controls.
Narrator: Next day, General Lucius Clay, the man in charge of occupied Germany, demanded to know what Erhard thought he was doing.
Translator: Clay said, "What have you done? You've changed the Allied price controls."
Erhard replied, "Herr General, I haven't changed them, I've abolished them." (chuckling) And Clay said, "My advisers tell me it's a big mistake." Erhard replied, "Herr General, my advisers tell me the same thing." Narrator: 0vernight, the black market disappeared.
People stopped hoarding and goods not seen for ten years went on sale.
Friedman: 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.
Narrator: Germany's "social market economy" combined free markets with a strong welfare state.
Within a few years, Germany's social market economy overtook Britain's more planned economy.
But back then, nobody wanted to model themselves on Germany.
Most countries preferred to plan their economies.
(playing patriotic march) Narrator: 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.

Man: In the 1950s, India was the Mecca of all economists.
You talk of any economist in the world and 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.
Narrator: Nehru put his faith in technology.
Nehru was a rational thinker, and he wanted to apply science and technologies to solve the great mass poverty that prevailed at the time of independence.
Narrator: Under Nehru, central planning became a form of science.
Nehru was always recruiting intellectuals in India on his side in the cause of planning.
And there was this genius statistician, Mahalanobis, who was head of the Indian Statistical Institute.
Narrator: 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.
Mahalanobis (dramatized): Let YT equal national income, CT equal consumption and KT equal investment at time.
Into, open bracket, open bracket, one plus lambda k beta k, close bracket, minus one, are fractions of investment allocated to industries producing capital goods- that is, K sector and consumer goods at C sector, respectively...

Narrator: People believed this perfect mathematical model could be applied in a less than perfect world.
Desai: And at that time, Mahalanobis' model was hailed as one of the pioneering mathematical models for planning in a mixed economy.
And that made Mahalanobis very influential.
Narrator: 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.
Narrator: 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.
Man: Chicago has always been an exceptional place...
out of the mainstream.
Chicago is geographically isolated.
This affects Chicago's intellectual influence in many more areas than economics.
Narrator: The University of Chicago's intellectual influence would grow.
Eight professors and another 11 economists from Chicago went on to win Nobel Prizes.
Gary Becker is one of them.

Becker: When I came as a graduate student to Chicago in 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 a 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.
People were interested in ideas and argument and not in making sure you didn't 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, you see, 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.
Narrator: 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." Narrator: Milton Friedman was becoming the most articulate spokesman for the so-called "Chicago School of Economics." Friedman: The Chicago School meant there's 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, uh, my youth in a Keynesian household of economists, uh, because he seemed, with his emphasis on individualism, freedom and markets, to be so unconcerned with fairness.

Narrator: Liberals may have loathed the Chicago School but Hayek felt on home ground in an intellectual atmosphere so like the Vienna of his youth.
0ur 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.
Narrator: 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 policymakers said the only reason you have bad economic outcomes is because the government is not doing enough.
It sounds almost like central planning, doesn't it? Narrator: Washington's Keynesians saw the economy not as a force of nature but a sophisticated machine to be fine-tuned by technocrats like themselves.
The Keynesian consensus was summed up when that most Ivy League of presidents, John Kennedy, received an honorary degree from Yale.
It might be said now that I have the best of both worlds- a Harvard education and a Yale degree.
(audience laughing) Narrator: For J.F.K., 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 clichés, but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead.
Narrator: Kennedy's council of economic advisors had drafted his speech along Keynesian lines.
(audience applauding) Man: We thought it was a great day when Kennedy decided to give that, uh, speech at Yale and to talk about economic policy.
(audience applauding) That speech suggested that we had won over Kennedy, we had, uh, won the heart and mind of the...
of the president.
Narrator: 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.
Narrator: 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.
Man: 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.
Narrator: Hayek found his ideas shunned by the academic world.
Well, most of the departments came to dislike me, so much so that, uh, I can feel it to the present day- that economists very largely tend to treat me as an outsider.

Narrator: 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." Narrator: After 30 glorious years of growth, the American economy was in trouble.
Shultz: The economy basically was kind of going nowhere and had inflation which, uh, didn't seem to get cured and kind of a malaise in the economy.
Friedman: 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.
Narrator: President Nixon looked like a Chicago economist's dream come true.
Milton Friedman was his special advisor and George Shultz was in charge of the budget.
...About the wholesale price index a moment ago.
0ne of the big areas where prices were going up with wholesale very rapidly was lumber and other materials associated with home building.
Narrator: But the president wasn't listening.
He tried to spend his way out of trouble.
Shultz: It is going to wind up having its impact.
Narrator: To add insult to injury, he declared, "Now I am a Keynesian." This declaration by Nixon horrified his conservative supporters.
Indeed, one congressman wrote him, and said, "Mr.President, I'm going to have to burn all of my old speeches," and Nixon wrote back to him, "I will, too." Narrator: Nixon decided he hadn't gone far enough.
So he took his top economic advisors 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.
Stein: Here's my father walking into the president's cabin to meet Mr.Nixon and there's George Shultz right behind him.
I'm not sure but I think it's a fair bet that at any one of these meetings, they're complaining about something being wrong.
Probably talking about prices and stagflation, I'm not sure.
Narrator: Dick Cheney was a young aide at the time.
Cheney: I always remember a debate we had during the...
the Nixon 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.
Narrator: The supposedly conservative Republican Nixon opted for wage and price controls.
Stein: 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 trouble.
Nixon (on tape): The time has come for a new economic policy for the United States.
Its targets are unemployment, inflation...
Cheney: At one point President Nixon spoke up and quoted Nikita Khrushchev and he said, uh, "Khrushchev once told me "that sometimes in order to be a statesman, you have to be a politician for a while." The problem with him was that he was willing to sacrifice principle too easily for political advantage.
(crowd cheering) Narrator: The voters liked the president's war on prices.
Nixon was reelected in a landslide.
The economy did less well.

Yergin: 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.
Instead of controlling inflation, they were creating shortages.
Narrator: And prices just kept on rising.
Friedman: The last time I saw Nixon in the 0val 0ffice with George Shultz, 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, "0h, no, Mr.President, "I don't blame George.
I blame you." (Big Ben's bells chiming) Narrator: Britain's mixed economy, so widely imitated, was in similar trouble.
It , too, was facing the deadly combination of unemployment and inflation.
In 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.
Man: I was a junior minister in Ted Heath's government, and I remember having to attend meetings with 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.
Narrator: 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 sets that we can operate at all.

We were the sick man of Europe, and the "English Disease" was the disease of strikes, which we had all over the place.
(crowd shouting) And you know, it was so bad that Herman 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 lowest standard of living in Europe, in the year 2000, would be shared between Albania and the United Kingdom.
Albania! (bell tolling) Narrator: 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.
Baker: Keith wore a hair shirt, he beat his breast and said, "We were to blame, we've got it wrong." And he did beat his breast, he was called "The 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 when he appeared on television he had a vein in his head which kept throbbing, and people said "0h, you know, this is a very strange figure indeed, this man." It's only...
to be expected.
But nonetheless, he started the rethink of Conservative policy Narrator: 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.
Harris: The institute started in 1957.
You could say it was a direct result of the Mont Pélerin Society of The Road to Serfdom, of Hayek's ideas of freedom and competitive enterprise.
Narrator: 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 Garnett is a biographer of Keith Joseph.

Garnett: From the middle of 197 4, Joseph undertakes a crusade to convert the country to his way of thinking.
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...
Man: And he was going right into the lion's den arguing a case that many people had never heard before.
Garnett: Joseph felt that it was his duty to fight back on behalf of the free market.
Narrator: To revive the economy, Joseph preached that Britain needed more risk taking which meant more bankrupts and more millionaires- and less equality.
Well...
well, the audience would sort of gasp.
They'd 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 block.
Harris: He used to be smuggled in the back door.
He was genuinely...
hurt that the students had reacted to this penetrating argument by chucking flour bombs at him.
Garnett: It was almost a badge of honor that he would come away from these meetings with egg yolk running down his suit.

Narrator: 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.
Man: She relied on him to give her deep intellectual support.
There's nothing wrong with intuition.
Intuition is reason in a hurry and Keith just supported and reinforced her intuition, at the very moment she needed that support.
Narrator: Margaret Thatcher had a gut instinct for market economics.
Her father had been a grocer and when she was a girl, she had helped him in the shop.
Hardworking and studious, she won a place at 0xford University, where she became interested in student politics.
While she was at 0xford, 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." Harris: 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 from Margaret Thatcher as she sat there, intense, attending to the master's words.
Narrator: By 197 4, Hayek sensed the world beginning to go his way.

Hayek: Insofar as the movement of intellectual opinion is concerned, it is now for the first time in my life moving in the right direction.
(Clarke's "Trumpet Voluntary" playing) Narrator: 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 Hayek.
Hayek: I'd like to say that when I was a young man, only the very old men still believed in the free-market system.
When I was 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 that the young people believe again in it.
And that is a very important change.
(blues guitar playing) Narrator: The U.S.economy was going through the worst downturn since the Great Depression.
Industry slowed.
Unemployment rose.
The Yom Kippur War was followed by an Arab oil embargo.
Americans waited in gas lines, and the price of everything kept rising.
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.
Peltzman: 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.
Instructor: Number three, number four is...
(pilot speaking over radio) Narrator: 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.
Breyer: You discovered that basically the same firms that had been there in 1938 were still there.
Those were the major carriers and nobody new.
Narrator: The hearings began, and officials from the Civil Aeronautics Board were called to testify.
Breyer: And it turned out that five percent of their time went to stop prices that were too high and 95% of their time went to stop prices that were too low.
But always the effort was to keep the price high and not low.
Narrator: Naturally, the established airlines were quite happy with this arrangement.
And we'd say, "When was the last time you granted a new route?" "Well..." Narrator: Regulations meant that major carriers like Pan Am never had to compete with newcomers.
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-10s 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.

Breyer: 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." (orchestra playing) Narrator: 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 Kahn, a professor at Cornell University.
Kahn wanted a leaner, meaner regulatory environment, in which the market was free to chase profits without the dead weight of bloated government.
(music builds to crescendo) Democratic President Jimmy Carter made Kahn head of the Civil Aeronautics Board.
Kahn had spent years studying government regulation.
Now he had a chance to do something about it.
Kahn: 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 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, they competed by having more and more sumptuous meals.
We actually regulated the size of sandwiches.
(playing solemn piece) Narrator: By the time Kahn had finished, the C.A.B. had nothing left to do but close itself down.

Man: Competition is the rule and because of it, the consumers are better served than ever.
Narrator: Airline deregulation led to painful turbulence, as new carriers came and went.
Like her father, Judith Hamill works in the airline industry.
Hamill: My dad was a jet mechanic with Braniff- at the age of 59 he found that his skills were no longer desirable or...or needed.
And when Braniff 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.
Narrator: 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 for airfare at lower prices.
And what's happened is that as the prices went down, demand went up dramatically.
And once they were free to compete, you began to get supersaver fares, and super-apex fares, and potato fares, and peanuts fares.
And so an explosion of discounting and competition.
Well, those were dramatic.
Narrator: The stage was set for deregulation of the U.S.economy.
And now these ideas were about to make their entrance in the very homeland of Gilbert and Sullivan.
(audience applauding) (people talking) Well, five percent's no good to nobody, is it?
Interviewer: Do you think you can win this strike?
Yes, I do.
Narrator: They called it "the winter of discontent." It seemed as if everyone was on strike.
Man: I think it stinks, like all the other damn strikes in this country run by the filthy socialist-communist unions.

Narrator: 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.
(crowd applauding and booing) Laurence Hayek: 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." A few days later she wrote back from 10 Downing Street: "Dear Professor Hayek.
"I am very proud to have learnt so much from you over the past few years." (crowd applauding) Laurence Hayek: "I am determined that we should succeed.
"If we do so, your contribution to our ultimate victory "will have been immense.
Yours 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.
Narrator: Determined and, some said, strident, she would revolutionize the economy.
The spirit of enterprise had been sat upon for years- by socialism, by too-high taxes, by too-high regulation, by too-high public expenditure.
The philosophy was nationalization, centralization, control, regulation.
Now, this had to end.
(explosion) Narrator: Thatcher squeezed government spending and cut subsidies to business.
Thousands of bankruptcies and higher unemployment followed.
(crowd chanting "United") Narrator: Many saw her as uncaring.
Britain had rarely been so divided.

(through bullhorn): Maggie! Maggie! Maggie! (crowd chants in response) Maggie Thatcher! (crowd yells "0ut!") (applause) Narrator: Thatcher had no time for conventional, Keynesian economists who urged her to use government money to lessen the pain.
Thatcher: 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.
(applause) And those who urge us to relax the squeeze, to spend yet more money indiscriminately in the belief that we'll help the unemployed and the small businessman, are not being kind or compassionate or caring.
I have only one thing to say, "U-turn if you want to." (laughter and applause) "The lady's not for turning." (laughter and applause) Narrator: In Britain, the battle lines were drawn.
In America, the fight was already under way.
(applause) (helicopter whirring) Narrator: 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 Teheran.
Despite the beginning of deregulation, inflation was still at record heights.
Carter's attempts to follow Keynes' formula and spend his way out of trouble were going nowhere.
Jimmy Carter was maybe the...
the high point of Keynesian behavior.
And it simply was not working.
SHULTZ: Toward the end of the Carter administration, with inflation out of control, Paul Volcker was made chairman of the Federal Reserve.
He understood the problems.
I'm grateful to Paul Volcker for being willing now to accept the oath of office and in the responsibilities as chairman of the Federal Reserve system of our country.
Paul.

(crowd applauds) Narrator: Paul Volcker was steeped in the ideas of Austrian school economics.
It 's obvious to all of you from what's been said today that we're face to face with really unique economic difficulties.
Narrator: Volcker believed that inflation was one of the worst of all economic evils.
Volcker: 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, and it loses its effectiveness, like an antibiotic- you need a new one, you need a new one.
(crowd applauds) Volcker: And I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.
Narrator: Volcker used a blunt weapon- he tightened the money supply.
The economy went into a nose dive.
Facing a presidential election, Carter was reluctant to back such harsh measures.
(applause) (marching band playing) Narrator: 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.
(cheering) Man: Reagan knew Hayek personally.
He knew Milton Friedman personally.
And Reagan was in a sense their popularizer.
So he was the person who could take these...

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.
(crowd cheering) But you could get Reagan explaining the core of Hayek with better examples and in 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 a say...
a say in the spending of your own money.
The president is going to have more government on the backs of the people and of 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'll be ended by having a different kind of leadership...
(crowd applauding and cheering) Narrator: The American people voted for change and Reagan became president.
Friedman: The 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.
0bviously, who wants a recession? But I can remember President Reagan using those famous words, "If not now, when? If not us, who?" (train's brakes squealing) Narrator: Reagan offered Volcker his moral support in the fight against inflation.
As Volcker tightened the money supply, the economy slowed and contracted.
Unemployment hit ten percent.
Nobody had realized quite how tough it would be.
All across the heartland of America, ordinary people were hurting.

Man: 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 forced 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.
Volcker: If you had told me in August of 1979 when interest rates, the prime rate would get to 21? percent, I probably would have crawled into a hole.
I would have crawled into a hole and cried, I suppose, but then we lived through it.
(laughs) (crowd cheering) Narrator: It had taken three years- three years of growing public anger; three years of real hardship for millions of Americans.
But by 1982 the dragon of inflation had been slain.
Volcker: 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.
(marching band playing) Volcker: That's a...
a very different environment than the '50s and '60s.
(marching band playing) Announcer: Ladies and gentlemen, the president of the United States.
(crowd cheering, "Hail to the Chief"playing) Narrator: 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.
(crowd cheers) Narrator: They called his policy "Reaganomics." It had four key elements.

Lindsey: The first was the concept of sound money, the second was deregulation, the third was modest tax rates, and the forth 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.
Narrator: Reagan's tax cuts- the biggest in history- led to huge deficits.
0ur program has only been in effect for some...
Narrator: But the economy started to grow steadily again.
Friedman: 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.
Narrator: Far away in the South Atlantic, a 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.
(man calls out directions for artillery) Before the war, her popularity was at rock bottom.
Victory in the Falklands ensured the survival of Margaret Thatcher's government.
("Pomp and Circumstance" playing) Man: The Falklands saved her.
The Falklands gave her a new lease of life to implement the policies on which she had embarked which were not yet producing results.
In effect, she gambled all on the Falklands and she won decisively and that of course not only greatly bolstered her standing within the Tory Party; it bolstered her standing in the country and it greatly enhanced her reputation internationally.
Narrator: The Falklands War set her up politically to fight the final battle for the soul of the British economy.
The impact would be worldwide.

In 1945, Attlee's Labour government had nationalized the commanding heights of the economy, bringing core industries into state ownership.
For Thatcherites, these state industries were now the primary target.
Man: A whole lot of people who were left of 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 of 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.
Thatcher: So the whole efficiency of nationalized industries was running down.
Why should they be efficient? They had access to the treasury purse.
Narrator: Thatcher wanted to end their dependence on government subsidies and submit them to the discipline of the marketplace.
Redwood: The nationalized industries 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 dry, and they weren't doing a good job for their customers.
Narrator: 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 U.K.
0ne of the most singularly important economic/political events for 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 not go on pouring money into uneconomic pits.
It was taxpayers' money.

Man: If you look at our coal industry, the coal is very deep in the earth; it is hugely expensive to get out.
Narrator: 75% of Britain's coal mines were losing money.
It took government subsidies of $3 billion a year to keep them going.
But these statistics were seen as irrelevant by men like Ken Capstick, one of the radical socialists, who led the miners' union.
Man: What they would say was that in America, for instance, coal produced at the pithead was cheaper than coal produced at the pithead here.
Narrator: The union leaders argued that the government subsidies were money well spent if they kept 180,000 miners at work and able to feed their families.
Capstick: Miners used to say, and I can remember them saying it, "While ever I've got these, I'll always have a job." Narrator: It was an historic grudge match.
Both sides knew the miners had brought down Ted Heath's conservative government ten years earlier.
The fiery Marxist who led the national union of miners, said no mine should be closed until the coal ran out.
...to declare official, in accordance with Rule 41, the strike action...
(roar of crowd drowns out words) Man: 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 the jobs, defend their pits and defend their dignity.
Narrator: The strike was an epic clash of values which symbolized the wider battle of ideas: socialist against capitalist; free market against state ownership.
And it was a question of power: who ruled Britain? Illegal mass-picketing outside working mines led to violent clashes with the police.
(crowd shouting) Capstick: 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 hand in hand, in many ways.
Narrator: 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.
Thatcher: And then, suddenly, it collapsed the strike and the most powerful union with the most militant leader had failed.
Narrator: Britain has changed.
Today, less than 3,000 work in the mines.
Capstick: I feel devastated by what I see.
Grimethorpe had considerable reserves of coal when it was closed.
Plenty of work for those miners to continue to do to keep their families.
You can see the wasteland; you can see the social deprivation that it caused.
The children that are coming along, no prospects, no future.
People, uh, despairing because they can't find employment and the dignity that employment brings.
(pool balls clack) It's market forces gone mad.
Thatcher: 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.

Narrator: Perhaps the greatest political impact was on the Labour party that had all along opposed Thatcher's free market policies.
Brown: I came into politics as someone who lived in an area which was an old mining community.
The problem for the Left in the past was they 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.
Yergin: 0ne 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.
Narrator: 0ne 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 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.
Narrator: In his lifetime, Hayek saw fascism rise and fall, communism come and go and the end of his years in the intellectual wilderness.
Gingrich: 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.

Shultz: You had, in 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.
Friedman: 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 the later part, going into the new millennium, we're back to where we were practically at the start of the century and you have to give folks like Hayek and Friedman, and then later Reagan and Thatcher, their due for pushing all of this along.
Thatcher: 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." Narrator: Within ten 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.
0nly time would tell what people would ask of their governments in the event of a new recession, or a depression, or a war.
Next time on Commanding Heights, throughout the '90s, free markets replaced government-controlled economies.
Man: I watched it unfold, one country after another.
But would it work everywhere? Gorbachev began too late, and his reforms were too cautious.
"The Agony of Reform," next time on Commanding Heights.
Watch all of Commanding Heights on-line at pbs.org.
This enhanced net-cast 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: Captioned by Media Access Group at WGBH access.wgbh.org 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.
Globality may be new to some...
but to us, it's the way we do business.
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: and by contributions to your PBS station from: