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: