|Chapter 1: Prologue [2:45]
NARRATOR: 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.
RICHARD CHENEY, U.S. Vice President: Millions of people a day are better off than they
would have been without those trade developments, without globalization. And very few
people have been harmed by it.
NARRATOR: As the terrible events of September 11 drove the world deeper into a recession,
new questions emerged about the perils of the new world economy. Can our now deeply
interconnected world surmount a global downturn and rise above other crises? And is global
terrorism the dark side of the promise of globalization?
BILL CLINTON, U.S. President, 1993-2001: 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?
NARRATOR: 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.
JEFFREY SACHS, Professor, Harvard University: Part of what 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.
NARRATOR: This economic revolution has defined the wealth and fate of nations and will
determine the future of the planet.
DANIEL YERGIN, Author, Commanding Heights: 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.
NARRATOR: Tonight, the battle of ideas that still divides our world.
NARRATOR: Air-raid sirens sound the alert. German bombers will
pound another British city tonight .
Onscreen title: Cambridge University, 1940
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
DANIEL YERGIN: The debate over market forces, whether you have economy that's based upon
prices or on state, planning has been at the very heart of the economic battles of the
last 100 years. For decades, the ideas of John Maynard Keynes dominated the economies of
the Western world.
JOSEPH STANISLAW, Co-Author, Commanding Heights: 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.
DANIEL 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.
JOHN MAYNARD KEYNES: 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.
FRIEDRICH VON HAYEK: 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.
World War I destroyed 20 million lives. 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.
FRIEDRICH VON HAYEK: 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.
DANIEL 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.
Onscreen title: St. Petersburg, 1917
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.
Onscreen title: Cambridge University, 1918
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. One painted these murals for him. He was also a familiar
figure in the City of London, where he made a fortune in the stock market, lost it all,
and made it back again.
Familiar with politicians and prime ministers, Keynes spent the first world war advising
the British government on how to organize its wartime economy. 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.
ROBERT SKIDELSKY, Biographer of J.M. Keynes: All the statesmen of Versailles could think
about was how to squeeze money out of an already bankrupt Germany.
GEOFFREY HARCOURT, Professor of Economics, Cambridge University: Keynes felt the
reparations were out of all proportion to what an economy could really take and would have
very destructive social, 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.
JOHN MAYNARD KEYNES: 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.
Onscreen title: Vienna, 1919
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.
FRIEDRICH VON HAYEK: 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:
ALBERT ZLABINGER, Economist and Pupil of Hayek: He openly said that he at one time was a
socialist of the mild sort, where concerns for the poor and concerns for fairness and
equity would help to determine government policy.
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
ALBERT 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.
DANIEL 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.
ALBERT ZLABINGER: Von Mises argued that free markets do it best -- why fool with anything
Onscreen title: Moscow, 1922
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.
DANIEL YERGIN: Lenin knew that he needed a different kind of policy. and he instituted
what would become 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 Bolshevism and Marxism. And Lenin, who by this time had already had
a stroke and 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.
Onscreen title: Vienna, 1923
NARRATOR: 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.
KARL OTTO POHL, President, German Central Bank, 1980-1991: You saw people carrying their
money on wheels because you had to pay for a piece of bread billions of reichmarks.
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.
KARL OTTO POHL: 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.
Onscreen title: New York, The Roaring 1920s
DANIEL YERGIN: During the 1920s, while Europe was continuing to suffer the wounds of the
first world war, in American cities, at least, it was 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 was in these new
radio companies. Radio was like the Internet of the 1920s, an industry that had come from
nowhere. And the number one glamour stock was RCA, which in just a few years went from a
dollar and a half a share to $600 a share. Americans couldn't get enough of it.
NARRATOR: It was a classic stock market bubble. Then, on Black Thursday, October 24, 1929,
the bubble burst. Prices plunged. The downward spiral proved unstoppable. Eight hours
after the market had closed, the tickertape machines were still tapping out the bad news.
The stock market crash started America's slide into despair.
SPENCER ECCLES, Salt Lake City Banker: 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 implement seller,
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.
KENNETH RANDALL, Chairman of the Federal Deposit Insurance Corporation, 1964-1970: 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.
KENNETH RANDALL: 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
NEWSREEL NARRATOR: Private construction virtually ceases. Mills and factories shut down.
Railroads come to a virtual standstill. Millions of Americans -- men, women, children --
wait in the cold on bread lines, in soup kitchens. Three million Americans are ex-wage
earners, unemployed, and the ranks of the unemployed are to soar to 15 million.
Onscreen title: Europe, 1931
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.
ROBERT 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.
GEOFFREY HARCOURT: He was writing a book which he thought would revolutionize the way we
thought about economic systems. It would also give us the means to make sure they operated
ROBERT 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.
Onscreen title: Washington, D.C., 1933
NARRATOR: The new American president, Franklin Delano Roosevelt, was staring economic
disaster in the face. His wife, Eleanor, described Inauguration Day as "very solemn,
and a little terrifying."
FRANKLIN DELANO ROOSEVELT, U.S. President: This great nation will endure as it has
endured, will revive and will prosper. I shall ask the Congress for the one remaining
instrument to meet the crisis: broad executive power.
NARRATOR: Roosevelt's voice of confidence rallied the nation.
He then embarked on a whirlwind program of reform.
DANIEL 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.
DANIEL YERGIN: And the airline industry was a very good example of that. You had people 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
Onscreen title: Cambridge University, 1936
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
ROBERT SKIDELSKY: Keynes's solution to unemployment was for the government to spend the
money to 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
ROBERT SKIDELSKY: He gave people hope that unemployment could be cured without
NARRATOR: Harvard University became an intellectual bridgehead for Keynes in America. John
Kenneth Galbraith was one of Keynes's leading apostles.
JOHN KENNETH GALBRAITH, Professor Emeritus, Harvard University: I've said many times I
think 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: Keynes's ideas trickled down from Harvard to Washington, turning the federal
government's conventional economic policies upside down.
JOHN KENNETH 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.
Onscreen title: World War II, 1941
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 NARRATOR: ... 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
JOHN KENNETH GALBRAITH: One could not have had a better demonstration of the Keynesian
ideas, and I think it's fair to say that as a young Keynesian in Washington, in touch with
the other Keynesians there, we all saw that very clearly at the time.
NARRATOR: In a radio broadcast, Keynes expressed his hope that what worked in war would
work in peace.
JOHN MAYNARD KEYNES: 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.
Onscreen title: London, 1944
NARRATOR: Now teaching at the London School of Economics, Hayek feared that Keynes's brave
new world was a big step in the wrong direction. He attacked the growing consensus by
writing The Road to Serfdom. Sarcastically dedicated to "socialists of all
parties," it was a popular success. There was even a cartoon version of it.
Its message was simple and direct: Too much government planning means too much government
power, and too much government power over the economy destroys freedom and makes men
slaves. For Hayek, central planning was the first step to a totalitarian state.
GEOFFREY HARCOURT: 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
ROBERT SKIDELSKY: Hayek always rejected macroeconomics. He rejected any government
intervention during the Great Depression itself, whereas Keynes was an activist. He 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, and lots of Stalins. And who was right?
NARRATOR: Most people would have agreed with Keynes when he wrote this to Hayek.
JOHN MAYNARD KEYNES: 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.
FRIEDRICH VON 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.
Onscreen title: New Hampshire, 1944
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's idealism and humanity were an inspiration.
JOHN MAYNARD KEYNES: 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 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.
FRIEDRICH VON 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. And that changed the situation completely. And for
the following 30 years, it was only Keynes who counted, and I was gradually almost
Onscreen title: V-E Day, 1945
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.
JEFFREY SACHS: 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."
Onscreen title: Britain, 1945
NARRATOR: In Britain, the troops were coming home to a general election.
TONY BENN, Labor Candidate, 1945: Well, I came back in a troop ship in the summer of 1945,
and I was a pilot in the Royal Air Force, and I was picked as a 19-year-old to be the
Labor candidate. All these soldiers said, "Never again. We're never going back to
unemployment, the Great Depression, to fascism, to rearmament. We want to build a new
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 Labor Party.
Attlee argued that Britain had planned the war, and now planning would win the peace.
BARBARA CASTLE, Labor MP, 1945-1979: We knew that our people would never have withstood
the bombardments and the loss of life and the hardship if they hadn't been confident that
their government was operating a policy of fair shares. We set out to ensure that this
system of fair shares and the planning and controls continued after the war.
NARRATOR: Churchill, who was influenced by Hayek's book The Road to Serfdom,
opposed planning and controls.
WINSTON CHURCHILL: No socialist system can be established without a political police, some
form of Gestapo.
RALPH HARRIS, Institute of Economic Affairs, 1957-1987: 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
RALPH HARRIS: Attlee actually went out of his way to refer to this foreign professor with
this august [name], Friedrich August von Hayek -- this foreign chap with a slightly German
NARRATOR: Britain went to the polls. The result was sensational.
BBC RADIO NEWS: Here is the state of the parties up to 3:00, in detail: Conservatives 180,
NARRATOR: Churchill was out. The people had voted for a new socialist Britain.
BARBARA CASTLE: The Labor 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, "Churchill's done a fine job of war leader,
but we don't trust him to win the peace."
CLEMENT ATTLEE: What kind of society do you want?
NARRATOR: Attlee promised his party that they would build a new Jerusalem.
CLEMENT ATTLEE: 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."
NARRATOR: William Blake's hymn "Jerusalem" became an anthem for the Labor
BARBARA 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 we broke into the concept of the
sacredness of private property.
NARRATOR: When Labor took power, private owners were compelled to sell their businesses.
Labor created a "mixed economy" in which newly nationalized industries coexisted
with private enterprise. Now government-owned industries like coal, rail, and steel no
longer enriched owners and shareholders, but worked for the common good.
TONY BENN: So it was an act of regeneration, of renewal. That was the hope, and it was the
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.
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
TONY 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.
JEFFREY SACHS: 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.
JEFFREY SACHS: So about one-third of the world adopted socialism, sometimes to internal
revolution, sometimes to brutal imposition by the Red Army.
NARRATOR: The world was divided. The Cold War had begun.
Onscreen title: Switzerland, 1947
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 Pelerin -- Pilgrim Mountain.
RALPH 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, and 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.
MILTON FRIEDMAN, Professor Emeritus, University of Chicago: This was Hayek's belief and
the belief of other people who joined him there, that freedom was in serious danger.
NARRATOR: One of the delegates was a young economist from Chicago, Milton Friedman.
MILTON FRIEDMAN: The point of the meeting was very clear. Hayek and others felt that the
world was turning toward planning and that somehow we had to develop an intellectual
current that would offset that movement.
NARRATOR: They met downstairs in the cocktail bar. The room and its furniture are not much
RALPH HARRIS: The whole world was 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.
MILTON FRIEDMAN: In the middle of a debate on the subject of distribution of income, in
which you had people who you would hardly call socialist or egalitarian, people like
myself, Mises got up and said, "You're all a bunch of socialists," and walked
right out of the room. (laughs)
NARRATOR: But Hayek told the meeting that they had one great lesson to learn from the
RALPH 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.
Onscreen title: Berlin, 1947
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.
MILTON 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 an economy that was
brought to a halt.
ALFRED BOSCH, Economist and Friend of Hayek: In this situation the black markets formed,
and American cigarettes were its form of currency.
MILTON 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 Deutsche Mark, 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.
KARL OTTO POHL: 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
NARRATOR: Next day, Gen. Lucius Clay, the man in charge of occupied Germany, demanded to
know what Erhard thought he was doing.
ALFRED BOSCH: Clay said, "What have you done? You have changed the Allied price
controls." Erhard replied, "Herr General, I haven't changed them; I've abolished
them." And Clay said, "My advisors tell me it is a big mistake." Erhard
replied, "Herr General, my advisors tell me the same thing."
NARRATOR: Overnight the black market disappeared. People stopped hoarding, and goods not
seen for 10 years went on sale.
MILTON 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
But back then, nobody wanted to model themselves on Germany. Most countries preferred to
plan their economies.
Onscreen title: New Delhi, 1947
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. Pandhit Nehru, the first
prime minister, wanted to industrialize and combine British parliamentary democracy with
Soviet-style central planning.
JAIRAM RAMESH, Senior Economic Advisor to India's Congress Party, 1991-1998: 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.
MANMOHAN SINGH, Minister of Finance, 1991-1996: 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.
MEGHNAD DESAI, Professor, London School of Economics: 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
VOICE OF MAHALANOBIS: Let YT equal national income, CT equal consumption, and KT equal
investment at time, open bracket, open bracket, one plus lambda K beta K, closed 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
MEGHNAD DESAI: And at that time, Mahalanobis's model was hailed as one of the pioneering
mathematical models for planning a mixed economy. And that made Mahalanobis very
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.
Onscreen title: Chicago, 1950
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
SAM PELTZMAN, Professor, University of Chicago: 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
GARY BECKER, Professor of Economics, University of Chicago: When I came as a graduate
student to Chicago 1951, I was flabbergasted by how stimulating the atmosphere was. I had
been a very good student at Princeton. My first day in Friedman's class he raised 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.
MILTON FRIEDMAN: Nobody was very polite. People were interested in ideas and argument and
not in making sure you didn't ruffle anybody's feathers.
ARNOLD HARBERGER, Professor Emeritus, University of Chicago: If you're sitting in a
seminar room and somebody up there is saying something which if imbibed by your students
who are sitting in that same room is going to lead them astray, it's up to you to call
that guy right now and not later, and that, I think, is sort of the spirit that prevailed
in the Chicago workshop system. There wasn't that much fighting in the lunches. They were
pretty cordial. (laughs)
NARRATOR: Lunches at the Quadrangle Club were famous for the intensity of intellectual
discussion. And one man came to dominate those debates.
GEORGE SHULTZ, Dean of the Chicago Graduate School of Business, 1962 - 1968: 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
NARRATOR: Milton Friedman was becoming the most articulate spokesman for the so-called
Chicago School of economics.
MILTON FRIEDMAN: The Chicago School meant a strong belief in minimal government and an
emphasis on free market as a way to control the economy.
LAWRENCE SUMMERS, President, Harvard University: You know, in many ways Milton Friedman
was a devil figure in my youth in our household of Keynesian economists because he seemed,
with his emphasis on individualism, freedom, and markets, to be so unconcerned with
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.
ARNOLD HARBERGER: Our vision is that the forces of the market are just that: They are
forces; they are like the wind and the tides. If you want to try to ignore them, you
ignore them at your peril. If you find a way of ordering your life which harnesses these
forces to the benefit of society, that's the way to go.
NARRATOR: But in Washington, Keynes was still king of the hill. Nineteen years after he
died, his face was on the cover of Time magazine.
SAM PELTZMAN: 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's 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.
JOHN FITZGERALD KENNEDY, U.S. President, 1961-1963: It might be said now that I have the
best of both worlds -- a Harvard education and a Yale degree.
NARRATOR: For JFK, Keynes had won the argument. The battle of ideas was over.
JOHN FITZGERALD KENNEDY: What is at stake in our economic decisions today is not some
grand warfare of rival ideology 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
ROBERT SOLOW, Professor Emeritus, Massachusetts Institute of Technology: We thought it was
a great day when Kennedy decided to give that speech at Yale and to talk about economic
policy. That speech suggested that we had won over Kennedy. We had won the heart and mind
of the president.
NARRATOR: For what came to be known as the "Thirty 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.
Onscreen title: Austria, 1970
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
LAURENCE HAYEK, Hayek's Son: 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
NARRATOR: Hayek found his ideas shunned by the academic world.
FRIEDRICH VON HAYEK (interviewed in 1978): Most of the departments came to dislike me, so
much so that I can feel it to the present day, [and] 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
Onscreen title: USA, 1971
NARRATOR: After 30 glorious years of growth, the American economy was in trouble.
GEORGE SHULTZ: The economy basically was kind of going nowhere and had inflation, which
didn't seem to get cured -- kind of a malaise in the economy.
MILTON 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, 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 a special advisor, and George Shultz was in charge of the budget.
GEORGE SHULTZ: So I think going back to your comment about the wholesale price index a
moment ago, one of the areas where prices were going up 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. To
add insult to injury, he declared, "Now I am a Keynesian."
DANIEL YERGIN: This declaration by Nixon horrified his conservative supporters. Indeed,
one congressman wrote to him and said, "Mr. President, I'm going to have to burn all
of my old speeches." Nixon wrote back and said, "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
speechwriter in the White House, and his father was at the meeting.
BEN STEIN, Host, Win Ben Stein's Money: 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.
RICHARD CHENEY: I always remember the debate we had during 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.
BEN STEIN: Nixon was a great one for doing something, I think in retrospect we now know
that it would have been better to do nothing, but he was in favor of doing something.
GEORGE SHULTZ: I was there, and I opposed them. Wage and price controls, you could see
analytically, would get you in a lot of trouble.
RICHARD NIXON, U.S. President, 1969-1974: The time has come for a new economic policy for
the United States. Its targets are unemployment, inflation.
RICHARD CHENEY: At one point President Nixon spoke up and quoted Nikita Khrushchev, and he
said, "Khrushchev once told me that sometimes in order to be a statesman, you have to
be a politician for a while."
MILTON FRIEDMAN: The problem with him was that he was willing to sacrifice principles too
easily for political advantage.
NARRATOR: The voters liked the president's war on prices. Nixon was reelected in a
landslide. The economy did less well.
DANIEL 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.
MILTON FRIEDMAN: The last time I saw Nixon in the Oval Office, 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, "Oh, no, Mr.
President, I don't blame George; I blame you!"
Onscreen title: London, 1973
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
KENNETH BAKER, Conservative Minister, 1981-1992: 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 level of charges plumbers would charge next week to
repair taps and how much taxi drivers could charge for fares and how much hairdressers
should get in wages. It was absolutely unbelievable. It all came to a very sticky end, a
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.
SHOP MANAGER: Well, we're virtually out of business while the power's off. We've got no
sets that we can operate at all.
DAVID YOUNG, Conservative Minister, 1984-1989: We were the sick man of Europe, and the
English disease was the disease of strikes, which we had all over the place. And you know,
it was so bad that Herman Kahn 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!
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.
KENNETH 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 a Mad Monk.
KEITH JOSEPH (interviewed in 1975): 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.
KENNETH BAKER: And when he appeared on television, he had a vein in his head which kept
throbbing, and people said, "Oh, you know, this is a very strange figure indeed, this
man." But nonetheless, he started to rethink the 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.
RALPH HARRIS: The institute started in 1957, you could say the direct result of the Mont
Pelerin Society, of The Road to Serfdom, of Hayek's ideas of freedom and
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.
MARK GARNETT, Biographer of Keith Joseph: From the middle of 1974 Joseph undertakes a
crusade to convert the country to his way of thinking, and what he wants to do is take the
battle to the heart of the enemy camp, and he believed that the universities were infected
with socialist thinking.
KEITH JOSEPH: Because there was a free society in this country....
CECIL PARKINSON, Conservative Minister, 1981-1983, 1987-1989: And he was going right into
the lions' den, arguing a case that many people had never heard before.
MARK 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.
CECIL PARKINSON: The audience would sort of gasp. They'd never heard anybody challenging
KEITH JOSEPH: Mild inflation seemed a painless way of maintaining full employment,
encouraging growth, and expanding the social services. So the result is that we're now
more socialist in many ways than any other developed country outside the Communist bloc.
RALPH 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.
MARK 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.
NIGEL VINSON, Institute of Economic Affairs: 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 Oxford University, where she became interested in student politics.
While she was at Oxford, she read Hayek's Road to Serfdom. It made a lasting
impression on her. Years later, when she became the first woman to lead the Conservative
Party, she once slammed Hayek's book down on a table and announced, "This is what we
RALPH HARRIS: (laughs) 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 1974, Hayek sensed the world beginning to go his way.
FRIEDRICH VON HAYEK (interviewed in 1978): As for the movement of intellectual opinion is
concerned, it is now for the first time in my life moving in the right direction.
Onscreen title: Stockholm, 1974
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.
FRIEDRICH VON HAYEK: I like to say 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 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 again believe in it. And that is a very important change.
Onscreen title: Chicago, 1974
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.
SAM 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
Onscreen title: Washington, D.C., 1974
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
STEPHEN BREYER, U.S. Supreme Court Justice: You discovered that basically the same firms
that had been there in 1938 were still there. Those were the major carriers and nobody
NARRATOR: The hearings began, and officials from the Civil Aeronautics Board were called
STEPHEN BREYER: And it turned out that 5 percent of their time went to stop prices that
were too high and 95 percent of their time went to stop prices that were too low, but
always the effort was to keep the price high and not low.
NARRATOR: Naturally, the established airlines were quite happy with this arrangement.
STEPHEN BREYER: And we'd say, "When was the last time you granted a new route?
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 trans-Atlantic flights was an exuberant
Englishman called Freddie Laker.
FREDDY LAKER: I'm Freddy 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-bodied
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.
STEPHEN BREYER: The Transportation Department said that this may hurt Pan Am. And Freddy
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."
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
Kahn wanted a leaner, meaner regulatory environment in which the market was free to chase
profits without the dead weight of bloated government. Democratic president Jimmy Carter
made Kahn head of the Civil Aeronautics Board. Kahn had spent years studying government
regulation; now he had a chance to do something about it.
ALFRED KAHN, Civil Aeronautics Board, 1977-1978: When I got to the Civil Aeronauts 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.
NARRATOR: By the time Kahn had finished, the C.A.B. had nothing left to do but close
SPOKESMAN FOR THE CIVIL AERONAUTICS BOARD: 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.
JUDITH HAMILL, Administrator, Chicago O'Hare Airport: My dad was a jet mechanic with
Braniff. At the age of 59 he found that his skills were no longer desirable or needed.
When Braniff came back because of the duty to hire, he came back at half the salary that
he had made before. When you live by the rules and then the rules change, 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.
STEPHEN BREYER: The industry vastly underestimated the demand for airfares at lower
prices, and what's happened is that as the prices went down, demand went up dramatically.
ALFRED KAHN: And once they were free to compete, you began to get super-saver fares and
super-apex fares and potato fares and peanuts fares -- 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.
Onscreen title: Britain, 1979
WORKER: Well, 5 percent's no good to nobody, is it?
INTERVIEWER: Do you think you can win this strike?
WORKER: 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.
NARRATOR: With the economy in apparently terminal decline, the people voted for a new
Conservative government headed by Margaret Thatcher.
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 learned so
much from you over the past few years. I am determined that we should succeed. If we do
so, your contribution to our ultimate victory will have been immense. 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.
MARGARET THATCHER (interviewed in 1993): The spirit of enterprise had been sat upon for
years by socialism, by too-high taxes, by too-high regulation, by too-public expenditure.
The philosophy was nationalization, centralization, control, regulation. Now this had to
NARRATOR: Thatcher squeezed government spending and cut subsidies to business. Thousands
of bankruptcies and higher unemployment followed. Many saw her as uncaring. Britain had
rarely been so divided.
CROWD OF PROTESTERS: Maggie, Maggie, Maggie. Out, out, out!
NARRATOR: Thatcher had no time for conventional, Keynesian economists who urged her to use
government money to lessen the pain.
MARGARET 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.
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. The lady's
not for turning.
NARRATOR: In Britain, the battle lines were drawn. In America, the fight was already under
Onscreen title: USA, 1979
NARRATOR: Things were at a low in the United States. President Carter spoke of malaise and
loss of confidence in the country. Revolution in Iran had led to a second oil shock and
Americans held hostage in Tehran. Despite the beginning of deregulation, inflation was
still at record heights. Carter's attempts to follow Keynes's formula and spend his way
out of trouble were going nowhere.
LARRY LINDSEY, Assistant to the President for Economic Policy: Jimmy Carter was maybe the
high point of Keynesian behavior. And it simply was not working.
GEORGE 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.
JIMMY CARTER: I'm grateful to Paul Volcker for being willing now to accept the oath of
office and the responsibilities of the Federal Reserve system of our country. Paul?
NARRATOR: Paul Volcker was steeped in the ideas of Austrian school economics.
PAUL VOLCKER, Federal Reserve Board, 1979-1987: 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.
PAUL 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, because 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. Well, 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 nosedive. Facing a presidential election, Carter was reluctant to back such harsh
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.
NEWT GINGRICH, Speaker, U.S. House of Representatives, 1995-1999: Reagan knew Hayek
personally; he knew Milton Friedman personally. And Reagan was, in a sense, their
popularizer. So he was the person who would take these people who were very profound but
not very easy to communicate. I don't think you'd ever get Hayek on the Today show, but
you could get Reagan explaining the core of Hayek with better examples and in more
RONALD REAGAN, U.S. President, 1981-1989: 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 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
NARRATOR: The American people voted for change, and Reagan became president.
MILTON 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
GEORGE SHULTZ: Obviously, who wants a recession? But I can remember President Reagan using
those famous words: "If not now, when? If not us, who?"
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 10
percent. Nobody had realized quite how tough it would be.
All across the heartland of America, ordinary people were hurting.
DARREN SMITH, Farmer: Well, the interest rates, that just eats up your profit. It becomes
very difficult to keep your business running right. Nineteen eighties, 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.
PAUL VOLCKER: If you had told me in August of 1979 that interest rates, the prime rate
would get to 21.5 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)
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
PAUL 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. That's a very different environment than the '50s and '60s.
ANNOUNCER: Ladies and gentlemen, the president of the United States.
NARRATOR: Reagan and Volcker had set the United States on a new economic course.
RONALD REAGAN: From our very first day, we have been working to undo the economic wreckage
they left behind.
NARRATOR: They called his policy Reaganomics. It had four key elements.
LARRY LINDSEY: The first was the concept of sound money. The second was deregulation. The
third was modest tax rates. And the fourth was limited government spending. Sounds pretty
conventional now, but when Reagan was elected, he was vilified by his opponents as being
some radical extremist.
RONALD REAGAN: 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. But the economy
started to grow steadily again.
MILTON 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.
Onscreen title: Atlantic Ocean, 1982
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.
Before the war her popularity was at rock bottom. Victory in the Falklands ensured the
survival of Margaret Thatcher's government.
CHARLES POWELL, Thatcher's Foreign Affairs Advisor, 1983-1991: The Falklands saved her.
The Falklands gave her a new lease on 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.
NARRATOR: In 1945, Attlee's Labor 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.
JOHN REDWOOD, Head of Prime Minister's Policy Unit, 1983-1985: A whole lot of people who
were left of center thought that 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.
MARGARET THATCHER (interviewed in 1993): So the whole efficiency of nationalized
industries was running down. Why should they be efficient? They had access to the Treasury
NARRATOR: Thatcher wanted to end their dependence on government subsidies and submit them
to the discipline of the marketplace.
JOHN 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
NARRATOR: The coal mines and the miners' union became Thatcher's biggest challenge.
JOSEPH STANISLAW: The coal miners represented the last bastion of the socialist mindset in
the UK. One of the singularly most important economic/political events for the world
economic system was Margaret Thatcher's government confrontation with the miners.
MARGARET THATCHER: We were quite clear: Uneconomic pits must close. You could not go on
pouring money into uneconomic pits. It was taxpayers' money.
CECIL PARKINSON: If you look at our coal industry, the coal is very deep in the earth; it
is hugely expensive to get out.
NARRATOR: Seventy-five percent 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
KEN CAPSTICK, National Union of Miners: What they would say was that in America, for
instance, coal produced at the pit head was cheaper than coal produced at the pit head
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.
KEN 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 a historic grudge match. Both sides knew the miners had brought down Ted
Heath's Conservative government 10 years earlier. The fiery Marxist who led the National
Union of Miners said no mine should be closed until the coal ran out.
ARTHUR SCARGILL: Reaffirm the unanimous decision of March the eighth to declare official
in accordance with Rule 41 the strike action.
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.
KEN 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.
MARGARET THATCHER (interviewed in 1993): 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.
KEN 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 despairing because
they can't find employment and the dignity that employment brings. It's the market forces
MARGARET THATCHER: The political consequences of the failure of the strike were
GORDON BROWN, Labor Finance Minister: 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 Labor Party that had all along
opposed Thatcher's free-market policies.
GORDON 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 that 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.
DANIEL YERGIN: One of the most important things that the government of Margaret Thatcher
does is invent this thing called privatization; that is, taking these state-owned
companies, these nationalized industries, and selling shares to the public.
NARRATOR: One by one the Thatcher government put the commanding heights of the British
economy up for sale: electricity, telephones, oil, gas, coal, steel, trains, and planes --
even water. Before long, two-thirds of the state-owned industries were removed from
government control and sold off into the private sector. Who should control the commanding
heights -- governments or markets -- in Britain? That battle was over.
JOSEPH STANISLAW: 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.
JEFFREY SACHS: 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.
NEWT GINGRICH: Here was a man who had intellectually changed the world without really ever
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.
GEORGE SHULTZ: You had in Reagan and Thatcher at the same time two, what I call, idea
politicians. They had ideas they were convinced were the right ideas, and they put them
MILTON 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.
LAWRENCE SUMMERS: 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 of progressive thinking is not how
to oppose and suppress market forces but how to use market forces to achieve progressive
SAM PELTZMAN: 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, Friedman, and then later Reagan and
Thatcher their due for pushing all of this along.
MARGARET 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 10 years, governments everywhere would retreat from the commanding
heights of their economies. In the battle of ideas, the pendulum had swung from government
to market, from Keynes to Hayek. Only time would tell what people would ask of their
governments in the event of a new recession, or a depression, or a war.