Commanding HeightsEpisode 1

What are the guiding principles that Keynes and Hayek describe in their theories?

Trace the changes in economic theory from 1900-1980.

What are the important questions we ask in our modern economies? (It is no longer one or the other…)

What principles guided the economic theories of the post Reagan/Bush years in the US? Clinton, Bush II, Obama

Important Ideas from Commanding Heights

Russian revolution Against the global economy End exploitation of man by man Promise of a more just society Markets need to be free from government

meddling. Markets work and governments won’t. ~von Mises

Hayek

Keynes – market won’t work, government must step in – ◦ Trade and expanding technology flow freely in

early 20th century until WWI

Hayek – the market will prevail if we are more patient◦ Disillusioned by WWI and vows to work for a

better world

Keynes vs. Hayek

Worked with west during WWI Against the huge reparations imposed on

Germany The Economic Consequences of the Peace Predicted a final war that would destroy

civilization if we kept Germany/Austria impoverished

Keynes and the west

Allows small farmer and businesses to function to improve local conditions but insists that the commanding heights will remain under the control of governments.

30% of world population follows Marxist – Leninism

Stalin manages the economy and forges ahead. Capitalism appears doomed.

Lenin and Russia

Printing more money results in hyper-inflation

The Nazi's are successful due to the support of disenfranchised middle class.

Hayek hates inflation and makes fighting it the cornerstone of his theory

Germany and Austria

Boom time Spending money on goods Buying stock Radio is the internet of the 1920’s Stock market crash brings depression of the

1930’s The government does nothing to intervene

US in the 1920’s and 1930’s

Same conditions as the US in England Italy and Germany turn to fascism Keynes writes a book explaining the

depression and its solution. Macroeconomics.

Governments can manage their economies. Spend against the wind.

Europe in the 1930’s

Government programs developed to spur economy and create jobs

Regulation of capitalism New Deal creates structure and eliminates

boom/bust cycles that deter economic growth

Harvard and Galbraith Live with a little inflation to keep

unemployment low Accumulation of debt is not important

Roosevelt in the 1930’s

Depression disappears due to war “Good may come out of evil” Hayek writes “The Road to Serfdom”

1940’s

Britain: Build a new society with no unemployment, fascism, or depression

Labor party wants to plan the peace Churchill opposes planning and controls Labor party wins and Britain goes socialist Private owners must sell their businesses Created nationalized industries: coal, rail,

steel Rebuilds Britain: welfare state, health care,

employment

WWII Ends

Stalin and socialism Industrial and military powerhouse 1/3 of world is socialist Cold war begins Hayek sees socialist ideals as a threat to the

global economy and freedom

WWII Ends: Russia

Germany is ruined and divided Economy is brought to a halt through wage

and price controls Black market forms using cigarettes, liquor New German currency formed Ehrhart: eliminated price controls and the

markets started working again Germany combines free markets with

welfare state, but NOT planned economy

Berlin 1947

Economic Ideal: Gandhi- simple self-sufficient villages

Nehru: State led model of industrial growth India becomes the model for newly

independent nations Socialism is the road out of poverty and into

modernization

India

University of Chicago is the center of economic intellectual thinking

The market is comprised of forces that can neither be controlled or ignored. Instead they must be harnessed.

Keynes remains highly influential: the economy is not a force, but a machine.

1950s - US

US economy fails: stagflation – inflation and unemployment

Nixon claims to be Keynesian Nixon imposes wage and price controls The economy spirals out of control Deregulation of airlines leads to competitive

pricing and deregulation of the entire US economy

1970s - US

Also experiences unemployment and inflation

Also uses wage and price controls to combat stagflation

Coal miners strike and oil crisis Conservatives voted out Keith Joseph jumps ship and begins

promoting the free market and capitalism Thatcher is a big fan Hayek wins the Nobel Prize

1970s - Britain

Thatcher is a proponent of Hayek and the free market

Thatcher wins in the Falklands Socialist miners fight to keep government

subsidies and go on strike Strike collapses, 70000 jobs lost Britain sells state-owned industries

1980s and Britain

No longer Socialism vs. Capitalism No longer Market vs. Government How to harness market forces What would we demand of governments in

the face of difficulties, war? Economics of the 90s and the new

millennium.

Debate

History matters, and so do ideas. ◦ Does anybody remember the stimulus?

“It’s the economy, stupid.” ◦ Arguably, all of history is economic history. Which

might just mean that all of everything is economic history…

What is the developing world, and why are we developing it?◦ Jeff Sachs: 200 years ago, we were all subsistence

farmers

Mr. Bahlke segment: Key Points

Vote for me for class president, I’ll make iPads only $1◦ Mia and Jake have a bunch of iPads, everyone else

wants them. What’s going to happen? Tie back to Germany, pre and post price

controls

The Parable of the iPad

Inflation - a general increase in prices and fall in the purchasing value of money ◦ When/why/for whom is inflation good?◦ When/why/for whom is inflation bad?

Discussion

Think about the coal miners in Great Britain as the movie presents them.

Think about the coal miners in Great Britain as if they were your parents. (Billy Elliot, anyone?)

Think of modern equivalents of coal miners: US labor movement, etc.

Coal Miners and the Human Side of Free Markets

When do markets work and governments not work?

When do governments work and markets not work?

Human Side of Free Markets c’td

Three students were having a discussion about democracy, one from China, one from America, and one from Denmark…

What is a “free” market? Discussion: If you have a democracy, will

you automatically have capitalism? If you have capitalism, are you necessarily in a democracy?

Democracy and Capitalism