Commanding Heights ~Battle of Ideas~
Cambridge University
John Maynard Keynes, an English economist helped the British government defend freedom by planning the wartime economy
Friedrich von Hayek, an Austrian economist believe government intervention was a threat to economic freedom
Believed in government intervention and a more hands on approach
Believed that markets would self stabilize (free market)
Europe, 1910
First age of globalization
Telegraph and telephone revolutionized communication
Steamships and railways transformed transportation and trade
1914
Start of World War 1
Hayek served in the Austrian artillery
Emphasized the problems with political organization
Vowed to work for a better world
St. Petersburg, 1917
The Bolsheviks wanted to avoid capitalism
Founded and led by Vladimir Lenin
Revolution made trade, commerce and private property illegal
Promised to end the exploitation of all workers
Urged workers to fight against the global economy
Cambridge University, 1918
Keynes joined the British peace delegation in Versailles
The Allied countries wanted reparations from the Germans
Keynes disagreed with this and resigned
Vienna, 1919
Austria lost WW1 and it's empire
Revolution was looming; socialist and communist were in the lead for elections as it promised a more just society
Hayek enrolls at the University of Vienna
Meets Ludwig von Mises; he shares his economic/political views
Markets work and governments don’t
The new socialist economy in the Soviet Union wouldn’t work because it doesn’t have a functioning pricing system
Moscow, 1922
Seemed like von Mises' predictions were coming true
Wages and prices were fixed
Lenin needed a new economic policy
Said that farmers can sell their own goods and business can operate to revive the economy
His comrades strongly disagreed for going against Marxist principles
In Lenin’s eyes, the commanding heights of the economy were steel, coal and other heavy industries
Lenin dies
His successor, Joseph Stalin, introduces central planning
The Communist government planned and managed every aspects of the economy
Communism seem to be thrive and capitalism was on the other end of the spectrum
Vienna, 1923
German and Austrian governments printed money to pay off reparations
Resulted in hyperinflation
Hayek needed 200 pay raises in 8 months
Wiped out middle class savings
Ultimately led to the success and rise of Hitler and the Nazis
New York, 1920s
Europe, 1931
Washington D.C, 1933
Cambridge University, 1936
1941
World War 2 begins
London, 1944
New Hampshire, 1944
VE Day, 1945
Britain, 1945
Switzerland, 1947
Berlin, 1947
New Delhi, 1947
Chicago, 1950
Austria, 1970
USA, 1971
London, 1973
Stockholm, 1974
Chicago, 1974
Washington D.C, 1974
Britain, 1979
USA, 1979
USA, 1982
Atlantic Ocean, 1982
Britain, 1982
Early 1920's
Black Thursday, October 24, 1929, the stock market bubble burst causing a downward spiral
Values and prices crashed
People couldn't earn, repay, spend, or consume
People panicked and rushed to banks to withdraw savings
Millions of people couldn’t make withdrawals and lost everything
About 50% of American banks closed
Unemployment was around 15 million people
Americans were spending money and very optimistic, buying lots of stock
British men marched to petition the right to work
Keynes writes a book about what caused the Great Depression and what to do about it
Ultimately invents macroeconomics
Main Idea: View a country’s economy and a machine that can be managed
Franklin Roosevelt, the new president, was at war with the great depression
Created programs for the unemployed, the hungry, and more
Ideology: Regulate capitalism to protect people from the free market
Created new agencies to regulate to stock market, banks, capitalism
Industries faced many new rules and regulations
Keynes published his general theory about how to tackle the depression
Became the most influential economist of his times
Promoted government spending during bad economic times
Incur a surplus by lowering spending during good economic times
In D.C, the government learned to live with inflation to keep unemployment low
Keynesianism became government policy
US government borrowed money and pumped it into war effort to keep citizens employed
Employed citizens to make uniforms, machinists to build weapons and ammunition, auto workers to build jeeps and trucks
Hoped that what worked in war would work in peace
Hayek teaches at the London School of Economics
Feared Keynesianism was a step in the wrong direction
Wrote 'Road to Serdom'
Too much government planning means too much government power, too much power meant less freedom
Central planning was the first step to totalitarianism
Hayek rejected macroeconomics and government intervention
Hayek was on the losing side of the battle of ideas
Delegates gathered to organize the post war economy
Created the world bank and international monetary fund (IMF)
Designed to bring stability and prevent the 30’s depression and unemployment
Keynes Dies
His reputation was raised to sainthood and Hayek was discredited
Hayek was essentially forgotten
World War 2 ends
Truman, Stalin and Churchill came together to plan peace
Redrew map of Europe
Lost faith in market economy
End of war was met with a federal election
Churchill expected an easy victory because he was the ‘nations hero’
Clement Attlee led the opposition, the Labor Party
Churchill opposed planning and control (Hayek theories)
Cold War begins
Attlee wins the election
Created a mixed economy
Government owned industries didn’t enriched shareholder and owners, but worked for the common good
1/3 of the world's population adopts socialism
Hayek brought together 36 economists, historians and journalists
The world was turning towards planning and they thought they had to develop an intellectual current of offset the movement
Democracy is impossible without a free market economy
Hayek paid tribute to the socialists because they had the courage to implement their system through thick and thin
Germany and it's economy was in ruins; currency was worthless
Black markets begin to form (cigarettes, cognac, etc.)
Ludwig Earhart, a free market economist, was enlisted by the German government
Announced that the government would give up all price controls without warning on the radio
Everyone disagreed with this decision
Economy began to rebound because of the strong welfare state
German economy overtook the British economy
Black markets begin to disappear
Pandit Nehru, the prime minister, wanted to combine British democracy with Soviet style central planning
Steel, coal, machinery, capital goods and more were now in the public sector instead of private
Hayek is employed at the University of Chicago
He met Milton Friedman who believes in minimal government and emphasis on free market to control the economy
The US president, John F. Kennedy, used Keynesianism
High economic growth and standard of living across capitalist countries
Success of mixed economy made Hayek seem irrelevant
Hayek moved back to Austria
Inflation and unemployment were rising at the same time. Called ‘stagflation'
After 30 years of growth, the economy plateaued and had stagflation that wasn’t getting cured
President Nixon introduced wage and price controls
Instead of controlling inflation, they created shortages which rose prices once again
Britain was also facing stagflation and used wage & price controls
A coal miner strike and crisis plunged the country into darkness
A minister, Keith Joseph admitted he was wrong for opinions
Started the remodeling of conservative policies
Wants to convert the country to his ideology
Believed the universities were infected with socialist mindsets
Claimed Britain needs more risk taking, means less equality
Margaret Thatcher was elected and believed in Hayek's theories
Global focus shifts from Keynes to Hayek
Hayek receives the Nobel Peace Prize
Industry slowed and unemployment rose
Largest economic downturn since the Great Depression
All prices increased
Started the year with regulated capitalism, but deregulation was looming
The airline industry was heavily regulated which minimized competition
Soon deregulated which led to turbulence in the industry with high levels of competition
Workers like garbage men, paramedics, grave diggers, and etc. were on strike
Economy was spiraling out of control
Conservatives were elected, led by Margaret Thatcher
Increased government spending to avoid thousands of bankruptcies and high unemployment
President Carter had low levels of confidence from citizens
Inflation was still very high after implementing Hayek’s system
Carter's competition, Ronald Reagan (Republican), had the same philosophy as Margaret Thatcher
Reagan became the president because the citizens wanted change
Monetary contraction was the only way to bring inflation down
Would be impossible without a temporary recession
Unemployment hit 10%
Interest rates of around 20% ate away at business profits
Inflation was 'solved'
Reagan's policies were called 'Reaganomics'
Components:
Sound money
Deregulation
Modest tax rates
Limited government spending
Biggest tax cuts in history led to massive deficits
Argentina captured the Falkland Islands from Britain
Thatcher risked a war to regain possession
Before war, her popularity was low
The eventual victory of the war ensured the survival of her party
Coal miners and unions were Thatcher’s biggest enemy
Coal mines were not profitable, requires $3B per year in subsidies to survive
Unions demanded no mine would be closed until the coal is all out
Strikes and pickets began which caused clashes with police
Many miners wanted to return to work and the strike collapsed
Privatization was introduced by Thatcher
2/3 shares of state owned industries (commanding heights) were sold to private investors
Thatcher and Reagan being in office simultaneously was crucial for changing the global views
Main Ideas
Beginning of 20th century - Less government intervention
Middle of 20th century - More government intervention
Late 20th century - Less government intervention
Swing from government to market and Keynes to Hayek ideals
Legend
Green = No specific country
Purple = Soviet Union
Light Blue = Great Britain
Yellow = Germany
India = Orange
Gray = Atlantic Ocean
Brown = Switzerland
Red = United States
Dark Blue = Austria
Dark Green = Sweden
By: Eddie Rabinovich
February 22, 2021