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