0:00:08 > 0:00:11This vast solar power plant being built in the remote Arizona desert
0:00:11 > 0:00:16is part of the biggest economic rescue effort in history.
0:00:16 > 0:00:19While the cost of action will be great,
0:00:19 > 0:00:22I can assure you that the cost of inaction will be far greater.
0:00:23 > 0:00:25With the economy still struggling,
0:00:25 > 0:00:29the American government is shelling out three-quarters of a trillion dollars
0:00:29 > 0:00:32to try to haul the country out of trouble.
0:00:34 > 0:00:38And in Britain, billions are being spent to accelerate growth,
0:00:38 > 0:00:41even by a government determined to cut borrowing.
0:00:41 > 0:00:44Is this really the right road to take?
0:00:44 > 0:00:48After the crash in 2008, the world seemed to be running out of cash.
0:00:48 > 0:00:53But rather than cut back, governments spent huge amounts of money they didn¹t have.
0:00:53 > 0:00:55Why on earth would they do that?
0:00:56 > 0:01:00It¹s all goes back to the extraordinary ideas of this man,
0:01:00 > 0:01:04the British economist John Maynard Keynes.
0:01:04 > 0:01:06Quite simply, he changed the world.
0:01:06 > 0:01:10I think it is true that he¹s one of the great figures of the 20th century
0:01:10 > 0:01:13and in many ways of the 21st century.
0:01:13 > 0:01:16Keynes thought capitalism was brilliant.
0:01:16 > 0:01:19But left to its own devices, it could also go seriously wrong.
0:01:19 > 0:01:23It was up to governments to step in to get the economy back on track.
0:01:24 > 0:01:30He was the archetypal man in Whitehall, Westminster or Cambridge who thought he knew best.
0:01:30 > 0:01:35Keynes has never been more relevant or controversial than he is today.
0:01:35 > 0:01:37Because for the first time since the 1930s,
0:01:37 > 0:01:40the problems he was grappling with then -
0:01:40 > 0:01:43bank failures, international crises,
0:01:43 > 0:01:48the possibility of a long economic slump - we¹re facing, too.
0:01:48 > 0:01:53In this series, I¹ll tell you about the lives and thoughts of three extraordinary men
0:01:53 > 0:01:56with radically different views.
0:01:57 > 0:02:01Karl Marx, Friedrich Hayek and, tonight, Keynes.
0:02:01 > 0:02:04They all saw that taming the growing power of money
0:02:04 > 0:02:07was the crucial challenge for the modern world.
0:02:07 > 0:02:10All three were intellectual giants
0:02:10 > 0:02:13whose ideas have been a hidden force shaping world events,
0:02:13 > 0:02:15changing the lives of every one of us.
0:02:15 > 0:02:18But I think they have something special to tell us right now,
0:02:18 > 0:02:22because they, more than anyone, taught us the awesome power of money,
0:02:22 > 0:02:27the good that markets and capitalism could do and the enormous trouble they could cause.
0:02:27 > 0:02:31I think they¹d know exactly what we¹ve been going through.
0:02:31 > 0:02:34I want to know, can they help us find a way out?
0:02:51 > 0:02:54The quiet hills of north-west England.
0:02:55 > 0:02:59For me, a chance to experience economics in action.
0:03:04 > 0:03:06ENGINE REVS
0:03:15 > 0:03:19I¹m getting to try out rally cars competing in the Tour of Cumbria.
0:03:23 > 0:03:28The sponsors, Pirelli, are getting a slice of the government¹s £2.4 billion fund
0:03:28 > 0:03:31to help regional growth and employment.
0:03:31 > 0:03:35They want to show me what the company¹s really all about.
0:03:42 > 0:03:44Pirelli is one of the world¹s biggest tyre makers.
0:03:44 > 0:03:47It¹s been manufacturing in Britain for almost a century.
0:03:50 > 0:03:54It wants to develop some of its top ranges and beef up research and development.
0:03:55 > 0:03:57Brilliant. Absolutely brilliant.
0:03:57 > 0:04:00But the sums hadn¹t been adding up.
0:04:11 > 0:04:14This factory is one of Carlisle¹s biggest employers.
0:04:15 > 0:04:20There are about 750 workers here, producing 10,000 tyres a day.
0:04:20 > 0:04:26Not so long ago, people worried the company would shift production overseas to cut costs.
0:04:28 > 0:04:34A £2 million government grant has persuaded Pirelli to invest in Britain instead.
0:04:34 > 0:04:38When we have a major investment, the confidence in people
0:04:38 > 0:04:42to spend their wages is increased.
0:04:42 > 0:04:44And the local economy benefits.
0:04:44 > 0:04:47And it's not only Pirelli employees.
0:04:47 > 0:04:52We have hundreds of suppliers and contractors who depend on this factory
0:04:52 > 0:04:56and they benefit also when Pirelli increases its spend.
0:04:56 > 0:04:59And also they recycle that money into the local economy.
0:05:01 > 0:05:03It might seem surprising -
0:05:03 > 0:05:08a handout to a private company, when the government's so worried about the mounting national debt,
0:05:08 > 0:05:11now more than a trillion pounds.
0:05:11 > 0:05:13But Keynes was quite clear.
0:05:13 > 0:05:18There are times when we need to step in to make capitalism work for us,
0:05:18 > 0:05:21even when that means spending money we don¹t have.
0:05:21 > 0:05:25What Keynes said was that it was possible for government
0:05:25 > 0:05:30to come in and make markets work better.
0:05:30 > 0:05:37One way that it¹s often put is that Keynes saved capitalism from the capitalists.
0:05:39 > 0:05:44Though for Keynes¹ critics, it¹s mistakes by governments that really cause the trouble.
0:05:45 > 0:05:50When we find instances of economies being seriously knocked out of equilibrium,
0:05:50 > 0:05:53it¹s generally been as a result of government policy mistakes.
0:05:53 > 0:05:56But Keynes didn¹t really make a convincing case
0:05:56 > 0:05:59that even when an economy was knocked out of equilibrium,
0:05:59 > 0:06:06that government action could do better than allowing the economy to essentially mend itself.
0:06:10 > 0:06:12So Keynes was either an economic saviour,
0:06:12 > 0:06:14or the man who led us all astray.
0:06:14 > 0:06:17But there¹s no argument that he changed our world
0:06:17 > 0:06:19and the way we think about it.
0:06:19 > 0:06:23He was at the centre of the debate 80 years ago and he¹s back there again today.
0:06:23 > 0:06:26A great weight is lifted from us...
0:06:26 > 0:06:29This is the only known film of Keynes speaking.
0:06:29 > 0:06:32There's no danger of the exchange falling too far.
0:06:32 > 0:06:37There's no danger of a serious rise in the cost of living.
0:06:37 > 0:06:41It's a broadcast about economics, how to share out the world's resources.
0:06:41 > 0:06:44Meanwhile, British trade...
0:06:44 > 0:06:46But for Keynes, this was no dry science.
0:06:46 > 0:06:49It was about changing the world for the better.
0:06:49 > 0:06:55I think if we're looking at Britons who made a real difference in the 20th century,
0:06:55 > 0:06:59the most obvious name would be Winston Churchill.
0:06:59 > 0:07:01John Maynard Keynes is really not far behind.
0:07:05 > 0:07:07Keynes spent years in this house in London,
0:07:07 > 0:07:12developing ideas that helped shape some of the most important events of the past century,
0:07:12 > 0:07:18helping to save capitalism from the Great Depression, funding the war against the Nazis,
0:07:18 > 0:07:22and building a new post-war economic order
0:07:22 > 0:07:27that helped pave the way for decades of growth and rising prosperity.
0:07:27 > 0:07:31What¹s really extraordinary about Keynes from a modern perspective was his access.
0:07:31 > 0:07:35Despite being so unconventional in his life and especially in his views,
0:07:35 > 0:07:38he had the ear of anyone who mattered.
0:07:38 > 0:07:42Presidents and Prime Ministers all listened to what he had to say.
0:07:42 > 0:07:47Though it was only after his death that everyone started taking his advice.
0:07:48 > 0:07:52I applied to university in 1965,
0:07:52 > 0:07:57and the whole intellectual climate, not just in economics but politics,
0:07:57 > 0:08:01was driven by the idea that Keynes had solved the economic problem.
0:08:05 > 0:08:11By the late 1960s, Keynes' ideas were built into the fabric of pretty much every western economy.
0:08:11 > 0:08:15But he didn¹t seem to have an answer to the high inflation of the 1970s.
0:08:15 > 0:08:19After that, Keynesian fine-tuning was out
0:08:19 > 0:08:23and free-market ideas gradually took over.
0:08:23 > 0:08:28But when the world got into serious bother in 2008, Keynes was back.
0:08:28 > 0:08:35It's ideas that mobilise the world, on right and left, good and bad.
0:08:35 > 0:08:38And Keynes was the author of, in MY judgment,
0:08:38 > 0:08:42the best suite of ideas about how to think about capitalism that there's been.
0:08:42 > 0:08:46And if you think that counts, then he counts.
0:08:55 > 0:09:00So what are these great ideas that have dominated our economic landscape for so long
0:09:00 > 0:09:03and where exactly did they come from?
0:09:06 > 0:09:10Keynes was born at the height of the British Empire, in 1883,
0:09:10 > 0:09:15to middle-class parents who sent him to Eton and Cambridge.
0:09:15 > 0:09:17So far, so conventional.
0:09:18 > 0:09:24But at university he fell in with a very unconventional crowd, the Bloomsbury Set.
0:09:24 > 0:09:28As a young man, he spent a lot of time here at their country retreat,
0:09:28 > 0:09:31Charleston in Sussex.
0:09:31 > 0:09:36It was a kind of commune for artists and writers and the one economist.
0:09:37 > 0:09:41They did see themselves as very different.
0:09:41 > 0:09:46They were tinged by that rather indefinable concept, bohemian.
0:09:54 > 0:09:58They were very ahead of their time. They were pioneers about sexual behaviour.
0:09:58 > 0:10:01They were pioneers on a political front.
0:10:01 > 0:10:05They were pioneers in many aesthetic fields,
0:10:05 > 0:10:08in writing and in the arts.
0:10:08 > 0:10:12The Bloomsbury group allowed him to step outside of the box
0:10:12 > 0:10:14and to think the unthinkable.
0:10:14 > 0:10:17And that breadth of intellect that he had
0:10:17 > 0:10:22allowed him to leap off cliffs with a confidence that there was no bottom.
0:10:34 > 0:10:38Keynes immersed himself in the cultural world all his life,
0:10:38 > 0:10:45collecting paintings, fine books, even founding the Arts Theatre here in Cambridge.
0:10:45 > 0:10:48Perhaps it¹s no coincidence that a man with such wide-ranging interests
0:10:48 > 0:10:53should have the vision to develop a radically new approach to economics,
0:10:53 > 0:10:58Keynesianism, shorthand today for government efforts to control the economy.
0:10:59 > 0:11:04Keynes was born, nearly 130 years ago, into a confident age.
0:11:04 > 0:11:08Science had been marching forward in medicine, in engineering,
0:11:08 > 0:11:12every year extending what was humanly possible.
0:11:12 > 0:11:17But there was one domain where science had barely begun -
0:11:17 > 0:11:20economics, the world of money and markets.
0:11:20 > 0:11:25If we could tame capitalism, we could really shape our destiny.
0:11:25 > 0:11:27Keynes fundamentally believed that.
0:11:27 > 0:11:30But he also understood, maybe better than some of his followers,
0:11:30 > 0:11:33just how difficult that was going to be.
0:11:40 > 0:11:45Greek fury at the austerity they feel has been imposed on them by their European neighbours.
0:11:47 > 0:11:49For Keynes, this might feel a bit familiar.
0:11:49 > 0:11:53He saw at first-hand the disaster that can come from stronger countries
0:11:53 > 0:11:56dictating economic terms to the weak.
0:12:00 > 0:12:03That helped him form his first big idea.
0:12:03 > 0:12:09In an interconnected world, when you beggar your neighbour you might well beggar yourself.
0:12:15 > 0:12:19It was an idea forged by the horrors of World War I.
0:12:20 > 0:12:22True to his Bloomsbury values,
0:12:22 > 0:12:24Keynes didn¹t want to fight in the war.
0:12:26 > 0:12:31But he was willing to use his economic brilliance to help finance it.
0:12:33 > 0:12:40Keynes' job at the Treasury was to help channel loans from America to other countries in the alliance.
0:12:40 > 0:12:45His time here brought home to him how integrated the global economy had become.
0:12:45 > 0:12:47Isolation just wasn¹t an option.
0:12:47 > 0:12:50The economic fate of entire populations
0:12:50 > 0:12:54might come to depend on events hundreds, even thousands, of miles away.
0:12:59 > 0:13:04Once the war was over, Keynes could see how hatred of the defeated Germans
0:13:04 > 0:13:08might lead the victors to make a terrible mistake.
0:13:08 > 0:13:13At the end of the First World War there was a great deal of obviously public hostility towards Germany.
0:13:13 > 0:13:18It had been a disastrous war both in terms of lives and casualties,
0:13:18 > 0:13:20but economically, too.
0:13:20 > 0:13:23I think there was quite a strong feeling that Germany must be made to pay.
0:13:26 > 0:13:29At the Palace of Versailles, where the peace treaty was signed,
0:13:29 > 0:13:35British Prime Minister Lloyd George and his French and American allies relished their victory.
0:13:35 > 0:13:40Keynes was a member of the British delegation here but, against his advice,
0:13:40 > 0:13:45Germany was ordered to pay everyone¹s bills for the damage and suffering caused by the war.
0:13:45 > 0:13:49How could Germany afford to repay that debt?
0:13:49 > 0:13:53You need an economy that is running to produce money and wealth.
0:13:53 > 0:13:55And then you can repay.
0:13:55 > 0:13:58You cannot repay out of nothing.
0:14:05 > 0:14:08Keynes was so outraged that he resigned from the Treasury
0:14:08 > 0:14:10and retreated to his room in Charleston
0:14:10 > 0:14:16to write his first major book, ªThe Economic Consequences of the Peaceº.
0:14:16 > 0:14:19Brilliantly written, it became a best seller,
0:14:19 > 0:14:24though some said, with his sympathy for the Germans, he should be awarded an Iron Cross.
0:14:25 > 0:14:29He says, "If we aim deliberately at the impoverishment of Central Europe,
0:14:29 > 0:14:33"vengeance, I dare predict, will not limp."
0:14:33 > 0:14:35But the key point for me is,
0:14:35 > 0:14:40he didn¹t just think it was immoral, the treaty, or unfair, he thought it was stupid.
0:14:40 > 0:14:44He thought a desperate Germany wasn¹t going to keep the peace in Europe,
0:14:44 > 0:14:47and it certainly wasn¹t going to contribute to prosperity.
0:14:47 > 0:14:52It wasn¹t going to buy goods from Britain and help Britain recover from the war.
0:14:52 > 0:14:56Something he kept coming back to one way or another throughout his life -
0:14:56 > 0:14:58we¹re all in it together.
0:15:04 > 0:15:09The Versailles Treaty brought one of the great powers of Europe to its knees.
0:15:12 > 0:15:16As Keynes predicted, the German economy descended into chaos.
0:15:18 > 0:15:23Their debts were so impossibly large, they ended up printing the money to pay the bills
0:15:23 > 0:15:28which quickly led to hyperinflation and a thoroughly worthless currency.
0:15:30 > 0:15:33Hyperinflation didn¹t just destroy the economy.
0:15:33 > 0:15:38It destroyed the fabric of German society, people¹s hopes, too.
0:15:38 > 0:15:41There are stories about people taking out all of their savings
0:15:41 > 0:15:45to buy a single postage stamp for a suicide letter.
0:15:45 > 0:15:50When Keynes warned that the Versailles Treaty would bring a catastrophe here,
0:15:50 > 0:15:53even his admirers might have thought he was exaggerating.
0:15:53 > 0:15:55But they didn¹t think that for long.
0:15:55 > 0:15:59CROWD: Sieg Heil! Sieg Heil!
0:16:00 > 0:16:05Just 14 years after the Treaty of Versailles, Hitler came to power.
0:16:08 > 0:16:10World War II wasn't far away.
0:16:17 > 0:16:23As Keynes had predicted, the price of getting economic relations wrong was calamity.
0:16:24 > 0:16:28Keynes foresaw that the reparations were too onerous, would have to be adjusted
0:16:28 > 0:16:33and that actually you were laying the seeds of the next European conflagration.
0:16:33 > 0:16:36He thought it was unbelievably short-sighted. He was right.
0:16:40 > 0:16:43So what would Keynes make of Europe today?
0:16:43 > 0:16:48Well, once again he might see strong countries dictating economic terms to the weak,
0:16:48 > 0:16:51though this time it's strong countries like Germany itself
0:16:51 > 0:16:54insisting that crisis-ridden nations, like Greece,
0:16:54 > 0:16:59sign up to tough budget cuts in exchange for emergency loans.
0:17:01 > 0:17:05The newspapers show the depth of ill will that¹s built up as a result of the crisis.
0:17:05 > 0:17:11You¹ve got the Germans talking about the Greeks as no-good scroungers.
0:17:11 > 0:17:16But in Greece, well, there¹s no more taboo any more about comparing German leaders to Nazis.
0:17:16 > 0:17:21But Keynes might say they were harking back to the wrong war.
0:17:21 > 0:17:26The tough conditions being imposed on Greece might remind HIM, ironically,
0:17:26 > 0:17:29of the deal imposed on Germany at Versailles.
0:17:29 > 0:17:31The dominant thinking in Europe at the moment
0:17:31 > 0:17:36is exactly repeating the mistakes I believe, certainly for Greece,
0:17:36 > 0:17:39as was made at the end of the First World War.
0:17:39 > 0:17:43There comes a point, if you visit on countries things they can never deliver, it will end in tears.
0:17:43 > 0:17:46If you look at what's happening in the Eurozone today,
0:17:46 > 0:17:48you have riots on the streets of Greece,
0:17:48 > 0:17:51general strikes in Spain, general strikes in Portugal.
0:17:51 > 0:17:56You can see, well, aren't we just failing to learn the lessons of history here?
0:18:02 > 0:18:04If Keynes could join me in Berlin today,
0:18:04 > 0:18:08he¹d surely appreciate the complexity of the crisis in the Eurozone
0:18:08 > 0:18:14and he¹d understand why ordinary Germans feel it¹s time for Greece to pay its own way.
0:18:14 > 0:18:20But he also understood that imposing too much austerity could be self defeating.
0:18:22 > 0:18:27I think he would have said, "Let's make Greece strong, so then they can repay their debt."
0:18:27 > 0:18:30As long as a debtor pays, the creditor is happy.
0:18:30 > 0:18:33But as soon as a debtor gets into difficulties,
0:18:33 > 0:18:38and if he's a very important debtor, the creditor has also problems.
0:18:38 > 0:18:40Because he won't get his money back.
0:18:42 > 0:18:45Faced with the crisis affecting the people of Europe today,
0:18:45 > 0:18:49Keynes would undoubtedly have come up with some solutions.
0:18:52 > 0:18:54In fact, years after the Treaty of Versailles,
0:18:54 > 0:18:58he'd unveil a plan for countries to work better together.
0:18:58 > 0:19:01But first, there was a more basic question,
0:19:01 > 0:19:04how to steer the economy itself?
0:19:07 > 0:19:10To tame the economy, to make it work for us,
0:19:10 > 0:19:14Keynes realised you first had to understand how it worked.
0:19:14 > 0:19:19And the tool for doing that - economics - was still young in the 1920s,
0:19:19 > 0:19:22but it had grand ambitions.
0:19:22 > 0:19:25People hoped you'd be able to predict the movement of economies,
0:19:25 > 0:19:27like you could predict the movement of the planets.
0:19:27 > 0:19:34Keynes was drawn to that idea as well but he came to the conclusion economies weren't like planets.
0:19:34 > 0:19:36They were more like people.
0:19:36 > 0:19:39You never really knew what they were going to do next.
0:19:39 > 0:19:45In fact, he noticed, the times when economies looked most predictable,
0:19:45 > 0:19:49were usually the times when things were about to go disastrously wrong.
0:19:54 > 0:19:57It certainly felt like that in 2008,
0:19:57 > 0:20:03when the world financial system imploded after one of the longest booms in history.
0:20:03 > 0:20:05Many claim now to have seen it coming,
0:20:05 > 0:20:11but at the time, many more behaved as if the good times would go on and on.
0:20:11 > 0:20:15No return to Tory boom and bust.
0:20:15 > 0:20:18Being too sure about the economic future
0:20:18 > 0:20:22was another mistake that Keynes had warned about 80 years ago.
0:20:22 > 0:20:26Because he'd made the same mistake himself.
0:20:37 > 0:20:40After resigning from the Treasury after World War I,
0:20:40 > 0:20:45Keynes retreated to the sanctuary of his old college, Kings in Cambridge.
0:20:50 > 0:20:54He was a lecturer and later a bursar, looking after the college¹s finances.
0:21:02 > 0:21:05He had a special interest in probability theory,
0:21:05 > 0:21:10a branch of mathematics that tries to predict the future from the evidence of the past.
0:21:15 > 0:21:20When he wasn¹t writing or studying, Keynes was often betting on the financial markets.
0:21:20 > 0:21:24He needed money and he thought speculation was a good way to get it.
0:21:24 > 0:21:28But it was also a great way for him to test his belief
0:21:28 > 0:21:31that probability theory and statistics
0:21:31 > 0:21:34could help you predict the way markets were going to move.
0:21:34 > 0:21:36He had very mixed results.
0:21:51 > 0:21:55In his early years as an investor, Keynes sat in bed every morning
0:21:55 > 0:22:00poring over reams of statistics about currencies, shares, bonds and commodities.
0:22:00 > 0:22:05When he was sure he¹d worked out which way the market would move, he¹d make the deals.
0:22:12 > 0:22:17Cambridge academic David Chambers has spent a lot of time studying Keynes¹ investment strategies.
0:22:21 > 0:22:27Given this economic knowledge that he had, this great thirst that he had for numbers and statistics,
0:22:27 > 0:22:33he believed I think that he could define, delineate, the business cycle.
0:22:33 > 0:22:37And as a consequence of that he would be able to pick
0:22:37 > 0:22:41when was the right time to be in the stock market, to own shares,
0:22:41 > 0:22:46and when was the right time to come out of the stock market into bonds,
0:22:46 > 0:22:49government bonds in particular, or, alternatively, cash.
0:22:52 > 0:22:58But none of Keynes¹s elaborate calculations pointed out the disaster just around the corner.
0:23:00 > 0:23:06Wall Street before the crash in 1929 looked a lot like the tail end of our market boom.
0:23:06 > 0:23:09Investors could see no end to the good times.
0:23:09 > 0:23:15Armed with the very latest mathematical models, they thought they had everything covered.
0:23:15 > 0:23:17Then the bubble burst.
0:23:17 > 0:23:22World markets collapsed and Keynes lost money, along with millions of others,
0:23:22 > 0:23:24paving the way for the Great Depression.
0:23:24 > 0:23:27His confidence in predicting the future was gone.
0:23:27 > 0:23:32He would have bitterly reproached himself for not foreseeing the Great Depression.
0:23:32 > 0:23:36But he came to the view that the future is not like that,
0:23:36 > 0:23:41that anybody who happens to predict it right
0:23:41 > 0:23:45is likely to be doing so on the basis of luck rather than judgment.
0:23:49 > 0:23:53Keynes¹ speculating days weren¹t quite over.
0:23:57 > 0:24:02Years later, he thought he might have to store hundreds of tons of wheat in King¹s College chapel,
0:24:02 > 0:24:06after a commodity trade went wrong.
0:24:06 > 0:24:10But he did change the way he invested, and became a wealthy man.
0:24:10 > 0:24:15He¹d learned lessons about the way economies work that we still struggle with today.
0:24:16 > 0:24:22That you can never get rid of uncertainty and that economies are made up of people, not numbers.
0:24:24 > 0:24:29More than anyone, Keynes wanted economics to be respected as a modern science.
0:24:29 > 0:24:33But he knew it was never going to be a science you could reduce to a set of equations,
0:24:33 > 0:24:35iron predictions,
0:24:35 > 0:24:41because economists were always going to have one extra thing to deal with, human nature.
0:24:42 > 0:24:45If you don't know about the future and you're trying to get a fix
0:24:45 > 0:24:48on what's taking place anywhere in time,
0:24:48 > 0:24:51you know, you would defer to the crowds.
0:24:51 > 0:24:54If the crowd is moving in a certain direction, they must be right.
0:24:54 > 0:24:57"The crowd's buying. What are they buying? I must buy, too."
0:24:57 > 0:24:59"The crowd's selling, I must sell, too!"
0:24:59 > 0:25:02And it's very animal. It¹s very herd.
0:25:04 > 0:25:09This idea of herd psychology helped Keynes make sense of the economic bubble
0:25:09 > 0:25:13that blew up in the years before the great crash of 1929.
0:25:15 > 0:25:20It can also do a pretty good job explaining our own great financial crash in 2008.
0:25:23 > 0:25:28In normal times, any economic textbook now or in Keynes¹ time
0:25:28 > 0:25:32would say if the price of something goes up, people buy less of it.
0:25:32 > 0:25:34If the price goes down, they buy more.
0:25:34 > 0:25:39That's how markets work. Except, Keynes realised, when you have bubbles.
0:25:39 > 0:25:43Then a different side of human nature takes over.
0:25:43 > 0:25:46It's the side that says, "Oh, house prices are going up.
0:25:46 > 0:25:50"Shares are going up. I shall buy more because the price is going to go up again."
0:25:50 > 0:25:54Which, of course, it does. It becomes a self-fulfilling spiral.
0:25:54 > 0:25:57Prices go up and up and up and up.
0:25:58 > 0:26:01Eventually, the bubble will burst. It always does.
0:26:03 > 0:26:05In the years before 2008,
0:26:05 > 0:26:10did we forget what Keynes had taught us about herd psychology,
0:26:10 > 0:26:13bubbles and the uncertainty of economic life?
0:26:14 > 0:26:18Did the bankers, investors, politicians and the rest of us
0:26:18 > 0:26:23simply get too confident in thinking the good times would go on forever?
0:26:23 > 0:26:28I think inasmuch as people actually sat down and thought about what were the risks,
0:26:28 > 0:26:34what are the uncertainties, then clearly a large number of people were manifestly found wanting.
0:26:34 > 0:26:36And, of course, if you don't know what you're doing,
0:26:36 > 0:26:41it's not surprising that you end up being smashed to bits and that's precisely what happened.
0:26:51 > 0:26:54Keynes¹s big ideas, that countries shouldn¹t beggar their neighbours,
0:26:54 > 0:26:59that markets were unpredictable, all came out of his own experience.
0:26:59 > 0:27:04Now the Great Depression produced his most important idea yet,
0:27:04 > 0:27:08and added real urgency to his need to tame the economy.
0:27:08 > 0:27:12What he realised was, economies might sink
0:27:12 > 0:27:16and then not automatically float back up.
0:27:16 > 0:27:22Looking around the western economies today, that does sound a bit familiar.
0:27:25 > 0:27:29In the early '30s, the outside world was deep in gloom,
0:27:29 > 0:27:33with dole queues lengthening and factories closing everywhere,
0:27:33 > 0:27:35but Keynes¹ life was blissful.
0:27:37 > 0:27:42By now he was famous, and he'd shocked even his avant-garde Bloomsbury friends
0:27:42 > 0:27:44by marrying a Russian ballerina.
0:27:44 > 0:27:47Up till then, he¹d been gay.
0:27:52 > 0:27:58Art, books, love affairs, for Keynes this was what life was all about.
0:27:58 > 0:28:03But he understood, probably more keenly than his Bloomsbury friends with their inherited wealth,
0:28:03 > 0:28:06that money kept the whole thing afloat.
0:28:06 > 0:28:11You couldn¹t have a civilised society without a well-functioning economy.
0:28:11 > 0:28:14When he was back in the real world on Monday morning,
0:28:14 > 0:28:18he could see the British economy wasn¹t working at all.
0:28:21 > 0:28:23Britain had been in a slump for years.
0:28:23 > 0:28:28Classical economists said that if workers would just agree to wage cuts,
0:28:28 > 0:28:32businessmen would invest again, create jobs, and the economy would revive.
0:28:33 > 0:28:39But Keynes disagreed. He thought the way to recovery was being blocked by pessimism,
0:28:39 > 0:28:41or low animal spirits.
0:28:42 > 0:28:45The big insight of Keynes behind all of this
0:28:45 > 0:28:49was that a market economy is not self-stabilising.
0:28:49 > 0:28:52When you get very big changes in animal spirits, in sentiment,
0:28:52 > 0:28:55the people who are producing to sell in the future
0:28:55 > 0:29:01suddenly worry that actually maybe there won't be the demand in the future, so they stop producing.
0:29:01 > 0:29:04To get out of that low output trap can be very difficult.
0:29:08 > 0:29:13Keynes realisation that an economy could stay sunk indefinitely
0:29:13 > 0:29:16was a radical break with conventional thinking.
0:29:19 > 0:29:24The classical approach said the economy would get better, we just had to give it time.
0:29:24 > 0:29:28But looking around, it seemed obvious to Keynes that it wasn¹t getting any better
0:29:28 > 0:29:31and it seemed blindingly obvious why it wasn¹t.
0:29:31 > 0:29:36Every time someone lost their jobs and joined the dole queue, they had less money to spend,
0:29:36 > 0:29:38so that would mean fewer goods were bought.
0:29:38 > 0:29:41It would probably mean more job losses.
0:29:41 > 0:29:45You could get caught in a downward spiral with no obvious way out.
0:29:45 > 0:29:48Now it seems equally obvious to us today,
0:29:48 > 0:29:52but back then it was all very new.
0:29:53 > 0:29:59Keynes thought the low animal spirits in the business world were now infecting everyone.
0:30:03 > 0:30:08In a radio broadcast in 1931, he made a dramatic call for action.
0:30:11 > 0:30:14ACTOR AS KEYNES: The slump in trade and employment
0:30:14 > 0:30:18are as bad as the worst which have ever occurred.
0:30:18 > 0:30:23Activity and enterprise, both individually and nationally, must be the cure.
0:30:26 > 0:30:29Today, Keynes¹ followers have made similar calls.
0:30:30 > 0:30:33Years after the start of the recession,
0:30:33 > 0:30:36the economy is still struggling to get back to where it was.
0:30:36 > 0:30:41You don¹t have to be Keynes to see animal spirits are low.
0:30:41 > 0:30:44Whether his ideas can revive them is another question.
0:30:44 > 0:30:47Keynes¹ insight that countries could just get stuck
0:30:47 > 0:30:51was probably his most important contribution to economic thinking.
0:30:51 > 0:30:57But he didn¹t just want to understand economies, he wanted to make them work better.
0:30:57 > 0:31:00He had plenty of advice for getting out of a slump,
0:31:00 > 0:31:05but the most controversial was that governments should spend money they haven¹t got.
0:31:05 > 0:31:08To my mind, the biggest argument in politics today
0:31:08 > 0:31:13is over whether countries have done too much of that since the crisis hit or not enough.
0:31:21 > 0:31:24Keynes might have died almost seven decades ago,
0:31:24 > 0:31:31but out here in the Arizona desert, his big idea for getting the economy moving again lives on.
0:31:36 > 0:31:42At Gila Bend, they're building the biggest solar power plant of its kind in the world.
0:31:47 > 0:31:50The site covers over three-and-a-half square miles.
0:31:51 > 0:31:55Nearly a million mirrors will capture enough energy
0:31:55 > 0:32:00to provide 70,000 American homes with clean power.
0:32:00 > 0:32:05But for the people in this remote region, and for John Maynard Keynes,
0:32:05 > 0:32:09probably the most important thing this plant will produce is employment.
0:32:09 > 0:32:11Between my wife and I,
0:32:11 > 0:32:15we probably spent two years out of work.
0:32:15 > 0:32:17Thank God, not at the same time but...
0:32:17 > 0:32:21But we, er, we took some very significant hits.
0:32:26 > 0:32:32The company that sources our manpower tells me they receive 300 resumes per day.
0:32:32 > 0:32:35There's a lot of people looking for work.
0:32:35 > 0:32:39And the people who have jobs out here are very... feel very lucky to have their jobs.
0:32:40 > 0:32:45In effect, this plant is part of a vast Keynesian experiment.
0:32:45 > 0:32:47In the wake of the crash,
0:32:47 > 0:32:52the US government stumped up three-quarters of a trillion dollars for projects like this one
0:32:52 > 0:32:53to create jobs and growth.
0:32:58 > 0:33:01In normal times, say the people who run this site,
0:33:01 > 0:33:06they would have raised the billion and a half dollars to get things going from commercial banks.
0:33:06 > 0:33:09But these aren't normal times.
0:33:09 > 0:33:12Because of that downturn, we had to, er...
0:33:12 > 0:33:17..look for alternative sources of financing.
0:33:17 > 0:33:20And, of course, in this context
0:33:20 > 0:33:25the Federal loan guarantee programme here in the US has helped a lot.
0:33:25 > 0:33:31In fact without that kind of public programmes this plant would have never been a reality.
0:33:34 > 0:33:36Now we¹re used to governments using their cash
0:33:36 > 0:33:43to try to bring the economy to life in hostile environments where private money's drying up.
0:33:43 > 0:33:47But back in Keynes¹ day, it was a much more controversial idea.
0:33:53 > 0:33:59In the 1930s, Keynes spent weekdays at his home here in London¹s Bloomsbury district.
0:33:59 > 0:34:02He wrote countless articles and pamphlets
0:34:02 > 0:34:08explaining how something could and should be done to tackle this Great Depression.
0:34:08 > 0:34:13In normal times, Keynes thought monetary policy was the best way to help the economy.
0:34:13 > 0:34:17You cut interest rates to encourage people to borrow and spend more
0:34:17 > 0:34:20and companies to invest.
0:34:20 > 0:34:24But when animal spirits are really low that might not be enough.
0:34:24 > 0:34:27Companies might not see the point of making new investments,
0:34:27 > 0:34:30people might not want to borrow no matter how cheap it was.
0:34:30 > 0:34:36That¹s when Keynes thought government did need to make up the gap with more public spending.
0:34:39 > 0:34:44Keynes suggested the government should hire people to demolish South London and then rebuild it.
0:34:44 > 0:34:47He wasn¹t serious, but he was making a serious point.
0:34:47 > 0:34:52If the government borrowed to create jobs, people would spend more,
0:34:52 > 0:34:55confidence would rise, and the economy would recover.
0:34:55 > 0:35:00If you picked the right moment, he insisted the extra spending would pay for itself
0:35:00 > 0:35:03by producing higher tax revenues.
0:35:03 > 0:35:06He did have enormous trouble trying to persuade the Treasury,
0:35:06 > 0:35:08the so-called "Treasury view",
0:35:08 > 0:35:10that you should borrow at the bottom of a business cycle.
0:35:12 > 0:35:16But in economic terms what you need is more demand in the economy
0:35:16 > 0:35:18and you can do that in the ways Keynes suggested.
0:35:18 > 0:35:23Naive Keynesian prescriptions of simply responding to recession
0:35:23 > 0:35:26by raising the budget deficit, as if this had no effect,
0:35:26 > 0:35:30no adverse effect, on other economic variables,
0:35:30 > 0:35:33I really think are very dangerous policy prescriptions.
0:35:35 > 0:35:39In the '30s, Keynes found that most British politicians had a similar view -
0:35:39 > 0:35:42high borrowing was dangerous.
0:35:42 > 0:35:46He thought he might have a more receptive audience in America.
0:35:46 > 0:35:49After all, he was now a celebrity on both sides of the Atlantic,
0:35:49 > 0:35:53and the economic situation in America was desperate.
0:35:56 > 0:35:58Gross national product was down to almost 70%.
0:35:58 > 0:36:02You had unemployment nationally at 25%.
0:36:02 > 0:36:07In places like Chicago and Detroit, unemployment was up to 50%.
0:36:07 > 0:36:10Over half the population unemployed.
0:36:11 > 0:36:16President Hoover¹s solution to the Great Depression had been spending cuts and tax rises.
0:36:17 > 0:36:20He'd made an argument we¹ve heard others make more recently.
0:36:21 > 0:36:25Balancing the country¹s books would create confidence and encourage investment.
0:36:26 > 0:36:29Didn't happen. Never has happened.
0:36:29 > 0:36:31When you cut back government spending
0:36:31 > 0:36:37in a situation such as a recession or depression, demand goes down,
0:36:37 > 0:36:43unemployment goes up, and it's a vicious circle.
0:36:43 > 0:36:48Confidence isn't restored when unemployment goes up and when business goes down.
0:36:48 > 0:36:50Confidence is eroded.
0:36:52 > 0:36:56Hoover¹s successor, Franklin Delano Roosevelt, had a different approach.
0:36:59 > 0:37:02Again, echoing arguments made today,
0:37:02 > 0:37:05he thought the government should spend its way out of trouble.
0:37:05 > 0:37:08This nation is asking for action
0:37:08 > 0:37:11and action now!
0:37:11 > 0:37:13CHEERING AND APPLAUSE
0:37:20 > 0:37:23When Keynes arrived in America, in 1934,
0:37:23 > 0:37:27there¹s no evidence that he persuaded the US government to adopt Keynesianism.
0:37:29 > 0:37:31They were doing it anyway.
0:37:31 > 0:37:35Keynes had his one and only meeting with President Roosevelt.
0:37:35 > 0:37:38By all accounts, it didn¹t go very well.
0:37:38 > 0:37:40Keynes thought the President was no economist.
0:37:40 > 0:37:45The President thought Keynes was a bit too clever for his own good.
0:37:45 > 0:37:47But they did agree on the most important thing.
0:37:47 > 0:37:50This was no time for government to sit on its hands.
0:37:50 > 0:37:54It was time for an historic experiment.
0:37:58 > 0:38:03The New Deal, a vast programme of government-funded projects
0:38:03 > 0:38:05to put armies of jobless to work.
0:38:05 > 0:38:08Ever since, it¹s been the celebrated example
0:38:08 > 0:38:12of a Keynesian effort to boost flagging economies.
0:38:15 > 0:38:19And there¹s no more iconic project of that era than this one.
0:38:22 > 0:38:24Hoover Dam.
0:38:26 > 0:38:30Built across the Colorado River, bordering Nevada and Arizona,
0:38:30 > 0:38:33it was the biggest construction project in the world.
0:38:38 > 0:38:41I would call it a Keynesian project, absolutely.
0:38:41 > 0:38:43The government stepped in with money.
0:38:43 > 0:38:48Built a deficit, and out of that came Hoover Dam,
0:38:48 > 0:38:50which gave thousands, tens of thousands of people,
0:38:50 > 0:38:52a new life, money to spend.
0:39:00 > 0:39:03Armies of workers from across America
0:39:03 > 0:39:06tunnelled for five years through mile upon mile of mountain rock
0:39:06 > 0:39:11to build, what was in effect, a vast power generator,
0:39:11 > 0:39:14providing electricity for huge swathes of the country.
0:39:16 > 0:39:18It primed the economy.
0:39:18 > 0:39:21165 million investment,
0:39:21 > 0:39:25which produced billions in growth, economic growth.
0:39:33 > 0:39:39Just eight miles away is Boulder City, built to house the workers building the dam.
0:39:46 > 0:39:51All these houses along these avenues are what we now call "ding-bat houses".
0:39:51 > 0:39:53They were the homes built for the workers.
0:39:53 > 0:39:59They were put up to last through the construction of the dam. Very quickly built.
0:39:59 > 0:40:02But because people stayed, which they didn't anticipate,
0:40:02 > 0:40:04families still lived in them.
0:40:04 > 0:40:07Roger Shoaff runs the town's hotel.
0:40:07 > 0:40:10He thinks Boulder City shows how in a depression
0:40:10 > 0:40:15extra government spending CAN trigger private spending and investment, too,
0:40:15 > 0:40:18adding to the economic benefits.
0:40:18 > 0:40:21It's what Keynes called "the multiplier".
0:40:23 > 0:40:27By the end of the second year, they lived in a town, a full town,
0:40:27 > 0:40:31fully operating town with retail stores and restaurants
0:40:31 > 0:40:37and medical facilities and recreational facilities. It happened in less than two years.
0:40:39 > 0:40:44Critics of Keynesian spending plans often say the benefits are fleeting and the costs permanent.
0:40:45 > 0:40:48But Boulder City took root and thrived.
0:40:51 > 0:40:54Those who still live here say if it hadn¹t been for the New Deal,
0:40:54 > 0:40:57this would still be desert.
0:41:02 > 0:41:05Hoover Dam might have helped the local area,
0:41:05 > 0:41:10but it¹s actually a myth that the New Deal ended the Great Depression.
0:41:12 > 0:41:18It took a world war and all the extra government spending that went with that, finally,
0:41:18 > 0:41:21to bring the economy out of the doldrums.
0:41:25 > 0:41:29You might wonder whether a world war was really the best test of Keynes¹ arguments.
0:41:29 > 0:41:32But ever since then, so-called "Keynesian policies"
0:41:32 > 0:41:36have been what governments do when faced with emergencies.
0:41:36 > 0:41:42And the crisis of 2008 was the biggest emergency anyone had seen for a long time.
0:41:43 > 0:41:45When the global financial system crashed,
0:41:45 > 0:41:49the world faced the real possibility of another Great Depression.
0:41:50 > 0:41:53Governments had been preaching the free market for years.
0:41:54 > 0:42:00But faced with this economic disaster they reached again for the old Keynesian levers.
0:42:00 > 0:42:02It was a classic Keynesian response.
0:42:02 > 0:42:06When individuals and businesses stop spending money,
0:42:06 > 0:42:09if the government also stops spending money at the same time,
0:42:09 > 0:42:11then what happens? The economy, basically, crashes.
0:42:13 > 0:42:16The aim was to boost confidence, or animal spirits,
0:42:16 > 0:42:20by making it easier to borrow, invest and spend.
0:42:20 > 0:42:25Interest rates were slashed to just half of one percent, the lowest on record.
0:42:26 > 0:42:28We¹re all now in uncharted territory.
0:42:28 > 0:42:31Then, when interest rates couldn¹t go much lower,
0:42:31 > 0:42:35the Bank of England started pumping billions of pounds directly into the economy.
0:42:35 > 0:42:40It¹s literally creating £75 billion in the next few months
0:42:40 > 0:42:43to get money moving around the economy again.
0:42:43 > 0:42:46Even VAT was temporarily cut.
0:42:46 > 0:42:52It'll make goods and services cheaper and by encouraging spending it will help stimulate growth.
0:42:52 > 0:42:56In 2009, with the global economy still tottering,
0:42:56 > 0:43:01leaders gathered in London to endorse a Keynesian rescue plan for the entire world.
0:43:01 > 0:43:04This is the day that the world came together
0:43:04 > 0:43:08to fight back against the global recession.
0:43:08 > 0:43:12I find it very hard to explain the collapse in world trade,
0:43:12 > 0:43:17of over 15% between the end of '08 and the beginning of spring '09,
0:43:17 > 0:43:22in terms of anything other than an extraordinary collapse of "animal spirits", or confidence.
0:43:22 > 0:43:26Now some of that was turned around in 2009, but by no means all.
0:43:31 > 0:43:36Even that great rescue plan of 2009 wasn¹t quite what it seemed.
0:43:36 > 0:43:41For all Gordon Brown¹s talk, Britain's own stimulus plan was actually one of the smallest,
0:43:41 > 0:43:46because our government was already borrowing more than any other advanced economy.
0:43:46 > 0:43:52So even a Keynesian Prime Minister like Gordon Brown didn¹t think we could borrow a lot more.
0:43:52 > 0:43:55His successor thinks we should borrow much less.
0:43:56 > 0:44:02We now have a Prime Minister who, on one fundamental point, appears to disagree with Keynes.
0:44:02 > 0:44:07Some of the normal things that governments can do to deal with a normal recession,
0:44:07 > 0:44:11like borrowing to cut taxes or increasing spending.
0:44:11 > 0:44:14These things won't work because they lead to more debt,
0:44:14 > 0:44:16which would make the crisis worse.
0:44:16 > 0:44:21The only way out of a debt crisis is to deal with your debts.
0:44:21 > 0:44:26I suspect that Keynes probably wouldn't have used exactly the Prime Minister's formulation.
0:44:26 > 0:44:28I think that Keynes would have accepted at some point
0:44:28 > 0:44:32that you have to head back towards a more balanced budget,
0:44:32 > 0:44:36particularly if you don't want to stack debts on future generations.
0:44:36 > 0:44:40To me the remarkable thing is that countries like the UK,
0:44:40 > 0:44:42that have a choice,
0:44:42 > 0:44:46are voluntarily putting themselves through austerity
0:44:46 > 0:44:51and, almost certainly, we will know, we know what will happen.
0:44:51 > 0:44:54The economy will get weaker.
0:44:54 > 0:44:57Erm, unemployment will go up,
0:44:57 > 0:45:01and there will be an enormous amount
0:45:01 > 0:45:04of unnecessary suffering.
0:45:05 > 0:45:09This argument will run and run on both sides of the Atlantic.
0:45:09 > 0:45:14In Arizona, the massive spending programme that built this solar power plant
0:45:14 > 0:45:21and let thousands clock on for new jobs hasn't been a miracle cure for the US economy.
0:45:21 > 0:45:25Maybe the medicine didn¹t work because the dose was too small.
0:45:25 > 0:45:29Or maybe, the mountain of debt weighing on most western economies
0:45:29 > 0:45:34means the Keynesian route to recovery is simply shut off.
0:45:34 > 0:45:37We are in a stratosphere today
0:45:37 > 0:45:40that we just have not seen before and maybe it's fine,
0:45:40 > 0:45:45but no other countries, rarely, have seen these debt levels.
0:45:45 > 0:45:47Public, private and other measures, they're risks.
0:45:50 > 0:45:53By the 1940s, Keynes was riding high.
0:45:53 > 0:45:56His theatre, here in Cambridge, was thriving.
0:45:56 > 0:45:59He was back in the Treasury helping finance the Second World War,
0:45:59 > 0:46:03and his books were being hailed as masterpieces.
0:46:04 > 0:46:08But he had one last big idea to pursue,
0:46:08 > 0:46:11with profound implications for the world, then and now.
0:46:14 > 0:46:19Keynes¹s ideas for fixing broken economies had now been tested.
0:46:19 > 0:46:21But towards the end of World War II,
0:46:21 > 0:46:25he got a chance to leave his mark on the entire global economy.
0:46:25 > 0:46:28In a more integrated world he was more convinced than ever
0:46:28 > 0:46:33that countries needed institutions to force them together, make them co-operate.
0:46:33 > 0:46:38The catastrophe after World War I could never happen again.
0:46:44 > 0:46:49The single most important trip to America that Keynes ever took was in 1944
0:46:49 > 0:46:53to the exclusive resort of Bretton Woods in New Hampshire.
0:46:53 > 0:46:57He was joining delegates from over 40 different countries,
0:46:57 > 0:47:02all charged with laying the foundations of a new post-war global economy.
0:47:03 > 0:47:05They wanted to rebuild the system.
0:47:05 > 0:47:09Not just from the war, but from the Great Depression.
0:47:09 > 0:47:11The financial system had just been destroyed.
0:47:13 > 0:47:20The economic chaos of the '20s and '30s was largely responsible for the war, Keynes believed.
0:47:21 > 0:47:24Countries had all focused on charting their own path,
0:47:24 > 0:47:27without very much thought for what was going around them.
0:47:29 > 0:47:33The world had paid a terrible price for that failure to co-operate.
0:47:37 > 0:47:41There was a determination among officials in London and Washington
0:47:41 > 0:47:44that we couldn't do this again.
0:47:44 > 0:47:46We had to fix the world's economy.
0:47:46 > 0:47:51That we had to... We couldn't go back to the kind of economic crisis
0:47:51 > 0:47:54we'd had before because we couldn't afford another world war.
0:47:58 > 0:48:02As representatives from across the world gathered here at Mount Washington Hotel,
0:48:02 > 0:48:05elsewhere there was still ferocious fighting.
0:48:05 > 0:48:10But once the war was over, Keynes knew, for the world economy to prosper,
0:48:10 > 0:48:14countries would need to work together much more closely.
0:48:14 > 0:48:18Only two delegations at the conference really counted
0:48:18 > 0:48:21Keynes¹ British team and the Americans.
0:48:22 > 0:48:25Both agreed that there should be controls
0:48:25 > 0:48:29to prevent currencies fluctuating too wildly against each other.
0:48:29 > 0:48:35They agreed that institutions, that later became the World Bank and International Monetary Fund,
0:48:35 > 0:48:39should be there to foster trade and growth in poorer economies.
0:48:40 > 0:48:43Well, the big gain from it was the recognition
0:48:43 > 0:48:47that countries need to work together to resolve their macro-economic problems.
0:48:47 > 0:48:50It's just not enough to pretend that you can do it as an island.
0:48:50 > 0:48:54You may be an island geographically but you're not economically.
0:48:57 > 0:49:00But on one crucial issue, Keynes failed.
0:49:00 > 0:49:04The Americans were adamant that rich exporting countries, like them,
0:49:04 > 0:49:09shouldn¹t have to spend more and export less to balance world trade.
0:49:09 > 0:49:12It was weak countries with big trade deficits that had to shape up.
0:49:14 > 0:49:17If everyone at Bretton Woods had accepted Keynes' logic,
0:49:17 > 0:49:21that it takes ALL sides to keep the global economy in balance,
0:49:21 > 0:49:24the world today might be in a lot better shape.
0:49:29 > 0:49:33This old East German television tower is a symbol of reunified Germany.
0:49:35 > 0:49:39But these days feelings of European unity are in short supply.
0:49:42 > 0:49:47Ministers here in Berlin want struggling Eurozone countries to impose tough measures
0:49:47 > 0:49:50to get their economies into shape.
0:49:50 > 0:49:52The stronger countries have been willing to help
0:49:52 > 0:49:58by offering massive loans, but I don¹t think Keynes would have thought that was enough.
0:50:00 > 0:50:05Keynes thought, for the global economy to work, it had to be a two-way street.
0:50:05 > 0:50:09So the weak countries, that had run up a lot of debt with the rest of the world,
0:50:09 > 0:50:13they did have to become more competitive, learn to pay their way.
0:50:13 > 0:50:17But the rich exporters... Well, they had to do their bit as well -
0:50:17 > 0:50:21spending more on other countries' goods and exporting less,
0:50:21 > 0:50:23becoming a bit less competitive.
0:50:23 > 0:50:28Now that¹s a bit of Keynesian advice that doesn¹t go down well here in Germany at all.
0:50:28 > 0:50:32If you say Germany should export less or become less competitive,
0:50:32 > 0:50:34the popular view is, "That's mad!"
0:50:34 > 0:50:38Why getting us weak when others are already weak?
0:50:38 > 0:50:40And, certainly, that's the wrong conclusion.
0:50:44 > 0:50:47There are signs of movement on Germany¹s side of the street.
0:50:52 > 0:50:55Domestic car sales have been going up.
0:50:57 > 0:51:02But exports are still a central plank of the country¹s economic policies.
0:51:04 > 0:51:09And car exports are up by almost a third in the past two years.
0:51:10 > 0:51:13German consumers have been spending more lately.
0:51:13 > 0:51:18But not enough to provide much of a selling opportunity for struggling countries like Greece.
0:51:21 > 0:51:26That's a very popular approach, to tell German private households, "Please, spend more.
0:51:26 > 0:51:28"Don't be so greedy with your money."
0:51:28 > 0:51:31Er, but I think that's, that's wrong.
0:51:31 > 0:51:35Because people look at their income and say, "I can't afford it, simply." And that's true.
0:51:35 > 0:51:39I mean we have had very weak wage increases during the past years.
0:51:39 > 0:51:43And that's the point where you have to have higher wages.
0:51:43 > 0:51:45And these higher wages you could certainly spend.
0:51:45 > 0:51:50And then German consumption would be much stronger than it was in the past and that will help us.
0:51:55 > 0:51:59Memories of hyperinflation are still raw in Germany.
0:51:59 > 0:52:05Few want to put their hard-won economic stability at risk for their weaker European neighbours.
0:52:06 > 0:52:09The divisions between countries at a global level are even clearer.
0:52:10 > 0:52:15Leaders pay lip service to Keynes¹ dream of a truly co-ordinated global economy,
0:52:15 > 0:52:19where the strong work with the weak for the benefit of all.
0:52:19 > 0:52:22But there¹s little sign of them actually doing it.
0:52:22 > 0:52:24I think that Keynes would look at our world
0:52:24 > 0:52:27the troubles in the Eurozone, the banking crisis
0:52:27 > 0:52:30and say it was a pretty scary place,
0:52:30 > 0:52:35without many of the checks and balances that he argued for at Bretton Woods.
0:52:35 > 0:52:37But he'd also say - he DID say -
0:52:37 > 0:52:41that a really global economy was tremendously exciting,
0:52:41 > 0:52:45with huge potential to improve all of our lives.
0:52:45 > 0:52:48If governments could only work out how to put into practise
0:52:48 > 0:52:51that basic insight that he kept coming back to.
0:52:51 > 0:52:54We really are all in it together.
0:52:54 > 0:52:58Sure, it would be great to have better multinational institutions
0:52:58 > 0:53:00and Keynes was a pioneer in that.
0:53:00 > 0:53:05He was a big believer. In order to fix the international financial system that would be very helpful.
0:53:05 > 0:53:11And maybe somebody with the sort of magnetism and gravitas
0:53:11 > 0:53:14and stature of Keynes could somehow catalyse that.
0:53:14 > 0:53:16But he is a rare person indeed.
0:53:19 > 0:53:21Keynes left an extraordinary legacy.
0:53:21 > 0:53:24He didn¹t just transform economics,
0:53:24 > 0:53:28he changed the lives of billions of people around the globe.
0:53:29 > 0:53:31There aren¹t many people born in the 1880s
0:53:31 > 0:53:35whose name you hear as often as Keynes in current debates.
0:53:35 > 0:53:39His ideas that countries shouldn¹t beggar their neighbours,
0:53:39 > 0:53:42that economies were deeply unpredictable,
0:53:42 > 0:53:46could get stuck in slumps, have changed the way we think about the world.
0:53:46 > 0:53:50But what can Keynes actually do for us right now?
0:53:52 > 0:53:56Back in Cumbria, it¹s clear what Keynes has done for them.
0:53:56 > 0:54:00Government intervention will help keep Pirelli¹s tyre factory open,
0:54:00 > 0:54:03and provide a lot of employment.
0:54:03 > 0:54:08In the political mainstream, there aren¹t many who challenge Keynes¹ basic message
0:54:08 > 0:54:11that you can¹t leave economies to drive themselves.
0:54:13 > 0:54:17Keynes was a very dominant force in the 20th century
0:54:17 > 0:54:20and my guess is he will remain a dominant force in the 21st century,
0:54:20 > 0:54:25which is why I think he will go down as one of the greatest economists the world has produced.
0:54:26 > 0:54:3080 years ago, building this dam eased the Great Depression.
0:54:30 > 0:54:33With the government borrowing more cheaply than ever before,
0:54:33 > 0:54:37you might think the case for New Deal-type investments was equally strong today.
0:54:37 > 0:54:42But given the sheer volume of public debt, no-one can promise that piling on more borrowing
0:54:42 > 0:54:45will be a miracle cure.
0:54:45 > 0:54:49What is thought of as a typical Keynesian solution
0:54:49 > 0:54:53to get more debt, borrow money, spend, spend, spend and cut taxes.
0:54:53 > 0:54:56That needs to be used more judiciously here,
0:54:56 > 0:55:00because, at the end of the day, you¹ve got to get rid of this debt.
0:55:00 > 0:55:03This is a very long haul.
0:55:03 > 0:55:07I don't think anything just boosts your way and zooms your way out of this.
0:55:07 > 0:55:09There just is no magic bullet.
0:55:11 > 0:55:16And what of Keynes¹ final big idea, that countries are all in it together?
0:55:16 > 0:55:21Since Bretton Woods, the world has grudgingly accepted that we have to co-operate to prosper.
0:55:21 > 0:55:24But we¹re struggling to make it work in practise.
0:55:25 > 0:55:28He'd be worried. He'd be very worried.
0:55:29 > 0:55:33He'd have been very concerned about the growth of inequality worldwide.
0:55:33 > 0:55:38Er, he'd be very concerned that there was a return to beggar my neighbour policies.
0:55:38 > 0:55:43I have no doubt that he would be warning of regional war
0:55:43 > 0:55:45and all its dangers.
0:55:45 > 0:55:48He'd be very frightened
0:55:48 > 0:55:52that the circumstances that led to war in 14/18 and 39/45
0:55:52 > 0:55:57were, on a slow-burn basis, unfolding in front of us again.
0:55:58 > 0:56:01Maybe the biggest thing Keynes could do for us now
0:56:01 > 0:56:07would be to remind us of the traits that guided him all of his life -
0:56:07 > 0:56:09imagination and optimism.
0:56:09 > 0:56:14He came along and was willing to examine these profound problems
0:56:14 > 0:56:17in ways that no-one had done before.
0:56:17 > 0:56:21His great legacy is that fundamental belief in humanity,
0:56:21 > 0:56:24that fundamental belief in the ability of government and society
0:56:24 > 0:56:30to dedicate itself to helping those that are less fortunate and need our help.
0:56:40 > 0:56:46In 1946, Keynes suffered a fatal heart attack in his beloved Sussex Downs.
0:56:49 > 0:56:53Just 62, he left a legacy that changed the world.
0:56:54 > 0:56:56But he also left an enigma.
0:56:56 > 0:57:01He thought we should try to tame the power of money to make it work for us,
0:57:01 > 0:57:05but he also taught us that economies were fundamentally unpredictable.
0:57:07 > 0:57:11It¹s a contradiction we¹re still grappling with today.
0:57:15 > 0:57:20More than anyone, Keynes paved the way for activist government.
0:57:20 > 0:57:24He said you could and should make the world economy work better.
0:57:24 > 0:57:29The generation that rebuilt the global economy after the war
0:57:29 > 0:57:32really were children of Keynes.
0:57:32 > 0:57:36But when you read him today, there's another equally powerful message that comes through,
0:57:36 > 0:57:41about the great unpredictability, uncertainty, of economic life.
0:57:41 > 0:57:45You should never think you¹ve got it covered, that you¹ve abolished boom and bust.
0:57:45 > 0:57:47That¹s the great paradox.
0:57:47 > 0:57:50The man who did most to make economists arrogant
0:57:50 > 0:57:54in their capacity to bend the world to their will,
0:57:54 > 0:57:59also gave them or should have given them the best reasons for self-doubt.
0:58:04 > 0:58:09Next time on the Power Of Money, Keynes' great adversary, Friedrich Hayek,
0:58:09 > 0:58:12who looked at the same facts and drew exactly the opposite view -
0:58:12 > 0:58:16the market needed to be set free and government should back off.
0:58:17 > 0:58:20The Open University has produced six one-minute animations
0:58:20 > 0:58:23to explain some of the key economic ideas that affect all of us.
0:58:23 > 0:58:28So if you want to learn how to spot an invisible hand or other secrets of economics,
0:58:28 > 0:58:32Go to...
0:58:32 > 0:58:35And follow the link to the Open University.
0:58:54 > 0:58:57Subtitles by Red Bee Media Ltd