0:00:00 > 0:00:03We heard that he'd been sinking,
0:00:03 > 0:00:06and then we heard that he died,
0:00:06 > 0:00:10and my husband said, "You will have to contact."
0:00:10 > 0:00:13And I was on the phone to the world.
0:00:13 > 0:00:18And people were saying, had I told the American President?
0:00:18 > 0:00:21Had I told Mrs Thatcher?
0:00:21 > 0:00:24It was only then, I think, that finally it was rammed home to me
0:00:24 > 0:00:27the enormous effect that he'd had on the whole world.
0:00:27 > 0:00:30You know, ringing, in the middle of the night,
0:00:30 > 0:00:35ringing the President of the United States to say that FA Hayek had died.
0:00:37 > 0:00:41Friedrich Hayek was a champion of the market.
0:00:41 > 0:00:45He inspired many of the people who built the world we live in today.
0:00:45 > 0:00:49Margaret Thatcher would, from time to time,
0:00:49 > 0:00:53pull little bits of paper with quotations out of her handbag,
0:00:53 > 0:00:54and Hayek would be one of them.
0:00:54 > 0:00:57For more than a generation,
0:00:57 > 0:01:01Western leaders claimed to embrace one central economic idea -
0:01:01 > 0:01:02the free market.
0:01:02 > 0:01:06With the financial crisis, that orthodoxy's under attack.
0:01:06 > 0:01:09Our faith in it has been shaken like never before.
0:01:09 > 0:01:12But one great free-market visionary
0:01:12 > 0:01:15has emerged from the meltdown with his reputation enhanced.
0:01:15 > 0:01:19There might never be a better time to listen to Friedrich Hayek.
0:01:19 > 0:01:23I see right now, this moment in history,
0:01:23 > 0:01:28as a time where Hayek's ideas deserve a shot.
0:01:29 > 0:01:32Of all the big pro-market thinkers, Hayek was by far the most radical.
0:01:32 > 0:01:36He believed the market should be freer than any government
0:01:36 > 0:01:39has ever dared to allow it to be.
0:01:39 > 0:01:41In the world according to Hayek,
0:01:41 > 0:01:43politicians should step back
0:01:43 > 0:01:46from trying to manage capitalism's ups and downs.
0:01:46 > 0:01:49They should simply set it free.
0:01:49 > 0:01:52There's no doubt that he's a significant thinker,
0:01:52 > 0:01:56though there's major controversy about every area of his thought.
0:01:56 > 0:02:00In this series, I'll reveal the stories of the lives
0:02:00 > 0:02:03and revolutionary thinking of three extraordinary men.
0:02:03 > 0:02:08John Maynard Keynes, Karl Marx and Friedrich Hayek.
0:02:08 > 0:02:11They all saw their worlds changing as never before,
0:02:11 > 0:02:14becoming ever more complex and interconnected.
0:02:14 > 0:02:18The fate of entire nations now hung on the power of money,
0:02:18 > 0:02:21and they had very different ideas about what to do.
0:02:22 > 0:02:25Even in the middle of an economic meltdown,
0:02:25 > 0:02:28Hayek's advice to governments was to step back and do nothing.
0:02:28 > 0:02:31Meddling would only make things worse.
0:02:31 > 0:02:34It's not what anyone has ever wanted to hear,
0:02:34 > 0:02:37but today they've tried all the usual tricks for fixing the economy.
0:02:37 > 0:02:42Is it time, finally, to take Hayek's advice instead?
0:02:56 > 0:03:00Around the world we're all still feeling the shockwaves
0:03:00 > 0:03:03of the financial crash of 2008.
0:03:03 > 0:03:06'You really can feel the fear down here.'
0:03:06 > 0:03:09'The Dow has had its worst five days in five years.'
0:03:09 > 0:03:11Until that crisis hit,
0:03:11 > 0:03:15Western leaders had put their faith in the free market
0:03:15 > 0:03:17as the best way to generate wealth.
0:03:17 > 0:03:20But in their version of the market,
0:03:20 > 0:03:23derived from thinkers like Milton Friedman,
0:03:23 > 0:03:26they still believed if things went wrong they could step in,
0:03:26 > 0:03:29tweak the system and get everything back on track.
0:03:29 > 0:03:32Today, fans of the Austrian economist Friedrich Hayek
0:03:32 > 0:03:36say that arrogance, that distorted picture of a market economy,
0:03:36 > 0:03:38got us into this mess.
0:03:38 > 0:03:41If we want to try to get out of it, we need to try the real thing.
0:03:41 > 0:03:45To understand how governments, not markets,
0:03:45 > 0:03:47might have caused the crisis,
0:03:47 > 0:03:52we need to wind the clock back to the years leading up to it.
0:03:52 > 0:03:54America's interest rates have been cut.
0:03:54 > 0:03:57That was expected but the timing has come as a surprise.
0:03:57 > 0:03:59It's January 2001,
0:03:59 > 0:04:02and America's central bank, the Federal Reserve,
0:04:02 > 0:04:04has cut interest rates
0:04:04 > 0:04:08because it's worried the US economy is slowing down.
0:04:08 > 0:04:11It cut interest rates for the same reason central banks always do.
0:04:11 > 0:04:15To make it cheaper for companies and households to borrow
0:04:15 > 0:04:18and seek out profitable investments.
0:04:18 > 0:04:22The President was pleased, as you might imagine.
0:04:22 > 0:04:25This is the kind of thing Presidents expect central banks to do
0:04:25 > 0:04:27to avoid economic trouble.
0:04:27 > 0:04:32I think the cut was, um...was needed.
0:04:32 > 0:04:36It was a strong statement that measures must be taken
0:04:36 > 0:04:41to make sure our economy does not go into a tailspin.
0:04:42 > 0:04:44Had Friedrich Hayek been alive,
0:04:44 > 0:04:47he would have taken a very different view.
0:04:47 > 0:04:49Far from avoiding trouble,
0:04:49 > 0:04:52Hayek would have seen the Federal Reserve's decision
0:04:52 > 0:04:53to cut interest rates
0:04:53 > 0:04:56as sowing the seeds of today's financial crisis.
0:04:56 > 0:04:57In fact, Hayek believed
0:04:57 > 0:05:01almost any government intervention in the market,
0:05:01 > 0:05:03like propping up failing businesses,
0:05:03 > 0:05:06setting trade tariffs or manipulating interest rates,
0:05:06 > 0:05:09risked disaster.
0:05:10 > 0:05:12In the years after 2001,
0:05:12 > 0:05:15the Federal Reserve carried on cutting interest rates,
0:05:15 > 0:05:20helping to fuel a property boom that ultimately couldn't be sustained.
0:05:20 > 0:05:25Early in 2007, America's housing bubble burst
0:05:25 > 0:05:27and the global financial crisis began,
0:05:27 > 0:05:30just as Hayek might have predicted.
0:05:30 > 0:05:34The conventional wisdom was none of these events were foreseeable.
0:05:34 > 0:05:36We couldn't have done anything about it.
0:05:36 > 0:05:38But of course all of that was false.
0:05:38 > 0:05:41What's playing out before our eyes
0:05:41 > 0:05:44is exactly what men like Hayek had predicted would happen.
0:05:44 > 0:05:48At first glance, the Hayek view of the crisis
0:05:48 > 0:05:50looks a bit familiar.
0:05:50 > 0:05:52But don't be fooled.
0:05:53 > 0:05:56You probably feel like you've heard this argument before,
0:05:56 > 0:05:58that the Federal Reserve partly caused the crisis
0:05:58 > 0:06:00by setting interest rates too low,
0:06:00 > 0:06:04encouraging everyone to borrow too much and generally do silly things.
0:06:04 > 0:06:06But the argument of Hayek and his followers
0:06:06 > 0:06:08actually runs deeper than that.
0:06:08 > 0:06:10It's not just that they got their sums wrong
0:06:10 > 0:06:12and they didn't set the right interest rate.
0:06:12 > 0:06:14It's that they shouldn't have been in the business
0:06:14 > 0:06:16of setting interest rates at all.
0:06:16 > 0:06:18It's this radical rejection of the state's role
0:06:18 > 0:06:21in regulating the market
0:06:21 > 0:06:25that sets Hayek apart from other free-market thinkers.
0:06:26 > 0:06:30He believed the market would do a far better job regulating itself,
0:06:30 > 0:06:33if only governments would just leave it alone.
0:06:33 > 0:06:38Free market did not set interest rates at 1% under Greenspan.
0:06:38 > 0:06:42That's the government that is doing that. That is price-fixing.
0:06:42 > 0:06:44It's kind of the way the old Soviet Union
0:06:44 > 0:06:47used to fix the price of bread or gasoline.
0:06:47 > 0:06:50The US government fixes interest rates the same way.
0:06:50 > 0:06:53We need the market to set interest rates, not the government.
0:06:53 > 0:06:56If the market set interest rates they would've been much higher,
0:06:56 > 0:06:58and we wouldn't have had these problems.
0:06:59 > 0:07:04Hayek's belief in the positive power of the unbridled free market
0:07:04 > 0:07:07stems from his childhood in Austria.
0:07:07 > 0:07:10He was born in Vienna in 1899.
0:07:10 > 0:07:12Then, the city was packed full of intellectuals
0:07:12 > 0:07:17like Freud and Wittgenstein, many of whom Hayek came to know.
0:07:18 > 0:07:21These family photographs have not been widely seen.
0:07:25 > 0:07:28Growing up, he had a keen desire to make sense
0:07:28 > 0:07:31of the modern world taking shape around him.
0:07:33 > 0:07:35I must have been 13 or 14
0:07:35 > 0:07:38when I began pestering all the priests I knew
0:07:38 > 0:07:41to explain to me what they meant by the word "God",
0:07:41 > 0:07:42and none of them could.
0:07:43 > 0:07:46That was the end for me of it.
0:07:46 > 0:07:49Hayek grew up in a family of scientists.
0:07:49 > 0:07:52Like many other intellectuals in Vienna at that time
0:07:52 > 0:07:54they liked to think they were on a grand quest
0:07:54 > 0:07:57to unwrap the secrets of the universe.
0:07:57 > 0:08:01The young Hayek was especially influenced by his father -
0:08:01 > 0:08:04a doctor and enthusiastic botanist.
0:08:04 > 0:08:07Hayek started off like his dad,
0:08:07 > 0:08:10obsessively collecting plant and insect samples,
0:08:10 > 0:08:13really into the development of species.
0:08:13 > 0:08:16By the time he was 16 and he was more interested in people,
0:08:16 > 0:08:20the development of whole societies, not plants.
0:08:20 > 0:08:23But Darwin's theory of evolution stuck in his head.
0:08:25 > 0:08:27Since the 18th-century Enlightenment
0:08:27 > 0:08:31science had unlocked many of the puzzles of the universe,
0:08:31 > 0:08:34including the origins of life itself.
0:08:34 > 0:08:35As Hayek grew up
0:08:35 > 0:08:39he was drawn to what he saw as the last frontier -
0:08:39 > 0:08:41the mysterious workings of the economy
0:08:41 > 0:08:44in all its growing complexity and power.
0:08:44 > 0:08:46In Darwin's theory of evolution
0:08:46 > 0:08:51he thought he saw what a new science of the economy might look like.
0:08:51 > 0:08:55Physics, which allows, often, for precise predictions
0:08:55 > 0:08:58in terms of planetary motion and eclipses,
0:08:58 > 0:08:59is not a good model
0:08:59 > 0:09:02for understanding how social phenomena work.
0:09:02 > 0:09:06I think that was the basis of his attraction to evolutionary theory.
0:09:06 > 0:09:09He wanted to establish that you could be a science
0:09:09 > 0:09:11even if you don't make precise predictions,
0:09:11 > 0:09:14or have the sort of control that many of his opponents said,
0:09:14 > 0:09:18"Well, if we're a science we should be able to engineer society
0:09:18 > 0:09:20"the way an engineer builds a bridge."
0:09:21 > 0:09:25Darwin's theory of evolution also helped forge Hayek's vision
0:09:25 > 0:09:27of capitalism itself.
0:09:27 > 0:09:30He came to believe the global market had evolved
0:09:30 > 0:09:34over the course of human history, emerging as a kind of natural wonder
0:09:34 > 0:09:36driving civilisation forward.
0:09:44 > 0:09:48Hayek saw the market as a telecommunications system,
0:09:48 > 0:09:51processing billions of pieces of information
0:09:51 > 0:09:53about all our needs and desires
0:09:53 > 0:09:56and the changing supply of resources to meet them.
0:10:01 > 0:10:04Hayek said it was a marvel - the way all this is conveyed to us
0:10:04 > 0:10:08by prices that guide our actions as they rise and fall.
0:10:12 > 0:10:16And to Hayek the market does most good when it's most free.
0:10:21 > 0:10:26It's our desire to control it that most often turns it against us.
0:10:31 > 0:10:34Hayek thought meddling by government could make it harder for
0:10:34 > 0:10:37the market to do its job by distorting the signals
0:10:37 > 0:10:40it was sending to buyers and sellers,
0:10:40 > 0:10:42and the meddling involved in the government's control
0:10:42 > 0:10:45of the supply of money, Hayek decided,
0:10:45 > 0:10:48could be most damaging of all.
0:10:53 > 0:10:57Rampant inflation, unemployment, uncontrollable debt.
0:10:57 > 0:11:02In Vienna, after the First World War, Hayek saw for himself
0:11:02 > 0:11:04how government abuse of money can wreak havoc.
0:11:06 > 0:11:10Across Austria prices had taken off, and so had unemployment.
0:11:10 > 0:11:13Even the rich were struggling to feed themselves,
0:11:13 > 0:11:16and no-one could quite understand why.
0:11:19 > 0:11:22At the height of the crisis, if you walked down this street
0:11:22 > 0:11:24any time of day or night,
0:11:24 > 0:11:28you could hear a kind of relentless, heavy, rumbling sound.
0:11:33 > 0:11:38It was the sound of money tearing a country apart.
0:11:38 > 0:11:41This building housed the Austro-Hungarian Bank,
0:11:41 > 0:11:45and its printing presses that were rolling night and day
0:11:45 > 0:11:48churning out millions of new bank notes.
0:11:48 > 0:11:51The war had left the Austrian government with huge bills
0:11:51 > 0:11:53and low tax revenues.
0:11:53 > 0:11:57So it ordered the national bank to simply print the money it needed
0:11:57 > 0:12:00in exchange for bonds or IOUs.
0:12:03 > 0:12:06What the people manning these printing presses,
0:12:06 > 0:12:09and their political masters, had yet to really grasp
0:12:09 > 0:12:12was they weren't just producing money here,
0:12:12 > 0:12:14they were producing inflation.
0:12:14 > 0:12:17The amount of money in the economy was going up,
0:12:17 > 0:12:19so people had more money to spend, but of course,
0:12:19 > 0:12:22the amount of things they could buy had stayed more or less the same.
0:12:22 > 0:12:27That forced up the price of everything. Inflation took off.
0:12:27 > 0:12:29In fact, the situation got so bad in Austria,
0:12:29 > 0:12:33the inflation rate hit 10,000%.
0:12:35 > 0:12:37The financial wealth was destroyed.
0:12:37 > 0:12:40Those that had jobs
0:12:40 > 0:12:44continued to have them but they could no longer afford,
0:12:44 > 0:12:47for instance, to have maids and servants.
0:12:47 > 0:12:50We saw all of these people, all of a sudden, ended up being out of work.
0:12:51 > 0:12:54With their economy going up in smoke, Austria's central bankers
0:12:54 > 0:12:58tried to fight fire with fire.
0:13:00 > 0:13:05By the summer of 1922, prices were doubling every month,
0:13:05 > 0:13:07and the central bank was playing catch up,
0:13:07 > 0:13:10printing higher and higher denomination bank notes,
0:13:10 > 0:13:12just to reflect what was going on in the shops.
0:13:12 > 0:13:18In the end, this 500,000 Krone note could maybe buy you a loaf of bread.
0:13:18 > 0:13:21And of course, by pumping more and more money into the economy
0:13:21 > 0:13:25they were only making the problem worse.
0:13:25 > 0:13:29For Austria's politicians it was all a crisis of their own making.
0:13:29 > 0:13:33They'd been printing money to pay their bills since the start
0:13:33 > 0:13:36of the First World War,
0:13:36 > 0:13:39and they didn't understand that that could lead to inflation.
0:13:39 > 0:13:42It was a crisis caused by ignorance.
0:13:44 > 0:13:47Having seen Austria brought to its knees,
0:13:47 > 0:13:51Hayek had an almost visceral fear of inflation all of his life.
0:13:51 > 0:13:54It's a fear that central bankers still share today.
0:13:54 > 0:13:58What's interesting to me is the lesson he drew from that experience.
0:13:58 > 0:14:02Most people focus on the politics, on the fact that the winners of
0:14:02 > 0:14:07World War I had imposed impossibly high reparations on Austria.
0:14:07 > 0:14:09But Hayek was interested in the economics,
0:14:09 > 0:14:13and the fact that the Austrian government simply hadn't understood
0:14:13 > 0:14:14the power of money.
0:14:17 > 0:14:20What happened next in America led Hayek to conclude
0:14:20 > 0:14:24there can be something worse than government ignorance - hubris.
0:14:24 > 0:14:27He thought that entire period showed the calamity that can come
0:14:27 > 0:14:32when governments try to use the power of money to shape the economy.
0:14:32 > 0:14:33In America in the 1920's
0:14:33 > 0:14:38the greatest boom the world had ever seen was taking off.
0:14:38 > 0:14:41Consumers couldn't get enough of new products like cars,
0:14:41 > 0:14:45telephones and record players.
0:14:45 > 0:14:48The stock market rose higher and higher.
0:14:48 > 0:14:52As the Roaring Twenties wore on, the finest economic minds in America
0:14:52 > 0:14:55came to believe the boom would never end.
0:15:00 > 0:15:04Back in Austria, in early 1929, Hayek was convinced
0:15:04 > 0:15:06they'd got it all wrong.
0:15:07 > 0:15:10He'd become the director of the recently founded
0:15:10 > 0:15:13Institute for Business Cycle Research.
0:15:13 > 0:15:16Its job was to understand why economies were always
0:15:16 > 0:15:20lurching from one boom and bust cycle to another.
0:15:20 > 0:15:23Hayek called it "The 19th Century Pattern",
0:15:23 > 0:15:25though it was hardly a thing of the past.
0:15:28 > 0:15:31The Institute was based here at the Chamber of Commerce,
0:15:31 > 0:15:35where Hayek had been developing a new theory of boom and bust,
0:15:35 > 0:15:37along with new thinking about the market.
0:15:40 > 0:15:43The work he did here would change the way people thought
0:15:43 > 0:15:47about the economy forever - its ups, and its downs.
0:15:57 > 0:16:00To many, the downs were unpredictable -
0:16:00 > 0:16:05a kind of force of nature that might destroy an economy without warning.
0:16:05 > 0:16:09Hayek had been working on a new idea - that the seeds of busts
0:16:09 > 0:16:11were sown during booms.
0:16:11 > 0:16:14Because the world had become increasingly interconnected,
0:16:14 > 0:16:17Hayek had been studying the American boom to help him
0:16:17 > 0:16:20forecast what would happen to the Austrian economy.
0:16:22 > 0:16:26He had to produce these monthly reports on the state
0:16:26 > 0:16:28of the European economy.
0:16:28 > 0:16:30Most of it is pretty dry stuff.
0:16:30 > 0:16:36It's things like paper production or that month's steel exports.
0:16:36 > 0:16:39But he is credited with making a rather striking prediction
0:16:39 > 0:16:41in early 1929,
0:16:41 > 0:16:45because he thought the American stock market boom
0:16:45 > 0:16:48would end in a few months time.
0:16:48 > 0:16:49He was right.
0:16:49 > 0:16:53In October 1929 Wall Street fell off a cliff,
0:16:53 > 0:16:56and the '20s roared to an anguished end.
0:17:01 > 0:17:05Hayek's prediction came out of what he saw happening
0:17:05 > 0:17:08at America's new central bank.
0:17:08 > 0:17:11The Federal Reserve had been set up in 1913
0:17:11 > 0:17:15to stabilise America's notoriously shaky private banks
0:17:15 > 0:17:19by offering them a reliable source of credit.
0:17:19 > 0:17:24Hayek's big idea was that the great ups and downs in the economy
0:17:24 > 0:17:27nearly all started in buildings like this one.
0:17:27 > 0:17:30It was the cost of borrowing, the interest rate,
0:17:30 > 0:17:34set by central banks like the New York Federal Reserve
0:17:34 > 0:17:37that caused unsustainable booms to develop,
0:17:37 > 0:17:40and cause the inevitable busts.
0:17:42 > 0:17:46In the 1920s the governor of the New York Federal Reserve
0:17:46 > 0:17:48had a revolutionary idea.
0:17:48 > 0:17:51Benjamin Strong thought he could use the bank's power
0:17:51 > 0:17:55to set interest rates to influence what was happening in the economy.
0:17:55 > 0:17:59In many ways, that idea of using interest rates
0:17:59 > 0:18:02marked the start of modern monetary policy.
0:18:02 > 0:18:06Strong began buying government debt on the open market
0:18:06 > 0:18:10which did have the effect of raising the amount of money in the economy.
0:18:10 > 0:18:15But unlike Austria's hapless central bankers, Strong had a strategy.
0:18:15 > 0:18:18The difference with Austria was that the Fed wasn't buying
0:18:18 > 0:18:21treasury bonds to help the government pay its bills.
0:18:21 > 0:18:23It was doing it to get money into the market
0:18:23 > 0:18:25and keep interest rates low.
0:18:25 > 0:18:27The central bank wanted to encourage everyone,
0:18:27 > 0:18:31individuals and households, to borrow more from the banks.
0:18:31 > 0:18:32It worked.
0:18:32 > 0:18:36ARCHIVE: 'Steel up, utilities up, motors up,
0:18:36 > 0:18:39'radio way up - everything up, up, up!'
0:18:39 > 0:18:42Strong's intervention really paved the way
0:18:42 > 0:18:44for the financial system we have today.
0:18:44 > 0:18:46Thanks to all that credit he created
0:18:46 > 0:18:49the stock market rose higher and higher.
0:18:49 > 0:18:54With loans so cheap, many borrowed money to buy shares.
0:18:54 > 0:18:57Others invested heavily in property.
0:18:57 > 0:19:00The Federal Reserve hoped its intervention would keep
0:19:00 > 0:19:04the boom going indefinitely, but Hayek believed Strong's policy
0:19:04 > 0:19:07was sowing the seeds of an eventual bust.
0:19:07 > 0:19:10The way Hayek saw it, the low cost of borrowing
0:19:10 > 0:19:13was sending the wrong signal to investors here
0:19:13 > 0:19:15and to businesses around the country.
0:19:15 > 0:19:19The low interest rate told them that America was saving more,
0:19:19 > 0:19:22that there was lots of spare cash sitting in bank accounts
0:19:22 > 0:19:24ready to be lent on and invested.
0:19:24 > 0:19:26It wasn't true.
0:19:26 > 0:19:31ARCHIVE: 'Don't sell America short. Why, man, we've scarcely started.'
0:19:32 > 0:19:36By the time the Federal Reserve spotted the warning signs
0:19:36 > 0:19:37it was too late.
0:19:37 > 0:19:41ARCHIVE: 'Technical readjustments. Over 14 billion go with them
0:19:41 > 0:19:44'and so goes the confidence of a nation. Wall Street...'
0:19:44 > 0:19:46The crash came when interest rates rose
0:19:46 > 0:19:50and investors started to realise the banks didn't have money
0:19:50 > 0:19:52to back all those investments after all.
0:19:52 > 0:19:54At one point they had to close the visitors' gallery
0:19:54 > 0:19:57cos there were too many members of the public up here
0:19:57 > 0:20:02wailing and crying as they watched their life savings go up in smoke.
0:20:02 > 0:20:06ARCHIVE: 'The Jazz Age is over, all over.'
0:20:06 > 0:20:08To Hayek the lesson was clear -
0:20:08 > 0:20:11by feeding the boom with cheap credit the Federal Reserve
0:20:11 > 0:20:16had helped cause the Wall Street Crash and the Great Depression.
0:20:19 > 0:20:22Fast forward to today's global crisis
0:20:22 > 0:20:24and you could tell a similar story.
0:20:24 > 0:20:27We certainly saw a lot of cheap credit in Britain and America
0:20:27 > 0:20:30in the decade before the crash,
0:20:30 > 0:20:33which did help fuel unsustainable property booms.
0:20:33 > 0:20:37Northern Rock was one of many financial institutions
0:20:37 > 0:20:40taking ever greater risks in its lending.
0:20:40 > 0:20:45When it got into trouble in 2007, panicked savers rushed
0:20:45 > 0:20:49to withdraw their cash - the first run on a British bank since 1866.
0:20:49 > 0:20:53It was a sign of the disaster to come.
0:20:53 > 0:20:57If things hadn't come to a crash in 2007, 2008
0:20:57 > 0:21:00maybe with the corrective medicine you could have managed the situation
0:21:00 > 0:21:04back down again through, you know, interest rate monetary policy.
0:21:04 > 0:21:09As it was the banking system which was massively exposed to this
0:21:09 > 0:21:12and reached a situation where suddenly, people realised
0:21:12 > 0:21:15what had happened, they lost confidence in each other,
0:21:15 > 0:21:18and the entire edifice came crashing down.
0:21:18 > 0:21:22Today's central banks have computer models of the economy
0:21:22 > 0:21:25light years ahead of anything dreamt up by Benjamin Strong.
0:21:25 > 0:21:28But even so, Hayek's followers say the Federal Reserve
0:21:28 > 0:21:33had learned nothing from the mistakes it made in the 1920s.
0:21:33 > 0:21:38In the early 2000s it had kept interest rates too low for too long.
0:21:38 > 0:21:42But then and now there are plenty who would disagree.
0:21:42 > 0:21:45The job of the Fed chairman is to keep the party going,
0:21:45 > 0:21:48to spike the punch bowl at all costs.
0:21:48 > 0:21:51Not to take the punch bowl away, which really should be the job.
0:21:51 > 0:21:55I mean, the Federal Reserve should be independent, but it's not.
0:21:55 > 0:21:59It acts in concert with the government to try to maintain
0:21:59 > 0:22:00a phony prosperity.
0:22:00 > 0:22:05Interest rates are very low, and that was partly promoted
0:22:05 > 0:22:11by the fact that the surplus countries, notably China,
0:22:11 > 0:22:12but others as well,
0:22:12 > 0:22:15had a lot of money, they were perfectly happy with exporting.
0:22:15 > 0:22:19It would have been hard to force American interest rates higher
0:22:19 > 0:22:22in that environment because there was so much money
0:22:22 > 0:22:24flowing in at low interest rates.
0:22:24 > 0:22:28If it was all the Feds' fault how come Europe had
0:22:28 > 0:22:30the exact same experience?
0:22:30 > 0:22:34It's not the fact of the interest rate policy maybe having been wrong,
0:22:34 > 0:22:36although I'm not even sure I agree on that,
0:22:36 > 0:22:38but it's the fact that we had these deregulated Wild West
0:22:38 > 0:22:41financial markets that allowed us to get into the crisis we're in.
0:22:43 > 0:22:45Like our own financial collapse,
0:22:45 > 0:22:50the consequences of the 1929 crash were felt across the world.
0:22:50 > 0:22:52A string of banking crises followed,
0:22:52 > 0:22:56and a terrible depression in America and much of Europe.
0:22:56 > 0:22:58Again, Hayek said it was all down
0:22:58 > 0:23:00to interest rates being too low in the boom years.
0:23:00 > 0:23:03But years later, another hugely influential free market thinker
0:23:03 > 0:23:08came along who argued the exact opposite - Milton Friedman.
0:23:08 > 0:23:10He said the Federal Reserve
0:23:10 > 0:23:14had not pumped too much money into the system, but too little.
0:23:14 > 0:23:17That's the version of history that most politicians
0:23:17 > 0:23:20and economists still believe.
0:23:22 > 0:23:27Hayek was absolutely wrong to think that in the catastrophic depths
0:23:27 > 0:23:33of the Great Depression of the 1930s that all that was happening
0:23:33 > 0:23:35was an unwinding of the malinvestments
0:23:35 > 0:23:37that had come from a credit boom.
0:23:37 > 0:23:42Clearly, there had been a calamitous collapse of the banking sector
0:23:42 > 0:23:46that had nothing to do with the earlier so-called malinvestment.
0:23:50 > 0:23:53Facing the world's worst financial meltdown, the issue for economists
0:23:53 > 0:23:57and politicians was the same as it is today -
0:23:57 > 0:23:59how do we make it go away?
0:23:59 > 0:24:01As the Great Depression began, Hayek was invited to give
0:24:01 > 0:24:05a series of lectures here at the London School of Economics.
0:24:08 > 0:24:11Hayek was thrilled. He'd wanted to come here all his life.
0:24:11 > 0:24:14But there was a not very hidden agenda attached to the invitation.
0:24:14 > 0:24:17LSE wanted him as part of their fight back
0:24:17 > 0:24:21against a new, very different strand of economic thinking
0:24:21 > 0:24:23from their arch rivals Cambridge
0:24:23 > 0:24:25that had been getting a lot of attention.
0:24:25 > 0:24:30The man driving that new approach was John Maynard Keynes.
0:24:30 > 0:24:35The grand dispute between Keynes and Hayek in the 1930s
0:24:35 > 0:24:39seems so relevant to us today - it's become an internet sensation.
0:24:41 > 0:24:45Lord Keynes, wow, it's, it...it's such an honour.
0:24:45 > 0:24:47- Indeed, sir.- Please, just go.
0:24:47 > 0:24:50This surreal reinvention of their battle of ideas
0:24:50 > 0:24:52has been watched nearly two million times online.
0:24:53 > 0:24:55Hay-ek?
0:24:55 > 0:24:59No, High-ek, like um, high explosives.
0:25:11 > 0:25:15Hayek's opponent, Keynes, was a heavyweight thinker.
0:25:15 > 0:25:19The seemingly unstoppable new force in economics.
0:25:19 > 0:25:21The clash felt a bit like David and Goliath.
0:25:23 > 0:25:26Keynes had two brains.
0:25:26 > 0:25:29It was said of him that he caused more inferiority complexes
0:25:29 > 0:25:33with justification than anyone else in his generation.
0:25:33 > 0:25:38Hayek was not known. He was 16 years younger than Keynes.
0:25:38 > 0:25:41They fell out with each other on first meeting
0:25:41 > 0:25:43and continued to fight for the rest of their lives.
0:25:43 > 0:25:47As the Depression deepened the stakes could not have been higher.
0:25:47 > 0:25:50Hayek began with some awkward jabs.
0:25:50 > 0:25:56Drawing in rather confused diagrams on a blackboard behind him,
0:25:56 > 0:25:59he described what he called "fluctuations",
0:25:59 > 0:26:06which were how the market changed from day to day over time,
0:26:06 > 0:26:09and how, if you started interfering with it,
0:26:09 > 0:26:12how things would go wrong pretty quickly.
0:26:12 > 0:26:15The big economic argument that started here
0:26:15 > 0:26:19in this room in 1931 is still going on today.
0:26:19 > 0:26:21If an economy gets into trouble,
0:26:21 > 0:26:24should the government step in and try and fix it?
0:26:24 > 0:26:29Keynes was saying yes. Hayek stood up there and said no.
0:26:29 > 0:26:33For once, it really was that simple.
0:26:33 > 0:26:35For Keynes it was a moral problem.
0:26:35 > 0:26:38The fact was there were people unemployed
0:26:38 > 0:26:40and therefore they should be put back to work,
0:26:40 > 0:26:42and it didn't really matter how you did it.
0:26:42 > 0:26:45For Hayek, it was a different thing.
0:26:45 > 0:26:49Hayek concluded that we really didn't know enough about economics
0:26:49 > 0:26:52and that any attempt by people like Keynes
0:26:52 > 0:26:53to start fooling around with it
0:26:53 > 0:26:57would only end up with unintended consequences,
0:26:57 > 0:27:00and those unintended consequences, according to Hayek,
0:27:00 > 0:27:05could be even worse than the problems that were solved.
0:27:05 > 0:27:09The bitter argument between Hayek and Keynes embodied a fault line
0:27:09 > 0:27:11in economics that exists to this day.
0:27:15 > 0:27:19It's one of the great academic disputes in the history
0:27:19 > 0:27:21of intellectual thought.
0:27:21 > 0:27:24It set the tone for the difference between left and right today,
0:27:24 > 0:27:26between those who want to intervene in the economy,
0:27:26 > 0:27:28and those who would prefer to leave the economy alone.
0:27:33 > 0:27:37It was one of the most important intellectual battles
0:27:37 > 0:27:40of the 20th Century, and at the time it was pretty clear who won -
0:27:40 > 0:27:42Keynes.
0:27:42 > 0:27:44In 1933, as the Depression showed no sign of ending,
0:27:44 > 0:27:47President Roosevelt instigated a massive public spending programme
0:27:47 > 0:27:50that looked very Keynesian.
0:27:50 > 0:27:54Under the New Deal, all kinds of new infrastructure was built
0:27:54 > 0:28:00across America, like this elevated railway in the heart of New York.
0:28:00 > 0:28:04The New Deal's gone down in history as the first time a country
0:28:04 > 0:28:07seriously tried to spend its way out of recession,
0:28:07 > 0:28:10but even at the time, Hayek thought that was a mistake.
0:28:10 > 0:28:14He thought what the economy needed was a period of cleansing.
0:28:14 > 0:28:17Get past all that bad investment from the boom,
0:28:17 > 0:28:20get rid of all the weak businesses, let the fittest survive.
0:28:22 > 0:28:25Hayek saw the New Deal as an artificial stimulant
0:28:25 > 0:28:30preventing the market naturally healing its damaged ecosystem.
0:28:30 > 0:28:33Rather than stepping in, government should step back
0:28:33 > 0:28:35and let the recession do its job.
0:28:37 > 0:28:42Hayek thought that the recession was the return to normalcy.
0:28:42 > 0:28:46That the boom was caused by bad policy, but once the recession
0:28:46 > 0:28:50started that was the return of the economy to normalcy.
0:28:50 > 0:28:53It would involve liquidation of certain projects
0:28:53 > 0:28:56that had been starting that were not sustainable.
0:28:58 > 0:29:01But in the depths of capitalism's worst ever crisis,
0:29:01 > 0:29:05Hayek's tough message was too much for most politicians to swallow.
0:29:05 > 0:29:07He was ignored.
0:29:10 > 0:29:13# Going back and forth for a century
0:29:13 > 0:29:15# I want to steer markets
0:29:15 > 0:29:17# I want them set free
0:29:17 > 0:29:20# There's a boom and bust cycle and good reason to fear it
0:29:20 > 0:29:21# Blame low interest rates
0:29:21 > 0:29:23# No, it's the animal spirits... #
0:29:23 > 0:29:27Keynes' message rhetorically is a hopeful message
0:29:27 > 0:29:30in the sense that it says "we",
0:29:30 > 0:29:33and that "we" being the government,
0:29:33 > 0:29:36can do something proactive about this.
0:29:36 > 0:29:42The Hayekian view doesn't offer that sort of policy,
0:29:42 > 0:29:44doesn't offer that option.
0:29:49 > 0:29:55When the financial crisis hit in 2008 policymakers were blindsided.
0:29:55 > 0:29:57After Lehman Brothers -
0:29:57 > 0:30:00one of the world's most famous investment banks - went down,
0:30:00 > 0:30:04the American government swiftly turned to Keynes
0:30:04 > 0:30:06to try to stop the damage spreading.
0:30:08 > 0:30:12The meltdown in the financial system terrified the people in there.
0:30:12 > 0:30:15They started intervening on an epic scale
0:30:15 > 0:30:18spending hundreds of billions of dollars propping up banks,
0:30:18 > 0:30:21insurance companies, even America's biggest car firms
0:30:21 > 0:30:23to stop them going bust.
0:30:23 > 0:30:26Remember that started under a Republican free market president -
0:30:26 > 0:30:30George Bush, and then carried on under President Obama.
0:30:30 > 0:30:33Apparently, neither of them wanted to see the deep cleansing
0:30:33 > 0:30:36of the economy that Hayek would have recommended.
0:30:37 > 0:30:40It's not like I'm glad that we need a recession.
0:30:40 > 0:30:42It's unfortunate that we need this recession.
0:30:42 > 0:30:45Had the government not interfered in the economy,
0:30:45 > 0:30:47in ways that I would have been against,
0:30:47 > 0:30:50we never would have had this phony boom.
0:30:50 > 0:30:51In other words, if we didn't take drugs,
0:30:51 > 0:30:53we wouldn't need to go through the withdrawal.
0:30:53 > 0:30:57In that period in 2008, right across the world,
0:30:57 > 0:31:01people were scared stiff that this was going to go from a recession
0:31:01 > 0:31:04into a downright depression, and the world is so global now
0:31:04 > 0:31:07these things could easily have spread,
0:31:07 > 0:31:09that's why people thought, you know,
0:31:09 > 0:31:13"Different countries, we've got to do whatever it takes to stop that."
0:31:13 > 0:31:16Today, central banks in Britain and America
0:31:16 > 0:31:18are pursuing another Keynesian idea -
0:31:18 > 0:31:22keeping interest rates low, encouraging borrowing
0:31:22 > 0:31:24to stimulate economic activity.
0:31:24 > 0:31:28But if you follow the Austrian, Hayek view it's all worse
0:31:28 > 0:31:31than pointless, because this intervention in the market
0:31:31 > 0:31:34is setting the stage for an even greater disaster.
0:31:34 > 0:31:38What do you think is the relevance of Hayek
0:31:38 > 0:31:40to what the Fed's doing now?
0:31:40 > 0:31:43Pouring kerosene on the fire and trying to put it out.
0:31:43 > 0:31:47They're trying to stop the problem of excessive credit with more credit.
0:31:47 > 0:31:51But all that it does is re-start the problems again
0:31:51 > 0:31:53and you create a new bubble.
0:31:53 > 0:31:57And the bubble now is in the value of the dollar and the bond market.
0:31:57 > 0:31:59And it's unsustainable.
0:32:01 > 0:32:03Hayek's argument with Keynes
0:32:03 > 0:32:06was all about how best to make capitalism work.
0:32:06 > 0:32:11But as the '30s moved on Hayek was drawn into a far greater battle.
0:32:11 > 0:32:15Whether capitalism was even the right way to organise society
0:32:15 > 0:32:19or if the new ideologies of Communism and Fascism,
0:32:19 > 0:32:22with their centrally-planned systems held the answer.
0:32:22 > 0:32:27He was convinced both were utterly wrong.
0:32:27 > 0:32:32Hayek said, "Not merely can human beings struggle to understand
0:32:32 > 0:32:34"how to cope with uncertainty,
0:32:34 > 0:32:37"but the world is just too complex for them to cope
0:32:37 > 0:32:38"with understanding all of it."
0:32:39 > 0:32:44A market system conveys so much information that makes it feasible.
0:32:44 > 0:32:47Central planning will fail under the weight of the impossibility
0:32:47 > 0:32:50of understanding the complexity of the economy.
0:32:50 > 0:32:52That was Hayek's most important insight,
0:32:52 > 0:32:55and if people had listened to that they would never have been
0:32:55 > 0:32:59so worried about the threat from communism as they were,
0:32:59 > 0:33:03because central planning failed under the weight of its own inconsistency.
0:33:03 > 0:33:07Hayek had seen the economic costs of central planning
0:33:07 > 0:33:11but World War Two made him focus on the political implications.
0:33:11 > 0:33:13Of course, he didn't want the Allies to lose the war,
0:33:13 > 0:33:17but seeing how the war effort was changing the economy
0:33:17 > 0:33:19made him worry about what would happen if they won.
0:33:19 > 0:33:22He didn't want to defeat the Nazis and then find
0:33:22 > 0:33:26we'd handed our freedom to an army of bureaucrats instead.
0:33:28 > 0:33:30When the Second World War began,
0:33:30 > 0:33:33the British government took control of the economy
0:33:33 > 0:33:37to harness its power for the war effort.
0:33:37 > 0:33:39Hayek worried they would never let go.
0:33:42 > 0:33:44There was a lot of enthusiasm, especially among socialists,
0:33:44 > 0:33:47to continue the planning that had taken place during World War Two
0:33:47 > 0:33:49after the war was over.
0:33:49 > 0:33:52ARCHIVE: 'A government inspector checks
0:33:52 > 0:33:55'that the measurements are 90 inches long.'
0:33:55 > 0:33:58As men from the ministry dictated how many blankets
0:33:58 > 0:34:02each blanket factory produced, Hayek began writing a book
0:34:02 > 0:34:06attacking the government's control of the economy.
0:34:06 > 0:34:11It would help change the course of the 20th century
0:34:11 > 0:34:14and start a political battle that runs to this day.
0:34:16 > 0:34:22And there is a handwritten copy
0:34:22 > 0:34:27by my father-in-law, in an ordinary child's exercise book,
0:34:27 > 0:34:29of the Road to Serfdom.
0:34:29 > 0:34:34He has written on it - "This is about the third or fourth draft
0:34:34 > 0:34:40"from a longer typescript later destroyed by mistake."
0:34:40 > 0:34:46And so that is the draft that survived of the Road to Serfdom.
0:34:46 > 0:34:50In The Road to Serfdom, Hayek makes a moral argument
0:34:50 > 0:34:54that government attempts to control the economy
0:34:54 > 0:34:57ultimately enslave its people.
0:34:57 > 0:34:59When we give more and more power to the state,
0:34:59 > 0:35:03gradually there is an erosion of first, economic freedom,
0:35:03 > 0:35:06and then ultimately, political freedom.
0:35:06 > 0:35:09That erosion of political freedom then leads people to demand
0:35:09 > 0:35:11a strong man, a dictator to sort everything out,
0:35:11 > 0:35:14make the trains run on time and everything else,
0:35:14 > 0:35:17and that this leads inexorably down the road to totalitarianism.
0:35:18 > 0:35:23It says, "To the socialists of all parties."
0:35:23 > 0:35:27He loved it. He was so amused when he thought it up.
0:35:27 > 0:35:33The Road to Serfdom was published in Britain in 1944 with little fanfare.
0:35:34 > 0:35:37But across the Atlantic, things were very different.
0:35:37 > 0:35:42In April 1945 Hayek agreed to give a short lecture tour
0:35:42 > 0:35:44of American universities.
0:35:44 > 0:35:48Before he arrived, his book got the kind of publicity
0:35:48 > 0:35:50that money can't buy.
0:35:50 > 0:35:55Reader's Digest gave Hayek top billing and a rousing introduction,
0:35:55 > 0:35:58quoting from some of the reviews that the Road to Serfdom had got.
0:35:58 > 0:36:02Calling it "One of the most important books of our generation."
0:36:02 > 0:36:06"Professor Hayek with great power and rigour of reasoning
0:36:06 > 0:36:09"sounds a grim warning to Americans and Britons who look
0:36:09 > 0:36:10"to the government to provide the way out
0:36:10 > 0:36:12"of all our economic difficulties."
0:36:12 > 0:36:16And it should have "the widest possible audience".
0:36:16 > 0:36:18And that's exactly what the book got.
0:36:18 > 0:36:22Reader's Digest had more than 8 million subscribers.
0:36:22 > 0:36:25Hayek's warning about the dangers of big government
0:36:25 > 0:36:27struck a chord with many Americans.
0:36:28 > 0:36:32The Road to Serfdom really fitted in with the notions
0:36:32 > 0:36:36of American individualism and the sense that anybody
0:36:36 > 0:36:39could become a millionaire if only they were to work hard enough,
0:36:39 > 0:36:43and an anxiety which came right from the founding fathers about whether
0:36:43 > 0:36:47the federal government should take too much power from the states.
0:36:48 > 0:36:52After the war the size and reach of government
0:36:52 > 0:36:56did grow across the Western world with the rise of the welfare state.
0:36:56 > 0:36:59In Britain much of the economy was even nationalised -
0:36:59 > 0:37:01taken over by the state.
0:37:01 > 0:37:08Reading Hayek gave a kind of explanation of why
0:37:08 > 0:37:10what had gone wrong was going wrong.
0:37:10 > 0:37:17Hayek gave an alternative vision which seemed to me to be very cogent.
0:37:17 > 0:37:22What it boiled down to was freedom within the rule of law.
0:37:22 > 0:37:24What he was read to say
0:37:24 > 0:37:30and actually himself moved to say by the 1960s,
0:37:30 > 0:37:36was that moving to a social welfare society would eat away
0:37:36 > 0:37:38at the health of democracy.
0:37:38 > 0:37:43I think it's one of his failed predictions, badly failed,
0:37:43 > 0:37:46even though it remains an influential part of his thinking now
0:37:46 > 0:37:50with many followers in the libertarian mode.
0:37:50 > 0:37:53Today, the Road to Serfdom is back.
0:37:53 > 0:37:56'This book was like Mike Tyson in his prime.
0:37:56 > 0:38:00'Right hook to Socialism in Western Europe and in the United States.
0:38:00 > 0:38:01'But the influence didn't...'
0:38:01 > 0:38:04After Glenn Beck's Fox News broadcast in 2010,
0:38:04 > 0:38:08The Road to Serfdom shot to number one on Amazon in America.
0:38:08 > 0:38:10'Ronald Regan...'
0:38:10 > 0:38:12If you think about the people that would have been
0:38:12 > 0:38:16part of Glenn Beck's audience, sometimes defined as the Tea Party.
0:38:16 > 0:38:18'Look at what we're doing!
0:38:18 > 0:38:21'We now have a government car company, government banks
0:38:21 > 0:38:25'and Hayek demonstrates this road leads to one destination.'
0:38:25 > 0:38:29There is cynicism about government and it's quite widespread,
0:38:29 > 0:38:30there's a lot of anger.
0:38:30 > 0:38:32That certainly would feed into...
0:38:32 > 0:38:35Well, here's a guy who talked about the dangers of big government.
0:38:35 > 0:38:39In fact, Hayek was in favour of governments
0:38:39 > 0:38:41providing some kind of safety net.
0:38:41 > 0:38:44But his modern supporters don't like to dwell on that.
0:38:44 > 0:38:48Well, we have a lot more socialism now than when he wrote it.
0:38:48 > 0:38:51As socialism creeps in the economy slowly over time,
0:38:51 > 0:38:53a lot of people don't notice it.
0:38:53 > 0:38:57And eventually, you know, you're not on the road to serfdom,
0:38:57 > 0:38:58you've arrived at serfdom.
0:38:58 > 0:39:01Think about Victorian Britain.
0:39:01 > 0:39:04That was certainly a very free market,
0:39:04 > 0:39:08there was a minimum government intervention.
0:39:08 > 0:39:11Do we think that the average citizen of England
0:39:11 > 0:39:15in 1870 felt a great deal of personal freedom?
0:39:15 > 0:39:19I think there was a great deal of servility and class deference
0:39:19 > 0:39:22coming out of the fact that the lives of the poor
0:39:22 > 0:39:28were incredibly insecure and only by constantly flattering their betters
0:39:28 > 0:39:31could they have any reasonable assurance of survival.
0:39:31 > 0:39:35So no, I think there's more freedom and dignity
0:39:35 > 0:39:38in a moderately strong welfare state than there is
0:39:38 > 0:39:40in the Hayekian paradise of free markets.
0:39:46 > 0:39:49Despite the success of The Road to Serfdom,
0:39:49 > 0:39:53in the 1950s and '60s Hayek found himself in the political wilderness.
0:39:53 > 0:39:57Governments across the Western world were enthusiastically embracing
0:39:57 > 0:40:01the ideas of Hayek's nemesis from the dark days of the 1930s -
0:40:01 > 0:40:03John Maynard Keynes.
0:40:05 > 0:40:08It became the new capitalist orthodoxy that governments
0:40:08 > 0:40:11could successfully manage their economies.
0:40:11 > 0:40:14The tide of history had turned against Hayek.
0:40:15 > 0:40:17He got very depressed.
0:40:17 > 0:40:21People weren't listening to him, they weren't reading his books.
0:40:21 > 0:40:25England seemed to be going left-wing.
0:40:25 > 0:40:29He'd chosen to be British and he looked, from his views
0:40:29 > 0:40:35of an economist, and he could see everything going the wrong way.
0:40:37 > 0:40:42Then in 1974, Esca Hayek got a phone call out of the blue.
0:40:42 > 0:40:46It was the man who had invited Hayek to the LSE 40 years earlier
0:40:46 > 0:40:48to do battle with Keynes.
0:40:50 > 0:40:55It was Lionel Robbins who rang me and said, "Are you sitting down?"
0:40:55 > 0:40:57I said, "Yes."
0:40:57 > 0:41:01And he said, "Well, he's been awarded
0:41:01 > 0:41:04"a Nobel Prize for economics."
0:41:04 > 0:41:11That was like being given a knighthood of the world.
0:41:11 > 0:41:13That's the Nobel citation.
0:41:16 > 0:41:19Stockholm the 10th of December 1974,
0:41:19 > 0:41:26Alfred Nobel given to Friedrich von Hayek.
0:41:26 > 0:41:30His life started off completely again.
0:41:30 > 0:41:33He'd been depressed, he was coming up to retirement
0:41:33 > 0:41:35and suddenly everything started, it was a new life.
0:41:35 > 0:41:38Absolutely... everything took off for him.
0:41:49 > 0:41:52While everything began taking off for Hayek,
0:41:52 > 0:41:54Britain was sinking into economic decline.
0:41:54 > 0:41:57Strikes had become a fact of life.
0:41:57 > 0:42:00The post-war Keynesian consensus was crumbling.
0:42:04 > 0:42:07A few months after Hayek won the Nobel Prize,
0:42:07 > 0:42:11the Conservative Party turned to a new leader.
0:42:11 > 0:42:14The rise of Margaret Thatcher brought Hayek
0:42:14 > 0:42:17into the political mainstream for the first time.
0:42:17 > 0:42:20Margaret Thatcher would, from time to time,
0:42:20 > 0:42:22pull little bits of paper with quotations on them
0:42:22 > 0:42:26out of her handbag and Hayek would be one of them.
0:42:26 > 0:42:31Hayek had spent most of the 20th century as a political outsider.
0:42:31 > 0:42:33Now he had the ear of the woman
0:42:33 > 0:42:36who would be Britain's next Prime Minister.
0:42:36 > 0:42:37I think it would be a great mistake
0:42:37 > 0:42:41to think of her as studying Hayek like a student would.
0:42:41 > 0:42:46It's more trying to get inspiration from Hayek and casting around,
0:42:46 > 0:42:48ransacking the minds of great men,
0:42:48 > 0:42:50of whom he was one of the most prominent,
0:42:50 > 0:42:53so that she could somehow get the gold.
0:42:53 > 0:42:57In 1979 Margaret Thatcher was swept to power,
0:42:57 > 0:43:00determined to build a new Britain.
0:43:00 > 0:43:02It was a bold change of direction
0:43:02 > 0:43:05that really did create the world we live in today.
0:43:05 > 0:43:10We did institute a radical change of policy direction,
0:43:10 > 0:43:14which has not really been reversed.
0:43:14 > 0:43:18It may have been muddied, but it hasn't been reversed.
0:43:18 > 0:43:24It does chime in with Hayek right back in the 1940s
0:43:24 > 0:43:28saying that the path we're on at the moment
0:43:28 > 0:43:32is the road to serfdom, and we need to tread a very different path.
0:43:35 > 0:43:36In the language of the time
0:43:36 > 0:43:38Mrs Thatcher began rolling back the state.
0:43:38 > 0:43:41Government-owned industries were privatised.
0:43:41 > 0:43:44Public spending and taxes were cut.
0:43:44 > 0:43:47There was a bonfire of state controls on the market -
0:43:47 > 0:43:50on prices, wages, dividends and foreign exchange.
0:43:50 > 0:43:54Britain was moving Hayek's way.
0:43:55 > 0:43:59We were certainly very much on the same wavelength.
0:43:59 > 0:44:03We were not busy thumbing his works to find out what we should do,
0:44:03 > 0:44:05it was not a handbook for government,
0:44:05 > 0:44:08but it was the same general idea.
0:44:11 > 0:44:14Nowhere did today's world emerge more clearly
0:44:14 > 0:44:17than in the Conservative's battle with the trades' unions.
0:44:17 > 0:44:19Margaret Thatcher wanted to put a stop
0:44:19 > 0:44:22to what she saw as rampant union power.
0:44:22 > 0:44:25But she faced a dilemma -
0:44:25 > 0:44:28"How do you do that without alienating the entire population?"
0:44:28 > 0:44:31Hayek's philosophy helped her formulate her answer.
0:44:38 > 0:44:41She wanted to frame the argument in terms of liberty.
0:44:41 > 0:44:45She didn't want to say, "The workers are all dreadful, let's squash them."
0:44:45 > 0:44:48She wanted to say, "The workers are being squashed by their leaders."
0:44:53 > 0:44:59This very much fed into Hayek, and the idea of liberty
0:44:59 > 0:45:01was, you were defending your country here
0:45:01 > 0:45:04as well as the state of labour relations.
0:45:05 > 0:45:08Hayek and Margaret Thatcher agreed on a lot.
0:45:08 > 0:45:10But there was one crucial difference between them.
0:45:10 > 0:45:14Whereas Hayek thought you freed the market to prevent power
0:45:14 > 0:45:16getting too concentrated in the hands of politicians,
0:45:16 > 0:45:19Thatcher thought you could have free market policies
0:45:19 > 0:45:22and still keep a lot of power at the centre.
0:45:22 > 0:45:26That tension between Hayek's ideal and the controlling instinct
0:45:26 > 0:45:30of even free market politicians never really went away.
0:45:32 > 0:45:37Where she, I think, missed out sometimes was understanding
0:45:37 > 0:45:41the importance of institutions
0:45:41 > 0:45:46and of countervailing power in a society.
0:45:46 > 0:45:50Hayek, for example, was quite understanding about the role
0:45:50 > 0:45:54of local authorities and local municipalities
0:45:54 > 0:45:58and local power centres in a way which I don't think Margaret was.
0:46:04 > 0:46:06Hayek's political influence reached its height in 1986
0:46:06 > 0:46:11when Mrs Thatcher's government swept away much of the regulation
0:46:11 > 0:46:13that had constrained the City of London.
0:46:13 > 0:46:17The Big Bang set the financial markets free,
0:46:17 > 0:46:19ushering in today's vast
0:46:19 > 0:46:21interconnected global financial system.
0:46:21 > 0:46:25But it wasn't really the free market that Hayek wanted.
0:46:25 > 0:46:29Hayek's followers would say the deregulated financial system
0:46:29 > 0:46:32that came out of the '80s and '90s played a big role
0:46:32 > 0:46:37in the financial crisis because it was only ever half free.
0:46:37 > 0:46:40It was distorted by an implicit promise
0:46:40 > 0:46:42to all these financial institutions
0:46:42 > 0:46:46that if things went wrong the government would come to the rescue.
0:46:46 > 0:46:49In the kind of capitalism we've had in the West since the 1980s,
0:46:49 > 0:46:54the financial institutions that triggered the recent crash
0:46:54 > 0:46:59were free to do anything, it seems, except fail.
0:46:59 > 0:47:02It was the "Too big to fail problem".
0:47:02 > 0:47:06They knew that it was a question of,
0:47:06 > 0:47:10"Heads I win, tails the tax payer loses."
0:47:10 > 0:47:12And if that is the bet,
0:47:12 > 0:47:16you take the bet and you take it on a bigger and bigger scale.
0:47:16 > 0:47:21So they knew pretty well that if they got the gamble wrong
0:47:21 > 0:47:25governments couldn't allow them to fail, they'd have to be bailed out.
0:47:25 > 0:47:28That is what is wrong and that is what has to be stopped.
0:47:28 > 0:47:30We certainly have discovered, after the fact
0:47:30 > 0:47:31that banks are not allowed to fail.
0:47:31 > 0:47:35Was that actually a significant factor in the over-lending?
0:47:35 > 0:47:37I don't think there's much evidence of that.
0:47:37 > 0:47:42Now the fact that big banks clearly will not be allowed to fail
0:47:42 > 0:47:44and that is distorting our system.
0:47:44 > 0:47:47But I don't think that's the story of the crisis.
0:47:47 > 0:47:50I think that the crisis was one more about just a general failure
0:47:50 > 0:47:51to understand the risks.
0:47:54 > 0:47:58There's no doubt that in the last 30 years politicians of all stripes
0:47:58 > 0:48:03have let market forces influence more and more parts of society.
0:48:03 > 0:48:06But they have drawn the line at Hayek's most revolutionary idea
0:48:06 > 0:48:09of turning money itself over to the market.
0:48:12 > 0:48:16Imagine a world where we didn't have just one legal currency circulating
0:48:16 > 0:48:21in the economy, issued by the Bank of England, but dozens of them.
0:48:21 > 0:48:24Anyone - a company, a bank, a private individual could set up
0:48:24 > 0:48:28their own version of the pound and they would be free to compete.
0:48:28 > 0:48:32The market would determine how much they were worth.
0:48:32 > 0:48:35Hayek knew it was a crazy sounding suggestion, even for him.
0:48:35 > 0:48:38But it would finally stop governments
0:48:38 > 0:48:40abusing the power of money.
0:48:43 > 0:48:47In America one man has been trying to do just that.
0:48:51 > 0:48:57He's taken Hayek's most explosive idea and turned it in to a reality.
0:49:06 > 0:49:10Bernard von Nothaus calls himself a monetary architect.
0:49:10 > 0:49:14The American authorities call him a domestic terrorist.
0:49:16 > 0:49:20For some, what's happened to von Nothaus shows just how seriously
0:49:20 > 0:49:24governments take any challenge to their monopoly over money.
0:49:24 > 0:49:28Economics is dry and boring.
0:49:28 > 0:49:32But money is exciting! Money is sexy.
0:49:32 > 0:49:36You know, money's got pizzazz, it's about people and about dreams,
0:49:36 > 0:49:37about what we do, you know?
0:49:37 > 0:49:39Money is fantastic!
0:49:39 > 0:49:43And that's what I really connected with in terms of von Hayek.
0:49:43 > 0:49:48Because what he said in here was about people taking control
0:49:48 > 0:49:51and people issuing their own money.
0:49:53 > 0:49:56Von Nothaus created his own currency -
0:49:56 > 0:49:59a silver coin called the Liberty Dollar which anyone could buy.
0:49:59 > 0:50:01And many have.
0:50:01 > 0:50:04Thanks to him, coins worth anything up to 50 million
0:50:04 > 0:50:07have now been sent out in to the US economy.
0:50:07 > 0:50:10And Hayek was a big inspiration.
0:50:10 > 0:50:13He says the problem is government money.
0:50:13 > 0:50:15It's always been government money.
0:50:15 > 0:50:19Because they abuse their power. They make money out of thin air.
0:50:19 > 0:50:23So he says what we should do is to abolish the central bank.
0:50:23 > 0:50:26The end of the Federal Reserve, that was fantastic!
0:50:28 > 0:50:32Ever since Benjamin Strong was running the New York Federal Reserve
0:50:32 > 0:50:35in the 1920s, central banks have used their control
0:50:35 > 0:50:40over the supply of money to try to manage the economy's ups and downs.
0:50:40 > 0:50:43But as we've seen, to Hayek and his fans,
0:50:43 > 0:50:47central banks are the cause of many of capitalisms problems,
0:50:47 > 0:50:48not the solution.
0:50:49 > 0:50:52And I don't argue for closing the Fed down in one day either.
0:50:52 > 0:50:55I want to audit the Fed and I want competition,
0:50:55 > 0:50:58Hayek's ideas of competition and money,
0:50:58 > 0:51:02and see who can win this argument.
0:51:02 > 0:51:04But for them to claim monopoly powers
0:51:04 > 0:51:08and prevent us from practising private market economics
0:51:08 > 0:51:10is the real problem that we have.
0:51:12 > 0:51:16A lot of this is this Utopian vision, the golden age
0:51:16 > 0:51:19when men were men and currency was free.
0:51:19 > 0:51:22The United States had a long period of no government monopoly
0:51:22 > 0:51:23on currency.
0:51:23 > 0:51:27We had the whole system of unregulated banks
0:51:27 > 0:51:28issuing competing currencies.
0:51:28 > 0:51:31That system was heavily prone to financial crises.
0:51:31 > 0:51:34So the idea again that competition is the answer
0:51:34 > 0:51:36is flying in the face of history.
0:51:37 > 0:51:41Perhaps, but the history of government efforts
0:51:41 > 0:51:44to control the market hasn't been so pretty either.
0:51:44 > 0:51:48For Hayek, what was really utopian was the belief that central banks,
0:51:48 > 0:51:50or anyone else for that matter, could ever be a match
0:51:50 > 0:51:53for the dizzying complexity of our modern economy.
0:51:53 > 0:51:58Hayek would say since they can't do it they should just stop trying.
0:51:58 > 0:51:59We should stop having...
0:51:59 > 0:52:02Well, stop having any intervention in monetary policy,
0:52:02 > 0:52:05or stop having central banks if you go to the extreme.
0:52:05 > 0:52:08Well, that's dreaming, I think.
0:52:11 > 0:52:14Von Nothaus's attempt to compete with the Federal Reserve
0:52:14 > 0:52:18eventually drew the attention of the American authorities.
0:52:19 > 0:52:23In 2007, the FBI moved in.
0:52:23 > 0:52:28I think they begin to perceive us as a threat instead of a solution.
0:52:28 > 0:52:31NEWS REPORT: 'The architect behind the Liberty Dollar
0:52:31 > 0:52:32'is talking about the US government
0:52:32 > 0:52:37'and why agents raided his Evansville headquarters earlier this month.'
0:52:37 > 0:52:42Von Nothaus was charged with counterfeiting US currency.
0:52:42 > 0:52:46Giving evidence in this courthouse in North Carolina in 2011
0:52:46 > 0:52:50he talked about Hayek.
0:52:50 > 0:52:53Well, he was relevant to my defence.
0:52:53 > 0:52:57This wasn't some harebrained idea that I had thought up myself.
0:52:57 > 0:53:02I pointed out that here was a well-known Nobel laureate
0:53:02 > 0:53:06who had talked about exactly what I had done.
0:53:10 > 0:53:13Bernard von Nothaus was found guilty
0:53:13 > 0:53:16and now faces up to 25 years in prison.
0:53:25 > 0:53:29And I think this was the one he was most proud of,
0:53:29 > 0:53:34"Companion of Honour, presented by Queen Elizabeth II,
0:53:34 > 0:53:36"Buckingham Palace, 1984."
0:53:36 > 0:53:41And he was absolutely thrilled when he got that.
0:53:41 > 0:53:43"To Professor, Doctor..."
0:53:43 > 0:53:47Towards the end of his life, Hayek was feted by everyone.
0:53:47 > 0:53:51He'd inspired politicians all over the world with his boundless belief
0:53:51 > 0:53:54in the power of the free market.
0:53:54 > 0:53:58And that is Catholic University, Caracas.
0:53:58 > 0:54:02When it came to their actual policies,
0:54:02 > 0:54:05Western leaders in the 1980s usually turned to a free market thinker
0:54:05 > 0:54:08whose ideas they found more palatable.
0:54:08 > 0:54:12Milton Friedman's belief that governments could steer the economy
0:54:12 > 0:54:15using their power over the supply of money in circulation
0:54:15 > 0:54:19is still a touchstone for governments everywhere.
0:54:19 > 0:54:23In that sense, Friedman, unlike Hayek, did offer politicians
0:54:23 > 0:54:28a way to champion the free market and hold on to the reins of power.
0:54:30 > 0:54:34Hayek's life spanned almost the entire 20th century,
0:54:34 > 0:54:36an era of unprecedented scientific progress...
0:54:36 > 0:54:41'It's one small step for man,
0:54:41 > 0:54:44'one giant leap for mankind.'
0:54:44 > 0:54:50..but also unprecedented economic disasters.
0:54:50 > 0:54:52Living in the shadow of both,
0:54:52 > 0:54:56Hayek came to see the great crises of capitalism as the result
0:54:56 > 0:55:00of politicians mistaking economics for a science.
0:55:00 > 0:55:04It was a century for taking on all the big questions.
0:55:04 > 0:55:07And the big question for economists
0:55:07 > 0:55:11was how they were going to tame this extraordinary modern economy.
0:55:11 > 0:55:15Keynes and Hayek both thought that would be incredibly difficult,
0:55:15 > 0:55:17dangerous even.
0:55:17 > 0:55:19But Keynes flattered governments with the idea
0:55:19 > 0:55:23that they could tilt the course of human history their way.
0:55:23 > 0:55:27It was Hayek who said they shouldn't even try.
0:55:27 > 0:55:29We might uncover the laws of the universe -
0:55:29 > 0:55:33we were never going to master the complexities of human nature.
0:55:35 > 0:55:37"Pretence of knowledge", he called it -
0:55:37 > 0:55:40pretending they know something that they don't know.
0:55:40 > 0:55:42Well, they've been doing it now...
0:55:42 > 0:55:45We've given the current crop of economists,
0:55:45 > 0:55:47let's see, how many years would that be?
0:55:47 > 0:55:51About 70-some years. Total failure.
0:55:51 > 0:55:54Many of the computer models have been desperately misleading
0:55:54 > 0:55:57in pretending that we understand how the economy works.
0:55:57 > 0:56:00We don't. We can't forecast the economy.
0:56:00 > 0:56:03But we can try to think about the big questions.
0:56:03 > 0:56:05Can we get out of a deep slump?
0:56:05 > 0:56:07And I think by working with other countries,
0:56:07 > 0:56:10we can gradually find our way out of this.
0:56:10 > 0:56:12So you need the different insights together,
0:56:12 > 0:56:14but Hayek is a...
0:56:14 > 0:56:19The moral of Hayek is - avoid hubris in economic policy,
0:56:19 > 0:56:22just as we should avoid hubris in thinking that markets
0:56:22 > 0:56:26left to their own devices will lead us to Nirvana.
0:56:28 > 0:56:33There's no doubt Hayek helped change the course of world history,
0:56:33 > 0:56:37shifting it decisively away from the state and towards the market.
0:56:39 > 0:56:45Oh! 10 Downing Street, the Prime Minister,
0:56:45 > 0:56:473rd of May 1989.
0:56:47 > 0:56:50"Dear Professor Hayek, it is with the greatest pleasure
0:56:50 > 0:56:52"that I send you my warm congratulations
0:56:52 > 0:56:54"on the occasion of your 90th birthday.
0:56:54 > 0:56:58"The leadership and inspiration that your work and thinking gave us
0:56:58 > 0:57:03"are absolutely crucial and we owe you a great debt."
0:57:03 > 0:57:07"With every good wish, yours sincerely, Margaret Thatcher."
0:57:10 > 0:57:14But no government has ever dared to implement Hayek's vision
0:57:14 > 0:57:16of a market free from state intervention.
0:57:16 > 0:57:20And when capitalism faced its biggest test since the 1930s,
0:57:20 > 0:57:24politicians rushed to save the market from itself.
0:57:24 > 0:57:26In fact, the biggest debate in Britain today is not about
0:57:26 > 0:57:30whether the government is doing too much to prop up the economy,
0:57:30 > 0:57:31but whether it's doing enough.
0:57:31 > 0:57:35Today, Hayek's advice seems harder to take than ever.
0:57:35 > 0:57:38You've got the global economy still struggling to put
0:57:38 > 0:57:42the financial crisis behind it, if it is behind it.
0:57:42 > 0:57:46And Hayek would say governments should just step back,
0:57:46 > 0:57:49take a cool look at the historical record,
0:57:49 > 0:57:51dismantle most of the machinery
0:57:51 > 0:57:55they have constructed for guiding the economy,
0:57:55 > 0:57:57take a deep breath, and let go.
0:57:58 > 0:58:02I don't see any government today ready to do that.
0:58:02 > 0:58:03I don't think I ever will.
0:58:06 > 0:58:10Next time, Karl Marx, the man who had the most radical solution of all
0:58:10 > 0:58:13for the problems of capitalism - get rid of it.
0:58:15 > 0:58:19The Open University has produced six one-minute animations to explain
0:58:19 > 0:58:23some of the key economic ideas that affect all of us.
0:58:23 > 0:58:25If you want to learn how to spot an invisible hand
0:58:25 > 0:58:30or other secrets of economics, go to:
0:58:30 > 0:58:33and follow the link to the Open University.
0:58:42 > 0:58:47Subtitles by Red Bee Media Ltd