Hayek Masters of Money

We heard that he'd been sinking,

and then we heard that he died,

and my husband said, "You will have to contact."

And I was on the phone to the world.

And people were saying, had I told the American President?

Had I told Mrs Thatcher?

It was only then, I think, that finally it was rammed home to me

the enormous effect that he'd had on the whole world.

You know, ringing, in the middle of the night,

ringing the President of the United States to say that FA Hayek had died.

Friedrich Hayek was a champion of the market.

He inspired many of the people who built the world we live in today.

Margaret Thatcher would, from time to time,

pull little bits of paper with quotations out of her handbag,

and Hayek would be one of them.

For more than a generation,

Western leaders claimed to embrace one central economic idea -

the free market.

With the financial crisis, that orthodoxy's under attack.

Our faith in it has been shaken like never before.

But one great free-market visionary

has emerged from the meltdown with his reputation enhanced.

There might never be a better time to listen to Friedrich Hayek.

I see right now, this moment in history,

as a time where Hayek's ideas deserve a shot.

Of all the big pro-market thinkers, Hayek was by far the most radical.

He believed the market should be freer than any government

has ever dared to allow it to be.

In the world according to Hayek,

politicians should step back

from trying to manage capitalism's ups and downs.

They should simply set it free.

There's no doubt that he's a significant thinker,

though there's major controversy about every area of his thought.

In this series, I'll reveal the stories of the lives

and revolutionary thinking of three extraordinary men.

John Maynard Keynes, Karl Marx and Friedrich Hayek.

They all saw their worlds changing as never before,

becoming ever more complex and interconnected.

The fate of entire nations now hung on the power of money,

and they had very different ideas about what to do.

Even in the middle of an economic meltdown,

Hayek's advice to governments was to step back and do nothing.

Meddling would only make things worse.

It's not what anyone has ever wanted to hear,

but today they've tried all the usual tricks for fixing the economy.

Is it time, finally, to take Hayek's advice instead?

Around the world we're all still feeling the shockwaves

of the financial crash of 2008.

'You really can feel the fear down here.'

'The Dow has had its worst five days in five years.'

Until that crisis hit,

Western leaders had put their faith in the free market

as the best way to generate wealth.

But in their version of the market,

derived from thinkers like Milton Friedman,

they still believed if things went wrong they could step in,

tweak the system and get everything back on track.

Today, fans of the Austrian economist Friedrich Hayek

say that arrogance, that distorted picture of a market economy,

got us into this mess.

If we want to try to get out of it, we need to try the real thing.

To understand how governments, not markets,

might have caused the crisis,

we need to wind the clock back to the years leading up to it.

America's interest rates have been cut.

That was expected but the timing has come as a surprise.

It's January 2001,

and America's central bank, the Federal Reserve,

has cut interest rates

because it's worried the US economy is slowing down.

It cut interest rates for the same reason central banks always do.

To make it cheaper for companies and households to borrow

and seek out profitable investments.

The President was pleased, as you might imagine.

This is the kind of thing Presidents expect central banks to do

to avoid economic trouble.

I think the cut was, um...was needed.

It was a strong statement that measures must be taken

to make sure our economy does not go into a tailspin.

Had Friedrich Hayek been alive,

he would have taken a very different view.

Far from avoiding trouble,

Hayek would have seen the Federal Reserve's decision

to cut interest rates

as sowing the seeds of today's financial crisis.

In fact, Hayek believed

almost any government intervention in the market,

like propping up failing businesses,

setting trade tariffs or manipulating interest rates,

risked disaster.

In the years after 2001,

the Federal Reserve carried on cutting interest rates,

helping to fuel a property boom that ultimately couldn't be sustained.

Early in 2007, America's housing bubble burst

and the global financial crisis began,

just as Hayek might have predicted.

The conventional wisdom was none of these events were foreseeable.

We couldn't have done anything about it.

But of course all of that was false.

What's playing out before our eyes

is exactly what men like Hayek had predicted would happen.

At first glance, the Hayek view of the crisis

looks a bit familiar.

But don't be fooled.

You probably feel like you've heard this argument before,

that the Federal Reserve partly caused the crisis

by setting interest rates too low,

encouraging everyone to borrow too much and generally do silly things.

But the argument of Hayek and his followers

actually runs deeper than that.

It's not just that they got their sums wrong

and they didn't set the right interest rate.

It's that they shouldn't have been in the business

of setting interest rates at all.

It's this radical rejection of the state's role

in regulating the market

that sets Hayek apart from other free-market thinkers.

He believed the market would do a far better job regulating itself,

if only governments would just leave it alone.

Free market did not set interest rates at 1% under Greenspan.

That's the government that is doing that. That is price-fixing.

It's kind of the way the old Soviet Union

used to fix the price of bread or gasoline.

The US government fixes interest rates the same way.

We need the market to set interest rates, not the government.

If the market set interest rates they would've been much higher,

and we wouldn't have had these problems.

Hayek's belief in the positive power of the unbridled free market

stems from his childhood in Austria.

He was born in Vienna in 1899.

Then, the city was packed full of intellectuals

like Freud and Wittgenstein, many of whom Hayek came to know.

These family photographs have not been widely seen.

Growing up, he had a keen desire to make sense

of the modern world taking shape around him.

I must have been 13 or 14

when I began pestering all the priests I knew

to explain to me what they meant by the word "God",

and none of them could.

That was the end for me of it.

Hayek grew up in a family of scientists.

Like many other intellectuals in Vienna at that time

they liked to think they were on a grand quest

to unwrap the secrets of the universe.

The young Hayek was especially influenced by his father -

a doctor and enthusiastic botanist.

Hayek started off like his dad,

obsessively collecting plant and insect samples,

really into the development of species.

By the time he was 16 and he was more interested in people,

the development of whole societies, not plants.

But Darwin's theory of evolution stuck in his head.

Since the 18th-century Enlightenment

science had unlocked many of the puzzles of the universe,

including the origins of life itself.

As Hayek grew up

he was drawn to what he saw as the last frontier -

the mysterious workings of the economy

in all its growing complexity and power.

In Darwin's theory of evolution

he thought he saw what a new science of the economy might look like.

Physics, which allows, often, for precise predictions

in terms of planetary motion and eclipses,

is not a good model

for understanding how social phenomena work.

I think that was the basis of his attraction to evolutionary theory.

He wanted to establish that you could be a science

even if you don't make precise predictions,

or have the sort of control that many of his opponents said,

"Well, if we're a science we should be able to engineer society

"the way an engineer builds a bridge."

Darwin's theory of evolution also helped forge Hayek's vision

of capitalism itself.

He came to believe the global market had evolved

over the course of human history, emerging as a kind of natural wonder

driving civilisation forward.

Hayek saw the market as a telecommunications system,

processing billions of pieces of information

about all our needs and desires

and the changing supply of resources to meet them.

Hayek said it was a marvel - the way all this is conveyed to us

by prices that guide our actions as they rise and fall.

And to Hayek the market does most good when it's most free.

It's our desire to control it that most often turns it against us.

Hayek thought meddling by government could make it harder for

the market to do its job by distorting the signals

it was sending to buyers and sellers,

and the meddling involved in the government's control

of the supply of money, Hayek decided,

could be most damaging of all.

Rampant inflation, unemployment, uncontrollable debt.

In Vienna, after the First World War, Hayek saw for himself

how government abuse of money can wreak havoc.

Across Austria prices had taken off, and so had unemployment.

Even the rich were struggling to feed themselves,

and no-one could quite understand why.

At the height of the crisis, if you walked down this street

any time of day or night,

you could hear a kind of relentless, heavy, rumbling sound.

It was the sound of money tearing a country apart.

This building housed the Austro-Hungarian Bank,

and its printing presses that were rolling night and day

churning out millions of new bank notes.

The war had left the Austrian government with huge bills

and low tax revenues.

So it ordered the national bank to simply print the money it needed

in exchange for bonds or IOUs.

What the people manning these printing presses,

and their political masters, had yet to really grasp

was they weren't just producing money here,

they were producing inflation.

The amount of money in the economy was going up,

so people had more money to spend, but of course,

the amount of things they could buy had stayed more or less the same.

That forced up the price of everything. Inflation took off.

In fact, the situation got so bad in Austria,

the inflation rate hit 10,000%.

The financial wealth was destroyed.

Those that had jobs

continued to have them but they could no longer afford,

for instance, to have maids and servants.

We saw all of these people, all of a sudden, ended up being out of work.

With their economy going up in smoke, Austria's central bankers

tried to fight fire with fire.

By the summer of 1922, prices were doubling every month,

and the central bank was playing catch up,

printing higher and higher denomination bank notes,

just to reflect what was going on in the shops.

In the end, this 500,000 Krone note could maybe buy you a loaf of bread.

And of course, by pumping more and more money into the economy

they were only making the problem worse.

For Austria's politicians it was all a crisis of their own making.

They'd been printing money to pay their bills since the start

of the First World War,

and they didn't understand that that could lead to inflation.

It was a crisis caused by ignorance.

Having seen Austria brought to its knees,

Hayek had an almost visceral fear of inflation all of his life.

It's a fear that central bankers still share today.

What's interesting to me is the lesson he drew from that experience.

Most people focus on the politics, on the fact that the winners of

World War I had imposed impossibly high reparations on Austria.

But Hayek was interested in the economics,

and the fact that the Austrian government simply hadn't understood

the power of money.

What happened next in America led Hayek to conclude

there can be something worse than government ignorance - hubris.

He thought that entire period showed the calamity that can come

when governments try to use the power of money to shape the economy.

In America in the 1920's

the greatest boom the world had ever seen was taking off.

Consumers couldn't get enough of new products like cars,

telephones and record players.

The stock market rose higher and higher.

As the Roaring Twenties wore on, the finest economic minds in America

came to believe the boom would never end.

Back in Austria, in early 1929, Hayek was convinced

they'd got it all wrong.

He'd become the director of the recently founded

Institute for Business Cycle Research.

Its job was to understand why economies were always

lurching from one boom and bust cycle to another.

Hayek called it "The 19th Century Pattern",

though it was hardly a thing of the past.

The Institute was based here at the Chamber of Commerce,

where Hayek had been developing a new theory of boom and bust,

along with new thinking about the market.

The work he did here would change the way people thought

about the economy forever - its ups, and its downs.

To many, the downs were unpredictable -

a kind of force of nature that might destroy an economy without warning.

Hayek had been working on a new idea - that the seeds of busts

were sown during booms.

Because the world had become increasingly interconnected,

Hayek had been studying the American boom to help him

forecast what would happen to the Austrian economy.

He had to produce these monthly reports on the state

of the European economy.

Most of it is pretty dry stuff.

It's things like paper production or that month's steel exports.

But he is credited with making a rather striking prediction

in early 1929,

because he thought the American stock market boom

would end in a few months time.

He was right.

In October 1929 Wall Street fell off a cliff,

and the '20s roared to an anguished end.

Hayek's prediction came out of what he saw happening

at America's new central bank.

The Federal Reserve had been set up in 1913

to stabilise America's notoriously shaky private banks

by offering them a reliable source of credit.

Hayek's big idea was that the great ups and downs in the economy

nearly all started in buildings like this one.

It was the cost of borrowing, the interest rate,

set by central banks like the New York Federal Reserve

that caused unsustainable booms to develop,

and cause the inevitable busts.

In the 1920s the governor of the New York Federal Reserve

had a revolutionary idea.

Benjamin Strong thought he could use the bank's power

to set interest rates to influence what was happening in the economy.

In many ways, that idea of using interest rates

marked the start of modern monetary policy.

Strong began buying government debt on the open market

which did have the effect of raising the amount of money in the economy.

But unlike Austria's hapless central bankers, Strong had a strategy.

The difference with Austria was that the Fed wasn't buying

treasury bonds to help the government pay its bills.

It was doing it to get money into the market

and keep interest rates low.

The central bank wanted to encourage everyone,

individuals and households, to borrow more from the banks.

It worked.

ARCHIVE: 'Steel up, utilities up, motors up,

'radio way up - everything up, up, up!'

Strong's intervention really paved the way

for the financial system we have today.

Thanks to all that credit he created

the stock market rose higher and higher.

With loans so cheap, many borrowed money to buy shares.

Others invested heavily in property.

The Federal Reserve hoped its intervention would keep

the boom going indefinitely, but Hayek believed Strong's policy

was sowing the seeds of an eventual bust.

The way Hayek saw it, the low cost of borrowing

was sending the wrong signal to investors here

and to businesses around the country.

The low interest rate told them that America was saving more,

that there was lots of spare cash sitting in bank accounts

ready to be lent on and invested.

It wasn't true.

ARCHIVE: 'Don't sell America short. Why, man, we've scarcely started.'

By the time the Federal Reserve spotted the warning signs

it was too late.

ARCHIVE: 'Technical readjustments. Over 14 billion go with them

'and so goes the confidence of a nation. Wall Street...'

The crash came when interest rates rose

and investors started to realise the banks didn't have money

to back all those investments after all.

At one point they had to close the visitors' gallery

cos there were too many members of the public up here

wailing and crying as they watched their life savings go up in smoke.

ARCHIVE: 'The Jazz Age is over, all over.'

To Hayek the lesson was clear -

by feeding the boom with cheap credit the Federal Reserve

had helped cause the Wall Street Crash and the Great Depression.

Fast forward to today's global crisis

and you could tell a similar story.

We certainly saw a lot of cheap credit in Britain and America

in the decade before the crash,

which did help fuel unsustainable property booms.

Northern Rock was one of many financial institutions

taking ever greater risks in its lending.

When it got into trouble in 2007, panicked savers rushed

to withdraw their cash - the first run on a British bank since 1866.

It was a sign of the disaster to come.

If things hadn't come to a crash in 2007, 2008

maybe with the corrective medicine you could have managed the situation

back down again through, you know, interest rate monetary policy.

As it was the banking system which was massively exposed to this

and reached a situation where suddenly, people realised

what had happened, they lost confidence in each other,

and the entire edifice came crashing down.

Today's central banks have computer models of the economy

light years ahead of anything dreamt up by Benjamin Strong.

But even so, Hayek's followers say the Federal Reserve

had learned nothing from the mistakes it made in the 1920s.

In the early 2000s it had kept interest rates too low for too long.

But then and now there are plenty who would disagree.

The job of the Fed chairman is to keep the party going,

to spike the punch bowl at all costs.

Not to take the punch bowl away, which really should be the job.

I mean, the Federal Reserve should be independent, but it's not.

It acts in concert with the government to try to maintain

a phony prosperity.

Interest rates are very low, and that was partly promoted

by the fact that the surplus countries, notably China,

but others as well,

had a lot of money, they were perfectly happy with exporting.

It would have been hard to force American interest rates higher

in that environment because there was so much money

flowing in at low interest rates.

If it was all the Feds' fault how come Europe had

the exact same experience?

It's not the fact of the interest rate policy maybe having been wrong,

although I'm not even sure I agree on that,

but it's the fact that we had these deregulated Wild West

financial markets that allowed us to get into the crisis we're in.

Like our own financial collapse,

the consequences of the 1929 crash were felt across the world.

A string of banking crises followed,

and a terrible depression in America and much of Europe.

Again, Hayek said it was all down

to interest rates being too low in the boom years.

But years later, another hugely influential free market thinker

came along who argued the exact opposite - Milton Friedman.

He said the Federal Reserve

had not pumped too much money into the system, but too little.

That's the version of history that most politicians

and economists still believe.

Hayek was absolutely wrong to think that in the catastrophic depths

of the Great Depression of the 1930s that all that was happening

was an unwinding of the malinvestments

that had come from a credit boom.

Clearly, there had been a calamitous collapse of the banking sector

that had nothing to do with the earlier so-called malinvestment.

Facing the world's worst financial meltdown, the issue for economists

and politicians was the same as it is today -

how do we make it go away?

As the Great Depression began, Hayek was invited to give

a series of lectures here at the London School of Economics.

Hayek was thrilled. He'd wanted to come here all his life.

But there was a not very hidden agenda attached to the invitation.

LSE wanted him as part of their fight back

against a new, very different strand of economic thinking

from their arch rivals Cambridge

that had been getting a lot of attention.

The man driving that new approach was John Maynard Keynes.

The grand dispute between Keynes and Hayek in the 1930s

seems so relevant to us today - it's become an internet sensation.

Lord Keynes, wow, it's, it...it's such an honour.

-Indeed, sir.

-Please, just go.

This surreal reinvention of their battle of ideas

has been watched nearly two million times online.

Hay-ek?

No, High-ek, like um, high explosives.

Hayek's opponent, Keynes, was a heavyweight thinker.

The seemingly unstoppable new force in economics.

The clash felt a bit like David and Goliath.

Keynes had two brains.

It was said of him that he caused more inferiority complexes

with justification than anyone else in his generation.

Hayek was not known. He was 16 years younger than Keynes.

They fell out with each other on first meeting

and continued to fight for the rest of their lives.

As the Depression deepened the stakes could not have been higher.

Hayek began with some awkward jabs.

Drawing in rather confused diagrams on a blackboard behind him,

he described what he called "fluctuations",

which were how the market changed from day to day over time,

and how, if you started interfering with it,

how things would go wrong pretty quickly.

The big economic argument that started here

in this room in 1931 is still going on today.

If an economy gets into trouble,

should the government step in and try and fix it?

Keynes was saying yes. Hayek stood up there and said no.

For once, it really was that simple.

For Keynes it was a moral problem.

The fact was there were people unemployed

and therefore they should be put back to work,

and it didn't really matter how you did it.

For Hayek, it was a different thing.

Hayek concluded that we really didn't know enough about economics

and that any attempt by people like Keynes

to start fooling around with it

would only end up with unintended consequences,

and those unintended consequences, according to Hayek,

could be even worse than the problems that were solved.

The bitter argument between Hayek and Keynes embodied a fault line

in economics that exists to this day.

It's one of the great academic disputes in the history

of intellectual thought.

It set the tone for the difference between left and right today,

between those who want to intervene in the economy,

and those who would prefer to leave the economy alone.

It was one of the most important intellectual battles

of the 20th Century, and at the time it was pretty clear who won -

Keynes.

In 1933, as the Depression showed no sign of ending,

President Roosevelt instigated a massive public spending programme

that looked very Keynesian.

Under the New Deal, all kinds of new infrastructure was built

across America, like this elevated railway in the heart of New York.

The New Deal's gone down in history as the first time a country

seriously tried to spend its way out of recession,

but even at the time, Hayek thought that was a mistake.

He thought what the economy needed was a period of cleansing.

Get past all that bad investment from the boom,

get rid of all the weak businesses, let the fittest survive.

Hayek saw the New Deal as an artificial stimulant

preventing the market naturally healing its damaged ecosystem.

Rather than stepping in, government should step back

and let the recession do its job.

Hayek thought that the recession was the return to normalcy.

That the boom was caused by bad policy, but once the recession

started that was the return of the economy to normalcy.

It would involve liquidation of certain projects

that had been starting that were not sustainable.

But in the depths of capitalism's worst ever crisis,

Hayek's tough message was too much for most politicians to swallow.

He was ignored.

# Going back and forth for a century

# I want to steer markets

# I want them set free

# There's a boom and bust cycle and good reason to fear it

# Blame low interest rates

# No, it's the animal spirits... #

Keynes' message rhetorically is a hopeful message

in the sense that it says "we",

and that "we" being the government,

can do something proactive about this.

The Hayekian view doesn't offer that sort of policy,

doesn't offer that option.

When the financial crisis hit in 2008 policymakers were blindsided.

After Lehman Brothers -

one of the world's most famous investment banks - went down,

the American government swiftly turned to Keynes

to try to stop the damage spreading.

The meltdown in the financial system terrified the people in there.

They started intervening on an epic scale

spending hundreds of billions of dollars propping up banks,

insurance companies, even America's biggest car firms

to stop them going bust.

Remember that started under a Republican free market president -

George Bush, and then carried on under President Obama.

Apparently, neither of them wanted to see the deep cleansing

of the economy that Hayek would have recommended.

It's not like I'm glad that we need a recession.

It's unfortunate that we need this recession.

Had the government not interfered in the economy,

in ways that I would have been against,

we never would have had this phony boom.

In other words, if we didn't take drugs,

we wouldn't need to go through the withdrawal.

In that period in 2008, right across the world,

people were scared stiff that this was going to go from a recession

into a downright depression, and the world is so global now

these things could easily have spread,

that's why people thought, you know,

"Different countries, we've got to do whatever it takes to stop that."

Today, central banks in Britain and America

are pursuing another Keynesian idea -

keeping interest rates low, encouraging borrowing

to stimulate economic activity.

But if you follow the Austrian, Hayek view it's all worse

than pointless, because this intervention in the market

is setting the stage for an even greater disaster.

What do you think is the relevance of Hayek

to what the Fed's doing now?

Pouring kerosene on the fire and trying to put it out.

They're trying to stop the problem of excessive credit with more credit.

But all that it does is re-start the problems again

and you create a new bubble.

And the bubble now is in the value of the dollar and the bond market.

And it's unsustainable.

Hayek's argument with Keynes

was all about how best to make capitalism work.

But as the '30s moved on Hayek was drawn into a far greater battle.

Whether capitalism was even the right way to organise society

or if the new ideologies of Communism and Fascism,

with their centrally-planned systems held the answer.

He was convinced both were utterly wrong.

Hayek said, "Not merely can human beings struggle to understand

"how to cope with uncertainty,

"but the world is just too complex for them to cope

"with understanding all of it."

A market system conveys so much information that makes it feasible.

Central planning will fail under the weight of the impossibility

of understanding the complexity of the economy.

That was Hayek's most important insight,

and if people had listened to that they would never have been

so worried about the threat from communism as they were,

because central planning failed under the weight of its own inconsistency.

Hayek had seen the economic costs of central planning

but World War Two made him focus on the political implications.

Of course, he didn't want the Allies to lose the war,

but seeing how the war effort was changing the economy

made him worry about what would happen if they won.

He didn't want to defeat the Nazis and then find

we'd handed our freedom to an army of bureaucrats instead.

When the Second World War began,

the British government took control of the economy

to harness its power for the war effort.

Hayek worried they would never let go.

There was a lot of enthusiasm, especially among socialists,

to continue the planning that had taken place during World War Two

after the war was over.

ARCHIVE: 'A government inspector checks

'that the measurements are 90 inches long.'

As men from the ministry dictated how many blankets

each blanket factory produced, Hayek began writing a book

attacking the government's control of the economy.

It would help change the course of the 20th century

and start a political battle that runs to this day.

And there is a handwritten copy

by my father-in-law, in an ordinary child's exercise book,

of the Road to Serfdom.

He has written on it - "This is about the third or fourth draft

"from a longer typescript later destroyed by mistake."

And so that is the draft that survived of the Road to Serfdom.

In The Road to Serfdom, Hayek makes a moral argument

that government attempts to control the economy

ultimately enslave its people.

When we give more and more power to the state,

gradually there is an erosion of first, economic freedom,

and then ultimately, political freedom.

That erosion of political freedom then leads people to demand

a strong man, a dictator to sort everything out,

make the trains run on time and everything else,

and that this leads inexorably down the road to totalitarianism.

It says, "To the socialists of all parties."

He loved it. He was so amused when he thought it up.

The Road to Serfdom was published in Britain in 1944 with little fanfare.

But across the Atlantic, things were very different.

In April 1945 Hayek agreed to give a short lecture tour

of American universities.

Before he arrived, his book got the kind of publicity

that money can't buy.

Reader's Digest gave Hayek top billing and a rousing introduction,

quoting from some of the reviews that the Road to Serfdom had got.

Calling it "One of the most important books of our generation."

"Professor Hayek with great power and rigour of reasoning

"sounds a grim warning to Americans and Britons who look

"to the government to provide the way out

"of all our economic difficulties."

And it should have "the widest possible audience".

And that's exactly what the book got.

Reader's Digest had more than 8 million subscribers.

Hayek's warning about the dangers of big government

struck a chord with many Americans.

The Road to Serfdom really fitted in with the notions

of American individualism and the sense that anybody

could become a millionaire if only they were to work hard enough,

and an anxiety which came right from the founding fathers about whether

the federal government should take too much power from the states.

After the war the size and reach of government

did grow across the Western world with the rise of the welfare state.

In Britain much of the economy was even nationalised -

taken over by the state.

Reading Hayek gave a kind of explanation of why

what had gone wrong was going wrong.

Hayek gave an alternative vision which seemed to me to be very cogent.

What it boiled down to was freedom within the rule of law.

What he was read to say

and actually himself moved to say by the 1960s,

was that moving to a social welfare society would eat away

at the health of democracy.

I think it's one of his failed predictions, badly failed,

even though it remains an influential part of his thinking now

with many followers in the libertarian mode.

Today, the Road to Serfdom is back.

'This book was like Mike Tyson in his prime.

'Right hook to Socialism in Western Europe and in the United States.

'But the influence didn't...'

After Glenn Beck's Fox News broadcast in 2010,

The Road to Serfdom shot to number one on Amazon in America.

'Ronald Regan...'

If you think about the people that would have been

part of Glenn Beck's audience, sometimes defined as the Tea Party.

'Look at what we're doing!

'We now have a government car company, government banks

'and Hayek demonstrates this road leads to one destination.'

There is cynicism about government and it's quite widespread,

there's a lot of anger.

That certainly would feed into...

Well, here's a guy who talked about the dangers of big government.

In fact, Hayek was in favour of governments

providing some kind of safety net.

But his modern supporters don't like to dwell on that.

Well, we have a lot more socialism now than when he wrote it.

As socialism creeps in the economy slowly over time,

a lot of people don't notice it.

And eventually, you know, you're not on the road to serfdom,

you've arrived at serfdom.

Think about Victorian Britain.

That was certainly a very free market,

there was a minimum government intervention.

Do we think that the average citizen of England

in 1870 felt a great deal of personal freedom?

I think there was a great deal of servility and class deference

coming out of the fact that the lives of the poor

were incredibly insecure and only by constantly flattering their betters

could they have any reasonable assurance of survival.

So no, I think there's more freedom and dignity

in a moderately strong welfare state than there is

in the Hayekian paradise of free markets.

Despite the success of The Road to Serfdom,

in the 1950s and '60s Hayek found himself in the political wilderness.

Governments across the Western world were enthusiastically embracing

the ideas of Hayek's nemesis from the dark days of the 1930s -

John Maynard Keynes.

It became the new capitalist orthodoxy that governments

could successfully manage their economies.

The tide of history had turned against Hayek.

He got very depressed.

People weren't listening to him, they weren't reading his books.

England seemed to be going left-wing.

He'd chosen to be British and he looked, from his views

of an economist, and he could see everything going the wrong way.

Then in 1974, Esca Hayek got a phone call out of the blue.

It was the man who had invited Hayek to the LSE 40 years earlier

to do battle with Keynes.

It was Lionel Robbins who rang me and said, "Are you sitting down?"

I said, "Yes."

And he said, "Well, he's been awarded

"a Nobel Prize for economics."

That was like being given a knighthood of the world.

That's the Nobel citation.

Stockholm the 10th of December 1974,

Alfred Nobel given to Friedrich von Hayek.

His life started off completely again.

He'd been depressed, he was coming up to retirement

and suddenly everything started, it was a new life.

Absolutely... everything took off for him.

While everything began taking off for Hayek,

Britain was sinking into economic decline.

Strikes had become a fact of life.

The post-war Keynesian consensus was crumbling.

A few months after Hayek won the Nobel Prize,

the Conservative Party turned to a new leader.

The rise of Margaret Thatcher brought Hayek

into the political mainstream for the first time.

Margaret Thatcher would, from time to time,

pull little bits of paper with quotations on them

out of her handbag and Hayek would be one of them.

Hayek had spent most of the 20th century as a political outsider.

Now he had the ear of the woman

who would be Britain's next Prime Minister.

I think it would be a great mistake

to think of her as studying Hayek like a student would.

It's more trying to get inspiration from Hayek and casting around,

ransacking the minds of great men,

of whom he was one of the most prominent,

so that she could somehow get the gold.

In 1979 Margaret Thatcher was swept to power,

determined to build a new Britain.

It was a bold change of direction

that really did create the world we live in today.

We did institute a radical change of policy direction,

which has not really been reversed.

It may have been muddied, but it hasn't been reversed.

It does chime in with Hayek right back in the 1940s

saying that the path we're on at the moment

is the road to serfdom, and we need to tread a very different path.

In the language of the time

Mrs Thatcher began rolling back the state.

Government-owned industries were privatised.

Public spending and taxes were cut.

There was a bonfire of state controls on the market -

on prices, wages, dividends and foreign exchange.

Britain was moving Hayek's way.

We were certainly very much on the same wavelength.

We were not busy thumbing his works to find out what we should do,

it was not a handbook for government,

but it was the same general idea.

Nowhere did today's world emerge more clearly

than in the Conservative's battle with the trades' unions.

Margaret Thatcher wanted to put a stop

to what she saw as rampant union power.

But she faced a dilemma -

"How do you do that without alienating the entire population?"

Hayek's philosophy helped her formulate her answer.

She wanted to frame the argument in terms of liberty.

She didn't want to say, "The workers are all dreadful, let's squash them."

She wanted to say, "The workers are being squashed by their leaders."

This very much fed into Hayek, and the idea of liberty

was, you were defending your country here

as well as the state of labour relations.

Hayek and Margaret Thatcher agreed on a lot.

But there was one crucial difference between them.

Whereas Hayek thought you freed the market to prevent power

getting too concentrated in the hands of politicians,

Thatcher thought you could have free market policies

and still keep a lot of power at the centre.

That tension between Hayek's ideal and the controlling instinct

of even free market politicians never really went away.

Where she, I think, missed out sometimes was understanding

the importance of institutions

and of countervailing power in a society.

Hayek, for example, was quite understanding about the role

of local authorities and local municipalities

and local power centres in a way which I don't think Margaret was.

Hayek's political influence reached its height in 1986

when Mrs Thatcher's government swept away much of the regulation

that had constrained the City of London.

The Big Bang set the financial markets free,

ushering in today's vast

interconnected global financial system.

But it wasn't really the free market that Hayek wanted.

Hayek's followers would say the deregulated financial system

that came out of the '80s and '90s played a big role

in the financial crisis because it was only ever half free.

It was distorted by an implicit promise

to all these financial institutions

that if things went wrong the government would come to the rescue.

In the kind of capitalism we've had in the West since the 1980s,

the financial institutions that triggered the recent crash

were free to do anything, it seems, except fail.

It was the "Too big to fail problem".

They knew that it was a question of,

"Heads I win, tails the tax payer loses."

And if that is the bet,

you take the bet and you take it on a bigger and bigger scale.

So they knew pretty well that if they got the gamble wrong

governments couldn't allow them to fail, they'd have to be bailed out.

That is what is wrong and that is what has to be stopped.

We certainly have discovered, after the fact

that banks are not allowed to fail.

Was that actually a significant factor in the over-lending?

I don't think there's much evidence of that.

Now the fact that big banks clearly will not be allowed to fail

and that is distorting our system.

But I don't think that's the story of the crisis.

I think that the crisis was one more about just a general failure

to understand the risks.

There's no doubt that in the last 30 years politicians of all stripes

have let market forces influence more and more parts of society.

But they have drawn the line at Hayek's most revolutionary idea

of turning money itself over to the market.

Imagine a world where we didn't have just one legal currency circulating

in the economy, issued by the Bank of England, but dozens of them.

Anyone - a company, a bank, a private individual could set up

their own version of the pound and they would be free to compete.

The market would determine how much they were worth.

Hayek knew it was a crazy sounding suggestion, even for him.

But it would finally stop governments

abusing the power of money.

In America one man has been trying to do just that.

He's taken Hayek's most explosive idea and turned it in to a reality.

Bernard von Nothaus calls himself a monetary architect.

The American authorities call him a domestic terrorist.

For some, what's happened to von Nothaus shows just how seriously

governments take any challenge to their monopoly over money.

Economics is dry and boring.

But money is exciting! Money is sexy.

You know, money's got pizzazz, it's about people and about dreams,

about what we do, you know?

Money is fantastic!

And that's what I really connected with in terms of von Hayek.

Because what he said in here was about people taking control

and people issuing their own money.

Von Nothaus created his own currency -

a silver coin called the Liberty Dollar which anyone could buy.

And many have.

Thanks to him, coins worth anything up to 50 million

have now been sent out in to the US economy.

And Hayek was a big inspiration.

He says the problem is government money.

It's always been government money.

Because they abuse their power. They make money out of thin air.

So he says what we should do is to abolish the central bank.

The end of the Federal Reserve, that was fantastic!

Ever since Benjamin Strong was running the New York Federal Reserve

in the 1920s, central banks have used their control

over the supply of money to try to manage the economy's ups and downs.

But as we've seen, to Hayek and his fans,

central banks are the cause of many of capitalisms problems,

not the solution.

And I don't argue for closing the Fed down in one day either.

I want to audit the Fed and I want competition,

Hayek's ideas of competition and money,

and see who can win this argument.

But for them to claim monopoly powers

and prevent us from practising private market economics

is the real problem that we have.

A lot of this is this Utopian vision, the golden age

when men were men and currency was free.

The United States had a long period of no government monopoly

on currency.

We had the whole system of unregulated banks

issuing competing currencies.

That system was heavily prone to financial crises.

So the idea again that competition is the answer

is flying in the face of history.

Perhaps, but the history of government efforts

to control the market hasn't been so pretty either.

For Hayek, what was really utopian was the belief that central banks,

or anyone else for that matter, could ever be a match

for the dizzying complexity of our modern economy.

Hayek would say since they can't do it they should just stop trying.

We should stop having...

Well, stop having any intervention in monetary policy,

or stop having central banks if you go to the extreme.

Well, that's dreaming, I think.

Von Nothaus's attempt to compete with the Federal Reserve

eventually drew the attention of the American authorities.

In 2007, the FBI moved in.

I think they begin to perceive us as a threat instead of a solution.

NEWS REPORT: 'The architect behind the Liberty Dollar

'is talking about the US government

'and why agents raided his Evansville headquarters earlier this month.'

Von Nothaus was charged with counterfeiting US currency.

Giving evidence in this courthouse in North Carolina in 2011

he talked about Hayek.

Well, he was relevant to my defence.

This wasn't some harebrained idea that I had thought up myself.

I pointed out that here was a well-known Nobel laureate

who had talked about exactly what I had done.

Bernard von Nothaus was found guilty

and now faces up to 25 years in prison.

And I think this was the one he was most proud of,

"Companion of Honour, presented by Queen Elizabeth II,

"Buckingham Palace, 1984."

And he was absolutely thrilled when he got that.

"To Professor, Doctor..."

Towards the end of his life, Hayek was feted by everyone.

He'd inspired politicians all over the world with his boundless belief

in the power of the free market.

And that is Catholic University, Caracas.

When it came to their actual policies,

Western leaders in the 1980s usually turned to a free market thinker

whose ideas they found more palatable.

Milton Friedman's belief that governments could steer the economy

using their power over the supply of money in circulation

is still a touchstone for governments everywhere.

In that sense, Friedman, unlike Hayek, did offer politicians

a way to champion the free market and hold on to the reins of power.

Hayek's life spanned almost the entire 20th century,

an era of unprecedented scientific progress...

'It's one small step for man,

'one giant leap for mankind.'

..but also unprecedented economic disasters.

Living in the shadow of both,

Hayek came to see the great crises of capitalism as the result

of politicians mistaking economics for a science.

It was a century for taking on all the big questions.

And the big question for economists

was how they were going to tame this extraordinary modern economy.

Keynes and Hayek both thought that would be incredibly difficult,

dangerous even.

But Keynes flattered governments with the idea

that they could tilt the course of human history their way.

It was Hayek who said they shouldn't even try.

We might uncover the laws of the universe -

we were never going to master the complexities of human nature.

"Pretence of knowledge", he called it -

pretending they know something that they don't know.

Well, they've been doing it now...

We've given the current crop of economists,

let's see, how many years would that be?

About 70-some years. Total failure.

Many of the computer models have been desperately misleading

in pretending that we understand how the economy works.

We don't. We can't forecast the economy.

But we can try to think about the big questions.

Can we get out of a deep slump?

And I think by working with other countries,

we can gradually find our way out of this.

So you need the different insights together,

but Hayek is a...

The moral of Hayek is - avoid hubris in economic policy,

just as we should avoid hubris in thinking that markets

left to their own devices will lead us to Nirvana.

There's no doubt Hayek helped change the course of world history,

shifting it decisively away from the state and towards the market.

Oh! 10 Downing Street, the Prime Minister,

3rd of May 1989.

"Dear Professor Hayek, it is with the greatest pleasure

"that I send you my warm congratulations

"on the occasion of your 90th birthday.

"The leadership and inspiration that your work and thinking gave us

"are absolutely crucial and we owe you a great debt."

"With every good wish, yours sincerely, Margaret Thatcher."

But no government has ever dared to implement Hayek's vision

of a market free from state intervention.

And when capitalism faced its biggest test since the 1930s,

politicians rushed to save the market from itself.

In fact, the biggest debate in Britain today is not about

whether the government is doing too much to prop up the economy,

but whether it's doing enough.

Today, Hayek's advice seems harder to take than ever.

You've got the global economy still struggling to put

the financial crisis behind it, if it is behind it.

And Hayek would say governments should just step back,

take a cool look at the historical record,

dismantle most of the machinery

they have constructed for guiding the economy,

take a deep breath, and let go.

I don't see any government today ready to do that.

I don't think I ever will.

Next time, Karl Marx, the man who had the most radical solution of all

for the problems of capitalism - get rid of it.

The Open University has produced six one-minute animations to explain

some of the key economic ideas that affect all of us.

If you want to learn how to spot an invisible hand

or other secrets of economics, go to:

and follow the link to the Open University.

Subtitles by Red Bee Media Ltd