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Documentary, Masters Of Money Part 2 Friedrich Hayek
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00:00we heard that he'd been sinking and then we heard that he died and my husband said you will have to
00:10contact and I was on the phone to the world and people were saying had I told the American
00:20president had I told Mrs. Thatcher it was only then I think that finally it was rammed home to
00:26me the enormous effect that he'd had on the whole world no ringing in the middle of the night bringing
00:33the president of the United States to say that F.A. Hayek had died Friedrich Hayek was a champion
00:42of the market he inspired many of the people who built the world we live in today Margaret Thatcher
00:49would from time to time pull little bits of paper with quotations on them out of her handbag and
00:55Hayek would be one of them for more than a generation Western leaders claim to embrace
01:01one central economic idea the free market with a financial crisis that orthodoxy is under attack
01:08our faith in it has been shaken like never before but one great free market visionaries emerged from
01:14the meltdown with his reputation enhanced there might never be a better time to listen to Friedrich Hayek
01:21I see right now this moment in history as a time where Hayek's ideas deserve a shot
01:30of all the big pro-market thinkers Hayek was by far the most radical he believed the market should be
01:37freer than any government has ever dared to allow it to be in the world according to Hayek politicians
01:45they should step back from trying to manage capitalism's ups and downs they should simply
01:50set it free there's no doubt that he's a significant thinker though there's major controversy about every
01:57area of his thought in this series I'll reveal the stories of the lives and revolutionary thinking of
02:04three extraordinary men John Maynard Keynes Karl Marx and Friedrich Hayek they all saw their worlds
02:12changing as never before becoming ever more complex and interconnected the fate of entire nations now hung
02:19on the power of money and they had very different ideas about what to do even in the middle of an
02:26economic meltdown Hayek's advice to governments was to step back and do nothing meddling would only make
02:32things worse it's not what anyone has ever wanted to hear but today they've tried all the usual tricks
02:38for fixing the economy is it time finally to take Hayek's advice instead
02:59around the world we're all still feeling the shock waves of the financial crash of 2008
03:05you really can feel the fear that the Dow has had its worst five days in five years until that crisis
03:14hit western leaders had put their faith in the free market as the best way to generate wealth
03:21but in their version of the market derived from thinkers like Milton Friedman they still believed if
03:26things went wrong they could step in tweak the system get everything back on track today fans of the
03:33Austrian economist Friedrich Hayek say it's that arrogance that distorted picture of a market
03:38economy that got us into this mess if we want to try to get out of it we need to try the real thing
03:45to understand how governments not markets might have caused the crisis we need to wind the clock back
03:52to the years leading up to it america's interest rates have been cut that was expected but the timing
03:58has come as a surprise it's january 2001 and america's central bank the federal reserve has cut interest
04:06rates because it's worried the u.s economy is slowing down now it cut interest rates for the same reason
04:13central banks always do to make it cheaper for companies and households to borrow and seek out
04:19profitable investments the president was pleased as you might imagine this is the kind of thing presidents
04:26expect central banks to do to avoid economic trouble i think the cut was was needed it was a strong
04:36statement that measures must be taken to make sure our economy does not go into a tailspin had Friedrich
04:45Hayek been alive he would have taken a very different view far from avoiding trouble hayek would have seen
04:52the federal reserve's decision to cut interest rates as sowing the seeds of today's financial crisis
04:59in fact hayek believed almost any government intervention in the market like propping up
05:04failing businesses setting trade tariffs or manipulating interest rates risked disaster
05:13in the years after 2001 the federal reserve carried on cutting interest rates
05:18helping to fuel a property boom that ultimately couldn't be sustained early in 2007 america's
05:26housing bubble burst and the global financial crisis began just as hayek might have predicted
05:33the conventional wisdom was that none of these events were foreseeable uh we couldn't have done
05:38anything about it but of course all of that was false what's playing out before our eyes
05:43uh is exactly what men like hayek predicted would happen at first glance the hayek view of the crisis
05:51looks a bit familiar but don't be fooled you probably feel like you've heard this argument
05:58before that the federal reserve partly caused the crisis by setting interest rates too low encouraging
06:03everyone to borrow too much and generally do silly things but the argument of hayek and his followers
06:09actually runs deeper than that it's not just that they got their sums wrong and they didn't set the
06:13right interest rate it's that they shouldn't have been in the business of setting interest rates at all
06:19it's this radical rejection of the state's role in regulating the market that sets hayek apart from
06:25other free market thinkers he believed the market would do a far better job regulating itself
06:33if only governments would just leave it alone free market did not set interest rates at one percent
06:40under greenspan that's the government that is doing that that is price fixing it's kind of the way the
06:45old soviet union used to fix the price of bread or gasoline the u.s government fixes interest rates the same
06:52way we need the market to set interest rates not the government and if the market set interest rates they
06:58would have been much higher and we wouldn't have had these problems hayek's belief in the positive
07:04power of the unbridled free market stems from his childhood in austria he was born in vienna in 1899
07:12then the city was packed full of intellectuals like freud and wittgenstein many of whom hayek came to know
07:21these family photographs have not been widely seen
07:28growing up he had a keen desire to make sense of the modern world taking shape around him
07:36must have been 13 or 14 when i began pestering all the priests i knew to explain to me what's
07:42meant by the word god none of them could that was the end for me of it hayek grew up in a family of
07:50scientists like many other intellectuals in vienna at that time they like to think they were on a grand
07:57quest to unwrap the secrets of the universe the young hayek was especially influenced by his father
08:03a doctor and enthusiastic botanist hayek started off like his dad obsessively collecting plant and
08:11insect samples really into the development of species by the time he was 16 and he was more
08:17interested in people the development of whole societies not plants but darwin's theory of evolution
08:25stuck in his head since the 18th century enlightenment science had unlocked many of
08:32the puzzles of the universe including the origins of life itself as hayek grew up he was drawn to what
08:39he saw as the last frontier the mysterious workings of the economy in all its growing complexity and power
08:46in darwin's theory of evolution he thought he saw what a new science of the economy might look like
08:54physics which allows often for precise predictions in terms of planetary motion and eclipses is not a
09:02good model for understanding how social phenomena work i think that was the basis of his attraction to
09:07evolutionary theory he wanted to establish that you could be a science even if you don't make precise
09:13predictions even if you don't have the sort of control that many of his opponents said well if
09:17we're a science we should be able to engineer society the way an engineer builds a bridge
09:24darwin's theory of evolution also helped forge hayek's vision of capitalism itself he came to believe the
09:31global market had evolved over the course of human history emerging as a kind of natural wonder driving
09:37civilization forward
09:47hayek saw the market as a telecommunication system processing billions of pieces of information about
09:54all our needs and desires and the changing supply of resources to meet them
09:58hayek said it was a marvel the way all this is conveyed to us by prices that guide our actions as they rise and fall
10:15and to hayek the market does most good when it's most free
10:19it's our desire to control it that most often turns it against us
10:34hayek thought meddling by government could make it harder for the market to do its job
10:38by distorting the signals it was sending to buyers and sellers
10:41the meddling involved in the government's control of the supply of money hayek decided could be most damaging of all
10:55rampant inflation unemployment uncontrollable debt in vienna after the first world war
11:02hayek saw for himself how government abuse of money can wreak havoc
11:07across austria prices had taken off and so had unemployment even the rich were struggling to
11:15feed themselves and no one could quite understand why
11:22at the height of the crisis if you walk down this street any time of day or night
11:27you could hear a kind of relentless heavy rumbling sound
11:31it was the sound of money tearing a country apart this building housed the austro-hungarian bank
11:44and its printing presses that were rolling night and day churning out millions of new bank notes
11:51the war had left the austrian government with huge bills and low tax revenues so it ordered the national
11:57bank to simply print the money it needed in exchange for bonds or ious
12:06what the people manning these printing presses and their political masters had yet to really
12:11grasp as they weren't just producing money here they were producing inflation the amount of money in
12:17the economy was going up so people had more money to spend but of course the amount of things they
12:23could buy had stayed more or less the same that forced up the price of everything inflation took
12:29off in fact the situation got so bad in austria the inflation rate hit 10 000 percent
12:37the financial wealth was destroyed those that had jobs continue to have them but
12:44they could no longer afford for instance to have uh maids and servants with us all of these people
12:50all of a sudden ended up being out of work with their economy going up in smoke austria's central
12:57bankers tried to fight fire with fire
13:03by the summer of 1922 prices were doubling every month the central bank was playing catch-up printing
13:10higher and higher denomination bank notes just to reflect what was going on in the shops
13:14in the end this 500 000 kroner note could maybe buy you a loaf of bread of course by pumping more
13:22and more money into the economy they were only making the problem worse
13:28for austria's politicians it was all a crisis of their own making
13:32they'd been printing money to pay their bills since the start of the first world war
13:37they didn't understand that that could lead to inflation it was a crisis caused by ignorance
13:47having seen austria brought to its knees hayek had an almost visceral fear of inflation all his life
13:54it's a fear that central bankers still share today what's interesting to me the lesson he drew from that
14:00experience most people focus on the politics on the fact that the winners of world war one had imposed
14:06impossibly high reparations on austria but hayek was interested in the economics and the fact that
14:12the austrian government simply hadn't understood the power of money
14:19what happened next in america led hayek to conclude there can be something worse than government
14:24ignorance hubris he thought that entire period showed the calamity that can come when governments
14:31try to use the power of money to shape the economy in america in the 1920s the greatest boom the world
14:38had ever seen was taking off consumers couldn't get enough of new products like cars telephones and
14:45record players the stock market rose higher and higher as the roaring 20s wore on the finest economic
14:54minds in america came to believe the boom would never end back in austria in early 1929 hyatt was convinced
15:07they'd got it all wrong he'd become the director of the recently founded institute for business cycle
15:14research its job was to understand why economies were always lurching from one boom and bust cycle to
15:22another hayek called it the 19th century pattern that was hardly a thing of the past
15:31the institute was based here at the chamber of commerce where hayek had been developing a new
15:36theory of boom and bust along with new thinking about the market
15:43the work he did here would change the way people thought about the economy forever
15:48it's ups and it's downs
15:59to many the downs were unpredictable a kind of force of nature that might destroy an economy without
16:06warning hayek had been working on a new idea that the seeds of busts were sown during booms
16:14because the worlds have become increasingly interconnected hayek had been studying the
16:18american boom to help him forecast what would happen to the austrian economy
16:26he had to produce these monthly reports on the state of the european economy most of it's pretty
16:32dry stuff it's things like paper production or that month's steel exports but he is credited with
16:40making a rather striking prediction in early 1929 because he thought the american stock market boom
16:47would end in a few months time he was right in october 1929 wall street fell off a cliff
16:55and the twenties roared to an anguished end
17:04hayek's prediction came out of what he saw happening at america's new central bank
17:10the federal reserve had been set up in 1913 to stabilize america's notoriously shaky private banks
17:18by offering them a reliable source of credit
17:22hayek's big idea was that the great ups and downs in the economy nearly all started in buildings like
17:29this one it was the cost of borrowing the interest rate set by central banks like the new york federal
17:35reserve that caused unsustainable booms to develop and caused the inevitable busts
17:42in the 1920s the governor of the new york federal reserve had a revolutionary idea
17:51benjamin strong thought he could use the bank's power to set interest rates to influence what was
17:56happening in the economy in many ways that idea of using interest rates marked the start of modern
18:03monetary policy strong began buying government debt on the open market which did have the effect of raising
18:10the amount of money in the economy but unlike austria's hapless central bankers strong had a
18:16strategy the difference with austria was that the fed wasn't buying treasury bonds to help the
18:22government pay its bills was doing it to get money into the market and keep interest rates low the central
18:28bank wanted to encourage everyone individuals and households to borrow more from the banks it worked
18:34steel up utilities up motors up radio way up everything up up strong's intervention really paved the way for
18:44the financial system we have today thanks to all that credit he created the stock market rose higher and
18:51higher with loans so cheap many borrowed money to buy shares others invested heavily in property
19:00the federal reserve hoped its intervention would keep the boom going indefinitely but hayek believed
19:06strong's policy was sowing the seeds of an eventual bust the way hayek saw it the low cost of borrowing
19:13was sending the wrong signal to investors here and to businesses around the country the low interest rate
19:19told them that america was saving more but there was lots of spare cash sitting in bank accounts ready to be
19:25lent on and invested it wasn't true don't sell america short why man we've scarcely started
19:35by the time the federal reserve spotted the warning signs it was too late over 14 billion dollars go with
19:43them and so goes the confidence of the nation wall street the crash came when interest rates rose and
19:49investors started to realize the banks didn't have money to back all those investments after all
19:54at one point they had to close the visitors gallery because there were too many members of the public
19:59up here wailing and crying as they watched their life savings go up in smoke the jazz age is over all
20:08over to hayek the lesson was clear by feeding the boom with cheap credit the federal reserve had helped
20:14cause the wall street crash and the great depression
20:22fast forward to today's global crisis you could tell a similar story
20:27we certainly saw a lot of cheap credit in britain and america in the decade before the crash which did
20:32help fuel unsustainable property booms northern rock was one of many financial institutions taking ever greater risks in its lending
20:42when it got into trouble in 2007 panicked savers rushed to withdraw their cash the first run on a british bank
20:50since 1866 it was a sign of the disaster to come if things hadn't come to a crash in 2007 2008 maybe with the
21:00corrective medicine you could have managed the situation back down again through you know interest rate monetary
21:06policy as it was the banking system which was massively exposed to this uh you know and reached a
21:13situation where suddenly people realized what had happened they lost confidence in each other and the
21:18entire edifice case came crashing down today central banks have computer models of the economy light years
21:25ahead of anything dreamt up by benjamin strong but even so hayek's followers say the federal reserve had
21:32learned nothing from the mistakes it made in the 1920s in the early 2000s it had kept
21:38interest rates too low for too long but then and now there are plenty who would disagree
21:44the job of the fed chairman is to keep the party going to spike the punch bowl at all costs
21:50not to take the punch bowl away which really should be the job i mean the federal reserve should be
21:55independent but it's not it acts in concert with the government to try to maintain a phony prosperity
22:04interest rates are very low and that was partly promoted by the fact that the surplus countries
22:12notably china but others as well had a lot of money they were perfectly happy with exporting would have
22:18been hard to force american interest rates higher in that environment because there was so much money
22:25flowing in at low interest rates if it was all the fed's fault how come europe had the exact same
22:32experience it's not the fact of of the interest rate policy maybe having been wrong although i'm not
22:37even sure i agree on that but it's the fact that we had these deregulated wild west financial markets
22:42that allowed us to get into the crisis we're in like our own financial collapse the consequences of the 1929
22:50crash were felt across the world a string of banking crises followed and a terrible depression in america
22:57and much of europe again hayek said it was all down to interest rates being too low in the boom years
23:03but years later another hugely influential free market thinker came along who argued the exact opposite
23:09milton friedman he said the federal reserve had not pumped too much money into the system
23:15but too little that's the version of history that most politicians and economists still believe
23:24hayek was absolutely wrong to think that in the catastrophic depths of the great depression of the
23:311930s that all that was happening was a an unwinding of the mal investments that had come from a credit boom
23:40clearly there had been a calamitous collapse of the banking sector that had nothing to do with the
23:46earlier so-called malinvestment
23:52facing the world's worst financial meltdown the issue for economists and politicians was the same as
23:57it is today how do we make it go away as the great depression began hayek was invited to give a series
24:04of lectures here at the london school of economics
24:10hi i was thrilled he'd wanted to come here all his life but there was a not very hidden agenda attached to the invitation
24:17lse wanted him as part of their fight back against a new very different strand of economic thinking from their arch rivals
24:24cambridge that had been getting a lot of attention the man driving that new approach was john maynard canes
24:33the grand dispute between canes and hayek in the 1930s seems so relevant to us today it's become an internet
24:41sensation lord lord canes wow it's it's it's such an honor indeed sir please just go this surreal reinvention
24:51of their battle of ideas has been watched nearly two million times online hayek no hayek like um high
25:13hayek's opponent canes was a heavyweight thinker the seemingly unstoppable new force in economics
25:20the clash felt a bit like david and goliath
25:26canes had two brains it was said of him that he caused more inferiority complexes with justification
25:32than anyone else in his generation hayek was not known he was 16 years younger than canes
25:41they fell out with each other on first meeting and continued to fight for the rest of their lives
25:46as the depression deepened the stakes could not have been higher hayek began with some awkward jabs
25:54drawing in rather confused diagrams on a blackboard behind him he described what he called fluctuations
26:02which were how the market changed from day to day to day over time and how if you started
26:09interfering with it how things would go wrong pretty quickly the big economic argument that started
26:17here in this room in 1931 is still going on today if an economy gets into trouble should the government
26:24step in and try and fix it canes was saying yes hayek stood up there and said no for once it really was
26:33that simple for canes it was a moral problem the fact was there were people unemployed and therefore
26:41they should be put back to work and it didn't really matter how you did it for hayek it was a different
26:47thing hayek concluded that we really didn't know enough about economics and that any attempt by people
26:54like canes to start fiddling around with it would only end up with unintended consequences and those
27:00unintended consequences according to hayek could be even worse than the problems that were solved
27:08the bitter argument between hayek and canes embodies a fault line in economics that exists to this day
27:18it's one of the great academic disputes in the history of intellectual thought it set the tone
27:24really from the difference between left and right today between those who want to intervene in the
27:28economy and those who would prefer to leave the economy alone
27:35it was one of the most important intellectual battles of the 20th century at the time it was
27:41pretty clear who won canes in 1933 as the depression showed no sign of ending president
27:47roosevelt instigated a massive public spending program that looked very keynesian under the new
27:54deal all kinds of new infrastructure was built across america like this elevated railway in the heart
28:00of new york
28:04the new deal's gone down in history is the first time a country seriously tried to spend its way out
28:08of recession but even at the time hayek thought that was a mistake he thought what the economy needed
28:14was a period of cleansing get past all that bad investment from the boom get rid of all the weak
28:20businesses let the fittest survive hayek saw the new deal as an artificial stimulant preventing the market
28:29naturally healing its damaged ecosystem rather than stepping in government should step back and let the
28:36recession do its job hayek thought that the recession was the return to normalcy that the boom was caused
28:47by bad policy but once the recession started that was the return of the economy to normalcy it would
28:53involve liquidation of certain projects that had been started that were not sustainable
28:58but in the depths of capitalism's worst ever crisis hayek's tough message was too much for most
29:06politicians to swallow he was ignored
29:09going back and forth for a century i want to steer markets i want them set free there's a boom and
29:20bust cycle and good reason to fear it it's the animal spirit canes's message rhetorically is a hopeful
29:29message in the sense that it says we and we being the government can do something proactive about this
29:38the hayekian view doesn't offer that sort of policy doesn't offer that option
29:52when the financial crisis hit in 2008 policymakers were blindsided
29:59after lehman brothers one of the world's most famous investment banks went down
30:03the american government swiftly turned to canes to try to stop the damage spreading
30:08the meltdown in the financial system terrified the people in there they started intervening on an
30:16epic scale spending hundreds of billions of dollars propping up banks insurance companies even america's
30:22biggest car firms to stop them going bust remember that started under a republican free market president
30:29george bush then carried on under president obama apparently neither of them wanted the kind of deep
30:35cleansing of the economy that hayek would have recommended it's not like i'm glad that we need a
30:42recession it's unfortunate that we need this recession had the government not interfered in the economy
30:47in ways that i would have been against we never would have had this phony boom so in other words if we
30:52didn't take all these drugs we wouldn't have to go through the withdrawal in that period in 2008 right
30:59across the world people were scared stiff that this was going to go from a recession into a downright
31:05depression and the world is so global now these things could easily have spread that's why you know
31:11people thought you know different countries we've got to do whatever it takes to stop that
31:17today central banks in britain and america are pursuing another keynesian idea keeping interest rates
31:22low encouraging borrowing to stimulate economic activity but if you follow the austrian hayek view
31:30it's all worse than pointless because this intervention in the market is setting the stage
31:35for an even greater disaster what do you think is the relevance of hayek to to what the fed's doing now
31:42pouring kerosene on the fire and trying to put it out they're trying to stop the problem of excessive
31:48credit with more credit but all that it does is it restarts the problems again and you create a new
31:55bubble and the bubble now is in the value of the dollar and the bond market and it's unsustainable
32:04hayek's argument with canes was all about how best to make capitalism work
32:09but as the thirties moved on hayek was drawn into a far greater battle
32:14whether capitalism was even the right way to organize society or if the new ideologies of
32:19communism and fascism with their centrally planned systems held the answer he was convinced both were
32:27utterly wrong hayek said not merely can human beings struggle to understand how to cope with uncertainty
32:37but the world is just too complex for them to cope with understanding all of it
32:40a market system conveys so much information that makes it feasible central planning will fail under
32:48the weight of the impossibility of understanding the complexity of the economy that is hayek's most
32:53important insight and if people had listened to that they would never have been so worried about
32:59the threat from communism as they were because central planning failed under the weight of its own
33:04inconsistency hayek had seen the economic costs of central planning but world war ii made him focus
33:11on the political implications of course he didn't want the allies to lose the war but seeing how the
33:17war effort was changing the economy made him worry about what would happen if they won he didn't want
33:22to defeat the nazis and then find we'd handed our freedom to an army of bureaucrats instead
33:28when the second world war began the british government took control of the economy
33:36to harness its power for the war effort hayek worried they would never let go
33:44there's a lot of enthusiasm especially among socialists to continue the planning that had
33:48taken place during world war ii uh after the war was over a government inspector checks that the
33:54measurements are 90 inches long and 60 wide and that the weight is four and a half pounds as men
33:59from the ministry dictated how many blankets each blanket factory produced hayek began writing
34:04a book attacking the government's control of the economy it would help change the course of the 20th
34:12century and start a political battle that runs to this day and there is a handwritten
34:24copy by my father-in-law in an ordinary child's exercise book of the road to serfdom
34:32he has written on it this is about the third or fourth draft from a longer typescript later
34:40destroyed by mistake and so that's that is the draft that survived of the road to serfdom
34:48in the road to serfdom hayek makes a moral argument that government attempts to control
34:55the economy ultimately enslave its people when we give more and more power to the state gradually
35:03there is an erosion of first economic freedom and then ultimately political freedom that erosion of
35:09political freedom then leads people to demand a strong man a dictator to sort everything out
35:14make the trains run on time and and everything else and that this leads inexorably down the road to
35:19totalitarianism it says to the socialists of all parties he loved it he he was so amused when he
35:29thought it up the road to serfdom was published in britain in 1944 with little fanfare
35:35but across the atlantic things were very different in april 1945 hayek agreed to give a short lecture
35:44tour of american universities before he arrived his book got the kind of publicity money can't buy
35:53readers digest gave hayek top billing and a rousing introduction quoting from some of the reviews that
35:59a road to serfdom had got calling it one of the most important books of our generation professor hayek
36:06with great power and rigor of reasoning sounds a grim warning to americans and britons who look to the
36:11government to provide the way out of all of our economic difficulties and it should have the widest
36:16possible audience and that's exactly what the book got readers digest had more than eight million
36:24subscribers hayek's warning about the dangers of big government struck a chord with many americans
36:31the road to serfdom really fitted in with notions of american individualism and the sense that
36:37anybody can become a millionaire if only they were to work hard enough and an anxiety which came right
36:44from the founding fathers about whether the federal government should take too much power from the states
36:49after the war the size and reach of government did grow across the western world with the rise of the
36:57welfare state in britain much of the economy was even nationalized taken over by the state reading hayek gave
37:06a kind of explanation of why what had gone wrong was going wrong hayek gave an alternative vision
37:16which uh seemed to me to be very cogent what it boiled down to was freedom within the rule of law
37:25what he was read to say and actually himself moved to say by the 1960s was that moving to
37:34a social welfare society would eat away at the health of democracy i think it's one of his failed
37:43predictions badly failed even though it remains an influential part of his thinking now with many
37:49followers in the libertarian mode today the road to serfdom is back credited this book was like mike
37:57tyson in his prime right hook to socialism in western europe and in the united states but the influence
38:04after glenn beck's fox news broadcast in 2010 the road to serfdom shot to number one on amazon in america
38:10if you think about the people that would have been part of glenn beck's audience sometimes defined
38:18as the tea party look what we're doing we now have a government car company a government bank
38:24and hayek demonstrates this road leads to one destination there is cynicism about government
38:30and it's quite widespread there's a lot of anger that certainly would feed into well here's a guy who
38:35who talked about the dangers of of big government in fact hayek was in favor of governments providing
38:42some kind of safety net but his modern supporters don't like to dwell on that well we have a lot
38:48more socialism now than when he wrote it as socialism creeps in the economy slowly over time a lot of
38:55people don't notice it and eventually you know you're not on the road to serfdom you've arrived at
39:00serfdom think about victorian britain that was certainly a a very free market it was there was
39:08a minimum of government intervention do we think that the average citizen of england in in 1870 felt
39:16a great deal of personal freedom i think there was a great deal of servility and class deference
39:22coming out of the fact that the lives of the poor were incredibly insecure and only by constantly
39:28uh uh flattering their betters could they have any reasonable assurance of survival so no i think
39:34i think there's more more freedom and dignity in a uh in a moderately strong welfare state than
39:40there is in in the hayek and paradise of free markets
39:48despite the success of the road to serfdom in the 1950s and 60s hayek found himself in the political
39:55wilderness governments across the western world were enthusiastically embracing the ideas of hayek's
40:01nemesis from the dark days of the 1930s john maynard canes it became the new capitalist orthodoxy that
40:10governments could successfully manage their economies the tide of history had turned against hayek
40:16he got very depressed people weren't listening to him and they weren't reading his books
40:24england seemed to be going left wing he'd chosen to be british and he looked from his views of an
40:32economist and he could see everything going the wrong way then in 1974 esker hayek got a phone call out of
40:43the blue it was the man who'd invited hayek to the lse 40 years earlier to do battle with canes
40:52it was lionel robbins who rang me and said are you sitting down i said yes and he said uh well
41:02uh he's been awarded a nobel prize in economics and that was
41:08like being given the knighthood of the world that's the nobel citation
41:18stockholm the 10th of december 1974
41:23alpha nobel given to friedrich von hayek
41:29his life started off completely again
41:31he'd been depressed he was coming up to retirement and suddenly everything started it was a new life
41:38absolutely everything took off for him
41:51while everything began taking off for hayek britain was sinking into economic decline strikes have become a
41:58fact of life the post-war keynesian consensus was crumbling
42:07a few months after hayek won the nobel prize the conservative party turned to a new leader
42:13the rise of margaret thatcher brought hayek into the political mainstream for the first time
42:20margaret thatcher would from time to time pull little bits of paper with quotations on them out of
42:25her handbag and hayek would be one of them hayek had spent most of the 20th century as a political outsider
42:34now he had the ear of the woman who would be britain's next prime minister
42:39i think it would be a great mistake to think of her as studying hayek like a student would it's
42:44more trying to get inspiration from hayek and casting around ransacking the minds of great men of
42:51whom he was one of the most prominent so that she could somehow get the gold in 1979 margaret thatcher
42:58was swept to power determined to build a new britain it was a bold change of direction that really did
43:04create the world we live in today we did institute a radical change of policy direction which has not
43:15really been reversed it may have been muddied but it hasn't been reversed it does chime in with hayek right
43:25back in the 1940s saying that the path we're on at the moment is is the road to serfdom and we need
43:32to tread a very different path in the language of the time mrs thatcher began rolling back the state
43:41government-owned industries were privatized public spending and taxes were cut there was a bonfire
43:47of state controls on the market on prices wages dividends and foreign exchange britain was moving
43:55hayek's way we were certainly very much on the same wavelength we were not busy thumbing his works to
44:04find out what we should do it was not a handbook for government but it was the same general idea
44:11you know where did today's world emerge more clearly than in the conservatives battle with the
44:18trades unions margaret thatcher wanted to put a stop to what she saw as rampant union power
44:25but she faced a dilemma how do you do that without alienating the entire population hayek's philosophy
44:32helped her formulate her answer she wanted to frame the argument in terms of liberty she didn't want
44:45to say the workers are all dreadful let's squash them she wanted to say the workers are being squashed
44:49by their leaders this very much fed into hayek and the idea of liberty was you were defending your
45:03country here as well as the state of labor relations hayek and margaret thatcher agreed on a lot but there
45:11was one crucial difference between them whereas hayek thought you freed the market to prevent power
45:16getting too concentrated in the hands of politicians thatcher thought you could have free market
45:21policies and still keep a lot of power at the center that tension between hayek's ideal and the
45:28controlling instinct of even free market politicians never really went away where she i think missed out
45:37sometimes was understanding the importance of institutions and of countervailing power
45:47in a society hayek for example was quite understanding about the role of local authorities and local
45:55municipalities and local power centers in a way which i don't think margaret ever was
46:00high x political influence reached its height in 1986 when mrs thatcher's government swept away much
46:12of the regulation that had constrained the city of london the big bang set the financial markets free
46:19ushering in today's vast interconnected global financial system but it wasn't really the free market that hayek
46:26wanted hayek's followers would say the deregulated financial system that came out of the 80s and 90s
46:34played a big role in the financial crisis because it was only ever half free it was distorted by an
46:41implicit promise to all these financial institutions that if things went wrong the government would come
46:46to the rescue in the kind of capitalism we've had in the west since the 1980s
46:52the financial institutions that triggered the recent crash were free to do anything it seems except fail
47:02it was the too big to fail problem that they knew that it was a question of heads i win
47:10tails the taxpayer loses and if that is the bet you take the bet and you take it on a bigger and bigger
47:18scale so they knew pretty well that if they got the gamble wrong governments couldn't allow to fail
47:25they'd have to be bailed out that is what is wrong and that is what has to be stopped we certainly have
47:31discovered after the fact that banks are not allowed to fail was that actually a significant factor
47:36in the over lending i don't think there's much evidence of that now the fact that that big banks
47:42clearly will not be allowed to fail and that is distorting our system but i don't think that's
47:47the story of of the crisis i think that the crisis was one more about just a general failure to understand
47:53the risks there's no doubt that in the last 30 years politicians of all stripes have let market
48:02forces influence more and more parts of society but they've drawn the line at hayek's most revolutionary
48:08idea of turning money itself over to the market imagine a world where we didn't have just one legal
48:18currency circulating in the economy issued by the bank of england but dozens of them anyone a company
48:24a bank a private individual could set up their own version of the pound and then they'd be free to
48:30compete the market would determine how much they were worth hayek knew it was a crazy sounding suggestion
48:37even for him but it would finally stop governments abusing the power of money
48:46in america one man has been trying to do just that
48:54he's taken hayek's most explosive idea and turned it into a reality
49:07bernard von notthaus calls himself a monetary architect the american authorities call him a domestic
49:16terrorist for some what's happened to von notthaus shows just how seriously governments take any
49:24challenge to their monopoly over money economics is dry and boring but money money money money money is
49:33exciting money sexy you know money's got pizzazz it's about people and about dreams about what we do you
49:40know money is fantastic and that's what i really connected with in terms of of von hayek because what he
49:47said in here was about people taking control and people issuing their own money von notthaus created his own
49:57currency a silver coin called the liberty dollar which anyone could buy and many have thanks to him
50:04coins worth anything up to 50 million dollars have now been sent out into the u.s economy and hayek was
50:11a big inspiration he says the problem is government money it's always been government money because they
50:18abuse their power they make money out of thin air so he says what we should do is to abolish the central bank
50:26the end of the federal reserve that was fantastic ever since benjamin strong was running the new york
50:33federal reserve in the 1920s central banks have used their control over the supply of money
50:39to try to manage the economy's ups and downs but as we've seen to hayek and his fans central banks are
50:46the cause of many of capitalism's problems not the solution and i don't argue for closing the fed down in
50:54one day either i want an order the fed and i want competition i x ideas of competition and money
51:00and uh and see who can who who can win this this argument but for them to claim monopoly powers and
51:07prevent us from practicing uh private market economics is the real problem that we have
51:15a lot of this is this utopian vision the golden age when men were men and currency was free
51:21the united states had a long period of no government monopoly on currency we had that whole system
51:28of unregulated banks issuing competing currencies that system was heavily prone to financial crises
51:34so the idea again that competition is the answer is flying in the face of history
51:40perhaps but the history of government efforts to control the market hasn't been so pretty either
51:46for hayek what was really utopian was the belief that central banks or anyone else for that matter
51:52could ever be a match for the dizzying complexity of our modern economy
51:57hayek would say since since they can't do it they should just stop trying we should stop having
52:02well stop having any intervention in monetary policy or stop having central banks if you go to the stream
52:08well that's dreaming i think
52:14von nottaus's own attempt to compete with the federal reserve eventually drew the attention of the
52:19american authorities in 2007 the fbi moved in i think they began to perceive us as a threat instead of a
52:30solution the monetary architect behind the liberty dollar is talking about the u.s government and why
52:35agents raided his evansville world headquarters earlier this month von nottaus was charged with
52:42counterfeiting u.s currency giving evidence in this courthouse in north carolina in 2011 he talked about hayek
52:53well he was relevant to my defense was because this wasn't some harebrained idea that i had thought
52:59up myself that i pointed out that here was a well-known nobel lawyer who had talked about exactly what i had done
53:13bernard von nottaus was found guilty and now faces up to 25 years in prison
53:18i think this was the one he was most proud of companion of honor presented by queen elizabeth
53:35the second buckingham palace 1984 and he was absolutely thrilled when he got that
53:44to professor towards the end of his life hayek was fated by everyone he'd inspired politicians all
53:52over the world with his boundless belief in the power of the free market is catholic university caracas
54:01when it came to their actual policies western leaders in the 1980s usually turned to a free
54:07market thinker whose ideas they found more palatable milton friedman's belief that governments could
54:13steer the economy using their power over the supply of money in circulation is still a touchstone for
54:19governments everywhere in that sense friedman unlike hayek did offer politicians a way to champion the free
54:27market and hold on to the reins of power hayek's life spanned almost the entire 20th century an era of
54:37unprecedented scientific progress but also unprecedented economic disasters living in the shadow of both
54:54hayek came to see the great crises of capitalism as the result of politicians mistaking economics for a
55:01science it was a century for taking on all the big questions and the big question for economists was
55:09how they were going to tame this extraordinary modern economy canes and hayek both thought that
55:16would be incredibly difficult dangerous even but canes flattered governments with the idea that they could
55:22tilt the course of human history their way it was hayek who said they shouldn't even try
55:30we might uncover the laws of the universe we were never going to master the complexities of human nature
55:38pretense of knowledge he called it pretending they know something that they don't know
55:43well they've been doing it now they we've we've given the the current crop of economists uh
55:48let's see how many years would that be about 70 some years total failure many of the computer models have
55:55been desperately misleading in pretending that we understand how the economy works we don't we can't
56:01forecast the economy but we can try to think about the big questions can we get out of a deep slump
56:08and i think by working with other countries we can gradually find our way out of this
56:13so you need the different insights together but hayek is a is on the moral of hayek is
56:18is avoid hubris in economic policy just as we should avoid hubris in thinking that markets left to their
56:26own devices will lead us to nirvana
56:31there's no doubt hayek helped change the course of world history shifting it decisively away from the
56:37state and towards the market oh 10 downing street the prime minister 3rd of may 1989 dear professor hayek
56:50it is with the greatest pleasure that i send you my warm congratulations on the occasion of your 90th
56:56birthday the leadership and inspiration that your work and thinking gave us were absolutely crucial and
57:03we owe you a great debt with every good wish yours sincerely margaret thatcher
57:12but no government has ever dared to implement hayek's vision of a market free from state intervention
57:19and when capitalism faced its biggest test since the 1930s politicians rushed to save the market from
57:25itself in fact the biggest debate in britain today is not about whether the government's doing too much to
57:31prop up the economy but whether it's doing enough today hayek's advice seems harder to take than ever
57:38you've got the global economy still struggling to put the financial crisis behind it if it is behind it
57:44and hayek would say government should just step back take a cool look at the historical record
57:51dismantle most of the machinery they've constructed for guiding the economy take a deep breath and let go
58:01i don't see any government today ready to do that i don't think i ever will
58:09next time karl marx the man who had the most radical solution of all to the problems of capitalism
58:15get rid of it the open universities produce six one minute animations to explain some of the key
58:22economic ideas that affect all of us so if you want to learn how to spot an invisible hand or other secrets
58:29of economics go to bbc.co.uk slash masters of money and follow the link to the open university
58:42light-hearted musical banter next tonight with kathy burke asking the questions on never mind the buzzcocks
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