The
Commanding Heights (Part 1, Chapters 1-6): The Battle of Ideas
Chapter
1: Prologue [2:45]
NARRATOR: As the 20th century drew
to its close, and our new century began, the battle over the world economy intensified.
Some people feared globalization and questioned
the benefits.
Others welcomed it.
RICHARD CHENEY, U.S. Vice President: Millions of people a day are better off than
they would have been without those trade developments, without globalization.
And very few people have been harmed by it.
NARRATOR: As the terrible events of September 11 drove the world deeper into
a recession, new questions emerged about the perils of the new
world economy. Can our now deeply interconnected world
surmount
a global
downturn and rise above other
crises? And is global terrorism the dark
side of the promise of globalization?
BILL CLINTON, U.S. President, 1993-2001: You can't get away from the fact
that globalization makes us interdependent. So it's not an option to shed
it. So is it going to be on balance positive or negative?
NARRATOR: This is the story of how the new global economy was born, a
century-long battle as to which would control the commanding heights of
the world's economies -- governments or markets; the story of intellectual
combat over which economic system would truly benefit mankind; the story of
epic political struggles to implant those ideas on the nations of the world.
JEFFREY SACHS, Professor, Harvard University: Part of what happened is a
capitalist revolution at the end of the 20th century. The market economy, the
capitalist system, became the only model for the vast majority of the world.
NARRATOR: This economic revolution has defined the wealth and fate of nations
and will determine the future of the planet.
DANIEL YERGIN, Author, Commanding Heights: This new world economy is
being driven by technological change and by political change, but none of it
would have happened without a revolution in ideas.
NARRATOR: Tonight, the battle of ideas that still divides our world.
Chapter
2: The Old Order Fails [8:11]
NARRATOR: Air-raid sirens sound the alert. German bombers
will pound another British city tonight .
Onscreen
title: Cambridge University, 1940
During
the Blitz, the two most important economists of the age shared air-warden
duty on the roof of King's College, an English gentleman and an Austrian
exile -- personal friends, but intellectual rivals. How their battle of
ideas still shapes our life and society is our story.
John Maynard Keynes helped the allied governments defend freedom by
planning their wartime economies. Friedrich von Hayek thought government
interference in the economy was a threat to freedom.
DANIEL YERGIN: The debate over market forces, whether you have an economy that's
based upon prices or on state, planning has been at the very heart of the
economic battles of the last 100 years. For decades, the ideas of John Maynard
Keynes dominated the economies of the Western world.
JOSEPH STANISLAW, Co-Author, Commanding Heights: Keynes felt that the
market economy would go to excesses, and when things were in difficulty the
market wouldn't work. Therefore the government had to step in. Hayek felt
that the market would eventually take care of
itself.
DANIEL YERGIN: It was only when Hayek was a very old man that his ideas began to
prevail and the world began to change.
NARRATOR: At the start of the 20th century, Hayek and Keynes had witnessed the
first age of globalization. Every day life was being transformed
everywhere. Technologies like the telegraph and the telephone revolutionized
communications. Steamships and railways made the world a smaller place. Tens of
millions migrated without the need for passports.
Keynes described this global market in which trade flowed freely.
JOHN MAYNARD KEYNES: The inhabitant of London could order by telephone, sipping
his morning tea, the various products of the whole earth, and reasonably expect
their early delivery upon his doorstep. Militarism and imperialism of racial and
cultural rivalries were little more than the amusements of his daily newspaper.
What an extraordinary episode in the economic progress of man was that age which
came to an end in August 1914.
NARRATOR: Hayek summed it up more succinctly.
FRIEDRICH VON HAYEK: We did not realize how fragile our civilization was.
NARRATOR: The murder of an Austrian archduke by a terrorist triggered a world
war. It would be almost 80 years before there was once again a truly global
economy.
World War I destroyed 20 million lives. It laid a whole continent to waste.
There was blood and carnage amidst the beauty of the Italian Alps, where
the armies of Austria and Italy were fighting.
Friedrich von Hayek served in the Austrian artillery. He was only 17 years old
-- still a schoolboy. The fighting was ferocious. He experienced
retreat and defeat.
FRIEDRICH VON HAYEK: The decisive influence was really World War I. It's bound
to draw your attention to the problems of political organization.
NARRATOR: He vowed to work for a better world.
DANIEL YERGIN: The first world war was a cataclysm. People were disillusioned.
People were bitter. They were looking for
something better.
Socialism, communism seemed to promise that better world.
Onscreen
title: St. Petersburg, 1917
NARRATOR:
By overthrowing the old order, the Russian Revolution aimed to deliver
that better world. Inspired by the economic theories of Karl Marx, the
Bolsheviks sought to smash capitalism. Lenin, the revolution's leader, urged the
workers of the world to unite against the global economy. The
revolution made trade, commerce, and private property criminal acts. Lenin
promised to end the economic exploitation of man by
man.
Onscreen
title: Cambridge University, 1918
The
man who was destined to be Hayek's great intellectual rival was a brilliant
young academic at Cambridge University. But John Maynard Keynes was much more
than that. He befriended writers and artists. One painted these murals for him.
He was also a familiar figure in the City of London, where he made a fortune
in the stock market, lost it all, and made it back again.
Familiar with politicians and prime ministers, Keynes spent the first world war
advising the British government on how to organize its wartime economy. At the
end of the war, Keynes joined the British peace delegation at Versailles
in France. The victorious allies wanted defeated Germany to pay the costs of the
war through what were called reparations.
ROBERT SKIDELSKY, Biographer of J.M. Keynes: All the statesmen of Versailles
could think about was how to squeeze money out of an already
bankrupt
Germany.
GEOFFREY HARCOURT, Professor of Economics, Cambridge University: Keynes felt the
reparations were out of all proportion to what an economy could really
take and would have very destructive social, political, and economic
consequences.
NARRATOR: Angry and disgusted, Keynes resigned. Back in England,
he went to stay with his friend, the painter Duncan Grant. That summer, Grant
painted Keynes writing his prophetic book, The Economic Consequences of the
Peace.
JOHN MAYNARD KEYNES: If we take the view that Germany must be kept impoverished
and her children starved and crippled, vengeance, I dare predict, will not limp.
Nothing can delay that final war that will destroy the civilization and progress
of our generation.
Chapter
3: Communism on the Heights [6:16]
Onscreen
title: Vienna, 1919
NARRATOR:
Austria had lost the war and its empire. Vienna was a cold and hungry city.
Revolution was in the air. Socialists and Communists were winning the
battle for hearts and minds. Young and idealistic, Friedrich von Hayek
enrolled at the University of Vienna.
FRIEDRICH VON HAYEK: It was during the war that I more or less decided to do
economics. I really got hooked.
NARRATOR: Socialism seemed to promise a more just society. Albert
Zlabinger, a former pupil and disciple of Hayek:
ALBERT ZLABINGER, Economist and Pupil of Hayek: He openly said that he at one
time was a socialist of the mild sort, where concerns for the poor and
concerns for fairness and equity would help to determine government policy.
NARRATOR: Much of Vienna's intellectual life took place outside the university,
in the coffeehouses across the Ringstrasse. There were informal seminars for
those who loved discussion and argument. Hayek joined the circle of a
passionate libertarian called Ludwig von Mises. Von Mises believed markets,
like people, needed to be free from government meddling.
ALBERT ZLABINGER: Ludwig von Mises was the preeminent economist of the
Austrian school. The distinguishing hallmark of the Austrian school of
economic thought is that markets work and governments
don't.
NARRATOR: Von Mises predicted that the new Soviet socialist economy would never
work, precisely because the government controlled wages and prices.
DANIEL YERGIN: What von Mises said is that the great flaw of socialism is
that it doesn't have a functioning price system to send all the signals to
consumers and producers as to what something is worth; that these prices are
at the very heart of what makes a functioning economy work.
You can think of them as traffic signals. And if you don't have them, what you
get is a system that doesn't work, or you get chaos.
ALBERT ZLABINGER: Von Mises argued that free markets do it best -- why fool
with anything else?
Onscreen title: Moscow, 1922
NARRATOR:
In Soviet Russia, it seemed as if von Mises's predictions were coming true.
Lenin had abolished what he saw as the chaos of free markets. The state
controlled the economy. Wages and prices were
fixed. But the great
Marxist experiment was in trouble. Lenin had an economic disaster on his hands.
Soviet Russia was a grim place, haunted by cold, famine, hunger, and
death.
DANIEL YERGIN: Lenin knew that he needed a different kind of policy, and he instituted
what would become known as the New Economic Policy. Lenin says farmers can sell
their own goods and own their own land. He says that small businesses can
operate, and you start to get an economic
revival. Well, his comrades
on the left attacked him viciously for selling out the principles of
Bolshevism and Marxism. And Lenin, who by this time had already had a stroke
and was not well, nevertheless pulled himself up on the platform for one of the
very last times in his life, and he was still the old Lenin. He was vitriolic;
he was sarcastic. His critics, he said, were fools, were stupid, because
the state, the government, the Bolsheviks would control the overall economy:
steel, railroads, coal, the heavy industries -- what he called the
"commanding heights" of the economy.
NARRATOR: Within a year Lenin was dead. The mourners at Lenin's funeral believed
that history was on their side, and in less than 30 years, not only
Russia, but Eastern Europe, China -- more than a third of humanity -- would be
living according to the economic tenets of Marxist
Leninism.
Lenin's successor would tighten the Communist Party's iron grip
on the
commanding heights of the economy. Joseph Stalin introduced
central
planning. Under him, the Communist Party planned and managed every aspect of
the economy. While communism seemed to be forging ahead, capitalism
looked to be doomed.
Chapter 4: A Capitalist Collapse [8:48]
Onscreen
title: Vienna, 1923
NARRATOR:
Germany and Austria were living with the economic consequences of the peace.
Forced to pay unbearable war reparations, the defeated governments simply
printed more money. The result: inflation, more inflation, hyperinflation.
It took a basket full of paper money to go shopping.
KARL OTTO POHL, President, German Central Bank, 1980-1991: You saw people
carrying their money on wheels because you had to pay for a piece of bread
billions of reichmarks.
NARRATOR: Hayek, who was working at a statistical research institute, needed 200
pay raises in eight months. Money was cheaper than wallpaper. Million-mark notes
lit stoves. Shoes that cost 12 marks in 1913 sold for 32 trillion marks in 1923.
In Hitler's favorite beer keller, a glass of beer cost a billion marks.
Hyperinflation wiped out the savings of the middle class.
KARL OTTO POHL: And that was one of the reasons for the success of the Nazis, of
Hitler. They got support from these people who lost their fortunes.
NARRATOR: Hayek would always see inflation as an evil that corroded society and
undermined democracy. The fight against inflation became a cornerstone of
his economic philosophy.
Onscreen
title: New York, The Roaring 1920s
DANIEL
YERGIN: During the 1920s, while Europe was continuing to suffer the wounds of
the first world war, in American cities, at least, it was boom time. Americans
were spending money. They were dancing. They were partying. They were buying
cars. They were buying bathtub gin. And they were buying stock -- lots of
stock.
The stock market, the New York Stock Exchange, had become a national pastime.
The Americans couldn't get enough of it. And the favorite stock of the
day was in these new radio companies. Radio was like the Internet of the
1920s, an industry that had come from nowhere. And the number one glamour
stock was RCA, which in just a few years went from a dollar and a half a share
to $600 a share. Americans couldn't get enough of it.
NARRATOR: It was a classic stock market bubble. Then, on Black Thursday,
October 24, 1929, the bubble burst. Prices plunged. The downward
spiral proved unstoppable. Eight hours after the market had closed, the tickertape
machines were still tapping out the bad news. The stock market crash started
America's slide into despair.
SPENCER ECCLES, Salt Lake City Banker: During the '30s here, it was a complete
and utter collapse from the people's point of view. It was despair. As
values and prices spiraled ever onward,
downward, it left them with no
ability to earn, no ability to repay, no ability to spend, no ability to
consume. Everything went down. The farm implement seller, the clothing
store, the merchant -- everything spiraled downward, and of course with it went
the banks.
NARRATOR:
People panicked. They rushed to withdraw their hard-earned savings.
KENNETH RANDALL, Chairman of the Federal Deposit Insurance Corporation,
1964-1970: A run on a bank means lines through the lobby and out the
front door and down around the block, people waiting day and night to get up to
see if they could withdraw their cash.
NARRATOR: The millions that could not lost everything.
KENNETH RANDALL: If you look at the period of time from '29 on, about half the
banks in the United States closed.
NARRATOR: The government failed to halt the downward spiral. In fact, it made
things worse.
NEWSREEL NARRATOR: Private construction virtually ceases. Mills and factories
shut down. Railroads come to a virtual
standstill. Millions of Americans
-- men, women, children -- wait in the cold on bread lines, in soup kitchens.
Three million Americans are ex-wage earners, unemployed, and the ranks of
the unemployed are to soar to 15 million.
Onscreen
title: Europe, 1931
NARRATOR:
Banks collapsed. Industry ground to a stop. Millions were out of work.
In Britain, working men, many of them war veterans, marched the length of the
country to petition the government for the simple "right to work." In
Italy, Spain, and Germany, they marched to a different drum. With the failure of
capitalism, fascism cast its shadow ever
wider. John Maynard Keynes saw
his nightmare coming true.
In Cambridge, Keynes set out to save capitalism from itself
by writing a
book about what caused the Great Depression and what to do about it. He aimed to
rewrite the rules of economics, to see a country's economy as a whole, as a
machine that could be managed.
ROBERT SKIDELSKY: Keynes was the real inventor of macroeconomics. Concepts we
take for granted today, like gross domestic
product, the level of
unemployment, the rate of inflation, all to do with general features of the
economy, were invented by him.
GEOFFREY HARCOURT: He was writing a book which he thought would revolutionize
the way we thought about economic systems. It would also give us the means to
make sure they operated better.
ROBERT SKIDELSKY: It was written against the background of not only the collapse
of the world economy, but the potential collapse of democratic government.
Hitler became chancellor of Germany in 1933. Democracy seemed to be losing
ground, and with democracy, the system of liberty. So Keynes had to produce an
answer to the Great Depression, or democracy would be swamped by
totalitarianism.
Chapter 5: Global Depression [5:26]
Onscreen title:
NARRATOR:
The new American president, Franklin Delano Roosevelt, was staring economic
disaster in the face. His wife, Eleanor, described Inauguration Day as
"very solemn, and a little terrifying."
FRANKLIN DELANO ROOSEVELT, U.S. President: This great nation will endure as it
has endured, will revive and will prosper. I shall ask the Congress for the one
remaining instrument to meet the crisis: broad executive power.
NARRATOR:
He then embarked on a whirlwind program of reform.
DANIEL YERGIN: For
NARRATOR: Privately,
DANIEL YERGIN: And the airline industry was a very good example of that. You had
people go into this business, be very competitive, they'd go bankrupt. New
people would come in, they would go bankrupt. It was very unstable, so the New
Deal stepped in and said, "We're going to stabilize this industry.
We're going to set the prices that you can charge for tickets. We're going to
tell you what routes you can fly." And with that system they eliminated
these very vicious cycles of boom and bust in the aviation industry,
and in a sense, that was what they were aiming to do throughout the American
economy.
Onscreen title:
NARRATOR:
In 1936 John Maynard Keynes finally published his General Theory, a
brilliant analysis of how to fight the Depression. By showing governments that
it was possible to manage their economies, Keynes made himself the most
influential economist of the age.
ROBERT SKIDELSKY: Keynes's solution to unemployment was for the government to spend
the money to restore and maintain full employment.
NARRATOR: Governments, said Keynes, should spend against the wind. In good times
they should reduce their spending and build surpluses; in bad times, like
the Great Depression, they should step up spending, run deficits, and put
purchasing power into the hands of working people.
ROBERT SKIDELSKY: He gave people hope that unemployment could be cured without concentration
camps.
NARRATOR:
JOHN KENNETH GALBRAITH, Professor Emeritus,
NARRATOR: Keynes's ideas trickled down from Harvard to
JOHN KENNETH GALBRAITH: You resisted conservative finance, borrowed money, and
hired people across the country, rescuing them from unemployment. That was the
basic essential -- and that you didn't worry about accumulating debt, or, more
precisely, you worried about it, but did it anyway.
NARRATOR: Keynes's ideas began to gain ground.
Chapter
6: Worldwide War [
Onscreen title: World War II, 1941
NARRATOR:
It took a world war for Keynesianism to
become government policy. As the
NEWSREEL NARRATOR: ... men and women to make the uniforms; machinists to make
the guns and ammunition; auto workers to produce the jeeps and trucks, to build
the ships and tanks; civilian soldiers to turn out the fighters, the bombers.
NARRATOR: In charge of wartime wage and price controls, John Kenneth Galbraith
saw the economy rebound.
JOHN KENNETH GALBRAITH: One could not have had a better demonstration of the
Keynesian ideas, and I think it's fair to say that as a young Keynesian in
NARRATOR: In a radio broadcast, Keynes expressed his hope that what worked in
war would work in peace.
JOHN MAYNARD KEYNES: If expenditure on armaments really does cure unemployment,
a grand experiment has begun. Good may come out of evil. We may learn a trick or
two which will come in useful when the day of peace comes.
Onscreen
title:
NARRATOR:
Now teaching at the London School of Economics, Hayek feared that Keynes's
brave new world was a big step in the wrong direction. He attacked the
growing consensus by writing The Road to Serfdom. Sarcastically dedicated
to "socialists of all parties," it was a popular success. There was
even a cartoon version of it.
Its message was simple and direct: Too much government planning means too
much government power, and too much government power over the economy destroys
freedom and makes men slaves. For Hayek, central planning was the first step
to a totalitarian state.
GEOFFREY HARCOURT: Well, Hayek thought that since freedom was an absolute, you
must let a competitive system just work itself out. And if at times that meant
there was considerable unemployment, well, that's what you had to put up with
ROBERT SKIDELSKY: Hayek always rejected macroeconomics. He rejected any
government intervention during the Great Depression itself, whereas Keynes was
an activist. He said in the long run we're all dead, and in the long run if we
allow things to go on without remedy, we get lots of Hitlers, lots of wars, and
lots of Stalins. And who was right?
NARRATOR: Most people would have agreed with Keynes when he wrote this to Hayek.
JOHN MAYNARD KEYNES: What we want is not no planning, or even less planning. We
almost certainly want more.
NARRATOR: In the battle of ideas, Hayek was on the losing side.
FRIEDRICH VON HAYEK: I had a fairly good reputation as an economic theorist in
1944 when I published The Road to Serfdom, and it was treated even by the
academic community very largely as a malicious effort by a reactionary
to destroy high ideals.
Onscreen
title:
NARRATOR:
With the world at war, Keynes traveled to Bretton Woods and a grand resort
hotel. Here, delegates gathered from all over the world to organize the postwar
economy.
The
Bretton Woods Conference created the
World Bank and the
International
Monetary Fund. They were designed to bring stability to the world economy
and prevent the unemployment and the depression of 1930s.
Keynes's idealism and humanity were an inspiration.
JOHN MAYNARD KEYNES: There has never been such a far-reaching proposal on so
great a scale to provide employment in the present and increase productivity in
the future. And I doubt if the world understands how big a thing we are bringing
to birth.
NARRATOR: Keynes did not have long to live. Ill and overworked, his health gave
way, but his reputation and influence outlived him.
FRIEDRICH VON HAYEK: When Keynes died, Keynes and I were the best known
economists. Then two things happened. Keynes died and was raised to sainthood,
and I discredited myself by publishing The Road to Serfdom. And that
changed the situation completely. And for the following 30 years, it was only
Keynes who counted, and I was gradually almost forgotten.
Onscreen
title: V-E Day, 1945
NARRATOR:
The war was over, and the troops came marching home.
The final summit conference of the three wartime allies took place in a palace
in the
JEFFREY SACHS: There's no doubt that at the end of World War II there was
a tremendous loss of faith in the market economy. You had a feeling in large
parts of the world, "We don't want to go that way. We want to go a better
way."