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The Commanding Heights (Part 1): The Battle of Ideas (Chapters 7-12)

Chapter 7: Planning the Peace [ 6:47 ]

Onscreen title: Britain , 1945

NARRATOR: In Britain , the troops were coming home to a general election.

TONY BENN, Labor Candidate, 1945: Well, I came back in a troop ship in the summer of 1945, and I was a pilot in the Royal Air Force, and I was picked as a 19-year-old to be the Labor candidate. All these soldiers said, "Never again. We're never going back to unemployment, the Great Depression, to fascism, to rearmament. We want to build a new society."

NARRATOR: During the dark war years, Britain had been governed by a coalition of conservatives and socialists. Winston Churchill, the great wartime leader and head of the Conservative Party, expected an easy victory. Everywhere he went, huge crowds turned out to cheer the nation's hero.

Heading the campaign against Churchill was Clement Attlee, leader of the Labor Party. Attlee argued that Britain had planned the war, and now planning would win the peace.

BARBARA CASTLE, Labor MP, 1945-1979: We knew that our people would never have withstood the bombardments and the loss of life and the hardship if they hadn't been confident that their government was operating a policy of fair shares. We set out to ensure that this system of fair shares and the planning and controls continued after the war.

NARRATOR: Churchill, who was influenced by Hayek's book The Road to Serfdom, opposed planning and controls.

WINSTON CHURCHILL: No socialist system can be established without a political police, some form of Gestapo.

RALPH HARRIS, Institute of Economic Affairs , 1957-1987: He got carried away with this Gestapo. And this, of course, was carrying things to absurdity -- Gestapo in Britain !

NARRATOR: Attlee, a mild-mannered Christian Socialist, gave Churchill's gaffe a sinister spin.

RALPH HARRIS: Attlee actually went out of his way to refer to this foreign professor with this august [name], Friedrich August von Hayek -- this foreign chap with a slightly German accent.

NARRATOR: Britain went to the polls. The result was sensational.

BBC RADIO NEWS: Here is the state of the parties up to 3:00 , in detail: Conservatives 180, Labor 364.

NARRATOR: Churchill was out. The people had voted for a new socialist Britain .

BARBARA CASTLE: The Labor Party swept to power simply because the vast majority of people, particularly those men and women in the fighting forces who'd lived through the dreadful Depression years of the '30s, just said, "Churchill's done a fine job of war leader, but we don't trust him to win the peace."

CLEMENT ATTLEE: What kind of society do you want?

NARRATOR: Attlee promised his party that they would build a new Jerusalem.

CLEMENT ATTLEE: Let's go forward into this fight in the spirit of William Blake: "I will not cease from mental fight, nor shall the sword sleep in my hand, till we have built Jerusalem in England 's green and pleasant land."

NARRATOR: William Blake's hymn " Jerusalem " became an anthem for the Labor movement.

BARBARA CASTLE: You know, it seemed to people who'd been through a war, it seemed to them natural justice. Why not pool your resources? And so we broke into the concept of the sacredness of private property.

NARRATOR: When Labor took power, private owners were compelled to sell their businesses. Labor created a "mixed economy" in which newly nationalized industries coexisted with private enterprise. Now government-owned industries like coal, rail, and steel no longer enriched owners and shareholders, but worked for the common good.

TONY BENN: So it was an act of regeneration, of renewal. That was the hope, and it was the hope that gave us the welfare state, gave us the National Health Service, gave us full employment, gave us trade union rights, really rebuilt the country from the bottom up.

NARRATOR: The welfare state provided care, free of charge, "from womb to tomb." Nobody, rich or poor, would need to fear poverty, ignorance, unemployment, ill health, or old age.

TONY BENN: And people said, "This is better than allowing a lot of gamblers to run the world, where they're not interested in us, but only in profit."

NARRATOR: Russia ended the war as a military and industrial giant. With the Red Army and the Secret Police, Stalin imposed his economic system on half of Europe .

JEFFREY SACHS: The planned economy of Lenin and Stalin had defeated fascism. Scientific socialism seemed to be in the ascendancy.

NARRATOR: Socialism was on the march; capitalism and free markets were on the retreat.

JEFFREY SACHS: So about one-third of the world adopted socialism, sometimes to internal revolution, sometimes to brutal imposition by the Red Army.

NARRATOR: The world was divided. The Cold War had begun.

Chapter 8: Pilgrim Mountain [ 3:43 ]

Onscreen title: Switzerland , 1947

NARRATOR: Hayek loved mountains. He said they breathed freedom. But he saw socialist ideals and the planned economy as threats to freedom, and so he organized a conference at a formerly fashionable hotel on the top of Mont Pelerin -- Pilgrim Mountain .

RALPH HARRIS: Well, what happened in 1947 was that Hayek at last brought off a great dream, which was to assemble 36, mostly economists, some historians, and a few journalists, a handful of what he regarded as survivors, good eggs, good intellectuals, who understood the market economy and the whole of the case.

MILTON FRIEDMAN, Professor Emeritus, University of Chicago : This was Hayek's belief and the belief of other people who joined him there, that freedom was in serious danger.

NARRATOR: One of the delegates was a young economist from Chicago, Milton Friedman.

MILTON FRIEDMAN: The point of the meeting was very clear. Hayek and others felt that the world was turning toward planning and that somehow we had to develop an intellectual current that would offset that movement.

NARRATOR: They met downstairs in the cocktail bar. The room and its furniture are not much changed.

RALPH HARRIS: The whole world was shadowed by the Iron Curtain, the Russian threat, by the failure to establish democracies in the Eastern European countries and by the prevalence everywhere intellectually of these ideas of collectivism arising from the war. The argument always was that democracy is impossible without a free economy. You need a free economy; free economy is a necessary though not a sufficient condition for democracy.

NARRATOR: The debates were passionate. At one point, Hayek's former mentor, Ludwig von Mises, stormed out of a meeting.

MILTON FRIEDMAN: In the middle of a debate on the subject of distribution of income, in which you had people who you would hardly call socialist or egalitarian, people like myself, Mises got up and said, "You're all a bunch of socialists," and walked right out of the room. (laughs)

NARRATOR: But Hayek told the meeting that they had one great lesson to learn from the socialists.

RALPH HARRIS: Hayek paid enormous tribute to the socialist intellectuals and said that the great strength of the socialists is that they had the courage, he said, to be idealistic; to have a theory, to have a project, to have a vision, and to go on working towards that, through thick and thin.

NARRATOR: As the meeting came to an end, Hayek predicted a long fight, a battle of ideas that might last 20 years or more, before the world changed its mind. In the meantime, Hayek could see only one gleam of light.

Chapter 9: Germany 's Bold Move [ 4:11 ]

Onscreen title: Berlin , 1947

NARRATOR: The war left Germany in ruins. Its economy had disintegrated. Markets had broken down. Shops were empty. Already the Russians occupied East Germany and were waiting for the rest to fall into their lap. In the American and British occupation zones, raging hyperinflation had made the German currency worthless.

In the winter of 1948, the Allies appointed as director of economic affairs a rotund, cigar-chomping economist named Ludwig Erhard. A staunch anti-Nazi, Erhard was a free-market economist who shared many of Hayek's beliefs and ideas. He also believed the Allies' economic rules were making a bad situation worse.

MILTON FRIEDMAN: The occupying authorities had imposed a system under which there were extensive wage and price controls, supposedly to control inflation, but of course wage and price controls never control inflation. And you had essentially an economy that was brought to a halt.

ALFRED BOSCH, Economist and Friend of Hayek: In this situation the black markets formed, and American cigarettes were its form of currency.

MILTON FRIEDMAN: Nobody smoked cigarettes. They were for small transactions. Cognac was a medium of circulation for large transactions.

NARRATOR: The Allies introduced a new currency, the Deutsche Mark, to replace the worthless German money. But for Erhard, that was not enough. So without informing the Allies, Erhard went on the radio and made a startling announcement.

KARL OTTO POHL: Ludwig Erhard, a legendary man, he decided, without asking anybody and against the will of the American occupation powers, he decided to give up all price controls.

NARRATOR: Next day, Gen. Lucius Clay, the man in charge of occupied Germany , demanded to know what Erhard thought he was doing.

ALFRED BOSCH: Clay said, "What have you done? You have changed the Allied price controls." Erhard replied, "Herr General, I haven't changed them; I've abolished them." And Clay said, "My advisors tell me it is a big mistake." Erhard replied, "Herr General, my advisors tell me the same thing."

NARRATOR: Overnight the black market disappeared. People stopped hoarding, and goods not seen for 10 years went on sale.

MILTON FRIEDMAN: It started the markets working, with free prices. Instead of nothing being in the windows of the shops, everything started to come up. And that began the German economic miracle.

NARRATOR: Germany 's "social market economy" combined free markets with a strong welfare state. Within a few years, Germany 's social market economy overtook Britain 's more planned economy.

But back then, nobody wanted to model themselves on Germany . Most countries preferred to plan their economies.

Chapter 10: India 's Way [ 3:51 ]

Onscreen title: New Delhi , 1947

NARRATOR: India , the jewel in the crown of the British Empire , the very symbol of imperialism, celebrated its freedom. Mahatma Gandhi was the father of independence. His economic ideal was a simple India of self-sufficient villages. Pandhit Nehru, the first prime minister, wanted to industrialize and combine British parliamentary democracy with Soviet-style central planning.

JAIRAM RAMESH, Senior Economic Advisor to India 's Congress Party, 1991-1998: In the 1950s India was the Mecca of all economists. You talk of any economist in the world, and they were advising the Indian government. And the advice was, you must have a state-led model of industrial growth; the public sector must occupy what came to be called the commanding heights of the economy. And that's why steel, coal, machine tools, capital goods, all the areas of heavy industry were in the public sector and not in the private sector.

NARRATOR: Nehru put his faith in technology.

MANMOHAN SINGH, Minister of Finance, 1991-1996: Nehru was a rational thinker, and he wanted to apply science and technologies to solve the great mass poverty that prevailed at the time of independence.

NARRATOR: Under Nehru, central planning became a form of science.

MEGHNAD DESAI, Professor, London School of Economics: Nehru was always recruiting intellectuals in India on his side in the cause of planning. And there was this genius statistician, Mahalanobis, who was head of the Indian Statistical Institute.

NARRATOR: Nehru asked Mahalanobis to think about how to plan an economy. The brilliant Mahalanobis succeeded in expressing the entire Indian economy in a single mathematical formula.

VOICE OF MAHALANOBIS: Let YT equal national income, CT equal consumption, and KT equal investment at time, open bracket, open bracket, one plus lambda K beta K, closed bracket, minus one, are fractions of investment allocated to industries producing capital goods; that is K sector and consumer goods at C sector, respectively.

NARRATOR: People believed this perfect mathematical model could be applied in a less-than-perfect world.

MEGHNAD DESAI: And at that time, Mahalanobis's model was hailed as one of the pioneering mathematical models for planning a mixed economy. And that made Mahalanobis very influential.

NARRATOR: India became the model of economic development for newly independent nations. Across the developing world, socialism, planning, government control, regulation, and ownership -- these became the gospel. All over Africa , people looked to socialism to lead them out of poverty. Across South America , governments chose state control as the way to modernize. The apparent success of communist countries like the Soviet Union and China seemed to show the way.

Chapter 11: Chicago Against The Tide [ 7:32 ]

Onscreen title: Chicago, 1950

NARRATOR: By 1950, Hayek's market economics were so completely out of fashion that when he sought a full-time academic job in the United States , only one university was willing to hire him.

SAM PELTZMAN, Professor, University of Chicago : Chicago has always been an exceptional place, out of the mainstream. Chicago is geographically isolated. This affects Chicago 's intellectual influence in many more areas than economics.

NARRATOR: The University of Chicago 's intellectual influence would grow. Eight professors and another 11 economists from Chicago went on to win Nobel Prizes. Gary Becker is one of them.

GARY BECKER, Professor of Economics, University of Chicago : When I came as a graduate student to Chicago 1951, I was flabbergasted by how stimulating the atmosphere was. I had been a very good student at Princeton . My first day in Friedman's class he raised a question. I answered. He said, "That's no answer; that's just rephrasing the question." That was the example of how blunt people were.

MILTON FRIEDMAN: Nobody was very polite. People were interested in ideas and argument and not in making sure you didn't ruffle anybody's feathers.

ARNOLD HARBERGER, Professor Emeritus, University of Chicago: If you're sitting in a seminar room and somebody up there is saying something which if imbibed by your students who are sitting in that same room is going to lead them astray, it's up to you to call that guy right now and not later, and that, I think, is sort of the spirit that prevailed in the Chicago workshop system. There wasn't that much fighting in the lunches. They were pretty cordial. (laughs)

NARRATOR: Lunches at the Quadrangle Club were famous for the intensity of intellectual discussion. And one man came to dominate those debates.

GEORGE SHULTZ, Dean of the Chicago Graduate School of Business, 1962 - 1968: Somehow Milton managed to set the agenda of argument, and so there was a saying, "Everybody loves to argue with Milton , particularly when he isn't there," because he's a good arguer.

NARRATOR: Milton Friedman was becoming the most articulate spokesman for the so-called Chicago School of economics.

MILTON FRIEDMAN: The Chicago School meant a strong belief in minimal government and an emphasis on free market as a way to control the economy.

LAWRENCE SUMMERS, President, Harvard University : You know, in many ways Milton Friedman was a devil figure in my youth in our household of Keynesian economists because he seemed, with his emphasis on individualism, freedom, and markets, to be so unconcerned with fairness.

NARRATOR: Liberals may have loathed the Chicago School , but Hayek felt on home ground in an intellectual atmosphere so like the Vienna of his youth.

ARNOLD HARBERGER: Our vision is that the forces of the market are just that: They are forces; they are like the wind and the tides. If you want to try to ignore them, you ignore them at your peril. If you find a way of ordering your life which harnesses these forces to the benefit of society, that's the way to go.

NARRATOR: But in Washington , Keynes was still king of the hill. Nineteen years after he died, his face was on the cover of Time magazine.

SAM PELTZMAN: Keynes's influence on economics at mid-century can't be exaggerated. The economic advice that economists gave to policymakers said the only reason you have bad economic outcomes is because the government's not doing enough. It sounds almost like central planning, doesn't it?

NARRATOR: Washington 's Keynesians saw the economy not as a force of nature but a sophisticated machine to be fine-tuned by technocrats like themselves. The Keynesian consensus was summed up when that most Ivy League of presidents, John Kennedy, received an honorary degree from Yale.

JOHN FITZGERALD KENNEDY, U.S. President, 1961-1963: It might be said now that I have the best of both worlds -- a Harvard education and a Yale degree.

NARRATOR: For JFK, Keynes had won the argument. The battle of ideas was over.

JOHN FITZGERALD KENNEDY: What is at stake in our economic decisions today is not some grand warfare of rival ideology which will sweep the country with passion, but the practical management of a modern economy. What we need is not labels and clichés, but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead.

NARRATOR: Kennedy's council of economic advisors had drafted his speech along Keynesian lines.

ROBERT SOLOW, Professor Emeritus, Massachusetts Institute of Technology: We thought it was a great day when Kennedy decided to give that speech at Yale and to talk about economic policy. That speech suggested that we had won over Kennedy. We had won the heart and mind of the president.

NARRATOR: For what came to be known as the "Thirty Glorious Years," Keynesian economics had been delivering the goods. Europe , Japan , and America all saw high economic growth and rising standards of living. People enjoyed a　prosperity undreamed of at the end of the war.

Chapter 12: The Specter of Stagflation [ 6:34 ]