Episode 1
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What are the guiding principles that Keynes
and Hayek describe in their theories?
Trace the changes in economic theory from
1900-1980.
What are the important questions we ask in
our modern economies? (It is no longer one
or the other…)
What principles guided the economic theories
of the post Reagan/Bush years in the US?
Clinton, Bush II, Obama
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Russian revolution
Against the global economy
End exploitation of man by man
Promise of a more just society
Markets need to be free from government
meddling. Markets work and governments
won’t. ~von Mises
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Keynes – market won’t work, government
must step in –
◦ Trade and expanding technology flow freely in early
20th century until WWI
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Hayek – the market will prevail if we are more
patient
◦ Disillusioned by WWI and vows to work for a better
world
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Worked with west during WWI
Against the huge reparations imposed on
Germany
The Economic Consequences of the Peace
Predicted a final war that would destroy
civilization if we kept Germany/Austria
impoverished
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Allows small farmer and businesses to
function to improve local conditions but
insists that the commanding heights will
remain under the control of governments.
30% of world population follows Marxist –
Leninism
Stalin manages the economy and forges
ahead. Capitalism appears doomed.
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Printing more money results in hyperinflation
The Nazi's are successful due to the support
of disenfranchised middle class.
Hayek hates inflation and makes fighting it
the cornerstone of his theory
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Boom time
Spending money on goods
Buying stock
Radio is the internet of the 1920’s
Stock market crash brings depression of the
1930’s
The government does nothing to intervene
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Same conditions as the US in England
Italy and Germany turn to fascism
Keynes writes a book explaining the
depression and its solution.
Macroeconomics.
Governments can manage their economies.
Spend against the wind.
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Government programs developed to spur
economy and create jobs
Regulation of capitalism
New Deal creates structure and eliminates
boom/bust cycles that deter economic
growth
Harvard and Galbraith
Live with a little inflation to keep
unemployment low
Accumulation of debt is not important
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Depression disappears due to war
“Good may come out of evil”
Hayek writes “The Road to Serfdom”
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Britain: Build a new society with no
unemployment, fascism, or depression
Labor party wants to plan the peace
Churchill opposes planning and controls
Labor party wins and Britain goes socialist
Private owners must sell their businesses
Created nationalized industries: coal, rail,
steel
Rebuilds Britain: welfare state, health care,
employment
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Stalin and socialism
Industrial and military powerhouse
1/3 of world is socialist
Cold war begins
Hayek sees socialist ideals as a threat to the
global economy and freedom
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Germany is ruined and divided
Economy is brought to a halt through wage
and price controls
Black market forms using cigarettes, liquor
New German currency formed
Ehrhart: eliminated price controls and the
markets started working again
Germany combines free markets with welfare
state, but NOT planned economy
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Economic Ideal: Gandhi- simple selfsufficient villages
Nehru: State led model of industrial growth
India becomes the model for newly
independent nations
Socialism is the road out of poverty and into
modernization
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University of Chicago is the center of
economic intellectual thinking
The market is comprised of forces that can
neither be controlled or ignored. Instead
they must be harnessed.
Keynes remains highly influential: the
economy is not a force, but a machine.
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US economy fails: stagflation – inflation and
unemployment
Nixon claims to be Keynesian
Nixon imposes wage and price controls
The economy spirals out of control
Deregulation of airlines leads to competitive
pricing and deregulation of the entire US
economy
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Also experiences unemployment and inflation
Also uses wage and price controls to combat
stagflation
Coal miners strike and oil crisis
Conservatives voted out
Keith Joseph jumps ship and begins
promoting the free market and capitalism
Thatcher is a big fan
Hayek wins the Nobel Prize
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Thatcher is a proponent of Hayek and the free
market
Thatcher wins in the Falklands
Socialist miners fight to keep government
subsidies and go on strike
Strike collapses, 70000 jobs lost
Britain sells state-owned industries
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No longer Socialism vs. Capitalism
No longer Market vs. Government
How to harness market forces
What would we demand of governments in
the face of difficulties, war?
Economics of the 90s and the new
millennium.
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History matters, and so do ideas.
◦ Does anybody remember the stimulus?
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“It’s the economy, stupid.”
◦ Arguably, all of history is economic history. Which
might just mean that all of everything is economic
history…
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What is the developing world, and why are we
developing it?
◦ Jeff Sachs: 200 years ago, we were all subsistence
farmers
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Vote for me for class president, I’ll make
iPads only $1
◦ Mia and Jake have a bunch of iPads, everyone else
wants them. What’s going to happen?
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Tie back to Germany, pre and post price
controls
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Inflation - a general increase in prices and fall
in the purchasing value of money
◦ When/why/for whom is inflation good?
◦ When/why/for whom is inflation bad?
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Think about the coal miners in Great Britain
as the movie presents them.
Think about the coal miners in Great Britain
as if they were your parents. (Billy Elliot,
anyone?)
Think of modern equivalents of coal miners:
US labor movement, etc.
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When do markets work and governments not
work?
When do governments work and markets not
work?
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Three students were having a discussion
about democracy, one from China, one from
America, and one from Denmark…
What is a “free” market?
Discussion: If you have a democracy, will you
automatically have capitalism? If you have
capitalism, are you necessarily in a
democracy?