BBC: Masters of Money...

NOTE: this partial transcript is followed by my rough notes,


Presenter: Stephanie Flanders
BBC Economics editor (former)
Fredrich Hayek was a champion of the market. He inspired many of the people who built the world we live in today. For more than a generation, western leaders claimed to embrace one central economic idea: The Free Market. With the financial crisis, that orthodoxy is under attack. Our faith in it has been shaken like never before. But one great Free Market visionary has emerged from the meltdown with his reputation enhanced: There might never be a better time to listen to Fredrik Hayek. I see right now—this moment in history, as a time where Hayek's ideas deserve a shot. Of all the big pro-market thinkers, Hayek was by far the most radical. He believed the market should be freer than any government has dared to allow it to be. In the world according to Hayek, politicians should step back from trying to manage capitalism's ups and downs. They should simply set it free. There is no doubt that he is a significant thinker, though there is major controversy about every area of this thought.

The fate of nations now hung on the power of money, and they [Kaynes, Marx, Hayek] had very different ideas about what to do. Even in the middle of an economic crisis, Hayek's advice to governments was to step back and do nothing. Meddling would only make things worse. That is not what anyone has ever wanted to hear, but today they've tried all the usual tricks for fixing the economy . Is it time, finally, to take Hayek's advice instead?

Around the world, you really can feel the shock waves of the crash of 2008. Until that crisis hit, Western leaders had put their faith in the Free Market as the best way to generate wealth. But in their version of the market, derived from thinkers like Milton Friedman, they still believed that if things went wrong they could step in—tweak the system and get everything back on track. Today, fans of the Austrian economist Fredrich Hayek say it is that arrogance, that distorted picture of a market economy that got us into this mess. If we want to try to get out of it, we need to try the real thing. To understand how governments, not markets, might have caused the crisis, we need to wind the clock back to the years leading up to it.

Its January 2001, and America's central bank, the Federal Reserve has cut interest rates because its worried the economy is slowing down. Now it cut interest rates for the same reason central banks always do. To make it cheaper for companies and households to borrow and seek out profitable investments.

Had Fredrik Hayek been alive, he would have taken a very different view. Far from avoiding trouble, Hayek would have seen the Federal Reserve's decision to cut interest rates as sewing the seeds of today's financial crisis. Hayek believed almost any government intervention in the market, like propping up failing businesses, setting trade tariffs, or manipulating interest rates risk disaster. In the years after 2001, the Federal Reserve carried on cutting interest rates helping to fuel a property boom that ultimately couldn't be sustained. Early in 2007, America's housing bubble burst, and the global financial crisis began, just as Hayek might have predicted.

Peter Shiff: The conventional wisdom was than none of these events were foreseeable. We couldn't have done anything about it. But, of course, all of that was false. What's playing out before our eyes is exactly what men like Hayek have predicted would happen.

The argument of Hayek and his fellow actually runs deeper than that. Its not just that they got their sums wrong and they didn't set the right interest rate. Its that they shouldn't have been in the business of setting interest rates at all.
Its this radical rejection of the state's roll in regulating the market that sets Hayek apart from other Free Market thinkers. He believed the market would do a far better job of regulating itself, if only governments would just leave it alone.

Peter Shiff: Free Markets did not set interest rates at 1% under Greenspan. That is the government that is doing that. That is price fixing. ...We need the market to set interest rates, not the government. And if the market had set interest rates they would have been much higher. And we wouldn't have had these problems.

Hayek's belief in the positive power of the unbridled Free Market stems from his childhood in Austria. He was born in Vienna in 1899. Then the city was packed full of intellectuals like Freud and Wittgenstein, many of whom Hayek came to know. ... Growing up, he had a keen desire to make sense of the modern world taking shape around him.
"I must have been 13 or 14 when I began pestering all the priests I knew to explain to me what they meant by the word god. None of them could. That was the end for me." Hayek grew up in a family of scientists. Like many others intellectuals in Vienna at that time, they liked to think they were on a grand quest to unwrap the secrets of the universe. The young Hayek was especially influenced by his father, a doctor and enthusiastic botanist. Hayek started off like his dad: excessively collecting plant and insect samples —really into the development of species. By the time he was 16 he was more interested in people -the development of whole societies, not plants. But Darwin's theory of evolution stuck in his head. Since the 18 century enlightenment, scientists had unlocked many of the puzzles of the universe, including the origins of life itself. As Hayek grew up, he was draw to what he saw was the last frontier: the mysterious workings of the economy in all its growing complexity and power. In Darwin's theory of evolution he thought he saw what a new science of the economy might look like.


Prof. Bruce Caldwell: Physics, which allows often for precise predictions in terms of planetary motion and eclipses, is not a good model for understanding how social phenomena work. I think that was the basis of his attraction to evolutionary theory. He wanted to establish that you could be a science even if you don't make precise predictions. Even if you don't have the sort of control that many of his opponents said, well if we're a science we should be able to engineer society the way an engineer builds a bridge.

Darwin's theory of evolution also helped forge Hayek's vision of capitalism itself. He came to believe the global market had evolved over the course of human history, emerging as a kind of natural wonder, driving civilization forward. Hayek saw the market as a telecommunications system processing billions of pieces of information about all our needs and desires and the changing supply of resources to meet them. Hayek said it was a marvel the way all this is conveyed to us by prices the guide our actions as they rise and fall. And to Hayek, the market does most good when it is most free. Its our desire to control it that most often turns it against us. Hayek thought meddling by government could make it harder for the market to do its job by distorting the signals it was sending to buyers and sellers. And the meddling involved in the government's control of supply of money, Hayek decided, could be most damaging of all: Rampant inflation, unemployment, uncontrollable debt.

End exact transcription: 10:50

Beginning of general notes:

...intervention in the Market sets the stage for even greater disaster.
Ron Paul: "Pouring kerosene on the fire trying to put it out. They're trying to stop the problem of excess credit with more credit; but all that it does is restart the problems again and you create a new bubble. The bubble now is in the value of the dollar and the bond market, and is unsustainable."

Hayek argument with Kaynes was all about how best to make capitalism work. But as the 30s moved on, Hakey was drawn into a far greater battle—whether capitalism was even the right way to organise society. Or is the new ideology of Communism and fascism— whether their centrally planned systems held the answer.

Hayek was convinced both were utterly wrong.
Sir Mervyn King Governor of the Bank of England:
"Hayek said not merely can human beings strggle to understand how to cope with uncertainty, but the world is just too complex for them to cope with understanding all of it. A Market system conveys so much information that makes it feasible that central planning will fail under the weight of the impossibility of understanding the complexity of the economy. That is Hayek's most important insight and if people had listened to that they would never have been as worried about the threat from communism as they were, because central planning failed under the weight of its own inconsistency."

Seeing how WW2 effort was changing the economy made him worry about what woud happen if the Allies won. Hayek didn't want to defeat the Nazis and then find we'd handed our freedom to an army of bureaucrats instead.

When the 2nd world war broke began, the British government took control of the economy to harness its power for the war effort. Hayek worried they would never let go.
Hayed believed government regulation would lead to serfdom.
He wrote the book "The Road to Serfdom" in 1944
Hayek: "Governments that try to control the economy ultimately enslave its people."

Prof Philip Brooks, Institute of Economic:
"More power held in the state leads to: erosion of economic freedom; political freedom; dictatorship; totalarianism"

Hayek's worry about the danger of Big government struck a chord with Americans
The notion of American individualism —the right to make money —freedom within the rule of law.
Hayek was in favour of governments providing a safety net but his followers don't like to dwell on that.

Hayek believed that socialism led to welfare which leads to serfdom.

1950 into the 1960, Kaynes' approach was adopted.
Hayek was ignored.
In 1974, Hayek received the Nobel Prize in Economics.
Post-war Keynsian case crumbled into riots unrest and poverty.

Thatcherism introduced the world we live in today.
"Rolling back the State"
Publicly owne denterprises were privatised. Taxes were cut.
There was a Bon-fire of State-controlled enterprise on the market.
They wanted to stop union power: workers being squashed by their union leaders.

Hayek thought that by freeing the Market you could prevent power from concentrating in the hands of politicians.

Thatcher thought you could have Free Market policies and still keep power at the centre.
That tension between Hayek's ideas and the controlling instinct of every Free Market politicial never really went away.

Hayek understood the importance of local municipalities.
Thatcher didn't.

In 1986, Thatcher set the Market Free, but not in the way Hayek envisioned.
The deregulated financial system that came out of the 80s and 90s played a big role in the financial crisis because it was half free. The implicit promise to financial institutions that if they got into trouble, they'd be BAILED OUT.
Free to do anything except fail. Too big to fail
Heads I win. Tails, the tax payer loses.

That is what is wrong and that is what has to be stopped.
Hayek set money free, recommending many currencies, with people taking control by issuing their own money.

Friedman's belief that government could steer the economy, using their power to supply money in circulation, is still a touchstone for governments everywhere. Freedman's flattery offered goverenment a way to champion Free Markets and hold on to their power, mistaking economy for a science.

Governments shouldn't try to tame the complexities of human nature.

GoTo: A Short History of Economics

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