COMMANDING HEIGHTS T H E B A T T L E F O R T H E W O R L D E C O N O M Y Jon Fischer | R. Scott Livengood | Kyle Loosli | Jeff Morgan | Trent Snarr.
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COMMANDINCOMMANDING G
HEIGHTSHEIGHTST H E B A T T L E F O R T H E W O R L D E C O N O M Y
Jon Fischer | R. Scott Livengood | Kyle Loosli | Jeff Morgan | Trent Snarr
THE BATTLE OF IDEASTHE BATTLE OF IDEAS
THE OLD ORDER FAILSTHE OLD ORDER FAILS
• Early 20th century was the first age of globalization
• This was shattered by World War I• Disillusioned, people gravitated to
communism– No commerce, trade, or private property– Promised to end the “economic exploitation
of man by man”
• In the West, the Allies were trying to squeeze reparations out of defeated Germany
THE BATTLE OF IDEAS
The Old Order Fails
Communism on the Heights
Capitalist Collapse
Global Depression
Worldwide War THE AGONY OF
REFORM NEW RULES OF
THE GAME
COMMUNISM COMMUNISM ONON THETHE HEIGHTSHEIGHTS
• The Austrian School: Markets work; governments don’t
• Communist experiment in Russia was already failing– Lenin’s “New Economic Policy”– Allowed small business, private property– State controlled “Commanding Heights”
• After Lenin’s death, Stalin consolidated control of the economy
THE BATTLE OF IDEAS
The Old Order Fails
Communism on the Heights
Capitalist Collapse
Global Depression
Worldwide War THE AGONY OF
REFORM NEW RULES OF
THE GAME
CAPITALIST COLLAPSECAPITALIST COLLAPSE
• War reparations sparked hyperinflation• Boom and bust in the United States
– Mass-market investing, high-flying radio stocks
– Stock market crash prompted bank runs, halted investment, drove unemployment
• European unrest threatened not only capitalism, but democracy
• Keynes begins developing theories of fiscal intervention
THE BATTLE OF IDEAS
The Old Order Fails
Communism on the Heights
Capitalist Collapse
Global Depression
Worldwide War THE AGONY OF
REFORM NEW RULES OF
THE GAME
GLOBAL DEPRESSIONGLOBAL DEPRESSION
• Roosevelt’s New Deal was a “war on the Great Depression”– Relief Programs– Employment Programs– Increased regulation
• Typical example of Keynesian counter-cyclical spending
THE BATTLE OF IDEAS
The Old Order Fails
Communism on the Heights
Capitalist Collapse
Global Depression
Worldwide War THE AGONY OF
REFORM NEW RULES OF
THE GAME
WORLDWIDE WARWORLDWIDE WAR
• War spending pulled the country out of depression, vindicating Keynesians
• Friedric von Hayek published The Road to Serfdom as a counter argument to Keynes– Rejected government planning and
intervention
• Keynes’ ideas triumphed at Bretton Woods with creation of IMF and World Bank
THE BATTLE OF IDEAS
The Old Order Fails
Communism on the Heights
Capitalist Collapse
Global Depression
Worldwide War THE AGONY OF
REFORM NEW RULES OF
THE GAME
POST-WAR PLANNING IN POST-WAR PLANNING IN EUROPEEUROPE
• In Britain: – Wartime hero Winston Churchill is defeated– Labor Party takes power, promising to build
a “New Jerusalem.”
• Similar nationalization of the commanding heights of the economy was occurring in Russia, under Joseph Stalin.
• The Battle of Ideas - Keynes vs. Hayek
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
THE ECONOMY IN THE ECONOMY IN GERMANYGERMANY
• The war left Germany in ruins. Its economy had disintegrated. – Markets didn’t function– Shops were empty– Raging hyperinflation– Worthless currency– Black markets– American cigarettes were the currency
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
THE ECONOMY IN THE ECONOMY IN GERMANYGERMANY
"What have you done? You have changed the Allied price controls." Erhard was asked.
He replied, "Herr General, I haven't changed them; I've abolished them.”
The General said, "My advisors tell me it is a big mistake."
Erhard replied, "Herr General, my advisors tell me the same thing."
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
PLANNING SWEEPS THE PLANNING SWEEPS THE GLOBEGLOBE
• State-led model for industrial growth• Public sector must occupy what came
to be known as the “commanding heights” of the economy:– Electricity– Telephones– Water– Oil– Gas– Coal– Steel– Trains, planes
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
UNIVERSITY OF CHICAGOUNIVERSITY OF CHICAGO
• Hayek went to teach at the University of Chicago
• 8 professors and 11 other economists would go on to win Nobel Prizes
• In Washington, however, Keynes remained king.
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.”
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
UNITED STATES – 1970’SUNITED STATES – 1970’S
• Stagflation – inflation and unemployment rising at the same time
• Nixon implemented wage and price controls
• The Results:– Shortages were created– Prices kept on rising
RICHARD NIXON, U.S. President, 1969-1974: “The time has come for a new economic policy for the United States. Its targets are unemployment, inflation.”
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
BRITAIN’S MIXED ECONOMY BRITAIN’S MIXED ECONOMY FLOUNDERSFLOUNDERS
• Britain faced stagflation• Conservative party opted for wage, price
controls – just as in U.S.• Keith Joseph and other conservatives
voted out of office
Joseph began to preach the virtues of free markets. In a series of pamphlets, he went on the intellectual offensive, attacking the mixed economy, making the case for capitalism.
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
MARGARET THATCHERMARGARET THATCHER
While at Oxford, Thatcher once slammed Hayek's book down on a table and announced, “This is what we believe!”
THATCHER: “The spirit of enterprise had been sat upon for years by socialism, by too-high taxes, by too-high regulation, by too-public expenditure. The philosophy was nationalization, centralization, control, regulation. Now this had to end.”
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
““REAGANOMICS”REAGANOMICS”RONALD REAGAN: They just can't accept that their discredited policies of tax and tax, spend and spend, are at the root of our current problems.
MILTON FRIEDMAN: There's no doubt in my mind that those actions of Reagan, lowering tax rates, plus his emphasis on deregulating - unleashed the basic constructive forces of the free market, and from 1983 on, it's been almost entirely up.
• Reaganomics had four key principles:– The concept of sound money– Deregulation– Modest tax rates– Limited government spending
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
““THE HEIGHTS” GO UP THE HEIGHTS” GO UP FOR SALEFOR SALE
MARGARET THATCHER: So the whole efficiency of nationalized industries was running down. Why should they be efficient? They had access to the Treasury purse.
• Thatcher’s plan for the Commanding Heights:– End their dependence on government
subsidies– Subject them to the discipline of the
marketplace
THE BATTLE OF IDEAS
Post-war Planning in Europe
Planning Sweeps the Globe
University of Chicago
United States – 1970’s
Britain’s Mixed Economy Founders
Thatcher/Reagan “The Heights” up
for sale Was The Battle
Decided? THE AGONY OF
REFORM NEW RULES OF
THE GAME
WAS THE BATTLE WAS THE BATTLE DECIDED?DECIDED?
Video
THE AGONY OF REFORMTHE AGONY OF REFORM
A Look At
Russia, Poland, Chile & Bolivia
LENIN’S REVOLUTIONLENIN’S REVOLUTION
• The Essence of Soviet Power
• Central Planning
• Socialism
• Control
• Government Ownership
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
BEHIND THE IRON BEHIND THE IRON FAÇADEFAÇADE
• What Gordievsky knew
• The true cost of military power
• The result was empty shelves
• Collapse of an Empire
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
RUSSIARUSSIA
• A campfire conspiracy
• Michael Gorbachev
• The Pantyhose Commission
• Pressure from the West
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
Video
POLANDPOLAND
• The Shipyards of Gdansk
• Solidarity Party
• Professor Sachs
• “There is not milk in this city”
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
THE PHONE CALL THAT THE PHONE CALL THAT ENDED THE COLD WARENDED THE COLD WAR
• Berlin 1953
• Budapest 1956
• Prague 1968
• Warsaw 1989 - Different Answer
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
Video
POLAND’S ANSWERPOLAND’S ANSWER
• Rapid and Massive
• Shock Therapy
• The “Egg Test”
• The hardest hit had helped most
• Solidarity loses support
• Poland’s Entrepreneurial Drive
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
SOVIET FREE FALLSOVIET FREE FALL
• Hard-liners strike back
• The Soviet Union disintegrates
• The boys in pink shorts
• Voucher Capitalism
• Red Directors vs. Oligarchs
• Russia defaults, Yeltsin resigns
THE BATTLE OF IDEAS
THE AGONY OF
REFORM Lenin’s
Revolution Behind the Iron
Façade Russia Poland The Phone Call
That Ended the Cold War
Poland’s Answer Soviet Free Fall
NEW RULES OF THE GAME
Video
TROUBLE IN LATIN TROUBLE IN LATIN AMERICAAMERICA
• Mid-late 1900’s• Rich in Raw
Materials• Poor Economies• Dependency
Theory• Increased
Government Intervention
• Political Unrest
THE BATTLE OF IDEAS
THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
DEPENDENCY THEORYDEPENDENCY THEORY
• Goal: Economic Growth– Put up barriers– Tariffs– Invest in domestic industries
• Reality: Economic Stagnation– Cut-off from technology– No external investment– Less domestic productivity
THE BATTLE OF IDEAS
THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
EXAMPLE: CHILEEXAMPLE: CHILETHE BATTLE OF
IDEAS THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
Video
THE CHICAGO BOYSTHE CHICAGO BOYS
• University of Chicago School of Economics– Milton Friedman Visited Chile
• Inflation Problem• Pinochet• Encouraged Free Markets• “Decisive and Immediate” Action
• Painful Reforms (High unemployment)– Damage of association of repressive
government and free market reforms.– “Painful” Economic Growth as a Result– Freedom Follows Free Markets
Friedman
Pinochet
THE BATTLE OF IDEAS
THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
EXAMPLE: BOLIVIAEXAMPLE: BOLIVIA
• Poorest of Latin American Countries• Hyperinflation (July 1985, 60,000%)• Instability (President of the Week)• Government Spending (30x Tax
Income)• Most Severe Case in Latin America
– Jeffrey Sachs, Harvard University• Introduced “Shock Therapy” to Bolivia’s
Economy• Pattern for all of Latin America Sachs
THE BATTLE OF IDEAS
THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
EXAMPLE: BOLIVIAEXAMPLE: BOLIVIATHE BATTLE OF
IDEAS THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
Video
REFORM IN LATIN REFORM IN LATIN AMERICAAMERICA
• Led by Leading U.S. Scholars• Extremely Painful at First:
– Political Unrest– Anti-American Sentiment– High Prices; High Unemployment
• Results:– Increased Stability– Economic Growth– Political Freedom
THE BATTLE OF IDEAS
THE AGONY OF
REFORM … Trouble in Latin
America Dependency
Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin
America
NEW RULES OF THE GAME
DOUBLE-EDGED DOUBLE-EDGED SWORD OF SWORD OF
GLOBALIZATIONGLOBALIZATION
Video
THE GOODTHE GOOD
• Opening of new markets• New sources of capital• Broader opportunities for investment
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
Game
THE BADTHE BAD
• Global responsibility• Increased risk due to the unknown• Contagion
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
Game
NAFTANAFTA
• First great debate of the globalization era
• Great sucking sound• Transformation of Northern Mexico
(TV’s)• Trade from $40B to $280B in 6 years
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
Game
TECHNOLOGY SPURS TECHNOLOGY SPURS EXPANSIONEXPANSION
• Internet
• Information flow
• Knowledge of cultures and new markets
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
Game
LIQUID MONEYLIQUID MONEY• What do you think of when we say “trade?”
• Goods and services. Trade in goods and services: $8 trillion
• Stocks, bonds, and currencies Trade in currencies: $288 trillion
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
GameVideo
AVERTING A DISASTER – AVERTING A DISASTER – MEXICAN MELTDOWNMEXICAN MELTDOWN
The very day NAFTA came into effect, Zapatista rebels launched an uprising in Southern Mexico. Shortly afterward, the leading presidential candidate was assassinated.
Worried about stability, foreign investment began to flee. The global economy was about to face a new kind of crisis.
Bailout of $40 Billion to Mexico.
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
GameVideo
MO MONEY, MO MO MONEY, MO PRAHLEMSPRAHLEMS
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
Game
ASIA: READY FOR ASIA: READY FOR SUCCESS?SUCCESS?
• Huge influx of capital
• Institutional weakness
• Underdeveloped markets
• Inadequate securities laws
• “Pegging” as monetary policy
• Lack of positive NPV projects
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
GameVideo
CONTAGION CONTAGION ILLUSTRATEDILLUSTRATED
Thailand
Malaysia
Indonesia S. Korea
Russia
LTCMGlobal
Interconnectedness
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
GameVideo
NEW RULES OF THE NEW RULES OF THE GAMEGAME
• Required reserves
• Lending restrictions
• Exchange rate monitoring
• Increased transparency
THE BATTLE OF IDEAS
THE AGONY OF
REFORM
NEW RULES OF THE GAME
The Good The Bad NAFTA Technology Spurs
Expansion Liquid Money Averting a
Disaster Mo Money,
Mo Prahlems Asia: Ready for
Success Contagion
Illustrated New Rules of the
GameVideo
QUESTIONSQUESTIONS
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