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.

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


Capitalist Collapse

Global Depression


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


Capitalist Collapse

Global Depression


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


Capitalist Collapse

Global Depression


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


Capitalist Collapse

Global Depression


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









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









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









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









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









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









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









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









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









REFORM NEW RULES OF

THE GAME

WAS THE BATTLE WAS THE BATTLE DECIDED?DECIDED?

Video

http://www.pbs.org/media/commandingheights/ch_p01_19_qt_300.mov

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






RUSSIARUSSIA

• A campfire conspiracy

• Michael Gorbachev

• The Pantyhose Commission

• Pressure from the West

THE BATTLE OF IDEAS

THE AGONY OF

REFORM Lenin’s






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






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






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






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






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


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


America Dependency


America


EXAMPLE: CHILEEXAMPLE: CHILETHE BATTLE OF

IDEAS THE AGONY OF


America Dependency


America


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


America Dependency


America


http://www.britannica.com/needmore

http://www.britannica.com/needmore

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


America Dependency


America


EXAMPLE: BOLIVIAEXAMPLE: BOLIVIATHE BATTLE OF

IDEAS THE AGONY OF


America Dependency


America


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


America Dependency


America


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


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




Disaster Mo Money,


Success Contagion


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




Disaster Mo Money,


Success Contagion


Game

TECHNOLOGY SPURS TECHNOLOGY SPURS EXPANSIONEXPANSION

• Internet

• Information flow

• Knowledge of cultures and new markets

THE BATTLE OF IDEAS

THE AGONY OF

REFORM




Disaster Mo Money,


Success Contagion


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




Disaster Mo Money,


Success Contagion


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




Disaster Mo Money,


Success Contagion


GameVideo

MO MONEY, MO MO MONEY, MO PRAHLEMSPRAHLEMS

THE BATTLE OF IDEAS

THE AGONY OF

REFORM




Disaster Mo Money,


Success Contagion


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




Disaster Mo Money,


Success Contagion


GameVideo

CONTAGION CONTAGION ILLUSTRATEDILLUSTRATED

Thailand

Malaysia

Indonesia S. Korea

Russia

LTCMGlobal

Interconnectedness

THE BATTLE OF IDEAS

THE AGONY OF

REFORM




Disaster Mo Money,


Success Contagion


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




Disaster Mo Money,


Success Contagion


GameVideo

QUESTIONSQUESTIONS

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.

Documents

game slide

agony of reform new

europe planning

planning sweeps

government planning

worldwide war war spending

new jerusalem

intervention keynes