All language subtitles for Masters.of.Money.S01E02.Hayek.and.the.Free.Market.1080p.AMZN.WEB-DL.DDP2.0.H.264-MRCS

We heard that
he'd been sinking.

And then we heard that he died,

and my husband said,
"You will have to contact."

And I was on the phone
to the world,

and people were saying,

had I told
the American president?

Had I told Mrs Thatcher?

It was only then, I think,

that finally
it was rammed home to me,

the enormous effect
that he'd had

on the whole world.

You know, ringing
in the middle of the night,

ringing the President
of the United States,

to say that
FA Hayek had died.

Narrator: Friedrich Hayek
was a champion of the market.

He inspired many of the people

who built the world
we live in today.

- Margaret Thatcher would,
from time to time,

pull little bits of paper
with quotations on them

out of her handbag,

and Hayek would be one of them.

Narrator:
For more than a generation,

Western leaders claim to embrace
one central economic idea,

the free market.

With the financial crisis,
that orthodoxy's 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 Friedrich Hayek.

I see, right now,
this moment in history,

as a time where

Hayek's ideas deserve a shot.

Narrator: 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 ever 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's no doubt
that he's a significant thinker.

Though there's major controversy
about every area of his thought.

Narrator: In this series,
we'll reveal the stories

of the lives
and revolutionary thinking

of three extraordinary men.

John Maynard Keynes,
Karl Marx, and Friedrich Hayek.

They all saw their worlds
changing as never before,

becoming ever more complex
and interconnected.

The fate of entire nations
now hung on the power of money.

And they had
very different ideas

about what to do.

Even in the middle
of an economic meltdown,

Hayek's advice to governments
was to step back and do nothing.

Meddling
would only make things worse.

It's not what anyone
has ever wanted to hear,

but today, we've tried
all the usual tricks

for fixing the economy.

Is it time, finally,
to take Hayek's advice, instead?

Narrator: Around the world,
we're all still feeling

the shockwaves
of the financial crash of 2008.

Reporter 1: You really can feel
the fear down here.

Reporter 2: The Dow has had
its worst five days

in five years.

Narrator: 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
if things went wrong,

they could step in.

Tweak the system,
get everything back on track.

Today, fans
of the Austrian economist

Friedrich Hayek,
say it's 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.

- America's interest rates
have been cut,

that was expected,

but the timing
has come as a surprise.

Narrator: It's January 2001,

and America's central bank,
the Federal Reserve,

has cut interest rates

because it's worried
the US 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.

The President was pleased,
as you might imagine.

This is the kind of thing

presidents expect
central banks to do

to avoid economic trouble.

I think the cut was needed.

It was a strong statement

that measures must be taken

to make sure our economy
does not go into a tailspin.

Narrator: Had Friedrich Hayek
been alive,

he would've taken
a very different view.

Far from avoiding trouble,

Hayek would've seen

the Federal Reserve's decision
to cut interest rates

as sowing the seeds
of today's financial crisis.

In fact, Hayek believed

almost any
government intervention

in the market,

like propping up
failing businesses,

setting trade tariffs
or manipulating interest rates,

risked disaster.

[indistinct shouting]

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.

The conventional wisdom

was that 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
predicted would happen.

Narrator: At first glance,
the Hayek view of the crisis

looks a bit familiar.

But don't be fooled.

You probably think you've heard
this argument before,

that the Federal Reserve
partly caused the crisis

by setting interest rates
too low,

encouraging everyone
to borrow too much.

But the argument of Hayek
and his followers

actually runs deeper than that.

It's not just
that the Federal Reserve

got its sums wrong,

didn't set the right
interest rate,

it's that it shouldn't be
in the business

of setting interest rates
at all.

It's this radical rejection

of the state's role
in regulating the market

that set Hayek apart
from other free market thinkers.

He believed the market

would do a far better job
regulating itself,

if only governments
would just leave it alone.

- Free market
did not set interest rates at 1%

under Greenspan.

That's the government
that is doing that,

that is price-fixing.

It's kind of the way
the old Soviet Union

used to fix the price
of bread or gasoline.

The US government
fixes interest rates

the same way.

We need the market
to set interest rates,

not the government.

And if the market
set interest rates,

they would've been much higher,

and we wouldn't have had
these problems.

Narrator: 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.

These family photographs
have not been widely seen.

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
older priests I knew

to explain to me what's it meant
by the word 'God'?

And none of them could. [laughs]

That was the end, for me, of it.

Narrator: Hayek grew up
in a family of scientists.

Like many other intellectuals
in Vienna at that time,

they liked to think
they were on a grand quest

to unwrap the secrets
of the universe.

Since the 18th-century
Enlightenment,

science had unlocked

many of the puzzles
of the universe,

including the origins
of life itself.

As Hayek grew up,

he was drawn to what he saw
as 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.

- 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."

Narrator: 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 civilisation 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 that guide our actions

as they rise and fall.

And to Hayek,
the market does most good

when it's most free.

It's our desire to control it

that most often
turns it against us.

Hayek thought that meddling
by a 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 the supply of money,

Hayek decided,
could be most damaging of all.

Rampant inflation, unemployment,
uncontrollable debt.

In Vienna,
after the First World War,

Hayek saw for himself

how government abuse of money
can wreak havoc.

Across Austria,
prices had taken off,

and so had unemployment.

Even the rich were struggling
to feed themselves.

And no-one
could quite understand why.

The war had left
the Austrian government

with huge bills
and low tax revenues.

So it ordered the national bank

to simply print the money
it needed,

in exchange for bonds or IOUs.

What the people
manning the printing presses

and their political masters
had yet to really grasp

was that they weren't
just producing money,

they were producing inflation.

The amount of money
in the economy was going up,

so people had more money
to spend.

But, of course, the amount
of things they could buy

had stayed more or less
the same.

That forced up
the price of everything.

Inflation took off.

In fact, the situation
got so bad in Austria,

the inflation rate hit 10,000%.

- The financial wealth
was destroyed.

Those that had jobs
continued to have them,

but they could no longer afford,
for instance,

to have maids and servants,

so all of these people,
all of a sudden,

ended up being out of work.

Narrator: With their economy
going up in smoke,

Austria's central bankers
tried to fight fire with fire.

By the summer of 1922,

prices were doubling
every month,

and the central bank

was playing catch-up,

printing higher and higher
denomination banknotes

just to reflect
what was going on in the shops.

In the end,
this 500,000 krone note

could maybe buy you
a loaf of bread.

Of course, by pumping

more and more money
into the economy,

they were only
making the problem worse.

For Austria's politicians,
it was all a crisis

of their own making.

They'd been printing money
to pay their bills

since the start
of the First World War.

They didn't understand

that that could lead
to inflation.

It was a crisis
caused by ignorance.

Having seen Austria
brought to its knees,

Hayek had
an almost visceral fear

of inflation all his life.

It's a fear that central bankers
still share today.

[upbeat '30s music plays]

What happened next in America
led Hayek to conclude

there can be something worse
than government ignorance -

hubris.

He thought that entire period

showed the calamity
that can come

when governments
try to use the power of money

to shape the economy.

In America in the 1920s,

the greatest boom
the world had ever seen

was taking off.

Consumers couldn't get enough
of new products

like cars, telephones
and record players.

The stock market
rose higher and higher.

As the Roaring '20s wore on,

the finest economic minds
in America

came to believe
the boom would never end.

[clamouring]

Back in Austria, in early 1929,

Hayek was convinced
they'd got it all wrong.

He'd become the director
of the recently founded

Institute
for Business Cycle Research.

Its job was to understand

why economies
were always lurching

from one boom and bust cycle
to another.

Hayek called it
"the 19th century pattern".

Though, it was hardly
a thing of the past.

The Institute was based here
at the Chamber of Commerce,

where Hayek
had been developing a new theory

of boom and bust,

along with new thinking
about the market.

To many,
the downs were unpredictable.

A kind of force of nature

that might destroy an economy,
without warning.

Hayek had been working
on a new idea,

that the seeds of busts

were sown during booms.

Because the world had become
increasingly interconnected,

Hayek had been studying
the American boom

to help him forecast

what would happen
to the Austrian economy.

He had to produce
monthly reports

on the state
of the European economy.

And in 1929, he's credited

with making
a striking prediction.

He thought the American
stock market boom

was about to end.

He was right.

In October 1929,
Wall Street fell off a cliff,

and the '20s roared
to an anguished end.

[cheerful musical whistling]

Hayek's prediction came out
of what he saw happening

at America's new central bank.

The Federal Reserve
had been set-up in 1913

to stabilise America's
notoriously shaky private banks,

by offering them
a reliable source of credit.

Hayek's big idea

was that it was the cost
of borrowing,

the interest rate
set by central banks

like the New York
Federal Reserve,

that caused unsustainable booms
to develop,

and caused the inevitable busts.

[cheerful whistling continues]

In the 1920s, the governor
of the New York Federal Reserve

had a revolutionary idea.

Benjamin Strong thought
he could use the bank's power

to set interest rates,

to influence what was happening
in the economy.

In many ways, that idea
of using interest rates

marked the start
of modern monetary policy.

Strong began
buying government debt

on the open market,

which did have the effect

of raising the amount of money
in the economy.

But unlike Austria's
hapless central bankers,

Strong had a strategy.

The difference

with what had happened
in Austria

was that the Fed
wasn't buying Treasury bonds

to help the government
pay its bills,

it was doing it
to get money into the market,

and keep interest rates low.

The central bank
wanted to encourage everyone,

individuals and households
and companies,

to borrow from the banks.

It worked.

Man: Steel up, utilities up,
motors up,

radio way up,

everything, up, up, up...

Narrator: Strong's intervention
really paved the way

for the financial system
we have today.

Thanks to all that credit
he created,

the stock market rose
higher and higher.

With loans so cheap,

many borrowed money
to buy shares.

Others invested heavily
in property.

The Federal Reserve
hoped its intervention

would keep the boom going
indefinitely,

but Hayek believed
Strong's policy

was sowing the seeds
of an eventual bust.

According to Hayek,
the low cost of borrowing

was sending the wrong signal
to investors.

In effect,
that low interest rate

was telling them
that America was saving more,

that there was lots of cash
sitting in bank accounts,

ready to be lent on
and invested.

It wasn't true.

Man: Don't sell America short.

Why, man,
we've scarcely started.

Narrator: By the time

the Federal Reserve
spotted the warning signs,

it was too late.

Man: ..technical readjustments.

Over $14 billion go with them,

and so goes the confidence
of a nation.

Wall Street...

Narrator: The crash came
when interest rates rose

and investors started to realise

the banks didn't have money
to back up

all those investments,
after all.

Man: The Jazz Age is over.
All over.

Narrator: To Hayek,
the lesson was clear.

By feeding the boom
with cheap credit,

the Federal Reserve
had helped cause

the Wall Street Crash
and the Great Depression.

Fast forward
to today's global crisis,

and you could tell
a similar story.

We certainly saw
a lot of cheap credit

in the decade before the crash,

which did help fuel
unsustainable property booms.

Today, central banks

have computer models
of the economy

light-years ahead of anything
dreamt up by Benjamin Strong.

But even so,
Hayek's followers say

the Federal Reserve
had learned nothing

from the mistakes it made
in the 1920s.

In the early 2000s,
it had kept interest rates

too low for too long.

But then and now,

there are plenty
who would disagree.

The job of the Fed chairman
is to keep the party going,

to spike the punchbowl
at all costs.

Not to take the punchbowl away,

which, really,
should be the job, I mean,

the Federal Reserve
should be independent,

but it's not.

It acts in consort
with the government

to try to maintain
a phoney prosperity.

- Interest rates were very low.

And that was partly promoted

by the fact that

the surplus countries,

notably China,
but others, as well,

had a lot of money.

They were perfectly happy
with exporting.

It would've been hard

to force American interest rates
higher in that environment

because there was so much money
flowing in

at low interest rates.

- If it was all the Fed's fault,

how come Europe had
the exact same experience?

It's not the fact
of the interest rate policy

maybe having been wrong,

although I'm not even sure
I agree on that,

but it's the fact
that we had these deregulated,

'Wild West' financial markets
that allowed us

to get into the crisis
we're in.

Narrator:
Like our own financial collapse,

the consequences
of the 1929 crash

were felt across the world.

A string of banking crises
followed,

and a terrible depression
in America and much of Europe.

Again, Hayek said
it was all down

to interest rates being too low
in the boom years.

But years later,

another hugely influential
free market thinker came along,

who argued the exact opposite,

Milton Friedman.

He said the Federal Reserve

had not pumped too much money
into the system,

but too little.

That's the version of history

that most politicians
and economists still believe.

- Hayek was absolutely wrong

to think that,
in the catastrophic depths

of the Great Depression
of the 1930s,

that all that was happening
was a...

..an unwinding
of the malinvestments

that had come
from a credit boom.

Clearly, there had been
a calamitous collapse

of the banking sector,

that had nothing to do

with the earlier
so-called malinvestment.

Narrator:
As the Great Depression began,

Hayek was invited
to give a series of lectures

here at the London School
of Economics.

The LSE wanted him
as part of their fightback

against a new,
very different strand

of economic thinking
from arch-rivals Cambridge,

that had been getting
a lot of attention.

The man driving
that new approach

was John Maynard Keynes.

The grand dispute

between Keynes and Hayek
in the 1930s

seems so relevant to us today,

it's become
an Internet sensation.

Lord Keynes, wow!
It's, it's, it's such an honour!

- Indeed, sir.
- Please, just go.

Narrator:
This surreal reinvention

of their battle of ideas

has been watched
nearly 2 million times online.

- Hey-ek?
- No, Hayek.

Like, high explosives.

[trumpet fanfare]

Narrator:
Hayek's opponent, Keynes,

was a heavyweight thinker.

The seemingly unstoppable
new force in economics.

The clash felt a bit
like David and Goliath.

- Keynes had two brains.

It was said of him
that he caused

more inferiority complexes
with justification

than anyone else
in his generation.

Hayek was not known.

He was 16 years younger
than Keynes.

- They fell out
with each other on first meeting

and continued to fight
for the rest of their lives.

Narrator:
The big economic argument

that started here in 1931

is still going on today.

If an economy gets into trouble,

should the government intervene
to try to fix it?

Keynes's answer
was emphatically yes.

Hayek said no.

For once,
it really was that simple.

- For Keynes,
it was a moral problem.

The fact was
there were people unemployed,

and therefore
they should be put back to work.

And it didn't really matter
how you did it.

For Hayek,
it was a different thing.

Hayek concluded

that we really
didn't know enough

about economics,

and that any attempt
by people like Keynes

to start fiddling around with it

would only end up
with unintended consequences.

And those
unintended consequences,

according to Hayek,
could be even worse

than the problems
that were solved.

Narrator: The bitter argument
between Hayek and Keynes

embodies a fault line
in economics

that exists to this day.

It's one of the great
academic disputes

in the history
of intellectual thought.

It set the tone, really,

for the difference
between left and right today.

Between those who want
to intervene in the economy,

and those who would prefer
to leave the economy alone.

Narrator: It was
one of the most important

intellectual battles
of the 20th century,

and at the time,
it was pretty clear who won.

Keynes.

In 1933, as the Depression
showed no sign of ending,

President Roosevelt
instigated a massive

public spending programme
that looked very Keynesian.

Under the New Deal,
all kinds of infrastructure

was built across America,
perhaps most famously,

Hoover Dam in Arizona.

The New Deal's
gone down in history

as the first time
a country seriously tried

to spend its way
out of recession.

But even at the time,
Hayek thought it was a mistake.

He believed
what the economy needed

was a period of cleansing,

to get rid
of all the bad investment

and weak businesses
from the boom,

and let the fittest survive.

Hayek saw the New Deal
as an artificial stimulant,

preventing the market
naturally healing

its damaged ecosystem.

Rather than stepping in,

government should step back

and let the recession
do its job.

- Hayek thought
that the recession

was the return to normalcy,

that the boom
was caused by bad policy,

but once the recession started,

that was the return
of the economy to normalcy.

It would involve liquidation
of certain projects

that have been started
that were not sustainable.

Narrator:
But in the depths

of capitalism's
worst ever crisis,

Hayek's tough message

was too much
for most politicians to swallow.

He was ignored.

When the financial crisis hit
in 2008,

policymakers were blindsided.

After Lehman Brothers,

one of the world's most famous
investment banks went down,

the American government
swiftly turned to Keynes

to try to stop
the damage spreading.

They started intervening
on an epic scale,

spending hundreds
of billions of dollars

propping up banks,
insurance companies,

even America's
biggest car firms,

to stop them going bust.

Apparently,
they didn't want to see

the deep cleansing
of the economy

that Hayek would've recommended.

- It's not like I'm glad
that we need a recession.

It's unfortunate
that we need this recession.

Had the government
not interfered in the economy,

in ways
that I would've been against,

we never would've had
this phoney boom.

So in other words,

if we didn't take
all these drugs,

we wouldn't have to go through
the withdrawal.

In that period in 2008,

right across the world,

people were scared stiff

that this was going to go
from a recession

into a downright depression.

The world is so global now,

that these things could easily
have spread.

That's why, you know,
people thought,

you know,
in different countries,

we've got to do
whatever it takes to stop that.

Narrator: Today, central banks
are pursuing

another Keynesian idea,

keeping interest rates low,

encouraging borrowing
to stimulate economic activity.

But if you follow the Austrian,
Hayek view,

it's all worse than pointless.

Because this intervention
in the market

is setting the stage
for an even greater disaster.

Interviewer: What do you think
is the relevance of Hayek

to what the Fed's doing now?

Pouring kerosene on the fire
and trying to put it out.

They're trying to stop
the problem

of excessive credit
with more credit.

But all that it does

is it restarts
the problems again,

and you create a new bubble.

And the bubble now
is in the value of the dollar

and the bond market.

And it's unsustainable.

Narrator:
Hayek's argument with Keynes

was all about how best
to make capitalism work.

But as the '30s moved on,

Hayek was drawn
into a far greater battle,

whether capitalism
was even the right way

to organise society.

Or if the new ideologies
of communism and fascism,

with their centrally-planned
systems,

held the answer.

He was convinced
both were utterly wrong.

Hayek said,

not merely can human beings

struggle 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

central planning will fail
under the weight,

the impossibility

of understanding the complexity
of the economy.

That's Hayek's
most important insight,

and if people had listened
to that,

they would never have been
so worried about the threat

from communism as they were.

Because central planning
failed under the weight

of its own inconsistency.

Narrator: Hayek had seen

the economic costs
of central planning,

but World War II made him focus
on the political implications.

Of course,
he didn't want the Allies

to lose the war,

but seeing how the war effort
was changing the economy,

made him worry about
what would happen if they won.

He didn't want
to defeat the Nazis

and then find
we'd handed our freedom

to an army of bureaucrats,
instead.

When the Second World War began,

the British government
took control of the economy

to harness its power
for the war effort.

Hayek worried
they would never let go.

- There was a lot of enthusiasm,
especially among socialists,

to continue the planning

that had taken place
during World War II,

after the war was over.

Man:
A government inspector checks

that the measurements
are 90in long and 60 wide,

and that the weight
is 4.5 lbs.

Narrator:
As men from the ministry

dictated how many blankets
each blanket factory produced,

Hayek began writing a book,

attacking the government's
control of the economy.

It would help change
the course of the 20th century,

and start a political battle
that runs to this day.

- And there is...

..a handwritten copy,

by my father-in-law,

in an ordinary
child's exercise book

of 'The Road to Serfdom'.

He has written on it,

"This is about the third
or fourth draft

"from a longer typescript,
later destroyed by mistake."

And so, that's...

That is the draft that survived

of 'The Road to Serfdom'.

Narrator:
In 'The Road to Serfdom,'

Hayek makes a moral argument

that government attempts
to control the economy

ultimately enslave its people.

- When we give
more and more power

to the state, gradually,

there is an erosion of,

first, economic freedom,

and then, ultimately,
political freedom.

That erosion
of political freedom

then leads people to demand
a strongman, a dictator,

to sort everything out,

make the trains run on time
and everything else.

and that this leads, inexorably,

down the road
to totalitarianism.

- It says, "To the socialists
of all parties."

He loved it!

He was so amused
when he thought it up.

Narrator: 'The Road to Serfdom'

was published in Britain
in 1944, with little fanfare.

But across the Atlantic,
things were very different.

In April 1945,

Hayek agreed
to give a short lecture tour

of American universities.

Before he arrived,
his book was given

the kind of publicity
that money can't buy,

an extended extract
was published

in 'Reader's Digest,'

which had
more than 8 million subscribers.

Hayek's warning
about the dangers

of big government struck a chord
with many Americans.

- 'The Road To Serfdom'
really fitted in

with notions
of American individualism

and the sense that anybody
can become a millionaire,

if only they were
to work hard enough.

And an anxiety, which came
right from the Founding Fathers,

about whether
the federal government

should take too much power
from the states.

Narrator: After the war,
the size and reach of government

did grow
across the Western world,

with the rise
of the welfare state.

- Reading Hayek
gave a kind of explanation

of why what had gone wrong
was going wrong.

Hayek gave
an alternative vision

which seemed to me,
to be very cogent.

What it boiled down to

was freedom,
within the rule of law.

- What he was read to say

and actually himself
moved to say

by the 1960s,

was that moving
to a social welfare society

would eat away
at the health of democracy.

I think it's one
of his failed predictions.

Badly failed.

Even though it remains
an influential part

of his thinking,
now with many followers

in the libertarian mode.

Narrator: In fact,
Hayek was in favour

of governments providing
some kind of safety net.

But his modern supporters
don't like to dwell on that.

Well, we have
a lot more socialism now,

than when he wrote it.

As socialism
creeps in the economy,

slowly over time,

a lot of people don't notice it.

And eventually, you know,

you're not
on the road to serfdom,

you've arrived at serfdom.

Think about Victorian Britain.

That was, certainly,
a very free market.

There was a minimum
government intervention.

Do we think that
the average citizen of England,

in 1870,

felt a great deal
of personal freedom?

I think there was a great deal
of servility and class deference

coming out of the fact
that the lives of the poor

were incredibly insecure,

and only by constantly
flattering their betters

could they have any reasonable
assurance of survival.

So no, I think
there's more freedom in dignity

in a moderately strong
welfare state

than there is
in the Hayekian paradise

of free markets.

Narrator: Despite the success
of 'The Road to Serfdom,'

in the 1950s and '60s,

Hayek found himself
in the political wilderness.

Governments
across the Western world

were enthusiastically embracing
the ideas of Hayek's nemesis

from the dark days of the 1930s,

John Maynard Keynes.

It became the new
capitalist orthodoxy

that governments
could successfully manage

their economies.

The tide of history
had turned against Hayek.

- He got very depressed.

People weren't listening to him,
they weren't reading his books.

England seemed to be going
left wing.

He'd chosen to be British
and he looked,

from his views of an economist,

and he could see everything
going the wrong way.

Narrator: Then, in 1974,

Esca Hayek got a phone call
out of the blue.

It was the man
who'd invited Hayek to the LSC

40 years earlier,

to do battle with Keynes.

- It was Lionel Robbins
who rang me and said,

"Are you sitting down?"

[laughing] I said, "Yes."

And he said, "Well...

"..he's been awarded
a Nobel Prize for economics."

And that was...

..like being given
a knighthood of the world.

That's the Nobel citation.

Stockholm, 10 December 1974.

Alfred Nobel.

Given to Friedrich von Hayek.

His life started off completely,
again.

He'd been depressed,

he was coming up to retirement,
and suddenly everything started.

It was a new life, absolutely.

Everything took off for him.

[rock music plays]

Narrator: While everything
began taking off for Hayek,

Britain was sinking
into economic decline.

Strikes had become
a fact of life.

The post-war Keynesian consensus
was crumbling.

A few months after Hayek
won the Nobel Prize,

the Conservative Party
turned to a new leader.

The rise of Margaret Thatcher

brought Hayek
into the political mainstream

for the first time.

- Margaret Thatcher would,
from time to time,

pull little bits of paper
with quotations on them

out of her handbag

and Hayek would be one of them.

Narrator: Hayek had spent
most of the 20th century

as a political outsider.

Now, he had the ear of the woman

who would be Britain's
next prime minister.

- I think it would be
a great mistake

to think of her
as studying Hayek,

like a student would.

It's more,
trying to get inspiration

from Hayek.

And casting around,

ransacking the minds
of great men,

of whom he was
one of the most prominent.

So that she could, somehow,
get the gold.

Narrator: In 1979,

Margaret Thatcher
was swept to power,

determined to build
a new Britain.

It was a bold
change of direction

that really did create the world
we live in today.

- We did institute

a radical change
of policy direction,

which has not really
been reversed.

It may have been muddied,

but it hasn't been reversed.

It does chime in with Hayek

right back in the 1940s,

saying that the path we're on
at the moment,

is the road to serfdom,

and we need to tread
a very different path.

Narrator:
In the language of the time,

Mrs Thatcher began rolling back
the state.

Government-owned industries
were privatised,

public spending
and taxes were cut.

There was a bonfire
of state controls on the market,

on prices, wages,

dividends and foreign exchange.

Britain was moving Hayek's way.

- We were certainly, very much,
on the same wavelength.

We were not busy
thumbing his works

to find out what we should do.

It was not a handbook
for government.

But it was
the same general idea.

Narrator:
Nowhere did today's world

emerge more clearly than
in the Conservatives' battle

with the British trade unions.

Margaret Thatcher
wanted to put a stop

to what she saw
as rampant union power.

But she faced a dilemma.
How do you do that

without alienating
the entire population?

Hayek's philosophy
helped her formulate her answer.

- She wanted
to frame the argument

in terms of liberty.

She didn't want to say,

"The workers are all dreadful,
let's squash them."

She wanted to say,

"The workers are being squashed
by their leaders."

- Come on!
- No, go away! Go away! Go away!

- This very much fed into Hayek

and the idea of liberty

was you were defending
your country here,

as well as the state
of labour relations.

Narrator:
Hayek and Margaret Thatcher

agreed on a lot.
But there was

one crucial difference
between them.

Whereas Hayek thought
you freed the market

to prevent power
from getting too concentrated

in the hands of politicians,

Mrs Thatcher thought

you could have
free market policies

and still keep a lot of power
at the centre.

That tension
between Hayek's ideas

and the controlling instinct
of even free market politicians

never really went away.

- Where she, I think,

missed out sometimes,

was understanding the importance
of institutions

and of countervailing power

in a society.

Hayek, for example,

was quite understanding
about the role

of local authorities
and local municipalities

and local power centres,

in a way which I don't think
Margaret ever was.

Narrator:
Hayek's political influence

reached its height in 1986,

when Mrs Thatcher's government
swept away

much of the regulation

that had constrained
the City of London.

The 'Big Bang'
set the financial markets free,

ushering in today's vast,

interconnected global
financial system.

But it wasn't really
the free market

that Hayek wanted.

Hayek's followers would say

the deregulated financial system

that came out
of the '80s and '90s

played a big role
in the financial crisis

because it was only ever
half free.

It was distorted
by an implicit promise

to all these
financial institutions,

that if things went wrong,

governments would still
come to the rescue.

In the kind of capitalism

we've had in the West
since the 1980s,

the financial institutions
that triggered the recent crash

were free to do anything,
it seems, except fail.

- It was the "too big to fail"
problem.

That they knew

that it was a question
of heads, I win,

tails, the taxpayer loses.

And if that is the bet,
you take the bet

and you take it on a bigger
and bigger and a bigger scale.

So they knew pretty well

that if
they got the gamble wrong,

governments
couldn't allow them to fail,

they'd have to be bailed out.

That is what's wrong,

and that is
what has to be stopped.

- We certainly have discovered
after-the-fact

that banks are not allowed
to fail.

Was that actually
a significant factor

in the over-lending?

I don't think
there's much evidence of that.

Now, the fact that
big banks, clearly,

will not be allowed to fail,

and that
is distorting our system.

But I don't think
that's the story of the crisis.

I think the crisis
was one more about

just a general failure
to understand the risks.

Narrator: There's no doubt
that in the last 30 years,

politicians of all stripes

have let market forces

influence more and more
parts of society.

But they've drawn the line

at Hayek's
most revolutionary idea

of turning money itself
over to the market.

Imagine a world
where we didn't have

just one legal currency
circulating in each country,

issued by a central bank,

but dozens
of competing currencies,

anyone, a company, a bank,
a private individual,

could set up their own version
of the currency

and they'd be free to compete.

The market would determine
how much they were worth.

Hayek knew it was
a crazy-sounding suggestion,

even for him,

but it would finally
stop governments

abusing the power of money.

In America, one man
has been trying to do just that.

He's taken Hayek's
most explosive idea

and turned it into a reality.

Bernard von NotHaus

calls himself
a monetary architect.

The American authorities
call him

"a domestic terrorist".

For some,
what's happened to von NotHaus

shows just how seriously
governments take any challenge

to their monopoly over money.

- Economics is dry and boring.

But money,

money, money, money,

money is exciting,
money's sexy,

you know, money's got pizzazz,

it's about people
and about dreams

and about what we do, you know?

Money is fantastic.

And that's what
I really connected with

in terms of, of von Hayek.

Because what he said in here

was about people taking control

and people
issuing their own money.

Narrator: Von NotHaus
created his own currency,

a silver coin
called the Liberty Dollar,

which anyone could buy.

And many have.

Thanks to him, coins worth
anything up to $50 million

have now been sent out
into the US economy.

And Hayek was a big inspiration.

- He says the problem

is government money.

It's always been
government money.

Because they abuse their power!

They make money out of thin air!

So he says what we should do

is to abolish the central bank.

The end of Federal Reserve.
That was fantastic.

Narrator:
Ever since Benjamin Strong

was running
the New York Federal Reserve

in the 1920s,

central banks
have used their control

over the supply of money,

to try to manage the economy's
ups and downs.

But, as we've seen to Hayek
and his fans,

central banks are the cause

of many
of capitalism's problems,

not the solution.

And I don't argue for closing
the Fed down in one day, either.

I want it out of the fan,
and I want competition,

Hayek's ideas
of competition and money,

and see who can win
this argument.

But for them to claim
monopoly powers

and prevent us from practising
private market economics

is the real problem
that we have.

[Wild West-style whistling]

- A lot of this
is this utopian vision.

The golden age
when men were men

and currency was free.

The United States
had a long period

of no government monopoly
on currency.

We had that whole system

of unregulated banks
issuing competing currencies.

That system was heavily prone
to financial crises.

So the idea, again,
that competition is the answer

is flying
in the face of history.

Narrator: Perhaps.
But the history

of government efforts
to control the market

hasn't been so pretty, either.

For Hayek,
what was really utopian

was the belief
that central banks,

or anyone else
for that matter,

could ever be a match
for the dizzying complexity

of our modern economy.

Interviewer: Hayek would say,
since they can't do it,

they should just stop trying.

We should stop having...

Well, stop having
any intervention

in monetary policy,

or stop having central banks,
if go to the extreme.

Well, that's dreaming, I think.

Narrator: Von NotHaus's
own attempt

to compete
with the Federal Reserve

eventually drew the attention
of the American authorities.

In 2007, the FBI moved in.

I think they began
to perceive us as a threat,

instead of a solution.

Reporter: The monetary architect
behind the Liberty Dollar

is talking about
the US government,

and why agents raided

his Evansville
world headquarters,

earlier this month.

Narrator:
Von NotHaus was charged

with counterfeiting US currency.

Giving evidence
in this courthouse

in North Carolina in 2011,

he talked about Hayek.

- Why he was relevant
to my defence

was because this wasn't
some hare-brained idea

that I had thought out myself.

That I pointed out,

that here was a well-known
Nobel laureate

who had talked about
exactly what I had done.

Narrator: Bernard von NotHaus
was found guilty,

and now faces up to 25 years
in prison.

- I think this was the one
he was most proud of.

Companion of Honour.

Presented by Queen Elizabeth II,

Buckingham Palace, 1984.

And he was absolutely thrilled
when he got that.

To Professor...

Narrator:
Towards the end of his life,

Hayek was feted by everyone.

He'd inspired politicians
all over the world

with his boundless belief
in the power of the free market.

- Catholic University, Caracas.

Narrator: When it came
to their actual policies,

Western leaders in the 1980s

usually turn
to a free market thinker,

whose ideas they found
more palatable.

Milton Friedman's belief

that governments
could steer the economy,

using their power

over the supply of money
in circulation,

is still a touchstone
for governments everywhere.

In that sense, Friedman,
unlike Hayek,

did offer politicians a way
to champion the free market

and hold onto the reins
of power.

Hayek's life spanned
almost the entire 20th century,

an era of unprecedented
scientific progress.

Neil Armstrong:
That's one small step for man,

one giant leap for mankind.

Narrator: But also,

unprecedented
economic disasters.

Living in the shadow of both,

Hayek came to see
the great crises of capitalism

as a result of politicians

mistaking economics
for a science.

It was a century for taking on
all the big questions,

and the big question
for economists

was how they were going to tame

this extraordinary
modern economy.

Keynes and Hayek both thought

that would be
incredibly difficult,

dangerous, even.

But Keynes flattered governments
with the idea

that they could tilt the course
of human history their way.

It was Hayek who said
they shouldn't even try.

We might uncover the laws
of the universe,

we were never going to master

the complexities
of human nature.

- 'Pretence of Knowledge',
he called it,

pretending that
they know something

that they don't know.

Well, they've been doing it now,

we've given the current crop
of economists, let's see,

how many years would that be?

About 70-some years.
Total failure.

Many of the computer models
have been desperately misleading

in pretending that we understand

how the economy works.
We don't.

We can't forecast the economy.

But we can try to think about
the big questions.

Can we get out of a deep slump?

And I think, by working
with other countries,

we can gradually find our way
out of this.

So, you need
the different insights together,

but Hayek is...

..the moral of Hayek is

avoid hubris in economic policy,

just as we should avoid hubris

in thinking that markets,
left to their own devices,

will lead us to nirvana.

Narrator: There's no doubt
Hayek helped change

the course of world history,
shifting it decisively away

from the state
and towards the market.

But no government
has ever dared

to implement Hayek's vision
of a market

free from state intervention.

And when capitalism
faced its biggest test

since the 1930s,

politicians rushed
to save the market from itself.

In fact, the biggest debate
in Britain today,

is not about whether
the government's doing too much

to prop up the economy,

but whether it's doing enough.

Today, Hayek's advice
seems harder to take than ever.

The global economy's
still struggling

with the effects
of the financial crisis.

Hayek would say government
should just step back,

dismantle most of the machinery

they've constructed
for guiding the economy,

take a deep breath, and let go.

But how many politicians
do you know

who could ever, really,
follow that advice?

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