Original subtitles

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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