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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
COMMANDING HEIGHTS T H E B A T T L E F O R T H E W O R L D E C O N O M Y Jon Fischer | R. Scott Livengood | Kyle Loosli | Jeff Morgan | Trent Snarr
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THE BATTLE OF IDEAS
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THE OLD ORDER FAILS 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 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
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COMMUNISM ON THE HEIGHTS
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 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
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CAPITALIST COLLAPSE War reparations sparked hyperinflation
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 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
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GLOBAL DEPRESSION 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 Roosevelt’s New Deal was a “war on the Great Depression” Relief Programs Employment Programs Increased regulation Typical example of Keynesian counter-cyclical spending
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WORLDWIDE WAR 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 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
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POST-WAR PLANNING IN EUROPE
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 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
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THE ECONOMY IN GERMANY The war left Germany in ruins. Its economy had disintegrated. Markets didn’t function Shops were empty Raging hyperinflation Worthless currency Black markets American cigarettes were the currency THE BATTLE OF IDEAS Post-war Planning in Europe Planning Sweeps the Globe University of Chicago United States – 1970’s Britain’s Mixed Economy Founders Thatcher/Reagan “The Heights” up for sale Was The Battle Decided? THE AGONY OF REFORM NEW RULES OF THE GAME
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THE ECONOMY IN GERMANY "What have you done? You have changed the Allied price controls." Erhard was asked. He replied, "Herr General, I haven't changed them; I've abolished them.” The General said, "My advisors tell me it is a big mistake." Erhard replied, "Herr General, my advisors tell me the same thing." THE BATTLE OF IDEAS Post-war Planning in Europe Planning Sweeps the Globe University of Chicago United States – 1970’s Britain’s Mixed Economy Founders Thatcher/Reagan “The Heights” up for sale Was The Battle Decided? THE AGONY OF REFORM NEW RULES OF THE GAME
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PLANNING SWEEPS THE GLOBE
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 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
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UNIVERSITY OF CHICAGO Hayek went to teach at the University of Chicago
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 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.”
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UNITED STATES – 1970’S 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 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, : “The time has come for a new economic policy for the United States. Its targets are unemployment, inflation.”
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BRITAIN’S MIXED ECONOMY FLOUNDERS
THE BATTLE OF IDEAS Post-war Planning in Europe Planning Sweeps the Globe University of Chicago United States – 1970’s Britain’s Mixed Economy Founders Thatcher/Reagan “The Heights” up for sale Was The Battle Decided? THE AGONY OF REFORM NEW RULES OF THE GAME Britain 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.
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MARGARET THATCHER 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 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.”
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“REAGANOMICS” Reaganomics had four key principles:
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. THE BATTLE OF IDEAS Post-war Planning in Europe Planning Sweeps the Globe University of Chicago United States – 1970’s Britain’s Mixed Economy Founders Thatcher/Reagan “The Heights” up for sale Was The Battle Decided? THE AGONY OF REFORM NEW RULES OF THE GAME Reaganomics had four key principles: The concept of sound money Deregulation Modest tax rates Limited government spending 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.
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“THE HEIGHTS” GO UP FOR SALE
THE BATTLE OF IDEAS Post-war Planning in Europe Planning Sweeps the Globe University of Chicago United States – 1970’s Britain’s Mixed Economy Founders Thatcher/Reagan “The Heights” up for sale Was The Battle Decided? THE AGONY OF REFORM NEW RULES OF THE GAME MARGARET 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
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WAS THE BATTLE DECIDED? Video
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A Look At Russia, Poland, Chile & Bolivia
THE AGONY OF REFORM A Look At Russia, Poland, Chile & Bolivia
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LENIN’S REVOLUTION The Essence of Soviet Power Central Planning
THE BATTLE OF IDEAS THE AGONY OF REFORM Lenin’s Revolution Behind the Iron Façade Russia Poland The Phone Call That Ended the Cold War Poland’s Answer Soviet Free Fall NEW RULES OF THE GAME The Essence of Soviet Power Central Planning Socialism Control Government Ownership
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BEHIND THE IRON FAÇADE What Gordievsky knew
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 What Gordievsky knew The true cost of military power The result was empty shelves Collapse of an Empire
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RUSSIA A campfire conspiracy Michael Gorbachev
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 A campfire conspiracy Michael Gorbachev The Pantyhose Commission Pressure from the West Video
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POLAND The Shipyards of Gdansk Solidarity Party Professor Sachs
THE BATTLE OF IDEAS THE AGONY OF REFORM Lenin’s Revolution Behind the Iron Façade Russia Poland The Phone Call That Ended the Cold War Poland’s Answer Soviet Free Fall NEW RULES OF THE GAME The Shipyards of Gdansk Solidarity Party Professor Sachs “There is not milk in this city”
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THE PHONE CALL THAT ENDED THE COLD WAR
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 Berlin 1953 Budapest 1956 Prague 1968 Warsaw Different Answer Video
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POLAND’S ANSWER Rapid and Massive Shock Therapy The “Egg Test”
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 Rapid and Massive Shock Therapy The “Egg Test” The hardest hit had helped most Solidarity loses support Poland’s Entrepreneurial Drive
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SOVIET FREE FALL Hard-liners strike back
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 Hard-liners strike back The Soviet Union disintegrates The boys in pink shorts Voucher Capitalism Red Directors vs. Oligarchs Russia defaults, Yeltsin resigns Video
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TROUBLE IN LATIN AMERICA
THE BATTLE OF IDEAS THE AGONY OF REFORM … Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME Mid-late 1900’s Rich in Raw Materials Poor Economies Dependency Theory Increased Government Intervention Political Unrest
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DEPENDENCY THEORY Goal: Economic Growth Reality: Economic Stagnation
THE BATTLE OF IDEAS THE AGONY OF REFORM … Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME Goal: Economic Growth Put up barriers Tariffs Invest in domestic industries Reality: Economic Stagnation Cut-off from technology No external investment Less domestic productivity
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EXAMPLE: CHILE Video THE BATTLE OF IDEAS THE AGONY OF REFORM …
Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME Video
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THE CHICAGO BOYS University of Chicago School of Economics
THE BATTLE OF IDEAS THE AGONY OF REFORM … Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME 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 Pinochet Friedman
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EXAMPLE: BOLIVIA Poorest of Latin American Countries
THE BATTLE OF IDEAS THE AGONY OF REFORM … Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME 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
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EXAMPLE: BOLIVIA Video THE BATTLE OF IDEAS THE AGONY OF REFORM …
Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME Video
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REFORM IN LATIN AMERICA
THE BATTLE OF IDEAS THE AGONY OF REFORM … Trouble in Latin America Dependency Theory Example: Chile The Chicago Boys Example: Bolivia Reform in Latin America NEW RULES OF THE GAME 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
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DOUBLE-EDGED SWORD OF GLOBALIZATION
Video
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THE GOOD Opening of new markets New sources of capital
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Opening of new markets New sources of capital Broader opportunities for investment
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THE BAD Global responsibility Increased risk due to the unknown
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Global responsibility Increased risk due to the unknown Contagion
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NAFTA First great debate of the globalization era Great sucking sound
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game First great debate of the globalization era Great sucking sound Transformation of Northern Mexico (TV’s) Trade from $40B to $280B in 6 years
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TECHNOLOGY SPURS EXPANSION
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Internet Information flow Knowledge of cultures and new markets
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LIQUID MONEY What do you think of when we say “trade?”
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game 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 Video
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AVERTING A DISASTER – MEXICAN MELTDOWN
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game The 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. Video
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MO MONEY, MO PRAHLEMS THE BATTLE OF IDEAS THE AGONY OF REFORM
NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game
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ASIA: READY FOR SUCCESS?
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Huge influx of capital Institutional weakness Underdeveloped markets Inadequate securities laws “Pegging” as monetary policy Lack of positive NPV projects Video
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CONTAGION ILLUSTRATED
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Global Interconnectedness Thailand LTCM Malaysia Russia Indonesia S. Korea Video
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NEW RULES OF THE GAME Required reserves Lending restrictions
THE BATTLE OF IDEAS THE AGONY OF REFORM NEW RULES OF THE GAME The Good The Bad NAFTA Technology Spurs Expansion Liquid Money Averting a Disaster Mo Money, Mo Prahlems Asia: Ready for Success Contagion Illustrated New Rules of the Game Required reserves Lending restrictions Exchange rate monitoring Increased transparency Video
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QUESTIONS
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