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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. Jon Fischer | R. Scott Livengood | Kyle Loosli | Jeff Morgan | Trent Snarr. THE BATTLE OF IDEAS. THE OLD ORDER FAILS. THE BATTLE OF IDEAS The Old Order Fails Communism on the Heights

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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

COMMANDING HEIGHTS

Jon Fischer | R. Scott Livengood | Kyle Loosli|Jeff Morgan|Trent Snarr

the old order fails
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
communism on the heights
COMMUNISM ONTHE 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
capitalist collapse
CAPITALIST COLLAPSE

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
global depression
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
worldwide war
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
post war planning in europe
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
the economy in germany
THE ECONOMY IN GERMANY

THE BATTLE OF IDEAS

Post-war Planning in Europe

Planning Sweeps the Globe

University of Chicago

United States – 1970’s

Britain’s Mixed Economy Founders

Thatcher/Reagan

“The Heights” up for sale

Was The Battle Decided?

THE AGONY OF REFORM

NEW RULES OF THE GAME

  • The 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 economy in germany10
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

planning sweeps the globe
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
university of chicago
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.”

united states 1970 s
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, 1969-1974: “The time has come for a new economic policy for the United States. Its targets are unemployment, inflation.”

britain s mixed economy flounders
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.

margaret thatcher
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.”

reaganomics
“REAGANOMICS”

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

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.

  • 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.

the heights go up for sale
“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
the agony of reform

THE AGONY OF REFORM

A Look At

Russia, Poland, Chile & Bolivia

lenin s revolution
LENIN’S REVOLUTION

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
behind the iron fa ade
BEHIND THE IRON FAÇADE

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
russia
RUSSIA

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

poland
POLAND

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”
the phone call that ended the cold war
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 1989 - Different Answer

Video

poland s answer
POLAND’S ANSWER

THE BATTLE OF IDEAS

THE AGONY OF REFORM

Lenin’s Revolution

Behind the Iron Façade

Russia

Poland

The Phone Call That Ended the Cold War

Poland’s Answer

Soviet Free Fall

NEW RULES OF THE GAME

  • Rapid and Massive
  • Shock Therapy
  • The “Egg Test”
  • The hardest hit had helped most
  • Solidarity loses support
  • Poland’s Entrepreneurial Drive
soviet free fall
SOVIET FREE FALL

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

trouble in latin america
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
dependency theory
DEPENDENCY THEORY

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
example chile
EXAMPLE: CHILE

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

the chicago boys
THE CHICAGO BOYS

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 FriedmanVisited 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

example bolivia
EXAMPLE: BOLIVIA

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

example bolivia32
EXAMPLE: BOLIVIA

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

reform in latin america
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
the good
THE GOOD

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
the bad
THE BAD

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
nafta
NAFTA

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
technology spurs expansion
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
liquid money
LIQUID MONEY

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

averting a disaster mexican meltdown
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

mo money mo prahlems
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

asia ready for success
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

contagion illustrated
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

new rules of the game
NEW RULES OF THE GAME

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