_The Commanding Heights: The Battle of Ideas_ episode explains the economy’s change in structure between 1914 and 1970, as well as the functioning of the markets and government during that time. John Maynard Keynes and Friedrich von Hayek both had influential roles on the economy in the 20th century due to their opposing arguments regarding aggregate demand and classical liberalism, respectively. Keynes’ “planned economy” idea and Hayek’s “market economy” both fought to shape the economy into what they hoped was ideal for modern day society. Between the two, Keynes’ argument seemed to have the most success, especially in times of great need, which is why I found his the most compelling.
After World War I, Germany and Austria were forced to pay the costs of the war, which was near impossible for them, until they began to print more money in order to compensate for their lack of funds. Printing more money caused a hyperinflation to occur, where prices skyrocketed and people’s savings decreased in value. By 1929, the market began to crash; banks started closing and millions of people lost all of their money. It was at this time that the government and the economy were in desperate need of a plan that would revive them from this devastating crash.
At this point, John Maynard Keynes came in with his theory in an attempt to save the economy from the Great Depression. He wrote a book explaining why the Great Depression occurred and what the government should do to prevent such an economic downfall from ever happening again. As Robert Skidelsky, a British economist, said, “Concepts we take for granted today, like gross domestic product, the level of unemployment, the rate of inflation, all to do with general features of the economy, were invented by [Keynes]” (Ch.4 Europe, 1931). His idea was that the government should spend money in order to keep full employment, even if it meant bringing about a deficit. In the long run, the increase in spending would benefit the economy overall. Roosevelt, being the President of the United States during this period, used this idea by creating government agencies to give citizens work.
As Daniel Yergin, an American author, mentions, “[Roosevelt and the New Deal] instituted a program of regulating capitalism in a way that had never been done before, in order to protect people from what they saw as the recklessness of the unfettered market” (Ch.5 Washington, D.C., 1933). Regardless of the effort Friedrich Hayek put in to convince citizens that the government should not be given more control over the economy, the majority followed Keynes’ view. Once World War II hit, numerous job opportunities opened up for the preparation of the war, and the Great Depression was defeated. After the war ended, many countries took to following Keynes theory, resulting in successful economies and in some cases, socialism.
Hayek still did not think Keynes’ plan was going to work and wrote a sarcastic novel to disclaim this. The message he was getting across with this book was that “too much government planning means too much government power, and too much government power over the economy destroys freedom and makes men slaves” (Ch.6 London, 1944). In truth, Germany’s market had diminished and hyperinflation had caused the German currency to become worthless, leaving them in need of a new leader to change their situation. This is when a new director of economic affairs, Ludwig Erhard, was appointed. He had similar views to Hayek, including the belief that price controls were not stopping inflation from occurring, nor were they helping the economy in any way.
For this reason, Erhard got rid of price controls, leaving citizens with more freedom, and less desire to make trades in the black market. This is an example of Friedrich von Hayek’s view of how the economy should be run. He thought Keynes’ idea was giving the government too much power over the economy instead of giving that influence to the citizens. Hayek followed the view of a libertarian named Ludwig von Mises who believed “markets, like people, needed to be free from government meddling” (Ch.3 Vienna, 1919). He thought that the economy would fail because of the control over wages and prices.
In the end, Keynes theory prevailed, which is why I find his argument more compelling. With the evidence to back him up, he seemed to be on the right track in terms of how the government should react and how the economy should be run. Many people prospered from his ideas and beliefs. I believe that he made society feel more secure in terms of finances and their overall style of living.