1. Commanding the Heights: the Battle of Ideas
The essay gives an overview of the documentary Commanding the Heights: the Battle of Ideas made by
PBS, followed by the analysis of the two competing economic ideas Keyes vs. Hayek, and then presented
a detailed illustration of their impact on the America’s economic policies since 1980s.
Introduction
The PBS-made documentary ‘Commanding the Heights’ is to promote better understanding of
globalization, economic development and world trade, featured with specific examples of different
countries and interviews with related parties.
Episode One: "The Battle of Ideas," gives an overview of the battle between two major competing ideas
about the world economy over the course of last century. One the one and, the English economists
Keynes believes in the ‘planned economy’ and advocates the government intervention to mitigate the
risk during economic recession or depression; On the other hand, the Australian economist Hayek favors
the free market mechanism and believes in minimum government intervention as market will eventually
take care of itself and the prices system is at the heart of what makes a functioning economy work. The
episode tracks the root of these ideas and explains how the world moved toward the government
controlled economy during the 20th century in a chronological order.
The Russian Revolutionary in 1917 marked the beginning of communism economy, in which government
is very important to allocate resources and goods. During the great depression of 1930, the Keynes’
theory began to dominate. According to Keynes, the solution to the depression was for the government
to spend more money to restore the full employment. By late 1940s, socialism was on the march and
free market was on the retreat all over the world from Great Britain to United States. The Keynes’
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2. economic theory dominated for decades until the economic crisis of 1970s, which forced political
leaders to look for new ideas. In the 1980s Margaret Thatcher took the helm of Great Britain and Ronald
Reagan was elected president of United States. Both of them embraced Hayek’s free-market theory and
played a critical role for the worldwide acceptance of this different economic approach. The next section
illustrates my opinions/analysis on these two different economic theories after viewing the film.
Keynes vs. Hayek
In order to better understand these two ideas, further research has been done beyond the film. The
main concept of Keynesian economics is that market sometimes can lead economic in-efficiency,
therefore requiring significant government intervention. Keynesian economics advocates the ‘mixed
economy’ and government should play an important role in the marketplace. According to Keynesian
economics, the solution to great depression is for government to reduce the tax rate and increase the
spending on the infrastructure. In certain situations, market is not able to restore to full efficiency
automatically. (Wikipedia) The two theories of mainstream Keynesian economics include LS/LM model
and Philips curve (See, Exhibit 1). LS/LM model gives the relationship between real market output and
the interest rate. And the Philips curve describes the inverse relationship between inflation rate and
unemployment rate. (Wikipedia)
By contrast, Hayek is a strong advocate of free market capitalism. Hayek is one of the major contributors
of Australia Economic School thoughts. The Austrian Business Cycle Theory (or ABCT) is key theory of
Australia Economic School. Exhibit 2 gives an overview of ABCT. To illustrate, in a totally free market if
demand is greater than supply, the prices increase, therefore leading to the increased profits and
eventually the production increase; on the contrary if supply is greater than demand, the prices
decrease and the profits decreases therefore resulting in the decreased production. (Slideshare)
Australia Economics also argues that during the recession, the government intervention can only slow
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3. the recovery and worsen the situation as the prices sends information signal to determine the output
eventually. For example, the US bailout in 2008 and the stimulus package will be considered as a bad
move to recover the economy by Hayek’s theory.
After viewing the film and further researching on these two major economic ideas, I found myself
neither a Keynesian follower nor Hayek persuasion. Both theories have made great contribution to the
economic development. However, they both have their limitations as well. The main difference between
these two ideas is the government role in an economy. In my opinion, I agree that ‘No matter if it is a
white cat or a black cat; as long as it can catch mice, it is a good cat’ by the famous Chinese reformer
Deng Xiaoping. No matter
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4. Exhibit 1a, LC/LM model
Source:
Exhibit 1b, Philips curve
Source:
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5. Exhitbit 2, Austrania Business Cycle theory
1. Demand > Supply
2. Supply > Demand
Source: http://www.slideshare.net/ManAgainstTheState/austrian-business-cycle-theory
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6. References:
http://en.wikipedia.org/wiki/IS-LM_model#See_also
http://en.wikipedia.org/wiki/Phillips_curve
http://www.slideshare.net/ManAgainstTheState/austrian-business-cycle-theory
http://en.wikipedia.org/wiki/Keyensian
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