Masters of Money: Friedrich Hayek

Presented by Stephanie Flanders, BBC iPlayer

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When the credit crunch first hit I attended an industry annual dinner where I was sat next to the chief executive of a well-known loan provider who let me in on his own strategy for solving the debt crisis.

Rather than reducing interest rates, they should be allowed to rise naturally, he said.

“We need to go through hell to sort out the mess we’re in,” he argued, and then proceeded to wax lyrical about former prime minister Margaret Thatcher.

Frankly I found it difficult to stomach the idea of this man rubbing his hands at the prospect of a cleansing financial fire to set everything straight. It was at this point that I turned my chair to face the opposite direction to indicate that I no longer wanted to have this conversation – and then stared at my spoon.

I was prompted to recall that incident after watching the second episode of the BBC economics editor Stephanie Flanders’ Masters of Money series on Friedrich Hayek.

Each episode looks at a different economic powerhouse, with the first on John Maynard Keynes, the second Hayek and the third on Karl Marx.

On the subject of Hayek, Flanders provides a mixture of biographical information and interviews with some big names in the world of economics, such as former chancellors Alistair Darling and Nigel Lawson, and the current governor of the Bank of England Sir Mervyn King.

A native Austrian, Hayek’s ideas were born out of the economic collapse and hyper-inflation he witnessed in Germany and Austria after the first World War.

He basically thought that governments should butt out when it came to financial markets.

Having seen the soaring inflation that resulted from the German government’s decision to print more money, he thought that all financial markets should be free from external intervention.

On that same basis, with the US government encouraging people to invest in its stock market in the 1920s, he likewise accurately predicted the Great Depression that took hold of the US in 1929.

But Hayek was also anti the remedies to the depression put forward at the time by economic heavyweight John Maynard Keynes, whom Flanders covered in her first episode of the series.

Hayek published his ideas in the 1944 book The Road to Serfdom, which brought him to the attention of world leaders. He was apparently widely quoted by the likes of Margaret Thatcher and others who were intrigued by his idea of liberalising markets.

But as Flanders explains, Hayek’s message was that governments should not just free markets, but relinquish control of them as well, with no setting of interest rates.

Most leaders and governments ultimately found this a difficult pill to swallow and instead went for a halfway house in the ideas of Milton Friedman, who argued that governments could have their cake and eat it – with free markets and control.

So what would have happened if Hayek’s theories had been applied to the current crisis? What if interest rates had been allowed to balloon?

There’s no denying Hayek’s ideas are seductive. Part of the current vogue for banker bashing is the fact that it seems those who profited in the run-up to the last crisis have got away scot free. But the consequences of letting everything collapse would have been anarchy – repossessions, a collapse in house prices, our banks all falling down like a pack of cards, and a full-blown depression.

Flanders’ show is excellent. If you’re interested in economic ideas, definitely check out the Masters of Money series on BBC iPlayer.