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The Commanding Heights

At Pfizer we’re spending over five billion dollars looking for the cures of the future. We have twelve thousand scientists and health experts who firmly believe the only thing incurable is our passion. Pfizer. Life is our life’s work.
Additional funding is provided by the Lynde and Harry Bradley Foundation, the John M. Olin Foundation, the Bernard and Irene Schwartz Foundation, and the Smith Richardson Foundation.

(Musical break.)

BEN WATTENBERG: Hello, I’m Ben Wattenberg. When Soviet dictator Vladimir Lenin coined the phrase ’the commanding heights’ he was referring to the locus of national economic power. That is, the major enterprises and the major industries. The epic struggle between the government and the marketplace to control those commanding heights has profoundly altered human history since the close of World War II. Joining us to explore that history and its consequences are Pulitzer Prize winner Daniel Yergin, co-author with Joseph Stanislaw of The Commanding Heights: The Battle Between Government and the Marketplace That is Remaking the Modern World; and one of the supreme generals in that battle, Nobel Prize-winning economist Milton Friedman. Later in the program, we will hear a different point of view from the noted economist John Kenneth Galbraith. The topic before the house, the Commanding Heights. This week on Think Tank.

(Musical break.)

BEN WATTENBERG: Welcome, Daniel Yergin, and welcome to you, Milton Friedman, in San Francisco. Let me begin with you, Dan, and Milton please interject whenever you think it’s appropriate, what is this great story that you’re writing about?

DANIEL YERGIN: The story really has two elements. One is how the world moved towards greater government control over economies, and then the very dramatic story of how the world changed its mind, which is what we’re living through right now.

BEN WATTENBERG: When would you date that change of mind?

DANIEL YERGIN: I think the change of mind began in the late ’70s, early ’80s, in a way. It, of course, had begun earlier. Professor Friedman was writing, but the impact really began to gather force, and particularly, I think, the turning point was, of course, the election of Ronald Reagan in this country and Margaret Thatcher becoming prime minister in Britain.

MILTON FRIEDMAN: If I may interrupt briefly.

BEN WATTENBERG: Milton, please.

MILTON FRIEDMAN: Briefly, I believe there were two episodes there. The idea of moving to a free market started to gain some credence in the 1950s, and was on the move in the early ’60s, when the whole process was interrupted in the United States by the Vietnam War, and what happened during the ’60s. And then, Daniel, you are entirely right, that it resumed momentum in the late ’70s and early ’80s, particularly with the election of Ronald Reagan.

DANIEL YERGIN: One of the things, Professor Friedman, we quote you in The Commanding Heights saying, is that you became an economist because of the Great Depression, and it seemed a more relevant thing to do than to become a, as you put it, an insurance actuary. And I think that the “commanding heights” really, as the momentum, of course, came out of the Second World War where the strong view that markets had failed, of course, the Great Depression, and the confidence in governments had won the war. Those two things came together, I think, to create this momentum where governments would control the strategic sectors of the economy either through ownership, which is what happened in most parts of the world, or in the United States through regulation.

BEN WATTENBERG: So, we have a story of the Depression Era that sends out a signal to the great thinkers of the world that markets don’t work, and then they put in mixed economies, and more regulation, and in the Soviet Union, and a lot of other places, command economies, and dictatorial government.

MILTON FRIEDMAN: Right. The extreme form is, of course, the Communist systems where, you know, you weren’t supposed to have a market.

BEN WATTENBERG: Right. So that says markets don’t work. Then, after World War II, as government and regulation grows, people start saying, government doesn’t work. And that is the story of the Friedman Revolution, or the Reagan Revolution.

DANIEL YERGIN: The high point, perhaps, and I don’t know if Professor Friedman would agree, of the belief or the confidence that governments can manage economies was December 31st, 1965, because that was the week that John Maynard Keynes appeared on the cover of Time Magazine, 19 years after his decease, and saying, we have it all under control, and we can do it from the center. But then, I think that you started to find more and more, as discussion really--instead of markets failing, also how governments fail when they try and carry out economic activities. And this concept of the commanding heights in Britain, not only was it the strategic sectors of the economy, you know, steel and railroads, but it included travel agencies and pubs.

BEN WATTENBERG: Milton, looking back on it, after all, this great drama starts unfolding during the Depression, was this period of 30 or 35-40 years or so of a mixed economy, of more planning, more regulation, more government, was it necessary in order to get to a point where you can then start saying, decentralize, privatize, deregulate, let the market have its will?

MILTON FRIEDMAN: Necessary from a political point of view or an economic point of view?

BEN WATTENBERG: An economic point of view. Well, I guess both.

MILTON FRIEDMAN: I don’t think it was necessary from an economic point of view. But it was clearly necessary from a political point of view. Unfortunately, the Depression did instill the idea that the markets couldn’t work, and the war planning cemented the idea that governments could work. And so, politically, I don’t believe you could have had a change of ideas without having gone through a stage in which you demonstrated that government could also have failures.

BEN WATTENBERG: Let’s pick up this history in the late ’70s.

MILTON FRIEDMAN: When you have Margaret Thatcher.

BEN WATTENBERG: Margaret Thatcher, right. Margaret Thatcher gets elected, Dan, what happened? Pick up the story there.

DANIEL YERGIN: Well, she came in, I mean, it was by almost accident she became head of the Conservative Party. She came in. The word ’privatization’ hardly appeared in the manifesto. Britain was in its winter of discontent, and you’ve seen so often, countries change course when they finally run into the wall. And in Britain it looked like it was headed to try and see if it could lower its level to below East Germany. It was really in trouble.
And her first three years were very tough, as she said when we interviewed her for The Commanding Heights, she said that, you know, the polls were down, they felt very isolated. Then one of these accidents of history came along. And the accident was the Falklands War in 1982 with Argentina. And out of that, she emerged as the Iron Lady. And that gave her the political muscle to begin this program of deregulation, of backing up from these changes. In a sense, made Margaret Thatcher in a position to actually become Margaret Thatcher.

BEN WATTENBERG: Milton, wouldn’t the so-called ’tides of history’ have taken us in that direction whether or not there was a Falklands War, or Mrs. Thatcher?

MILTON FRIEDMAN: Yes, I think there would have been…they would have. We intellectuals get an overestimation of our role. What happens, and Dan has described it--they’ve described it--very well in the book.

BEN WATTENBERG: Dan and his co-author Joe Stanislaw, right.

MILTON FRIEDMAN: Yes. What happened is that we intellectuals set forth ideas, and they lie around and are stagnant or are picked up by other intellectuals, but have very little influence on the course of events until a crisis arises. Major changes don’t come except at times of crisis. And what happened in Britain was that Britain had run into a crisis. What happened in the United States was a crisis. And the crisis in both cases was inflation, and stagflation. The fact that you had prices rising accompanied by relatively high unemployment. And that created a crisis which tended to discredit the idea of government being able to control the economy, keeping it on a steady keel. It discredited essentially the Keynesian vision, which was the dominant vision in the United States and in Britain prior to that date. It still is, in part.

BEN WATTENBERG: Okay.

MILTON FRIEDMAN: But there is no doubt whatsoever that Margaret Thatcher played a major role in speeding up the process, and having it come sooner than it did, and having it take place in a more critical form.

BEN WATTENBERG: Okay. Now, we turn the pages forward, we’re in 1980. Ronald Reagan is running for president. He has this so-called ’supply side’ vision of the economy. It is labeled ’voodoo economics.’ He becomes president, and within a few months the country goes into what was called the deepest recession since the Great Depression. What is Reagan’s role in this, Daniel?

DANIEL YERGIN: I would actually like to hear Milton.

BEN WATTENBERG: Yeah. Well, were you a voodoo economist at that time?

MILTON FRIEDMAN: Absolutely. I still am. But what Reagan’s role in that is not what is ordinarily thought. I think the most important role he played was being willing to standby while the measures were taken, the monetary measures were taken, which was necessary to break the inflation. I do not believe that there is any other president in my lifetime who would have stood by and supported the Federal Reserve in the policy of sharp deflation, which occurred from 1980 to 1982.

BEN WATTENBERG: This is Paul Volcker as the head of the Fed, right?

MILTON FRIEDMAN: Paul Volcker as the head of the Fed.

DANIEL YERGIN: And Volcker is saying, if we don’t deal with inflation, that our social fabric is going to snap, that terrible things can happen, and that, as painful as it is, if you didn’t bring it out of the system…

MILTON FRIEDMAN: And by 1981, you were in a very sharp recession. The poll results for Reagan were going down. But Reagan did not in any way try to pressure Volcker to change his course, because Reagan understood, despite what people say, Reagan really was a smart man, is a smart man, and Reagan knew that you had to slow down the rate of monetary growth and keep it slow if you were going to get out of the inflationary spiral. And, that worked. And, thanks to his willingness to take the heat when it was very, very intense, you came out of it in 1983, and started on the very rapid rise of the next …well, ever since.

BEN WATTENBERG: We’ve talked about some of the successes. Let’s stay in the 1980s, what were the conspicuous and ongoing failures, because this is a process not an event.

DANIEL YERGIN: Yes. Well, I think that the most important thing that was probably going on in the 1980s in the second half was the accumulating, accelerating collapse of Communism in the Soviet Union, because, of course, that was the model. That was the alternative, the New Jerusalem that people looked at. And I think, in a sense, that that probably dominated the agenda because there was no longer a Socialist model out there.

BEN WATTENBERG: But the Social Democrats and the welfare state people would bitterly resent the idea of being put in the same grouping with the Communists. Now, are you prepared to let that stand? It seems to me that’s what you have done?

DANIEL YERGIN: Well, I realize…yes, they were clearly not on the same team, but the fact that you could sit in India and still say, well, there are problems in the Soviet Union, you know, there are problems about political liberty, but look what they’ve done in terms of economic growth, or central planning. And I think that partly, for discussion, that the end of Communism has also led to this crisis within Social Democracy.

BEN WATTENBERG: But the Europeans…

MILTON FRIEDMAN: But also, look at what the people you’re talking about were saying about Russia.

BEN WATTENBERG: What was that?

MILTON FRIEDMAN: All of the leading welfare state economists were saying, most of the Sovietologists were saying, in the middle ’80s that Russia is a sign that a centrally planned economy can work. They were all very positive about the Soviet Union.

BEN WATTENBERG: For example, who, Milton?

MILTON FRIEDMAN: For example, Paul Samuelson. For example, John Kenneth Galbraith. For example, Thoreau. They all… There’s a wonderful Young Americans for Freedom poster which has in the center a statement by Reagan in the ’80s, in the early ’80s, that the Soviet Union will collapse, that Communism is a failed system which will collapse. And it’s surrounded by quotes from all of the people I’ve described, each of which says: Well, the Soviet Union has demonstrated that you can have full employment, and that you can a productive workforce.

BEN WATTENBERG: Okay. It is now 1998, let us perform a thought experiment and make it 2008, we’re 10 years into the future. What would you guess and imagine the course of this intellectual revolution that we are witnessing will be?

MILTON FRIEDMAN: I think it is easier to imagine what the course of the practical changes will be, because I think what you will see is that in the main there will be no major additional governmental programs. But at the same time, there will very little elimination of existing programs. Once you get a program adopted, it’s very, very hard to get rid of it, because it tends to establish a vested interest in a small group that benefits from it. And the harm tends to be spread widely. So the pressure to continue it is very strong. There’s an inertia of the status quo that is almost immovable. But, on the other hand, you’re not going to get any new programs added.

BEN WATTENBERG: But, is the vigor of the entrepreneurial economy that we are now witnessing, particularly in California, for one example, enough to overcome and swamp that governmental inertia?

MILTON FRIEDMAN: Yes, it is. It will not do so in a completely regular way. We will have recessions. We will have back-stepping. But the direction is strongly up, and I’m very optimistic for the long-run future. And what I foresee is government growing smaller as a fraction of the national income because the national income grows, while government more or less stagnates.

BEN WATTENBERG: Okay. Dan, please.

DANIEL YERGIN: Let me first give the comment on…you talk about the changing attitudes towards Milton Friedman. In The Commanding Heights we quote Larry Summers, who is the deputy secretary of the treasury, nephew of Paul Samuelson and Kenneth Arrow, two Nobel Prize winners--and I think Milton may know the quote--but Larry says: “You know, when I was growing up, Milton Friedman was the devil figure of my youth”--because [Summers] grew up in a family of economists--he said, “with time I’ve had increasingly grudging respect and increasingly--he paused and said, “ungrudging respect.” And I think that’s a sign of the change of attitudes.

BEN WATTENBERG: Is the root of this intellectual transformation not economic but political in the sense that the driving force for it is liberty?

MILTON FRIEDMAN: That’s a very tough one. I think the root of the change is economic. I would wish it were otherwise. I believe in a free society, and I take freedom as my highest value. I believe most people do. And yet, I think the change has been driven by economic events.

BEN WATTENBERG: That you have to hit a wall and then you try to do something better. Let me ask you another question. You all know Murphy’s Law: if it can go wrong, it will go wrong. I keep asking myself, where’s Murphy? And under what disguise will he come into our lives next?

MILTON FRIEDMAN: Well, he will come into your life in the form that what’s going on now can’t keep going on. It will overshoot. The stock market is not going to go to the heavens. You will get a stock market collapse pretty soon, sooner or later.

BEN WATTENBERG: Now, what is collapse, 1000 points or 5000 points?

MILTON FRIEDMAN: Who knows? Who knows?

BEN WATTENBERG: Milton Friedman.

MILTON FRIEDMAN: If you and I could predict that, we’d be much wealthier people than we are. Nobody can predict that. But there will be a collapse, there will be recessions. Things are not going to go on always as well as they are now. They can’t. There’s no possibility. But that doesn’t mean that any such check will be more than a temporary check. The long-run prospect is very favorable. The Internet is something that you want to you’re your eye on, because one of the great features of the Internet is that it’s making harder… it’s becoming harder and harder for government to collect taxes.

BEN WATTENBERG: Dan Yergin…one second…where is Murphy?

DANIEL YERGIN: Well, I think that I would say, or as Mrs. Thatcher puts it, the unexpected happened. Keep your eye on the Japanese banking system if you want to look for a near-term thing that a year from now we’ll say, how could we miss, or perhaps the impact of the Euro will have consequences that we don’t see, or, as Milton says, that, you know, there are cycles, and suddenly this kind of happy optimism where everybody loves to talk about their mutual funds, maybe that time will change. But I do think we have to ask Milton, because there was a missing sentence in there between why you say this thing can’t go on like this, what trips it up? Is it genetically embedded in a market that’s doing this well that it will fall over itself?

MILTON FRIEDMAN: Yes, because any such movement tends to overshoot. You get people ?? Keynes described this very well. If everybody is guessing what everybody else is guessing, and you stop basing what goes on, on basic fundamentals that can last for a long time and on the game itself, on the stock market itself, so that historically, if you look back, you’ll find the Florida land boom was a historical example, you go back to John Laws, time and again when you’ve had these kinds of booms they have invariably overshot and come back down again.

BEN WATTENBERG: That does not mean that the fundamentals themselves are unsound?

MILTON FRIEDMAN: No, no, not at all.

DANIEL YERGIN: But here’s the risk.

MILTON FRIEDMAN: But look at what happened in Japan, because that is really an object lesson. In the 1980s, you had one of these typical overshoots. You had a bubble in which stock prices, land prices went up to unsustainable levels and they collapsed, and Japan is still fighting, it’s getting out of that.

BEN WATTENBERG: All right. Dan, have you changed your mind in these last 20 or 30 years? I remember you and some of your views about the oil crisis and things like that. As I recollect them, they were not these sort of vigorously pro free market views
.
DANIEL YERGIN: Yeah.

BEN WATTENBERG: Have you had your own hegira?

DANIEL YERGIN: Absolutely. And writing this book was partly an exploration of my own thinking and change of thinking and forcing myself to go through a process of looking at assumptions. I think it started really with The Prize where, when I finished it, I realized that…

BEN WATTENBERG: The Prize was the book about oil?

DANIEL YERGIN: Oil. And I realized at the end there are hundreds of great characters in the book, but there are basically two characters, supply and demand. And then we did Russia 2010 and asked, what is a market? So there has been an intellectual evolution and an understanding of markets, and I think also being an entrepreneur at the same time, you know, you live it every day. That old thing, you have to meet the payroll. So, I think that intellectually and in terms of experience, that writing The Commanding Heights was really a process of both consolidation but also a process of discovery and reflection.

BEN WATTENBERG: After our session with Friedman and Yergin, Think Tank traveled to Cambridge, Massachusetts, home of Harvard University and the economist John Kenneth Galbraith, author of the widely heralded book, The Affluent Society. We asked Ken Galbraith for his thoughts about Dan Yergin’s book, The Commanding Heights.

KENNETH GALBRAITH: It covers a wide range of territory, both intellectual and geographic. There are a couple of faults, both rather important. It deals with this new fashion of the market, the new rush to the market and away from the state, as though this were a set of ideas that had taken hold, and doesn’t look for the deeper factors that maybe in back of those ideas. Ideology is never something in itself, it is always something in its environment. And there’s the other point, that we are enjoying the market. We’re enjoying the fashion of conservative politics. As we want, if we have a crash, if we have a recession or a depression or however it is called, at that point, the market will lose some of its prestige and the government will be asked to come in. I carefully avoid predictions because I’ve discovered over a period of some years that people remember better my wrong predictions than they do my right ones. But that we have, are having, a characteristic, a classical speculative episode, mergers and acquisitions, a multiplication of stock market institutions, mutual funds. We have far more mutual funds than we have intelligence to covert them all. And a speculative situation in common stocks, all of which should give us pause, even if we don’t want to make predictions.

BEN WATTENBERG: And what does Professor Galbraith think of Milton Friedman’s claim that Galbraith and others gave too much credit to the Soviet economy?

KENNETH GALBRAITH: We have seen the deeply planned economies, such as that of the Soviet Union, and latterly that of China, we have seen them give way to a much larger role for the market. And while I find myself in a very uneasy situation if I agree with my old friend Milton Friedman, he’s certainly right on that. On the other hand, if we have a recession or a depression, which I don’t hope for, we will find people, as now in Japan, talking much more about the command role of the government, what it can do about expanding aggregate demand, increasing employment, saving businesses from the misadventures of their past, as in the case of the savings and loan companies a few years ago, and ideas will be moving painfully to some extent from Friedman to people like Samuelson or Galbraith.

BEN WATTENBERG: Thank you all very much for watching. For Think Tank, I’m Ben Wattenberg.
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Additional funding is provided by the Lynde and Harry Bradley Foundation, the John M. Olin Foundation, the Bernard and Irene Schwartz Foundation, and the Smith Richardson Foundation.
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