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The Commanding Heights (Part 1): The Battle of Ideas (Chapters 13-19)

Chapter 13: A Mixed Economy Flounders

Onscreen title: London, 1973

NARRATOR: Britain's mixed economy, so widely imitated, was in similar trouble. It, too, was facing the deadly combination of unemployment and inflation. In theory, the Conservative prime minister Ted Heath and his Cabinet believed in markets. In practice, like Nixon, they made a sharp U-turn and used wage and price controls to combat stagflation.

KENNETH BAKER, Conservative Minister, 1981-1992: I was a junior minister in Ted Heath's government, and I remember having to attend meetings with three or four other ministers where we would actually decide the level of charges plumbers would charge next week
to repair taps and how much taxi drivers could charge for fares and how much hairdressers should get in wages. It was absolutely unbelievable. It all came to a very sticky end, a complete collapse.

NARRATOR: A coal miners' strike and an oil crisis plunged the country into darkness. Voters blamed Ted Heath and voted the Conservatives out of office.

SHOP MANAGER: Well, we're virtually out of business while the power's off. We've got no sets that we can operate at all.

DAVID YOUNG, Conservative Minister, 1984-1989: We were the sick man of Europe, and the English disease was the disease of strikes, which we had all over the place. And you know, it was so bad that Herman Kahn of the Hudson Institute wrote a book called The Year 2000, and he saw many things, but the one thing he did see was that the lowest standard of living in
Europe in the year 2000 would be shared between Albania and the United Kingdom . Albania !

NARRATOR: A minister in the defeated government, Keith Joseph may have been an unworldly intellectual, but his search for fresh answers would change the way not only
Britain but the world thought about economics and society.

KENNETH BAKER: Keith wore a hair shirt, he beat his breast, and said we were to blame; we've got it wrong. And he did beat his breast. He was called a Mad Monk.

KEITH JOSEPH (interviewed in 1975): I thought I was a Conservative. I thought I was a Conservative, but all the time I was in favor of... I was in favor of shortcuts to Utopia. I was in favor of the government doing things, because I was so impatient for good things to be done.

KENNETH BAKER: And when he appeared on television, he had a vein in his head which kept throbbing, and people said, "Oh, you know, this is a very strange figure indeed, this man." But nonetheless, he started to rethink the Conservative policy.

NARRATOR: Keith Joseph's search brought him here, where, with Hayek's encouragement, a group of kindred spirits had set up a think tank called the
Institute of Economic Affairs .

RALPH HARRIS: The institute started in 1957, you could say the direct result of the Mont Pelerin Society, of The Road to Serfdom, of Hayek's ideas of freedom and competitive enterprise.

NARRATOR: With the zeal of a convert, 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.

Mark Garnett is a biographer of Keith Joseph.

MARK GARNETT, Biographer of Keith Joseph: From the middle of 1974 Joseph undertakes a crusade to convert the country to his way of thinking, and what he wants to do is take the battle to the heart of the enemy camp, and he believed that the universities were infected with socialist thinking.

KEITH JOSEPH: Because there was a free society in this country....

CECIL PARKINSON, Conservative Minister, 1981-1983, 1987-1989: And he was going right into the lions' den, arguing a case that many people had never heard before.

MARK GARNETT: Joseph felt that it was his duty to fight back on behalf of the free market.

NARRATOR: To revive the economy, Joseph preached that
Britain needed more risk-taking, which meant more bankrupts and more millionaires, and less equality.

CECIL PARKINSON: The audience would sort of gasp. They'd never heard anybody challenging the consensus.

KEITH JOSEPH: Mild inflation seemed a painless way of maintaining full employment, encouraging growth, and expanding the social services. So the result is that we're now more socialist in many ways than any other developed country outside the Communist bloc.

RALPH HARRIS: He used to be smuggled in the back door. He was genuinely hurt that the students had reacted to this penetrating argument by chucking flour bombs at him.

MARK GARNETT: It was almost a badge of honor that he would come away from these meetings with egg yolk running down his suit.

NARRATOR: Keith Joseph's most significant adherent was an up-and-coming Conservative politician named Margaret Thatcher. In Parliament and politics, Thatcher's closest friends agree that Keith Joseph's influence on her was crucial.

Institute of Economic Affairs : She relied on him to give her deep intellectual support. There's nothing wrong with intuition. Intuition is reason in a hurry, and Keith just supported and reinforced her intuition. At the very moment, she needed that support.

NARRATOR: Margaret Thatcher had a gut instinct for market economics. Her father had been a grocer, and when she was a girl, she had helped him in the shop. Hardworking and studious, she won a place at
Oxford University , where she became interested in student politics.

While she was at
Oxford , she read Hayek's Road to Serfdom. It made a lasting impression on her. Years later, when she became the first woman to lead the Conservative Party, she once slammed Hayek's book down on a table and announced, "This is what we believe."

RALPH HARRIS: (laughs) Thatcher's office came on and said could she come and drop in to see him. And so she called by, and there was a period of unaccustomed silence from Margaret Thatcher as she sat there, intense, attending to the master's words.

NARRATOR: By 1974, Hayek sensed the world beginning to go his way.

FRIEDRICH VON HAYEK (interviewed in 1978): As for the movement of intellectual opinion is concerned, it is now for the first time in my life moving in the right direction.

Onscreen title: Stockholm , 1974

NARRATOR: In the battle of ideas, 1974 was a turning point. Hayek's Nobel Prize came as a surprise, but the balance was now shifting away from Keynes and towards Hayek.

FRIEDRICH VON HAYEK: I like to say when I was a young man, only the very old men still believed in the free-market system. When I was in my middle ages I myself and nobody else believed in it. And now I have the pleasure of having lived long enough to see that the young people again believe in it. And that is a very important change.
Chapter 14: Deregulation Takes Off [ 7:29 ] Onscreen title: Chicago, 1974

NARRATOR: The U.S. economy was going through the worst downturn since the Great Depression. Industry slowed. Unemployment rose. The Yom Kippur War was followed by an Arab oil embargo. Americans waited in gas lines. And the price of everything kept rising.

Chicago School economists had always argued that rigid government regulations were keeping prices high and fueling inflation. Now more people began to wonder if competition could break the inflationary stranglehold.

SAM PELTZMAN: What is the effect of regulating the airlines? What is the effect of regulating the trucking industry? And what is the effect of regulating the railroad industry? Very often, it raises prices. Instead of allowing competition, it suppresses competition.

Onscreen title:
Washington , D.C. , 1974

NARRATOR: In the airline industry, the host of regulations enacted during the Great Depression were still in force. It was a classic example of regulated capitalism. But deregulation was in the air.

Stephen Breyer, now a Supreme Court justice, then a Harvard professor, was asked by liberal Democratic senator Ted Kennedy to head a Senate investigation of airline regulations.

STEPHEN BREYER, U.S. Supreme Court Justice: You discovered that basically the same firms that had been there in 1938 were still there. Those were the major carriers and nobody new.

NARRATOR: The hearings began, and officials from the Civil Aeronautics Board were called to testify.

STEPHEN BREYER: And it turned out that 5 percent of their time went to stop prices that were too high and 95 percent of their time went to stop prices that were too low, but always the effort was to keep the price high and not low.

NARRATOR: Naturally, the established airlines were quite happy with this arrangement.

STEPHEN BREYER: And we'd say, "When was the last time you granted a new route? Well?"

NARRATOR: Regulations meant that major carriers like Pan Am never had to compete with newcomers. But some cut-price charter flight operators wanted to break this club. Leading the struggle against Pan Am over its profitable trans-Atlantic flights was an exuberant Englishman called Freddie Laker.

FREDDY LAKER: I'm Freddy Laker. I own Laker Airways, and I'm dedicated to low-cost air travel. With Laker you can fly round trip to the
USA or Canada in one of our wide-bodied DC-10s for less than half the price of a normal economy ticket. Look, I've got to give you a better deal -- I've got my name on every plane.

STEPHEN BREYER: The Transportation Department said that this may hurt Pan Am. And Freddy Laker testified and said, "The cause of this whole thing is 'Panamania.'" So we said, "What is that?" And he said, "Well, everybody should do everything for Pan Am."

NARRATOR: The man who was to sweep away airline regulations is a lifelong Gilbert and Sullivan fan. Improbably enough, the bearded poet is played by Fred Kahn, a professor at
Cornell University .

Kahn wanted a leaner, meaner regulatory environment in which the market was free to chase profits without the dead weight of bloated government. Democratic president Jimmy Carter made Kahn head of the Civil Aeronautics Board. Kahn had spent years studying government regulation; now he had a chance to do something about it.

ALFRED KAHN, Civil Aeronautics Board, 1977-1978: When I got to the Civil Aeronauts Board, the biggest division under me was the division of enforcement -- in effect, FBI agents who would go around and seek out secret discounts and then impose fines. We would discipline them. It was illegal to compete in price. That means it was illegal to compete in the discounts you offer travel agents. So we regulated travel agents' discounts. Internationally, since they couldn't cut rates, they competed by having more and more sumptuous meals. We actually regulated the size of sandwiches.

NARRATOR: By the time Kahn had finished, the C.A.B. had nothing left to do but close itself down.

SPOKESMAN FOR THE CIVIL AERONAUTICS BOARD: Competition is the rule, and because of it, the consumers are better served than ever.

NARRATOR: Airline deregulation led to painful turbulence as new carriers came and went. Like her father, Judith Hamill works in the airline industry.

JUDITH HAMILL, Administrator, Chicago O'Hare Airport: My dad was a jet mechanic with Braniff. At the age of 59 he found that his skills were no longer desirable or needed. When Braniff came back because of the duty to hire, he came back at half the salary that he had made before. When you live by the rules and then the rules change, it's sad.

NARRATOR: But 20 years later, the industry was employing two times as many people to fly almost three times as many passengers.

STEPHEN BREYER: The industry vastly underestimated the demand for airfares at lower prices, and what's happened is that as the prices went down, demand went up dramatically.

ALFRED KAHN: And once they were free to compete, you began to get super-saver fares and super-apex fares and potato fares and peanuts fares -- an explosion of discounting and competition. Well, those were dramatic.

NARRATOR: The stage was set for deregulation of the
U.S. economy, and now these ideas were about to make their entrance in the very homeland of Gilbert and Sullivan.   Chapter 15: Thatcher Takes the Helm [ 3:50 ] Onscreen title: Britain , 1979

WORKER: Well, 5 percent's no good to nobody, is it?

INTERVIEWER: Do you think you can win this strike?

WORKER: Yes, I do.

NARRATOR: They called it the Winter of Discontent. It seemed as if everyone was on strike.

MAN: I think it stinks, like all the other damn strikes in this country run by the filthy Socialist Communist unions.

NARRATOR: The garbage men were out. So were the ambulances. And if you died, the gravediggers were out, too.

NARRATOR: With the economy in apparently terminal decline, the people voted for a new Conservative government headed by Margaret Thatcher.

LAURENCE HAYEK : Margaret Thatcher was elected prime minister on the day of my father's birthday, so he sent her this telegram from
Freiburg : "Thank you for the best present to my 80th birthday that anyone could have given me." A few days later she wrote back from 10 Downing Street : "Dear Professor Hayek, I am very proud to have learned so much from you over the past few years. I am determined that we should succeed. If we do so, your contribution to our ultimate victory will have been immense. Yours sincerely, Margaret Thatcher."

MARGARET THATCHER: And I'll strive unceasingly to try to fulfill the trust and confidence that the British people have placed in me and the things in which I believe.

NARRATOR: Determined, and some said strident, she would revolutionize the economy.

MARGARET THATCHER (interviewed in 1993): 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.

NARRATOR: Thatcher squeezed government spending and cut subsidies to business. Thousands of bankruptcies and higher unemployment followed. Many saw her as uncaring.
Britain had rarely been so divided.

CROWD OF PROTESTERS: Maggie, Maggie, Maggie. Out, out, out!

NARRATOR: Thatcher had no time for conventional, Keynesian economists who urged her to use government money to lessen the pain.

MARGARET THATCHER: Although 364 economists wrote to the Times and said, "This is outrageous; you'll put us into a deep depression from a recession," 364 were wrong, and the half dozen who supported us were right.

And those who urge us to relax the squeeze, to spend yet more money indiscriminately in the belief that we'll help the unemployed and the small businessman, are not being kind or compassionate or caring. I have only one thing to say: U-turn if you want to. The lady's not for turning.

Britain , the battle lines were drawn. In America , the fight was already under way.   Chapter 16: Reagan Rides In [ 8:17 ] Onscreen title: USA , 1979

NARRATOR: Things were at a low in the United States . President Carter spoke of malaise and loss of confidence in the country. Revolution in Iran had led to a second oil shock and Americans held hostage in Tehran . Despite the beginning of deregulation, inflation was still at record heights. Carter's attempts to follow Keynes's formula and spend his way out of trouble were going nowhere.

LARRY LINDSEY, Assistant to the President for Economic Policy: Jimmy Carter was maybe the
high point of Keynesian behavior. And it simply was not working.

GEORGE SHULTZ: Toward the end of the Carter administration, with inflation out of control, Paul Volcker was made chairman of the Federal Reserve. He understood the problems.

JIMMY CARTER: I'm grateful to Paul Volcker for being willing now to accept the oath of office and the responsibilities of the Federal Reserve system of our country. Paul?

NARRATOR: Paul Volcker was steeped in the ideas of Austrian school economics.

PAUL VOLCKER, Federal Reserve Board, 1979-1987: It's obvious to all of you from what's been said today that we're face to face with really unique economic difficulties.

NARRATOR: Volcker believed that inflation was one of the worst of all economic evils.

PAUL VOLCKER: It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.

NARRATOR: Volcker used a blunt weapon: He tightened the money supply. The economy went into a nosedive. Facing a presidential election, Carter was reluctant to back such harsh measures.

Carter's rival was the Republican Ronald Reagan. Reagan shared the same economic philosophy as Margaret Thatcher. For over 20 years, he had been campaigning against the Keynesian orthodoxy and for Hayek and Friedman's ideas of free markets and freedom.

NEWT GINGRICH, Speaker, U.S. House of Representatives, 1995-1999: Reagan knew Hayek personally; he knew Milton Friedman personally. And Reagan was, in a sense, their popularizer. So he was the person who would take these people who were very profound but not very easy to communicate. I don't think you'd ever get Hayek on the Today show, but you could get Reagan explaining the core of Hayek with better examples and in more understandable language.

RONALD REAGAN, U.S. President, 1981-1989: Vote for me, if you believe in yourself, if you believe in your right to control your own destiny and plan your own life, yes, and have a say in the spending of your own money.

The president is going to have more government on the backs of the people and of business and of industry, the working people, in order to try to solve the problems that were created by too much government on our backs.

We can get government off our backs, out of our pockets. This kind of indifference to economic disaster must be ended, and it'll be ended by having a different kind of leadership.

NARRATOR: The American people voted for change, and Reagan became president.

MILTON FRIEDMAN: The situation was this: The only way you could get the inflation down was by having monetary contraction. There was no way you could do that without having a temporary recession.

GEORGE SHULTZ: Obviously, who wants a recession? But I can remember President Reagan using those famous words: "If not now, when? If not us, who?"

NARRATOR: Reagan offered Volcker his moral support in the fight against inflation. As Volcker tightened the money supply, the economy slowed and contracted. Unemployment hit 10 percent. Nobody had realized quite how tough it would be.

All across the heartland of
America , ordinary people were hurting.

DARREN SMITH, Farmer: Well, the interest rates, that just eats up your profit. It becomes very difficult to keep your business running right. Nineteen eighties, the interest rates were up to 20 percent or better. It was very interesting times. I remember, you know, cash flows got very tight as things got tighter and tougher. Creditors forced sales -- you know, "Come up with the cash or we're going to have to liquidate you." It's a hole that almost seems impossible that you can get out of.

PAUL VOLCKER: If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it. (laughs)

NARRATOR: It had taken three years -- three years of growing public anger, three years of real hardship for millions of Americans. But by 1982, the dragon of inflation had been slain.

PAUL VOLCKER: What changed drastically in the 1980s and running through today is the kind of presumption that inflation is bad. The primary job of a central bank is to prevent inflation. That's a very different environment than the '50s and '60s.

ANNOUNCER: Ladies and gentlemen, the president of the
United States .

NARRATOR: Reagan and Volcker had set the United States
on a new economic course.

RONALD REAGAN: From our very first day, we have been working to undo the economic wreckage they left behind.

NARRATOR: They called his policy Reaganomics. It had four key elements.

LARRY LINDSEY: The first was the concept of sound money. The second was deregulation. The third was modest tax rates. And the fourth was limited government spending. Sounds pretty conventional now, but when Reagan was elected, he was vilified by his opponents as being some radical extremist.

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.

NARRATOR: Reagan's tax cuts, the biggest in history, led to huge deficits. But the economy started to grow steadily again.

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.   Chapter 17: War in the South Atlantic [ 1:41 ] Onscreen title: Atlantic Ocean , 1982

NARRATOR: Far away in the South Atlantic , a British expeditionary force was at sea. Argentina had seized the Falkland Islands from Britain . Margaret Thatcher risked a war to make the islands British once again.

Before the war her popularity was at rock bottom. Victory in the
Falklands ensured the survival of Margaret Thatcher's government.

CHARLES POWELL, Thatcher's Foreign Affairs Advisor, 1983-1991: The Falklands saved her. The
Falklands gave her a new lease on life to implement the policies on which she had embarked which were not yet producing results. In effect, she gambled all on the Falklands , and she won decisively. And that of course not only greatly bolstered her standing within the Tory Party, it bolstered her standing in the country, and it greatly enhanced her reputation internationally.

NARRATOR: The Falklands War set her up politically to fight the final battle for the soul of the British economy. The impact would be worldwide.   Chapter 18: The Heights Go Up for Sale [ 8:08 ]
NARRATOR: In 1945, Attlee's Labor government had nationalized the commanding heights of the economy, bringing core industries into state ownership. For Thatcherites, these state industries were now the primary target.

JOHN REDWOOD, Head of Prime Minister's Policy Unit, 1983-1985: A whole lot of people who were left of center thought that nationalization was Britain's great gift to the world, and one of my phrases at the time was that having exported the disaster of nationalization to the world, Britain should offer them the antidote; it was the decent thing to do, to say we're very sorry, it didn't work.

MARGARET THATCHER (interviewed in 1993): So the whole efficiency of nationalized industries was running down. Why should they be efficient? They had access to the Treasury purse.

NARRATOR: Thatcher wanted to end their dependence on government subsidies and submit them to the discipline of the marketplace.

JOHN REDWOOD: The nationalized industries fell to pieces. They lost huge sums of money; they put the prices up massively and still weren't able to make a profit. They were bleeding the nation dry, the taxpayer dry, and they weren't doing a good job for their customers.

NARRATOR: The coal mines and the miners' union became Thatcher's biggest challenge.

JOSEPH STANISLAW: The coal miners represented the last bastion of the socialist mindset in the
UK . One of the singularly most important economic/political events for the world economic system was Margaret Thatcher's government confrontation with the miners.

MARGARET THATCHER: We were quite clear: Uneconomic pits must close. You could not go on pouring money into uneconomic pits. It was taxpayers' money.

CECIL PARKINSON: If you look at our coal industry, the coal is very deep in the earth; it is hugely expensive to get out.

NARRATOR: Seventy-five percent of
Britain 's coal mines were losing money. It took government subsidies of $3 billion a year to keep them going. But these statistics were seen as irrelevant by men like Ken Capstick, one of the radical Socialists who led the miners' union.

KEN CAPSTICK, National Union of Miners: What they would say was that in
America , for instance, coal produced at the pit head was cheaper than coal produced at the pit head here.

NARRATOR: The union leaders argued that the government subsidies were money well spent if they kept 180,000 miners at work and able to feed their families.

KEN CAPSTICK: Miners used to say -- and I can remember them saying it -- "While ever I've got these I'll always have a job."

NARRATOR: It was a historic grudge match. Both sides knew the miners had brought down Ted Heath's Conservative government 10 years earlier. The fiery Marxist who led the National Union of Miners said no mine should be closed until the coal ran out.

ARTHUR SCARGILL: Reaffirm the unanimous decision of March the eighth to declare official in accordance with Rule 41 the strike action.

The issue before our members is very clear. They either accept the policies of the Coal Board and the government, which will result in the loss of 70,000 jobs, or alternatively, they stand on their feet like men. They fight -- defend the jobs, defend their pits, and defend their dignity.

NARRATOR: The strike was an epic clash of values which symbolized the wider battle of ideas: socialist against capitalist, free market against state ownership. And it was a question of power: Who ruled
Britain ?

Illegal mass picketing outside working mines led to violent clashes with the police.

KEN CAPSTICK: It was the next thing to, you know, to a war. We were faced with an enemy, and that enemy was out to destroy our livelihoods, out to destroy our pits, out to destroy our communities and what our communities stood for. Miners and their families had a set of values that I don't think Margaret Thatcher could understand, values of socialism and Christianity. The two things went hand in hand in many ways.

NARRATOR: For more than a year the miners held out, until internal rifts and the desire of many to return to work brought the walkout to an end.

MARGARET THATCHER (interviewed in 1993): And then suddenly it collapsed, the strike, and the most powerful union with the most militant leader had failed.

Britain has changed. Today, less than 3,000 work in the mines.

KEN CAPSTICK: I feel devastated by what I see. Grimethorpe had considerable reserves of coal when it was closed, plenty of work for those miners to continue to do to keep their families. You can see the wasteland; you can see the social deprivation that it caused. The children that are coming along -- no prospects, no future; people despairing because they can't find employment and the dignity that employment brings. It's the market forces gone mad.

MARGARET THATCHER: The political consequences of the failure of the strike were incalculable.

GORDON BROWN, Labor Finance Minister: The coal-mining strike of the early 1980s was a tragedy for so many of the mining families that were involved in it.

NARRATOR: Perhaps the greatest political impact was on the Labor Party that had all along opposed Thatcher's free-market policies.

GORDON BROWN: I came into politics as someone who lived in an area which was an old mining community. The problem for the left in the past was that they equated the public interest with public ownership and public regulation, and therefore they assumed that markets were not therefore in the public interest. What we have had to explain both to ourselves and to the country -- and now I believe it's possible to explain this to the rest of the world as well -- is that markets are in the public interest.

DANIEL YERGIN: One of the most important things that the government of Margaret Thatcher does is invent this thing called privatization; that is, taking these state-owned companies, these nationalized industries, and selling shares to the public.

NARRATOR: One by one the Thatcher government put the commanding heights of the British economy up for sale: electricity, telephones, oil, gas, coal, steel, trains, and planes -- even water. Before long, two-thirds of the state-owned industries were removed from government control and sold off into the private sector. Who should control the commanding heights -- governments or markets -- in
Britain ? That battle was over.   Chapter 19: The Battle Decided? [ 3:26 ] JOSEPH STANISLAW: What Margaret Thatcher did in Britain and the principles that she introduced were imitated worldwide -- Asia , Latin America , even in Africa and to some degree in the Middle East .

JEFFREY SACHS: The tide had surely swung. The thinkers that had kept alive the ideas of markets did play their role at that moment.

NARRATOR: In his lifetime, Hayek saw fascism rise and fall, communism come and go, and the end of his years in the intellectual wilderness.

NEWT GINGRICH: Here was a man who had intellectually changed the world without really ever leaving the university. It was the power of his books, the power of his ideas as then captured by Ronald Reagan and Margaret Thatcher that had changed things.

GEORGE SHULTZ: You had in Reagan and Thatcher at the same time two, what I call, idea politicians. They had ideas they were convinced were the right ideas, and they put them into effect.

MILTON FRIEDMAN: The coincidence of Thatcher and Reagan having been in office at the same time was enormously important for the public acceptance worldwide of a different approach to economic and monetary policy.

LAWRENCE SUMMERS: The old debates were about what the role of the market was, what was the role of the state. I think it's now generally appreciated that it's the market that harnesses people's initiative best. And the real focus of progressive thinking is not how to oppose and suppress market forces but how to use market forces to achieve progressive objectives.

SAM PELTZMAN: If you look at the whole of the 20th century, there's been a huge cycle. Less government was the orthodoxy at the beginning of the 20th century, more government clearly was the orthodoxy for the middle part of the 20th century, and now the later part, going into the new millennium, we're back to where we were practically at the start of the century. And you have to give folks like Hayek, Friedman, and then later Reagan and Thatcher their due for pushing all of this along.

MARGARET THATCHER: I remember the foreign minister and finance minister from another country saying to me: "You're the first prime minister who's ever tried to roll back the frontiers of socialism. We want to know what's going to happen, because if you succeed, others will follow."

NARRATOR: Within 10 years, governments everywhere would retreat from the commanding heights of their economies. In the battle of ideas, the pendulum had swung from government to market, from Keynes to Hayek. Only time would tell what people would ask of their governments in the event of a new recession, or a depression, or a war.