Masters of Money: Friedrich Hayek
You might think the financial crisis was caused by letting markets get too free - the financial markets, in particular.
Followers of the Austrian economist Friedrich Hayek would say exactly the opposite. In their view, it happened because the markets weren't free enough.
A few of you wrote to say last week's film on Keynes helped convince you of the case for Keynesian policies. I can't decide whether to be flattered or alarmed.
But if you were turned into a Keynesian last week, you should be sure to tune into Hayek. He could well change your mind again.
Hayek was the great free-market thinker who argued with Keynes in the 1930s over government intervention in the economy.
Hayek had the intellectual firepower to take on Keynes. He was often exasperated by the inconsistencies in Keynes' work and his tendency to change his mind - something the Cambridge economist did quite regularly, and not only "when the facts changed".
But Hayek did not have Keynes' charisma and famous powers of persuasion. (The Austrian accent didn't help.)
Also, Keynes was telling politicians that intervention by policymakers could make things better, whereas Hayek was saying they would only make things worse. In the end, that made all the difference.
Hayek wrote a best-selling polemic railing against economic planning, The Road to Serfdom, shortly after World War II.
In it, he warned that the dead hand of the bureaucrat could threaten a free society almost as much as the iron boot of Stalin. (If he had written it today, I suspect modern health and safety regulations would have featured.)
After that, Hayek had years in the intellectual wilderness, while the Keynesians bestrode the world. But there was a last great burst of fame and influence in the 1970s, when he was awarded a Nobel Prize for economics and feted by free-market politicians on both sides of the Atlantic.
Lord Patten reports in the programme how Margaret Thatcher would pull favourite Hayek quotations from her handbag at key moments during cabinet meetings.
So far, so interesting, but what can Hayek say to us right now? And why would I choose him as a Master of Money, not the other great free-market economist, Milton Friedman, who was almost certainly more influential?
In fact, I very much wanted to do a programme on Friedman too. There are modern monetarists who have interesting things to say about the crisis. But, amazingly, BBC Two did not want to broadcast four hours of economics at 21:00 on a Monday. Three was challenging enough.
Friedman has been profiled and lauded many times over the years. For this series I chose Hayek because, like Keynes - and unlike Milton Friedman - he focused on the great complexity of markets and their inherent unpredictability.
And because, unlike Keynes or Friedman, Hayek did not think policymakers could master those complexities well enough to guide the economy in the right direction.
More often than not, Hayek said, politicians would only make things worse.
Politicians had some sympathy with that view in the 1930s, when Hayek's arguments often did get a better hearing than Keynes'. But it has been very hard for post-war leaders to swallow - even, it turns out, politicians who claim to be free-marketers.
These leaders might pay lip service to liberalising the economy and setting markets free, but in practice it has been difficult for them truly to give up the urge to meddle, even when they are convinced of the intellectual case for doing so.
Witness the difficulties that coalition ministers have had letting go of day-to-day power over the NHS, or local councils. Or, to take a very different example, the US government's decision to rescue the people who had invested in Mexican bonds, in the "Tequila Crisis" of 1994.
The free-market economist and then Federal Reserve Chairman, Alan Greenspan, supported that massive US-IMF rescue package for Mexico, even though he had previously warned that protecting investors from the consequences of their mistakes would build up problems for the future, by encouraging institutions and investors to take excessive risks.
Of course, that is what many people think happened in the financial markets generally, in the years leading up to the financial crisis.
The financial system might have seemed free, these critics argue, but it was really a dangerous hybrid. In fact, the banks were free to do anything, except fail in large numbers.
That encouraged them to take out some pretty risky bets, which ended up costing us all dear. And lest there be any doubt that the safety net was there, the massive bailouts of 2008 made it crystal clear.
All of which explains why Hayek and some other Austrian economists have acquired a new generation of fans - including the Republican Congressman and presidential candidate Ron Paul. They find in Hayek's writing both a convincing explanation of the financial crisis and a bracing solution.
Leave well alone?
The Hayekian explanation for the crisis says it's all down to government meddling, to policymakers not giving markets the benefit of the doubt. And the worst kind of meddling, Hayek thought, came in the government's determination to control the price of money - also known as the interest rate.
In the Austrian view, the US Federal Reserve and other central banks helped cause the financial crisis, by always cutting interest rates when the economy showed signs of faltering; for example, after the bursting of the dotcom bubble.
That might have staved off a more serious downturn. But only at the cost of encouraging people to take on debts they couldn't afford - and giving banks an incentive to take excessive risks.
This, in effect, is the argument that Hayek made against Keynes in the late 1920s and 1930s: he said the Fed caused the crash, by keeping interest rates too low and encouraging a lot of "malinvestment" - investment in projects or assets which were not economically worthwhile.
He also said that further efforts to stimulate the economy would only make things worse - especially if they meant more borrowing by government.
When it comes to the 1930s, history has not looked kindly on Hayek's arguments. The classic study of the depression by Milton Friedman and Anna Schwartz, decades later, made a convincing case that it was caused by the US central bank pumping too little money into the economy, not too much.
What's interesting to note is that Milton Friedman and John Maynard Keynes are on the same side of that argument - united against Friedrich Hayek.
Given a bump in the road, Friedman and Keynes each thought policymakers could come to the rescue. And each thought, in normal times, that monetary policy was the best way to do it.
The difference between them - much exaggerated in the historical record - was that Keynes saw a big role for fiscal policy too, particularly in the aftermath of financial crises.
What makes Hayek a different kind of free-market economist is that he distrusted both sets of policy machinery for guiding the economy - monetary and fiscal.
Maybe it was the hyperinflation he'd lived through as a young adult in Austria, in the 1920s, but he simply did not believe governments should or could iron out the bumps in the economic cycle. The only government power he had confidence in was the power to make things worse, by debauching the currency.
Hayek's view has resonance for anyone who feels uneasy about governments bailing out bankers and central banks pumping hundreds of billions of dollars into the economy.
Whether it's the European central bank lending trillions to European banks, or a third bout of quantitative easing by the Federal Reserve, it feels, to many, like these institutions are simply kicking the can down the road - deferring the moment of truth.
So you can understand why many would be turning to Austrians like Hayek for a different kind of answer. But whether any government or mainstream politician is really prepared to step back, and let the system "heal itself" - whatever the short-term consequences - is another matter. They certainly weren't in 2008.
I asked Ron Paul whether he thought Americans were ready to be "Austrians". He paused. "Well, I think you'd have to change the name," he deadpanned. "But you know, I went to Austria last year. They're completely devoted to their welfare state. I turns out, even the Austrians aren't very Austrian."
Are you? Watch the programme and find out.
Masters of Money was made with help from the Open University and is broadcast at 21:00 on Monday 24 September on BBC Two.