States and Markets Sociology 2, Class 3 Copyright © 2014 by Evan Schofer Do not copy or distribute...
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Transcript of States and Markets Sociology 2, Class 3 Copyright © 2014 by Evan Schofer Do not copy or distribute...
States and Markets
Sociology 2, Class 3
Copyright © 2014 by Evan SchoferDo not copy or distribute without
permission
Announcements• Class schedule:
• Topic: States and markets and economic globalization
• Today:• Wrap up Commanding Heights Part I• Lecture: States & Markets – basic concepts &
definitions.
Review: Commanding Heights Part 1
• The video series examines globalization: the emergence of a global free-market economy
• 1930-1970: Shift toward greater state planning• 1970-present: Shift to free markets, global economy
• Key people:– John Meynard Keynes: An economist; devised
ways for governments to regulate the economy• And argued that capitalism works better with regulation.
– Friedrich Hayek: An economist, a proponent of free markets• Related: The “Austrian school”, the “Chicago School”
Review: State Control vs. “Free Markets”
• BIG debate over the last century: How much should states control (“regulate”) markets?
State Control Free Markets
Communism “Laissez Faire Capitalism”
Socialism
Keynesian“Mixed Economy”
“Washington Consensus”
Welfare StateMarxism
RegulationCentral Planning“Public” Services
Deregulation“Liberalization”Privatization
Review: Commanding Heights Video
• Background– 1900: A global free-market economy existed
• Issue: substantial economic instability• Industries saw “boom and bust” cycles – e.g.,
Airlines• The economy as a whole suffered severe
recessions & depressions– 1929-31: A stock market collapse triggers
“bank runs”• Millions lose their savings• Deflation. A vicious cycle: Unemployed people
have no money to spend, so more companies go bankrupt… more unemployment…
Review: Commanding Heights Video
• “The New Deal”: A set of policies passed during the Roosevelt presidency
• Included “Keynesian” ideas • Increased government spending to hire workers• Increased regulation to stabilize markets
– Example: Regulation to prevent bank runs– Example: Airline regulation to reduce bankruptcies
• Social programs – such as social security– Result: Economy improved…
• Note: Some conservatives argue against this, but the historical evidence is quite solid
• Later: World War II spending further boosted the economy…
Commanding Heights Video
• Today’s video:– Total dominance of Keynesian ideas from
1950-70• State ownership of many industries
– Ex: Coal & railroads in Britain• Strong regulation of industries
– Ex: Airlines
– Strong economic growth in 50s/60s, but severe recession in 1970s• Some blamed Keynesian policies• Revival of Hayek’s ideas: free markets, increased
competition, less regulation– Video: Airline deregulation & the
Reagan/Thatcher revolution…
Commanding Heights Video
• End of part 1– Start 31:40 Keynesian ideas adopted– 36:30 Bretton Woods
• Skim 46:22-1:00:50– 58:10 Chicago School of Economics
Airline Deregulation• The airline industry exemplifies the good
and bad of both regulation and deregulation– Deregulation in 1930s: Industry growth but
instability, bankruptcies– Regulation in the 60s: Industry stability, but
high prices– Deregulation in the 1970s: Industry growth &
low prices• But, will instability return?
Airline Bankruptcies• A partial list of airlines that went
bankrupt in the last decade:• Northwest Airlines• US Airways• Delta• United• TWA• American Airlines
– Basically, all major airlines and many small ones
– In 2004 there was a period where 4 of the 7 largest airlines were all operating under “Chapter 11” bankruptcy protection.
Airline Bankruptcies• What does “Chapter 11” mean?
• Is it really that bad? After all, the planes keep flying…
• What happens when a company can’t pay the bills… is losing money badly?
• Owes a lot of money to “creditors” (banks, etc)
• Option #1: “Liquidate” – Close the company, fire all the workers, sell all the planes
• The “proceeds” of the sale go to the creditors• Like when a car is “repossessed”• Downsides: Destroys the company; but usually
doesn’t raise enough money to pay off debts; workers lose jobs.
Airline Bankruptcies• Option #2: “Restructure”
– Filing Chapter 11 protects a company from creditors• Under court supervision, company negotiates
w/creditors• OK… I can’t pay you 500 million in September…
how about if I pay you 300 million in October?– There is the potential for “win/win”
• Creditors get paid back more $$ compared to liquidation
• Company keeps operating– BUT: the company has to radically cut costs
& increase profits to please creditors• Union contracts are re-negotiated, wages cut, etc.
Airline Bankruptcies• Issues to reflect on:
– Why did deregulation/competition led to bankruptcies?
– Was deregulation worth it?• It produced 30 years of cheap flights
– improved competition; better “service”– stockholders & executives made millions
• But, now we have a “bust”… – Workers feel pain – lost jobs and reduced wages– Government bailed out airlines after 9/11– Government bailed out many airline pension plans; etc.
– Would slightly more regulation have helped?
Econ Basics: Definitions• Gross Domestic Product (GDP)
• “gross” means “total”– Definition: The total economic value of
goods & services produced within a country• Note: GDP is often measured “per capita,” which
gives a sense of wealth per person
• GDP in 2009 (CIA World Factbook):– United States: $16,000,000,000,000 –
trillions!• $51,000 per capita
– Brazil: $2.3 trillion, $11,700 per cap– Liberia: $2.63 billion, $700 per capita.
Econ Basics: Definitions• Economic Growth: An increase in
GDP– Growth means: more production, more
profits, more wealth, more jobs, more income, more consumption, more everything!
– Growth is generally considered a good thing• But, environmentalists foresee ecological limits
• Recession: A period of decline in GDP• Fewer jobs, less consumption, etc…
• Depression: A period of severe and protracted decline in GDP
• Massive unemployment, poverty, hunger; political unrest.
Econ Basics: Growth• Why do economies grow?• Long term growth comes from:
– New technologies• Ex: Machines allow people to produce more
goods– Increased skills and efficiency of labor
force• Ex: Highly educated workers can get more
done– Investment
• Ex: Money spent to build more factories
• Short term growth can be sped up by:– Greater consumption by people, firms,
states• Spending $$ creates demand, speeds up
economy.
GDP = Prosperity?• Question: What is the relationship
between GDP growth and prosperity?– Answer: It depends on who you ask– Political conservatives argue that growth
is the best route to prosperity• In the long run, the poor are better off in a fast
growing economy, even if the rich get most of the reward
• Imagery: Rather than divide the “pie” evenly, the pie needs to grow so everyone’s piece gets bigger…
– Political liberals have generally stressed the importance of social equality• Plus, other concerns like the environment.
Econ Basics: Business Cycles• Issue: Economic growth isn’t always
smooth• Capitalist economies are prone to
cycles of “boom” and “bust” – the “business cycle”– In good times, everyone gets optimistic,
builds a lot of factories… economy and jobs boom• Unemployment is very low, wages and prices
go up– Eventually economic capacity becomes too
great• More is produced than people are willing to buy• Firms have layoffs or go bankrupt,
unemployment goes up, prices go down.
Econ Basics: Business Cycles• Issue: If unemployment goes too high
then consumption drops• Without consumer spending, economy can go
into a deflationary spiral…• Ex: The Great Depression…
• In general, governments use policies to avoid extreme cycles
• Example: Unemployment insurance– Provides money to the unemployed to avoid a
downward spiral• Example: Setting interest rates
– We’ll discuss this later.