states and markets sociology 2, class 3 copyright © 2011 by evan schofer do not copy or distribute...

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States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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Page 1: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

States and Markets

Sociology 2, Class 3

Copyright © 2011 by Evan SchoferDo not copy or distribute without

permission

Page 2: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Announcements• Class schedule:

• Topic: States and markets and economic globalization

– Reminder: Do the readings!• The week’s readings will be covered during

section… even if section is early in the week!!!

• Today:• Wrap up Commanding Heights Part I• Lecture: States & Markets – basic concepts &

definitions.

Page 3: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Readings: Some comments

• Friedman, Thomas: The Untouchables• Chapter in “The World is Flat”

– Flattening: refers to economic globalization• People from around the world increasingly compete on

a level playing field

– Question: What is an “untouchable”?– Answer: Someone whose job can’t be outsourced

• Specialized: “Knowledge work” that is hard to duplicate

– Ex: surgeon, highly skilled software engineer

• Anchored: Location specific, face to face (chefs, nurses)

• Adaptable: “Learn how to learn”… constantly acquire new skills.

Page 4: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

In the news: UC Budget Cuts

• More privatization of the UC system?• This morning Governor Edmund G. Brown Jr.

unveiled his proposed state budget for the 2011-12 fiscal year. It contains draconian cuts in state funding to the University of California. The overall cut to the UC system budget is slated to be approximately $500 million. The specific cut to our campus will be determined by the Office of the President, but could be as high as $50 million. Cuts of this magnitude are far reaching and significant. They will affect all aspects of our enterprise.

Page 5: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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

Page 6: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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: People have less money to purchase…• A vicious cycle: People have no money to spend, so

more companies go bankrupt… more unemployment…

Page 7: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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…

Page 8: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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…

Page 9: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Commanding Heights Video

• End of part 1

Page 10: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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

• But, will instability return?

Page 11: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Airline Bankruptcies 2001-10

Page 12: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Airline Bankruptcies• A partial list of airlines that went

bankrupt in the last decade:• Northwest Airlines• US Airways• Delta• United• TWA• Aloha• Sun Country

– In 2004 there was a period where 4 of the 7 largest airlines were all operating under “Chapter 11” bankruptcy protection.

Page 13: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Airline Bankruptcies• What does “Chapter 11” mean?

• Is it really that bad? After all, the planes keep flying…

• In short: 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 feel “pain”.

Page 14: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

Airline Bankruptcies• Option #2: “Restructure”

– Filing Chapter 11 protects a company from creditors• Under court supervision, the company negotiates with

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, workers are fired,etc.

Page 15: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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?

Page 16: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

If time allows…

Page 17: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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: $14,120,000,000,000 –

trillions!• $46,000 per capita

– Brazil: $2.01 trillion, $10,100 per cap– Liberia: $1.63 billion, $500 per capita.

Page 18: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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.

Page 19: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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.

Page 20: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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.

Page 21: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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.

Page 22: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

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.

Page 23: States and Markets Sociology 2, Class 3 Copyright © 2011 by Evan Schofer Do not copy or distribute without permission

US GDP Growth 1970-2010