states and markets sociology 2, class 3 copyright © 2011 by evan schofer do not copy or distribute...
TRANSCRIPT
States and Markets
Sociology 2, Class 3
Copyright © 2011 by Evan SchoferDo 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.
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.
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.
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: People have less money to purchase…• A vicious cycle: 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
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?
Airline Bankruptcies 2001-10
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.
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”.
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 $$ compared to liquidation• Company keeps operating
– BUT: the company has to radically cut costs & increase profits to please creditors• Union contracts are re-negotiated, workers are fired,etc.
Airline Bankruptcies• Issues to reflect on:
– Why did deregulation/competition led to bankruptcies?
– Was deregulation worth it?• It produced 30 years of cheap flights
– improved competition; better “service”– stockholders & executives made millions
• But, now we have a “bust”… – Workers feel pain – lost jobs and reduced wages– Government bailed out airlines after 9/11– Government bailed out many airline pension plans; etc.
– Would slightly more regulation have helped?
If time allows…
Econ Basics: Definitions• Gross Domestic Product (GDP)
• “gross” means “total”
– Definition: The total economic value of goods & services produced within a country• Note: GDP is often measured “per capita,” which
gives a sense of wealth per person
• GDP in 2009 (CIA World Factbook):– United States: $14,120,000,000,000 –
trillions!• $46,000 per capita
– Brazil: $2.01 trillion, $10,100 per cap– Liberia: $1.63 billion, $500 per capita.
Econ Basics: Definitions• Economic Growth: An increase in GDP
– Growth means: more production, more profits, more wealth, more jobs, more income, more consumption, more everything!
– Growth is generally considered a good thing• But, environmentalists foresee ecological limits
• Recession: A period of decline in GDP• Fewer jobs, less consumption, etc…
• Depression: A period of severe and protracted decline in GDP
• Massive unemployment, poverty, hunger; political unrest.
Econ Basics: Growth• Why do economies grow?• Long term growth comes from:
– New technologies• Ex: Machines allow people to produce more goods
– Increased skills and efficiency of labor force• Ex: Highly educated workers can get more done
– Investment• Ex: Money spent to build more factories
• Short term growth can be sped up by:– Greater consumption by people, firms, states
• Spending $$ 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.
US GDP Growth 1970-2010