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 2001-10

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?

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: $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.

US GDP 2000-2012

US GDP 1970-2012