States and Markets Sociology 2, Class 3 Copyright © 2014 by Evan Schofer Do 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 : 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 ControlFree Markets Communism “Laissez Faire Capitalism” Socialism Keynesian “Mixed Economy” “Washington Consensus” Welfare State Marxism Regulation Central 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 – : 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 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

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

US GDP