Transcript Chapter 5

Varieties of Advanced Market
Capitalism
Chapter V
The United States of America:
The Market Capitalist Leader
1
World’s Largest Economy

Not only the prime example of market capitalist economy but is
technological leader of the world with very high per capita income

Its important role in developing distinctive institutions of market
capitalism, such as modern corporation

From a nearly pure laissez-faire economy in the mid-19th
century has become a mixed economy, but still laissez-faire
oriented

The “darker side” of market capitalism, with relatively high levels
of income inequality and poverty
2
World’s Largest Economy

Oldest constitution of any nation on earth 1787

Well established private property allowed the market
capitalist economy to function flexibly

Greatest crisis and conflict was over the slavery
system that divided the industrial North from the
cotton-growing South

Civil War of 1861-1865
3
World’s Largest Economy

Leading in technology with the emergence of the
American system of interchangeable parts and
standardization during the early 1800s

Innovator in economic institutional structures and
organizational forms

The key organization of the modern world economy
→ industrial corporation whose standard form
emerged in the railroads
4
World’s Largest Economy

Fordist assembly line production

US automobile industry → modern multidivisional
corporation → General Motors Corporation

Mass production with rapidly rising productivity

Institutional foundation of modern American
macroeconomic policy established in 1913


Federal income tax and the establishment of the Federal
Reserve System
Development of a strong financial system
5
World’s Largest Economy

After WW I displaced Great Britain as the world’s
leading financial power

but avoiding a global role

Isolationist attitude → refusal to join the League of
Nations in 1920

The Great Depression of the 1930s and the
presidency of Franklin Roosevelt → expansion of
the federal government’s role in economy moving
away from pure laissez-faire
6
World’s Largest Economy

Change in attitudes with WW II

Took the lead at the Bretton Woods Conference (1944)


Washington D.C became the headquarters for the new
postwar global economic institutions → IMF, World Bank
New York City → UN (successor to League of Nations)

The General Agreement on Trade and Tariffs (GATT) in
1948 → tariff-reducing negotiations and moves to
expand international trade

Establishment of World Trade Organization (WTO)
7
World’s Largest Economy

1980s → a period of deregulation of the US economy

US leadership of the word economy challenged by other
countries, especially Japan

The stagnation of Japanese economy after 1990

New Economy high technology development in US in late
1990s, led by the information technology sector → reasserted its
primacy position

A speculative bubble in the US stock market that peaked in early
2000 and high-tech sector has been in slowdown since

Recession of 2001 → terrorist attacks
8
Historical Development of the US
Economy:
The
Colonial
Period
and the
Revolution
 European
nations
contesting
on the
territory of US
→ the British, French, Dutch, Spanish and Russians

Original 13 Colonies (eventual states)

Each colony initially had little economic or political
relations with each other- trying to develop its own
state by developing overseas trade with Britain, the
Caribbean, and other areas

Arrival of the first African slaves in 1619 in
Jamestown, Virginia
9
Historical Development of the US
Economy:
The
Colonial
PeriodPolicies
and the
Revolution
British
Mercantilist
and
Declaration of


Independence
In 1700s, British imposed laws and restrictions on
trade as a result of their mercantilist policies in order
to enrich Great Britain → anger at these laws and
taxes led to the declaration of independence in 1776
American colonies won independence from Britain in
1781 with the support of the French


Adam Smith also published his book Wealth of Nations in
1776
Watt refined the steam engine
10
Historical Development of the US
Economy:
From
Revolution
to Civil War
 Articles
of Confederation




With the 1789 Constitution, the supremacy of the
federal government was established


The initial governmental system
The individual states were supreme over the federal
government
Interstate conflicts
Trade protectionism between states forbidden
Disagreements over relations between the states
and the federal government
11
Historical Development of the US
Economy:
From
Revolution to Civil War
 During Washington’s presidency (1789-97) →
the national economy → First National Bank
stabilizing the currency

The infant industry argument for tariff
protection → the issue of tariffs dividing the
industrializing and import competing North
from cotton-exporting South (slave-based
cotton production)
12
Historical Development of the US
Economy:
From
Revolution
to Civil War Infrastructure
Development
of Transportation

1800’s American economy was led by the
development of transportation infrastructure
(private railroad construction) that linked the
East Coast with interior regions

Development in the infrastructure of
transformation led to expansion of agricultural
products
13
Historical Development of the US
Economy:
From
Revolution
to Civil
War Corporations
Foundation
of Limited
Liability

Establishment of the idea of a corporation as a
juridical person (entity) separate from its owners

Within 40 years this fundamental legal institutional
innovation had spread to all the states

Later organizational evolution of corporate form
depend upon this institutional development
14
Historical Development of the US
Economy:
From Revolution to
Civil
War
Civil
War

As a result of conflicts over states’ rights
versus federal supremacy regarding slavery
→ the North (with its industrial strength) won
the war, reunified the nation, and outlawed
the slavery in 1865

At the end of the Civil War, American industry
matched British industry in productivity
15
Historical Development of the US
Economy:
Growth
andofReform
 By the end
the 19th century → the world’s largest
aggregate economy with rapid growth and
industrialization



Major technological innovations



Expansion of railroads
Development of the new corporate industrial organizational
form
Light bulb by Thomas Edison → General Electric
Corporation
Telephone by Alexander Graham Bell → AT&T
Establishment of a strong patent system
16
Historical Development of the US
Economy:
Growth
and Reform
Laissez-Faire
Economic Environment

Massive immigration in the late 19th century and early
20th century in a pure Laissez-Faire economic
environment

Only interventions by federal government were




Tariff protection for American industries
Land grants to railroads
Regulation of railroad by Interstate Commerce Commission (ICC)
Beginning of anti-trust policy in 1890 with the passage of
Sherman Act

Weak and unprotected unions and unequally distributed
income lead to restructuring in industry
17
Historical Development of the US
Economy:
Growth
and Reform
Government
Intervention to Laissez-Faire
Economy: Progressive Era Reforms of
President Roosevelt (1901-1909) and Wilson
(1913-1921)






Various trusts and monopolies broken up
The conservation efforts expanded
Laws to regulate food safety
Federal income tax allowed
The Federal Reserve System established
Tariffs reformed
18
Historical Development of the US
Economy:
Growth
Reform Policies: Roaring Twenties
Back toand
Laissez-Faire

Good economic growth

Boom in Automotive sector

Transformation of American economy and society by the
automobile → Mass Production

Majority of the American families owned a car
 Model T Ford

Radios spread throughout society → unifying America through
mass communication
19
Historical Development of the US
Economy:
Stock Market Crash of 1929
Growth and Reform

Increase in investments in stock market fueled further rises in stock prices,
and created an economic bubble

Banks lent heavily to fund this share-buying trend

On October 24, 1929, the bubble finally burst and panic selling (due to
people disposing of their shares) set in

Over the following few days thirty million shares changed hands and share
prices collapsed, ruining many investors

The banks which had lent heavily to fund share buying found themselves in
debt → leading them to bankruptcy
 People lost their savings
 Businesses lost their credit lines and customers
 Businesses were forced to close, causing massive unemployment
20
Historical Development of the US
Economy:
Great Depression of 1930s
Growth andThe
Reform


The crash worsened an already fragile economic situation, and it was a
major contributing factor to the Great Depression
Causes

Restrictive monetary policy

A decline in consumption expenditures in the late 1920s

A collapse of business investment due to a collapse of business confidence after
the stock market crash

A collapse of the banking sector as real debts increased with deflation

An international trade war

Collapse of total financial system due to global efforts to maintain gold standard
21
Historical Development of the US
Economy:
Growth
Reform
Resultand
of Stock
Market Crash and Great


Depression
American economy declined about 30 per
cent and unemployment went up to 25
percent
US economy fully emerged from the Great
Depression only with World War II in the early
1940s
22
Historical Development of the US
Economy:
GrowthBack
and to
Reform
Government Intervention:


New Deal of President Franklin Roosevelt
From 1932 onward Roosevelt argued that a
restructuring of the economy-a “reform” would be
needed to prevent another depression
An enormous expansion in the federal government
economic activities by implementing social safety
nets
23
Historical Development of the US
Economy:
New Deal and
programs
sought to stimulate demand and provide work
Growth
Reform

and relief for the impoverished through increased government
spending, by:
 Creation of Social Security system

Creation of Securities and Exchange Commission (SEC) to
regulate stock market

Creation of Federal Deposit Insurance Corporation (FDIC) to
insure bank deposits

Setting minimum prices and wages and competitive conditions in
all industries

Encouraging unions that would raise wages, to increase the
purchasing power of the working class
24
Historical Development of the US
Economy:
Growth
and Reform
During World
War II: Government Intervention

Temporary command economy with wage and price
controls

Output expanded rapidly and US ended the war
producing half of world’s aggregate output

US started to lead world’s economy:


By overseeing the Bretton Woods international monetary
conference in 1944
By funding the recovery-oriented Marshall Plan in Western
Europe after the war
25
Historical Development of the US Economy:
Evolution of the American Economy since WW II
Cold War Period: Soviet Threat

Post WW II period is the period of prosperity

Cold War brought the concerns on socialist system
led by the Soviet Union

Concerns about Soviet influence led US to:



Spend highly on military
Implementing the Marshall Plan to economically rebuild
Western Europe
Space race of 1950s and 1960s
26
Historical Development of the US Economy:
Evolution of the American Economy since WW II

Back to Increase in the Role of Government in Economy:
Keynesian fine-tuning of fiscal policies under President Kennedy

Great Society programs of President Johnson (1963-69)







War on poverty
Establishment of medicare program
Passage of civil rights legislation against racial segregation
Voting rights legislation for blacks
Increased various social welfare programs for housing and welfare
Restrictions for immigrants were relaxed
Inflation accelerated with rapid expansion of government spending
on the Great Society programs and the Vietnam War, without any
increase in taxes to pay for them
27
Historical Development of the US Economy:
Evolution of the American Economy since WW II
Economic Turmoil of 1970s

1970s were a period of economic turmoil


Oil price shocks
Stagflation (combination of inflation and stagnation)

Bretton Woods system of fixed exchange rates were
abandoned in the early 1970s

President Nixon, Ford and Carter all attempted to deal with
these macroeconomics upheavals by a variety of policies
such as


wage and price controls,
by attempts to restrain inflation that generally failed
28
Historical Development of the US Economy:
Evolution of the American Economy since WW II

Reaganomics
Reagan: “government is not the solution to our
problem, government is the problem.”

Supply-side policies

Reaganomics is based on his fundamental belief in
the free market, with two key ideas:


Reagan’s desire to lower taxes and
To have a smaller government
29
Historical Development of the US Economy:
Evolution of the American Economy since WW II
Reaganomics

Reduction of Great Society programs

Competitive nature of free markets make markets the best
means to distribute economic resources

No government regulation

A series of cuts in taxes and in government spending



Inflation dropped dramatically from 13.5 % in 1980 to just 3 % in
1983
Real GDP growth began to grow
The unemployment dropped at the end of Reagan’s presidency in
January 1989
30
Historical Development of the US Economy:
Evolution of the American Economy since WW II
Results of Reaganomics

Reagan’s massive military spending resulted in massive
budget deficit

The disparity between upper and lower socioeconomic levels
increased

Federal debt tripled, reaching record levels

US started to have large trade deficits

US went from being the world’s largest creditor nation to
becoming the world’s largest debtor nation during Reagan’s
second term
31
Historical Development of the US Economy:
Evolution of the American Economy since WW II
Clinton’s Presidency

During the 1990s, the national debt doubled

Clinton passed a welfare reform in an effort to reduce the
number of people dependent on government

With Republicans in control of Congress starting in 1994,
most major spending programs were opposed by one side or
the other, and spending increases stayed relatively low

1990s saw a significant boost in the software and “dotcom”
industries
32
Historical Development of the US Economy:
Changing Trends

Rapid economic growth in the 1960s and early 1970s
dramatically slowed down after the first oil price shock in 1973

US economy only managed to recover in the late 1990s with
high-technology boom after inflation was brought under control

The Soviet Union, America’s greatest postwar ideological and
military rival, ceased to exist in 1991

Japan, America’s greatest economic rival, went into severe
economic stagnation after 1990

America’s high-tech sector emerged in the 1990s
33
World’s Five Largest Corporations are all
US based





Wal-Mart
Exxon-Mobil
General Motors
Ford
Enron → collapsed in 2002 as a result of
financial scandals
34
Basic Ingredients of the American
Economy:



Natural Resources
Labor
Manufacturing and Investment
35
Basic Ingredients of the American Economy:
Natural Resources

Rich in mineral resources

Fertile farm soil

Fortunate to have a moderate climate

Has extensive coastlines on both the Atlantic and Pacific
Oceans and Gulf of Mexico

Rivers flow from far within the continent

Has Great Lakes → provide additional shipping access
36
Basic Ingredients of the American
Economy: Labor

Steady growth in the labor force → led to constant
economic expansion

Until shortly after World War I, most workers were
immigrants from Europe, or African Americans

Beginning in the early 20th century, many Latin
Americans immigrated

They were followed by large numbers of Asians
37
Basic Ingredients of the American
Economy: Manufacturing and Investment

In US, the corporation has emerged as an
association of owners, known as
stockholders, who form a business enterprise
governed by a complex set of rules and
customs

Through the stock market, American banks
and investors have grown their economy by
investing and withdrawing capital from
profitable corporations
38
The American Corporation:
Nature of the American Corporate Form


America’s most important contribution to the world economy has
been its development of the organizational form of the modern
corporation
Anglo-American Corporate Form that is different from those found
in Japan, Germany and other nations






Distinct internal hierarchies and divisions
Led by strong and highly paid chief executive officers (CEOs)
With relatively little control by banks, other firms, workers, and
government
Ownership is by stockholders
Tendency in recent years to make CEOs or other top managers part
owners by giving them stock options as part of their compensation
Reduces the principal-agent problem arising from the separation of
ownership and control in large
39
The American Corporation:
Nature of the American Corporate Form

In 1819 the doctrine of the juridical identity of
the corporation as effectively a legal person
distinct from its owners

The emergence of the limited liability
corporation, whose finances were legally
distinct from those of the owners of the
corporation
40
The American Corporation:
Nature of the American Corporate Form

U-form structure by A. Chandler

With the rise of the railroads in the 1840s, these
entities began to integrate into manufacturing

The first formal appearance of full-time salaried
managers in a decentralized line and staff hierarchy

Lead to economies of scale in manufacturing
industries by implementing forward integration into
wholesale distribution activities as distribution costs
fell
41
The American Corporation:
Nature of the American Corporate Form

M-form structure by Du Pont

During 1920s, multidivisional structure, General Motors
Corporation

Each division being essentially a distinct U-form subentity within
larger corporation

Top management compares profit across divisions

Firms decide which activities to carry out upon minimizing
transactions costs

The development of corporate financing

The establishment of permanent corporate R&D
42
The American Corporation:
Regulation and Deregulation

The rise of American corporations generated a broad movement to
restrain their power and perceived excesses

This began in 1887 with the establishment of Interstate Commerce
Commission (ICC) to regulate the rates charged by railroads

Anti-trust regulations started after the passage of Sherman Act of
1890

Federal Reserve System regulated the banking system after 1913

Civil Aeronautics Board regulated airfares and airline routes

Federal Communications Commission regulate allocation and the
use of the radio spectrum
43
The American Corporation:
Regulation and Deregulation

Monopolies are allowed in certain industries
that were subject to rate regulation



AT&T in telephone industry
Electric utility industry
During 1960s focused on safety and
environmental concerns


Monitoring food and drug safety
Consumer product safety
44
The American Corporation:
Regulation and Deregulation

As the 1970s proceeded, movements to reduce regulations arose:
 The first deregulation is to deregulate the airline fares and routes
(The CAB was eliminated in 1983)

The ICC was eliminated in 1996

In the early 1990s the FCC moved to auctioning of spectrum
rights

EPA moved to the use of marketable pollution emission permits,
notably for sulfur dioxide

Long distance telephone industry AT&T

The deregulation of the electricity supply industry
45
Prospects and Problems of the American
Economy

The Problem of Poverty and Inequality
The overall time trend of inequality





There was a gradual trend toward greater equality from the
late 1920s
Increased dramatically during WW II
Continued until the mid-1970s
After the trend reversed and inequality has since tended to
increase
The role of government in these trends



Transfer payments rising
Social security for elderly
Transfer payments to low income groups have raised
46
Prospects and Problems of the American
Economy

The Rise of the New Economy
Second half of the 1990s






A steady decline of the unemployment rate
Low inflation
Decline in poverty
Acceleration in the economic growth rate
Increase in rate of productivity
The accumulated impact of computerization and the
spread of new technologies as the internet
47
Prospects and Problems of the American
Economy

The Mass Consumption Society and Its
Sustainability
High levels of consumption

Luxury fever “never ending pursuit of more and
more expensive luxury goods”

Low savings rate and high personal debt/income
ratio

US become its largest net debtor by the mid-1990s
48
Back and forth:
From laissez-faire economy to government’s intervention in
economy and back to laissez-faire


During much of the 19th century, US was almost a
purely laissez-faire economy
In the 20th century, role of federal government
increased on various stages:




Progressive Era Reforms of 1901-1909
New Deal of 1930s
Great Society initiatives of the 1960s
Since 1960s US economy has experienced
deregulation and other moves back to laissez-faire
(although 1/3 of the economy is directed by some level of government)

US definitely has a mixed economy despite its
strong orientation to market capitalism
49
Conclusion:
The United States of America: The Market Capitalist Leader







The world's most dynamic and flexible society and
economy
Immigrants from an increasingly diverse array of nations
Established institutions of contract and property
Evolving corporate forms, patterns of standardization
and mass production
A tradition of entrepreneurship
Technologically leadership based upon basic science
and solid R&D within a financial and institutional
framework
The darker side of market capitalism with high levels of
income and wealth inequality
50