Transcript capitalism - Jon M. Huntsman School of Business

capitalism
The variants
Where have we come from the
theory of capitalism?
-CAPITALISMWHAT IS IT?
• CAPITALISM USUALLY REFERS TO AN
ECONOMIC SYSTEM
• AN ECONOMIC SYSTEM WHERE THE
MEANS OF PRODUCTION (CAPITAL) ARE
PRIVATELY CONTROLLED
• LABOR, GOODS AND CAPITAL ARE
TRADED IN A MARKET
• PROFITS ARE DISTRIBUTED TO OWNERS
OR INVESTED IN NEW PRODUCTION
• DIFFERENCES IN CAPITALISM STEM FROM:
– THE EXTENT TO WHICH DIFFERENT MARKETS
ARE FREE
– RULES DETERMINING WHAT IS PRIVATE
PROPERTY
– RULES DETERMING OWNERSHIP RIGHT AND
USE RIGHTS
– THE RIGHT TO FIRE AND THEREFORE THE
RIGHT TO HIRE
– THE EXTENT THAT MONOPOLY, BOTH PRIVATE
AND GOVERNMENTAL ARE EXERCISED IN THE
MARKET
CAPITALISM AS A SOCIAL
SYSTEM
• A SOCIAL SYSTEM CENTERED
AROUND PRIVATE RIGHTS,
OPERATING MARKETS, PRIVATE
PROPERTY OF SOME SORT
• SOMETIMES ASSOCIATED WITH
DEMOCRACY OF VARIOUS FREE AND
REGULATED / CENTRALIZED FORMS
“CAPITALIST”
• THE TERM CAPITALIST REFERS TO AN
OWNER OF CAPITAL
• A DEFENDER OF THE OWNERSHIP OF
CAPITAL --- THE MEANS OF PRODUCTION
• THE INVESTER IN THE MEANS OF
PRODUCTION – CAPITAL
• THE CLAIMENT OF THE PROFITS AND THE
CAPITAL INVESTED
EARLY CAPTALISM
•
•
•
•
CHINA --- THE FISHING EXPLORATION
ISLAMIC CAPITALISM – 8TH – 12TH
CENTURIES
MERCANTILISM IN THE 16TH – 18TH
CENTURIES - BUT FILLED WITH
GOVERNMENT ( THE KING AHD THE
KING’S COURT) INTERFERENCE
• THE PRE-CLASSICAL PERIOD OF THE
1700’S
ANCIENT CHINESE
TRADE
Guan Zhong
and the book
Guan Zi
(725-645 BC)
The light heavy idea of the
operation of markets
Guan Zhong argued that when a good was abundant, it became
light, and its price would fall--- when the good was “locked away”, it
became heavy, and the good’s price would rise
There are movements of goods into and out of markets based on
their lightness and heaviness, with a tendency toward one price–
equilibrium --- hence a statement of the law of supply & demand
The movement “IN and OUT” of markets was trade
A TRANSELATED QUOTE
Guan Zhong
“INDEED, IT IS THE NATURE OF MEN THAT WHENEVER THEY SEE PROFIT, THEY
CANNOT HELP CHASING AFTER IT, AND WHENEVER THEY SEE HARM, THEY
CANNOT HELP RUNNING AWAY. WHEN THE MERCHANT ENGAGES IN TRADE AND
TRAVELS TWICE THE ORDINARY DISTANCE IN A DAY, USES THE NIGHT TO EXTEND
THE DAY, AND COVERS A THOUSAND LI WITHOUT CONSIDERING IT TOO FAR, IT IS
BECAUSE PROFIT LIES AHEAD. WHEN THE FISHERMAN PUTS OUT TO SEA, THE
SEA MAY BE TEN THOUSAND-REN DEEP, AND WHEN HE HEADS INTO ITS WAVES
AND STRUGGLES AGAINST ITS TIDES, RAISES HIS SMALL MAST AND SAILS OUT A
HUNDRED LI, NEVER LEAVING THE WATER FROM MORNING TO NIGHT, IT IS
BECAUSE PROFIT LIES IN THE WATER. THUS, WHEREVER PROFIT LIES, EVEN
THOUGH IT BE ATOP A THOUSAND-REN PEAK, THERE IS NO PLACE PEOPLE WILL
NOT CLIMB. EVEN THOUGH IT IS AT THE BOTTOM OF THE DEEPEST DEPTHS,
THERE IS NO PLACE PEOPLE WILL NOT ENTER.
INDEED, THOSE WHO ARE SKILLED IN GOVERNMENT CONTROL THE
PRESENCE OF WEALTH SO THAT THE PEOPLE ARE NATURALLY
CONTENT. WITHOUT PUSHING THEM, THEY GO; WITHOUT PULLING
THEM, THEY COME. WITHOUT TROUBLE OR WORRY, THE PEOPLE
ENRICH THEMSELVES. IT IS LIKE A BIRD SITTING ON ITS EGGS;
THERE IS NEITHER SHAPE NOR SOUND, BUT THE YOUNG SUDDENLY
APPEAR QUITE COMPLETE”
GUAN ZHONG, GUAN ZI, VOL. II, TRANSELATED BY W. ALLYN RICKETT
(PRINCETON, N.J.: PRINCETON UNIVERSITY PRESS, 1998), pp. 219-220.
• Free markets are traced to the Islamic
golden age and the Muslim agricultural
revolution
• Early forms of merchants markets
• High value currency and monetary
economy relative to barter
Anglo-Saxon model
• Capitalist theory --- economy is based
on the “invisible” hand idea of markets
• Markets adjust according to the weight
of supply and demand
• Resources are allocated by the market ---- no single market participant
administrates the market and its price
• Property rights foundations – but has
changed from time to time
Anglo-Saxon form is based in
Great Britain tradition and law
•
•
•
•
Classical liberalism --- Adam Smith
Classical liberalism --- the law
---- common law base of Great Britain
Lay Judges --- broad legal principles,
court arguments are oral --- precedents
--- social contract based on mutual
delegation of powers to government
(John Locke --- relative to Thomas
Hobbes)
• Limited intervention of government in
the economy
• --- Scottish law was more of Roman
Law ---- but mixed with the Great Britain
established law --- brought in property
law and corporate organization
• U.S. is an example of Anglo-Saxon
capitalism--- but we have deviations
from the theory of capitalism
The European Model
• Based in German and French
economies
• Less faith in the “invisible” hand in the
market
• Constitutional order of socialism idea –
(James Buchanan idea)
• So the state has a higher order of
activity in the economy and regulation
• Here the Roman law rule of sovereignty
and state head rule pervades the
operation of the economy
• Professional judges--- legal codes --written records
• More industrial state action and
government ownership of industries
• Examples are German, French, and
Swedish economies
• Roman law – Common Law– Napoleonic Law
forms
• --- common law --- consideration of common
liability --- liable for negligence --- so you
build to accommodate mistakes or safety
problems --- Napoleonic law form has to
have all the details of liability problems
spelled out --- don’t have to build as safe as
possible given current technology
• Roman law sets up property as high form of
ownership ---- protection for ownership even
if won in battle or knavery!
Common vs civil law
foundations
• Common law --- Anglo-Saxon model
– Custom, usage, court decisions, precedent
– British, British Commonwealth, Israel, Hong
Kong, and U.S. forms
• Civil law--- (Roman law)
– System of rules, codes, perhaps certain
application
– European, Argentina, Japan, South Korea
the Asian Model
• The Asian model is more of a recent
“experimentation” with capitalism
• Most like the European model ---- state
involvement in the economy
• Intervention by government to form a
high level of capital formation
• The capital formation is a move to
overcome the long backwardness of
Asian economies over the centuries
• Examples of the Asian model are the
modern day
• Japan
• South Korea
• Taiwan
• “the so-called “miracle of the tigers”
• China has moved to a market system,
but with military state rule --- an
experiment -- market socialism with
market allocation
• There are differences within these
models --- Germany different than
France --- a Polish European model
and a Polish high state and union rule
and intervention in the Polish economy
• The Czech privatization --- now a highly
monopoly industry type --- industrial
state type of economy
Constitutional Foundations
• The U.S. economy
James Madison concept --- rejects the
“strong state” notions
Alexander Hamilton --- the strong state
notion
So the constitution is set up to limit the
powers of government p. 162 of Text
Separation of powers – broad outline
• The worry about majority rule --majority would vote to redistribute
property --- the overbearing majority –
in the mind of Madison p. 163 of Text
• Or the fear of jealous minorities
passing laws against minorities
• Constitution is set up to prevent
domination by factions
Private vs public sectors
 Private sector = business sector ==
private ownership prevails ---- but we
have 25% +- state ownership/operated in
the U.S. ---- maybe 17% of GNP is
produced by fully regulated industries --today probably 80% of the economy is
private
 Government in the U.S. employs  16% of
labor force ---- government employment
has grown --- vendors to government
have increased
Business organization in U.S.
 Sole proprietorship
 Partnership --- now LLC, LLP, PC
 Corporation --- we get this from the
Romans actually--- ‘an organization as an
entity different than its owners”
 Business revenues higher in the LLC,
partnership, corporation organizations but
most businesses are sole proprietorships
 Bulk of output by the corporation
 U.S. has an ongoing market for corporate
control --- buy control of shares--- control the
corporation ---- the corporate raiders
 CEO’s receive fixed salaries, commissioned
salaries, incentive salaries and stock options
or warrants --- severance bonuses or “golden
parachutes
 Wait for weakness --- buy up and change
management- then sell for a gain --tradeoffs of gains relative to loss of trust,
employees, suppliers, customers
 The corporation is set up to maximize
shareholder value --- not to maximize stakeholder
value (the European model)
 Control the share --- control the value
 European model of capitalism protects the stake
holder ---- the stake holder may be the
government or be an administrative agency for
the government that maximizes the government
stake holding share
 But we have the TVA, the Army Corps of
Engineers, SEPA, government athletic teams,
Bureau of Reclamation
 Capital market – market for raising
investment finance or capital --- primary
the issuance of equities , the IPO--secondary market is where the issued
bonds & equities are exchanged
 Shares are sold by underwriters who
organize the initial sale of shares and
operate via the Exchanges
 More investment in the U.S. via issuance
of stocks than through banks (the
European model)
 Opponents of the U.S. style argue that stock
markets are too volatile ---- the Keynesian
argument that real capital is investment and
not the speculation of the exchanges --arguing as a pseudo “European model”
defender in his criticism of the Anglo-Saxon
model
 Concentration issues in the product market -- antitrust legislation and regulation of
monopoly and breaches of competition
State right to tax
 The U.S. constitution allows for the right of
eminent domain --- the right to take property
for public interest --- this forms the right to tax
owners of property
 Constitution contract clause – protection of
contracts from state laws --- John Marshall
as the guardian of constitutional protection of
contracts --- courts are tribunals to protect
property (a Roman concept actually) and to
decide human rights
 We generally have turned to
administrative regulation by authority of a
governor or other appointee to regulate in
various areas of concern --- we have been
going through some transitions on
regulation as a result of authority of a
budget agency , OMB rulings --deregulation era as of 1970’s 1980’s in the
U.S.
The labor market
The stakeholders of a corporation are
the managers, employees, agents
 But the interests of these
stakeholders is of less importance
than staying on the job in AngloSaxon form model --- different than
in stakeholder protection mode of
the European capitalism model




Labor unions are formed to attempt to
balance or bring about countervailing
power to change or transfer power to the
stakeholder, particularly labor
Labor is allocated via labor markets in the
U.S.
Government intervention has increased --base is fair labor and standards act of
1938 – to establish standards, minimum
wage, basis for overtime pay, child labor
issues
Occupational Safety and Health Act
of 1970 --- OSHA ---- job safety
 European model brings in elements
of “life time sinecure” in job status
 Anglo-Saxon rule maintains right to
fire --- if not allowed, then there is
less hiring
 We still have not solved the gender
wage & income issue

The safety net --- welfare–
income distribution
 Pure Anglo-Saxon ---- self reliance
 But the U.S. moves to Social Security -- it is a part of the latter portions of
Adam Smith’s Wealth of Nations!!
 Now becomes an entitlement in the
nation’s budget --- other forms and
safety nets become entitlements --less flexibility in the budget
 Income redistribution --- what percent of the
population has what percent of the income
--- the Lorenz Curve --- see p. 102 of the text
 Redistribution is less a force in AngloSaxon capitalism --- but is more of a
sentiment and in law in European
capitalism --- comes from Judaic tradition
of steward of the land – so we see it in
Europe, Mexico, Latin America – land
reform