Professional Documents
Culture Documents
I.
Models of Capitalism
Is patterned after the econ principles from the 19 century in France and
Germany that places less faith in the invisible hand and call for more state
intervention in econ activity, including more state ownership
Uses civil (roman) law, which is based on professional judges, legal codes and
written records.
Best real-world examples-France, Germany and Sweden
Constitutional Foundations
The legal foundations of the US economy is the US
Constitution:
2. The Environment
Large size and rich natural resources7% of world land area, and
5% of world's population.
Philosophy of Individualism
Individuals can have significant impact on society; success through
individual hard work.
Encourages higher education; discourages welfare spending.
Partnerships
owned by 2 or more partners who make all decisions, and share
profits/losses
Finance, insurance, real estate, services
Advantages
Relatively simple
Their profits are taxed only once
Disadvantages
The owners are personally liable for the debts of the business
The ability to raise capital is limited, dependent on the owners
ability to borrow against personal assets
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Corporations
owned by its shareholders and act as a legal person. A board of
directors, elected by the stockholders, appoints management to run
the corporation
Advantages:
The owners (stockholders) are not personally liable for the
debts of the corporation (limited liability)
The management can be changed if necessary
It has more options for raising capital (sale of bonds and
additional stock)
Disadvantages:
The income is taxed a second time when corporate profits are
distributed to stockholders as dividends.
Double taxation gives American corporations to reinvest
earnings rather than pay out dividends.
Corporate Governance
Is concerned with the issue of for whose interest a corporation is
operated. In theory, the corporation can be run in the interests of:
Shareholders
owners
Stakeholders
those who participate in the corporation as managers, employees, workers,
suppliers or buyers, but not as owners.
The community
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5. Capital Markets
The market in which businesses raise investment finance trough the
issue of stocks, bonds and bank borrowing.
Brings together users and suppliers of credit
Well organized and efficient (new information is very quickly
reflected in share prices)
stock markets
bond markets
A capital market could be:
Primary
The corporation sells (issue) new shares of stocks or bonds to buyers, called
Initial Public Offering (IPO).
Investment financing is created in the primary mkt
Secondary
Secondhand mkt in which shares of stock or bonds that have already been
issued are traded by one owner to another.
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The American capital mkt is one in which new shares are sold to
private investors by underwriters who organize the initial sale of
shares. The stock exchanges are private organizations that have
established operating rules and have the power to punish
underwriters, brokers or companies that violate their rules.
Insider trading lawsstock exchanges and security commissions have more
strict laws against insider trading; all insider transactions must be reported to
the security and exchange commission for publication. Insider trading occurs,
but if it discovered, is punishable.
Strict accounting standards that require transparency
Features:
The operating principle of major US stock exchange is full financial
disclosurethe potential buyers of new stocks need to have a full info about
the company
In US more investment is financed by the issue of stock and bonds than
through bank financing. The financing of investments through stock mkt is
characteristic feature of the Anglo-Saxon model
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2009 RankCompany
Revenues ($ millions)
Profits ($ millions)
1.Exxon Mobil
2.Wal-Mart Stores
3.Chevron
4.ConocoPhillips
5.General Electric
6.General Motors 148,979
7.Ford Motor
8.At&T
9. Hewlett-Packard
10.Valero Energy 118,298
442,851
405,607
263,159
230,764
183,207
45,220
13,400
23,931
-16,998
17,410
-30,860
146,277
124,028
118,364
-14,672
12,867
8,329
-1,131
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7. Regulation
Another important part of the institutional infrastructure that supports
a mkt economy.
The constitution of the US was designed to protect private property
from the government regulation.
The federal government can make decisions affecting businesses through the legislature,
in which a bill is passed by congress and signed by the president, or by executive order
or regulation.
Both econ and social regulation impose costs and creates benefits
--Costs
One of the costs is compliance cost, the associated paper work, etc
2002 the cost of business regulation was approx. $1 trillion or 9% GDP (large
costs)
The Fed register, which publishes all federal regulations has reached 100,000
pages per year
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Benefits
Substantial progress in cleaning air, water and land
Reducing automobile emissions
Improvements in automobile safety
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8. Deregulation
In the 1960s and 1970s the high cost and percieved inefficiencies of
regulation prompted a movement to deregulation
The reduced incidence of govt regulation of business and the return
of decision-making to the private business themselves
The deregulation in the American economy began in late 1970sairlines, railroad, transport
The Airline Deregulation Act signed in 1978, allowing the airlines rather than
the Civil Aeronautics Board to set fares and routes
Much of the deregulation was motivated by the message of microecon theory
the development of competitive mkts could provide benefits that would
outweigh associated costs.
Increased competition
Improves efficiency in an industry
More business uncertainty and volatility, which is characteristic of capitalism
Lower prices for most (but not all consumers)
Consumers in small mkts characterized by high costs are no longer protected and
now have to pay prices closer to costs.
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-effects on productivity
Negative (strikes; work rules; distortion on union-nonunion wage)
Positive (training; reduced turnover and higher moral)
-effect on wages
unions increase unionized wages about 15-18%
increased wages cause reduction in quantity of labor demanded in unionized sector
thus supply of labor in non-unionized sector increased
thus non-unionized wages depressed
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The government intervenes the labor market with ant discriminatory policies
Discrimination against:
Women
Minorities/ race
Potential effects
exclusion from certain occupations/channeling into certain occupations
reducing wages of women and minorities
Most work indicates that discrimination does exist but affect on wages small
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11. Welfare
In the US, government public assistance has been limited to public
education, some low cost health care for the poor, social security,
disability and unemployment.
FSP, TANF
Limited welfare assistance
promoting self-reliance thru the acquisition of job skills
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Educational system
Public and private educ. In the US education is more a personal rather than
social investment
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14. Privatization
the shift of the economy from the public sector to the private
publicly owned facilities, such as airports, roads, water systems
there is substantial amount of private initiative in the provision of local services.
In the US privatization is more likely to consist of government contracting for the
private production of traditionally public sector goods and services such as trash
collection, local transportation services, etc.
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Fiscal policy adjustments are what almost all the econ policy advisers
have in mind when they say now is the time to pursue Keynesian
policies. Especially now, when conventional monetary policy is
ineffective, since short-term interest rates on safe assets are close to
zero, Keynesian theory would argue that the government should have a
fiscal target. If spending would otherwise be less than full employment
GDP, the government should put more money into people's pockets.
A critical aspect of animal spirits is trust, an emotional state that
dismisses doubts about others. In talking about animal spirits, Keynes
sought to convey the message that swings in confidence are not always
logical. The business cycle is in good part driven by animal spirits.
There are good times when people have substantial trust and associated
feelings that contribute to an environment of confidence. They make
decisions spontaneously. They believe instinctively that they will be
successful, and they suspend their suspicions. As long as large groups
of people remain trusting, people's somewhat rash, impulsive decisionmaking is not discovered.
Unfortunately, the recent period showed that confidence was blind. It
was not based on rational evidence. The trust in the mortgage and
housing markets that drove real-estate prices to unsustainable heights is
one of the most dramatic examples of unbridled animal spirits.
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The role of the government is not to harness animal spirits but really
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to set them free, to allow them to be maximally creative.