BA107 (WEEK 4) -- POLITICAL THEORY AND INSTITUTIONS
1. Introduction to the political environment of business.
2. How government influences business.
3. Political ideologies and the role of the state.
Video application: clip from Commanding Heights on the historical role of government in the US, Britain, Germany, and India.
4. Overview of the US political system. PREPARATION QUESTIONS FOR SECTION
In order to provide some basic background before you write up your first paper, we will spend this week's section reviewing the party platforms for the Democrats and Republicans. Although it is recommended that you read the entire platform in order to become familiar with the overall thinking of each party, we will focus our attention on those sections that are most pertinent to understanding economic and business issues. Specifically:
1. Democratic platform.
2. Republican platform.
Focus on the following issues:
Taxes....
Environment....
[??] FIVE KEY MODES OF GOVERNMENT INFLUENCE OVER BUSINESS
1. Public ownership. State ownership of production and/or distribution of goods and services. Primarily found outside of the US and declining in importance worldwide.
2. Regulation. Intervention in private sector activities using commands, controls, and incentives. a. Economic regulation (eg, of the airline industry). Targetted at specific industrial sectors. Declining in importance [see Commanding Heights]. b. Social regulation (eg, of the environment). Extends across all industrial sectors. Remains important in the US and elsewhere.
3. Antitrust. Interventions that eliminate "undesireable" monopolies by restricting business practices and combinations where competition would be reduced.
4. Intellectual property. Creates "desireable" monopolies by ensuring exclusive control by the property holder (inventor, artist, etc).
5. Industrial policies. The targetting of selected "strategic" industries (e.g., high tech) through government assistance in various forms (tax concessions, subsidies, etc).
EXAMPLE: KEY MODES OF GOVERNMENT INFLUENCE APPLIED TO THE INTERNET
1. Public ownership. This has played only a limited role in the US.
2. Regulation.
- As a fundamental technology, the Internet is shaped by a broad range of regulatory issues.
- Key battle over whether regulation will be by government or by industry self-regulation.
3. Antitrust.
- Some have predicted that this will be the primary template for control of the new economy.
- One of the main rationales for the Microsoft antitrust case is concern that Microsoft will extend its market power from operating systems to Internet software and services.
4. Intellectual property. This is a critical new battlefield in Internet development, since digitalization and the Internet permit the mass duplication of music, movies, and other forms of content and entertainment.
5. Industrial policies. Internet development has been shaped since the beginning by government support.
- Initial funding from DOD and NSF for basic research on networking technology --> creation of TCP/IP.
- Support in late 80s and early 90s from Cern (European supercollider project) --> creation of HTML and the World Wide Web.
- Support in late 1990s for e-commerce through tax moratorium, digital signatures legislation, etc --> expansion of e- business within the US.
- The Magaziner report on e-commerce --> expansion of e-business outside of the US. IDEOLOGY AND THE ROLE OF THE STATE -- ECONOMIC POLICIES
LIBERAL ("left")CONSERVATIVE ("right") IDEOLOGY AND THE ROLE OF THE STATE -- SOCIAL POLICIES
LIBERAL ("left")CONSERVATIVE ("right") IDEOLOGY AND THE ROLE OF THE STATE
ECONOMIC POLICIES SOCIAL POLICIES = use "regulation" instead of "policies"?
LIBERAL ("left")pro-intervention anti-intervention
CONSERVATIVE ("right") pro-intervention anti-intervention
= note how left and right are preferred terms in Europe, where "liberal" often means what we would call [economic] libertarian. IDEOLOGY AND THE ROLE OF THE STATE
ECONOMIC INFLUENCE
WEAK STATE STRONG STATE
WEAK STATELibertarian Liberal
SOCIAL INFLUENCE
STRONG STATEConservative Authoritarian ECONOMIC, SOCIAL, AND POLITICAL FEATURES OF MARKET CAPITALISM
1. Economic characteristics.
1. Free markets -- the free trade of valued goods and services under direction of some form of price system.
2. Capitalism -- private ownership of the means of production (ie, little state ownership).
2. Social characteristics.
1. Self-interested exchange as guiding principle (eg, Adam Smith on the "invisible hand").
2. The protestant work ethic (Weber) -- hard work was a road to salvation, and would be rewarded, if not in this life than in the next.
3. Acceptance of economic and social disparities as inevitable to the economic process.
3. Political characteristics. (These are not necessarily intrinsic to market capitalism, but tend to be positively correlated.)
1. Limited government in the economic sector.
2. Liberal democracy. a. an electoral process with the possibility for political change -- the market mechanism is extended to the political process b. the rule of law -- an independent legal system that enforces contracts
WARTIME AND POSTWAR FORCES LEADING TO THE RISE OF BIG GOVERNMENT
The perceived effectiveness of allied governments in World War II led to increased legitimacy of the state.
Other parts of the world made a strong move toward a mixed economy during the early postwar period.
Postwar economic success led to increasing confidence in Keynesian thinking. VIDEO DISCUSSION ISSUES -- COMPARISONS IN THE RISE OF GOVERNMENT
(from "The Battle of Ideas," Commanding Heights vol. 1)
1. US -- FDR and the New Deal.
FDR created many new bureaucracies dealing with new regulations.
Keynes vs Hayek on the proper role of the state.
2. Britain -- the socialization of the economy in the early postwar period.
The long shadow of the depression had led to a loss of faith in markets.
Atlee and postwar Britain -- especially the reasons behind the enthusiasm for socialism.
At the other end of the political spectrum, Churchill had read Hayek and opposed state planning.
3. Germany -- the creation of a social market economy after the war.
Postwar Germany's ruin.
Ludwig Erhard helped promote the removal of price controls. This led to the end of black markets.
Germany's social market economy vs British planning.
4. India -- independence and the creation of the command economy. Ghandi's views of self-sufficient villages vs Nehru's goal of Soviet-style planning over the Commanding Heights.
India became the model for countries in Africa, South America, etc. [needs work]
SUMMARY OF THE MIXED ECONOMY IN EUROPE AND INDIA
BRITAIN -- Attlee as postwar prime minister that put in place the "mixed economy." This took the form of (a) fiscal management and (b) state ownership. Forces for this: a. Capitalism had a bad name -- due to the 1930s depression, ineffectiveness of the British capitalist class in entrepreneurship, etc. And socialism had a good name -- due to Soviet defeat of Hitler and its claims of success with its 5-year plans. b. Unemployment was "the central structural problem toward which all policies were geared."
GERMANY -- Germany reflected a similar process as Britain and France, but with two key differences: a. It operated at multiple levels of state ownership, consistent with its federalist system. b. It took place through a corporatist system (with government, business, and labor) designed not so much to replace the market as make it work better.
US comparison: What made the US distinctive compared to Europe was not that government was not involved in the economy, but that it was involved through regulation rather than ownership. FDR called for "a partnership in planning between government and business, with government having the right to prevent, with the assistance of the overwhelming majority of that industry, unfair practices and to enforce this agreement by the authority of government."
51. India's independence. Ghandi's views of self-sufficient villages vs Nehru's goal of Soviet-style planning over the Commanding Heights. 54. India became the model for countries in Africa, South America, etc. VIDEO DISCUSSION ISSUES -- "The Battle of Ideas" (Commanding Heights vol. 1)
[alt #1]
1. Examples of ideological thinking.
"Leftwing" thinking.
"Rightwing" thinking.
2. How these affected the nonmarket environment of business.
[alt #2]
1. Examples of social rules.
2. Examples of political rules. [save to later?]
TRENDS IN THE BUSINESS-GOVERNMENT RELATIONSHIP
1. Shift in emphasis from "market failures" to "government failures."
In Europe, this HAS led to privatization of state-owned enterprises.
In the US, it has led to deregulation.
2. Shift in emphasis from economic to social regulation.
Deregulation in the US has come primarily in industry-specific regulation -- eg, in telecommunications.
Social regulation continues into the present in areas such as the environment, consumer welfare, and workplace safety and employment practices.
3. Shift in emphasis from controlling industry to promoting industry. [discussed in week 8]
With globalization, etc, has come increased interest by the US government in helping domestic industries to compete in world markets.
In some cases, this is through deregulation, in other cases (eg, national security) through "industrial policies" targetted at promoting industries. EXAMPLES OF THE CONTINUING IMPACT OF GOVERNMENT TODAY
1. Defining basic property rights. Example: assigning Internet domain names.
2. Macroeconomic policymaking. Example: Long-Term Capital Management bailout.
3. National security. Example: new regulations concerning airline safety.
4. Social regulation and welfare. Example: controls over arsenic levels in drinking water. THE US HAS A "FEDERALIST" POLITICAL SYSTEM
"Federalism" is a political system in which at least two separate governments share the responsibility for governing the same people and the same territory.
Federalism draws lines to separate the powers of different levels of government. BASIC ROLES OF THE THREE BRANCHES OF AMERICAN GOVERNMENT
1. Legislative. Congress (the House and Senate) makes laws. can override a presidential veto can impeach and remove the president ratifies presidential appointments authorizes/appropriates funds for legislation checks on the judiciary can impeach and remove judges confirms federal judges
2. Executive. The president carries out those laws. proposes legislation vetoes legislation makes treaties appoints federal judges enforces court decisions
3. Judicial. The courts (Supreme Court and lower courts) interpret the laws. reviews executive acts reviews congressional laws THE LOGIC OF "THE SEPARATION OF POWERS"
1. The underlying logic of this tripartite division is a separation of powers. Each branch has its own powers, though some powers are shared among them.
2. The system of separation of powers is designed to reduce the risk that a single branch might act independently and abuse its power. No branch can carry out its functions without some cooperation from the other branches. This cooperation prevents excesses in policy that might result if a single branch were in complete control.
3. This is sometimes referred to as "a system of checks and balances." A system of balances minimizes the risk that one branch might completely take over the government or stray too far politically from the other branches.