Government Government and the Economyand the Economy

This weekThis week

1.1. From feudalism to capitalismFrom feudalism to capitalism

2.2. Questioning the welfare stateQuestioning the welfare state

From feudalism to capitalismFrom feudalism to capitalism

An ideological transformation: An ideological transformation: the Protestant Reformationthe Protestant Reformation

• The Church: politics, economics, spiritualityThe Church: politics, economics, spirituality

• The Church’s talk vs. the Church’s walkThe Church’s talk vs. the Church’s walk

• The Protestant Reformation & individualismThe Protestant Reformation & individualism

Martin Luther 1483-1546 Martin Luther 1483-1546

The enclosures movement (England)The enclosures movement (England)

• The CommonsThe Commons• The profit motiveThe profit motive• Technical innovation & Technical innovation &

agricultural productivityagricultural productivity• Farm workers with no Farm workers with no

workwork• Doing away with the Doing away with the

CommonsCommons

Basics of the free marketBasics of the free market

• Private propertyPrivate property

• Limited governmentLimited government

• Buyers and sellers operate freelyBuyers and sellers operate freely

• Labour: bought & sold Labour: bought & sold

A particular way of seeing humansA particular way of seeing humans•Cost-benefit calculating individualsCost-benefit calculating individuals•HouseholdsHouseholds•Firms/businesses/enterprisesFirms/businesses/enterprises•People & activities considered People & activities considered exclusively in their economic exclusively in their economic dimensiondimension

A particular way of seeing humansA particular way of seeing humans•Cost-benefit calculating individualsCost-benefit calculating individuals•HouseholdsHouseholds•Firms/businesses/enterprisesFirms/businesses/enterprises•People & activities considered People & activities considered exclusively in their economic exclusively in their economic dimensiondimension

The “invisible hand” The “invisible hand” of the marketof the market

• The division of labourThe division of labour

• The invisible hand: a surprising The invisible hand: a surprising assumptionassumption

• The invisible hand today: the The invisible hand today: the supply & demand equilibriumsupply & demand equilibrium

Adam Smith 1723-1790 Adam Smith 1723-1790

People’s motivationPeople’s motivation

• ““It is not from the benevolence of the butcher, It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our the brewer, or the baker, that we expect our dinner, but from their regard to their own dinner, but from their regard to their own interest. We address ourselves, not to their interest. We address ourselves, not to their humanity but to their self-love, and never talk humanity but to their self-love, and never talk to them of our own necessities but of their to them of our own necessities but of their advantages”, Adam Smith, advantages”, Adam Smith, The Wealth of The Wealth of NationsNations, Ch. 2. , Ch. 2.

The limited role of the stateThe limited role of the state

• Law & order (police, courts, prisons)Law & order (police, courts, prisons)

• Private property & contractsPrivate property & contracts

• Weights & measuresWeights & measures

• MoneyMoney

• Armed forcesArmed forces

• Limited spending: taxation & Limited spending: taxation & representationrepresentation

The expansion of the state 1The expansion of the state 1

• The free market utopia & its The free market utopia & its consequencesconsequences

• Another intellectual revolutionAnother intellectual revolution

• Worker demandsWorker demands

• Male suffrageMale suffrage

• A three-way ideological splitA three-way ideological split

• The first government regulationsThe first government regulations

The expansion of the state 2The expansion of the state 2

• The Great Depression, 1929-1939The Great Depression, 1929-1939

• Explaining the Great DepressionExplaining the Great Depression– boom & bust cyclesboom & bust cycles– investment investment – capital concentrationcapital concentration

• John Maynard Keynes’ explanation John Maynard Keynes’ explanation & solution& solution

Keynesian economic policyKeynesian economic policy

• Typical of capitalist staTypical of capitalist statestes

• Government spendingGovernment spending

• Government regulationsGovernment regulations

• Major projectsMajor projects

• Transfers to individualsTransfers to individuals

• Mostly temporary*Mostly temporary*

• Today called “economic stimulus”Today called “economic stimulus”

John Maynard KeynesJohn Maynard Keynes1883-19461883-1946

The state as producer The state as producer of goods & servicesof goods & servicesGoodsGoods• National interests & needsNational interests & needs• Economic prioritiesEconomic priorities• Industrial policyIndustrial policy• Ownership, protection, or Ownership, protection, or

regulation of key regulation of key industriesindustries– miningmining– steelsteel– airlinesairlines– railroads railroads – hydrohydro

ServicesServices

• Infrastructure (roads, bridges, etc.)Infrastructure (roads, bridges, etc.)

• MailMail

• Fire serviceFire service

• EducationEducation

• HealthcareHealthcare

• Unemployment insurance & welfareUnemployment insurance & welfare

• Scientific research fundingScientific research funding

• Daycare (maybe)Daycare (maybe)

• Water, transit, recreation, parking Water, transit, recreation, parking (cities)(cities)

NB:NB: in in federations federations different levels different levels of governments of governments (federal, (federal, provincial, provincial, muni-cipal) muni-cipal) produce produce different different products & products & provide different provide different servicesservices

NB:NB: in in federations federations different levels different levels of governments of governments (federal, (federal, provincial, provincial, muni-cipal) muni-cipal) produce produce different different products & products & provide different provide different servicesservices

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The state as regulatorThe state as regulator

• A major, less visible roleA major, less visible role• Individual behaviour for public good’s sakeIndividual behaviour for public good’s sake• Economic behaviourEconomic behaviour

– environmentenvironment– rentrent– product standardsproduct standards– health & safety (workplace & products)health & safety (workplace & products)– work: wages, hiring, firing, unionization ruleswork: wages, hiring, firing, unionization rules– competition policycompetition policy– airwaves (radio & cell phone freq.)airwaves (radio & cell phone freq.)– airways (for aircrafts)airways (for aircrafts)– consumer protectionconsumer protection

• Inspectors & prosecutorsInspectors & prosecutors

NB:NB: in federations in federations different levels of different levels of governments governments (federal, (federal, provincial, provincial, municipal) municipal) regulate different regulate different activitiesactivities

NB:NB: in federations in federations different levels of different levels of governments governments (federal, (federal, provincial, provincial, municipal) municipal) regulate different regulate different activitiesactivities

The state as buyer & employerThe state as buyer & employer

• Public procurementPublic procurement

• Public tenderingPublic tendering

• Buying local/nationalBuying local/national

• Public employees in CanadaPublic employees in Canada– federalfederal– provincialprovincial– municipalmunicipal– territorialterritorial

Financing the stateFinancing the state

• Getting the money: the Getting the money: the BudgetBudget

• Sources of revenueSources of revenue– taxes (consumption, income, corporate)taxes (consumption, income, corporate)– borrowing (government bonds)borrowing (government bonds)– tariffs (on imports)tariffs (on imports)

• Spending the money: the Spending the money: the EstimatesEstimates

Questioning the welfare stateQuestioning the welfare state

US president Ronald Reagan1981-1989

British Prime MinisterMargaret Thatcher

1979-1990

The 1970s: global eventsThe 1970s: global events

• The 1973 “oil shock” The 1973 “oil shock”

• Effects on businessEffects on business

• Effects on workersEffects on workers

State spending in State spending in a stagnating (or shrinking) economya stagnating (or shrinking) economy

• Potentially unlimited needsPotentially unlimited needs

• Limits to taxationLimits to taxation

• The temptation to borrowThe temptation to borrow

• Diverting money from the private sectorDiverting money from the private sector

• Paying taxes & not benefitingPaying taxes & not benefiting

Questioning state regulationsQuestioning state regulations

• So-called “red tape”So-called “red tape”

• Competition & the competitiveness of Competition & the competitiveness of corporationscorporations

• Public servants & “bureaucracy”Public servants & “bureaucracy”

Neoliberalism:Neoliberalism:An economic programAn economic program

• A.k.a. neoclassical economicsA.k.a. neoclassical economics

• Milton Friedman and the “Chicago Milton Friedman and the “Chicago School”School”

• An economic doctrineAn economic doctrine

• Domestic & globalDomestic & global

• Another free market utopiAnother free market utopiaa

Neoliberal policy: Privatization, Neoliberal policy: Privatization, tax cuts & deregulationtax cuts & deregulation

• The principal problem: profitabilityThe principal problem: profitability

• Tax cuts: two rationalesTax cuts: two rationales

• DeregulationDeregulation

• Reducing government interventionReducing government intervention

• More punitive policiesMore punitive policies

• Freer markets: conditions for growth & Freer markets: conditions for growth & job creationjob creation

Ideology: Ideology: A more individualistic societyA more individualistic society

• What “social rights”?What “social rights”?

• Promoting different valuesPromoting different values– entrepreneurshipentrepreneurship– competitivenesscompetitiveness– ““work ethic”work ethic”

• Fingering problem peopleFingering problem people

• Going after problem peopleGoing after problem people

Welfare recipientsWelfare recipientsThe unemployedThe unemployedGovernment employeesGovernment employeesUnionsUnionsEveryone but me (!)Everyone but me (!)

Welfare recipientsWelfare recipientsThe unemployedThe unemployedGovernment employeesGovernment employeesUnionsUnionsEveryone but me (!)Everyone but me (!)

Effects of neoliberalismEffects of neoliberalism

• BusinessBusiness

• Government servicesGovernment services

• WorkersWorkers

• SocietySociety

• Economic growth but…Economic growth but…

ConclusionConclusion

• The interpenetration of politics & The interpenetration of politics & economicseconomics

• Changing roles for the state over timeChanging roles for the state over time

• From the minimal state…From the minimal state…

• … … to the state as agent of redistribution to the state as agent of redistribution & regulation…& regulation…

• ……to a reduced role for the state againto a reduced role for the state again

AnnexAnnex(to read on your own time if you’re so inclined)(to read on your own time if you’re so inclined)

The subprime crisis in the US and The subprime crisis in the US and the global financial crisisthe global financial crisis

Buying a homeBuying a home

• Symbolism of home ownershipSymbolism of home ownership• Getting the money: going to the bankGetting the money: going to the bank

– banks’ business is to lendbanks’ business is to lend– buyer borrows from bank: mortgagebuyer borrows from bank: mortgage– bank assesses capacity to repaybank assesses capacity to repay– … … & decides whether to lend& decides whether to lend

• A mortgage contract is negotiated A mortgage contract is negotiated – downpaymentdownpayment– interest rate, the interest rate, the prime rateprime rate– timeframe for repaymenttimeframe for repayment

• If all goes wellIf all goes well: in : in xx years the mortgage is paid back years the mortgage is paid back

All did not go well

• Banks lent to buyers who could Banks lent to buyers who could not repaynot repay• Why?Why?

– US government changed banking US government changed banking regulationsregulations• Allow bank to make more loansAllow bank to make more loans• To encourage home ownershipTo encourage home ownership

– to give people a stake in private property/capitalismto give people a stake in private property/capitalism– home owners are less radical in their economic viewshome owners are less radical in their economic views

– Banks engaged in predatory & risky lendingBanks engaged in predatory & risky lending• initial contract at a initial contract at a subprime subprime raterate• hide the risk from borrowerhide the risk from borrower

• Banks Banks knewknew they were making risky loans they were making risky loans

Why the ripple effect?Why the ripple effect?

• Banks making loans borrowed from other banksBanks making loans borrowed from other banks– ……that borrowed from other banks, and so onthat borrowed from other banks, and so on

• When home buyers can’t repay their bankWhen home buyers can’t repay their bank– ……their bank can’t repay other banks and so ontheir bank can’t repay other banks and so on

• Lending to home buyers is Lending to home buyers is only oneonly one role of banks role of banks– banks loan to businesses, farmers, students, etc.banks loan to businesses, farmers, students, etc.

– banks losing money from unpaid mortgages run out of banks losing money from unpaid mortgages run out of money to lend to othersmoney to lend to others

– economy grinds to a halteconomy grinds to a halt

• Businesses, etc. can’t function without access to Businesses, etc. can’t function without access to creditcredit

The US government bailout packageThe US government bailout package

• ““Too big to fail”: a contradiction of capitalist Too big to fail”: a contradiction of capitalist principlesprinciples

• Giving taxpayer money to banksGiving taxpayer money to banks• Stated objective: allowing banks to resume lendingStated objective: allowing banks to resume lending• The controversyThe controversy

– Using taxpayer money to save the wealthyUsing taxpayer money to save the wealthy– Imposing conditions on banksImposing conditions on banks– Re-regulating the marketRe-regulating the market

• More controversyMore controversy– Using bailout money to buy failing banks rather than Using bailout money to buy failing banks rather than

resume making loansresume making loans– Luxury hotel retreat for AIG, Inc. executives Luxury hotel retreat for AIG, Inc. executives