Comparing Economic Systems
in the Twenty-First Century (Part 2)

1. General Notes:

   • Chapter 5 - Theory of Capitalism (pg. 93)

     • The Invisible Hand (pg. 95)

       • "speaking against the mercantilist position that free trade could lead toa country's ruin, Adam Smith argued that a highly efficient and harmonious economic system would emerge if competitive markets were left to function freely without government intervention" (pg. 95)

         • Mercantilism - "argued that economies must be heavily regulated by the state to prevent a loss of resources to rival nations" (pg. 96)

       • "Smith's notion of a natural tendency toward an efficient economic equilibrium was the foundation for the liberal economic thought of the 19th century" (pg. 95)

     • How Markets Work (pg. 96)

       • "interactions of demand and supply determine prices" (pg. 96)

       • Market Equilibrium pg. 96)

         • "partial equilibrium assumes two motivating forces drive market capitalism:" (pg. 96)

           • "the desire of producers to maximize profits and the desire of consumers to maximize their own welfare (utility) subject to the constraint of limited income" (pg. 96)

       • Efficiency of Market Allocation (pg. 97)

         • "there are two arguments:" (pg. 97)

           • "one depends on the market being competitive - that is, consisting of a large number of buyers and sellers, none of whom has the power to influence the market price." (pg. 97)

             • Marginal Cost (MC) = Marginal Benefit (MB) (pg. 97)

               • Profit = Revenue - Cost

               • MC is the derivative of the Cost function; MB is the derivative of the Revenue function.

             • "firms that operate in competitive markets produce the level of output that equates price and marginal cost" (pg. 97)

               • Price (P) = MC

               • Profit = MR - MC

           • "the other…rests on the ability of markets to use information effectively" (pg. 97)

       • Markets and Institutions (pg. 99)

         • Monetary Policy - "is conducted by a central bank, which determines the quantity of money" (pg. 99)

         • Fiscal Policy - "relates to how the state collects taxes and spends revenue" (pg. 99)

         • Simple Markets - "markets, such as small retail trade in goods in services, that do not require sophisticated institutions" (pg. 99)

         • Complex Markets - "market that deal in non-homogeneous goods and services that may be bought in one period of time and sold in another period of time" (pg. 99)

     • State Intervention (pg. 100)

       • "the need for state intervention [is] to deal with monopoly power, externalities, [provision of] public goods, and income-distribution problems" (pg. 100)

       • Monopoly Power (pg. 100)

         • "the crux of the monopoly problem is the monopolist's inclination to hold output below the level that would prevail in a competitive situation" (pg. 100)

           • "monopolists underproduce and overcharge…[which] causes 'dead-weight loss'" (pg. 100)

             • MR = MC to find Quantity (Q) to produce.

             • At that quantity, they decide what to produce.

       • External Effects and Collective Action (pg. 102)

         • "external effects brought to bear in situations where the actions of one producer or consumer directly affect the costs or utility of a second producer or consumer" (pg. 102)

         • "when externalities are present, enterprises base their decisions on private marginal costs [rather than total MC = private MC + public MC]" (pg. 103)

       • Problems of Democratic Public Choice (pg. 104)

         • "F. A. Hayek…argued that democracy is possible only in a market economy, but that democracy is fragile" (pg. 104)

         • Public Good - "[could be] national defense, police protection and a legal system, dams, [or] flood control projects" (pg. 104)

       • Income Distribution (pg. 105)

         • "John Rawls…argues that an unequal distribution of income persists because those who benefit from income inequality are unwilling to accept changes that favor the poor" (pg. 106)

       • Macroeconomic Instability (pg. 106)

         • "Keynes argued that there is no assurance that equilibrium will occur at full employment or that the automatic adjustment mechanism will work with reasonable speed. Thus…it is the responsibility of government to ensure full employment" (pg. 107)

         • "after World War II…discretionary monetary and fiscal policy [called policy activism] became widely accepted by economists…[thereby] abandoning the traditional hands-off policies favored by the neoclassical school" (pg. 107)

         • "monetarists argue against the use of activist policy. Because fiscal policy is decided primarily by politics rather than economics, monetary policy has been the most flexible tool of activist policy" (pg. 108)

           • "monetarist [therefore] favor[ed] a fixed-monetary-growth rule, which would bind monetary policy authorities to expand the money supply by a fixed rate each year regardless of the state of the economy" (pg. 108)

         • "the basic message of the monetarists, the rational-expectations economists, and the real business cycle theorists is that capitalism is much more stable than Keynes thought and that activist policies are likely to harm the economy" (pg. 108)

     • Growth and State Policy (pg. 108)

       • Creative Destruction - "a particular company or industry will find new ways to produce products or find new products to develop. Such adaptability can become the engine of growth for the entire company, pulling along laggard branches" (pg. 108-109)

     • The Performance of Capitalist Economic Systems: Hypothesis (pg. 109)

       • Efficiency (pg. 109)

         • "capitalism should provide a high level of efficiency, especially in the static case. The more competitive the economy, the more efficient the economy" (pg. 109)

         • "imperfect competition and external effects reduce this efficiency" (pg. 109)

         • "the most important point is that profit maximization, under all market arrangements, strongly encourages the efficient (least-cost) combination of resources to produce output" (pg. 109)

       • Stability (pg. 110)

         • "stability is the ability of an economic system to grow without undue fluctuations in the rate of growth and without excessive inflation and unemployment" (pg. 110)

           • "Keynes argued that capitalist economies are not stable, at in terms of short-run automatic equilibrating forces. Monetarists and rational-expectations theorists believe that capitalist economies are (or could be) inherently more stable if left to their own devices" (pg. 110)

       • Income Distribution (pg. 110)

         • "the theory of capitalism cannot make definitive judgements about equity and how resources should be divided among the members of capitalist societies" (pg. 110)

   • Chapter 6 - Theory of Planned Socialism (pg. 117)

     • The Socialist Economy (pg. 117)

       • "4 fundamental tasks of an economic system:" (pg. 117)

         • What to produce

         • How to produce

         • Who gets what

         • How to prove for the future

       • "[overall,] the state dictates sectoral expansion and, within sectors, the arrangements for production" (pg. 117)

       • "factor prices are of limited importance in deciding the appropriate input mix" (pg. 118)

       • "for the household, the primary source of income is labor [as] private income from capital is absent" (pg. 118)

         • "moreover, in a system where the socialization of consumption is an objective, one would expect a more even distribution of income. This expectation - one of the strongest basic tenets of socialism - relies on assumptions about basic human needs, human participation in the economy, and how these basic needs ought to be fulfilled" (pg. 118)

       • "the socialist economy follows policies that expand present savings to offset individual shortsightedness and expand well-being in the future" (pg. 118)

       • "the socialist economy places greater emphasis on economic equality and socialization and, in doing so, uses a variety of state controls and policies to offset problems of unemployment, inflation, and slow economic growth, which are perceived as inevitable under capitalism" (pg. 118)

     • The Marxist-Leninist View of Socialism (pg. 118)

       • "for Marx…capitalism, because of its exploitation of workers and internal contradictions, would be replaced by socialism" (pg. 118)

       • "socialism its would be an intermediate step, a system ultimately to be replaced by communism" (pg. 118)

         • "communism, the highest stage of social and economic development, would be characterized by the absence of markets and money and by abundance, distribution according to need, and the withering away of the state" (pg. 118)

         • "the state would be transformed into a dictatorship of the proletariat" (pg. 118)

       • "under socialism…the state would be representative of the masses and therefore noncoercive" (pg. 118-119)

       • "under communism, the basis of reward would be need" (pg. 119)

       • "Lenin wrote extensively on the role of the state under socialism, especially on the tactics of revolution" (pg. 119)

         • "Lenin emphasized that inequalities and vestiges of capitalism would still exist under socialism and that, accordingly, coercive actions by the state would be necessary" (pg. 119)

     • The Socialist Controversy: The Feasibility of Socialism (pg. 119)

       • Barone: A Theoretical Framework (pg. 119)

         • "in 107, [Enrico] Barone published "The Ministry of Production in the Collective State" [where]…he argued, though in a limited and purely theoretical way, that prices, understood as relative valuations, are not bound to the market. A central planning board (CPB) could establish prices, or 'ratio's of equivalence' among commodities" (pg. 119)

           • [THE MINISTRY OF PRODUCTION IN THE COLLECTIVIST STATE on JSTOR]

         • "Barone's model consisted of simultaneous equations relating inputs and outputs to the rations of equivalence. When solved, the equations could provide the appropriate relative valuations of resources to balance demand and supply" (pg. 119-120)

       • The Challenge of Mises and Hayek (pg. 120)

         • "Mises argued that for a state to direct available resources rationally toward the achievement of given ends, even if resource availabilities and ends were known, a knowledge of relative valuations (prices) would be essential [and] maintained that the only way to establish these valuations would be through the market mechanism, which is absent in a socialist system" (pg. 120)

     • The Planned Economy: Formal Organization (pg. 121)

       • Administration of a Planned Socialist Economy (pg. 121)

         • "the top administration of both state and party consists of interlocking directorates of key political figures such that distinctions between party and state are blurred at the highest level" (pg. 121-122)

         • "the 'plan is the law' [and] given that there are a large number of plans, many conflicting, the administration must engage in considerable negotiating, coercion, and compromising in the absence of overall rules of the game" (pg. 122)

       • Horizontal versus Vertical Transactions (pg. 122)

         • "students of dictatorships also simplified by assuming 'costless coercion' - that the dictator could effectively persuade subordinates to do [their] bidding" (pg. 122-123)

     • Resource Allocation Under Planned Socialism (pg. 124)

       • Origins: The Soviet Union in the 1920's (pg. 124)

         • "the most important practical work of this period was the development of balances of the national economy, forerunners of the input-output analysis of Wassily Leontief, and of material balance, the planning system later used in planned socialist economies" (pg. 125)

         • "material balances formulated by Soviet economists focused on the need to determine aggregate demands and supplies for basic industrial commodities and to them in balance without relying on market forces" (pg. 125)

           • "the material balance approach (input-output analysis) demonstrated that the productive relations of an economic system could be approximated by a system of simultaneous equations along the lines suggested by Barone" (pg. 125)

         • "[however,] some Soviet economists even argued that the whole discussion of relative values (prices) under socialism was irrelevant because the law of value would not exist under socialism" (pg. 125)

       • Economic Planning: A Paradigm for Planned Socialism (pg. 125)

         • "Gerald Sirkin writes, "planning is an attempt, by centralizing the management of the allocation of resources sufficiently, to take into account social costs and social benefits which would be irrelevant to the calculus of the decision-maker" (pg. 125)

         • "plan formulation involves doing the best one can to achieve objectives, albeit with limitations on available resources" (pg. 126)

         • "[overall, the Soviet model agrees] that a national economic plan is a mechanism to guide the activity of an economy through time toward the achievement of specified goals. The notion of control is fundamental to the concept of planning…the planner attempts to alter the economy's direction of movement and hence to change economic outcomes. It is convenient to categorize planning as either indicative or directive" (pg. 126)

           •  Indicative - "targets are set in the hope of affecting economic outcomes by providing information external to the market; typically, individual firms receive no directives from planners" (pg. 126)

           • Directive - "targets are set by planners with the expectation of directly altering outcomes" (pg. 126)

       • Material Balance Planning (pg. 127)

         • "the CPB specifies a list of goods and services that are to be produced in the plan period" (pg. 127)

         • "the CPB must ensure a balance between outputs and inputs. For each factor input and intermediate good, the amount needed to produce output must be equated with the amount available" (pg. 127)

         • "on the supply side, there are three main sources of inputs:" (pg. 127)

           • Production

           • Stocks on Hand

           • Imports

         • "on the demand, there are two main elements:" (pg. 127)

           • Interindustry Demand - "the output of one industry is used as the input for another industry" (pg. 127)

           • Final Demand - "consists of output that will be invested, consumed by households, or exported" (pg. 127)

         • "adjustment is possible on both the demand and supply sides, and it is through administrative adjustment that demand and supply are balanced. This adjustment procedure is in basic contrast to market economies, where prices adjust to eliminate imbalances" (pg. 127)

         • Key Question:

           • "how does the CPB know how much of each input will be necessary to produce a unit of output?" (pg. 128)

         • "material balance planning must deal with the interrelatedness of economic sectors" (pg. 130)

           • "second-round effects reverberate throughout the economic system, making it very difficult to obtain a balance" (pg. 130)

         • "a plan that achieves a balance of supplies and demands is a consistent plan" (pg. 130)

         • "optimality implies selecting the best plan of all those consistent plans with which it would be possible to achieve a balance" (pg. 130)

         • "at this juncture, let us simply say observe that material balance planning was a mechanism that worked, though at a low level of efficiency" (pg. 130)

       • The Input-Output Model (pg. 131)

         • "[this model] offers an alternative approach to administrative material balance planning. In theory, it gives planners an opportunity to determine balances quickly and hence to explore alternative resource allocation" (pg. 131)

       • Optimization and Economic Planning (pg. 134)

         • "material balance planning was the actual planning method used by the Soviets to allocate resources" (pg. 134)

           • "[it] was a pragmatic method for planning an economy by administrative means…[however,] because of its administrative complexity, Soviet material balance planning aimed at achieving a balance [though] it did not aim at achieving the optimal balance" (pg. 134)

         • "the theory of economic planning focuses on the problem of achieving an optimal balance" (pg. 134)

           • "it shows how, in theory, planners can plan for the economy to produce the optimal combinations of outputs, subject to the constraints of limited land, labor, and capital resources" (pg. 134)

         • "the critics of the Barone model…[argue] it is not possible to solve millions of simultaneous equations for the optimal combinations of inputs and outputs" (pg. 135)

           • "[even further,] it is still not clear how to get enterprises actually to produce the planned commodities by using optimal combinations of inputs" (pg. 135)

           • "a final problem with optimal planning is obtaining agreement on the objective function of society" (pg. 135)

       • Coordination: How Much Market? How Much Plan? (pg. 135)

         • "the theory of planning stresses the formulation of a plan, consisting of a set of objectives and the means for achieving the objectives. However, plans are of little value unless they are implemented. Implementation calls for incentives that induce economic agents to achieve the goals planners have set…[however,] the Soviet Union and other planned socialist economic systems shows that ensuring appropriate motivation is a serious problem" (pg. 136)

     • The Performance of Planned Socialism: Hypotheses (pg. 136)

       • Income Distribution (pg. 136)

         • "we…expect income to be distributed relatively equally in a planned socialist economy" (pg. 137)

       • Efficiency (pg. 137)

         • "the hypothesis that the planned socialist economies do not perform well in terms of both dynamic and static efficiency appears to be a fairly safe one" (pg. 137)

       • Economic Growth (pg. 137)

         • "we must again refrain from stating a strong hypothesis" (pg. 137)

       • Stability (pg. 137)

         • "we hypothesize that the planned socialist economies will be more stable than their capitalist counterparts" (pg. 137)

   • Chapter 7 - Theory of Market Socialism (pg. 142)

     • Market Socialism: Theoretical Foundations (pg. 142)

       • "[it is] a hybrid of market and state ownership" (pg. 142)

       • "the major problems appear to be how to motivate participants to use resources efficiently and how to make markets work when private individuals do not own capital" (pg. 142)

       • The Lange Model (pg. 143)

         • "the most famous theoretical model of market socialism is the trial-and-error model proposed by the Polish economist Oskar Lange. This model focuses on the use of a general equilibrium framework, approaching a 'solution' through a number of sequential stages" (pg. 143)

         • "the model posits 3 levels of decision-making:" (pg. 143)

           • "at the lowest level are firms and households" (pg. 143)

           • "at the intermediate level [are] industrial authorities" (pg. 143)

           • "at the highest level [is] a CPB" (pg. 143)

         • "the means of production, with the exception of labor, are state-owned. Consumer goods are allocated by the market. The CPB would set the prices of producer goods" (pg. 143)

           • "in a sequential process, the CPB would adjust prices until they were at the 'right' levels - that is, where supply and demand were balanced" (pg. 143)

         • "features of the Lange model [such as] a more even distribution of income and state control over investment are presumed advantages" (pg. 144)

       • Critics of the Lange Model (pg. 145)

         • "Abram Bergson and others have pointed to a key problem in the Lange model: that of ensuring appropriate managerial motivations" (pg. 145)

           • "the problem of establishing a workable incentive structure has been a major theme in modern socialist economic systems" (pg. 145)

         • "Bergson also emphasized the possibility of monopolistic behavior in the Lange framework" (pg. 145)

     • Market Socialism: The Cooperative Variant (pg. 145)

       • "the cooperative model of market socialism stems from the notion that people should participate in making the decisions that affect their well-being" (pg. 146)

       • "cooperative socialism belongs to the more general category of market socialism because there is state ownership of the means of production but also an exchange of goods and services in the market without intervention by central planners" (pg. 146)

       • "there is a close relationship between the cooperative model and the competitive capitalist and Lange models. In essence, the cooperative model captures the efficiency features of both. In the Lange model, the firm follows two rules, equating price and marginal cost and minimizing average cost of production. In the cooperative model, these two rules are replaced by a single rule. In the case of the capitalist market economy, the firm follows the rule of equating marginal cost and marginal revenue, which in the case of perfect competition reduces to the Lange rule" (pg. 149)

       • Criticism of the Cooperative Model (pg. 149)

         • "[Benjamin] Ward notes that the two key features of the model are 'individual material self-interest as the dominant human motivation' and 'the resort to markets as the means of allocating resources'" (pg. 149)

         • "Ward demonstrated curve may well be negatively sloped, especially in the short-run" (pg. 149)

           • "an increase in price generates a decrease in output" (pg. 149)

         • "Ward also argued that if two cooperative producing an identical product use different technologies, there will be a misallocation of labor and capital that would not occur if the two were capitalist firms" (pg. 149)

           • "overall output could be increased by moving workers to the cooperative where the value of marginal product is higher" (pg. 149)

       • Advantages of the Cooperative Model (pg. 150)

         • "[Jaroslav] Vanek argues that is also the best alternative for developing economies" (pg. 150)

         • "Vanek argues that the imperfectly competitive cooperative firm will be superior to the imperfectly competitive capitalist firm because it will have no incentive to grow extremely large and hence to dominate a particular market" (pg. 150)

     • Democratic Socialism? (pg. 152)

       • "proponents of socialism…specifically cling to socialism's perceived advantages: a more even distribution of income and a greater willingness, as a consequence of state ownership and control, to deal with externalities and monopolies" (pg. 152)

       • "a key issue in any assessment of the feasibility of democratic socialism is whether public ownership and democracy are compatible" (pg. 152)

         • "F. A. Hayek wrote that state ownership will eventually lead to political totalitarianism" (pg. 152)

           • "totalitarianism is a logical consequence of the attempt to centrally plan an economy. Although there may be no original intent to exercise political power over people, the exercise of arbitrary power is the consequence of the desire to plan the economy scientifically" - F. A. Hayek (pg. 152)

     • The Performance of Market Socialism: Hypotheses (pg. 154)

       • Income Distribution (pg. 154)

         • "we would expect income to be distributed more nearly equally under market socialism than under capitalism" (pg. 134)

       • Economic Growth (pg. 154)

         • "we believe it risky  to presume that market socialism will yield higher investment rates - and hence higher rates of growth - than the capitalist model" (pg. 154)

       • Efficiency (pg. 154)

         • "we cannot venture any hypothesis about the relative efficiency of market socialism" (pg. 155)

       • Stability (pg. 155)

         • "we cannot propose any strong hypothesis" (pg. 155)

   • Chapter 8 - The Anglo-Saxon Model of Capitalism (pg. 161)

     • Models of Capitalism (pg. 161)

       • Anglo-Saxon Model - "has its historical origins in Great Britain and is patterned after the classical liberal ideas of Adam Smith and the constitutional precepts of classical liberalism…[it] uses common law, which operates with lay judges, broader legal principles, oral arguments, and precedents and is based on the principle that government intervention in the economy should be limited." (pg. 161)

       • European Model - "is patterned after economic principles enunciated in France and Germany in the 19th century that places less faith in the invisible hand and calls for or more state intervention in economic affairs, including more state ownership. Its legal foundation is based on what James Buchanan terms 'the constitutional order of socialism'…[it] accords the state a higher level of activity in the economy, pays relatively more attention to the common good as opposed to individual property rights, and provides for more regulation of private economic activity…[it] operates on civil (or Roman) law, which uses professional judges, legal codes, and written records" (pg. 161)

       • Asian Model - "is closer in its institutional arrangements to the European model. It focuses on high rates of capital formation and on other devices, often supported by the state, to overcome relative backwardness in as short a time as possible." (pg. 161)

     • Constitutional Foundation of the U.S. Economy (pg. 162)

       • "The U.S. Constitution was ratified in 1787 following a Constitutional Convention a lengthy public discussion published in what came to be known as the 'Federalist Papers'" (pg. 162)

         • "the U.S. Constitution was heavily influenced by the classical liberal thinking of the turn of the 19th century" (pg. 162)

         • "classical liberalism's [foundation is] that a strong state poses a danger to it polity" (pg. 162)

       • "[James] Madison, and the other founders and ratifying states concurred, that the best way to limit power of the government was the separation of powers" (pg. 162)

       • "Douglass North concludes that the political system of the U.S. 'was explicitly oriented to preventing domination by fractions…the tripartite system of government…was designed to make efforts at restructuring property rights and redistribute wealth and income very difficult'" (pg. 163)

       • "by limiting the power and scope of government, the Constitution embraced the idea of strict restraints on government intervention that would reduce the liberties of private individuals" (pg. 163)

     • The Private Sector versus the Public Sector (pg. 164)

       • "most resource-allocation decisions are made in the private sector, though in areas such as public utilities, government regulation is active" (pg. 164)

     • Business Organization (pg. 167)

       • "business enterprises are divided into 3 categories on the basis of legal organization:" (pg. 167)

         • Sole Proprietorships

         • Partnerships

         • Corporations

       • "these 3 forms of business organizations are supplemented in the U.S. by innovative legal arrangements (such as limited-liability partnerships) designed to circumvent a variety of problems" (pg. 167)

     • Corporate Governance (pg. 167)

       • "U.S. corporations produce the bulk of output" (pg. 167)

       • "corporate governance raises the question of in whose interests a corporation, in which owners are not managers, will be run" (pg. 168)

     • Capital Markets (pg. 171)

       • "the capital market is the market in which businesses raise investment finance through the issue of stocks and bonds and bank borrowing" (pg. 171)

       • "the financing of investment through stock markets, which is a characteristic feature of the Anglo-Saxon model, means a separation of those who finance corporations from those who manage corporations" (pg. 172)

         • "opponents of the Anglo-Saxon model of investment finance argue that stock markets are too volatile and are dominated by emotion. They believe it is better to have knowledgeable bankers deciding who should get investment financing." (pg. 172)

       • Competition in the Product Market (pg. 173)

         • "resource-allocation arrangements depend on the degree of market power in different product markets. There is no accurate measure of market power, but the most frequently used measure is the concentration ratio" (pg. 173)

           • "the concentration ratio gives the percentage of industry sales accounted for by the largest 4, 8, or 20 firms" (pg. 173)

         • "another gauge of the degree of competition in the U.S. economy is how much output would increase if monopoly were eliminated" (pg. 175)

     • Regulation (pg. 176)

       • "the Constitution's due process clause was designed to protect private property from government regulation." (pg. 176)

       • "[However,] the due process clause…creates a dilemma:" (pg. 176)

         • "what should the state do to protect the general welfare from the misuse of property by private owners?" (pg. 176)

       • "government regulation can be classified as social regulation or economic regulation" (pg. 177)

         • Social Regulation - "is regulation of health, safety, and environment" (pg. 177)

         • Economic Regulation - "is government involvement in markets, such as setting prices, restricting corporate decision-making, and controlling competition" (pg. 177)

     • Deregulation (pg. 183)

       • "the reduced incidence of government regulation of business and the return of decision-making to the private" (pg. 183)

       • "the most controversial area of expansion of deregulation is the electricity markets" (pg. 184)

         • "under this system, the forces of competition, not regulatory agencies, will determine the price of electricity" (pg. 184)

       • The Labor Market (pg. 185)

         • "labor is allocated largely labor markets in the U.S. in competitive labor markets, employers demand larger quantities of labor at low wages. The supply of labor is a positive function of the wage rate offered, and a wage rate equating the supply and the demand of labor is established" (pg. 186)

     • Providing for Income and Security (pg. 192)

       • "the 'pure' Anglo-Saxon model espouses the principle of self-reliance. The state is not responsible for the income and security of its citizens; rather, this responsibility lies with the families, local community, and private charities" (pg. 192)

         • "obviously, there must be deviations from this pure model in the real world" (pg. 192)

       • August 14, 1935 - Social Security Act was signed into law (pg. 192)

     • Macroeconomic Planning (pg. 195)

       • "planning for macroeconomic stability in the U.S. is limited to using the indirect tools of monetary and fiscal policy" (pg. 195)

         • "the Federal Reserve System is in charge of formulating monetary policy" (pg. 196)

         • "authority over fiscal policy is diffused among the various executive and legislative bodies in charge of government spending and taxation" (pg. 196)

         • "the conduct of monetary policy is more divorced from the business of day-to-day politics than is that of fiscal policy" (pg. 196)

   • Chapter 9 - The European Model (pg. 203)

     • "the European Union (EU) was established via a series of treaties" (pg. 203) [Founding agreements (europa.eu)]

       • Treaty of Paris - "signed in 1951, [it] established the European Coal and Steel Community" (pg. 203)

         • Expired July 23, 2002

       • Treaty of Rome - "signed in 1957, [it] established the European Economic Community, generally referred to as the European Common Market" (pg. 203)

       • Maastricht Treaty - "signed in February of 1992, [it] concluded that Europe should have a common currency and one central bank and should move toward a political union" (pg. 203)

       • Treaty of Amsterdam - "signed on October 2, 1997, [it] abolished border patrols and passport requirements between member states, calling for the removal of immigration barriers among EU member countries" (pg. 203)

       • The Nice Summit of 2000 - "spelled out procedures for expansion of membership rights to other countries and for voting rights" (pg. 203)

       • The Barcelona Summit of 2002 - "took the first step toward liberalizing gas and electricity sectors" (pg. 203)

     • January 1, 1999 - European Central Bank (ECB) was established, and a common currency, the euro, was adopted for all bank transactions (pg. 203)

     • January 1, 2002 - the euro became the sole currency for the EU (pg. 203)

       • "England, Sweden, and Denmark opted out of the common currency" (pg. 203)

     • "the ECB shares many features with the Federal Reserve Bank of the U.S…the EU also requires a common fiscal policy based on the rule that no member country can run a budget deficit great than 2% of its GDP" (pg. 204)

     • Ideological and Philosophical Foundations (pg. 204)

       • "the European model…arrives at the conclusion that the state is a necessary force to promote the general welfare" (pg. 206)

         • "individual economic freedoms, property rights, and private contracts may have to be abridged by a powerful state in the name of the public interest" (pg. 206)

         • "this conclusion follows from mercantilism, a philosophy that was particularly strong in France and England in the 17th and 18th centuries" (pg. 206)

         • "according to the tenets of mercantilism, a strong state is necessary to regulate and control the domestic and international operations of a national economy in order to promote the political and economic strength of the country vis-a-vis its neighbors" (pg. 206)

         • "under mercantilism, the state collected its revenues by selling licenses, charters, and other monopoly rights to special-interest groups. The basic conclusion of mercantilism was the only a strong state could keep the economy from ruin" (pg. 207)

       • "social democracy [purports]…that the state is a necessary force for good and must intervene actively in economic affairs" (pg. 208)

     • Legal Foundations: Civil Law (pg. 208)

       • "whereas the Anglo-Saxon model is based on common law (custom, usage, and court decisions), the European model uses civil law" (pg. 208)

         • "the civil law system grew out of the European tradition of monarchies and feudal lords" (pg. 208)

         • "civil law gave less weight to individual rights, such as the right of property and the right of private contract, and more to the rights of the state" (pg. 208)

         • "more countries follow civil law than common law" (pg. 209)

     • Features of the European Model (pg. 209)

       • Corporate Governance (pg. 210)

         • "in the Anglo-Saxon model, the primary aim of corporate management is to maximize shareholder value, even if it means sacrificing the interests of stakeholders" (pg. 210)

         • "in the European model, managerial capitalism replaces shareholder capitalism" (pg. 210)

           • Managerial Capitalism - "a system of corporate governance that places the interests of stakeholders above those of shareholders" (pg. 210)

         • "whereas shareholder capitalism requires managers to focus on profitability, managerial capitalism focuses on other objective, such as providing a stable work environment for managers and employees or maintaining stable relationships with banks, suppliers, and major customers" (pg. 210)

         • "the European model is also characterized by codetermination" (pg. 214)

           • Codetermination - "places worker representatives on the boards of directors of corporations" (pg. 214)

       • Capital Markets (pg. 215)

         • "in the European model, the initial capital of the company is usually supplied by a bank" (pg. 215)

         • "the funding bank then becomes the company's 'house bank' and may eventually arrange to issue shares so as to pay back part of the bank's loans" (pg. 215)

         • "European banks are universal banks, which can perform not only traditional banking but also risk-sharing, stock sales, and merchant-banking functions" (pg. 215-216)

         • "in Europe, banks provide venture capital to start-up companies. In the U.S., start-up capital is provided by private venture capitalists" (pg. 217)

       • The Labor Market (pg. 217)

         • "the European labor market is much more highly regulated than that of the U.S." (pg. 217)

         • "the Treaty of Amsterdam of 1997 called for the creation of a coordinated strategy for employment and for promoting a skilled, trained, and adaptable workforce and labor markets" (pg. 218)

     • Public Enterprise: Nationalization, Privatization, and Deregulation (pg. 224)

       • "social democratic and trade union governments favored nationalization, and conservative government opposed it" (pg. 224)