1. American Politics

3. A magnet for financial investment.

4. The key to opening the West.

6. The Light Bulb

7. The Motion Picture Camera

8. Alexander Graham Bell Telephone (1876)

9. Alternate Current George Westinghouse Nikola Tesla

10. Alternate Current Westinghouse Lamp ad

11. The Airplane Wilbur Wright Orville Wright Kitty Hawk, NC – December 7, 1903

12. Model T Automobile Henry FordI want to pay my workers so that they can afford my product!

13. “Model T” Prices & Sales

14. U. S. Patents Granted 1790s  276 patents issued. 1990s  1,119,220 patents issued.

15. Causes of Rapid Industrialization Unskilled & semi-skilled labor in abundance. Abundant capital. New, talented group of businessmen [entrepreneurs] and advisors. Market growing as US population increased. Government willing to help at all levels to stimulate economic growth. Abundant natural resources.

16. New Type of Business Entities

17. U. S. Corporate Mergers

19. The Reorganization of Work Frederick W. Taylor The Principles of Scientific Management (1911)

20. The Reorganization of Work The Assembly Line

21. % of Billionaires in 1900

22. % of Billionaires in 1918

23. The Protectors of Our Industries

24. The ‘Bosses’ of the Senate

25. The ‘Robber Barons’ of the Past

26. Cornelius [“Commodore”] Vanderbilt Can’t I do what I want with my money?

29. Viewed as a sign of God’s approval.

30. Christian duty to accumulate wealth.

31. Should not help the poor.Russell H. Conwell

33. “Gospel of Wealth” (1901).

34. Inequality is inevitable and good.

35. Wealthy should act as “trustees” for their “poorer brethren.”Andrew Carnegie

37. “rule of reason” loophole1895 US v. E. C. Knight Co.

38. Relative Share of World Manufacturing

39. Modern ‘Robber Barons’??

40. Introduction: A Study in Contrast(The United States) In the midst of plenty Expanding technologies Losing the trade war 22 + million new jobs since 1990-91 Baby boomers better off than previous generations Poverty Dying industries Won the cold war Thousands of college graduates looking for jobs in 2002 & 2003 Today’s generation is generally worse off than parents 1-3 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

41. The Downside of the World’s Largest Economy & One of the Highest Standards of Living The federal budget is at a record high The US trade deficit is at a record high The federal government is borrowing $2 billion dollars a day from foreigners to finance the budget & trade deficits Social Security & Medicare trust funds will run out of money well before most of you reach retirement age 1-4 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

42. The Downside of the World’s Largest Economy & One of the Highest Standards of Living When you graduate, you may not be able to get a decent job The savings rate in the United States is close to zero The real hourly wage (adjusted for inflation) of the average worker is lower today than it was in 1973 1-5 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

43. The American Economy in the 19th Century Agricultural Development The National Railroad Network The Age of the Industrial Capitalist 1-6 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

44. Agriculture Development At the start of the American revolution, America had an almost limitless supply of land Nine of ten Americans lived on a farm One hundred years later, fewer than one in two Today, fewer than two in one hundred These two feed America and create a huge surplus that helps to feed the rest of the world The abundance of land was the most influential factor in our economic development in the 19th century Brought millions of immigrants Encouraged large families Encouraged rapid technological development 1-7 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

46. After the Civil War New England, the middle Atlantic states, and the mid-west were poised for major industrial expansion and experienced significant economic growth The south remained primarily an agriculture region and experienced economic doldrums until the early 1960s 1-9 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

47. The National Railroad Network The completion of the transcontinental railroads 1850 The United States had 10,000 miles of track 1890 The United States had 164,000 miles of track This made possible mass production, mass marketing, and mass consumption, which brought the country together into a huge social and economic unit This made it possible to go almost anywhere in the U.S. by train except in the south (i.e., transcontinental lines by-passed the south This severely retarded its economic development well into the 20th century 1-10 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

48. The Age of the Industrial Capitalist The last quarter of the 19th century was the age of the industrial capitalist Carnegie (steel) Du Pont (chemicals) McCormick (farm equipment) Rockefeller (oil) Swift (meat packing) 1-11 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

49. The American Economy in the 20th Century Until the last quarter of the 19th century, American economic history was largely agricultural The beginning of the 20th century witnessed a shift to manufacturing By the end of WW I, agriculture played a relatively minor role in our economic development 1-12 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

50. Industrial Development By the turn of the 20th century America was primarily an industrial economy Fewer than 4 of 10 people lived on farms The U.S. was among the world leaders in production of steel, coal, steamships, textiles, apparel, chemicals, and agricultural machinery America’s trade balance was positive America exported most of her agricultural surpluses America began to export manufactured goods 1-13 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

51. Industrial Development(Continued) America’s Population 1789 4 million people 1812 8 million people 1835 16 million people 1858 32 million people 1915 100 million 1968 200 million 2007 Estimate of 300 million 1-14 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

52. America’s large and growing population was extremely important as a market for our farmer’s and manufacturers Foreign countries also targeted the American market Especially Japan after WW II Japan largely financed its industrial development with American dollars Industrial Development(Continued) 1-15 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

53. Industrial Development(Continued) America was on the way to becoming the world’s first mass consumption society America’s development of the automobile industry was right around the corner 1-16 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

54. Industrial Development(Continued) America’s first plane would soon be flying at Kitty Hawk Commercial aviation was still a few decades away American technological progress made possible the era of mass consumption and higher living standards 1-17 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

55. By the End of WWI the U.S. Emerged As the Worlds Leading Industrial Power Due to: The technological talent A large agricultural surplus The world’s first universal public education system The available entrepreneurial abilities The fact that the U.S. was kept out of harm’s way during World War I 1-18 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

56. The American Economy in the 20th Century The Roaring Twenties The Great Depression The New Deal 1-19 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

57. The Roaring Twenties Actually began and ended with depressions Early in 1920 the country had a brief depression Between 1921 and 1929 national output rose by 50 percent and most Americans thought prosperity would last forever However the stock market crashed in1929 The “Great Depression” had arrived 1-20 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

58. The Great Depression Started with the August 1929 recession Had the stock market not crashed and had the federal government acted more quickly, this could have been a fairly short recession The economy hit bottom in March, 1933 National output was one third what it was in 1929 Official unemployment was 25 percent 16 million Americans were out of work The population was less than ½ its present size 1-21 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

59. The Recession of 1937-38 An expansion began in March 1933 and lasted until May 1937 Output however did not reach 1929 levels Seven million people were still unemployed in 1937 A system similar to today’s workfare (work for your welfare check) was put in place About 6 million people were put to work on public works type projects 1-22 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

60. The Recession of 1937-38(Continued) A lot of credit goes to Franklin D. Roosevelt’s “New Deal” administration for the 1933 – 1937 expansion Banks were reopened The Government confiscated America’s gold The Securities and Exchange Commission (SEC) came into being The Federal Deposit Insurance Commission (FDIC) was set up An unemployment insurance benefit program was started The Social Security System was started This was the most significant reform 1-23 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

61. What Went Wrong? The Federal Reserve greatly tightened credit This reduced the money supply The Roosevelt administration suddenly got the urge to balance the budget This would have made sense during an economic boom but not when the unemployment rate was 12% This caused Industrial production to fall by 30% Five million more people to be put out of work 1-24 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

62. What Went Wrong?(Continued) In April, 1938 the Federal Reserve and the Roosevelt Administration reversed course War broke out in Europe America mobilized in 1940 – 41 and then entered the war on December 7, 1941 America was back on the road to recovery 1-25 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

63. What Finally Brought the United States Out of the Great Depression? The massive federal government spending that was needed to prepare for and fight World War II? This was deficit spending (borrowed money) In other words the federal budget ran a deficit 1-26 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

64. The End World War II The country that emerged from WW II was very different from what it had been four years earlier Prosperity had replaced depression Inflation was now the number one economic problem The U.S. accounted for ½ of the world’s manufacturing output With just 7 percent of the world’s population The U.S. and the Soviet Union were the only superpowers left standing 1-27 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

65. The End of World War II(Continued) The U. S. spent tens of billions of dollars to prop up the economies of Western Europe and Japan It spent hundreds of billions more for their defense Since WW II The U.S. has expended 6 percent of national output on defense The Soviet Union expended at least 18 percent of national output on defense which contributed to its collapse in 1990 1-28 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

66. The 1940s: World War II and Peacetime Prosperity WW II required a total national effort It consumed nearly half of the nation’s output It mobilized 12 million men and women The Unemployment rate fell below 2 percent 1939 – 1944 Output of goods and services doubled Government spending rose more than 400 percent Mainly for defense The economy grew 10 – 11 percent a year The government instituted wage and price controls and issued ration coupons for meat, butter, gasoline, and other staples Business and workers strived to produce goods of the highest quality possible, believing it a prerequisite to win the war 1-29 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

67. 1-30 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

68. The Suburbanization of America After WW II Twelve million men and several hundred thousand women returned to civilian lives There was a tremendous shortage of housing The V.A. offered affordable mortgages One percent interest and nothing down The FHA supplemented this need The only place to build was outside cities This required roads and cars The Federal Government subsidized an interstate highway network along with state freeways, state highways, roads, and local streets 1-31 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

69. 1940s and 1950s One big construction boom The automobile industry prospered Supplied America’s pent up demand and became the world’s leading exporter of cars Birth rates shot up Congress passed the G.I. Bill of Rights (1944) Provided loans for home mortgages, business, and education 1-32 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

70. The 1950s: The Eisenhower Years The advent of television and the Korean War stimulated the economy The Eisenhower administration Ended the Korean War and inflation Made no attempt to undo the legacies of the New Deal The role of the federal government as a major economic player became a permanent one 1-33 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

71. The Soaring Sixties: The Years of Kennedy and Johnson The country was in recession when Kennedy was elected He was assassinated and replaced by Johnson in 1963 Johnson enacted a tax cut planned by Kennedy The tax cut and the spending on the Vietnam war ended the recession The federal budget deficit and the money supply grew Inflation began and lasted until the mid-80s 1-34 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

72. The Soaring Sixties: The Years of Kennedy and Johnson(Continued) Johnson enacted three spending programs in 1965 that would have profound long-term effects on the economy Medicare Medicaid Food stamps 1-35 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

73. The Sagging Seventies: The Stagflation Decade(Stagnation + Inflation = Stagflation) Nixon became President in 1968 The decade began with the problems of inflation and ending the Vietnam war Wage and price controls were initiated Ford became President when Nixon resigned 1-36 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

74. The Sagging Seventies: The Stagflation Decade(Continued) 1973 Economic disaster began OPEC quadrupled oil prices The U.S. was hit by the worst recession since the 1930s The U.S. faced double digit inflation The U.S. experienced stagflation Economic stagnation + inflation 1-37 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

75. The Sagging Seventies: The Stagflation Decade(Continued) Jimmy Carter was President in 1976 He presided over mounting budget deficits The money supply grew rapidly Inflation rose almost to double digit levels He faced the Iranian revolution in 1979 Gasoline prices went through the ceiling In October, 1979 the Fed stopped the growth of the money supply By January, 1980 the country was in recession The inflation rate was 18 percent The nation’s productivity growth was at one percent, one third the postwar rate 1-38 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

76. The1980s: The Age of Reagan Supply-Side vs. Keynesian economics The objective of both is to stimulate output Keynesian economics The government should spend more money This would give business the incentive to produce more Supply-Side economics The government should cut tax rates Consumers would then have More incentive to work More of their own money to spend and business would produce more 1-39 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

77. The1980s: The Age of Reagan(Continued) The country was in a severe recession 1981 It was the worst since WW II Unemployment reached nearly 11 percent in 1982 Inflation had been brought under control Unemployment rates began falling They seemed to stick around 6 percent Deficits were a problem: $79 billion in 1981 and $290 billion in 1992 Personal income taxes were cut Business taxes were cut 1-40 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

78. George Bush “Read my lips: no new taxes” Bush won the election of 1988 Two years later, he agreed to a major tax increase Supposedly to reduce the deficit But, the deficit continued to rise A recession began in early 1992 and ended late in 1992 Bush failed in his bid for reelection 1-41 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

79. The State of American Agriculture The story is one of vastly expanding productivity 1850 to 1900 output doubled 1900 to 1947 output doubled 1947 to 1960 output doubled In 1820, one farmer fed 4.5 people. Today one farmer feeds 100 people. In 1800, it took 370 hours to produce 100 bushels of wheat. In 1960, it took just 15 hours to produce 100 bushels of wheat. 1-42 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

80. The State of American Agriculture(Continued) Agriculture is one of the most productive sectors of our economy Yet, only 4.5 million people live on farms today and less than half farm full time The U.S. exports more than one-third of its crops 35 million Americans make use of food pantries and other food distribution programs In the Great Depression, Americans resorted to soup kitchens 1-43 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

81. The State of American Agriculture(Continued) Despite hundreds of billions of dollars in government aid (subsidy payments) since WW II Family farms are disappearing 7 out of 10 are now gone The average farm has gone from 139 acres to 435 acres Family farms are being squeezed out by huge agriculture combines Today you have to become big to survive! The Farm Act of 1996 was supposed to reduce subsidy payments and eventually phase them out Nevertheless, as crop prices sank to 10 and 20 year lows in 1999, subsidy payments to farmers were a record $23 billion 1-44 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

82. Subsidy Payments In 2002 President Bush signed a 10 year $190 billion farm bill that provides the nation’s largest farmers with subsidies of $19 billion. Defenders point out that the European union gives its farmers $60 billion in annual subsidies To compete in world markets so do we. Critics contend that subsidies provide farmers with essentially a guaranteed income so they keep producing more than the market wants This keeps prices low and the farmers have to continually ask the government for more subsidies 1-45 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

83. The “New Economy” of the Nineties It was a decade of major technological change Marked by low inflation, low unemployment, and rapidly growing productivity The 1920s and the 1960s could be similarly described One of the most prosperous decades ever The stock market soared The length of the economic expansion ended in March, 2001 (a period of 120 months) an all-time record 1-46 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

84. The “New Economy” of the Nineties(Continued) The last two decades our economy has become increasingly integrated with the global economy This has resulted in An exodus of jobs making shoes, electronics, toys and clothing to developing countries Service work like writing software code and processing credit card receipts shifted to low-wage countries White collar jobs now moving offshore Routine service and engineering tasks are now going to India, China, and Russia Educated workers are paid a fraction of what their American counterparts earn 1-47 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

85. The “American Economy” in the New Millennium 2001 was not a good year for America March, 2001 the 10 year economic expansion ended (a recession started) The stock market started down Unemployment began to creep up 9/11 occurred Unbridled optimism gave way to uncertainty 2003 the war with Iraq began 1-48 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

86. Current IssueAmerica’s Place in History In the early years of the 20th Century the United States Emerged as the world’s leading industrial power Had the largest economy and the largest consumer market Emerged as the world’s greatest military power 1-49 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

87. Tomorrow’s Concerns Rising budget deficits Trade deficits Concern about Social Security being there when you retire Medicare being there when you need it Will we be able to live as well as our parents? 1-50 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

88. Tomorrow’s Concerns In the nineteenth century, the sun never set on the British empire The drain of two world wars compelled the British to give up their empires By the mid 20th century to the present, American military bases do the globe We have become the world’s policeman, perhaps self-anointed, We are currently involved in Iraq, Afghanistan, A World war on terror that has come to our shores, and huge problems with securing our on borders Many believe we are overextended and stretched too thin both militarily and economically This would mean we will have to cut back both militarily and economically The big question is will you be able to live as well as your parents? 1-51 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

89. “We’ve never been better off, but can America keep the party going?” Jonathan Alter, Newsweek, February 7, 2000 1-52 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

90. Apparently NOT! Benjamin Franklin said “A question is halfway to wisdom.” Hopefully your generation can up with better answers than that of your parents. 1-53 Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

93. What is a Corporation? A corporation is a legal entity created to run a business. There are a number of advantages of a business being a corporation: Limited liability – the assets of the owners of a corporation (stockholders, if publicly traded) are protected Longevity – the company can survive past the death of its owner

94. Tax impacts Tax Advantages of Corporations: Corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and self-employment taxes Tax disadvantages Corporate earnings are taxed and then taxed again as capital gains when paid out as dividends.

95. The institution most often referenced by the word "corporation" is a public or publicly traded corporation, the shares of which are traded on a public stock exchange (e.g., the New York Stock Exchange or NASDAQ in the United States) where shares of stock of corporations are bought and sold by and to the general public. Most of the largest businesses in the world are publicly traded corporations. However, the majority of corporations are said to be closely held, privately held or close corporations, meaning that no ready market exists for the trading of shares. Many such corporations are owned and managed by a small group of businesspeople or companies.

96. A Corporation as a “Person” A corporation is allowed to own property and enter contracts. It can also be sued and held liable under both civil and criminal law. Among the most frequently discussed and controversial consequences of corporate personhood in the United States is the extension of a limited subset of the same constitutional rights. Corporations were recognized as ‘people’ for purposes of the 14th Amendment in an 1886 Supreme Court Case, Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394.

97. Disadvantages of Corporations As Adam Smith pointed out in the Wealth of Nations, when ownership is separated from management (i.e. the actual production process required to obtain the capital), the management will inevitably begin to neglect the interests of the ownership, creating dysfunction within the company. Some maintain that recent events in corporate America may serve to reinforce Smith's warnings about the dangers of legally-protected collectivist hierarchies.

98. Prosperity and American Business Increased production, new management methods, and a booming economy elevated the public image of big business in the minds of many Americans in the 1920s.

101. Technology The rapid economic growth was aided by new industries–production of light metals such as aluminum, a brand-new synthetics industry, motion picture production, radio manufacturing and, above all else, the production of automobiles As roads and automobiles remade the horizontal landscape, skyscrapers revolutionized the vertical landscape

102. The corporate revolution Many family-run firms could not raise the capital to compete with the corporations that came to dominate business in the 1920s. The merger movement reduced the number of firms operating in the United States. Under pressure from Republican Presidents, the Federal Trade Commission–created to protect small businesses from takeovers–began to encourage trade associations and mergers

104. Small firms went out of business, while chain stores and other large companies thrived.

108. U.S. GOVT REGULATION: An Overview Cycles of regulation periods of heavy regulation followed by periods of deregulation Economic and political influences Federal regulatory agencies and commissions

109. HISTORY: GOVT REGULATION OF BUSINESS IN THE US Justification for Government Regulation --the use of private property can be regulated to serve the public interest Prior to the 1880s most regulation of business took place at the state and local level Congress established the first modern regulatory agency in 1887

110. HISTORY OF GOVERNMENT REGULATION - Interstate Commerce Commission ** initially set railroad rates ICC was the first significant reaction to concerns regarding the detrimental effects of the concentration of ownership with higher prices and reduced output ICC in line with the constitution --right of federal government to regulate trade among the states

111. HISTORY OF GOVERNMENT REGULATION Level of federal regulation remained low until the Great Depression in the 1930s The Depression (stock market “crash” and collapse of the banking industry) represented to many: -- “the failure of the free enterprise system” -- the problems with concentration of economic resources

112. HISTORY OF GOVT REGULATION THE NEW DEAL (FDR): Vast System of Federal Economic Regulation attempted to alleviate detrimental effects of concentrated ownership and private market through: Price control Control over the entry of firms Vested federal government with unprecedented authority to intervene in business affairs

113. HISTORY OF REGULATON By the 1960s government regulation of prices and entry was commonplace in the transportation (railroads, trucking, airlines), communications (telephone services, radio, television), and “natural” utility (electricity, natural gas) industries

114. SOCIAL REGULATION * Increased significantly starting late 1960s and continuing in the 1970s -- in the wake of Vietnam protests and emergence of environmental and consumer movements Scale & scope of regulatory activity expanded Fed govt imposed new controls on environmental pollution, the safety of the workplace & consumer products

115. DEREGULATION Then came the late 1970s--Great Stagflation (double digit inflation and unemployment during the Carter administration) This undermined public confidence in the prevailing system of regulation From the late 1970s through the Reagan/Bush administrations there was a move to Deregulation and greater reliance on market forces

116. ECONOMIC DEREGULATION Emanated from: -- the perceived failure of government regulation -- the value placed on the efficacy of free markets by Reagan/Bush administrations Removal of many price and entry restrictions in regulated industries

117. DEREGULATION OF THE 1980s: Started with Carter accelerated with Reagan -Airline Industry & Trucking deregulation was supported by some, but not all, firms in the effected industries - particularly supportive were new and small firms who could now compete more effectively - however, many incumbent firms lost market share & profits - also, wages of unionized workers (e.g., Teamsters in trucking) in “protected” industries declined

118. DEREGULATION OF THE 1980s * While economic regulation declined, social regulations (e.g., environmental, product safety, workplace) remained -- Interest groups and general public support remained high for social regulation

119. US GOVERNMENT REGULATIONIN SUMMARY * U.S. Government Regulation has been characterized as a “middle way” of relating government to industry -- somewhere between government control and more complete reliance on private markets * Cycles of Regulation and Deregulation affected by economic conditions, public interest and politics

120. CURRENT REGULATORY ENVIRONMENT Clinton administration “middle ground” Support for social (e.g., equal employment opportunity, increased min. wage) and environmental regulation Economic deregulation of: (1) Telecommunications (2) Electrical Utilities (3) Banking/Financial Services

121. Regulatory institutional arenas Most U.S. Government Regulations are implemented through independent commissions and agencies of the federal executive branch and state government Regulatory statutes and practices can be appealed to the courts to test their constitutionality and to ensure that agencies satisfy due process in their decision making

122. FEDERAL REGULATORY AGENCIES --There are 60 autonomous federal agencies, some (e.g.,EPA) report directly to the President, bypassing cabinet secretaries -- There are also 20 independent regulatory commissions which do not report to the President (e.g., Fed Reserve System, FCC, CPSC)

123. FEDERAL REGULATORY AGENCIES Independent Regulatory Commissions (IRCs) -- Commission members appointed by President and approved by Senate, terms are not coterminous with President (e.g, FEC) -- Lack continuing supervision of any of the formal branches of government -- Represent the “fourth branch of government”

124. LISTING OF SOME FEDERAL AGENCIES AND IRCs “many familiar names” INTERSTATE COMMERCE COMMISSION, (1887) IRC FED RESERVE SYSTEM, (1913) IRC FED TRADE COMMISION, (1914) IRC FOOD AND DRUG ADM, (1931) AGENCY UNDER HHS

125. EXAMPLES OF FEDERAL AGENCIES & IRCs SECURITIES AND EXCHANGE COMMISSION, (1934) IRC FEDERAL COMMUNICATIONS COMMISSION, (1934) IRC FEDERAL AVIATION AGENCY, (1948) agency under DOT EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, (1965) IRC ENVIRONMENTAL PROTECTION AGENCY, (1970) IND. AGENCY

126. ANTI-TRUST POLICY HISTORY JUSTIFICATIONS INSTITUTIONAL ARENAS EXEMPTIONS DIFFERENT APPROACHES: TRADITIONAL, “CHICAGO SCHOOL”, CURRENT POLICY MICROSOFT CASE (ROLE PLAYS)

127. ANTI-TRUST POLICY HISTORY Anti-trust became an issue at the turn of the 20th century Concern about control of industry by single firm, “unnatural” monopoly & loss of economic efficiency -- resulting in reduction of output and rise in prices which worked against interests of consumers and detrimental to US economy

128. ANTI-TRUST POLICY Monopoly as market failure justifying government intervention: -- price above MC -- output below efficient level -- loss of consumer surplus -- transfer of surplus to producers -- loss of efficiency in economy, as ** max (PS+CS) is not achieved

129. ANTI-TRUST POLICY To promote economic efficiency govt. anti-trust policy attempts to ensure entry and fair competition in industries with barriers to entry and anti-competitive practices Anti-trust policies (as with all govt regs) change over time and are strongly influenced by economics and politics The awarding of triple damages in anti-trust cases provides significant incentive for private firms to initiate cases

130. Anti-Trust institutional arenas Anti-Trust laws are established by the U.S. Congress. However, laws are enforced mostly through the courts by private litigation & law suits -- in contrast with most govt regs where main I.A.s are agencies, commissions & legislatures Broad language of anti-trust acts leaves considerable room for interpretation for courts/judges/juries

131. INSTITUTIONAL ARENAS Apart from the courts the enforcement of Anti-Trust is the responsibility of the DOJ Anti-Trust Div., FTC, the DOT (with airlines) and state attorney generals FTC has enforcement, investigation and regulatory role (e.g., Staples-Office Depot proposed merger) DOJ’s role in enforcement is through law suits brought to Federal Courts as in the Microsoft case

132. Key Issues to consider in Anti-Trust - what is the relevant market? - market share of competitors? - prices, are they fair? - barriers to entry (capital costs, distribution chains, software platforms)? - is there international competition? - cost structure of industry (is it subject to increasing returns to scale?) - incentives to innovate ? - the effect of tech change on relevant market?

133. Types of Anti-Competitive Behavior (1) Horizontal Restraint of Trade -- a division of market, which reduces competition and creates monopoly -- a single company dominates a market and/or industry

134. Types of Anti-Competitive Behavior (2) Vertical Restraint of Trade examples: --resale price maintenance (manufacturer tries to control the retail price) -- exclusive dealing (e.g., Anheuser Bush) -- a single firm controls supply chain

135. Types of Anti-Competitive Practices (3) Predatory Pricing -- firms price below marginal cost until other firms get driven out of business and then they price and profit as a monopolist -- most relevant in industries with high barriers to entry (e.g., airlines)

136. MICROSOFT & ANTI-COMPETITIVE PRACTICES Microsoft has been accused of Horizontal and Vertical Monopoly practices -- MS dominates operating system (OS) market with MS DOS -- accused of unfairly using position in supply chain in browser competition with Netscape/American Online

137. SOME EXEMPTIONS TO ANTI-TRUST -- Regulated Industries (e.g.., natural monopolies) -- Agricultural Cooperatives -- State Economic Activity (e.g., NH liquor monopoly) -- Major League Baseball (“it is a game”) -- Competitors working together to lobby the govt-- First Amendment right -- Unions (first thought to be unlawful combinations not serving the public good)

138. SCHOOLS OF “THOUGHT” ON ANTI-TRUST (1) TRADITIONAL/STRUCTURALIST the dominant school until 1970s, emanated from populist tradition - social, political & econ justifications for breaking up large companies - concern with economic power leading to political power - concern with fairness and protection of consumer & small businesses

139. SCHOOLS OF “THOUGHT” ON ANTI-TRUST (1) Traditional/Structuralist (continued) - “Per Se” rule -- few competitors reduced supply, increased price - most concerned with industry structure, i.e., the number of firms and market share

140. SCHOOLS OF “THOUGHT” ON ANTI-TRUST (2) CHICAGO SCHOOL Started to dominate in late 70s, in Reagan and Bush administrations - Economic objectives emphasized - market efficiency is objective i.e., P=MC & max(PS+CS) - not concerned with distribution of income or equity - “Rule of Reason” Test-- does market operate as if competition was possible?

141. SCHOOLS OF “THOUGHT” ON ANTI-TRUST (2) CHICAGO SCHOOL(continued) - barriers to entry, substitutes and international competition are considered - not concerned with social and political implications of concentration of economic resources

142. GOVERNMENTAL POLICIES-- suggested by the different schools of thought (1) STRUCTURALISTS - active government role - promote an increased number of firms in industries - focus removing barriers to entry - break-up “per se” monopolies - restrict mergers that will result in market power (e.g., Staples-Office Depot, Microsoft and Intuit)

143. SUGGESTED GOVERNMENTAL POLICIES (2) CHICAGO SCHOOL - minimal government anti-trust effort - government intervention often makes markets less competitive and less efficient - government can inhibit entry, e.g., govt regulation of trucking till the 1980s - private firm control of regulatory agencies can lead to “capture” - large firms and limited competition could be most efficient, particularly in capital intensive industries with increasing returns

144. CURRENT ANTI-TRUST POLICIES Microsoft is the leading example Also in the news Airline industry (American Airlines, Continental-Northwest) Visa/MasterCard Auction Houses Mix of traditional & Chicago views used, reflective of economic as leading, but not only concern Also the internationalization of anti-trust reg., e.g., EU vs. Boeing, Lonza vs. US

145. MICROSOFT CASE ACCUSATIONS AGAINST MICROSOFT MICROSOFT --IT’S DEFENSE RULING