Download In chapter 1 we discussed in broad outline some of the institutions

5 The Institutions of a Modern Market Economy
THE OBJECTIVES OF GOVERNMENT POLICY
The Allocation Function
Government Production of Pure and Quasi-Public Goods.
Table 5.1 The Structure of Government Outlays by Function
Percent of GDP
Public Goods
General
Total
Defence
Public
Expenditure
Services
Australia
37.7
8.2
1.9
3.0
Austria
52.2
4.5
0.9
3.6
Canada
46.3
2.9
1.4
1.5
Czech Republic 40.8
3.9
1.6
2.3
Denmark
59.9
6.0
1.7
4.3
Finland
54.3
3.3
1.6
1.6
France
55.4
9.2
2.9
4.5
Germany
49.7
5.2
1.4
3.9
Italy
52.2
6.5
1.7
4.5
Japan
36.5
4.5
0.9
3.6
Korea
19.2
5.7
2.9
2.0
Netherlands
52.2
11.6
1.8
9.8
New Zealand
38.9
5.3
1.1
4.2
Norway
52.0
6.3
2.6
3.1
Portugal
49.9
8.3
2.2
2.0
Spain
45.2
9.9
1.4
1.8
Sweden
64.5
5.4
2.3
3.0
United Kingdom 43.6
5.4
3.2
1.9
United States
34.3
9.2
5.2
2.9
SOURCE: OECD 2001, Economic Survey of Czech Republic, 2001
Information as a Public Good.
Merit Goods
Total
Other
Functions
3.3
0.0
0.0
0.0
0.0
0.1
1.8
0.0
0.3
0.0
0.8
..
0.0
0.6
4.1
6.7
0.1
0.2
1.0
REGULATION OF PRODUCTS. REGULATION OF INDUSTRY. .
Total
10.5
11.9
12.3
11.1
16.5
15.2
14.1
13.9
10.2
10.1
5.6
12.0
10.6
18.4
10.6
10.6
17.2
11.5
11.9
Education
4.5
5.3
5.8
4.4
6.5
6.6
5.9
4.5
4.5
3.8
3.6
4.6
5.2
6.8
5.4
4.8
6.6
4.6
5.0
Health
5.5
5.7
6.5
6.1
5.1
5.6
7.1
8.0
5.3
5.6
1.8
6.5
5.3
6.6
4.7
5.5
5.7
5.7
6.5
Other
Social
Services
0.5
0.8
0.0
0.5
4.9
3.0
1.1
1.3
0.3
0.6
0.2
1.0
0.1
5.1
0.5
0.3
4.9
1.2
0.4
The Distribution Function
Income Support
Redistribution in-Kind.
The Stabilization Function
THE INSTRUMENTS OF STABILIZATION.
Fiscal Policy
Monetary Policy
. THE TAX SYSTEM
TABLE 5.2
The Structure of the Tax System in Selected Countries
Tax Structures as a Percentage of Total Tax Receipts
Total Tax
Social Security
Personal
Receipts
Contributions
Income
Percentage of
Tax
Employees
Employers
GDP
Australia
29.9
43.3
0
0
Belgium
45.9
30.7
9.7
19.2
Canada
37.4
37.8
5.3
8.1
Czech R.
38.3
13.6
10.1
28.8
Denmark
49.8
51.6
2.4
0.7
France
45.2
17.4
8.7
25.2
Italy
42.7
25
6.3
20.5
Japan
28.4
18.8
15
19.6
Korea
21.1
20.1
3.3
7.7
Poland
37.9
22
0
32.3
Sweden
52
35
5.8
22.5
Turkey
28.7
27
5.7
7.3
United Kingdom
37.2
27.5
7.3
9.4
United States
28.9
40.5
10.2
12.2
EU Average
41.3
25.6
8.2
15.9
OECD Average
37
27
7
14.9
SOURCE: OECD in Figures, 2001. p. 38
Total
Corporate Taxes on
Other
Taxes on Income Goods and
Taxes
income
Tax
Services
43.3
59.6
51.2
52.5
54.7
51.3
51.8
53.4
31.1
54.3
63.3
40
44.2
62.9
49.7
48.9
15.2
8.5
10.5
9.7
5.6
5.9
7
13.3
12.2
7.5
5.7
5.8
11
9
8.7
8.9
25.5
24.9
24.7
31
33.2
26.6
27.4
18.8
40.5
34.4
21.6
35.7
32.6
16.2
30.2
31.3
16
7
13.6
6.8
6.5
16.2
13.8
14.5
16.2
3.8
9.4
18.5
12.2
11.9
11.4
10.8
THE LEGAL SYSTEM
Ownership and Property Rights
Freedom to Engage in Economic Activity
The Enforcement of Contracts and Compensation
Bankruptcy Law
Accounting and Financial Disclosure
A Clear Definition of Governmental Responsibility
A System of Civil Compensation
BOX 1
The Crash of 2002
The consequences of failure to provide clear and reliable financial disclosure
have been made abundantly clear in the United States economy during the stock
market downturn of 2000-2002. After the boom of the late 1990s several
important companies resorted to creative accounting techniques to boost the
public’s perception of their revenue and profits. The accounting firms proved
too complacent and were often compromised by acting both as consultants to
companies as well as auditor of their books. Investors became alarmed by their
inability to determine a company’s true financial position. Supplier and buyers
too, became reluctant to enter into contractual relationships with firms who
might be closer to bankruptcy than their published accounts seemed to show.
Among the major casualties were the energy trader Enron, and the
telecommunications firms Global Crossing and WorldCom.
Drastic
consequences also befell Arthur Anderson, one of the world’s largest accounting
firms, which seemed to be a willing tool of the companies rather than an
independent arbiter of a firm’s financial condition.
The US government’s response has been to change the regulating framework.
In the short-term chief executive officers are to be required to swear, under
penalty of law, for the correctness of the accounting statements. More reform is
possible including the structure that accounting firms should not act both as
consultants and auditor.
The real consequences of the crisis for the US economy are at the present hard
to fathom. The flight of investors from the market can have real consequences
for the way that companies raise money, and can affect investment and the
growth of the US economy. Particularly severe might be the reaction of foreign
investors. Far from being the safe haven of capitalism, the United States began to
look riskier than many other markets, especially Europe where the heavier hand
of government generally practiced high accounting standards.
THE FINANCIAL SYSTEM
.
The Central Bank
Tasks
1. To act as a clearing bank for the banks
2. To act as the promulgator and enforcer of financial regulation, designed to enhance the stability and
efficiency of the financial system
3. To act as a lender of last resort
4. To control the overall stock of money in the economy, and hence the interest rate
5. To monitor the foreign exchange value of the currency
Tools
The central bank has at its disposal several tools with which it can influence the stock of money in the system:
1. Open-market operations, by which the central bank buys or sells government bonds to and from the public
2. Reserve requirements, which constitute controls on the minimum amount of liquid reserves which banks
must hold against the liabilities that it owes its depositors
3. The discount rate, which is the interest rate at which the central bank lends money to banks to provide the
reserve base against which banks can lend to borrowers
The Independence of the Central Bank.
Depository Institutions
Commercial Banks.
Savings and Loan Banks.
Credit Unions.
Postal Savings Banks.
Nondepository Institutions
Investment Banks.
Mutual Funds.
Venture Capital Funds.
Insurance Companies.
The Market for Financial Assets
The Ownership of Stock.
TABLE 5.3
Ownership of Common Stock: An International Comparison
(percentage at year-end)
United
States Japan
1994
FY 1994
United
Germany France Kingdom Italy
1993
1993
Sweden
1993
1993
1993
Financial Sector
Banks
Insurance companies
Investment funds
Pension funds
Mutual funds
Other financial institutions
45
3
4
0
26
12
4
44
26
16
0
0
0
2
29
14
7
0
0
8
0
8
3
1
0
0
2
2
62
1
17
0
34
7
3
19
10
2
0
0
6
1
24
1
8
8
0
6
0
Nonfinancial Sector
55
56
71
92
38
81
76
0
0
48
6
1
100
24
1
24
7
0
100
39
4
17
12
0
100
59
4
19
11
0
100
2
1
18
16
2
100
32
28
17
5
0
100
34
7
16
9
10
100
Nonfinancial enterprises
Public authorities
Individuals
Foreign
Other
Total
How Financial Markets Provide Corporate Governance.
The Market for Corporate Control.
BOX 2
Stocks, Options, and Corporate Governance
The rise of global stock markets in the 1990s had a strong impact both on
stock ownership and on corporate governance. Several trends were at work.
First the rise of the markets tended to attract first time owners of shares. Second
the wider use of vested stock ownership plans to replace traditional pension
schemes broadened share ownership further. Perhaps most startling was the
acceleration in the use of stock options as a means of compensating both
management and worker. There were two implications of this. One was that the
ownership of the corporations was progressively transferred from the preexisting group of shareholders towards the management and workers. While this
might in some respects be a solution to the principal/asset problem by making
management more closely identified with the profitability of the firm, it did
represent a transfer of wealth from shareholders to management. There is now a
pressure to ensure that the issuance of options should be more carefully
documented and reflected as an expense in the reporting of financial results. A
serious problem was revealed when it became clear that too frequently the
reward of management with options encouraged a short-term view of the future.
It became in management’s interest to manipulate the stock price higher, cash
out options, and leave the firm. What had seemed a device to reward
management for a firm’s success, by putting too much emphasis on the short run
(and perhaps by allowing the reward to be great enough to facilitate premature
retirement), encouraged the pillaging of the corporation. Having survived the
challenge of the Marxists people began to wonder if capitalism was strong
enough to survive the capitalists.
THE ORGANIZATION OF BUSINESS
The Corporate Form
The Behavior of Firms
THE LABOR MARKET
Types of Labor Unions
TABLE 5.4
Union Membership, Selected Countries, 1987–1989
Membership as a Percentage of
Nonagricultural
Country Employment
Sweden
Austria
Australia
Ireland
United Kingdom
Italy
Germany
Canada
Netherlands
Switzerland
France
Japan
United States
Relative Rates of Unionization
96
61
56
51
50
45
43
36
35
33
28
28
17
Full-Time
Employment
na
52
70
48
47
33
34
na
42
37
na
na
19
Full-Time
Manual Workers
na
57
69
49
53
37
39
na
47
37
na
na
27
Income Support
INDUSTRIAL POLICY
TRADE POLICY
BOX 3 Trade and Protectionism
The United States has traditionally seen itself as a strong advocate of free trade
and it has been, to a large degree, responsible for pushing international trade
liberalization agreements since World War II. Most economists believe that free
trade enhances both world welfare and the aggregate welfare of countries that
engage in it. However, within a country there are costs to particular groups. In
general we may say that the broad consuming public benefits from liberalization
because it provides access to lower cost imports. However, the labor and capital
engaged in the industries at home that the imports compete with are likely to bear
the costs. As a rule the broad benefits are greater than the narrower losses to
specific labor and capital. However, trade policy is almost always a political issue
and that was demonstrated clearly in March of 2002 when President George Bush
announced tariffs on steel of up to 30 percent. Bush had generally sided with the
anti-tax, anti-tariff wing of the Republican Party, and the move also put the
president at odds with many of his steel-producing allies. Generally speaking
economist accept few arguments in favor of tariffs – the chief being the protection
of infant industries and the preservation of strategic assets. Protection of steel
might be seen as strategic consideration but it is more likely that protectionism
was promoted by domestic political considerations than by long run strategic
concerns. What should be emphasized is that protectionism always has a cost and
in this case it will raise the costs in every industry that uses steel as an input. As
such it will negatively affect the United States competitive position in industries
like automobiles and machinery. It will raise the cots of US construction and have
knock-on effects in every corner of the economy. It might succeed in saving some
jobs in steel but the likelihood is that this will be more than balanced by the
increase in prices and the affect on competitiveness in other industries.
DEVELOPING HUMAN RESOURCES
The Educational System
The Health-Care System