As the rule of thumb, we can stress that the BEST RESULTS are usually achieved by countries with enough ECONOMIC FREEDOM and with effective, but NOT overdeveloped, ECONOMIC REGULATION by the STATE.
Since the begin of the 21st century, China, India, Brazil, as well as other BRICS countries (Russia, South Africa) have been demonstrating an enviable growth potential. It is difficult to judge, however, to what degree their not petty achievements are resulting from FACTORS which can be summed up under the concept of ECONOMIC FREEDOM.
As Thomas Paine, English born American author, whose writings were important influences on the American Revolution, once wisely noticed, " That government is best which governs least."
The dynamic nature of Asian nations, since the 1990s, could be seen especially clearly in the field of INTERNATIONAL TRADE. With their rapidly growing IMPORTS which illustrate the region's tremendous PURCHASING POTENTIAL, developing Asian countries have become the FOURTH FOCUS of global commercial activity. In 1999, the MERCHANDISE IMPORTS of the main Asian traders (including "four tigers", "four dragons", China and India, but WITHOUT Japan) amounted to $889 billion, while comparable imports of the U.S. were $1.059 billion (the whole NAFTA area $1.280 billion), of the European Union $2.232 billion (of which import from countries outside the EU about $890 billion), and of Japan $311 billion. Recent estimates indicate that HALF of the world's 10 largest economies by the year 2020 will come from East Asia.
* You might know that, since midsummer 1997, some Asian countries (most of all, Thailand, Indonesia, Malaysia, South Korea) have been facing serious financial and economic difficulties (the socalled "financial meltdown " and "economic slowdown"). By the middle of 1998, these local troubles have overgrown into a REGIONAL CRISIS (i.e., the famous Asian crisis) and even threatened to provoke, in the worst case, a GLOBAL MARKET SLUMP. Fortunately, this threat did not materialize, and since the second half of 1999 Asian crisis generally dissolved and economic growth resumed.
* At least partly as a result of those sad events in other Asian countries, also ECONOMY OF JAPAN got in real danger (first time in more than two decades, actually). After about SEVEN years (19901997) of nearly STAGNATION ("nearzero economic growth"), in 1998 1999 Japan's main MACROINDICATORS like Gross National Product GNP, or new investment have shown a DOWNWARD trend. The head of Sony Corp. warned that Japanese economy might be on the verge of collapse". Since 2000, however, also in Japan the economic growth resumed, albeit at low rates and with danger of new relapses into stagnation and slump.
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Thus, the need of REFORMING remains very TOPICAL. "The political inertia and inability of world's secondlargest economy to restore growth looms as the major obstacle to economic recovery in Asia," wrote Los Angeles Times on the very eve of the New Millennium celebrations.
The issue of the "Big Bang" a nickname for a deep and energetic reform of Japan's financial and economic system in the direction of radical DEREGULATION and more OPENNESS of domestic markets to foreign businesses looms high on the political agenda. You should know that this ambitious program of financial reforming has been initiated by the then Prime Minister Ryataro Hashimoto as early as November 1996 and is often associated with his name. It envisaged several stages and was expected (as it turned out, wrongly) to be concluded by the end of the year 2001. It is worthwhile to notice that many elements of Japans Big Bang, including its nickname, are based on a similar program implemented in Britain since mid1980s.
Also, at the begin of 1999, Japans government adopted a basic plan for reforming countrys CENTRAL BUREAUCRACY as to fit new conditions in the 21st century. Since January 2001, the number of ministries and central government agencies was reduced from 21 to 12, and the number of bureaus and secretariats from 128 to 96. Correspondingly, the number of national government employees was to be cut by about 25 percent during 10 years.
* On the other hand, at least since the Asian crisis, there has been a lot of sharp criticism directed at the modern often dubbed AngloSaxon version of FREEMARKET ideology. This new brand of ECONOMIC POLICY often called NEOLIBERALISM and characterized by a radically LIBERAL, or laissezfaire, approach to economic matters has been rudely imposed on many troubled developing countries by the International Monetary Fund (IMF) in exchange for financial rescue packages aimed at stabilizing their financial situation. Politicians, economic analysts, even late Pope John Paul II blamed NEOLIBERALISM for social and economic PLIGHT befallen many countries in Latin America (first of all, Mexico), in South East Asia and Africa at the end of the 20th century.
* The current GLOBAL FINANCIAL AND ECONOMIC CRISIS has brought many changes in the economic mechanisms of individual countries. As a general trend, a new turn TOWARD Keynesian recipes and AWAY from monetarist methods of state regulation can be named. The financial troubles have also put on the international agenda the necessity of further developing and improving REGIONAL and GLOBAL (multilateral) economic INSTRUMENTS and INSTITUTIONS. We shall discuss related questions in some of the following Topics of the course.
* As of late, the ECONOMIC MECHANISM of Japan, together with its MODEL of economic MANAGEMENT, has been provoking more and more theoretical and political DISPUTES. Traditionally, Japanese corporations are responsible to their STAKEHOLDERS, which include not only their owners (SHAREHOLDERS) but, most importantly, their EMPLOYEES, CUSTOMERS, SUPPLIERS, CREDITORS and the COMMUNITIES where they do their business. This system, ruling economic life first of all on the MICROLEVEL, is mainly oriented on keeping STATUS QUO, which more often than not may undermine economic DYNAMISM. However, it undoubtedly has also its strong points which have been becoming obvious under the conditions of global crisis. In contrast, the Western (predominantly, AngloSaxon) model is based on the relationship between shareholders, management and the board of directors, and emphasizes the socalled SHAREHOLDER VALUE as the main criterion of business success. Its advocates (who are usually also the toughest critics of Japanese management) favor the principles of modern CORPORATE GOVERNANCE as it is seen in the United States, in the United Kingdom, in many other places in Europe and worldwide, for example and especially, in Hong Kong and Singapore. No one knows the truth, however, at least for the time being.
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Topic 2. INDUSTRIALIZATION AND EMERGENCE OF MODERN MARKET ECONOMY
To be able to clearly see the motives behind certain political actions and modes of practical political behavior of countries with different socialpolitical systems we need to have profound understanding of the ORIGIN (genesis) and the MECHANISM of their economies.
As a matter of fact, the socialeconomic PRINCIPLES on which particular countries with their economic systems and foreign policy are based can vary dramatically. And major role in this differentiation plays their belonging or NOT belonging to the family of MARKET ECONOMIES and the degree to which they have developed their market relation and mastered the POTENTIAL of the SOCIAL DIVISION OF LABOR to achieve reasonable (and therefore profitable) SPECIALIZATION of national production, its high EFFICIENCY and sufficient COMPETITIVENESS of goods produced for domestic and foreign markets.
However, to develop a normal MARKET SYSTEM with enough space and freedom for creative forces of COMPETITION, the society must possess (or consciously create) some necessary PRECONDITIONS (or PREREQUISITES) for emergence and maturing of the exchange (market) relations.
* PREREQUISITES. Here are the THREE PILLARS on which any MARKET ECONOMY (or COMMODITY ECONOMY, where commodities, or GOODS, are manufactured NOT for the producer's own needs, but with special aim of selling them on the market) is based:
# economic ISOLATION (AUTONOMY, or independent legal status) of producers of goods and services, who are also their owners, and of other economic subjects (traders, carriers, moneylenders, etc.)
# sufficient FREEDOM of action for EACH of such economic subjects in HIS or HER (or ITS, if we speak of a firm) striving to secure own interests
# DIVISION OF LABOR between them, i.e., a system, where every economic subject "works (produces) FOR the market" and "lives FROM the market" (that means purchases everything necessary for his life and business ON the market).
Historical experience has shown that the FIRST CONDITION is easier and fuller secured on the basis of PRIVATE OWNERSHIP (or PRIVATE PROPERTY) relations. It is important to notice that the institute of PRIVATE PROPERTY is not so easy to create. For example, in Western Europe it has taken CENTURIES (approximately from the 15th century to the second half of the 20th century) to establish complete system of private ownership based on a wide set of legislative acts to guarantee and to defend it.
The SECOND CONDITION comes out as certain ECONOMIC LIBERTIES, i.e., freedom of COMPETITIVE BEHAVIOUR, freedom of ECONOMIC MANAGEMENT aimed exactly at protecting the interests of a concrete producer or trader, so that he could expect a reasonable PROFIT (of course, if he is good at his job).
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The THIRD CONDITION, in its turn, is connected with the development grade of economic SPECIALIZATION and COOPERATION in the sphere of PRODUCTION, i.e., with the widening and deepening of the SOCIAL DIVISION OF LABOR.
It is the existence of these PREREQUISITES in a society that makes the INDIRECT (MARKET) form of economic TIES the main, predominant one. MARKET with its COMPETITION provides a firm basis for a COMMODITY PRODUCTION (also called "PRODUCTION OF GOODS") and becomes the principal element of the ECONOMIC MECHANISM of the society.
On the market, i.e., in the sphere of INDIRECT, partnershipbased, compensatory ties, there is much SPONTANEITY, the factor of UNCERTAINTY is strongly felt, a clash of INTERESTS of individual economic subjects takes place. The autonomous economic activity and sovereign, "egoistic" behavior of participants in MARKET COMPETITION have as their side effect the satisfaction of SOCIAL REQUIREMENTS (very often without any comprehension of this on the side of economic actors).
There is also strong DIFFERENTIATION among the producers themselves: for the most successful and progressive ones market temporary secures their advantages due to INNOVATION (a kind of "technological monopoly"), while the weakest, backward ones are mercilessly ruined by it. Thus, SELECTION of the best producers takes place, hand in hand with general STIMULATION of scientific and technical (technological) achievements which once again serve to meet social interests.
* MECHANISM. As a system, MARKET represents a certain balance of the TWO principles:
COMPETITIVE principle (independent, spontaneous, egoistic actions),
REGULATIVE principle (elements of regulation, organization, control, coordination; manifestations of monopolistic collusion; a kind of established "rules of the game") see Diagram 1.2.1 at the end of the TextBook.
On the one hand, a multitude (big number) of independent COMMODITY PRODUCERS with different production conditions, individual characteristics of their products, different resource base etc. take part in COMPETITION. Their COMPETITIVE BEHAVIOR is characterized by sovereign, isolated, often uncoordinated, but largely spontaneous actions aimed at guaranteeing their own interests. Therein lies the COMPETITIVE PRINCIPLE inherent in the market system.
On the other hand, however, on EACH market and for EACH concrete type of product the SUPPLY and DEMAND are represented NOT by an infinite, but by quite definite and NOT necessarily large number of economic subjects (individual persons, industrial and trading firms). Very often, within a limited number of SELLERS (and/or BUYERS) of some or other product, there may arise an open or secret DEAL (exactly this is called "COLLUSION") on individual questions of market policy, mostly on PRICES (those are typical features of MONOPOLIST behavior). There always is a certain COORDINATION of actions on the market. It does NOT preclude COMPETITION among SELLERS and BUYERS, but imparts to it some ORDER, some UNIFORMITY of behavior.
Let us add to this that each commodity market is characterized by a certain UNIFORMITY (community) of DEMANDS made by purchasers (consumers) on a given product. Each market is also characterized by generally similar effect of SEASONAL and FASHION factors, by common QUALITY CRITERIA regarding goods circulating on it, as well as by existing trading methods, typical terms of payment, etc.
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So, each market has its own measure of REGULATING and COMPETITIVE behavior of both sellers and buyers, i.e., its own "RULES OF THE GAME".
Like in a good soccer match, in a well developed market stability of "game" quality well agrees with the dynamism and mutability of situations, strictness of the "RULES OF THE GAME" with improvisations of "players" and unpredictability of the outcome of the confrontation, certain harmony and aesthetics with passion and drama.
The combination and dialectic interaction of COMPETITIVE (spontaneous) and REGULATIVE (organizing) principles inherent in the MARKET produce an EFFECTIVE MECHANISM to guarantee INDIVIDUAL (private), GROUP (collective) and PUBLIC (nationwide) interests.
Thus, the MARKET MECHANISM can be characterized as a system of "ORGANIZED COMPETITION"( or of REGULATED COMPETITION). In fact, this system (the economic mechanism of a society) has a large SELFADJUSTMENT POTENTIAL (we can also name it AUTOMATICTUNING QUALITY) and an inherent tendency toward an OPTIMAL combination of the competitive and regulative principles. This OPTIMUM (typical for NORMAL market conditions) can be defined as MAXIMUM of competition with MINIMUM of regulation (organization, control, coordination).
DEPARTURES from this OPTIMUM bear the DANGER of great losses for the society. For instance, unrestrained COMPETITION coupled with weakening of regulative mechanism ("rules of the game") may entail DESTRUCTIVE consequences: bankruptcies, unemployment, fraudulence (cheating) and product falsification.
On the contrary, EXCESSIVE ORGANIZATION and hypertrophied regulative tendencies threaten to bring about STAGNATION and DECAY, as well as loss of impetus for innovations and shameless robbery of consumers by way of very HIGH ("exclusive") PRICES (a kind of MONOPOLY situation).
In today's economic structure with strong positions of BIG PRODUCERS the possibilities for SELFADJUSTMENT of the market mechanism are rather WEAK. So, "ORGANIZED COMPETITION" in its OPTIMAL form (as "MAXIMUM of competition with MINIMUM of regulation") can only be assured by the conscious and refined use of SPECIAL economic policies of the STATE aimed at restoring and maintaining this optimum. Although such policies also represent a kind of STATE REGULATION, their SPECIAL GOAL is to strengthen the MARKET FORCES, to give impetus to COMPETITION and to stimulate SMALL and MEDIUMSIZE businesses (here we can mention such things as ANTITRUST activities and FINANCIAL SUPPORT of independent producers).
Actually, what we call here "ORGANIZED COMPETITION" is, in reality, FREE COMPETITION of our day. It assures necessary correspondence (or accordance) between the PRODUCTION STRUCTURE (supply) and the SOCIAL NEEDS AND WANTS (demand). It also stimulates the application of new machinery and new technologies (innovations), encourages the BEST producers, "punishes" the WORST and lies in wait for the SLOWEST.
* HISTORICAL GENESIS. Maybe it sounds unexpected, but actually the by far longest part of its history the mankind has been living WITHOUT MARKET, under the conditions of the socalled NATURAL ECONOMY. It was the world of DIRECT ECONOMIC TIES, of COLLECTIVE WORK under the COMMAND of tribal chiefs or heads of families, with low productivity and EGALITARIAN DISTRIBUTION of food and all other material resources, in closed selfsufficient communities (the socalled "AUTARCHY "). There were almost NO contacts with the outside world and practically NO opportunities for regular EXCHANGE of goods or services (i.e., no INDIRECT ECONOMIC TIES that serve the MARKET RELATIONS).
If we imagine that the 1, 5 million years old mankind is now at the end of a 1000meter running distance, it turns out that MORE than 998 meters of this historical path it has run in the absence of MARKET RELATIONS. And from the remaining less than TWO meters, only the last 3040 cm (about 600 years) were covered under conditions of visibly prevailing MARKET ECONOMY (i.e., with production of goods mostly for sale and a rapidly developing system of social division of labor), while the INDUSTRIAL SOCIETY with developed MODERN MARKETS takes merely about FOUR last centimeters of this imaginable distance.
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However, in the period of the socalled " feudalism ", i.e., in Middle Ages and in the epoch of the Renaissance, MARKET already appeared as a relatively OMNIPRESENT (universal, widely spread), although not fully developed, BASIC ELEMENT of economic and social life, gradually preparing conditions for the coming INDUSTRIAL REVOLUTION, bourgeois upheavals and the spread of hired labor system (what is usually summed up as "capitalism ").
In Western Europe of that time, typical was a rapid growth of cities (townships). Those were "microsocieties" where the socalled "MONOSTRUCTURES" prevailed. It means that these cities lived their own life under the strong rule of local masters (lords or princes) and in each of them there usually was a pretty SMALL NUMBER of producers (sellers) and consumers (buyers), while the varieties of products circulating on the local markets as goods (commodities) were not numerous either.
Thereby the SUPPLY on these local markets was originally RESTRICTED, nor could it greatly exceed the limits of the DEMAND depending on the size and incomes of the townsfolk (local population).
We can add to this that the RULERS (lords and princes) exercised a strong CONTROL over the production, first of all over the NUMBER of producers (through the socalled "gilds"), issuing special PERMITS (licenses) to open new workshops. So, the SUPPLY on the local markets was restricted thus artificially establishing a kind of FEUDAL MONOPOLY. The "REGULATIVE" forces on the markets PREVAILED over the forces of COMPETITION.
However, the "MONOSTRUCTURES" could NOT have lived long. The guild (workshop) system was based on the principals of MANUFACTURY (i.e., on a profound and sophisticated system of TECHNOLOGICAL division of MANUAL LABOR and its cooperation). It brought about such a considerable GROWTH IN PRODUCTIVITY that the town boundaries began to tumble down (to collapse) and the local products (goods, commodities) started to circulate in the neighboring country and in other towns, sometimes rather far away. The "microsocieties" opened their doors forming wider MARKET STRUCTURES which embraced several towns, whole regions and even countries (the emerging NATIONSTATES).
Accordingly, the former "MONOSTRUCTURES" were replaced by new "MULTI STRUCTURES", i.e., by a LARGE NUMBER of independent (mostly small) producers, a relatively mass demand and rapid growth of the number of types of products ("commodity nomenclature") sold on the emerging national markets. Especially prospered inventive producers who introduced NEW PRODUCTS and so enjoyed a kind of monopolistic position on the markets ("monopoly of distinction").
In the market mechanism itself, with feudal power being clearly on the decline, there was a sharp turn towards the COMPETITIVE forces. There arose what in theory is called ATOMISTIC STRUCTURE of the market characterized by DESTRUCTIVE COMPETITION, a MULTITUDE of small producers, market instability and strong POLARIZATION (differentiation) of producers (successful and unlucky, getting rich and close to ruin).
The accelerated development of SCIENCE AND TECHNOLOGY laid foundation for the future INDUSTRIAL REVOLUTION. Thus, NEW lines of production sprang up all over, tens and hundreds of NEW types of products were annually developed and tried on the market, NEW technologies, technical implements and organizational principles were tested in MANUFACTURE PRODUCTION growing over into MACHINE PRODUCTION (factories and plants instead of old gilds and workshops).
* Over TWO centuries (in case of Britain the "pioneer" of the Industrial Revolution a whole century BEFORE other European nations) at least SEVEN radical processes simultaneously developed in the economic sphere building up the cumulative process of INDUSTRIAL REVOLUTION:
* spread of MACHINE TECHNOLOGIES (instead of MANUAL WORK technologies)
* creation of LEGISLATIVE BASE (system of law and order) stimulating growth of industrial MARKET ECONOMY by the new bourgeois governments
* transition to the use of HIRED LABOUR on a mass scale
* emergence of COLLECTIVE (group) forms of PRIVATE PROPERTY (jointstock property, corporatization)
* rapid ACCUMULATION of capital (massive INVESTMENT in production)
* creation of a mighty RAW MATERIAL BASE for European industrial centers in the COLONIAL PERIPHERY
* establishment of an INDUSTRIAL PRODUCTION STRUCTURE (in its first "rough" variant typical for countries on early stages of INDUSTRIALIZATION)
ALL these processes TOGETHER meant exactly INDUSTRIALIZATION and represented the FIRST PHASE in the formation of modern INDUSTRIAL SOCIETIES. In contrast to this, Carl Marx regarded these processes as EMERGENCE OF "CAPITALISM" and built up his "revolutionary ideology" around this concept.
* In the course of industrialization, the development and application of MACHINES went very UNEVEN (with different speed). It concerns both SECTORS (individual industries) and COUNTRIES, on the one side, and production and market positions of individual FIRMS, on the other side. Leading INDUSTRIAL and TRADING COMPANIES began to appear. The CONCENTRATION of production and capital was supplemented with the CENTRALIZATION of capital, particularly along the lines of HORIZONTAL INTEGRATION through intrasectoral MERGERS and TAKEOVERS (now more often called "mergers and acquisitions" M&A) of formerly independent firms. Here, a powerful impetus was given by the spread of the JOINTSTOCK form of property and organizational structures of a CONCERN type. Jointstock FINANCING began to play an important role in capital formation.
As a result, by the end of the 19th century in the European countries (in Britain a hundred years earlier), in North America and Japan INDUSTRIAL STRUCTURE of production came into being and gained in strength pushing the NONMECHANIZED manual labor to the PERIPHERY of the economic system. In each of the industries (sectors) thus formed, a SMALL GROUP of producers took the leading, even dominating role enjoying what economic theory calls MONOPOLIST POSITION (monopoly).
What one could observe in the beginning of the 20th century was, however, NOT "the last stage in the development of capitalism" (as Vladimir Lenin regarded it). It was a painful, internally contradictory, but still inevitable as the early fruit of the industrialization, FIRST STAGE in the development of a NEW technological mode of production, i.e., of the MACHINE PRODUCTION the base of the economic system of modern INDUSTRIAL and POSTINDUSTRIAL societies.
The ATOMISTIC STRUCTURE preceding the industrialization and based on the MANUAL WORK was being replaced by a new kind of economic structure, which we call "RIGID" MONOPOLY, characterized by HEGEMONY (absolute power) of a couple (one two three five) of MAJOR COMPANIES in each of the basic industries. So, for a certain period of time the REGULATIVE PRINCIPLE (in its extreme, MONOPOLIST form) prevailed once more, while the forces of COMPETITION were put down (restricted) and could NOT fully exercise their fruitful influence on the economy.
In the last sixseven decades, however, under the influence of further technological development, this "RIGID" MONOPOLY STRUCTURE has been losing its "rigidity" and transforming to even newer kind of production and market structure to that called OLIGOPOLY. It is the stage of the MATURE industrial system characterized by COEXISTENCE in every industrial sector of BIG, MEDIUMSIZE and SMALL firms (producers and traders) living in a kind of "symbiosis", i.e., in a very complex relationship combining elements of COMPETITION and COOPERATION between them ("liveandletlive" principle). By the way, the NATIONSTATES contributed much to the emergence of the OLIGOPOLY SYSTEM by their ANTITRUST LAWS and policy of SUPPORTING small business.
In a book describing emergence and growth of modern tobacco industry in the U.S. ("Ashes to Ashes" by Richard Kluger) this historical process of change is illustrated on example of one particular industry based on advanced MACHINE technology. In about 30 years, the at first splintered TOBACCO industry made a transition from HANDREDS of small, familyowned concerns to an ABSOLUTE MONOPOLY of ONE man, James Buchanan Duke, and then to market OLIGOPOLY conditions which brought about a big variety of new tobacco products thus enhancing the consumers' choice.
It is worthwhile to notice that in modern times the "RIGID" MONOPOLY conditions can be found only SELDOM, i.e., in rather RARE cases, as a kind of EXCEPTION, for a SHORT PERIODS of time and in very special cases (for example, in very NEW and TECHNOLOGICALLY UNIQUE industrial sectors enjoying GOVERNMENT ASSISTANCE, like AEROSPACE industry, where right now the world market of commercial airplanes is dominated by only TWO major producers American Boeing, which since 1997 also includes McDonnell, and Europe's Airbus Industrie consortium). Usually, however, in a couple of years the situation changes, and the extraordinary MONOPOLY conditions evolve to become similar to that of the more "regular" OLIGOPOLY.
In this historical transition to OLIGOPOLY, the COMPETITIVE FORCES of the market at last found an OPTIMAL BALANCE with the REGULATIVE FORCES, and that allowed to fully realize the POTENTIAL inherent in the MECHANISM of "ORGANIZED COMPETITION" typical for societies based on MARKET ECONOMY, i.e., on the principle "MAXIMUM of competition with MINIMUM of regulation".
* In Diagram 1.2.2, you can see a drawing which shows a typical way of emerging and maturing of an INDUSTRY (industrial sector) and its MARKET. The curve clearly indicates the "rollback" from "RIGID" MONOPOLY regime and transition to OLIGOPOLISTIC STRUCTURES, i.e., to the mentioned "symbiosis" of BIG, MEDIUMSIZE and SMALL business.
In EACH industry, on EACH sectoral market a situation arises sooner or later when the bulk of finished products comes from a RELATIVELY NARROW CIRCLE of big producers capable of strongly influencing the market situation (first of all the PRICES), thereby effecting "GROUP MONOPOLY" (i.e., OLIGOPOLY). However, their own production is efficient precisely because it is based on the principles of profound DIVISION and wide COOPERATION of resources and labor including SUBCONTRACTING RELATIONS with independent partners from among small and midsize firms.
Moreover, a certain portion of any sectoral production comes from relatively SMALL outsider FIRMS offering NEW products or using NEW technologies and being therefore capable to work at a profit. By the way, such firms have it relatively EASY exactly because of the CONDITIONS on the sectoral market created by the oligopoly supply which helps to keep PRICES at sufficiently HIGH level.
The last decades have shown that "narrowed", but still quite EXTENSIVE (in comparison with the "rigid" monopoly conditions) OLIGOPOLY STRUCTURES of sectoral markets provide sufficient latitude (enough space) for COMPETITION, thereby encouraging technological and organizational INNOVATIONS and that even more among SMALL and MEDIUMsize firms than among the BIGGEST.
Here lies the fundamental distinction of the OLIGOPOLY and its decisive ADVANTAGE over "RIGID" MONOPOLY, when the market has been really strongly undermined, and stagnation and ruin in the vortex of contradictions have threatened the emerging industrial society.
The TRANSITION from "ROUGH" industrial structures with their "RIGID" sectoral monopolies to more flexible and "spacious" (extensive) OLIGOPOLY STRUCTURES with enough COMPETITION and big opportunities for technological cooperation among firms of different sizes started in the United States in the 1920s1930s, while in Europe, in Australia and New Zealand it has displayed itself considerably later, only over the second half of the 20th century.
However, today OLIGOPOLY production and market STRUCTURES have became typical for national economies of practically ALL industrial countries, encouraging competition, rapid technological progress and structural change, high efficiency of production, social and political stability, and international cooperation.
In Japan, the emergence of modern OLIGOPOLY relations developed over a long historical period dating back to the middle of the 17th century when the two first zaibatsu Mitsui and Sumitomo came into being. Since then, the zaibatsu type of organization links, nowadays regarded as a kind of inter market group, such as giant industrial CONGLOMERATES Mitsubishi and Mitsui, has more and more taken the character of an OLIGOPOLY arrangement. The same is valid also for keiretsu, or a specific kind of intra market group usually formed around a SINGLE large company operating in a SINGLE market (such as Toyota in automobiles or Matsushita in electronics) which includes many subsidiaries and affiliates (about both zaibatsu and keiretsu we shall further speak in Topic 4).
* However, aside of the BASIC MECHANISM of MARKET ECONOMY (characterized earlier as effective system of "ORGANIZED COMPETITION"), we can also distinguish its FUNCTIONAL STRUCTURE, i.e., PRINCIPAL BUILD of a modern INDUSTRIAL and POSTINDUSTRIAL economy (see Diagram 1.2.3).
* FUNCTIONAL STRUCTURE. To better understand specific character of this structure let us compare it with a sweet delicious cake like one you may order in a coffee shop. As you well know, a cake often consists of THREE different layers. While EACH of these LAYERS has its special purpose and unique characteristics, ONLY ALL THREE TOGETHER represent the WHOLE (i.e., a tasty CAKE or, for that matter, an effective FUNCTIONAL STRUCTURE of the MARKET ECONOMY).
# At the bottom of the structure lies the socalled MICROLEVEL formed by independent business activities in production, science, finance, trade and services undertaken by INDEPENDENT PRODUCERS (either by individual OWNERS, small and mediumsize FIRMS, or by big CORPORATIONS, also called "CONCERNS" a term which you will better understand after Topic 4).
Here, at the MICROLEVEL, commodity producers work DIRECTLY for the market, manufacturing final (finished) or intermediate (semifabricated) PRODUCTS and rendering different kind of SERVICES. While doing so, they strictly CALCULATE their expenses and future earnings in their striving for PROFIT. These private firms use such implements as modern ACCOUNTING, refined MARKETING and LOGISTICS techniques to achieve HIGH EFFICIENCY of their production and sufficient COMPETITIVENESS of goods manufactured by them. Their products (services) may be meant either for ordinary COMMERCIAL sale (through their own stores and/or with the help of specialized trading companies) or on a SUBCONTRACTING basis i.e., for a particular purchaser, mostly on the basis of longterm PRODUCTION COOPERATION relations (all this is also called SUBCONTRACTING system).
# In the latter case, actual INDEPENDENCE of producers is somewhat LIMITED, as they find themselves in a rather STRICT, technologically predetermined SYSTEM which dictates the rhythm and qualitative characteristics of shipments (deliveries). As a rule, PRICES figuring in such COOPERATION transactions are somehow LOWER than those in COMMERCIAL TRADE (i.e., on an "open" market). This is a kind of "payment" for the opportunity to work for a GUARANTIED MARKET (i.e., a certain "price" for steady partnership relations) which assures SALES on a longterm basis.
Precisely such stable and reliable COOPERATIVE TIES form the MESOLEVEL (middle, intermediate level) of the FUNCTIONAL STRUCTURE of a highlyindustrialized MARKET ECONOMY (like, in our metaphor, a cream filling forms the medium layer of a cake).
Very often cooperationbased relationship rests on TECHNOLOGICAL division of labor WITHIN the production complex of a company. In such cases, we usually find MANY typical elements of ADMINISTRATIVE COORDINATION, i.e. of DIRECT ties, especially in SMALL and MEDIUMSIZE firms.
As for BIG modern concerns, WITHIN their DECENTRALIZED organizational structures the role of INDIRECT ties (i.e., of MARKETtype relationship) often is a major one. There, more and more typical become highly COMMERCIALIZED relations between company divisions which supply each other with their products and services NOT on order (command) but on the basis of financial compensation using the socalled TRANSFER PRICES. In cases when production cooperation is being organized through inviting INDEPENDENT partners on a CONTRACTING basis, we also deal with a major role of INDIRECT ties, i.e., with relations of a purely MARKET type, even if the DISCIPLINE of deliveries in such partnership can be very strict (the socalled "justintime" JIT system is often regarded as the highest form of such relationship).
In BOTH last cases the COMPETITIVE forces remain at active play, NOT allowing the SUBCONTRACTORS (DIVISIONS of the same company or INDEPENDENT SUPPLIERS working on a SUBCONTRACTING basis) to feel safe. Competition, MARKET motivation stay in force. Precisely that assures very high EFFICIENCY of modern COOPERATION systems and technological PROGRESS for society as a whole.
# Finally, the MACROLEVEL of the market structure is formed by the regulative activity of the STATE, its economic policy (including international, mostly trading aspects of such policy). We speak here of a WHOLE TOOLKIT of means and policies at the disposal of the state (government) allowing it to exercise INFLUENCE on the market situation and the conditions of economic life as a whole.
Let us make special stress on the fact that a typical FUNCTIONAL STRUCTURE of the modern MARKET ECONOMY necessarily includes many and various elements of STATE REGULATION. For example, very important among such elements are those directed at securing the REGULAR COURSE of economic processes, preventing RECESSIONS (slumps) in production and dangerously high rate of UNEMPLOYMENT. Others are aimed at a certain REDISTRIBUTION of income and wealth (mostly through TAXATION policies) as to assist small producers and to support elderly people, disabled, etc. (we shall speak of different MODELS of ECONOMIC REGULATION exercised by the STATE in the next Topic).
It is also worthwhile to notice that nowadays effective FUNCTIONAL STRUCTURES, including as necessary element different tools of STATE REGULATION, are emerging NOT only on local and NATIONAL MARKETS (i.e., WITHIN individual countries), but also on the scale of large REGIONAL MARKETS (like Europe or North America). This new trend has got a new strong impetus from the repercussions of the modern GLOBAL FINANCIAL AND ECONOMIC CRISIS a phenomenon we are observing right now.
Topic 3. ECONOMIC AND POLITICAL FEATURES OF INDUSTRIAL AND
POSTINDUSTRIAL SOCIETIES
You already know that in the second half of the 20th century the production and market structures of OLIGOPOLY have become typical for the national economies of practically ALL industrial countries. Here it is worthwhile to notice that the cumulative process of INTERNATIONALIZATION of economic life, which shall be analyzed later, has given rise to a tendency to RECREATE such structures also within a WIDER international framework on world commodity MARKETS, in particular economic REGIONS (like Europe or North America), and on a GLOBAL scale.
In the area of DEVELOPED industrial societies, i.e., in Western Europe, North America, in the Pacific basin (Japan, Australia, New Zealand), the INDUSTRIAL MARKET SYSTEM has taken final shape and reached its maturity in the second half of the 20th century or, in historical terms, literally before our eyes.
What are the MAIN COMPONENTS of this system and in what DIRECTIONS does it continue to develop? Let us turn to Diagram 1.3.1.
We shall begin with the TECHNOLOGICAL BASE of today's industrial society, including its MEANS OF PRODUCTION (i.e., material factors machines, different kind of equipment, etc.) and MANPOWER (i.e., human factor).
* The principal specific feature of the modern SYSTEM OF PRODUCTION consists in MACHINE TECHNOLOGY applied for making (manufacturing) practically everything, including MACHINES themselves. We shall call this historically NEW phenomenon the "MACHINE production of MACHINES". Therein lies the fundamental difference of the INDUSTRIAL society and INDUSTRIAL production from the epoch of HANDICRAFT, i.e., of MANUAL work and its ingenious "MANUFACTURE" organization.
There is a widespread, albeit wrong, idea that the transition to MACHINE SYSTEMS is dated nearly from the mid18th century. However, their MASS APPLICATION in mechanical engineering itself (or, using another term, in MACHINERY industry) was first observed only on the eve and during the World War I, i.e., in the first TWO decades of the last century. As for the American industrial boom of the 1920s (preceding the "Great Depression" of the 1930s) and the World War II, both gave a strong impetus to further spreading of INDUSTRIAL TECHNOLOGIES and to deep REORGANIZATION of BIG BUSINESS thus highly accelerating the ECONOMIC DEVELOPMENT process (we shall return to these questions in following Topics).
Among other things, this period brought a steep rise in the EFFICIENCY of the INDUSTRIAL PRODUCTION through the socalled "scientific organization" of the WORK PROCESS (or "Taylorism" by the name of its inventor), as well as through the use of CONVEYER (ASSEMBLY LINE) as the technological base of MASSSCALE PRODUCTION (sometimes also labeled "Fordism" after Henry Ford I).
We can state that the first "rough" stage of INDUSTRIALIZATION as a UNIVERSAL form of ECONOMIC DEVELOPMENT in the socalled "civilized world" generally ended by the MIDDLE of the 20th century. Since then, in growing parts of the world, this cumulative process of ECONOMIC DEVELOPMENT is taking a new form, which received the name of TECHNOLOGICAL REVOLUTION.
Among other features, it is characterized by such NEWEST TENDENCIES in the development of material and technical (technological) base of modern production as wide appliance of CONTINUOUS processes (first of all in the CHEMICAL industry), AUTOMATION and ROBOTICS; a breakthrough is also taking place in the sphere of BIOTECHNOLOGIES (remember the blackbox principle!) and of NANOTECHNOLOGIES (based on principle of manipulating matter on an atomic and molecular scale).
So far, however, MACHINE TECHNOLOGIES (but no longer always MECHANICAL ones) still prevail. Of course, these technologies themselves continue to improve. As PROGRAMcontrolled technologies, new generation of AUTOMATIVE lines of production and ROBOTS (robotics) continue to develop. The MACHINE as a functional system more and more often includes a NEW (fourth) component: a CONTROL DEVICE; traditional machines included three blocs i.e., the ENGINE (motor), the TRANSMISSION and the WORKING INSTRUMENT (tool) like cutter or drill, while the control function was performed by living people, i.e., by MACHINISTS (machine operators) see Diagram 1.3.2.
* All this not only radically changes the POSITION of MAN in the production system, but also advances fundamentally NEW DEMANDS on manpower itself, i.e., brings NEW CRITERIA for assessment (evaluation) of WORKING PERSONS.
For the conditions of the first ("rough") stage of industrialization, it was the QUALIFICATION of workers and engineers that formed the main criterion in assessing their QUALITIES as personnel (line and staff) of the plant or the factory i.e., as production factor. And QUALIFICATION was (and still is) understood as their level of proficiency, i.e., the level of professional skill of the working persons, depending first of all on their practical (production) experience.
In contrast to that, and according to modern views on "HUMAN CAPITAL", it is NOT qualification, but the socalled COMPLEXITY of manpower that serves as the base for the assessment of working persons. The MORE complex the MANPOWER is, the MORE complex and important the PRODUCTION FUNCTION of the worker in question can be, the MORE complex is WORK itself to which this person is fit, and the better are RESULTS of its efforts (measured in PRODUCTIVITY, EFFICIENCY, PRODUCT CHARACTERISTICS, etc.).
These very qualities of a working person, which can be summed up under the term " COMPLEXITY ", depend on the total volume of EDUCATION this person has received FROM kindergarten, through 1112 years of ordinary school, and UP TO graduating from special institution of higher learning, like UNIVERSITY (polytechnic or humanitarian) or VOCATIONAL TRAINING SCHOOL (TRADE SCHOOL) of some kind. In many cases, education stretches even further through the GRADUATE and/or POSTGRADUATE course, or the SECOND UNIVERSITY, or through some other form of additional learning (what the Germans call "die Weiterbildung"). On the whole, such a modern, very prolonged educational process takes about 16 22 years, and more.
The modern production asks for highly educated people, with wide intellectual horizon and deep understanding of his or her own place in the production system. They should be capable of evaluating the arising SITUATIONS and available INFORMATION (including ECOLOGICAL implications which are gaining new importance) and of taking RESPONSIBILITY as well as farreaching operational DECISIONS quickly and correctly.
If we are to speak of the very latest tendencies in the development of labor force (manpower), then the MAIN of them is, to all appearance, the growing sphere of MENTAL (intellectual) work, its saturation (filling) with CREATIVE elements. Now, MAIN FIGURES (or functional roles) in ANY production system are CONSTRUCTORS and DESIGNERS, COMPUTER PROGRAMMERS and SOFTWARE CONSULTANTS, TECHNOLOGISTS and INSTALLERS (adjusters) of complex, mostly automatic equipment and NOT traditional production ENGINEERS or skilful MACHINE OPERATORS any more.
By the way, it changes the economic situation in the society MUCH MORE than the naked eye can see. For instance, it brings about NEW features in the formation of PRICES because of VERY SPECIAL character of LABOR engaged in the science and research activities. The matter is that composite MENTAL work CANNOT be reduced to simple (physical) work and evaluated in terms of WORKING HOURS.
Nowadays, it is generally RECEARCH & DEVELOPMENT (R&D) that logically finds itself in the CENTER of the integrated system of "science production sales effort". It is NOT mere chance that PRODUCTION is often characterized as "technological shops of science". Accordingly, research and development work with its CREATIVE PRINCIPLE looms ever larger in the aggregate volume of labor guaranteeing vital functions of the society.
We should specially stress the importance of the decisive shift in the MACROECONOMIC structure (i.e., GNP structure) of advanced countries away from MATERIAL PRODUCTION (agriculture, mining, manufacturing, etc.) toward NONMATERIAL PRODUCTION (sometimes even called "SPIRITUAL" PRODUCTION, because it includes such elements as science, education and arts) and SERVICE SECTOR. It is exactly this deep structural shift that gives us the right to speak of the gradual transition of individual STATES and whole WORLD REGIONS to a NEW stage of development, thus becoming what is usually called POSTINDUSTRIAL SOCIETY. In modern economic literature these and some other NEW features of MODERN ECONOMY are sometimes described as its extreme "weightlessness".
* The MODERN system of ECONOMIC RELATIONS with institutes and instruments inherent in it which serves the needs of SOCIAL PRODUCTION also substantially differs from the "Capitalism" (i.e., "rough", unregulated variety of market economy) of the 19th and even the early 20th century.
Here, the emergence of the THREE new phenomena of economic life, forming what we call the "MAGICAL TRIANGLE", are of vital importance. These phenomena are: " JOINTSTOCK property (capital) MANAGERS MARKETING".
≠ It all started approximately in the middle of the 19th century with the most revolutionary change in the economic system represented by the consolidation and wide application of JOINTSTOCK form of capital (while the first "soapbubble" variety of CORPORATIZATION has been described by Adam Smith a hundred years earlier). It radically helped overcome the financial limitations of INDIVIDUAL property, thus opening NEW VISTAS for national economic growth on a large scale. It also created a UNIVERSAL mechanism of CAPITAL MOVEMENT including its flow BEYOND the national boundaries. In this way a foundation was laid for INTERNATIONALIZATION of capital and production itself.
At the beginning of the 20th century, the wide spread of " CARTELS " (resulting from monopolist COLLUSION in the sphere of TRADE), and of " TRUSTS " (resulting from the HORIZONTAL INTEGRATION of capital through MERGERS and TAKEOVERS of individually owned private firms) had led to "rigid" sectoral MONOPOLIES. In other words, immediately after a "rough" industrialization, CARTELS and TRUSTS represented typical organization form of BIG BUSINESS in individual INDUSTRIES (iron and steel, textile, food and beverages, shipbuilding, etc.) and economic SECTORS (like retail trade or banking).
However, after the World War II, both these forms of monopolist organization have given way to a NEW phenomenon the universal spread and predominance of the socalled " CONCERNS ", i.e., of organization systems based on FINANCIAL CONTROL secured through JOINTSTOCK CAPITAL mechanism.
Accordingly, as a typical MODERN organization form of big industrial complex we shall mention the MULTISECTORIAL CONCERN (or CORPORATION) as a rule, with vertically integrated and diversified production based on profound functional (technological) INTRAFIRM division of labor (aspects which we shall discuss in the next Topic).
In the last several years (approximately, from 1996) we observe a renewal of horizontal integration processes (MERGERS and TAKEOVERS, nowadays more often called MERGERS and ACQUISITIONS M&A). However, this time such M&A are unfolding on a HIGHER level, i.e. among the biggest CORPORATIONS, organized as MULTISECTORAL CONCERNS mentioned above, which are doing business in the MOST MODERN vertically integrated industries (like carmaking, aerospace or electronics). So, nowadays as never before, the JOINTSTOCK form of property (share capital, equity capital) shows its usefulness and advantages fullscale. For example, the famous Daimler Chrysler deal (one of the first grandscale INTERNATIONAL M&A when the leading German carmaker acquired control over the thirdinsize American automotive company for $41 billion) could never have taken place without such tools as JOINTSTOCK CAPITAL (materialized in shares) and the STOCK MARKET (or the socalled stock exchange) where such shares can be sold and bought.
The mass transition to JOINTSTOCK property and its far reaching DEMOCRATIZATION by the "diffusion of shares" in the society could not but effect the deeprooted principles of the HIRED LABOR system. The COLLECTIVIST (group) principles of property and of the production system as a whole grew in strength. The CONTRADICTIONS between wage labor (employees) and capital (employers) lost their acuteness. Favorable conditions arose for a better combination of PRIVATE (individual), COLLECTIVE (group) and COMMON (national) interests.
≠ It was jointstock property that placed modern MANAGERS, i.e., hired PROFESSIONALS with a special training and profound knowledge of their business, on top of big industrial and marketing complexes. This not only raised the COMPETENCE and QUALITY of management, but also created a certain "buffer" between owners and hired personnel, between BIG shareholders and a mass of ORDINARY holders. MANAGERS as TOP PEOPLE in modern business form the second side of the aforementioned "MAGICAL TRIANGLE".
≠ And what is the main tool, the basic principle of management at the disposal of modern MANAGER? It is exactly MARKETING the third side of this very TRIANGLE.
If we try to define MARKETING in the most general terms it is the "marketoriented concept of management". And a more sophisticated and substantial definition could sound like this: "MARKETING is a market researchbased concept of management aimed at a maximum volume of sales and a sufficient profit through serving consumers TO THE BEST of the firm's abilities".
It means that of paramount importance here is the RESEARCH EFFORT directed at finding a good MARKET RECESS ("NICHE") and at creation of such a PRODUCT (commodity) for the SPECIALIZATION of the firm that would make possible a stable and ever wider SELLING of it (the product) in the domestic and foreign markets, thus yielding sufficiently HIGH RETURNS on the firm's invested capital.
It is only with the aid of SCIENCE, of RESEARCH and DEVELOPMENT (R&D ) that advanced firms are capable to arrange business according to results of their MARKET SURVEYS.
MANAGERS study everything necessary for taking competent DECISIONS, i.e., all the aspects of the MARKET situation and trends of its development including:
tendencies in the evolution of the PRODUCT itself, its varieties and variants of use (PRODUCT DIFFERENTIATION),
the dynamics and structure of SALES, their analysis and forecasts for individual types of products and groups of purchasers (MARKET SEGMENTATION),
identification of the CIRCLE OF CONSUMERS to whom the chosen variety of PRODUCT would be offered (PRODUCTION PROFILE and MARKET NICHE),
the methods of ADVERTISING and PROMOTION for the individual products (MARKETING MIX).
They also study production and marketing experience of COMPETITORS, as well as their INTENTIONS so as to delimit (to separate) the spheres of action with them as EARLY and as FAR as possible, thus reducing the possibility of CLASHING with them at the final stage of the SALES EFFORT (i.e., on the MARKET itself).
However, such are only the principal components of MARKETING RESEARCH. There is also BASIC (fundamental) and APPLIED science, firms are engaged in research and development of a purely TECHNICAL and TECHNOLOGICAL nature, and that is where the center (core) of research and development activity in the firm (i.e., of its R&D system) is commonly found.
MARKETING answers the question as to WHAT is to be produced and FOR WHOM, whereas an answer to the question as to HOW it can be practically done (i.e., exactly HOW to assure LOW unit costs and HIGH quality) should be given by other parts of the firm's R&D.
* However, nowadays in securing a SOCIALLY VALUABLE production structure and preventing recessions or stagnation of its volume in individual sectors and in the framework of the national economy as a whole, the role of the STATE and of its REGULATIVE ACTIVITY gets a paramount importance.
There are numerous MODELS of modern economic regulation executed by the STATE through its special ORGANS (bodies), which can be summarized into THREE main groups:
# KEYNESIAN approach (named after the wellknown British economist of the 1930s John Maynard Keynes) with following main specific features:
predominantly DIRECT influence on the economy, first of all through an active TAXATION policy and massive government SPENDING in times of recession,
considerable STATE SECTOR in industry and utilities,
relatively big STATE BUDGET with rich social programs, tolerance in regard to budget DEFICITS (common use of the socalled deficit financing),
main attention to the DEMAND side of the economy and tools aimed at stimulating the AGGREGATE DEMAND, especially in the periods of production slumps (recessions) the socalled " DEMANDSIDE ECONOMICS " approach,
major SOCIAL GOALS of Keynesian methods of economic regulation "full employment", stable and adequate investment process and industrial growth, bringing some elements of "social justice" to the economic system (like American President L. B. Johnson tried to do with his concept of "Great Society").
# MONETARIST approach (developed mostly in the 19601970s by the socalled "Chicago School of Economics" headed by Milton Friedman) with following typical features:
MINIMAL interference into ECONOMY based mostly on INDIRECT methods, while the MAIN STRESS is being made on regulating the MONEY SUPPLY the major idea of the MONETARIST POLICY,
minimal STATE SECTOR, as much as possible of FREE MARKET ECONOMY conditions,
generally LOW TAXES, NOT big and strictly balanced BUDGET, NO or very modest SOCIAL PROGRAMS.
many ideas of the GOP (the Republican party) in the U.S. concerning its fight against "BIG GOVERNMENT" and for "TAX CUTS" and "BALANCED BUDGET" are taken from the MONETARIST arsenal.
# NEOCONSERVATIVE approach (developed in the 1980s in the U.S. in form of the socalled "REAGANOMICS", in Great Britain under M. Thatcher, in France under F. Mitterrand and in Chile under General Pinochet). It is characterized by a certain SYNTHESIS of the first two approaches, but mainly on the base of the SECOND one, i.e., closer to the MONETARISM. It includes:
mostly INDIRECT influence on the economy through regulating of the MONEY SUPPLY and the BANK RATES,
REPRIVATIZATION of all inefficient components of the STATE SECTOR, i.e., its "streamlining,"
generally LOW TAXES and government SPENDING, balanced BUDGET, as few as possible SOCIAL PROGRAMS (components of the "SMALL GOVERNMENT" policies).
main interest to the SUPPLY side of the
