BUSM4185 Introduction to Management Week 2 Management and Society Part 1

Introduction
CLASS OBJECTIVES
Develop an understanding of the term political economy. Recognise how this has changed over time.

Be able to describe the different theories of 3 main contributors to the field of political economy.
Understand the difference in these three points of view. Apply these theories to the Vietnam context.

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Textbook
This topic does not correspond with any chapter in the text book.

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Political Economy
Why are some countries richer than others? Political Economy refers to policy issues arising in the area where politics meets economics. It has a particular focus on improving economic performance.

As such we dont just ask Why? but instead we need to ask What do we need to do? regarding financial crises, unemployment, rising inflation, and other economic issues.
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Political Economy
Who owns what? How should things be managed?

Who works for who and why?

What is the governments role? How should laws be made? Is there fair distribution of wealth? Who tells who what to do?

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Foundations of Political Economy

There are many people who have been involved in the development of Political Economy but here we will focus on three:

Adam Smith

John Maynard Keynes

Milton Friedman
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Adam Smith
1723 1790
Developed political economy and used it to describe what we now call economics. First, to enable the people to supply a plentiful revenue for themselves and, second, to endow the state with sufficient revenue to provide public services (Smith, 1776) The rise of political economy reflects the rise of the state, linking it with politics. As the modern state developed, so too did the desire to understand how wealth was created for society, rather than just for a reigning monarch.
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Adam Smith
1723 1790
The invisible hand of the market produces an efficient use of resources overall, even though producers and consumers act only in their own interests. It is not from the benevolence of the butcher, the brewer or the baker, that

we expect our dinner, but from their

regard to their own interest. (Smith, 1776)
http://www.youtube.com/watch?v=4FHxpoQqPTU
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John Maynard Keynes

1883 1946
The Great Depression of the 1930s saw some countries have unemployment levels exceeding 25%.

The classical solution was to reduce wages so that employers could hire more staff, which reduces unemployment. The problem was that if people continued to receive lower salaries they could buy even less products, causing more of a problem.

http://www.youtube.com/watch?v=JppgeksnrdE
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John Maynard Keynes

1883 1946
Keynes suggested that governments should increase public spending that will circulate through the economy. This would rebuild confidence, demand, investment, employment, and eventually the investment would return to the government (through taxes).

For Keynes the fundamental objective was a diverse but harmonious society, in which a balanced economy provided sufficient resources for individuals to live a good life.

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Milton Friedman
1912 2006
The 1970s were a tough period for many countries, with rising inflation, government budget deficits, high personal taxation, and declining productivity growth. Keynesian policies had achieved high employment, which increased the power of trade unions, contributing to price and wage increases. Milton Friedman argued that when money is plentiful, its value will go down, resulting in inflation which means a certain amount of money will buy less. So if money is tight, and supply is limited, its value will stay high resulting in stable prices.

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Milton Friedman
1912 2006
Friedman's solution was to restrict growth in the money supply and pay the short term price of increased unemployment. In the long term, economic activity will recover in response to the stable and predictable environment which stable money provides. Friedman does not follow Keynes belief that the policy makers could improve market performance. Friedman emphasis returned to Adam Smiths belief in the wisdom of the market. Keynes was sympathetic to government involvement; Friedman was not.

http://www.youtube.com/watch?v=R5Gppi-O3a8
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What would they do today?

Group Activity:
What would be the reaction by each of these economists to a financial crisis in Vietnam today?
Would Adam Smith try to increase new business? If so, how? Who would John Maynard Keynes see as responsible for the situation that the country is in? What would Milton Friedman recommend?

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What would you do today?

Like many countries Vietnam has both rich and poor people. Whilst there are many programs to help the poor, some people continue to live in much worse circumstances than others.

What is needed in these situations?

Who is responsible? Should the government make policies to improve the economic situation? Or should the market decide? Watch the following video and discuss the options?
http://cnn.com/video/?/video/world/2012/02/13/cfp-allen-vietnam-playground-1.cnn
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Questions?

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BUSM4185 Introduction to Management Week 2 Management and Society Part 2

Introduction
CLASS OBJECTIVES
Understand the meaning of the term market. Recognise how is it used in economic discussions?

Develop and understanding on what is required to create a market.

Understand what is meant by the term market economy, and be able to describe different types of market economies. Recognise systems that countries use if they do not have a market economy. How does a countries choice of economy affect their management and decision making?

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Textbook
This topic does not correspond with any chapter in the text book.

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What is a market?
Typically in Vietnam we use the term market to describe a place where we buy and sell products for everyday use.

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What is a market?
However in this course a market is a collection of all of the actual and potential buyers of a product or service.

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What is a market?
A market can be looked at in many ways. Examples: Location Vietnam is a popular market for tourists Size The Vietnamese insurance market is still undeveloped Growth The real estate market in HCMC is growing each year Influences The stock market in Vietnam is relatively new

Competition The transport industry in Vietnam is a very competitive market

Sustainability Hanoi is a good market for long term investment
Profitability Vietnamese seafood exports are in constant demand in many international markets

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How does the market work?

http://www.youtube.com/watch?v=3shDwU-Y8G4
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What is a Market Economy?

A market economy is one where decisions regarding investment, production, and distribution are based on supply and demand, and the prices of goods and services are determined in a free price system. There are two main examples of these: 1) A liberal market economy

2) A coordinated market economy

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Liberal Market Economy

Usually contracts define relationships for selling products and services, employing labour or raising finance. Competing firms operate in a flexible labour market aiming to increase profitability to give a return to shareholders.

Governments enforce contracts and resolve disputes.

Industry associations and trade unions advise, but do not direct. Growing companies can take on more labour, knowing they can be laid off when not needed.

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Liberal Market Economy

Employees are mobile and willing to move for another job. Hostile takeovers and corporate bankruptcies are influenced by the market forces. Both large corporations and individual employees have autonomy (freedom/independence), creating potential for rapid market lead restructuring when needed.

Failing companies can declare bankruptcy but managers can simply start another business.

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Coordinated Market Economy

Less aggressive in character with business relationships being more personal.
Businesses are more likely to raise finance through a bank rather than the stock market.

Employment is long term with staff more likely to be retained through hard times. This increases commitment but reduces staffs capacity to instigate radical change. The private sector is less independent and is influenced by social and political forces, including the government.

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Coordinated Market Economy

Economic competition is subject to political control in order to deliver social stability. The market operates in a constrained way, with social cohesion and solidarity being core values. This coordination can come from industry associations, political parties, or the government itself.

Wages are often negotiated at a national level rather than within a business.

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The Developmental State

Another variety of capitalism found mostly in rapidly developing economies in East Asia. Combines a powerful bureaucracy that determines national economic targets, with private ownership of production. Governments role is more central than in a developed economy. Often focuses on export oriented manufacturing. Undervalued currencies encourage exports while high tariffs and trade barriers restrict imports.

Wages and benefits are low but are distributed evenly, with high job security.
Profits are reinvested and efficient production is essential.

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Communist/Socialist States
In a communist command economy, also called a centrally planned economy, the national government set quotas for stateowned production units and allocated resources to them. The bureaucracy then implements the plan. Has proven successful in building industrial development, but relies heavily on human input.
Government controls major industries and services and is a major employer in the country. Essentially the market decides however it is closely monitored.

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A comparison

http://www.youtube.com/watch?v=d8ivuSUfTg4
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Convergence
Convergence means moving towards uniformity. The convergence thesis maintains that all developed economies are adopting a common format. The proposition is that a more global environment is forcing a liberal, pro-market response from each national economy. Fewer employees are choosing to join trade unions in coordinated market economies. Over regulation and high labour costs are reducing investment. Developmental states are losing their advantages of efficient production and are increasingly effected by global crises.

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Finally..
Economic performance typically depends on the period of comparison chosen: different economies have appeared to be top dog at different times which in itself should indicate that there is no one superior model

Perraton, J. and Clift, B. (2004b) Where Are National Capitalisms Now? Basingstoke and New York: Palgrave Macmillan

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Questions?

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