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In economics, a bailout is when someone loans or gives capital to a failing business in order to save it from total ruin. [1] [2]

A bailout is a matter of circumstance, so the possible motives behind one are unlimited, though typically the bail-er demands some influence over the company he bailed out. A bailout could be done for mere profit, as when a predatory investor resurrects a foundering company by buying its shares at fire-sale prices; for social improvement, as when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable fast food company into a non-profit food distribution network; or the bailout of a company might be seen as a necessity in order to prevent greater, socioeconomic failures: For example, the US government assumes transportation to be the backbone of America's general economic fluency, which maintains the nation's geopolitical power. [3] As such, it is the long-held policy of the US government to protect the biggest American companies responsible for transportation--airliners, petrol companies, etc-- from failure through subsidies and low-interest loans, or, in other words, through bailing them out. These companies, among others, are deemed "too big to fail" because their goods and services are considered by the government to be constant universal necessities in maintaining the nation's welfare and often, indirectly, its security.[4] [5]

Emergency-type government bailouts can be controversial. To name an instance in current events, there are debates raging over if and how to bailout the failing auto industry in the United States. Those against it, like pro-free market radio personality Hugh Hewitt, see this bailout as an unacceptable passing-of-the-buck to taxpayers. He has denounced any bailout for the Big Three, arguing that mismanagement caused the companies to fail, and they now deserve to be dismantled organically by the free-market forces so that entrepreneurs may arise from the ashes; that the bailout signals lower business standards for giant companies by incentivizing risk, creating moral hazard through the assurance of safety nets (that others are responsible in paying for) that should not be, but unfortunately are, considered in business equations; and that a bailout promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout. Others, such as John Stewart of The Daily Show, and Nobel Laureate in Economics Jeffrey Sachs [6], have characterized this particular bailout a necessary evil, arguing that the probable incompetence in management of the car companies is insufficient reason to let them fail completely and potentially disturb the current delicate economic state of the United States, since up to three million jobs rest on the solvency of the Big Three and things are bleak enough as it is. In any case, the bones of contention here can be generalized to represent the issues at large, namely the virtues of private enterprise versus those of central planning, and the dangers of a free market's volatility versus the those of socialistic bureaucracy.

Governments around the world have bailed out their nations businesses with some frequency since the early 20th century. In general, the needs of the entity/entities bailed out are subordinate to the needs of the state.



[edit] Themes from Bailouts

From the many bailouts over the course of the 20th century, certain principles and lessons have emerged that are consistent:[7][8][9][10]

  • Central banks provide loans to help the system cope with liquidity concerns, where banks are unable or unwilling to provide loans to businesses or individuals.
  • Let insolvent institutions (i.e., those with insufficient funds to pay their short-term obligations) fail in an orderly way.
  • Banks that are deemed healthy enough (or important enough) to survive require recapitalization, which involves the government providing funds to the bank in exchange for preferred stock, which receives a cash dividend over time.[11]
  • If taking over an institution due to insolvency, take effective control through the board or new management, cancel the common stock equity (i.e., existing shareholders lose their investment), but protect the debt holders and suppliers.
  • Government should take an ownership (equity or stock) interest to the extent taxpayer assistance is provided, so that taxpayers can benefit later. In other words, the government becomes the owner and can later obtain funds by issuing new common stock shares to the public when the nationalized institution is later privatized.

In economics, capital or capital goods or real capital refers to items of extensive value. The term can also be applied to the amount of wealth a person controls or is capable of controlling.

Capital goods may be acquired with money or financial capital. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business, sometimes referred to as Cash flow.



[edit] Capital in narrow and broad uses

In classical economics, capital is one of three (or four, in some formulations) factors of production. The others are land, labour and (in some versions) organisation, entrepreneurship, or management. Goods with the following features are capital:

  • It can be used in the production of other goods (this is what makes it a factor of production).
  • It was produced, in contrast to "land," which refers to naturally occurring resources such as geographical locations and minerals.
  • It is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)

These distinctions of convenience carried over to neoclassical economics with little change in formal analysis for an extended period. There was the further clarification that capital is a stock. As such, its value can be estimated at a point in time, say December 31. By contrast, investment, as production to be added to the capital stock, is described as taking place over time ("per year"), thus a flow.

Earlier illustrations often described capital as physical items, such as tools, buildings, and vehicles that are used in the production process. Since at least the 1960s economists have increasingly focused on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles. Human development theory describes human capital as being composed of distinct social, imitative and creative elements:

  • Social capital is the value of network trusting relationships between individuals in an economy.

Economics is the social science that studies the production, distribution, and consumption of goods and services.

The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1]

Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.[2] A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[3] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business and finance but also in crime,[4] education,[5] the family, health, law, politics, religion,[6] social institutions, and war.[7] The expanding domain of economics in the social sciences has been described as economic imperialism.[8][9]




Main article: Microeconomics

A common distinction is between positive economics (describing "what is") and normative economics (advocating "what ought to be") or mainstream economics (more "orthodox") and heterodox economics (more "radical"). The primary textbook distinction is between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and "macroeconomics" ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy. Microeconomics looks at interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed demand-and-supply analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is, partial-equilibrium analysis.

The social sciences comprise academic disciplines concerned with the study of the social life of human groups and individuals including anthropology, communication studies, criminology, economics, geography, history, political science, psychology, social studies, and sociology.[1] The expanding domain of economics in the social sciences has been described as economic imperialism.[2][3]



[edit] History of the social sciences

The word "science" is older than its modern use. Through the influence of positivism, the word has become a short-form for "natural science". It is a recent development that society has become the object of an organized body of knowledge which can be standardized and taught objectively, while following its own rules and methodology.

[edit] Ancient Greece

See also: Ancient Greece

In ancient philosophy, there was no difference between mathematics and the study of history, poetry or politics.[citation needed] Only with the development of mathematical proof did there gradually arise a perceived difference between "scientific" disciplines and others. Thus, Aristotle studied planetary motion and poetry with the same methods, and Plato mixes geometrical proofs with his demonstration on the state of intrinsic knowledge.

[edit] Augustine

Augustine of Hippo wrote the City of God in the 5th century AD. Bruce Haddock, in 'The Political Classics: Essential Texts from Plato to Rousseau' (OUP 1992), describes the work as a veritable encyclopedia of late Roman culture... [a] penetrating account of human motivation.

[edit] Islamic civilization

Further information: Islamic economics in the worldIslamic psychology, and Historiography of early Islam

Significant contributions to the social sciences were made by Muslim scientists in the Islamic civilization. Al-Biruni (973–1048) has been called "the first anthropologist".[4] He wrote detailed comparative studies on the anthropology of peoples, religions and cultures in the Middle East, Mediterranean and South Asia. Al-Biruni's anthropology of religion was only possible for a scholar deeply immersed in the lore of other nations.[5] Biruni has also been praised by several scholars for his Islamic anthropology).[6]

Ibn Khaldun (1332–1406) is regarded as the father of demography,[7] historiography,[8] the philosophy of history,[9] sociology,[7][9] and the social sciences,[10] and is viewed as one of the forerunners of modern economics. He is best known for his Muqaddimah (Prolegomenon in Greek).

[edit] European enlightenment

See also: Age of Enlightenment

During the European Age of Enlightenment, this unity of science as descriptive remains, for example, in the time of Thomas Hobbes who argued that deductive reasoning from axioms created a scientific framework, and hence his Leviathan was a scientific description of a political commonwealth. What would happen within decades of his work was a revolution in what constituted "science", particularly the work of Isaac Newton in physics.




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