CHAPTER 3

Political Economy and Ethics

1. Political System
A political system includes the structures, processes, and activities by which a
nation governs itself. A nation’s political system derives from its history and
culture, and includes such factors as population, age, race composition, and per
capital income.

We can arrange the world’s three political ideologies on a horizontal scale, with
one on either end and one in the middle.

1) Totalitarianism
The belief that every aspect of people’s live must be controlled in order for a
political system to be effective.
It does not tolerate opposing viewpoints.
Totalitarian governments tend to share three features:
- Imposed Authority
- Lack of Constitutional Guarantees
- Restricted Participation
Theocratic Totalitarianism: A political system in which a country’s religious
leaders are also its political leaders is called a theocracy.
Secular Totalitarianism: A political system in which political leaders rely on
military and bureaucratic power is called secular totalitarianism. It takes three
forms: communist, tribal, and right-wing.
2) Anarchism
The belief that only individuals, and private groups should control a nation’s
political activities.
3) Pluralism
The belief that both private and public groups play important roles in a
nation’s political activities.
 A democracy is a political system in which government leaders are elected
directly by the wide participation of the people or by their representatives.
Democracy differs from totalitarianism in nearly every respect.
For practical reasons most nations resort to a representative democracy in
which citizens elect individuals from their groups to represent their political
views.
Representative democracies strive to provide some or all of the followings:
- Freedom of Expression
- Periodic Elections
- Full Civil and Property Rights
- Minority Rights
- Nonpolitical Bureaucracies

2. Economic Systems

(*Range of Economic Systems)

At one end of the scale is a theoretical pure centrally planned economy, at the
other end is a theoretical pure market economy, and in between is a mixed
economy.
1) Centrally Planned Economy: A system in which the government owns the
nation’s land, factories, and other economic resources. The government makes
nearly all economy-related decisions, including who produces what and the prices
of products, labor, and capital.
Central planning is rooted in the ideology of collectivism. Just as collectivist
cultures emphasize group over individual goals, a centrally planned economy
strives to achieve economic and social equality for the sake of the collective, not
the individual.
German philosopher Karl Marx popularized the idea of central economic planning
in the nineteenth century.
- Failed to create economic value by failing to produce quality products
efficiently.
- Failed to provide incentives for businesses to maximize the outputs
obtained from resources, which slowed economic growth and lowered
living standards.
 - Failed to achieve rapid economic growth and witnessed themselves falling
quickly behind other nations.
- And failed to satisfy consumer needs for even basic necessities.
2) Mixed Economy: Economic system in which land, factories, and other
economic resources are rather equally split between private and government
ownership.
Goals:
- Low unemployment and poverty
- Steady economic growth
- Equitable distribution of wealth
Decline:
- Lack of accountability, rising costs, and slow economic growth
- Move toward market-based systems
- Move toward privatization
3) Market Economy: In a market economy, most of a nation’s land, factories, and
other economic resources are privately owned, either by individuals or businesses.
Origin and Essence:
- Private ownership
- Interplay of two forces: supply and demand
- Emphasis on individualism
- Laissez-faire economics
- Economic freedom
Features:
- Free choice: Alternative purchase options
- Free enterprise: Firms choose products and markets
- Price flexibility: Prices follow supply and demand
Government’s Role:
- Enforce antitrust laws
- Preserve property rights
- Provide fiscal and monetary stability
- Preserve political stability

3. Legal Systems
1) The common law system originated in England ten centuries ago. Common
law takes into account particular situations and circumstances.
It is based on:
- Tradition, or a nation’s legal history.
- Precedent, or past cases that have come before the courts.
- And usage, or how laws are applied in specific situations.
2) Civil law can be traced to Rome in the fifth century B.C. and is the most
common legal tradition.
3) Firms operating in countries with theocratic legal systems must be sensitive
to local values and beliefs.
Islamic law is the most widely practiced theocratic legal system today.

4. Global Legal Issues

1) Intellectual Property: Property that results from people’s intellectual talent and
abilities is called intellectual property. It includes graphic designs, novels,
computer software, machine-tool designs, and secret formulas.

2) Most national legal systems protect property rights—the legal rights to

resources and any income they generate. Industrial property includes patents and
trademarks, which are often a firm’s most valuable assets.
3) Product safety laws in most countries set standards that manufactured
products must meet. Product liability holds manufacturers, sellers, individuals,
and others responsible for damage, injury, or death caused by defective products.
4) Many countries impose a value added tax (VAT)
5) Antitrust laws try to provide consumers with a wide variety of products at fair
prices. The United States and the European Union are the world’s strictest
antitrust regulators.

5. Ethics and Social Responsibility

Businesses are expected to exercise corporate social responsibility(CSR)—the
practice of going beyond legal obligations to actively balance commitments to
investors, customers, other companies, and communities.
CSR as consisting of three layers of activity. The first layer is traditional
philanthropy. The second layer is related to risk management, whereby a
company develops a code of conduct that it will follow in its global operations
and agrees to operate with greater transparency. The third layer is strategic CSR,
in which a business builds social responsibility into its core operations to create
value and build competitive advantage.
1) Four philosophies of ethics and social responsibility:
- Friedman View
- Cultural Relativist View
- Righteous Moralist View
- Utilitarian View
2) Key Issues:
- Bribery and Corruption
- Labor Conditions and Human Rights
- Fair Trade Practices
- Environment

CULTURE MATTERS
Understanding legal systems in other countries begins with an awareness
about culture differences. Here are examples of several nations’ legal
environment:
1) Japan
Japan’s harmony-based, consensus-driven culture considers court battles
to be a last resort (((((last option or choice))))). But with growing patent
disputes and a rise in cross-border mergers, Japan is discovering the value
of lawyers. Japan has just 22,000 licensed attorneys compared with more
than one million in the United States. So Japan is minting thousands of
new lawyers every year. Japan businesses now litigate disputes that once
might have been settled between parties.
2) Saudi Arabia
Islam permeates every aspect of life in Saudi Arabia and affects its laws,
politics, economics, and social development. Islamic law is grounded in
religious teachings contained in the Koran and governs both criminal and
civil cases. The Koran, in fact, is considered Saudi Arabia’s constitution. The
king and the council of ministers exercise all executive and legislative
authority within the framework of Islamic law.