Business

Ethics- 502
BBA- 6th (B)
Chapter 2

The business system:

Government, Markets, and
International trade
 Globalization
 The process by which the economic and social systems of nations are connected
together so that goods, services, capital, and knowledge move freely between
nations.
 Businesses have to face numerous challenges when countries open to international
trade.
 In every country, individual companies and entire industries have been wiped out as
globalization has forced them to compete with companies in other parts of the
world.
 Should governments impose restrictions on business activities and
economic exchanges or should they leave business firms free to
pursue their own interests within free markets, and allow them also
to trade freely with members of other nations?
 One side argues that free markets and free trade are defective
because they cannot deal with many of the problems business
activities create, such as unfair competition, global pollution, unfair
labor practices, sweatshops, discrimination, and disregard for the
well-being of the poor.
 The other side argues that government restrictions on business are
bad because they violate their property rights and right to freedom,
lead to unfairness, and leave us all worse off.
 Economic Systems
Arguments about free markets and free trade are arguments about economic systems.
Economic system: the system a society uses to provide the goods and services it needs
to survive and flourish
Thissystem must accomplish two basic economic tasks
1. The task of actually producing goods and services
a. What to produce, how to produce, who produces it
2. The Task of distributing these goods and services among its members
a. Who will get what and how much each will get
Toaccomplish these two tasks, economic systems rely on three kinds of social devices
1. Traditions
2. Commands
3. Markets
1. Tradition-based societies: Such societies are small and rely on
traditional communal roles and customs to carry out two basic
economic tasks.
 - Individuals are motivated by the community’s expressions of
approval or disapproval, and the community’s productive resources
–such as its herds- are often owned in common.
 A small nomadic tribe, for example, that survives by hunting and
herding might rely on the traditional roles of husband, wife,
mother, father, son, and daughter to decide both who does what
and who gets what and may hold its herd in common.
 Societies that are almost tradition-based exist even today among
Bushmen, the Inuit, Kalahari hunters, and Bedouin tribes.
2. Command Economy: An economic system based primarily on a government
authority (a person or a group) making the economic decisions about what is to be
produced, who will produce it, and who will get it.
 Productive resources such as land and factories are mostly owned or controlled by
the government and are considered to belong to the public or “to the people”.
 Individuals are motivated to put forth the required effort by the rewards and
punishments government doles out and by its exhortations to serve society.
 China, Viet Nam, North Korea, Cuba, the former Soviet Union, and Several other
nations, at different times, have run their economies primarily on the basis of
commands.
 3. Market Economy: An economic system based primarily on private
individuals making the main decisions about what they will produce and who
will get it
 - Productive resources like land and factories are owned and managed by
private individuals, not by governments, and are considered the individual’s
“private property”.
 People are motivated to work primarily by the desire to get paid for voluntarily
supplying the things others are willing to pay for.
 England in the nineteenth century is often cited as a prime example of an
economy that was based primarily on a market system.
 Economies today contain elements of all three of these traditions, commands, and
markets.
 The United states, for example, is highly “ Market-oriented” yet some citizens still
consider jobs (such as primary school teachers and nurses) to be “women’s work”,
while others (like police officers and truck drivers) are “men’s work”, so for them
‘tradition’ determines who does those jobs.
 Moreover, the U.S. government not only issues “commands” that regulate business,
labor, and international trade but also owns or has owned several important
businesses, like U.S Postal services, some car companies, banks, and insurance
companies.
 It would be undesirable to run an economy completely on the basis of traditions, or
commands, or markets.
 If an economy was a pure market system, for example, with no economic
interventions by the government, there would be no constraints whatsoever on the
property one could own or what one could do with it.
 Slavery would be entirely legal, as would all drugs including hard drugs.

 Today, the governments of even the most market-oriented economies decree that
there are some things that may not be owned (such as slaves), some things may not
be done with one’s own property (such as pollution) some exchanges that are illegal
(children labor) and some exchanges that are imposed (through taxation).
 Such limitations on markets are the intrusion of a command system: Government
concern for the public welfare leads it to issue commands concerning which goods
may or may not be produced or exchanges.
 Free markets: Markets in which each individual is able to voluntarily exchange
goods with others and to decide what will be done with what he or she owns
without interference from the government.
 Debates on the active role of the government continue on Two levels:
1. Whether a nation’s own internal economy should be organized as a “free
market” economy.
i.e. whether a nation’s government should regulate business exchanges between its
citizens or instead allow its citizen to freely exchange goods with each other.
2. Whether exchange between nations should be based on “free trade” principles
i.e. whether a nation’s government should allow its citizen to freely trade goods with
the citizens of other nations or instead impose tariffs, quotas or other limits on the
goods citizen may want to buy from foreign citizens.
 Ideology: A system of normative beliefs shared by members of some social
group.
 Free Markets and Utility: John Locke
 John Locke (1632 -1704), an English political philosopher developed the idea that human
beings have a “natural right” to liberty and a “natural right” to private property.
 The two natural rights that free markets are supposed to protect are:
 the right to freedom
 the right to private property
 Free markets preserve the right to freedom for each individual to voluntarily exchange goods
with others free from the coercive power of government.
 Free markets preserve the right to private property for each individual to decide what will be
done with what he/she owns without interference from the government.
 Locke argued that if there were no governments, human beings would find themselves in a state
of nature or law of nature i.e. each individual would be politically equal of all others and would
be perfectly free of any constraints other than moral principle that God gave to humanity.
 Locke’s State of Nature
 All persons are free and equal
o Each individual would be equal to others
o Free from constraints
 Each person owns his body and labor, and whatever he mixes his labor into.
 People’s enjoyment of life, liberty, and property are unsafe and insecure.
 People agree to form a government to protect and preserve their right to freedom
and property
 Lockean Rights
 The right to life, liberty, and property
 Individuals have an absolute right to do whatever they want with their property and
the government has no right to interfere with or confiscate an individual’s private
property even for the good of society.
 When a person expends labor/effort to create or improve something, that person
acquires property rights over that thing e.g. writing a book, software programs.
 Criticism of Lockean Rights (1)
 Locke’s critics focus on four weaknesses in his argument:
1. The assumption that individuals have natural rights: (self- evident)
This assumption is unproven and assumes that the rights to liberty and property
should take precedence over all other rights. If humans do not have the overriding
rights to liberty and property, then the fact that free markets would preserve the rights
does not mean a great deal.
2. The conflict between natural (negative) rights and positive rights:
Why should negative rights such as liberty take precedence over someone’s else
positive right to food, medical care, housing or clean air? Critics argue, in fact, that we
have no reason to believe that the rights to liberty and property are overriding all other
rights.
 Criticism of Lockean Rights (2)
3. The conflict between natural rights and justice:
Free markets create unjust inequalities, and people who have no property/who are
unable to work will not be able to live. As a result, without government intervention,
the gap between richest and poorest will widen. Unless government intervenes to
adjust the distribution of property, large groups of citizens will remain at a subsistence
level while others grow ever wealthier.
4. Individualistic assumptions and their conflicts with the ethics of caring:
Locke assumes that people are individuals first, independent of their communities.
But humans are born dependent on others, and without caring relationships, no human
could survive.
 Free Markets and Utility: Adam Smith (1)
 Second major defense of unregulated markets rests on the utilitarian argument that
unregulated markets and private property will produce greater benefits than any
regulation could.
 In a system with free markets and private property, buyers will seek to purchase
what they want for themselves at the lowest prices they can find:
–Private businesses will produce and sell what consumers want;
–Sell at the lowest possible prices,
 The free market coupled with private property ensures that the economy is
producing what consumers want, prices are at the lowest levels possible and that
resources are efficiently used.
 The economic utility of society’s members is maximized.
 Free Markets and Utility: Adam Smith (2)
 Adam Smith (1723-1790), the “father of modern economics” is the originator of
this utilitarian argument for free market.
 According to Adam Smith, when private individuals are left free to seek their own
interests in free markets, they will inevitably be led to further the public welfare by
an invisible hand.
 Invisible hand: According to smith, the market competition drives self-interested
individuals to act in ways that serve society.
 Free Markets and Utility: Adam Smith (3)
 In a competitive market, a multiplicity of private businesses must all compete with
each other for the same buyers.
 To attract customers, each seller is forced to sell what the consumers want and to
drop the price as low as possible.
 The competition produced by a multiple of self-interested private sellers serves to
lower prices, conserve resources, and make producers respond to consumer desires.
 Free Markets and Utility: Adam Smith (4)
 Smith argued that a system of competitive markets allocates resources efficiently.
Examples:
 -–When a supply of a certain commodity is not enough to meet demand, the buyers need
to pay a higher price than the natural price. (i.e. the price that just covers the costs of
producing the commodity, including the going rate of profit obtainable in other markets)
 –Producers of that commodity will reap profits higher than those available to producers
of other commodities.
 –The higher profits will induce producers of other products to switch their resources to
the production of the more profitable commodity.
 –As a result shortage of that commodity disappears and the price sinks back to its natural
level
 Free Markets and Utility: Adam Smith (5)
 Conversely, when the Supply of a commodity is greater than the quantity
demanded, the resulting surplus causes its price falls, inducing its producers to
switch their resources into production of more profitable commodities.
 The fluctuating prices of commodities in a system of competitive market then
forces producers to allocate their resources to those industries where they are most
in demand and to withdraw resources from industries where there is a relative
oversupply of commodities.
 The market allocate resource so as to most efficiently meet consumer demand
thereby promoting social utility
 Free Markets and Utility: Adam Smith (6)
 According to Adam Smith, the best policy of a government to advance public
welfare is to do nothing –to let each individual pursue his self-interest in ‘natural
liberty’ so he is free to buy and sell whatever he wishes.
 Market competition ensures the pursuit of self-interest in markets advances the
public’s welfare which is a utilitarian argument.
 Any interventions in the market, by the government can only interrupt the self-
regulating effect of competition and reduce its many beneficial consequences by
creating either surpluses or shortages.
(e.g. Thailand government intervened in the drug market by taking Abbot’s patented drug,
then, it interfered with Abbot’s ability to recover its costs and to some extent, removed
Abbot’s incentive to continue developing new medicine, thereby potentially lowering the
future supply of new medicines).
 Criticisms of Adam Smith
 Smith's utilitarian argument is criticized for making unrealistic arguments:
1. Assumes no one seller can control the price of a good. Though this may have been
true at one time, today many industries are monopolized to some extent.
2. Assumes that the manufacturer will pay for all the resources used to produce a
product, but when a manufacturer uses water and pollutes it without cleaning it,
someone else must pay to do so.
3. Assumes that humans are motivated only by a natural, self-interested desire for
profit. This is clearly false. Many are concerned for others and act to help others,
constraining their own self-interest. Market systems, say Smith's critics, make humans
selfish and make us think that the profit motive is natural.
Keynesian Criticism of Adam Smith (1)
 Most influential criticism of Adam Smith’s classical assumption came from John
Maynard Keynes (1883-1946).
 Smith assumed that without any help from government, the automatic play of
market forces ensure full employment of all economic resources including labor.
 Keynes argued that the total demand for goods & services is the sum of the demand
of three sectors of the economy: household, businesses, and government (aggregate
demand).
 The aggregate demand of these three sectors may be less than the aggregate
amounts of goods and services supplied by the economy at the fullest employment
level.
Keynesian Criticism of Adam Smith (2)
 This mismatch between aggregate demand and aggregate supply will occur when
households prefer to save some of their income in liquid securities instead of
spending it on goods and services.
 When aggregate demand is less than aggregate supply the result is a contraction of
supply.
 Businesses realize they are not selling all their goods and services they will cut
back on production –causing a cut back on employment.
 As production falls the incomes of household also fall but the amount households
are willing to save fall even faster:
 The economy reaches a stable point of equilibrium at which demand equals supply
but at which there is widespread unemployment of labor and other resources.
 Keynesian Criticism of Adam Smith (3)
 The theory of John Maynard Keynes is that free markets alone are not necessarily the most efficient
means for coordinating the use of society’s resources.
 According to Keynes, the government can influence the propensity to save which lowers aggregate
demand and creates unemployment.
 Government can prevent excess savings through its influence on interest rates and it can influence
interest rates by regulating the money supply.
 The higher the supply of money, the lower the rates at which it is lent.
 Thus, contrary to smith’s claim, government intervention in the economy is a necessary instrument
for maximizing society’s utility.
 Free markets alone are not necessarily the most efficient means for coordinating the use of society’s
resources.
 Govt. spending and fiscal policies can serve to create the demand needed to stave off unemployment.
 But Keynes’s views were challenged when government spending did not cure high unemployment
but created inflation.
 The Utility of Survival of the Fittest: Social
Darwinism (1)
 The doctrines of social Darwinism named after Charles Darwin (1809-1882), who
argued that the various species of living things were evolving as the result of the
action of an environment that favored the survival of some things while destroying
others.
 Social Darwinism -belief that economic competition produces human progress.
 –Individuals whose aggressive business dealings enable them to succeed in the
competitive world of business are the ‘fittest’ and are the best.
 –Free competition enriches some individuals and reduces others to poverty will
result in the gradual improvement of human race.
 The Utility of Survival of the Fittest: Social
Darwinism (2)
 Social Darwinist argued that:
 If Government interferes with the competition –they would unintentionally be
impeding progress.
 Government must not lend economic aid to those who fall behind in the
competition for survival and if these economic misfits survive, they will pass on
their inferior qualities and human race will decline.
 Economic competition ensures the ‘best’ firms survive and the economic
system will gradually improve.
 Free Trade and Utility: David Ricardo (1)
 Countries differ in their ability to produce goods.
 One country can produce a good more cheaply than another and it is said to have an
‘absolute advantage’ in producing that good.
 Absolute Advantage: A situation where the production costs ( costs in terms of the
resources consumed in producing the good) of making a commodity are lower for one
country than for another.
 These cost differences may be based on differences in labor costs and skills,
climate, technology, equipment, land, or natural resources.
 Free Trade and Utility: David Ricardo (2)
 •David Ricardo (1772-1823), a British economist, said that even if one country has an
absolute advantage at producing everything, it is still better for it to specialize and trade.
 Ricardo realizes that both countries could benefit from specialization and trade even
though one can make everything more cheaply than the other. (Example England And
Portugal)
 Comparative advantage: A situation where the opportunity costs (costs in terms of other
goods given up) of making a commodity are lower for one country than for another.
 One country may be more efficient in making one product while another country will be
more efficient in making another product.
 Ricardo’s most important point: Globalization is good because specialization and
free trade boost total economic output and everyone can share in this increased
output
 Criticisms of Ricardo (1)
 Ricardo makes a number of assumptions do not hold in the real world:
1. Assume resources used to produce goods (e.g. labor, equipment, factories) do not
move from one country to another.
Today multinational companies can easily move their productive capital from one country
to another.
2. Assumes that each country’s production costs are constant and do not decline as
countries expand their production (i.e. no “economies of scale”) or as they acquire
new technology.
 Criticisms of Ricardo (2)
3. Assumes that workers can easily and without any cost move from one industry to
another.
In reality, re-trenched workers often cannot find comparable jobs and need retraining to
stay employable.
4. Ignores international rule setters.
•International trade inevitably leads to disagreements and conflicts and so countries
must agree to abide by some set of rules and rule setters.
•Main organizations that set the rules that govern globalization and trade are World
Trade Organization, IMF, and World Bank.
 Marx and Justice : Criticizing Markets and
Trade (1)
 Karl Marx (1818-1883) during the Industrial Revolution was the harshest and most
influential critic of the inequalities that private property institutions, free markets,
and free trade are accused of creating.
 Suffering and misery that capitalism was imposing on its workers:
 -–exploitative working hours
 –Pulmonary diseases
 –Premature deaths caused by unsanitary factory conditions.
 Marx and Justice : Criticizing Markets and
Trade (2)
 According to Marx, the capitalist system offers only two sources of income:
 -–Sale of one’s own labor; and
 –Ownership of the means of production (buildings, machinery, land, raw materials)
 Workers cannot produce anything without access to the means of production so
they are forced to sell their labor to the owner in return for a wage.
 Marx and Justice : Criticizing Markets and
Trade (3)
 The owner does not pay workers the full value of their labor, only what they need
to subsist.
 The difference (“surplus”) between the value of the labor and the subsistence wages
becomes the source of the owner’s profits.
 Those who own the means of production become wealthier and workers become
relatively poorer.
 Capitalism promotes injustice and undermines the communal relationship.
 Marx held that human beings should be enabled to realize their human nature by
freely developing their potential for self-expression and satisfying their real human
needs.
 Alienation (1)

 In Marx’s view capitalism ‘alienates’ the lower working classes by not

allowing them to develop their productive potential nor satisfy their real
human needs or form satisfying human relationships.
 Alienation: In Mar’s view, the condition of being separated or estranged
from one’s true nature or true human self.
 Marx’s fundamental criticism of capitalism was that it alienated workers by
robbing them of control of their lives and forcing them to satisfy needs that
were not their own.
 Alienation (2)
 According to Marx, capitalist economies alienate workers in four ways:
1. In capitalist societies, products that workers produce are taken away by the
capitalist employer.
2. Capitalism forces people into work that they find dissatisfying and unfulfilling
and that is controlled by someone else.
3. Capitalism alienates people by instilling in them false views of what their real
human needs and desires are.
4. Capitalist societies alienate human being from each other by separating them into
antagonistic and unequal social classes that break down community and caring
relationship.
 The Real Purpose Of Government
 According to Marx, the actual function that governments have served is that of
protecting the interests of the ruling economic class.
 According to Marx, society can be analyzed in terms of its two main components:
 –economic substructure; and
 –social superstructure
 Economic Substructure (1)
 Consists of the materials and social controls that society uses to produce its
economic goods.
 Marx refers to the materials (land, labor, natural resources, machinery, energy,
technology) used in production as the forces of production.
 Marx called the social controls used in producing goods (i.e. the social controls by
which society organizes and controls its workers) the relations of production.
 Economic Substructure (2)
 Two main types of relations of production:
 Control based on ownership of the materials used to produce goods; and
 Control based on authority to command
 In modern industrial society, capitalist owners control their factory laborers
because:
 The capitalists own the machinery on which laborers must work if they are to
survive.
 Laborers must enter a wage contract by which they give the owner (or manager) the
legal authority to command.
 Social Superstructure
 Consists of its government and its popular ideologies.
 Marx claims that the ruling class created by the economic substructure inevitably
controls this super structure.
 The members of the ruling class will control the government and use it to protect
their position and prosperity and will popularize ideologies that justify their
position of privilege.
 Replies from Proponents of the Free Market
 Defenders of free market counter Marx criticism by:
 Marx criticism wrongly assumes justice means either equality or distribution
according to need.
 Re-emphasizing that justice means distribution according to contribution
 E.g. when markets are free and functioning competitively, workers will be paid
according to their value and contributions as they add to the output of the economy
 Even if private ownership causes inequalities, the benefits of the system are greater
and more important than the incidental inequalities.
 Mixed Economy (1)
 The debate for/against free markets, free trade and private property has been
spurred on by recent world events:
 –The collapse of several communist regimes such as former Soviet Union; and
 –The emergence of strong competitors in several Asian nations, such as China,
Japan, Singapore, and Taiwan.
 Collapse of communist regimes around the world has shown that capitalism with its
emphasis on free markets is the clear winner.
 The resulting amalgam of government regulation, partially free markets, and
limited property rights is referred to as a mixed economy.
 Mixed Economy (2)
 Mixed economy retains a market and private property system but relies heavily on
government policies to remedy their deficiencies.
 Government transfers (of private income) are used to get rid of the worst aspects of
inequality by drawing money from the wealthy in the form of income taxes and
distributing it to the disadvantaged in the form of welfare.
 Minimum wage laws, safety laws, union laws, and other forms of labor legislation
are used to protect workers from exploitation
 Mixed Economy (3)
 Monopolies are regulated, nationalized, or outlawed.
 Sweden, Germany, Denmark, Japan, the Netherlands, Belgium, Norway, Finland,
Switzerland are all mixed economies with high levels of government intervention.
Thank You