chapter 3 the business system: government, markets, and international trade

Copyright © 2012 Pearson Education, Inc. All rights reserved.

Business Ethics Concepts & Cases

Manuel G. Velasquez


Chapter Three

The Business System: Government, Markets, and International Trade


Economic Systems– Tradition-Based Societies: rely on traditional communal roles and

customs to carry out basic economic tasks. (Tradition based societies are small and rely on traditional communal and family roles and customs to carry out the two basic economic tasks).

– Command Economy: economic system based primarily on a government authority making the economic decisions. (where the government authority makes the economic decisions about what enterprises must produce, which enterprises will produce it, and who will get it?)

– Market Economy: economic system based primarily on private individuals making the main economic decisions. (private companies make the main decisions about what they will produce and who will get it).


“Free” Markets and Trade

• Free Markets = 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 government. (Local area)

• Free Trade = citizens may freely trade goods with the citizens of other nations without the interference of tariffs, quotas, or other government limits on the goods citizens may buy from or sell to foreign citizens. (Global)


Locke’s State of Naturedeveloping the idea that human beings have a "natural

right" to liberty and a "natural right" to private property. Locke argued that if there were no governments, human beings would find themselves in a state of nature. In this state of nature, each man would be the political equal of all others and would be perfectly free of any constraints other than the law of nature.

Locke says, individuals organize themselves into a political body to protect their lives and property. The power of government is limited, however, extending only far enough to protect these very basic rights.


• All persons are free and equal.• Each person owns his body and labor, and

whatever he mixes his own 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 life, liberty, and property.

Locke’s State of Nature


Criticisms of Locke’s View on Rights• Locke does not demonstrate that individuals have

“natural” rights to life, liberty, and property.

• Locke’s natural rights are negative rights and he does not show these override conflicting positive rights.

• Locke’s rights imply that markets should be free, but free markets can be unjust and can lead to inequalities. Free markets create unjust inequalities, and people who have no property or who are unable to work will not be able to live. As a result, without government intervention, the gap between the richest and poorest will widen until large disparities of wealth emerge.


• 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.

The degree of liberty a person has depends on what the person can do. The less a person can do, the less he is free to do. But a person's abilities depend on what he learns from those who care for him as well as on what others care to help him to do or allow him to do.

Criticisms of Locke’s View on Rights


Free Markets and Utility• Adam Smith

– Market competition ensures the pursuit of self-interest in markets and advances the public’s welfare.

– Government interference in markets lowers the public’s welfare by creating shortages or surpluses.

– Private ownership leads to better care and use of resources than common ownership.

• Hayek and von Mises– Governments should not interfere in markets because

they cannot have enough information to allocate resources as efficiently as free markets.


Criticisms of Free Markets and Utility

• Rests on unrealistic assumption that there are no monopoly companies.

• Falsely assumes that all costs of manufacturing are paid by manufacturer, which ignores the costs of pollution.

• Falsely assumes human beings are motivated only by a self-interested desire for profit.

• Some government planning and regulation of markets is possible and desirable.


Keynes’ Criticism of Smith• Smith wrongly assumes demand is always

enough to absorb the supply of goods.– If households forego spending, demand can be less

than supply, leading to cutbacks (discounts), unemployment, and economic depression.

– Government spending can make up for such shortfalls in household spending, so government should intervene in markets.

• Keynes’ views were challenged when government spending did not cure high unemployment but created inflation.


Social Darwinism• Belief that economic competition produces

human progress.• Views of Herbert Spencer

– Evolution operates in society when economic competition ensures the fittest survive and the unfit do not, which improves the human race.

– If government intervenes in the economy to shield people from competition, the unfit survive and the human race declines, so government should not do so.

– Assumes those who survive in business are “better” people than those who do not.


Free Trade and Utility• Advocated by Adam Smith. everyone prospers (grows up or developed) if

nations specialize in making and exporting goods whose production costs for them are lower than for other nations.

Adam Smith's point here is simple. countries differ in their ability to produce goods. One country can produce a good more cheaply than another and it is then said to have an "absolute advantage" in producing that good. These cost differences may be based on differences in labor costs and skills, climate, technology, equipment, land, or natural resources.

Therefore, our nation can make one product for less than a foreign nation can, and suppose the foreign nation can make some other product for less than we can. Then clearly it would be best for both nations to specialize in making the product each has an "absolute advantage" in producing, and to trade it for what the other country has an "absolute advantage" in producing.


Free Trade and Utility

• Advocated by David Ricardo.– everyone prospers if nations specialize in making and

exporting goods whose opportunity costs to them are lower than the opportunity costs other nations incur to make the same goods.

– Ricardo also defined another way of looking at advantage for one country to trade with another, even though one can make everything more cheaply that the other. He defined “comparative advantage” as 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.


Criticisms of Free Trade and Utility

• Ignores the easy movement of capital by companies.

• Falsely assumes that a country’s production costs are constant.

• Ignores the influence of international rule setters.


Karl Marx: Criticizing Markets and Free Trade

• Capitalist systems offer only two sources of income.– Sale of one’s own labor.– Ownership of the means of production (i.e.

buildings, machinery, land, and raw materials).• Capitalism and its private property system

creates alienation among workers.


Marx on Alienation

• In capitalism, workers become alienated when they lose control of their own life activities and the ability to fulfill their true human needs.

• Capitalism alienates workers from their own productive work, the products of their work, their relationships with each other, and from themselves.

• Alienation also occurs when the value of everything is seen in terms of its market price.


Marx and Private Property

• Private ownership of the means of production is the source of the worker’s loss of control over work, products, relationships, and self.

• Productive property should serve the needs of all and should not be privately owned, but owned by everyone.


Marx’s Historical Materialism

• The methods a society uses to produce its goods determines how that society organizes its workers.

• The way a society organizes its workers determines its social classes.

• A society’s ruling social class controls society’s government and ideologies and uses these to advance its own interests and control the working classes.


Marx’s Historical MaterialismFirst, modern capitalist systems will exhibit an increasing concentration of

industrial power in relatively few hands. private owners struggle to increase the assets they control, little businesses will gradually be taken over by larger firms that will keep expanding in size. As businesses expand, they eventually have to move beyond their nation of origin into international markets, replacing national seclusion and self sufficiency with universal interdependence of nations, what we call “Globalization”. This greater power and wealth will be concentrated in few hands.

Second, capitalist societies will experience repeated cycles of economic downturns or crises. Because workers are organized into mass assembly lines, the firm of each owner can produce large amounts of surplus flooding the markets causing a depression or a recession.

Third, Marx argues, the position of the worker in capitalist societies will gradually worsen.' This gradual decline will result from the self-interested desire of capitalist owners to increase their assets at the expense of their workers.


Immiseration of Workers• Combined effects of increased concentration, cyclic

crises, rising unemployment, and declining relative compensation.– Industrial power is concentrated in the hands of a few who

organize workers for mass production.– Mass production in the hands of a few leads to surplus

which causes economic depression.– Factory owners replace workers with machines which

creates unemployment; they keep wages low to increase profits.

• The only solution is a revolution that establishes a classless society where everyone owns the means of production.


Criticism of Marx

• Marx’s claims that capitalism is unjust are unprovable.

• Justice requires free markets.• The benefits of private property and free markets

are more important than equality.• Free markets can encourage community instead

of causing alienation.• Immiseration of workers has not occurred;

instead their condition has improved.


Mixed Economy

• Mixed Economy = an economy that retains a market and private property system but relies heavily on government policies to remedy their deficiencies.

chapter 3 the business system: government, markets, and international trade

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