governments, market and international trade

Group # 1 1Presented To: Ma’am Amna Majid Rizvi

Dr. Keith Y.N. NgPh.D., MBA, MCIM

THINKING AND MANAGING ETHICALLY

The Business System: Government,

Markets And International Trade The Business System: Government,

Markets and International Trade

Business Ethics: Concepts and Cases

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.

Group # 1 Presented To: Ma’am Amna Majid Rizvi

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Globalization

֎ Threats– Local business wiped out– Workers laid off– Lower environmental standards

֎ Issues– Globalization and free trade VS

Government intervention in economic affairs


Economic System

֎The system a society uses to provide goods and services it needs to survive and flourish.


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Economic Systems

֎ The economic system accomplishes two basic economic task:– The task of producing goods and

services, which requires determining what will be produced, how it will be produced and who will produce it.

– The task of distributing these goods and services among its members which requires determining who will get what and how much each will get.


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Economic Systems

֎To accomplish these two tasks, economic system rely on three kinds of social devices: – Tradition-based societies– Command economy– Market economy


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Economic Systems Tradition-Based Societies

֎ Small and rely on traditional communal roles and customs to carry out the two basic economic tasks.

֎ Individuals are motivated by the community’s expression of approval or disapproval and the community’s productive resources - such as its herds are owned in common:

– e.g. wife shall cook, husband shall work, etc.Group # 1 Presented To: Ma’am Amna Majid

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Economic Systems Command Economy

֎ 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 owned or controlled by government and are considered belong to the public.

– e.g. China, Vietnam, North Korea, Cuba, former Soviet Union run their economies primarily on the basis of commands.


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Economic Systems 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.

֎Essentially on Supply and Demand– e.g. England in 19th century


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Economic Systems Mixed Economy

֎An economic system consisting the elements of the three economic systems:– Tradition-based societies– Command economy– Market economy


Free Markets

֎Markets in which individuals are able to voluntarily exchange goods with others and to decide what will be done with what he or she owns without interference from government.


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Issues Today

֎Arguments for and against “free markets” within a nation

֎Arguments for and against “free trade” between nations

֎Ideology is a system of normative beliefs shared by members of some social group.

– John Locke (based on moral rights)– Adam Smith (based on utilitarian principles)– David Ricardo (based on utilitarian

principles)– Karl Marx (based on justice principles)


Free Markets And Rights: 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.

֎Locke argued that if there were no governments, human beings would find themselves in a state of nature and would be free from the law of nature.– Every one would be equal in every aspect


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Free Markets And Rights: John Locke

֎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 government.


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Locke’s State of Nature

֎All are free and equal– each individual would be equal to others– free from constraints

֎Each person owns his body and labor, and whatever he mixes his labor into.

֎People agree to form a government to protect their right to freedom and property.


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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 (Fifth Amendment of US Constitution)

– e.g. Land Acquisition Act ֎ 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 programsGroup # 1 Presented To: Ma’am Amna Majid

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Criticism of Lockean Rights

Locke’s critics focus on four weakness in his argument:1. The assumption that individuals have natural

rights: 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 negative rights and positive rights: Why should negative rights such as liberty take precedence over positive rights? Critics argue, in fact, that we have no reason to believe that the rights to liberty and property are overriding.


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Criticism of Lockean Rights

Locke’s critics focus on four weakness in his argument:3. The conflict between Lockean 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.


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Free Markets And Utility: Adam Smith

֎ Adam Smith (1723-1790), the “father of modern economics” is the originator of this utilitarian argument for free market.

֎ Adam Smith argued that 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 Adam Smith, the market competition that drives self-interested individuals to act in ways that serve society.


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֎ 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 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.Group # 1 Presented To: Ma’am Amna Majid

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֎ 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.


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֎ Smith argued that a system of competitive markets allocates resources efficiently. Examples:-– Natural Price: The price that covers the price of producing a

commodity including the going rate of profits in other markets.– 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.

– Producers of that commodity will reap profits higher then those available to producers of other commodities.

– The higher profits will induce producers of other products to switch their resources into the production of the more profitable commodity.

– As a result shortage of that commodity disappears and the price sinks back to its natural level.


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֎ Smith argued that a system of competitive markets allocates resources efficiently. Examples:-– Supply of a commodity is greater than the

quantity demanded, its price falls, inducing its producers to switch their resources into production of more profitable commodities.

֎ The market allocate resource so as to most efficiently meet consumer demand thereby promoting social utility.


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֎ According to Adam Smith, the best policy of a government to advance public welfare is to do nothing – to let each individual pursue self-interest in ‘natural liberty’, so he is free to buy and sell whatever he wishes.

֎ Any interventions in the market, by the government can only interrupt the self-regulating effect of competition and reduce its many beneficial consequences.


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Criticisms of Adam Smith

Smith's utilitarian argument is criticized for making unrealistic arguments:

֎ Smith assumes that monopoly does not exist.

– Forces of supply and demand will force prices down to their lowest levels.

֎ Smith assumes that all relevant costs are paid by manufacturer.

– Pollution is an example of using social resources without paying.


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Criticisms of Adam Smith

֎ Smith assumes that human beings are solely motivated by self-interested desire for profit.– Sometimes caring can lead to a better-off

situation.

֎ Some degree of economic planning is possible and desirable.– All we need to know to set appropriate

prices are reports on the sizes of the inventories of producers.


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Keynesian Criticism of Adam Smith

֎ 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.

֎ Aggregate Demand: 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

– 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.


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֎ This mismatch between aggregate demand and aggregate supply will occur when household 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 – causes 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.


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֎ According to Keynes– Government can influence the propensity to save

via monetary (money supply) and fiscal (tax and government spending) policies, and therefore can lower the level of unemployment.

– Government can prevent excess savings through its influence on interest rates by regulating the money supply. The higher the money supply, the lower the interest rate

– Government can influence the household savings be raising or lowering taxes

– Inflation is incidentally the result.


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֎ These views became the kernels of Keynesian economics

– The theory which holds that free markets alone are not necessarily the most efficient means for co-ordinating the use of society’s resources

֎ During 1970s, Keynesian remedy for unemployment (increased government spending) had the expected effect of creating increasing inflation but did not cure unemployment.


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֎ During the 1970s Stagflation (due to union system) contradicts Keynes’s view.

֎ Post- Keynesian school: Economists who have sought to challenge and modify Keynesian economics believed that government must also curb the power of large oligopolistic groups.


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The Utility of Survival of the Fittest: Social Darwinism

֎ 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.


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֎ Social Darwinism - belief that economic competition produces human progress.

֎ Darwin claimed that species change gradually because only the “fittest” survive to pass their favorable characteristics on to their progeny.– 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.


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Social Darwinists argued that: ֎If Government interfere with the competitions – 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.


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֎Criticism:– The survival of humanity depend on

cooperative attitudes and mutual willingness of people to help each other, not a ruthless disregard for other human beings which might advance the business world.

– Naturalistic fallacy: The assumption which implies that whatever happens naturally always happens for the best. It holds that survival of fittest means survival of best.


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Free Trade and Utility: David Ricardo

֎ Countries differ in their ability to produce goods (Adam Smith).

֎ One country can produce a good more cheaply then another and it is said to have an ‘absolute advantage’ in producing that good.

֎ These cost differences may be based on differences in labor costs and skills, in climate, in technology, in equipment, in land or in natural resources.


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֎ 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.

֎ Comparative advantage– A situation where the opportunity costs (costs in

term 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.


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֎ What if one country has an absolute advantage over another country in producing everything?


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100 Barrels of Wine

100 Rolls of Cloth

Cost in Man-years

Cost in Man-Years

England

120 100

Portugal

80 90


֎ With 220 labors in England and 170 labors in Portugal, and no trade:


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Wine Cloth

England 100 100

Portugal 100 100

Total Output 200 200


֎ In England:– To produce 1 barrel of wine, it must give u 1.2 rolls of cloth.– To produce 1 roll of cloth, it must give up 0.83 barrels of

wine.֎ In Portugal:– To produce 1 barrel of wine, it must give up 0.89 rolls of

cloth.– To produce 1 roll of cloth, it must give up 1.1 barrels of wine.

֎ Conclusion– England has a comparative advantage in the production of

cloth.– Portugal has a comparative advantage in the production of

wine.


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֎ Ricardo says that a nation should produce the product which it has comparative advantage in producing, and trade it for what the other country has an comparative advantage in producing.


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Wine Cloth

England 0 220 rolls

Portugal 212 barrels 0

Total Output

212 barrels 220 rolls


֎ Suppose the rate of exchange is 1.04 rolls of cloth for 1 barrel of wine, and England trades 106 of its rolls of cloth for 102 of Portugal’s barrels of wine. (Both will have more of both products than either had when they did not specialize or trade).


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Wine Cloth

England 102 barrels 114 rolls

Portugal 110 barrels 106 rolls

Total Output

212 barrels 220 rolls


֎ Conclusion:– After specialization both countries have

more products than either had when they did not specialize or trade.

֎ Ricardo’s theory is considered to be most significant concept in international trade theory today and is the most significant economic arguments people propose in the favour of globalization.


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Criticisms of David Ricardo

֎ 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.


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Criticisms of David Ricardo

֎ Ricardo makes a number of assumptions that do not hold in the real world:3. Assumes that workers can easily and move costless 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, World Bank.


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Marx and Justice: Criticizing Markets and Trade

֎ 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.Group # 1 Presented To: Ma’am Amna Majid

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֎ According to Marx:– Capitalism offers only two sources of income:

o Sale of one’s own labor;o Ownership of the means of production (buildings,

machinery, land, raw materials)– 1s are forced to sell their labor to 2s because they

cannot produce anything without access to the means of production.

– As a result, the income gap between 1s and 2s is widened.

֎ 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.


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֎ 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 becomes wealthier and workers becomes relatively poorer.

֎ Capitalism promotes injustice and undermines 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.


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Alienation

֎ In Marx’s view capitalism ‘alienates’ the lower working classes by not allowing them to develop their productive potential nor to satisfy their real human needs nor to form satisfying human relationship.


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Alienation

֎ 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.


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Alienation

֎ Private property and free markets leads to alienation, which is unjust and in conflict with the demands of caring.– So common property institutions

should be established instead. Productive society can still be the result because the desire to be productive is an instinct.


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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– Social Superstructure


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Economic Substructure

֎ 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.


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֎ 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.

֎ Two main types of relations of production:– Control based on ownership of the

materials used to produce goods– Control based on authority to command


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֎ In modern industrial society, capitalist owners control their factory laborers because:– The capitalist 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.


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Social Superstructure

֎ Consists of its government and its popular ideologies.

֎ Marx claim that the ruling class created by the economic substructure inevitably controls this superstructure.

֎ 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.


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Social Superstructure

֎ According to Marx:– Society’s government and its ideologies are designed

to protect the interests of its ruling economic classes. These classes are created by the society’s underlying relations of production.

– These relations of productions, in turn, are determined by the underlying forces of production.

– Marx claimed all major historical changes are ultimately produced by the changes in society’s forces of production.

֎ Historical materialism: the Marxist view of history as determined by changes in economic methods by which humanity produces the materials on which it must live.


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Immiseration of workers

֎ Immiseration of workers– Capitalism produces the combined

effects of increased concentration of industrial power, cyclic crises due to an over supply of goods, rising unemployment, and declining relative compensation.


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Replies from Proponents of the Free Market

Defenders of free market counter Marx criticism by:֎ Marx criticism wrongly assume 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.


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Mixed Economy

֎ 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 mixed economy.


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Mixed Economy

֎ Mixed economy – An economy that 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 legislations are used to protect workers from exploitation.


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Mixed Economy

֎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.


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Property Systems and New Technologies

֎ Intellectual property:֎ Property that consists of an abstract

and nonphysical object. – e.g. a program, a song, an idea, etc.

֎ Unlike physical property, intellectual property can be copied, used, or consumed by countless individual at the same time.


Property Systems and New Technologies

֎ Locke and utilitarian view that intellectual property should be treated as private property.– Without such private property rights,

intellectual creation would dry up.

֎ Marx views that intellectual property should be treated as public property.– Intellectual creativity does not require

the financial incentives.Group # 1 71Presented To: Ma’am Amna Majid

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The End of Marxism?

֎ The fall of Soviet Union represent the end of Marxism!

֎ The soviet union broke up and reorganized states discarded the traditional Marxian concepts and incorporated both socialist and capitalist elements.

– The domination of mixed economy in western nations


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