THINKING AND MANAGING ETHICALLY
The Business System: Government,
Markets And International Trade
Dr. Keith Y.N. Ng
Ph.D., MBA, MCIM
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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.
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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.
• 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. Bushman, the Inuit, Kalahari hunters and Bedouin tribes.
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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. most countries
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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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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.
• 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 labour, and
whatever he mixes his labour 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 programs
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Criticism of Lockean Rights (1)
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 natural (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 (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.
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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 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.
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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, the market competition that
drives self-interested individuals to act in ways that serve
society.
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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.
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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.
– 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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Free Markets And Utility : Adam Smith (5)
• 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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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 self-interest in ‘natural liberty’.
• 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:
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 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.
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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 labour.
• 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.
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Keynesian Criticism of Adam Smith (2)
• 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 labour and other resources.
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Keynesian Criticism of Adam Smith (3)
• According to Keynes, 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.
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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.
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The Utility of Survival of the Fittest:
Social Darwinism (2)
Social Darwinist 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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Free Trade and Utility: David Ricardo (1)
• Countries differ in their ability to produce goods.
• 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
labour costs and skills, in climate, in technology, in
equipment, in land or in natural resources.
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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.
• 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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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.
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Criticisms of Ricardo (2)
3. Assumes that workers can easily and costlessly 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,
World Bank.
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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.
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Marx and Justice : Criticizing Markets
and Trade (2)
• According to Marx, capitalist system offers only two
sources of income:– Sale of one’s own labour; 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 labour
to the owner in return for a wage.
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Marx and Justice : Criticizing Markets
and Trade (3)
• The owner does not pay workers the full value of their
labour, only what they need to subsist.
• The difference (“surplus”) between the value of the labour
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 (1)
• 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 (2)
•
According to Marx, capitalist economies alienate workers
in four ways:1.
2.
3.
4.
In capitalist societies, products that workers produce are taken
away by the capitalist employer.
Capitalism forces people into work that they find dissatisfying
and unfulfilling and that is controlled by someone else.
Capitalism alienates people by instilling in them false views of
what their real human needs and desires are.
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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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
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Economic Substructure (1)
• Consists of the materials and social controls that
society uses to produce its economic goods.
• Marx refers to the materials (land, labour, natural
resources, machinery, energy, technology) used in
production as the forces of production.
• Marx called the social controls used in producing
goods (ie. the social controls by which society
organizes and controls its workers) the relations of
production.
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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 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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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 (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
mixed economy.
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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 labour legislations are used to protect workers
from exploitation.
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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.
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