WARSAW SCHOOL OF ECONOMICS
CEMS SP-10 Course
Ryszard Rapacki
BUSINESS-GOVERNMENT RELATIONS
IN THE EUROPEAN CONTEXT
Handout 1. Introduction to the course.
I BASIC CONCEPTS AND DEFINITIONS
1. Business - all forms of economic activity aimed at transforming resources (inputs,
factors of production) into goods and services (outputs), the role of profit motive.
The focus will be on corporate activities.
2. Government - structures (institutions) responsible for realizing societal goals
(economic, social, political, etc.). The emphasis will be on central government and
its economic and regulatory powers, with special regard to their impact on
business.
3. Business environment - major interrelationships (interfaces) between business and
other segments of the society, including external world.
Figure 1.1. Business and its major interrelationships
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Ryszard Rapacki
Business-Government Relations
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II ALTERNATIVE MODELS OF BUSINESS-GOVERNMENT RELATIONS
1. The dominance model.
Figure 1.2. The dominance model
1.1. Key implications.
• Society is hierarchical and a small elite (including business leaders)
manipulate society,
• Power moves down from top levels of society,
• The policy-making process is dominated by interests of business and the
wealthy,
• The role of business in solving societal problems is either paternalistic or
exploitative,
• Business-government relations are cooperative (symbiosis); the role of
government is to help business,
• No incentives for reforming institutions.
1.2. The dominance model is held principally by some critics of business who
conclude that business is too powerful and reform or radical change of the
system is necessary. Most prominent representatives of "power elite" theory
include: Galbraith (technostructure), Reich, Roszak, Baran and Sweezy,
Marcuse and Marx. Most managers, however, shun the model.
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Introduction to the course
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2. Market capitalism model.
Figure 1.3. The market capitalism model
2.1. Implications.
• Business interacts directly with market environment and is partly insulated
from government and social environment,
• Business (managers) concentrates exclusively on market goals, i.e.
profitability and expansion,
• Market performance is the only yardstick of business contribution to
societal goals and efficiency is the superior value,
• Government, not business, has primary responsibility for solving social
problems; government institutions are designed to monitor and adjust nonmarket environment of business,
• Business should not be subject to government regulation which
undermines efficiency,
• Business executives should accept social values as given and not attempt
to influence them.
2.1. Support – the model is dominant in the thinking of a majority of managers in
business, especially in small firms.
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Ryszard Rapacki
Business-Government Relations
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3. The dynamic forces model.
Figure 1.4. The dynamic forces model
3.1. Implications.
• Business is deeply integrated into the environment and must respond to
many forces, both economic and non-economic. It is not isolated from its
environment, nor is it dominant.
• Business a major initiator of change in its environment, especially through
its interaction with government and the introduction of new products and
services.
• Broad and underlying public support of the business enterprise depends
on its adjustments to many different environmental forces. To survive,
business must react to a mixture of social, political, and economic forces.
• Supports for business will be greatest when the net impacts of the
business system on its environment are positive, that is when benefits
provided are greater than costs imposed.
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Introduction to the course
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4. The stakeholder model.
Figure 1.5. The stakeholder model
4.1. Implications.
• It rejects central elements of the market capitalism model and is
fundamentally different from the other two models. It is the opposite of the
dominance model and is at odds with the dynamic forces model.
• The business firm is in the center of a set of mutual relationships with
different categories of individual and groups.
• Managers must be responsive to multiple stakeholders and because of
this the interests of owners/investors receive less emphasis.
• The task of appropriate corporate governance moves to the forefront of
managerial duties and becomes increasingly complicated.
• The model rejects the traditional view of the corporation as a profitmaximizer.
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Ryszard Rapacki
Business-Government Relations
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5. Roles of business and government in the BGR model (Figure 1.6).
Figure 1.6. Roles in the BGR model
III BASIC FEATURES OF APPROACH ADOPTED
1. Strong economic emphasis.
2. Interdisciplinary, with special emphasis on managerial perspective.
3. Stress on business implications of government actions.
4. Focus on BGR within the context of systemic transformation.
IV HISTORICAL BACKGROUND
1. Ancient world - low social esteem for business and trade, deeply rooted in
Greek tradition.
2. The Middle Ages - slow changes in social perception of business. St. Thomas
Aquinas.
3. The end of medieval world and ascending role of business in society.
• the role of Renaissance,
• expanding trade: revival of harbours, new discoveries (Columbus, da Gama,
Magellan),
• theological revolution, the role of Protestant ethics in nascent capitalism (Max
Weber).
4. Mercantilism - strong grip of central power (kings, e.g. France and England) on
business activities, in particular foreign trade. Promotion and protection of
national industries. Growing importance of towns and merchants.
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Introduction to the course
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5. The rise of capitalism.
5.1. Seeds of own destruction in mercantilism - demands for freedom from legal
restraints.
5.2. Great inventions and beginning of factory production.
5.3. Agricultural revolution.
5.4. New institutions: private property rights, sanctity of contracts, labour market
(new class of free workers), accounting systems, rapid growth of money
use, credit system, risk insurance.
5.5. New business organizations (first joint-stock company chartered by Mary
Tudor in 1553 in England).
5.6. New ideas.
• natural laws (John Locke, 1691 - freedom as a natural state of things);
they contested the "natural" character of government regulation and
gave birth to three ideas to flower in future, i.e.
• individualism - the supreme importance of individual in society,
combined with the inherent idea of decency of people and a belief in
their rationality,
• laissez faire,
• free economic system (Adam Smith).
6. The theory of classical capitalism (free enterprise system).
6.1. Role of government in view of Adam Smith.
• protection of society from invasion of other societies,
• protection of every member of society from injustice or oppresion of any
other member,
• the duty of erecting and maintaining certain public works and public
institutions that would never be in private (individual) interest to erect and
maintain.
6.2. Underlying institutional arrangements (preconditions) for proper functioning
of free enterprise system.
• private property, i.e. the right and ability of individuals to own and use
property, including capital accumulation; also it generates respect for
private property of others,
• profit motive as the mainspring of free enterprise system and a reward for
/1/ awareness of consumer demands, /2/ risk taking, and /3/
management of resources,
• division of labour, including specialization of firms and occupational
specialization of individuals,
• individual freedom,
• the "economic man" (homo economicus), and the self-interest as a
driving force in guiding the behaviour of both consumers, producers and
workers,
• consumer supremacy,
• limited role of government, government as a "night-guardian"; according
to liberal doctrine anti-monopoly laws were compatible with this limited
role of government.
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