1. 1
Business Ethics
Concepts and Cases
Manuel G Velasquez 6e
Chapter 3
The Business System: Government,
Markets and International Trade

2. 2
Overview
• This chapter discusses the morality of the
market system as a whole. It examines how
market systems are justified, and explains the
relative strengths and weaknesses of the various
systems currently in use.
• There are two basic viewpoints: one says that
the business system should be planned; the
other that it should be a free market system.
• After examining the arguments for and against
free markets and government regulation, the
chapter discusses the possibility of a hybrid
mixed economy system.

3. 3
Learning Objectives
• Understand the basic arguments for and against free
markets and central planning.
• Recognize how these arguments are based upon
ideology.
• Explain how John Locke (1632-1704) and Adam Smith
(1723-1790) make the case for free markets.
• Understand the major criticisms of these free market
theories, especially those of John Maynard Keynes
(1883-1946) and Karl Marx (1818-1883).
• Explain how Social Darwinism is connected to the free
market economy.
• Understand the effect of new technologies on free
market assumptions about property rights.

4. 4
Introduction to Business Systems
• Globalization & Free trade: It is but a single episode
in a centuries old debate on government regulation.
• Tradition-based societies.
• Economic Systems, ideologies of modern societies:
– Market economy and free markets:
– John Locke’s argument based on a theory of moral rights.
– Adam Smith’s argument based on utilitarian principles.
– Command economy.
• Arguments for free markets.
• David Ricardo’s arguments about free trade.
• Opposing arguments of Karl Marx.

5. 5
Free Markets and Rights
[Ideas of John Locke (1632-1704)]
• Human beings have a “natural right” to
“Liberty” and “private property”.
• If there were no governments human beings
would be in “a state of nature” free of any
constraints other than the “law of nature”: “Being
all equal and independent no one aught to harm
another in his life, health, liberty or
possessions.”
• Because the state of nature is dangerous,
individuals organize themselves in political
bodies to form governments with power that is
limited only to protect these very basic rights.

6. 6
Influence of Lockean Rights
• Locke’s views on property rights have been very
influential in America. (The 5th
. Amendment even
quotes Locke directly).
• Locke’s view that labor creates property rights has
also been influential in USA.
• Friedrich Hayek and several other 20th
. Century
authors have used Lockean rights to liberty and
property, to argue for free markets & the institution
of private property.
• Locke’s view that when a person creates a thing he
acquires property rights over that thing underlies
many laws regarding property and ownership.

7. 7
Criticism of the Lockean Defense of
Free Markets
• The assumption that individuals have natural rights
that take precedence over all other rights: This assumption
is unproven. If humans don’t have the overriding rights to
liberty and property then the fact that free markets will
preserve the rights doesn’t mean a great deal.
• The conflict between natural rights and positive
rights: why should negative rights, i.e., liberty take
precedence over positive rights?
• The conflict between natural rights and justice: Free
markets create unjust inequalities.
• Individualistic assumptions and their conflicts with
ethics of caring: Locke assumes that people are
individuals first, independent of their communities. But
without caring relationships no human could survive.

8. 8
Free markets and Utility
{Adam Smith (1723-1790)}
• Modifying Locke’s views on free markets, Adam Smith’s
arguments rest on utilitarian ideas that unregulated
markets and private property will produce greater benefits
than any other system.
• According to 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”.
• Supply and demand according to this view will allocate
resources efficiently.
• The best thing for the government to do is to do Nothing.
The market on its own will advance public welfare giving
people what they want at for the lowest possible cost.
• A system of private property is necessary for a free market
system.

9. 9
Common Criticism of Adam Smith’s
Utilitarian Argument
Smith’s arguments are unrealistic. Smith assumes that:
– No one seller can control the price of a good:
• This is not true today, as many industries are monopolized to
some extent.
– Manufacturers will pay for all resources used to produce
a product:
• When a manufacturer uses water and pollutes it, some one
else pays for it.
– Humans are motivated only by a natural self-interested
desire for profit:
• This, say his critics, is clearly false. Many humans are
concerned for others and act to help others, constraining
their own self-interest. Market systems make humans
selfish and make us think profit motive is natural.

10. 10
Keynes (1883-1946) An Influential
Critic Of Adam Smith
• John Maynard Keynes argued that government
intervention was necessary because there is a mismatch
between aggregate supply and demand which leads to
contraction of supply.
• Government can influence the propensity to save
through its influence on the interest rates.
• Government spending can also close the gap between
aggregate demand and aggregate supply by taking up
the slack in demand from households and businesses.
• Keynes arguments became less convincing though, after
stagflation of 1970s.
• It has been replaced by a post-Keynesian school of
thought, which argues for even more governmental
intervention in the market.

11. 11
Social Darwinism—A Justification
For Free Markets
• Economic competition produced human
progress. If governments were to interfere in this
process , they would also unintentionally be
impeding human progress.
• Weak firms must be weeded out by competition.
• Survival of the fittest means survival of the best.
• The fallacy which modern authors call
naturalistic fallacy, implies , of course, that
whatever happens naturally is always the best.

12. 12
Free Trade and Utility
[David Ricardo (1772-1823)]
• Adam Smith’s book, the “Wealth of Nations” was primarily
aimed at showing benefits of free trade.
• Smith highlighted the benefits of making products each
country has absolute advantage in producing and trading
it with what another country has an absolute advantage in
producing.
• Ricardo advocated free trade on the basis of comparative
advantage and specialization, even though one can make
everything more cheaply than the other.
• Specialization increases the total output of goods countries
produce, argued Ricardo, and through trade all countries
can share in this added bounty.

13. 13
Free Trade and Utility
• Ricardo’s basic argument is accepted by most economists
as correct in theory, but many question whether his
utilitarian argument applies in today’s real world.
• Ricardo makes many assumptions which aren’t correct
today:
– Resources used to produce goods do not move from one
country to another.
– Each country’s production costs are constant.
– Workers can easily move from one industry to another.
– Ricardo ignores international rule setters.
• It is difficult to say how telling these criticisms are.
However, many people today continue to be supporters of
free trade, repeating Ricardo’s comparative advantage
argument. Many others have become harsh critics of
globalization.

14. 14
Karl Marx (1818-1883) Criticizing Markets
and Free Trade
• Karl Marx is the most influential critic of the inequalities
that private property institutions, free markets and free
trade are accused of creating.
• According to Marx, capitalist systems offer only two
sources of income: sale of one’s own labor, and
ownership of the means of production. The workers are
forced to sell their labor to the owner for a wage. Those
who own the means of production (bourgeois) become
wealthier and workers (proletariat) become relatively
poorer.
• In Marx’s view capitalism alienates the lower working
classes by not allowing them to develop their productive
potential, nor real human needs.

15. 15
Karl Marx (1818-1883) Criticizing
Markets and Free Trade
• The real purpose of government, says Marx is
to protect the interest of the ruling class of
owners.
• The forces of production of the society (its
economic substructure) always have,
historically, given the society its class and its
social superstructure (or government and
popular ideologies).
• Those in power promote the ideologies that
justify their position of privilege. This view of
history is called Historical Materialism.

16. 16
Karl Marx (1818-1883) Criticizing
Markets and Free Trade
• The result of unrestrained free markets
and private ownership will be a series of
disasters for working people, leaving them
immiserated. Three general tendencies
will bring this about:
– Increasing concentration of industrial power.
– Repeated cycles of economic downturns.
– The position of the worker in capitalist
societies will gradually worsen.

17. 17
Karl Marx (1818-1883) Criticizing
Markets and Free Trade
• Though many of Marx’s predictions have turned out to be
correct, immiseration of workers has not occurred.
• Still many claim that unemployment, inflation, alienation and
false desires do characterize much of modern capitalist
society.
• Defenders of free markets claim that justice really means
distribution according to contribution. Even if private
ownership creates inequalities, defenders of free markets
still maintain that the benefits of the system are greater and
more important than the incidental inequalities.
• Whether the free market argument is persuasive depends
ultimately on the importance one gives to the rights to liberty
and property, as opposed to a just distribution of income
and wealth.

18. 18
Conclusion: The Mixed Economy
• Many economists now advocate retaining the
market system and private property while
modifying their working through government
regulation, a mixed economy that attempts to
remedy the deficiencies of a free market system.
• New technologies are also firing the debate over
the balance between Lockean private property
and collective ownership.
• Modern technologies create new forms of
intellectual property that can be copied and
consumed by a number of different individuals at
once.

19. 19
Conclusion: The Mixed Economy
• Though critics of Marx contend that Marxism is
dead, many socialist trends and theories remain
influential.
• Locke and Smith’s form of capitalism has the
upper hand, but many nevertheless maintain
that a mixed economy comes closest to
combining the utilitarian benefits of the market
economy with a proper respect for human rights,
caring and justice.

20. 20
Key Terms
Absolute advantage; Aggregate demand; Alienation;
Bourgeoisie; Command economy; Copyright;
Communitarianism;
Economic system; Economic substructure; Forces of
production; Free market system;
Globalization; Historical materialism; Ideology; Immiseration;
Individualism; Intellectual property; Invisible hand;
Keynesian economics; Lockean rights;
Markets; Means of production; Mixed economy; Natural
rights; Naturalistic fallacy;
Patent; Post-Keynesian school; Private property system;
Proletariat; Relations of production;
Say’s law; Social Darwinism; Social superstructure; State of
nature; Surplus value; Survival of the fittest; Tradition based
societies.