Chapter Four: The Nature of Capitalism 1 1 Wells Fargo fined $185M for fake accounts; 5,300 were fired An analysis by the San Francisco-headquartered bank found that its employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers, the officials said. Many of the transfers ran up fees or other charges for the customers, even as they helped employees make incentive goals. 2 2 Capitalism Capitalism: An economic system in which the major portion of production and distribution is in private hands, operating under what is termed a “profit” or “market” system Socialism: The polar opposite of capitalism, an economic system characterized by public ownership of property and a planned economy Worker control socialism: A hybrid market-oriented socialism 5 Introduction to Capitalism Capitalism Capitalism has historically evolved from the Renaissance through several stages – mercantile, industrial, financial, and state welfare. Many believe we are now at a new stage, globalized capitalism, involving reliance upon foreign labor and services, joint ventures in overseas companies, outsourcing, etc. Capitalism is constantly changing as new socio-economic and political conditions arise. 7 Key Features of Capitalism Companies: Capitalism permits the creation of companies or business organizations that exist separately from the people associated with them. Profit motive: The profit motive implies a critical assumption about human nature – that human beings are economic creatures who recognize and are motivated by their own monetary interests. 8 Capitalist Model - (Free-Market System) A free market is one that is not controlled either by government or by any small group of individuals. In a free market, government does not: set the price of goods set wages or control production. Competition is also vital to a free-market system. To try to achieve greater returns on investment, perhaps by taking more risk, resources must be free to move within the system to whichever portion of it someone believes will bring the greatest return. Key Features of Capitalism Competition: In his famous treatise on political economy, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith explained how free competition makes individual pursuit of self-interest socially beneficial. Private property: Capitalism requires private ownership of the major means of production (factories, warehouses, offices, machines, trucking fleets, land, etc.) 10 Moral Justifications of Capitalism The natural right to property: One basic defense of capitalism rests on a supposed natural moral right to property. Utilitarians deny the existence of such rights. Other critics doubt that this right entitles one to have a system of property rules and regulations identical to the one we now have in ...

1. Chapter Four:
The Nature of Capitalism
1
1
Wells Fargo fined $185M for fake accounts; 5,300 were fired
An analysis by the San Francisco-headquartered bank found that
its employees opened more than two million deposit and credit
card accounts that may not have been authorized by consumers,
the officials said.
Many of the transfers ran up fees or other charges for the
customers, even as they helped employees make incentive goals.

2. 2
2
Capitalism
Capitalism: An economic system in which the major portion of
production and distribution is in private hands, operating under
what is termed a “profit” or “market” system
Socialism: The polar opposite of capitalism, an economic
system characterized by public ownership of property and a
planned economy
Worker control socialism: A hybrid market-oriented socialism

3. 5
Introduction to Capitalism
Capitalism
Capitalism has historically evolved from the Renaissance
through several stages – mercantile, industrial, financial, and
state welfare.
Many believe we are now at a new stage, globalized capitalism,
involving reliance upon foreign labor and services, joint
ventures in overseas companies, outsourcing, etc.
Capitalism is constantly changing as new socio-economic and
political conditions arise.

4. 7
Key Features of Capitalism
Companies: Capitalism permits the creation of companies or
business organizations that exist separately from the people
associated with them.
Profit motive: The profit motive implies a critical assumption
about human nature – that human beings are economic creatures
who recognize and are motivated by their own monetary
interests.
8

5. Capitalist Model - (Free-Market System)
A free market is one that is not controlled either by government
or by any small group of individuals.
In a free market, government does not:
set the price of goods
set wages or
control production.
Competition is also vital to a free-market system.
To try to achieve greater returns on investment, perhaps by
taking more risk, resources must be free to move within the
system to whichever portion of it someone believes will bring
the greatest return.
Key Features of Capitalism
Competition: In his famous treatise on political economy, An
Inquiry into the Nature and Causes of the Wealth of Nations
(1776), Adam Smith explained how free competition makes
individual pursuit of self-interest socially beneficial.
Private property: Capitalism requires private ownership of the
major means of production (factories, warehouses, offices,
machines, trucking fleets, land, etc.)
10

6. Moral Justifications of Capitalism
The natural right to property: One basic defense of capitalism
rests on a supposed natural moral right to property.
Utilitarians deny the existence of such rights.
Other critics doubt that this right entitles one to have a system
of property rules and regulations identical to the one we now
have in the U.S.
13

7. Moral Justifications of Capitalism
Adam Smith’s concept of the invisible hand: In his Wealth of
Nations, Smith argues that when people are free to pursue their
own economic interests, they will, without intending it, produce
the greatest good for all.
His argument rests on the premise that human beings are
acquisitive and have a natural propensity for trading.
14
Moral Justifications of Capitalism
Adam Smith’s concept of the invisible hand – the law of supply
and demand: Smith argued that a market left to itself is
regulated by the mechanism of supply and demand.

8. The high demand for certain types of goods in one area of the
market will eventually by offset by supply in another area.
The law of supply and demand is equally applicable to the
standard of wages.
15
Criticisms of Capitalism
Inequality: Critics argue that poverty and inequality challenge
the fairness of capitalism and its claim to advance the interests
of all.
Defenders of capitalism respond in three ways:
By blaming government for interfering with the market
By arguing that the capitalist system can be internally modified
by political action
By arguing that the benefits of the system outweigh its weak
points

9. 16
Human nature and capitalism:
Capitalism wrongly assumes that human beings are rational
economic maximizers.
Capitalism offers us no higher sense of human purpose.
Capitalism operates on the assumption that human beings find
increased well-being through ever greater material consumption.
Criticisms of Capitalism
17

10. Competition isn’t what it’s cracked up to be:
Capitalism breeds oligopolies – concentrations of property and
resources (and thus economic power) in the hands of a few.
Corporate welfare programs often shelter businesses from
competition.
Critics contend that cooperation, rather than competition, leads
to better individual and group performance.
Criticisms of Capitalism
18
Exploitation and alienation: In his “Economic and Philosophic
Manuscripts” (1944), Marx explains the notion of alienation as
the separation of individuals from the objects of their creativity.

11. This separation in turn results in one’s separation from other
people, from oneself, and ultimately from one’s human nature.
Criticisms of Capitalism
19
Criticisms of Capitalism
Karl Marx believed the capitalists to be the most revolutionary
and praised capitalism for providing the means for
technological advancement and economic growth.
But he had also predicted that problems with capitalism would
lead to instability and socialism would eventually replace it.
20

12. WALTER WILLIAMS George Mason University
Professor of Economics Prager University
Today’s Economic Challenges
The decline of American manufacturing: Whereas
manufacturing accounted for 27 percent of GDP in the mid-
1960s, it has fallen to about half that.
For the first time since the Industrial Revolution, manufacturing
employs less than 10 percent of the U.S. workforce.
In 2007, the number of factory jobs hit a fifty-seven-year low.
Critics worry whether the U.S. can prosper without a strong
manufacturing base.
22

13. Outsourcing jobs: Since the 1980s, many U.S. manufacturers
have closed or curtailed their operations and becoming
marketing organizations for other producers, usually foreign.
The result is the evolution into a new kind of company, one that
does little or no manufacturing.
The firm may perform a host of profit-making functions, but
lacks its own production base.
Instead, it outsources, buying parts or whole products from
other producers, both at home and abroad.
Today’s Economic Challenges
23

14. Outsourcing jobs: Over 3.3 million US jobs have moved abroad
since 2000.
Outsourcing has affects white-collar jobs.
About 54 percent of the 1,000 largest U.S. companies
outsourcing or planning to outsource white-collar jobs.
At least 300,000 white-collar jobs may flow overseas every year
through 2016.
This would mean a total loss of 3.7 million jobs. {We will
exceed that total loss}
Today’s Economic Challenges
24
Economists disagree about whether outsourcing benefits
America overall.
Some economists argue that the economy is hurt by the massive
job losses that result.
Some economists argue that a country should produce for the

15. world market those goods in which it has a competitive
advantage.
Today’s Economic Challenges
25
The Private Enterprise System and Competition
Businesses meet needs of consumers and are rewarded through
profit. Four degrees of competition:
Pure competition
Monopolistic competition
Oligopoly
Monopoly
Four degrees of competition
Pure competition - A market characterized by a large number of
independent sellers of standardized products, free flow of
information, and free entry and exit. Each seller is a "price
taker" rather than a "price maker".
Examples:

16. Agricultural products such as potatoes and wheat
27
In a nutshell
The competitive environment affects the number, types and
behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where
competitors offer very similar products and customers see
different available products as close substitutes, which forces
marketing managers to compete with lower and lower prices,
leading to shrinking profit margins.
Monopoly—A situation where one company completely controls
a broad product market.
Monopolistic competition—A market situation where several
different companies offer marketing mixes that at least some
customers view as different—each competitor attempting to
obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar
products. Wheat, wool and dairy were the first examples of pure
competition, where prices could not be controlled. The clothing
industry and the snack-food industry are examples of industries
where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies.
Government regulation of monopolies is common. Utility
companies like gas, electricity and water are more deregulated
nowadays. Prices set by utility companies must be approved by
the government.
Monopolistic competition—There is still competition as many
customers perceive alternatives as substitutes. This is typical of
the situation faced by most marketing managers in developed
economies around the world. Fluffy fabric softener uses the
same basic chemicals as other fabric softeners. Marketing
managers may attempt to differentiate it from other fabric

17. softeners by offering a non-drip measuring and pouring spout,
producing advertisements that demonstrate its softening ability,
or by obtaining better shelf position in supermarkets. However,
if potential customers view the different offerings as essentially
similar, the market will become more and more competitive and
a company will need to rely on lower prices to obtain a
competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Oligopoly (ala-ga-poly) - A market dominated by a small
number of participants who are able to collectively exert control
over supply and market prices.
Examples:
Many industrial products such as steel and large consumer
durables such as appliances, the top cigarettes, beer companies
and the retail gas market. Also now the airlines and cable
companies.
Four degrees of competition
28
In a nutshell
The competitive environment affects the number, types and

18. behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where
competitors offer very similar products and customers see
different available products as close substitutes, which forces
marketing managers to compete with lower and lower prices,
leading to shrinking profit margins.
Monopoly—A situation where one company completely controls
a broad product market.
Monopolistic competition—A market situation where several
different companies offer marketing mixes that at least some
customers view as different—each competitor attempting to
obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar
products. Wheat, wool and dairy were the first examples of pure
competition, where prices could not be controlled. The clothing
industry and the snack-food industry are examples of industries
where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies.
Government regulation of monopolies is common. Utility
companies like gas, electricity and water are more deregulated
nowadays. Prices set by utility companies must be approved by
the government.
Monopolistic competition—There is still competition as many
customers perceive alternatives as substitutes. This is typical of
the situation faced by most marketing managers in developed
economies around the world. Fluffy fabric softener uses the
same basic chemicals as other fabric softeners. Marketing
managers may attempt to differentiate it from other fabric
softeners by offering a non-drip measuring and pouring spout,
producing advertisements that demonstrate its softening ability,
or by obtaining better shelf position in supermarkets. However,
if potential customers view the different offerings as essentially
similar, the market will become more and more competitive and
a company will need to rely on lower prices to obtain a

19. competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Monopoly - A market structure in which one firm sells a unique
product into which entry is blocked, in which the single firm
has considerable control over product price and in which non-
price competition may or may not be found.
Four degrees of competition
29
In a nutshell
The competitive environment affects the number, types and
behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where
competitors offer very similar products and customers see
different available products as close substitutes, which forces
marketing managers to compete with lower and lower prices,
leading to shrinking profit margins.
Monopoly—A situation where one company completely controls
a broad product market.
Monopolistic competition—A market situation where several
different companies offer marketing mixes that at least some
customers view as different—each competitor attempting to

20. obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar
products. Wheat, wool and dairy were the first examples of pure
competition, where prices could not be controlled. The clothing
industry and the snack-food industry are examples of industries
where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies.
Government regulation of monopolies is common. Utility
companies like gas, electricity and water are more deregulated
nowadays. Prices set by utility companies must be approved by
the government.
Monopolistic competition—There is still competition as many
customers perceive alternatives as substitutes. This is typical of
the situation faced by most marketing managers in developed
economies around the world. Fluffy fabric softener uses the
same basic chemicals as other fabric softeners. Marketing
managers may attempt to differentiate it from other fabric
softeners by offering a non-drip measuring and pouring spout,
producing advertisements that demonstrate its softening ability,
or by obtaining better shelf position in supermarkets. However,
if potential customers view the different offerings as essentially
similar, the market will become more and more competitive and
a company will need to rely on lower prices to obtain a
competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom

21. Monopoly examples:
Public utilities: gas, electric, water, cable TV, and local
telephone service companies, are often pure monopolies.
First Data Resources (Google, Yahoo and Microsoft are vying),
Wham-O (Frisbees), and the DeBeers diamond syndicate are
examples of "near" monopolies.
Manufacturing monopolies are virtually nonexistent in
nationwide U.S. manufacturing industries.
Professional sports leagues grant team monopolies to cities.
Monopolies may be geographic. A small town may have only
one airline, bank, etc.
Four degrees of competition
30
In a nutshell
The competitive environment affects the number, types and
behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where
competitors offer very similar products and customers see
different available products as close substitutes, which forces
marketing managers to compete with lower and lower prices,
leading to shrinking profit margins.
Monopoly—A situation where one company completely controls
a broad product market.
Monopolistic competition—A market situation where several
different companies offer marketing mixes that at least some
customers view as different—each competitor attempting to
obtain control (a monopoly) in its ‘own’ target market.
Application

22. Pure competition and oligopoly—Marketers offer very similar
products. Wheat, wool and dairy were the first examples of pure
competition, where prices could not be controlled. The clothing
industry and the snack-food industry are examples of industries
where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies.
Government regulation of monopolies is common. Utility
companies like gas, electricity and water are more deregulated
nowadays. Prices set by utility companies must be approved by
the government.
Monopolistic competition—There is still competition as many
customers perceive alternatives as substitutes. This is typical of
the situation faced by most marketing managers in developed
economies around the world. Fluffy fabric softener uses the
same basic chemicals as other fabric softeners. Marketing
managers may attempt to differentiate it from other fabric
softeners by offering a non-drip measuring and pouring spout,
producing advertisements that demonstrate its softening ability,
or by obtaining better shelf position in supermarkets. However,
if potential customers view the different offerings as essentially
similar, the market will become more and more competitive and
a company will need to rely on lower prices to obtain a
competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom

23. Monopolistic competition - a market structure in which several
or many sellers each produce similar, but slightly differentiated
products. Each producer can set its price and quantity without
affecting the marketplace as a whole.
Examples:
Grocery stores and gas stations
Four degrees of competition
31
In a nutshell
The competitive environment affects the number, types and
behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where
competitors offer very similar products and customers see
different available products as close substitutes, which forces
marketing managers to compete with lower and lower prices,
leading to shrinking profit margins.
Monopoly—A situation where one company completely controls
a broad product market.
Monopolistic competition—A market situation where several
different companies offer marketing mixes that at least some
customers view as different—each competitor attempting to
obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar
products. Wheat, wool and dairy were the first examples of pure
competition, where prices could not be controlled. The clothing
industry and the snack-food industry are examples of industries
where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies.
Government regulation of monopolies is common. Utility

24. companies like gas, electricity and water are more deregulated
nowadays. Prices set by utility companies must be approved by
the government.
Monopolistic competition—There is still competition as many
customers perceive alternatives as substitutes. This is typical of
the situation faced by most marketing managers in developed
economies around the world. Fluffy fabric softener uses the
same basic chemicals as other fabric softeners. Marketing
managers may attempt to differentiate it from other fabric
softeners by offering a non-drip measuring and pouring spout,
producing advertisements that demonstrate its softening ability,
or by obtaining better shelf position in supermarkets. However,
if potential customers view the different offerings as essentially
similar, the market will become more and more competitive and
a company will need to rely on lower prices to obtain a
competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
The U.S. trade deficit: America today imports twice as much
merchandise as it exports.
Our relentlessly growing trade deficit is now over $700 billion
annually, equivalent to almost 6 percent of GDP.
With this deficit the country’s reliance on foreign borrowing
has increased, and foreign creditors now provide two-thirds of

25. America’s net domestic investment.
Today we owe the rest of the world about $3 trillion—twice
what we owed in 2000.
Today’s Economic Challenges
32
Changing attitudes toward work: Americans now work 20
percent more than in 1970.
But the American work ethic is disappearing:
Only one in three persons believes that hard work pays off in
the end.
People are less interested in work than in looking out for
themselves.
With increased education, we are rearranging our ideas about
what we want from life.
People want meaningful and challenging work that offers us
autonomy and self-development.

26. Today’s Economic Challenges
33
Reflection
Questions ?
This weeks (wk 6)
Management Ethics
Reflection Questions
1. What do you see as the strongest moral consideration in
favor of capitalism? What do you see as the strongest objection
to it?
Chap 4 – The Nature of Capitalism
(pg 173)
This weeks (wk 6)
Management Ethics

27. Reflection Questions
2. How capitalist is our economic system today?
Chap 4 – The Nature of Capitalism
(pg 173)
This weeks (wk 6)
Management Ethics
Reflection Questions
3. What do you see as the major economic challenges facing
our society today and, in particular, your generation?
Chap 4 – The Nature of Capitalism
(pg 173)
RESPOND TO THE “FOR FURTHER REFLECTION”
QUESTIONS FOUND IN THE GREY SHADED
STUDY CORNER SECTION AT THE END OF EACH
CHAPTER.
AN 800 - 1000 WORD Reflection RESPONSE
TO THE QUESTIONS IS NEEDED TO BE
ELIGIBLE FOR FULL CREDIT.
BE PREPARED TO SHARE YOUR VIEWS DURING

28. CLASS DISCUSSIONS.
MANAGEMENT ETHICS
BUMGT 235 – UW-STOUT