The Return to the Market The global economy on the eve of World War I The catastrophe of World War I for Europe The Great Depression The subsequent turn from the market The return to the market after economic stagnation in the 1970s The power of ideas The value of studying economic history: We cannot understand the present, nor plan for the future, without understanding the past; and history is often driven by ideas and underlying social forces, not just by events. Economies throughout the world have been moving from a model in which there was extensive state intervention to a model of free markets: “In its entirety, the struggle constitutes one of the great defining dramas of the 20th century.” Yergin, D. & Stanislaw, J. (2002). The Commanding Heights. New York: Touchstone. (p. xi) Some questions about the turn to the market Is it irreversible? A natural path of development? What will the consequences be? What is the role of the state in a market economy? The global economy on the eve of world war i The causes of world war i The consequences of world war i Destabilization of the global economic & financial system: The great depression and failure of government economic policy Extent of the Depression The great depression and failure of government economic policy Causes of the Depression The great depression and failure of government economic policy Government responses to the Depression: The Wrong Medicine The turn from the market and the new economic models The problem with the market: It wasn’t delivering the goods The turn from the market and the new economic models The command economies: Communism and Fascism The theoretical foundation for the retreat from reliance on market forces in the west John Maynard Keynes The General Theory of Employment, Interest, and Money (1936) Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. Economic growth & prosperity resulting from government macroeconomic policy The end of a very good idea What Britain’s economy looked like in the 1970s - high inflation, and . . . - high unemployment - nationalized industries losing money - high taxes to fund welfare state - labor strife - negative balance of payments and declining value of the pound And in the U.S. . . . The grim realities of stagflation in the 1970s The return to the market The economic policies of Ronald Reagan and Margaret Thatcher: Another very good idea: The theoretical foundation for the return to the Market Friedrich van Hayek and the issue of economic information Milton Friedman, the Chicago School, and monetary policy Implications for government’s role in the economy The issue of economic information What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relev ...

1. The Return to the Market
The global economy on the eve of World War I
The catastrophe of World War I for Europe
The Great Depression
The subsequent turn from the market
The return to the market after economic stagnation in the 1970s
The power of ideas
The value of studying economic history:
We cannot understand the present, nor plan for the future,
without understanding the past; and history is often driven by
ideas and underlying social forces, not just by events.
Economies throughout the world have been moving from a
model in which there was extensive state intervention to a
model of free markets: “In its entirety, the struggle constitutes
one of the great defining dramas of the 20th century.”
Yergin, D. & Stanislaw, J. (2002). The Commanding Heights.
New York: Touchstone. (p. xi)
Some questions about the turn to the market
Is it irreversible?

2. A natural path of development?
What will the consequences be?
What is the role of the state in a market economy?
The global economy on the eve of world war i
The causes of world war i
The consequences of world war i
Destabilization of the global economic & financial system:
The great depression and failure of government economic policy
Extent of the Depression
The great depression and failure of government economic policy
Causes of the Depression
The great depression and failure of government economic policy
Government responses to the Depression: The Wrong
Medicine

3. The turn from the market and the new economic models
The problem with the market: It wasn’t delivering the goods
The turn from the market and the new economic models
The command economies: Communism and Fascism
The theoretical foundation for the retreat from reliance on
market forces in the west
John Maynard Keynes
The General Theory of Employment, Interest, and Money (1936)
Fiscal policy would enable wise
managers to stabilize the economy
without resorting to actual controls.
Economic growth & prosperity resulting from government
macroeconomic policy
The end of a very good idea
What Britain’s economy looked like in the 1970s
- high inflation, and . . .
- high unemployment
- nationalized industries losing money
- high taxes to fund welfare state

4. - labor strife
- negative balance of payments and declining
value of the pound
And in the U.S. . . .
The grim realities of stagflation in the 1970s
The return to the market
The economic policies of Ronald Reagan and Margaret
Thatcher:
Another very good idea: The theoretical foundation for the
return to the Market
Friedrich van Hayek and the issue of economic
information
Milton Friedman, the Chicago School, and monetary policy
Implications for government’s role in the economy
The issue of economic information
What is the problem we wish to solve when we try to
construct a rational economic order? On certain familiar
assumptions the answer is simple enough. If we possess all the
relevant information, and if we can start out from a given
system of preferences and if we command complete knowledge
of the available means, the problem which remains purely one

5. of logic . . . This, however, is emphatically not the economic
problem which society faces.
The peculiar character of the problem of a rational
economic order is determined precisely by the fact that the
knowledge of the circumstances of which we must make use
never exists in concentrated or integrated form, but solely as the
dispersed bits of incomplete and frequently contradictory
knowledge which all the separate individuals possess.
The economic problem of society is thus . . . How to
secure the best use of resources known to any of the members of
society for ends whose relative importance only these
individuals know. Or, to put it briefly, it is the problem of
utilization of knowledge not given to anyone in its totality.
Friedrich von Hayek (1945), The Use of
Knowledge in Society. American Economic
Review 35(4): 519-530 cited in H.E. Daly & J.B. Cobb,
1994, For the Common Good. Boston: Beacon
Press
Milton Friedman, the Chicago School, and monetary policy
Monetarism and the role of government in macroeconomic
policy
Milton Friedman, the Chicago School, and monetary policy
Monetarism and the role of government in macroeconomic
policy
The Chicago economists believed, in practice, in a very small
number of theorems about the way decision makers allocated
resources and the ways these allocations led to prices. They

6. trusted in markets and the effectiveness of competition. Left to
their own devices, markets produced the best outcomes. Prices
were the best allocators of resources. Any intervention to
change what markets, left alone, would achieve was likely to be
counterproductive.
At the same time, the government also got busy trying to
displace Keynesianism with monetarism. Instead of intervening
with fiscal policy, the Tory government believed that its main
economic job was to ensure a steady growth in the money
supply that would be commensurate with economic growth.
(The Commanding Heights, p.128)
Some Critical tests of the free market
Will the market deliver the goods?
Will the results be seen as fair and equitable?
What will happen to national identity in an international
economy?
Can the environment sustain it?
The Purpose of Business: Its Stakeholders and their Claims
The Purpose of Business: Its Stakeholders and their Claims

7. What is the appropriate role for business to play in a free
market democracy?
Who decides?
The answer provides a “normative foundation for business”.
Examples of “socially responsible” companies:
Examples of “socially responsible” companies:
Who are the primary stakeholders in a business and what claims
do they have on it?
Stakeholders Claims
What does “the social responsibility of business” or “corporate
social responsibility” (CSR) mean in our society?

8. What does the contemporary concept “the social responsibility
of business” mean?
“Social responsibility is the expectation that businesses or
individuals will strive to improve the overall welfare of
society.”
From the perspective of a business, this means that managers
must take active steps to insure that society is better off as a
result of the business’ existence.
(From Dess, G.G. et al. (2008) Strategic Management. New
York: McGraw-Hill Irwin)
“Values-led business is based on the idea that business has a
responsibility to the people and the society that makes its
existence possible.”
Timberland's program of social responsibility
What types of activities does Timberland’s program of Social
Enterprise include?

9. http://responsibility.timberland.com/
What are the costs of this program to Timberland?
What are the benefits?
Milton Friedman’s thesis on the social responsibility of
business
“There is one and only one social responsibility of business—to
use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game, which
is to say, engages in open and free competition without
deception or fraud.”
from The Social Responsibility of Business is to Make a Profit,
1970
“Companies that focus on making money become more
competitive, and that in turn means more economic growth, and
more jobs, and all the other results that ‘stakeholders’ care
about.”
Robert Eaton, Chairman & CEO of Chrysler
How does Friedman support his thesis that the social
responsibility of business is to increase its profits?

10. Supporting arguments for Friedman’s thesis on the social
responsibility of businessThe responsibility of the corporate
executive is to maximize profit because this is what
shareholders want. (p.2)The underlying political principle of the
market mechanism: “In an ideal market resting on private
property, no individual can coerce any other”. (p.5)The
vagueness of the term “social responsibility” as it applies to
business.The appeal to social welfare: When profit-seeking
occurs in competitive markets, firms direct society’s resources
to their highest use as measured by the willingness of people to
pay. (Adam Smith)The realities of competition. (p.3)Is social
responsibility really anything other than profit maximization?
(p.4)
According to Charles Handy, what is the purpose of business?
According to Charles Handy, what is the purpose of business?
The purpose of business is not to make a profit. It is to make a
profit so that the business can do something else. That
“something” becomes the real purpose of the business. (p.5)“To
many this will sound like quibbling with words. Not so. It is a
moral issue. To mistake the means for the end is to be turned in
on oneself . . . “ (p.5)“ . . . The suspicions about capitalism are
rooted in a feeling that its instruments, the corporations, are
immoral in that they have no purpose other than themselves.”

11. (p.5)
David Packard’s philosophy of business
“I think many people assume, wrongly, that a company exists
simply to make money. While this is an important result of a
company’s existence, we have to go deeper and find the real
reason for our being. As we investigate this, we inevitably come
to the conclusion that a group of people get together and exist
as an institution that we call a company so that they are able to
accomplish something collectively that they would
not accomplish separately–they make a contribution to society .
. . ”
from What’s a Business For?, Charles Handy, 2002
Summarizing: Can we find some agreement between the
arguments of Friedman and Handy, some common ground that
would point toward the purpose of business?

12. What is the primary objective of this business? How do you
think Blake Mycoskie would respond to Friedman’s view of the
social responsibility of business?
For most of the 20th century, professional managers of public
corporations did not view themselves as "agents" whose only
purpose was to maximize shareholder wealth. Rather, they
viewed themselves as stewards or trustees responsible for
steering great social institutions — public corporations — for
the benefit not only of shareholders but also employees,
customers and the nation. This system of "managerial
capitalism" was hardly perfect. But, ironically, it produced
better results for investors than the "shareholder primacy"
philosophy that dominates public corporations today.
from 'Maximizing shareholder value' is ill-conceived
concept by
Lynn Stout, professor of corporate and business law
at the Clarke Business Law Institute at Cornell
Law School (Los Angeles Times, 9/212)
“The job of management,” proclaimed Frank Abrams, chairman
of Standard Oil of New Jersey in a 1951 address that was
typical of the era, “is to maintain an equitable and working
balance among the claims of the various directly interested

13. groups . . . stockholders, employees, customers, and the public
at large.” The top executives of America’s major corporations
had emerged from World War Two as ‘corporate statesmen,’
who had overseen defense production for the nation as a whole.
Many continued to view themselves more as professionals with
public responsibilities than solely as agents of private interests.
Reich, R.R. (1998). The new meaning of corporate social
responsibility.
California Management Review 40:2, 8-17
Quantifying the impact of corporate
social responsibility
A Middle Way: “The Biggest Contract”
(Ian Davis, Worldwide Managing Director of McKinsey & Co.)
CSR is often a defensive, piecemeal, non-strategic reaction to
social pressure

14. Companies need to build social issues into strategy in a way
that reflects their actual business importance rather than taking
a reductionist approach of “the business of business is business”
which can lead to a focus on short-term performance
How IBM uses its expertise
The business enterprise must be founded on a sense of
responsibility to the public and to its employees. Service to its
customers, the wellbeing of its employees, good citizenship in
the communities in which it operates–these are cardinal
principles fundamental to any business. They provide the
platform on which a profitable company is built.
We shall build good ships here at a profit if we can–at a loss if
we must–but always good ships. (Newport News Shipyard,
1917)
From Hopper and Hopper, The Puritan Gift, 2007 (p.116)
The Pre-market Economy: Early solutions to the economic
problem
The big ideas we’ll be discussing tonight
The tasks of an economy
The “economic problem”
Three solutions to the economic problem
Economic structure in antiquity and in the middle ages
Conditions required for the emergence of a market economy

15. What are the primary tasks of an economy?
The Primary Tasks of an Economy
Production: to organize social institutions that will mobilize
human energy for productive purposes.
Distribution: the economic institutions of society must ensure a
viable allocation of the social effort
Therefore, a formal definition of economics is . . .
Economics is the study of how a society chooses to allocate
resources (land, labor, capital, knowledge) to produce and
distribute goods and services for consumption.
What is the economic problem?
Three approaches to solving the economic problem: What are
their strengths and drawbacks?
Tradition

16. production and distribution are coordinated by what worked in
the past
the drawback of this approach is that it is static and doesn’t
result in dynamic gains
Command
production and distribution are determined by an economic
commander-in-chief
a powerful mechanism for bringing about economic change
diverts economic resources toward the goals chosen by a higher
authority
3. The market
- production and distribution are coordinated by demand
the most dynamic system for generating economic growth
economic resources, however, may not be fairly distributed
The premarket economy
As we trace the evolution of economic life from the premarket
economies that characterized antiquity to the global free market
economic system we must consider the influence of numerous
forces including:
Culture and geography
Philosophy and religion
Political systems
Law
Money and capital markets
Economic life in Antiquity

17. What features characterized economic life in antiquity?
Economic life in Antiquity
Economics were overwhelmingly based on agriculture, done by
a peasantry who did not own their land, did not get to keep all
the fruits of their labor, did not enter the market, did not seek
out new technologies for dynamic gains.
The economic life of the cities, where trading in a market did
take place, was composed of consumers—primarily of luxury
goods—and not of producers of goods.
Wealth did not accrue to those who played an economic role but
to those with political, military, or religious power—economic
surplus did not accrue to the general population.
Economic life in Antiquity
Aristotle differentiated the economic process into two branches:
use and gain (vs. production and distribution). He approved of
the first (careful management of household resources) but not of
the second.
Markets existed, but they must not be confused with modern
markets because they were not how societies solved their basic
economic problems.
Differences between modern farmers and peasant farmers

18. Economic life in antiquity
Despite the fact that trade in commodities and “manufactured”
goods was widespread in antiquity, the author argues that these
were not market economies. Why not?
Economic life in the Middle Ages
The fall of the Western Roman Empire led to the fragmentation
of European economic life and trade, and to the rise of the
manorial system. What implications does this have for the role
of government in an economic system?
Economic life in the Middle Ages
After the fall of Rome, there was a breakdown in large political
organization (which made long distance trade hazardous)
leading to smaller political units and economic self-reliance
(although there were city-states that had trading empires such as
Venice and Genoa)
Feudalism: the social, political and economic organization of
society—the manor, although an economic entity, was primarily
a political and social entity, in which the lords had absolute
power over their serfs—primarily a barter as opposed to money
economy, extreme self-reliance
Exceptions to the manor: town and fair
Economic life in the Middle Ages

19. The guilds: unions of craftsmen organized not so much to make
money as to make production orderly, limit competition, and
prevent the growth of monopolistic power
Medieval economics sought to deal with economic organization
(what to produce, etc.) by tightly controlling economic life in
an order ordained by God such as the manor system and the
guild structure or production
Economic life in the Middle Ages
Economic thought was largely moral, or prescriptive:
the disrepute of gain
determination of the just price
the worldliness of material things
In summary, there was no free play of price, no competition, no
probing for advantage; no idea of an expanding economy, a
growing scale of production, an increasing productivity
“The idea of an expanding economy, a growing
scale
of production, and an increasing productivity
was as
foreign to the guildmaster or fair merchant as to
the
serf and lord. Medieval economic organization
was
conceived as a means of reproducing, but not
enhancing, the material well-being of the past.”
(p.31)

20. Summary of Pre-Market Approaches to Solving the Economic
Problem
In general, economic organization was highly structured and
restricted by government, by religion, and by the worldview that
human existence is static and that economic resources are fixed.
The emergence of the market economy
What are the prerequisites for change from a political or
religious society to a market society?
A new attitude toward economic activity will be needed
Economic life will have to be monetized
The forces of market demand will have to take over the
regulation of economic activity
Factors contributing to the emergence of the market society
From the itinerant merchant to the merchant of Prato: Bringing
“foreign” goods to a local market
Urbanization & the growth of a socio-economic sphere
independent of the manor
The breakdown of the manorial system
– the manorial system depended on barter
– with the rise of a monetized economy the nobility
had
insufficient access to money

21. 4. The growth of national power
Factors contributing to the emergence of the market society
5. Exploration and the increase of precious metals in
circulation
A change in the religious climate
– the disrepute of gain in the Catholic Church
– Calvinism, the Protestant work ethic, and the use of
wealth
7. The rise of a new interest in technology – the scientific
and industrial revolutions
The emergence of the market economy
In summary, the appearance of the economic aspect of life as a
sphere of activity separate from other aspects of social life was
a prerequisite for the emergence of the market economy as
exemplified in the life of Francesco di Marco Datini.
The Merchant of Prato
Francesco di marco Datini – 1335-1410
Here most men are still ordering their lives according to the
precepts of the Church and the statutes of the guilds, but a few
are already merely using these rules as a screen behind which to
form their own audacious schemes. The unquestioning
orthodoxy of the Middle Ages is giving place to the skeptical,
inquiring mind of the Renaissance, and among the pioneers of
the new order are men who perforce have had to depend upon

22. their own enterprise, adaptability, and shrewdness, to achieve
their ends; the merchants. . .
In his new business dealings Francesco was already a man of
the new world: he belonged to it by his spirit of enterprise, his
commercial methods, his international connections—and his
own intense individualism . . .
The medieval man was esteemed in so far as he formed part of
an aristocratic clan, a guild, or a party; in the Renaissance, he
was assessed by what he had made of himself.
In the extent and variety of his ventures, in his powers of
organization, in his international outlook, in his swift
adaptability to the changes of a society in turmoil, as in his own
ambition, shrewdness, tenacity, anxiety, and greed, he is a
forerunner of the business-man of today.
What are some approaches for solving the economic problem
through human organization; that is, what are the options
available for producing and distributing goods?
Three approaches to solving the economic problem: What are
their strengths and drawbacks?
OLS 520: Comparative Perspectives on Business & Society
Tonight

23. Personal Introductions
Course overview
Discussion of “Why Some MBAs are Reading Plato, Kant”
The environment of business
Four views of free market capitalism
OLS 520: Comparative Perspectives on Business & Society
Course Description & Objectives
To develop a broad understanding of the role of business in
American society
To understand the global free market economic system, how it
developed, and what the alternatives are
To equip you to better serve the common good by sharpening
your perspective on your individual career role
To develop skills in critical thinking and analysis through class
discussion and written analysis of assigned readings
OLS 520: Comparative Perspectives on Business & Society
Some key assumptions of the course
Business is the central organizing institution of the modern
technological society
The purpose of an economic system and of business is to meet

24. the material needs of society
The economic system that has historically been the greatest
generator of aggregate wealth is free market capitalism, but . . .
A person’s view of the role of business in society
- is critical to an effective democracy
- does affect how we do our work
OLS 520: Comparative Perspectives on Business & Society
Course Structure
The environment of business in the 21st century
The evolution of the global free market economic system
Assessing the global free market economic system
Trust: The core value of the free market system
OLS 520: Comparative Perspectives on Business & Society
Course Projects & Assignments
Class preparation and participation
Participation in electronic discussion forums
Essays and other short writing assignments
Books and readings
OLS 520: Comparative Perspectives on Business & Society

25. Reading maketh a full man;
speaking a ready man;
writing an exact man.
Francis Bacon
(1561-1626)
“Why Some MBAs are Reading Plato, Kant”
What ideas in the article strike strike you the most?
“Why Some MBAs are Reading Plato, Kant”
What are the purposes of the MBA courses described in the
article and are these legitimate topics to consider in an MBA
program?
“Why Some MBAs are Reading Plato, Kant”
Can we tell from the article what the author’s viewpoint on
inclusion of these topics in MBA programs is?
The Environment of Business
What forces in society have a major impact on business?
What type of impact do those forces have on business?

26. How has business responded to these forces?
How have these forces affected your job?
The Environment of Business
Four Views of Free-Market Capitalism
Karl Marx: Capitalism is an irredeemably corrupt and immoral
economic system which cannot exist without enriching a few by
exploiting the labor of the many.
Four Views of Free-Market Capitalism
Friedrich Hayek: Capitalism is the pinnacle of economic
systems and includes all the principles by which society should
be governed.
Four Views of Free-Market Capitalism
Daniel Yergin & Joseph Stanislaw: Capitalism is currently the
only game in town, is the economic system that generates the
greatest amount of wealth, but needs to prove that it benefits all
members of society.

27. Four Views of Free-Market Capitalism
Sir Brian Griffiths: Affirms the morality of the market based on
biblical teaching, but argues that the operation of the market
should not be viewed as an autonomous process and must be
hedged by biblical principles of love, economic justice,
personal responsibility, and compassion.
Topic and Assignment for Next Class
The Purpose of Business: Its Stakeholders and their Claims
Reading due
“What’s a Business For?”
“The Social Responsibility of Business is to Increase its
Profits”
Adam Smith and the Birth of Modern Economics
*
1.bin
Economics is ... The study of what, how, and for whom a
society producesSmith provided revolutionary ideas on these

28. three questions
*
give examples
what- guns vs butter
how – capital or labor intensive production
for whom-equal or unequal distribution of goods and/or income
The SettingWestern Europe: 1500-1750
*
ask class to describe – put on board
monarchies
colonialism
strong nation states
nation's quest for gold
enlightenment-religion, science,
tight government control over economy – trade, production,
monopolies
beginnings of "surplus" production (ag)
religious writing that reward and justified business profits
(Calvinism)
Hobbes' Leviathan (1651)

29. Along comes Adam ... Chair of Moral Philosophy, University of
Glasgow (1751), ScotlandTravels throughout Europe on a
personal tutoring assignmentFirst big hitThe Theory of Moral
Sentiments (1759)In 1766 begins "writing a book to pass the
time ..."An Inquiry into the Nature and Causes of the Wealth of
Nations (1776)
*
Smith –
single
absent minded (sleepwalker, falls into tanning pit, etc.)
key point – Smith didn't start in economics per se
Moral Sentiments-
-people make decisions as if judged/viewed by an independent
observer
-will impact Smith's economic thinking
Smith's QuestionsInspired by Newton's laws of motion and
planetary behavior"...the greatest discovery that was ever
made..."Smith sought equivalent laws for the organization of
societyWhat fosters innovation and growth?What if government
removes all the rules?What happens if individuals serve their
self interest?What is a country's true source of wealth?
*
context

30. -heavy state control of economy
-state's interests are primary
-gold is seen as wealth
Smith's Answers
"But the principle … of bettering our condition… comes with us
from the womb, and never leaves us till we go into the grave."
*
ask:
Do you believe the first quote?
2nd quote: examples?
innovation: new medicines,
laissez-faire policy
invisible hand
business will by itself produce things people want due to profit
motive
Smith's Answers
"It is not from the benevolence of the butcher, the brewer, or
the baker that we expect our dinner, but from their regard to
their own interest…"

31. *
ask:
Do you believe the first quote?
2nd quote: examples?
innovation: new medicines,
laissez-faire policy
invisible hand
business will by itself produce things people want due to profit
motive
Smith's Answers
"Division of labor is the great cause of the increase of public
opulence … and not to the quantity of gold and silver, as is
foolishly imagined."
*
tell Smith's pin factory story
labor creates a surplus, which creates increases profit, which
gets re-spent, earnings rise, etc
gold is only nominal wealth
opulence=
1.wealth, riches, or affluence.
2.abundance, as of resources or goods; plenty.

32. Smith's Answers
Society's best possible outcome occurs under a laissez-faire
government structure
*
industry profits – if restricted to 1 firm only (monopoly)
firm charges too high a price
no incentive to either innovate or lower cost
waste resources trying to maintain monopoly instead of product
improvement
The "Forgotten" SmithCompetition required to offset the
potential vices of self-interestIn defining "self-interest", Smith
emphasized the role of moral and ethical decision makingSmith
argued for strong government in areas of judiciary, education,
and national security
*
-OK
when greed and self interest rule
self interest works in business as long as competitive market –
can't over charge customers or underpay labor

33. self interest not the same as greed – remember Smith's guide to
moral decision making?
Smith is NOT a libertarian! In addition, can infer that Smith
would approve of anti trust legislation, health and safety
standards and other places where the market's invisible hand
doesn't work
Implications for Today?Business and technological
innovationEconomic and financial crisesGrowing inequalityTax
structuresClimate change
*
Financial crises
Innovationwould Smith be surprised at our technological
advances? I think notSmith's policy: let business keep the
rewards of its R&D expenditures, but patents that do expire
(pharmaceuticals)
Growing domestic inequalitywhat's the cause? At minimum gov
would be sure that equal opportunity exists for all –spirit of
competitionat worst, gov should not exacerbate the problem via
regressive taxes
Global warming
-Smith recognized where the market system doesn't work
-global warming is a classic example (carbon emissions are a
negative market externality), which requires gov intervention