Course Syllabus | LH's Virtual Office | Chapter 3 Outline

Business Ethics: Concepts & Cases: Chapter 3 Objectives and Overview
The Business System: Governments, Markets, and International Trade

Learning Objectives

  1. Understand the case for the morality of free markets as the best guarantors of capitalist distributive justice, economic utility, and liberty rights: appreciate the limitations of this justification.
  2. Understand how the case for the morality of free markets depends on the assumption of perfect competition.
  3. Know the defining features and essential presuppositions of perfectly competitive markets.
  4. Understand how perfect competition is a useful idealization, and how the principle of diminishing marginal utility and of increasing marginal costs interact to determine the equilibrium price.
  5. Understand the nature of monopoly markets and their negative impacts on perfect competition.
  6. Understand the Karl Marx's criticisms of free markets and the proposed Communist alternative to them.
  7. Recognize the ascendancy of mixed economies and issues remaining about the right mixture.


In this chapter the nature of the business system is explored through consideration of controversies surrounding it.  Two major currents of thought fuel these debates, regulative and antiregulative, or laissez faire.   These are associated with communitarian and individualistic ideologies, respectively.  Command economies (towards which regulation tends) and free market economies (towards which absence of regulation tends) represent different ways of solving the fundamental economic problem of coordinating the production and distribution of goods.  Under command systems, control is centralized and "top-down": a governing authority decides system wide policy and communicates its decisions to those responsible for carrying it out as enforceable commands.  The U. S. and British economies during WW2 as well as the Soviet economy (especially between 1928 and 1953) -- also integrated corporations -- provide examples of command economies.  In free market systems control is decentralized and "bottom up": individuals and privately owned and controlled corporations make their own production decisions and seek the most advantageous prices in exchanging their goods with other firms and consumers.  Price level fluctuations in such exchanges serve to coordinate system wide production by encouraging investment in profitable enterprises and discouraging investment in unprofitable ones.  The two main components of a free market system are (1) a system of private property embodied in property laws, and (2) a market system (such as our system of monetary exchange) enabling individuals and corporations to freely contract to exchange goods or property.  Few advocate an absolutely pure market system -- putting no restraints on rights of ownership and exchange whatever: this would allow trade in sex (prostitution), drugs, and even people (slavery).  All real market systems impose restrictions on ownership and exchange out of concern for the public welfare.  Still debate continues over to what extent governments should intervene in the workings of the market system.

John Locke, and his followers argue that a free market system best serves to guarantee fundamental human rights or "natural rights" to life, liberty, and property.  Governments are instituted, by the consent of the governed, in order to protect these rights and the consensual nature of this compact or covenant imposes moral limits on government.  Governmental interference with the life, liberty, and property of individuals -- except in order to prevent their infringement on the rights of others -- is unjust and unwarranted.  Government regulation of the marketplace infringes on individuals' natural rights without such just warrant and, hence, is a wrongful violation of individual rights that should not be tolerated.  Critics of Locke complain, that Locke's assertion of natural rights is baseless and his assertion of the priority of negative (life, liberty, and property rights) is too: even if humans do have natural (life, liberty, and property) rights, it doesn't follow that such rights override positive rights to food, housing, and medical care (for instance).  Furthermore, critics maintain, Lockean (life, liberty, and property) rights conflict with and may sometimes be overridden by the demands of distributive justice; and free market economies by their very natures create distributive injustices.  Finally critics dispute the individualist assumptions underlying Locke's approach, contending that individuals are endowed with life, liberty, and property not by nature alone, but as members of society: since these rights are granted by society, society may rightfully restrict these rights when doing so best promotes the general welfare.

Adam Smith and his followers argue that a free market system best promote the general welfare by maximizing economic utility.  This system ensures that the economy produces what consumers want with maximum efficiency: the law of supply and demand causes the marketplace to produce the goods consumers desire, and competition between  producers puts the inefficient out of business.  Consequently, economic efficiency is best served by a free market where agents motivated only by self-interest (a desire for their own profit) are led to serve society's needs "as if by an invisible hand."  Government intervention in the workings of the market interferes with the self regulating effect of competition, thus reducing its beneficial consequences since human planners can never regulate markets as efficiently as the "invisible hand."  Critics complain, first, that his argument rests on several false assumptions.  In the first place, Smith unrealistically assumes there always to be many producers freely competing to provide various products to consumers; but monopolies and oligopolies arise which -- being able to set prices artificially high and keep production artificially low -- are, to a great extent, immune to control by market forces.  Secondly, Smith falsely assumes that producers pay for all the resources they use in production and consequently will conserve resources to keep down costs; but this overlooks resources (such as air and water) for which producers do not have to pay and, consequently, have no reason to conserve and will carelessly exploit.  Thirdly, Smith assumes that profit is the only human motive driving economic behavior -- that each "intends only his own gain" by following the rule of "economic rationality."  But people (and even corporations) are not purely rational or exclusively profit seeking: they are frequently actuated by noneconomic goals and often behave irrationally, besides.  Worse yet, critics charge, a pure capitalistic free market system actually makes people more materialistic and selfish.  Critics also point to many successful attempts at economic planning as showing that planning is feasible; but perhaps it is only feasible, Velasquez observes, so long as it remains one component within a largely market based economy.

John Maynard Keynes and his followers maintain that government, by investment in the the "public sector," and other interventions can moderate the ups and downs of the business cycle.  By judicious governmental intervention the periodic recessions and depressions that unregulated free markets suffer can be controlled if not avoided entirely.  Given the immense economic and human costs of such economic downturns, Keynes maintains, timely governmental interventions to enlarge effective demand and decrease unemployment are an improvement on Smith's classical laissez faire approach when it comes to maximizing social utility.  Post Keynesians address the seeming paradox of stagflation -- inflation in conjunction with unemployment -- and explain this as the effect of nonmarket forces (especially, unions and monopolies & oligopolies).  Post Keynesians propose an even larger role for government: besides boosting aggregate consumption and demand (as Keynes advocated) governments should also curb the power of oligopolies and monopolies.

Social Darwinism maintains that economic competition works like natural biological selection to insure the "survival of the fittest" and thus the improvement of humanity since, under Capitalism, only the fittest survive individuals and enterprises survive and prosper.  In its individualistic form, Social Darwinism is biologically naive in its understanding of "fitness", logically dubious in its transition from the fact of survival (an is) to the goodness of the survivors (an ought), and just plain  mean-spirited with its let-the-weak-die-off attitude.  However, Social Darwinist sorts of claims when reinterpreted as applying to the evolution of  firms or corporations are more defensible.

Karl Marx and his followers advance the most thoroughgoing and severe criticism of the capitalist system of private ownership and free markets.  According to Marx the exploitative excesses of early capitalism were no accident but symptomatic of the underlying dynamic of a system which promotes distributive injustice, undermines communal relations, and causes alienation.  Alienation severs the connection between the worker and both the process of and the products of the production: the product of the wage laborer or proletarian's labor belongs to another, and the process of the production is dictated and controlled by another, the the capitalists or bourgeoisie who own the factories and other means of production.  The real purpose of government being to serve the interest of the ruling class, in capitalist societies, the government is, in effect, "a committee for managing the common affairs of the whole bourgeoisie" (Marx & Engels).  Other aspects of capitalist culture constitute an ideology that seeks to justify the continued rule of that class.  Capitalism, however, contains the seeds of its own destruction in the form of (1) concentration of wealth in the hands of the few leading to monopoly conditions (in one connection) and to swelling numbers and the increasing misery of the working class (in another); (2) the business cycle & periodic economic crises.  These contradictions must eventually give rise to a violent revolution wherein workers seize control of the means of production for themselves and institute the "dictatorship of the proletariat."  Under this regime the  means of production will be collectively (rather than privately) owned and the economy will be centrally planned and managed (rather than left to the working of the market).  With the advent of a classless society (and the "new socialist man"), it's maintained, the dictatorship of the proletariat will gradually "wither away."  Critics complain, first, that Marx's predictions have proved false: immiseration of workers has not occurred; the business cycle has been controlled; and capitalism has not caused the breakdown of community (if this has occurred, it can plausibly be blamed on other factors, and communism causes worse breakdowns).  Critics also defend the morality of capitalism on the grounds that capitalist distribution is just on  contribution based accounts of distributive justice, and that the utilitarian benefits of capitalist production may well outweigh any injustices there may be.

In reality, what exist today are all mixed economies -- mixing free market economic and command economic elements.  There remain substantial differences between national economies as to the degree to which command or free market elements predominate.  There also remains substantial debate regarding what is the best mix of governmental regulation and property rights & free markets.

 Course Syllabus | LH's Virtual Office | Chapter 3 Outline