132243 Business & Social

Responsibilities

The Business System:

Government, Markets,
and International Trade
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Globalization
Threats
Local businesses wiped out
Workers laid off
Lower environmental standards

Issue arises:
Globalization and free trade VS Government
intervention in economic affairs

Defenders of globalization:
Government regulation violates the right to freedom,
leads to an unfair allocation of goods, and leave us
all worse off.
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Economic System
Definition: the system a society uses to provide
the goods and services it needs to survive and
flourish.
What will be produced, how it will be produced, and
who will produced it?
Who will get what and how much each will get?

1. Traditional based societies

Societies that rely on traditional communal roles and
customs to carry out basic economic tasks
E.g. wife shall cook, husband shall work, etc.
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Economic System (cont.)

2. Command economy
Economic system based primarily on a government
authority
Black markets may exist

3. Market economy
Economic system based primarily on private
individuals
Slavery, prostitution, drugs are legal.

Economies today contain these three elements.

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Issues today
Arguments for and against free markets within
a nation
Arguments for and against free trade between
nations
Ideology is a system of normative beliefs shard
by members of some social group.
Adam Smith (based on utilitarian principles)
John Locke (based on moral rights)
David Ricardo (based on utilitarian principles)
Karl Marx (based on justice principles)
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Free Markets and Rights:

John Locke
The idea that human beings have certain
natural rights that only a free market
system can preserve.
Lockes stage of nature
All are free and equal
Each person owns his body and labor, and
whatever he mixes his labor into
People agree to form a government to
protect their right to freedom and property
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Free Markets and Rights:

John Locke
Lockean rights
The right to life, liberty, and property
Private property institutions and free markets are
used to preserve these rights

Private property rights

Established by nature (government does not create,
but exist when a person mixes labor into a thing),
and hence prior to government
E.g. when a person writes a book or a software
program, then that book or software program is the
property of the person who mixed labor into it.
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Criticisms of Lockean Rights

Assumption that individuals have natural rights
is unrealistic
Existence of these rights is self-evident?
Problems arise when a person mixes labor into some
object that is unclaimed, e.g. mixing my water into
the unowned river.

Conflict between positive and negative rights

Rights to liberty and property are overriding?
Rights to pollute VS rights to breath clean air
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Criticisms of Lockean Rights

(cont.)
Conflict between Lockean rights and
principles of justice
A persons productive power in a free market
system is proportionaled to the amount of
labor or property already owned. The
handicapped, poor, aged will be unable to
buy any goods.
Income gap may be widened.

Lockes argument ignores the relationship

one has with the community
A persons abilities depend on what he learns
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from those who care for him.

Free Markets and Utility:

Adam Smith
The invisible hand
The market competition that drives selfinterested individuals to act in ways that
serve society.
The fluctuating prices of commodities in a
system of competitive markets then forces
producers to allocate their resources to those
industries where they are most in demand
and to withdraw resources from industries
where there is a relative oversupply of
commodities. This efficiency promotes social
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utility.

Free Markets and Utility:

Adam Smith (cont.)
Government interference in markets does not
advance the publics welfare.

Mises and Hayek argued that government intervention

is impossible because of information difficulties
involved.

Private property institutions must be established

to have a free market system.
Why private property system is better than
common property system?
Every man is more careful to procure what is for
himself.
Confusion arises when everyone has to look after one
thing indeterminately.
Peaceful society can be achieved.
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Incentive to work is preserved.

Criticisms on Adam Smith

Smith assumes that monopoly does not
exist.
Forces of supply and demand will force
prices down to their lowest levels.

Smith assumes that all relevant costs are

paid by manufacturer.
Pollution is an example of using social
resources without paying.
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Criticisms on Adam Smith

(cont.)
Smith assumes that human beings are
solely motivated by self-interested desire
for profit.
Sometimes caring can lead to a better-off
situation.

Some degree of economic planning is

possible and desirable.
All we need to know to set appropriate prices
are reports on the sizes of the inventories of
producers.
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Keynesian Criticism
Smith assumes that Says Law works
In an economy, all available resources are
used and demand always expands to absorb
the supply of commodities made for them.
Unemployment is therefore not possible.

John Maynard Keynes argues that the

propensity to save, which lowers
aggregate demand (C + I + G), creates
unemployment.
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Keynesian Criticism (cont.)

According to Keynes
Government can influence the propensity to save via
monetary (money supply) and fiscal (tax and
government spending) policies, and therefore can
lower the level of unemployment.
Inflation is incidentally the result.

Stagflation (due to union system) during the

1970s contradicts Keyness view. So postKeynesian economists believe that government
must also curb the power of large oligopolistic
groups.
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The utility of Survival of the

Fittest: Social Darwinism
Social Darwinism

Belief that economic competition produces human

progress.
Just as survival of the fittest ensures the continuing
process of an animal species, so the free competition
that enriches some individuals and reduces others to
poverty results in the gradual improvement of the
human race.
Government intervention only impedes the progress.

Criticism

The survival of humanity depend on cooperative

attitudes and mutual willingness of people to help
each other, not a ruthless disregard for other human
beings which might advance the business world.
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Free Trade and Utility: David

Ricardo
Absolute advantage according to Adam
Smith
A situation where the production costs (cost
in terms of the resources consumed in
producing the good) of making a commodity
are lower for one country than for another.
A nation should produce the product which it
has absolute advantage in producing, and
trade it for what the other country has an
absolute advantage in producing.
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Free Trade and Utility: David

Ricardo (cont.)
What if one country has an absolute
advantage over another country in
producing everything?

England
Portugal

100 Barrels of Wine

100 Rolls of Cloth

Cost in Man-years

Cost in Man-Years

120
80

100
90

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Free Trade and Utility: David

Ricardo (cont.)
With 220 labors in England and 170 labors
in Portugal, and no trade:

England
Portugal

Wine
100
100

Cloth
100
100

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Free Trade and Utility: David

Ricardo (cont.)
In England:
To produce 1 barrel of wine, it must give up 1.2
rolls of cloth.
To produce 1 roll of cloth, it must give up 0.83
barrels of wine.

In Portugal
To produce 1 barrel of wine, it must give up
0.89 rolls of cloth.
To produce 1 roll of cloth, it must give up 1.1
barrels of wine.
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Free Trade and Utility: David

Ricardo (cont.)
Comparative Advantage
A situation where the opportunity costs
(costs in terms of other goods given up) of
making a commodity are lower for one
country than for another.

Conclusion
England has a comparative advantage in the
production of cloth.
Portugal has a comparative advantage in the
production of wine.
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Free Trade and Utility: David

Ricardo (cont.)
Ricardo says that a nation should produce the
product which it has comparative advantage in
producing, and trade it for what the other
country has an comparative advantage in
producing.
England
Portugal
Total

Wine
0
212
212

Cloth
220
0
220
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Free Trade and Utility: David

Ricardo (cont.)
Suppose the rate of exchange is 1.04 rolls of
cloth for 1 barrel of wine, and England trades
106 of its rolls of cloth for 102 of Portugals
barrels of wine. (Both will have more of both
products than either had when they did not
specialize or trade)
England
Portugal
Total

Wine
102
110
212

Cloth
114
106
220
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Criticisms of Ricardo
Ricardo assumes that the resources to produce
goods do not move across the border.
Ricardo assumes that there are no economies of
scale.
Production costs are constant.

Ricardo assumes that workers can easily and

costlessly switch from one industry to another.
Ricardo ignores international rule setters.
E.g. IMF, the World Bank, WTO
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Marx and Justice

According to Marx
Capitalism offers only two sources of income:
(1) sale of ones own labor and (2) ownership
of the means of production (buildings,
machinery, land raw materials).
1s are forced to sell their labor to 2s because
they cannot produce anything without access
to the means of production.
As a result, the income gap between 1s and
2s is widened.
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Marx and Justice (cont.)

Capitalism and its private property system
alienates the lower working class because
In capitalist societies, the products that 1s produce
by their labor are taken away by 2s.
Capitalism forces people into work that they find
dissatisfying and unfulfilling and that is controlled by
someone else.
Capitalism instill false views of what their real human
needs and desires are.
Capitalism alienates human beings from each other
by separating them into a proletariat laboring class
and a bourgeois class of owners and employers.

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Marx and Justice (cont.)

Private property and free markets leads to
alienation, which is unjust and in conflict
with the demands of caring.
So common property institutions should be
established instead. Productive society can
still be the result because the desire to be
productive is an instinct.

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Marx and Justice (cont.)

Subordination of government to interests of
ruling economic class
A societys government and its ideologies are
designed to protect the interests of its ruling
economic classes. Theses classes are created by the
societys underlying relations of production, and
these relations of production in their turn are
determined by the underlying forces of production.
Modern government is not created by consent as
Locke had claimed, but by a kind of economic
determination.
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Marx and Justice (cont.)

Subordination of government to interests
of ruling economic class (cont.)
Relations of production are the social
controls used in producing goods (i.e., the
social controls by which society organizes and
controls its workers).
Control based on ownership
Control based on authority to command

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Marx and Justice (cont.)

Subordination of government to interests
of ruling economic class (cont.)
Forces of productions are the materials
(land, labor, natural resources, machinery,
energy, technology) used in production.
Methods a society uses to produce goods
determine the way that society organizes its
workers.

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Marx and Justice (cont.)

Immiseration of workers
Capitalism produces the combined effects of
increased concentration of industrial power,
cyclic crises due to an over supply of goods,
rising unemployment, and declining relative
compensation.

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Defenders of Capitalism
Criticisms from Marx wrongly assume that
justice means either equality or distribution
according to need.
Marxs view is an imposition of his subjective
preference on the other members of society.

Justice really means distribution according to

contribution, and this requires free market
system.
Free market enables resources to be allocated
efficiently without interference, and this is a
greater benefit than equality.
Immiseration of workers never happened.

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The Mixed Economy

Mixed economy

An economy that retains a market and private

property system but relies heavily on government
policies (income taxes, minimum wage laws, safety
laws, union laws, fiscal and monetary policies) to
remedy their deficiencies.

US which has low level of government

intervention is worse off (greater inequality,
lower productivity, lower GNP, higher
unemployment, higher inflation) compared to
countries with high level of government
intervention.
Since the intrusion of government regulation
and social welfare programs, US economic
conditions have improved.

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Property Systems and New

Technologies
Intellectual property is a property that
consists of an abstract and nonphysical
object.
E.g. a program, a song, an idea, etc.
Unlike physical property, intellectual property
can be copied, used, or consumed by
countless individual at the same time.

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Property Systems and New

Technologies (cont.)
Locke and utilitarian view that intellectual
property should be treated as private property.
Without such private property rights, intellectual
creation would dry up.

Marx views that intellectual property should be

treated as public property.
Intellectual creativity does not require the financial
incentives.

At present, a copyright or a patent can be

granted to the expression of an idea.
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The End of Marxism?

The fall of Soviet Union represent the end
of Marxism?
The domination of mixed economy in
western nations

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CONTACT
Nattawoot Krongkajonsook
Email: fbusnwk@ku.ac.th
Homepage :

http://fin.bus.ku.ac.th/16/nattawoot.htm

Mobile: 01- 6394990

Office:
Department of Finance, 4th Floor of Faculty of
Business Administration, Kasetsart University
Tel: 02-9428777 Ext. 356

Office Hours:
Monday and Wednesday, 10 am 2 pm.
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