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Business Ethics

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Business Ethics ­MGT610
VU
LESSON 17
FREE MARKETS AND UTILITY: ADAM SMITH
Smith's utilitarian argument is most commonly criticized for making what some call unrealistic
arguments. First, Smith assumes that no one seller can control the price of a good. Though this
may have been true at one time, today many industries are monopolized to some extent.
Second, Smith assumes that the manufacturer will pay for all the resources used to produce a
product, but when a manufacturer uses water and pollutes it without cleaning it, for example,
someone else must pay to do so. Third, Smith assumes that 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, say Smith's critics, make humans selfish and make us think that the profit motive is
natural.
One especially influential critic of Smith was John Maynard Keynes. Keynes argued that
government intervention was necessary because there is a mismatch between aggregate supply
and demand, which inevitably leads to a contraction of supply. Government, according to
Keynes, can influence the propensity to save, which lowers aggregate demand and creates
unemployment. Government can prevent excess savings through its influence on interest rates,
and it can influence interest rates by regulating the money supply. The higher the supply of
money, the lower the rate at which it is lent. Second, government can directly affect the amount
of money households have available to them by raising or lowering taxes. Third, government
spending can close any gap between aggregate demand and aggregate supply by taking up the
slack in demand from households and businesses. Keynes' arguments became less convincing
after the stagflation of the 1970s, though. It has been replaced by a post-Keynesian school of
thought, which argues for even more governmental intervention in the market.
Social Darwinists had a different take on the utilitarian justification for free markets. They
argued that 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, they claim. The basic problem underlying the views of the
social Darwinist, however, is the fundamental normative assumption that survival of the fittest
means survival of the best. That is, whatever results from the workings of nature is necessarily
good. The fallacy, which modern authors call the naturalistic fallacy, implies, of course, that
whatever happens naturally is always for the best.
Free Trade and Utility: David Ricardo
Adam Smith's major work, the Wealth of Nations, in fact, was primarily aimed at showing the
benefits of free trade. There he wrote:
It is the maxim of every prudent master of a family never to attempt to make at
home what it will cost him more to make than to buy. The tailor does not make his
own shoes but buys them from the shoemaker... What is prudence in the conduct of
every family can scarce be folly in that of a great kingdom. If a foreign country can
supply us with a commodity cheaper than we ourselves can make it, better buy it of
them with some part of the produce of our own industry, employed in a way in
which we have some advantage.
Adam Smith's point here is simple. Like individuals, countries differ in their ability to produce
goods. One country can produce a good more cheaply than another and it is then said to have
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Business Ethics ­MGT610
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an "absolute advantage" in producing that good. These cost differences may be based on
differences in labor costs and skills, climate, technology, equipment, land, or natural resources.
Suppose that because of these differences, our nation can make one product for less than a
foreign nation can, and suppose the foreign nation can make some other product for less than
we can. Then clearly it would be best for both nations to specialize in making the product each
has an "absolute advantage" in producing, and to trade it for what the other country has an
"absolute advantage" in producing. It was Ricardo's genius to realize that both countries could
benefit from specialization and trade even though one can make everything more cheaply than
the other. Specialization increases the total output of goods countries produce, and through
trade all countries can share in this added bounty.
Ricardo's ingenious argument has been hailed as the single "most important" and "most
meaningful" economic discovery ever made. Some have said it is the most "surprising" and
"counterintuitive" concept in economics. It is, without a doubt, the most important concept in
international trade theory today and is at the heart of the most significant economic arguments
people propose today when they argue in favor of globalization. Ricardo makes a number of
simplifying assumptions that clearly do not hold in the real world, such as that there are only
two countries making only two products with only a fixed number of workers. But these are
merely simplifying assumptions Ricardo made to get his point across more easily and Ricardo's
conclusion could still be proved without these assumptions.
There are other assumptions, however, that are not so easy to get around. First, Ricardo
assumes that the resources used to produce goods (labor, equipment, factories, etc.) do not
move from one country to another. Yet today multinational companies can, and easily do, move
their productive capital from one country to another. Second, Ricardo assumes that each
country's production costs are constant and do not decline as countries expand their production
or as they acquire new technology.
Third, Ricardo assumes that workers can easily and unreservedly move from one industry to
another. Yet when a company closes down because it cannot compete with imports from
another country that has a comparative advantage in those goods, the company's workers are
laid off, suffer heavy costs, need retraining, and often cannot find comparable jobs.
Finally, and perhaps most importantly, Ricardo ignores international rule setters. International
trade inevitably leads to disagreements and conflicts, and so countries must agree to abide by
some set of rules and rule-setters.
Marx and Justice: Criticizing Markets and Trade
Karl Marx offers the most critical view of modern private property and free market institutions.
Marx claims that free-market capitalism necessarily produces extremes of inequality. Since
capitalist systems offer only two sources of income­owning the means of production and
selling one's labor­workers cannot produce anything without the owner of the productive
forces. But owners do not pay the full value of the workers' labor; they pay workers what they
need to subsist, keeping the rest for themselves and gradually becoming wealthier as a result.
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Table of Contents:
  1. INTRODUCTION:Business Issues
  2. INTRODUCTION (CONTD.)
  3. THEORY OF ETHICAL RELATIVISM
  4. MORAL DEVELOPMENTS AND MORAL REASONING
  5. MORAL REASONING:Arguments For and Against Business Ethics
  6. MORAL RESPONSIBILITY AND BLAME
  7. UTILITARIANISM:Utilitarianism: Weighing Social Costs and Benefits
  8. UTILITARIANISM (CONTD.):rule utilitarianism, Rights and Duties
  9. UNIVERSALIZABILITY & REVERSIBILITY:Justice and Fairness
  10. EGALITARIANS’ VIEW
  11. JOHN RAWLS' THEORY OF JUSTICE:The Ethics of Care
  12. THE ETHICS OF CARE:Integrating Utility, Rights, Justice, and Caring
  13. THE ETHICS OF CARE (CONTD.):Morality in International Contexts
  14. MORALITY IN INTERNATIONAL CONTEXTS:Free Markets and Rights: John Locke
  15. FREE MARKET & PLANNED ECONOMY:FREE TRADE THEORIES
  16. LAW OF NATURE:Theory of Absolute Advantage, Comparative Advantage
  17. FREE MARKETS AND UTILITY: ADAM SMITH:Free Trade and Utility: David Ricardo
  18. RICARDO & GLOBALIZATION:Ricardo’s Assumptions, Conclusion
  19. FREE MARKET ECONOMY:Mixed Economy, Bottom Line for Business
  20. COMPETITION AND THE MARKET:Perfect Competition
  21. PERFECT COMPETITION
  22. MONOPOLY COMPETITION:Oligopolistic Competition
  23. OLIGOPOLISTIC COMPETITION:Crowded and Mature Market
  24. OLIGOPOLIES AND PUBLIC POLICY:Ethic & Environment, Ozone depletion
  25. WORLDWATCH FIGURES:Population Year, Agriculture, Food and Land Use
  26. FORESTS AND BIODIVERSITY:The Ethics of Pollution Control
  27. THE ETHICS OF POLLUTION CONTROL:Toxic Chemicals in Teflon
  28. THE ETHICS OF POLLUTION CONTROL
  29. THE ETHICS OF POLLUTION CONTROL:Recommendations to Managers
  30. COST AND BENEFITS:Basis of social audit, Objectives of social audit
  31. COST AND BENEFITS:The Ethics of Conserving Depletable Resources
  32. COST AND BENEFITS:The Club of Rome
  33. THE ETHICS OF CONSUMER PRODUCTION AND MARKETING:DSA Comments
  34. THE ETHICS OF CONSUMER PRODUCTION AND MARKETING:Should Consumers Bear More Responsibility?
  35. THE CONTRACT VIEW OF BUSINESS' DUTIES TO CONSUMERS
  36. THE CONTRACT VIEW OF BUSINESS' DUTIES TO CONSUMERS:The Due Care Theory
  37. THE SOCIAL COSTS VIEW OF THE MANUFACTURER’S DUTIES
  38. ADVERTISING ETHICS:The Benefits of Advertising, The harm done by advertising
  39. ADVERTISING ETHICS:Basic Principles, Evidence, Remedies, Puffery
  40. ADVERTISING IN TODAY’S SOCIETY:Psychological tricks
  41. ADVERTISING IN TODAY’S SOCIETY:Criticism of Galbraith's Work
  42. ADVERTISING IN TODAY’S SOCIETY:Medal of Freedom
  43. ADVERTISING IN TODAY’S SOCIETY:GENERAL RULES, Substantiation
  44. ADVERTISING IN TODAY’S SOCIETY:Consumer Privacy, Accuracy
  45. THE ETHICS OF JOB DISCRIMINATION:Job Discrimination: Its Nature