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Business Ethics

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Business Ethics ­MGT610
VU
LESSON 16
LAW OF NATURE
"A state also of equality, wherein all the power and jurisdiction is reciprocal, no one
having more than another... without subordination or subjection [to another].... But...
the state of nature has a law of nature to govern it, which obliges everyone: and
reason, which is that law, teaches all mankind, who will but consult it, that being all
equal and independent, no one ought to harm another in his life, health, liberty, or
possessions."
Thus, according to Locke, the law of nature teaches us that we have a natural right to liberty.
But because the state of nature is so dangerous, says Locke, individuals organize themselves
into a political body to protect their lives and property. The power of government is limited,
however, extending only far enough to protect these very basic rights.
Locke's views on property rights have been very influential in America. The Fifth Amendment
to the U.S. Constitution even quotes Locke directly. In this view, government does not grant or
create property rights. Rather, nature does, and government must therefore respect and protect
these rights. Locke's view that labor creates property rights has also been influential in the U.S.
Although Locke never explicitly used his theory of natural rights to argue for free markets,
several 20th-century authors have employed his theory for this purpose.19 Friedrich A. Hayek,
Murray Rothbard, Gottfried Dietze, Eric Mack, and many others have claimed that each person
has the right to liberty and property that Locke credited to every human being and
consequently, government must leave individuals free to exchange their labor and their
property as they voluntarily choose. Only a free private enterprise exchange economy, in which
government stays out of the market and in which government protects the property rights of
private individuals, allows for such voluntary exchanges. The existence of the Lockean rights
to liberty and property, then, implies that societies should incorporate private property
institutions and free markets.
It is also important to note that Locke's views on the right to private property have had a
significant influence on American institutions of property even in today's computer society.
First, and most important, throughout most of its early history, American law has held to the
theory that individuals have an almost absolute right to do whatever they want with their
property and that government has no right to interfere with or confiscate an individual's private
property even for the good of society. Second, underlying many American laws regarding
property and ownership is Locke's view that when a person expends his or her labor and effort
to create or improve a thing, he or she acquires property rights over that thing.
Theory of Absolute Advantage
In 1776 Adam Smith asserted that the wealth of a nation consisted of the
goods and services available to its citizens. His theory of absolute
advantage holds that a country can maximize its own economic well being
by specializing in the production of those goods and services that it can
produce more efficiently than any other nation and enhance global efficiency
through its participation in (unrestricted) free trade. Smith reasoned that: (i)
workers become more skilled by repeating the same tasks; (ii) workers do
not lose time in switching from the production of one kind of product to
another; and (iii) long production runs provide greater incentives for the
development of more effective working methods. Smith also asserted that
country-specific advantages can either be natural or acquired.
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Business Ethics ­MGT610
VU
1. Natural Advantage. A country may have a natural advantage in the production
of particular products because of given climatic conditions, access to particular
resources, the availability of labor, etc. Variations in natural advantages among
countries help to explain where particular products can be produced most
efficiently.
2. Acquired Advantage. An acquired advantage represents a distinct advantage
in skills, technology, and/or capital assets that yields differentiated product
offerings and/or cost-competitive homogeneous products.  Technology, in
particular, has created new products, displaced old products, and altered trading-
partner relationships.
3. Resource Efficiency Example. Real income depends on the output of products
as compared to the resources used to produce them. By defining the cost of
production in terms of the resources needed to produce a product, the production
possibilities curve shows that through the use of specialization and trade, the
output of two countries will be greater, thus optimizing global efficiency.
Comparative Advantage
In 1817 David Ricardo reasoned that there would still be gains from trade if
a country
specialized in the production of those things it can produce most efficiently, even if other
countries can produce those same things even more efficiently. Put another way, Ricardo's
theory of comparative advantage holds that a country can maximize its own economic well-
being by specializing in the production of those goods and services it can produce relatively
efficiently and enhance global efficiency through its participation in (unrestricted) free trade
Locke's critics focus on four weaknesses in his argument:
The assumption that individuals have natural rights: This assumption is unproven and assumes
that the rights to liberty and property should take precedence over all other rights. If humans do
not have the overriding rights to liberty and property, then the fact that free markets would
preserve the rights does not mean a great deal.
The conflict between natural (negative) rights and positive rights: Why should negative rights
such as liberty take precedence over positive rights? Critics argue, in fact, that we have no
reason to believe that the rights to liberty and property are overriding.
The conflict between natural rights and justice: Free markets create unjust inequalities, and
people who have no property or who are unable to work will not be able to live. As a result,
without government intervention, the gap between the richest and poorest will widen until large
disparities of wealth emerge. Unless government intervenes to adjust the distribution of
property that results from free markets, large groups of citizens will remain at a subsistence
level while others grow ever wealthier.
Individualistic assumptions and their conflicts with the ethics of caring: Locke assumes that
people are individuals first, independent of their communities. But humans are born dependent
on others, and without caring relationships, no human could survive. The degree of liberty a
person has depends on what the person can do. The less a person can do, the less he is free to
do. But a person's abilities depend on what he learns from those who care for him as well as on
what others care to help him to do or allow him to do.
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Business Ethics ­MGT610
VU
Free Markets and Utility: Adam Smith
Modifying Locke's views on free markets, Adam Smith's arguments rest on utilitarian
arguments that unregulated markets and private property will produce greater benefits than any
other system. According to Smith, when private individuals are left free to seek their own
interests in free markets, they will inevitably be led to further the public welfare by an
"invisible hand:"
By directing [his] industry in such a manner as its produce may be of the greatest
value, [the individual] intends only his own gain, and he is in this, as in many other
cases, led by an invisible hand to promote an end that was no part of his intention.
By pursuing his own interest he frequently promotes that of society more effectively
than when he really intends to promote it. Free markets, according to Smith, ensure
that buyers will purchase what they need at the lowest prices they can find, and
business will correspondingly attempt to satisfy these needs at the lowest prices they
can offer. Competition forces sellers to drop their prices as low as they can and to
conserve resources while producing what consumers actually want.
Supply and demand, according to this view, will help allocate resources efficiently. When the
supply of a certain commodity is not enough to meet the demand, buyers bid the price of the
commodity upward until it rises above what Smith called the natural price (i.e., the price that
just covers the costs of producing the commodity, including the going rate of profit obtainable
in other markets). Producers of that commodity then reap profits higher than those available to
producers of other commodities. The higher profits induce producers of those other products to
switch their resources into the production of the more profitable commodity. As a result, the
shortage of that commodity disappears and its price sinks back to its natural level. Conversely,
when the supply of a commodity is greater than the quantity demanded, its price falls, inducing
its producers to switch their resources into the production of other, more profitable
commodities. 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.
The market, in short, allocates resources so as to most efficiently meet consumer demand,
thereby promoting social utility. The best thing for government to do is nothing; the market, on
its own, will advance the public welfare, giving people what they want for the lowest possible
cost. It is important to note that, although Adam Smith did not discuss the notion of private
property at great length, it is a key assumption of his views. Before individuals can come
together in markets to sell things to each other, they must have some agreement about what
each individual "owns" and what each individual has the right to "sell" to others. Unless a
society has a system of private property that allocates its resources to individuals, that society
cannot have a free market system.
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.
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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