Chapter 3

The Business System:

Government, Markets, and International Trade
Velasquez, M. G. (2014). Business Ethics: Concepts and Cases (7th Edition ed.). Pearson Education Limited.

Febi Fajar Nugroho Muhammad Adam Sudaryanto

Presented by:
Group 1 – Executive B 39 D Krissan Malinda Rizky Rachmiyanti Eka Putri
 Topics Discussed in This Chapter

00. Economic Systems Overview

01. Free Markets and Rights: John Locke
02. Free Markets and Utility: Adam Smith
03. Free Trade and Utility: David Ricardo
04. Marx and Justice: Criticizing Markets and Free Trade
05. Conclusion: The Mixed Economy, the New Property,
and the End of Marxism
06. Case: The GM Bailout

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 00. Economic Systems Overview

Social Devices to Accomplish Basic Economic Tasks

Tradition-Based Societies
Rely on traditional communal roles and customs
to carry out basic economic tasks.

Command Economy
Based primarily on a government authority (a person
or a group) making the economic decisions.

Market Economy
Based primarily on private individuals making the
main decisions about what they will produce and who
will get it.
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 00. Economic Systems Overview

What is the Proper Role of Government?

Individual is able to exchange goods

with others and decide what to do
Free Market with their own, without
interference from government.

A trade policy that does not restrict

imports or exports, in which
governments impose absolutely no Free Trade
tariffs, taxes, or duties on
imports, or quotas.

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 01. Free Markets and Rights: John Locke

Locke’s Views on Rights: The Right to Life, Liberty, and Property

▪ All persons are free and equal.

▪ People’s enjoyment of life, liberty, and property are unsafe and
insecure.
▪ Government does not grant or create private property rights.
Government is formed to protect and preserve the rights to life,
liberty, and property.
▪ Each person owns his body and labor, and whatever he mixes
his own labor into.

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 01. Free Markets and Rights: John Locke

Weaknesses and Criticisms on Locke’s Views on Rights

▪ The assumption that individuals have the “natural rights” Locke claimed
they have.
▪ The conflict between negative rights and positive rights.
▪ The conflict between Lockean right and principles of justice.
“markets should be free, but free markets can be
unjust and can lead to inequalities”
▪ The individualistic assumptions Locke makes and their conflict with
the demands of caring.
“human beings are not atomistic individuals”
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 02. Free Markets and Utility: Adam Smith

Utilitarian Argument for Free Market

According to Smith, when private individuals are left free to seek their
own interests in a free market, they will inevitably be led to further the
public welfare by an invisible hand.

invisible hand = market competition

……….. The best policy of a government that hopes to

advance the public welfare, therefore, is to do nothing.
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 02. Free Markets and Utility: Adam Smith

Assumptions that were Criticized

▪ Assumption 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.
▪ Assumption that the manufacturer will pay for all the resources
used to produce a product, but in fact, they’re not. Example:
costs of pollution.
▪ Assumption that humans are motivated only by a natural, self-
interested desire for profit.

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 02. Free Markets and Utility: Adam Smith

Keynesian Criticism: Importance of Government

▪ Government can influence the propensity to save, which lowers

aggregate demand and creates unemployment.
▪ Government can directly affect the amount of money households
have available to them by raising or lowering taxes.
▪ Government spending can close any gap between aggregate
demand and aggregate supply by taking up the slack in demand
from households and businesses.

……….. Government intervention in the economy is a necessary

instrument for maximizing society’s utility.
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 03. Free Trade and Utility: David Ricardo

Benefits of Free Trade

Best scenario 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”

▪ Specialization increases the total output of goods countries

produce, and through trade all countries can share in this added
bounty.
▪ The most important concept in international trade theory today is
Comparative Advantage .
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 03. Free Trade and Utility: David Ricardo

Objections to Ricardo’s Theory Assumptions

▪ Assumption that the resources used to produce goods (labor,

equipment, factories, etc.) do not move easily from one country to
another.
▪ Assumption that each country's production costs are constant
and do not decline as countries expand their production or as they
acquire new technology.
▪ Assumption that workers can easily move from one industry to
another.
▪ Influence of international rule setters.
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 04. Marx and Justice: Criticizing Markets and Free Trade

Marx’ View: Capitalism Promotes Unjust Inequality

Karl Marx (1818 – 1883) is undoubtedly the harshest and most well-
known critic of private property institutions, free markets and free
trade and the inequalities they are accused of creating.

According to Marx, capitalist system only offers two sources of

income:
▪ Sale of one’s own labor
▪ Ownership of the means of productions (the buildings, machineries,
land, raw materials, etc).

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 04. Marx and Justice: Criticizing Markets and Free Trade

Marx’ View on Alienation

In capitalism, workers become alienated when they lose control of

their own life activities and the ability to fulfill their true human needs.

According to Marx, capitalist economies alienate workers in 4 ways:

1 Alienation from Product

2 Alienation from Labor Process

3 Alienation from Fellow Workers
4 Alienation from Oneself
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 04. Marx and Justice: Criticizing Markets and Free Trade

Replies to Marx’s Criticism

1 Marx’s claims that capitalism is unjust are unprovable.

2 Justice requires free markets.

3 The benefits of private property and free markets (enable

resources to be allocated efficiently without coercion) have
a greater benefit than equality.
4 Free markets can encourage community instead of
causing alienation.
5 Immiseration of workers has not occurred; instead their
condition has improved
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 05. Conclusion: The Mixed Economy, The New Property

The Mixed Economy

▪ Mixed economy is an economy that retains a market and private

property system but relies heavily on government policies to
remedy their deficiencies.
▪ Mixed economy improve the economy and reduce inequality.

The New Property

▪ Intellectual property is nonphysical property that consists of

knowledge or information. It has pros and cons.
▪ Copyright is a grant that indicates that a particular expression of an
idea is the private property of an individual or a company.
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 05. Conclusion: The End of Marxism

▪ September 24, 1990 is the end of communist systems, U.S.S.R

switched to free market economy.
▪ Communist systems move toward economies that are based on the
best features of both socialism and capitalism.

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 06. Case: The GM Bailout

▪ By mid-December 2008, GM is the world’s second largest auto

manufacturer, 100 years old company.
▪ GM lacked-of vision in automobiles industry and can’t compete with
Japanese car makers that create more fuel-efficient cars.
▪ Price of gasoline gradually increase, and the demand for SUV car (best
selling GM car) decreased.
▪ GM would go bankrupt with $80 billion loss in the closing weeks of 2008.
▪ GM asked for bailout money to U.S. government.
▪ On December 19, 2008, President Bush announced that the U.S. Treasury
would provide GM with a $13.4 billion loan.
▪ On June 1, 2009, GM entered bankruptcy. The U.S. Treasury created a
new company named “General Motors Company”.
▪ Government bailout action are criticized.
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 06. Case: The GM Bailout

Q1 : How would Locke, Smith, and Marx evaluate the various events in this case?
▪ Locke
Government is formed to protect and preserve the rights to life, liberty, and property. Government
should only have a very limited role in business, so the bailout program is against the natural
rights of the individuals.
▪ Smith
The best policy of a government that hopes to advance the public welfare, therefore, is to do
nothing. The government should support free market and the market competition. If the GM
bankrupt, the other company will survive and create more job opportunities.
▪ Marx
Capitalism promotes unjust inequality. The idea of the government stepping in and wholly
owning or at least partially owning GM market share was a step in the right direction.
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 06. Case: The GM Bailout

Q2 : Explain the ideologies implied by the statements of: the letter to the U.S. Congress
signed by 100 leading economists, Joseph Stiglitz, Bob Corker, the Republican
resolution on the bailouts, Robert Higgs, and Michael Winther.
▪ The ideologies implies are free markets and free trade. The bailout program is a move into
socialism and against the ideology of U.S. The government should not involve in business
practice and interfere the competition.
▪ Government bailout action is lack of fairness. Because it was “a subsidy” to investors at
taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.

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 06. Case: The GM Bailout

Q3 : In your view should the GM bailout have been done? Explain why or why not.
Was the bailout ethical in terms of utilitarianism, justice, rights, and caring?
▪ It really depends. At one side, GM bailout was against free market, which we believe that market
competition will create more benefit to the society. Government intervention in this case was making
all taxpayers bearing the business risk for saving the companies.
▪ However, without government intervention, GM could go bankrupt and fail. GM bankruptcy will
certainly impact US economy and millions of workers that depend on those jobs.
▪ From the utilitarianism, justice, and right terms the bailout program is unethical because it
does not give greatest utility to society, harm the justice and right of the taxpayer. The bailout gives
more benefit to some party rather than to society. However, still, from caring point of view, the
bailout action can be judged ethical.
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 06. Case: The GM Bailout

Q4 : In your judgment, was it good or bad for the government to take ownership of 61
percent of GM? Explain why or why not in terms of the theories of Lock, Smith, and
Marx.
▪ The government owning 61 percent of GM will create a bad and good effect to industry, depending
on which perspective. Based on Lock’s and Smith’s point of view, the government decision is
bad because it harms the competition and create unfairness to other industry player. From
theories of Marx, the decision is good because government should control the means of
productions to eliminate inequality.

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Thank You

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