This Chapter Discusses the Morality of the Market System as a Whole

7/30/2019 This Chapter Discusses the Morality of the Market System as a Whole

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This chapter discusses the morality of the market system as a whole. It examines howmarket systems are justified, and explains the relative strengths and weaknesses of the

various systems currently in use.

There are two basic viewpoints: one says that the business system should beplanned; theother that it should be afree marketsystem.

After examining the arguments for and against free markets and government regulation, thechapter discusses the possibility of a hybrid mixed economysystem.

Learning Objectives-

Understand the basic arguments for and againstfree markets and central planning. Recognize how these arguments are based upon ideology.

Explain how John Locke (1632-1704) and Adam Smith (1723-1790) make the case for freemarkets.

Understand the major criticisms of these free market theories, especially those of JohnMaynard Keynes (1883-1946) and Karl Marx (1818-1883).

Explain how Social Darwinism is connected to the free market economy. Understand the effect of new technologies on free market assumptions about property

rights.

Introduction to Business Systems-

Globalization & Free trade: It is but a single episode in a centuries old debate on governmentregulation.

Tradition-based societies. Economic Systems, ideologies of modern societies:

Market economy and free markets: John Lockes argument based on a theory of moral rights. Adam Smiths argument based on utilitarian principles.

Command economy. Arguments for free markets. David Ricardos arguments about free trade. Opposing arguments of Karl Marx.

Free Markets and Rights

[Ideas of John Locke (1632-1704)]-


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Human beings have a natural right to Libertyand private property. If there were no governmentshuman beings would be ina state of naturefree of any

constraints other than the law of nature: Being all equal and independent no one aught

to harm another in his life, health, liberty or possessions.

Because the state of nature is dangerous, individuals organize themselves in political bodiesto form governments with power that is limited only to protect these very basic rights.

Influence of Lockean Rights-

Lockes views on property rights have been very influential in America. (The 5 th. Amendmenteven quotes Locke directly).

Lockes view that labor creates property rights has also been influential in USA.

Friedrich Hayek and several other 20

th

. Century authors have used Lockean rights to libertyand property, to argue for free markets & the institution of private property.

Lockes view that when a person creates a thing he acquires property rights over that thingunderlies many laws regarding property and ownership.

Criticism of the Lockean Defense of Free Markets-

The assumption that individuals have natural rights that take precedence over all otherrights: This assumption is unproven. If humans dont have the overriding rights to liberty and

property then the fact that free markets will preserve the rights doesnt mean a great deal.

The conflict between natural rights and positive rights: why should negative rights, i.e.,liberty take precedence over positive rights?

The conflict between natural rights and justice: Free markets create unjust inequalities. Individualistic assumptions and their conflicts with ethics of caring: Locke assumes that

people are individuals first, independent of their communities. But without caring

relationships no human could survive

Free markets and Utility

{Adam Smith (1723-1790)}-

Modifying Lockes views on free markets, Adam Smiths arguments rest on utilitarian ideasthat 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 freemarkets they will inevitably be led to further the public welfare by an invisible hand.

Supply and demand according to this view will allocate resources efficiently. The best thing for the government to do is to do Nothing. The market on its own will

advance public welfare giving people what they want at for the lowest possible cost.


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A system of private property is necessary for a free market system.Common Criticism of Adam Smiths Utilitarian Argument-

Smiths arguments are unrealistic. Smith assumes that:

No one seller can control the price of a good: This is not true today, as many industries are monopolized to some extent.

Manufacturers will pay for all resources used to produce a product: When a manufacturer uses water and pollutes it, some one else pays for it.

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. Marketsystems make humans selfish and make us think profit motive is natural.

Keynes (1883-1946) An Influential Critic Of Adam Smith-

John Maynard Keynes argued that government intervention was necessary because thereis a mismatch between aggregate supply and demand which leads to contraction of

supply.

Government can influence the propensity to save through its influence on the interestrates.

Government spending can also close the gap between aggregate demand and aggregatesupply by taking up the slack in demand from households and businesses.

Keynes arguments became less convincing though, after stagflation of 1970s. It has been replaced by a post-Keynesian school of thought, which argues for even more

governmental intervention in the market.

Social DarwinismA Justification For Free Markets-

Economic competition produced human progress. If governments were to interfere in thisprocess , they would also unintentionally be impeding human progress.

Weak firms must be weeded out by competition. Survival of the fittestmeans survival of the best. The fallacy which modern authors call naturalistic fallacy, implies , of course, that

whatever happens naturally is always the best.

Free Trade and Utility

[David Ricardo (1772-1823)]-


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Adam Smiths book, the Wealth of Nations was primarily aimed at showing ben efits offree trade.

Smith highlighted the benefits of making products each country has absolute advantage inproducing and trading it with what another country has an absolute advantage in

producing.

Ricardo advocated free trade on the basis of comparative advantage and specialization,even though one can make everything more cheaply than the other.

Specialization increases the total output of goods countries produce, argued Ricardo, andthrough trade all countries can share in this added bounty.

Free Trade and Utility-

Ricardos basic argument is accepted by most economists as correct in theory, but manyquestion whether his utilitarian argument applies in todays real world.

Ricardo makes many assumptions which arent correct today: Resources used to produce goods do not move from one country to another. Each countrys production costs are constant. Workers can easily move from one industry to another. Ricardo ignores international rule setters.

It is difficult to say how telling these criticisms are. However, many people today continueto be supporters of free trade, repeating Ricardos comparative advantage argument.

Many others have become harsh critics of globalization.

Karl Marx (1818-1883) Criticizing Markets and Free Trade -

Karl Marx is the most influential critic of the inequalities that private property institutions,free markets and free trade are accused of creating.

According to Marx, capitalist systems offer only two sources of income: sale of ones ownlabor, and ownership of the means of production. The workers are forced to sell theirlabor to the owner for a wage. Those who own the means of production (bourgeois)

become wealthier and workers (proletariat) become relatively poorer.

In Marxs view capitalism alienates the lower working classes by not allowing them todevelop their productive potential, nor real human needs.

The real purpose of government, says Marx is to protect the interest of the ruling class ofowners.

The forces of production of the society (its economic substructure) always have,historically, given the society its class and its social superstructure (or government andpopular ideologies).


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Those in power promote the ideologies that justify their position of privilege. This view ofhistory is called Historical Materialism.

The result of unrestrained free markets and private ownership will be a series of disastersfor working people, leaving them immiserated. Three general tendencies will bring this

about:

Increasing concentration of industrial power. Repeated cycles of economic downturns. The position of the worker in capitalist societies will gradually worsen.

Though many of Marxs predictions have turned out to be correct, immiseration ofworkers has not occurred.

Still many claim that unemployment, inflation, alienation and false desires do characterizemuch of modern capitalist society.

Defenders of free markets claim that justice really means distribution according tocontribution. Even if private ownership creates inequalities, defenders of free markets still

maintain that the benefits of the system are greater and more important than the

incidental inequalities.

Whether the free market argument is persuasive depends ultimately on the importanceone gives to the rights to liberty and property, as opposed to a just distribution of income

and wealth.

Conclusion: The Mixed Economy-

Many economists now advocate retaining the market system and private property whilemodifying their working through government regulation, a mixed economy that attempts

to remedy the deficiencies of a free market system.

New technologies are also firing the debate over the balance between Lockean privateproperty and collective ownership.

Modern technologies create new forms of intellectual property that can be copied andconsumed by a number of different individuals at once.

Though critics of Marx contend that Marxism is dead, many socialist trends and theoriesremain influential.

Locke and Smiths form of capitalism has the upper hand, but many nevertheless maintainthat a mixed economy comes closest to combining the utilitarian benefits of the market

economy with a proper respect for human rights, caring and justice.

This Chapter Discusses the Morality of the Market System as a Whole

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