Chapter Three The Market and Business



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Chapter Three

The Market and Business

Overview

Introduction

This chapter examines the ethical aspects of the market system itself—how it is justified, and what the strengths and weaknesses of the system are from the point of view of ethics. It begins by discussing the economic conditions in the U.S. at the close of the 20th century, when proponents of industrial policy were urging the government to help declining industries and their workers to adjust to new economic conditions. Others urged caution, advising the government to "avoid the pitfalls of protectionism." This dichotomy illustrates the difference between two opposite ideologies, those who believe in the "free market" and those who advocate a "planned" economy.


These two ideologies take different positions on some very basic issues: What is human nature really like? What is the purpose of social institutions? How does society function? What values should it try to protect?
In general, two important ideological camps, the individualistic and communitarian viewpoints, characterize modern societies. Individualistic societies promote a limited government whose primary purpose is to protect property, contract rights, and open markets. Communitarian societies, in contrast, define the needs of the community first and then define the rights and duties of community membership to ensure that those needs are met.
These two camps face the problem of coordinating the economic activities of their members in two distinct ways. Communitarian systems use a command system, in which a single authority decides what to produce, who will produce it, and who will get it. Free market systems are characteristic of individualistic societies. Incorporating ideas from thinkers like John Locke and Adam Smith, they allow individual firms to make their own decisions about what to produce and how to do so.
Free market systems have two main components: a private property system and a voluntary exchange system. Pure free market systems would have absolutely no constraints on what one can own and what one can do with it. Since such systems would allow things like slavery and prostitution, however, there are no pure market systems.

3.1 Free Markets and Rights: John Locke

John Locke (1632-1704), an English political philosopher, is generally credited with developing the idea that human beings have a "natural right" to liberty and a "natural right" to private property. Locke argued that if there were no governments, human beings would find themselves in a state of nature. In this state of nature, each man would be the political equal of all others and would be perfectly free of any constraints other than the law of nature—that is, the moral principles that God gave to humanity and that each man can discover by the use of his own God-given reason. As he puts it, in a state of nature, all men would be in:


“A state of perfect freedom to order their actions and dispose of their possessions and persons as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man. 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.
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.

3.2 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.
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.

3.3 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 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.

3.4 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 income–owning the means of production and selling one's labor–workers 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.


The result for workers is increased alienation. Rather than realizing their human nature and satisfying their real human needs, they are separated from what is actually theirs in four ways:


  1. ­In capitalist societies, the products that the worker produces by his or her labor are taken away by the capitalist employer and used for purposes that are antagonistic to the worker's own interests.

  2. Capitalism forces people into work that they find dissatisfying, unfulfilling, and that is controlled by someone else.

  3. Capitalism alienates people from themselves by instilling in them false views of what their real human needs and desires are.

  4. Capitalist societies alienate human beings from each other by separating them into antagonistic and unequal social classes that break down community and caring relationships namely the Bourgeois and proletariat.

Though utilitarians claim that people would be lazy without private property, Marx counters that by this argument the bourgeois owners should long ago have wasted away: they do not work, while those who do cannot acquire any real property.


The real purpose of government, according to Marx, is to protect the interests of the ruling class of owners. The forces of production of a society–its substructure–always have, historically, given society its class and its superstructure (or government and popular ideologies). Those in power promote the ideologies that justify their position of privilege. This view of history is called historical materialism.
The result of unrestrained free markets and private ownership will be a series of disasters for working people, leaving them immiserated. Three general tendencies will combine to bring this about:
First, modern capitalist systems will exhibit an increasing concentration of industrial power in relatively few hands. As self-interested private owners struggle to increase the assets they control, little businesses will gradually be taken over by larger firms that will keep expanding in size.
Second, capitalist societies will experience repeated cycles of economic downturns or crises. Because workers are organized into mass assembly lines, the firm of each owner can produce large amounts of surplus.
Third, Marx argues, the position of the worker in capitalist societies will gradually worsen.' This gradual decline will result from the self-interested desire of capitalist owners to increase their assets at the expense of their workers.
Though many of Marx's predictions have turned out to be correct, the immiseration of workers has not occurred. Still, many claim that unemployment, inflation, alienation, and false desires do characterize much of modern capitalist society.
Defenders of free markets counter that Marx makes an unprovable assumption that just means equality or distribution according to need. They claim that justice really means distribution according to contribution (which requires free markets). Even if private ownership causes 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 importance one gives to the rights to liberty and property as opposed to a just distribution of income and wealth.

­3.5 Conclusion: The Mixed Economy

Which side, free markets or government intervention, will ultimately win? Neither the collapse of the Soviet Union nor the rise of strong collectivist governments like Japan proves one side or the other. Indeed, it may be the case that neither side by itself presents a complete picture of how the modern economy ought to run.


Many economists now advocate retaining the market system and private property while modifying their workings through government regulation, a mixed economy that attempts to remedy the deficiencies of a free market system. Such policies can be very successful, as they have been in Sweden, Japan, Norway, and many other countries. Even though the U.S. is more successful economically than most other countries, studies do indicate that mixed economies have some advantages.
New technologies are also firing the debate over the balance between Lockean private property and collective ownership. Modern technologies, especially computers, create new forms of intellectual property that, unlike other types of property, can be copied and consumed by a number of different individuals at once. Locke's view, and the view of some utilitarians, is that the mental labor that creates the property creates the property rights over that product. Socialists point out that artists, writers, and thinkers have always created works without any financial incentive.
Should new scientific and engineering discoveries be protected as private property? Should these things be shared by the society that made their discovery possible? The debate continues. Still, though critics of Marx contend that Marxism is dead, many socialist trends and theories remain influential. Locke and Smith's form of capitalism has the upper hand, but many nevertheless maintain that a mixed economy comes closest to combining the utilitarian benefits of the market economy with a proper respect for human rights, caring and justice.

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