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Philosophy 360: Business Ethics. Chapter 8. American Free Enterprise. Individuals are free to pursue perceived benefit to themselves. This is only rational.

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american free enterprise
American Free Enterprise
  • Individuals are free to pursue perceived benefit to themselves. This is only rational.
    • However, individual rationality sometimes leads to conundra that are only solved by some form of collective rational activity, e.g. Prisoners’ Dilemmas, Free Rider Problems, and the Tragedy of the Commons.
  • Individual actions are tolerated by society only if they benefit or at least do not harm it. This is only rational.
fairness constraints
Fairness constraints:
  • A transaction is fair if both parties to it engage in the action freely and if both parties have access to adequate knowledge if the relevant aspects of the transaction.
  • Deceitful contract terms, negotiating in bad faith, concealing information, price gouging, etc. are all examples of unfair transaction practices and are socially controlled.
american government and its relationship to its economic system
American Government and its relationship to its economic system
  • Government is not the only social control mechanism, but is a major one. The American government has imposed the following general social controls on free enterprise:
    • Welfare ‘safety net’
    • Provision of common goods
    • Manipulation of economic cycles
    • Correction of unfair tendencies and market failures
    • Taxation
w elfare
  • Only those who contribute to economic activity are rewarded, so those who cannot or will not contribute to economic activity are left out.
  • Those who can but do not wish to engage in economic activity are justly denied its rewards, but clearly those who cannot contribute should not be simply left to starve.
  • Any social welfare policy must to some extent disentangle one group from another (see following slide about precision/recall), and this tends to be the greatest policy challenge.
precision recall problem
Precision/Recall Problem

Precision (only but not all)

Recall (all but not only)

Consider an analogy to a birdhouse. The designer must select the size of the entrance hole. If she makes the hole large enough, all sparrows (for example) will be able to enter. A birdhouse designed in this way has 100% recall, that is, it selects all sparrows. However, it does let in some skinny hawks, so does not maximize precision.

  • Consider an analogy to a birdhouse. The designer must select the size of the entrance hole. If she makes the hole small enough, only sparrows (for example) will be able to enter. A birdhouse designed in this way is 100% precise, that is, it selects for only sparrows. However, it does leave out some fat sparrows, so does not maximize recall.
provision of common goods
Provision of Common Goods
  • Highway systems, railroads, utility infrastructures, public schools, parks, libraries, reservoirs, dams, etc. are all examples of government (national, state, and local) provision of common goods.
  • Each serves (or is supposed to serve) a compelling social interest.
  • “All right... all right... but apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order... what have the Romans done for us?” – from Monty Python’s “Life of Brian”
control of economic cycles
Control of economic cycles:
  • Fiscal policy (deficit versus surplus government spending) and monetary policy (control of the amount of money in existence) are (theoretically) the tools that government uses to flatten the business cycle.
  • The idea is to decrease the size of the economy in good times and increase it in bad times to allow for more stability.
correction of unfair tendencies and market errors
Correction of unfair tendencies and market errors
  • Unfair tendencies (examples):
    • Monopolies restricting competition are addressed by antitrust laws
    • Some beneficial monopolies are regulated so as not to take advantage of monopoly
    • Food and Drug regulations protect against unreasonable inequalities in knowledge
  • Market errors (example):
    • The market undervalues a socially beneficial good or service.
    • Few vaccines are available or are being researched and/or approved for tropical diseases, even though the vast majority of all human disease is tropical.
prisoners dilemma
Prisoners’ dilemma
  • From each person’s perspective, staying quiet will either land them 10 years in prison if their partner rats them out or 2 years if their partner stays quiet. If they confess, they get 6 years if their partner rats them out (better than 10) and 0 years if their partner stays quiet (better than 2). This rationale prompts both to rat the other out and then both settle for the suboptimal outcome. This is an example where individuals acting rationally in the absence of communication result in a suboptimal outcome.
tragedy of the commons
Tragedy of the Commons
  • In this scenario, every individual has a rational incentive to make maximal use of a shared resource, and that incentive feeds back on itself for each individual until the shared resource is entirely depleted, leaving both parties worse off than they were before.
free rider problem
Free Rider Problem
  • Consider income taxes. Could the government exist and operate without any given single individual’s tax money? Surely it could.
  • Given that most people will pay their taxes, it seems rational for an individual not to pay their taxes while still benefitting from the existence and operation of the government.
  • The problem is that if everybody thought this way, the system would collapse. So a system can tolerate only so many free riders, but the temptation to be a free rider always exists when individuals make individually rational decisions without any social consideration.
  • At its most basic level, taxation is a mechanism for supporting the various functions of government, but taxation can also be a social force in its own right.
    • Keep in mind that there are many kinds of taxes. Income, excise, import, and vice taxes are all familiar.
    • Tax policy can not only raise revenue, but can be used as a tool to encourage and discourage certain behaviors and to redistribute resources.
  • What is a fair income tax rate?
    • Everybody gives up the same amount of money? Clearly no.
    • Everybody gives up the same percentage of income? Better, but still problematic
    • Everybody sacrifices equal value? Defensible (remember diminishing marginal value).
the marxist critique of capitalism
The Marxist Critique of Capitalism
  • There are three major elements of the Marxist critique, to be discussed in turn. It is worth noting first though that the failure of the Soviet Union in no way proves that the Marxist critique is invalid.
  • Elements of the criticism:
    • Capitalism necessarily exploits the workforce
    • Capitalism necessarily alienates humans from one another
    • Capitalism unavoidably protects the interests of a few at the expense of the many.
the labor theory of value
The Labor Theory of Value
  • Marx’s critique leaned heavily on the labor theory of value, which has some conceptual difficulties, but the charge that capitalism provides an inherent incentive for exploitation is a legitimate criticism even without the labor theory of value.
  • The labor theory of value states that all commodities are worth the time and effort that they took to produce, and so if there is any profit in capitalism, it is for undervaluing labor.
  • It is plausible to say that the profit in capitalism comes from the exchange of surpluses that are of small value to their possessors to those with deficits, to whom the commodities are very valuable.
  • Also, an amount of skilled time and labor can produce great value while an equal amount of unskilled time and labor can even subtract value.
the incentive to exploitation
The Incentive to Exploitation
  • Whether or not profit does or does not come from undervaluing labor, the profit motive provides a great incentive to undervalue labor.
  • Labor is always a significant business cost, and the more it can be minimized, the more profitable the business venture.
  • This leads to various forms of worker exploitation: long hours, bad pay, bad safety, higher underemployment and unemployment, lack of security
  • One major element of this argument is that as conditions have improved for workers in the developed world, exploitation of the developing world has become necessary for capitalism to continue.
alienation of the people
Alienation of the People
  • The Marxist position is that since capitalism treats persons as means to an end or as cogs in a big machine, it sets groups of people apart from one another and increasingly against one another. In other words, it makes society more adversarial and competitive than it needs to be.
  • Certainly there are aspects of contemporary life that are too materialistic and insufficiently cooperative, but it is far from clear that these features are inherent to all capitalist economic systems.
vested interests
Vested Interests
  • Again, it is not clear that capitalists societies are more inherently unequal, or that massive inequality is inevitable.
  • However, this criticism is primarily the criticism of the “occupy” movements: that the “top 1%” (or, the wealthiest few individuals and largest few businesses) have influenced government to serve their interests at the expense of everyone else’s
  • Francis Fukuyama, in “The Origins of Political Order” argues for an “Iron Law of Latifundia”, that is,  in any state where large and valuable incomes are captured by a rent-seeking elite, that elite will capture the governance and use its influence to continue to capture more and more of the wealth. This will generally continue, so the theory goes, until the society becomes intolerably unequal. This unhappy state is often resolved through reform, upheaval or outright revolution.
other criticisms of american capitalism
Other criticisms of American Capitalism:
  • Capitalism creates false needs and overproduction
  • Capitalism fosters a military-industrial complex
  • Capitalism creates gross unjust inequality
false needs and overproduction
False needs and overproduction
  • It is true that Americans have tended to be short-sighted and wasteful, and have over-consumed resources for frivolous purposes.
  • However, these defects may not be inherent in capitalism. Consumerism and capitalism may feed off of one another, but they are separate phenomena.
the military industrial complex
The Military-Industrial Complex
  • This term is generally credited to then President Dwight Eisenhower, who warned of the dangers of a “military-industrial complex” in his presidential farewell address.
  • The upshot of this criticism is that when war becomes profitable, it becomes assured.
  • This is likely overblown, but another point made by Eisenhower was the argument that money spent on non-military purposes is likely to have a much greater social benefit than excess military spending.
  • See the full text of Eisenhower’s speech here:
inherent inequality
Inherent Inequality
  • Remember Rawls’ conditions for distributive justice: that inequalities should be the result of opportunities open to all, and should be structured to benefit rather than harm the least advantaged.
  • In America, there is vast income inequality, and the real tax liability, despite the official tax rates, is borne by the middle classes.
  • The “trickle-down” theory of economics has been thoroughly discredited.
  • Clearly there is also discrimination despite laws to the contrary.
  • However, it is not clear that such outcomes are inherent to capitalism.
moral defenses of capitalism
Moral Defenses of Capitalism
  • The continued existence of capitalist countries does not morally justify capitalism. However, just as capitalism is alleged to have inherently immoral components, its defenders allege it to have inherently morally praiseworthy components. These include:
    • Freedom and Efficiency
    • The production of wealth
    • Preferability to actual socialist systems
freedom and efficiency
Freedom and Efficiency
  • Any system that significantly abridged or constrained the economic behaviors of individuals within it would by definition be an unfree system, and would by definition be a non-capitalist system, so freedom is an inherent characteristic of capitalism.
  • Also, markets are generally efficient in allocating and distributing resources, more so than central planning committees. (Fun fact, in the Soviet Union, brasieres were made in only one size until 1930, and only in three until 1970. Female swimwear was exclusively handmade.)
production of wealth
Production of wealth
  • It is virtually undisputable that free enterprise has overseen enormous growth in human productive capacity, nor is it clear that such increases in the standard of living of capitalist countries has come at the expense of the developing world.
  • If this standard of living increase is a common consequence of capitalism, capitalism can be positively morally evaluated for it.
preferability to actual socialist systems
Preferability to actual socialist systems
  • This position asserts that American capitalism has been more successful or as successful in providing good as any rival system and that the onus probandum is on other systems to do better.
non socialist reform options
Non-socialist reform options
  • Libertarianism (deregulation)
  • Workers’ Democracy – Social agitation to give more popular influence over the actions and decision making processes of big business.
  • Piecemeal reforms