Moral Issues in Business 12th Edition

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CHAPTER 4
The Nature of Capitalism

Learning Objectives

After completing this chapter students should be able to:

• Think critically about the ethical underpinnings of capitalism, its history and evolution,
positive and negative aspects, and alternative economic systems.
• Understand the mechanics and morality of each of the four features of capitalism—the
existence of companies, profit, competition, and private property.
• Review the political, economic, and philosophical challenges to the capitalist economic
model especially with regard to the role of government.
• Articulate and contrast the economic philosophies of Adam Smith and Karl Marx.
• Apply moral philosophies prescriptively to some of the theoretical and operational
challenges facing capitalism and capitalist economies today.

Glossary

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 1. alienation: Becoming a stranger to humanity—one's own humanity and the
humanity of others. Dehumanization and demonization can be considered to be
forms of alienation when we no longer appreciate the reality of others being
“humans” or “people.” Karl Marx argues that capitalism causes people to lose an
understanding of what it means to be human and they no longer see themselves or
others as being fully human. For example, exploitation is when a capitalist sees her
workers as being a “means to her ends.” They are to be “used” by her to make a
profit and their needs are not important to her.
2. capitalism: An economic system where people complete to make a profit and the
ownership of the means of production (resources and machines) are mainly owned
by “the private sector” rather than the government.
3. corporate welfare: Subsidies (money and resources) given to corporations from the
government.
4. economic system: The way a society organizes business and money, such as
capitalism, communism, socialism, and feudalism. Economic systems should be
distinguished from systems of government.
5. free market: An economy without government interference (other than to protect
people's property, contracts, and right to noninjury).
6. invisible hand: The force that moves a free market in mutually beneficial ways.
Adam smith's invisible hand argument states that a free market among well-
informed, profit-seeking individuals can lead to mutually-beneficial behavior—low
prices for quality products. (The assumption is that the people involved are rational
and informed.) People will be productive and enrich society as a result.
7. natural rights: Rights are moral entitlements that obligate others. If I have a right to
life, then others are obligated not to kill me. Natural rights are rights we have
regardless of our contracts or agreements. Some philosophers have argued that
capitalism is justified because of our natural right to property—it's our right to own
the world's resources and machines required for an industry.
8. socialism: An economic system where the means of production are primarily owned
and controlled by the government (or communities) rather than by private interests.
9. subsidies: Tax breaks, resources, and money given by the government (or other
organization). Both social welfare and corporate welfare are forms of subsidies.
10. systems of government: The way a society organizes justice, redistributes wealth,
and provides nonprofit services for citizens, such as democracy, aristocracy,
monarchy, and oligarchy.

Chapter Summary Points

1. Capitalism is an economic system in which the major portion of production and

distribution is in private hands, operating under a profit or market system.
Socialism is an economic system characterized by mainly having public ownership
of property and a planned economy.

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 2. Capitalism has gone through several stages: mercantile, industrial, financial, state
welfare, and globalized.

3. Four key features of capitalism are the existence of companies, profit motive,
competition, and private property. In particular, natural resources and means of
production are owned by the private sector.

4. One basic defense of capitalism rests on a supposed natural moral right to property.
Utilitarians deny the existence of such rights; other critics doubt that this right
entitles one to have a system of property rules and regulations identical to the one
we now have in the United States.

5. A common utilitarian defense of capitalism is associated with the classical

economic arguments of Adam Smith. Smith believed that human beings are
acquisitive and that they have a natural propensity for trading. He insisted that
when people are left free to pursue their own economic interests in a free market,
they will, without intending it, produce the greatest good for all.

6. Critics question the basic assumptions of capitalism (theoretical challenges) and

whether it has delivered on its promises (operational challenges). Specifically, they
raise the following questions: Can capitalism eliminate poverty and reduce
inequality? Are humans basically economic creatures? Does capitalism breed
oligopolies that thwart competition? Is competition valuable? Does capitalism
exploit and alienate people?

7. As the twenty-first century begins, our capitalist socioeconomic system faces a

number of challenges. These include the decline of American manufacturing and
the related problems of job outsourcing and our growing trade deficit, as well as an
excessive concern with short-term performance. In addition, we must come to
grips with our society’s changing attitudes toward work.

Teaching Suggestions

Chapter 4 is the main starting point of “applied ethics”—an attempt to know the difference
between right and wrong in various situations. In this case, we want to know which
economic system is “justified,” “right,” or “best.” This presents a good opportunity to (a)
analyze various philosophical arguments, (b) apply normative theories through argument
and debate, and (c) remind students how to apply logic to their arguments. This can be
done through class discussion, but it's also an opportunity to help the students analyze the
arguments and assumptions.

Perhaps the most important question of this chapter is “Is capitalism morally justified?” I
will examine whether or not capitalism is morally justified. In particular, I will examine
the justifications for capitalism. The two main justifications for capitalism include (a) the
natural right to property and (b) the invisible hand argument. This examination can be

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helpful to lectures or as an example of how lectures can include examinations, which can
lead to a lively class discussion.

1. The natural right to property. John Locke argues that we have a right to the fruits of
our labor. We own whatever we create including farm land. However, Locke admits that
we should leave enough of the world's resources for others. For example, we shouldn't take
all the food for ourselves and let others starve. If our right to property extends to the
world's resources and means of production, then supposedly capitalism follows from our
right to property insofar as the private sector has a right to own the world's resources and
means of production. It could even be wrong of the government to interfere with the
economy through taxation (a violation of our property rights).

It isn't obvious that Locke is right that we have a natural right to property and many people
have dismissed his argument out of hand, but Locke's argument does have some intuitive
support. If Sam is a lazy person who doesn't work, but Amanda is a hard worker who
produces a lot of food by farming the land, then it seems appropriate that Amanda gets to
own the food she produces and it would seem wrong for Sam to take the food for herself.
Locke's argument would be able to justify these strongly held intuitions.

I will discuss three objections to Locke's argument:

(a) If we have a natural right to property, that doesn't mean that no other moral
considerations are relevant. A natural right to property doesn't guarantee that free market
capitalism is morally justified because we know that there are other important
considerations that could be more important than our right to property. A right to property
can conflict with our right to autonomy and living a decent life. For example, capitalism is
compatible with “wage slavery”—being forced to work in horrible conditions because it's
necessary for survival. An example of wage slavery was oppressive versions of
“sharecropping” where black former slaves lived in poor conditions that reinforced their
inferior social class, and they had very few opportunities to find a better way of life.

This objection raises some important questions: One, is our right to property absolute?
Two, what moral considerations can conflict with our right to property?

(b) Even if we have a natural right to property, it might be a good idea for the public to
own natural resources and means of production. A natural right to property can imply that
we have a right to own natural resources and means of production, but that doesn't mean
the government (or community) doesn't have a right to own these things. Not everything in
the entire world needs to be owned by private interests.

This objection raises the question—should the government or community share ownership
of natural resources or the means of production?

(c) According to Locke, it's wrong for the wealthy to horde their wealth (resources,
means of production, and money) without leaving enough for others, but capitalism doesn't

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require the wealthy to do so. Capitalism often creates famines precisely because people
have been taking the world's resources without leaving enough for others.

This raises many questions: One, should the wealthy be allowed to take everything for
themselves without sharing? Two, how much do they have to leave for others? Three, does
it harm anyone when the wealthy hoard their money? Four, are the wealthy “leaving
enough for others” right now?

2. The invisible hand. I have already discussed Locke's invisible hand argument. He
thinks a free market can lead to quality products, hard workers, and low prices; and
therefore benefit society as a whole.

I will give two objections to the invisible hand argument:

(a) Locke assumes that people are rational and well-informed. Rational and well-
informed people will buy the best products from the most ethical businesses at a
reasonable price rather than shoddy products from unethical businesses at overly high
prices. However, it's not obvious that people are rational or well-informed. In fact, (i)
being a well-informed consumer is nearly impossible now that assessing the quality of
products requires unusual levels of expertise that most people can't be reasonably expected
to attain; (ii) being informed about the unethical practices of businesses often requires
investigations that are rare and costly (because we shouldn't just rely on hearsay and
rumors, which are anecdotal and fallacious forms of evidence); and (iii) being an informed
consumer concerning available information can require a large investment to time that we
can't reasonably expect of consumers (who now often have to work 50 hour work weeks).

This objection raises some questions. One, how rational or informed must people be for the
invisible hand to function? Two, how rational and informed are people?

(b) Locke's invisible hand argument requires the assumption that we have a “free
market” but we've never had a free market and such an ideal is unlikely to occur in the near
future. The subsidies, tariffs, and tax loopholes enjoyed by large corporations give some
corporations an unfair advantage over the competition and the wealthy have always been
able to get a helping hand from the governments of industrial nations through political
contributions and bribes. The actual capitalistic systems that exist are not compatible with
Locke's invisible hand, and the wealthy are unlikely to ever stop seeking unfair advantages.

This raises the questions—how well can the invisible hand function without a free market?
And how free of a market do we have right now?

Questions for Discussion

Introduction
What exactly is the nature of the economic system called capitalism? What are its
underlying values, principles, and economic philosophy? What has it accomplished, and

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what are its prospects for the future? This chapter examines these and related questions.
Do you agree?

Companies
“It’s not in the company’s interests . . . ’’ “The company thinks that . . . ’’ “From the
company’s viewpoint . . . ’’ “As far as the company is concerned. . . ’’—all of us have
heard, perhaps even used, expressions that treat a business organization like a person or at
least like a separate and distinct entity. Such personifications are not mere lapses into the
figurative but bespeak a basic characteristic of capitalism: Capitalism permits the creation
of companies or business organizations that exist separately from the people associated
with them. We take the existence of companies for granted, but some experts believe that it
is not church or state but the company that is “the most important organization in the
world.’’ Do you think that companies are the most important organizations in the world
today? Discuss and argue why or why not.

Profit Motive
Modern or not, profit in the form of money is the lifeblood of the capitalist system.
Companies and capitalists alike are motivated by a robust appetite for profit. Indeed, the
profit motive implies and reflects a critical assumption about human nature: that human
beings are basically economic creatures who recognize and are motivated by their own
economic interests. What do you think about this argument? Are we basically economic
creatures? Or do we have other motives? Given that the profit motive is a modern notion,
according to the text, is this an accurate reflection of how we should be motivated, even if
we are economic creatures?

Moral Justifications of Capitalism

Justifications for capitalism aren't generally enough to fully justify it because there are
many objections to capitalism. We must consider both arguments for and against
capitalism to decide if it's justified. Additionally, we need to compare alternative economic
systems to capitalism to see if anything else is better. The arguments for or against
capitalism are inconclusive until we can find out which economic system is most justified.

This raises various questions: One, are any justifications for capitalism convincing? Two,
are any objections to capitalism convincing? Three, what form of capitalism is best? Four,
how does capitalism stack up to the alternatives?

Today’s Economic Challenges

The end of this chapter examines some of the more specific socioeconomic challenges
facing the United States today. These include (1) the decline of American manufacturing
and the related problems posed by the outsourcing of jobs and the growing U. S. trade
deficit; (2) business’s obsession with short-term results; and (3) changing attitudes toward
work. Which of these challenges do you think is the most pressing and significant? What
other challenges do you think face the United States today?

Additional Resources for Exploring Chapter Content

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Further Reading

• John Locke (see footnotes)

• John Stuart Mill (see footnotes)
• Nickel and Dimed: On not Getting by in America by Barbara Ehrenreich

Internet Resources

• Adam Smith, The Wealth of Nations [full text online]

http://www.bibliomania.com/2/1/65/112/frameset.html

• The Fugger Dynasty and their role in the history of banking

http://www.historyworld.net/wrldhis/PlainTextHistories.asp?ParagraphID=idu

Other Resources

Film
• Wal-Mart: The High Cost of Low Price, 2005
http://www.walmartmovie.com/

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