This chapter discusses the morality of the market system as a whole.

It examines how market 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 be planned; the other that it should be a free market system. After examining the arguments for and against free markets and government regulation, the chapter discusses the possibility of a hybrid mixed economy system.

Learning Objectives Understand the basic arguments for and against free 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 free markets. Understand the major criticisms of these free market theories, especially those of John Maynard 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 government regulation. 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)]-

Human beings have a natural right to Liberty and private property. If there were no governments human beings would be in a state of nature free 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 bodies to 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 5th. Amendment even quotes Locke directly). Lockes view that labor creates property rights has also been influential in USA. Friedrich Hayek and several other 20th. Century authors have used Lockean rights to liberty and 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 thing underlies 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 other rights: 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 ideas 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. 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.

A system of private property is necessary for a free market system.

Common Criticism of Adam Smiths Utilitarian ArgumentSmiths 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. Market systems 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 there is 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 interest rates. Government spending can also close the gap between aggregate demand and aggregate supply 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 this process , they would also unintentionally be impeding human progress. Weak firms must be weeded out by competition. Survival of the fittest means 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)]-

Adam Smiths book, the Wealth of Nations was primarily aimed at showing benefits of free trade. Smith highlighted the benefits of making products each country has absolute advantage in producing 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, and through 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 many question 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 continue to 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 own labor, and ownership of the means of production. The workers are forced to sell their labor 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 to develop their productive potential, nor real human needs. The real purpose of government, says Marx is to protect the interest of the ruling class of owners. The forces of production of the society (its economic substructure) always have, historically, given the society its class and its social 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 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 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 claim that justice really means distribution according to contribution. 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 importance one 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 while modifying 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 private property and collective ownership. Modern technologies create new forms of intellectual property that can be copied and consumed by a number of different individuals at once. Though critics of Marx contend that Marxism is dead, many socialist trends and theories remain influential. Locke and Smiths 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.