The Ethics of Capitalism & Government Regulation: The Ethics of Capitalism & Government Regulation Paul L. Schumann, Ph.D. © 2003 by Paul L. Schumann. All rights reserved.


Main Issues: Main Issues Is capitalism ethical? Under what conditions is government regulation of business justified?


Ideologies: Ideologies Ideology: a system of normative beliefs. A person’s ideology: Colors perceptions Influences actions


Spectrum of Ideologies: Spectrum of Ideologies Individualistic ideology: Each person responsible for themselves Role of government limited: Protect private property Enforce contracts Communitarian ideology: Role of government broad: Define needs of society & ensure needs are met Example: “it takes a village to raise a child”


Spectrum of Ideologies: Spectrum of Ideologies


Fundamental Choices: Fundamental Choices What goods and services should be produced? How should the goods and services be produced? Who should get the goods and services?


Basic Methods to Make Choices: Basic Methods to Make Choices Tradition Command System Market System 2 Key Components: Private property Voluntary exchange But is capitalism ethical?


History: History Middle Ages: 450–1350 Collapse of Roman Empire in 476 Feudal society: Nobility, Clergy, Peasants Little Ice Age: late 1200’s to early 1300’s 1315–1317: The Great Famine of Europe 1347: Bubonic Plague (the Black Death) reached Europe 1347–1351: 25%–50% of Europe died 19–38 million people out of 75 million


History: History Renaissance: 1350–1550 Rebirth of Greco-Roman civilization Period of recovery and revival “Perfecting the individual”: culture, art, knowledge of history 1445–1450: printing press invented Education and literacy grows 1517: Martin Luther challenges Roman Catholic Church; Protestant Reformation


History: History Scientific Revolution (1550–1700) Knowledge based on reasoning & observations 1543: Copernicus: planets circle the sun 1610: Galileo: observations by telescope 1628: Harvey: observed blood circulation 1637: Descartes: understanding through reason 1668: Cavendish: humans are part of nature 1687: Newton: laws of motion & gravity Universe is governed by natural laws


History: History The Enlightenment: 1700–1800 Favorite word: Reason Apply the scientific method to the understanding of all of life Kant (1784): “Dare to know! Have the courage to use your own intelligence!” Popularization of science Skepticism about religion Growth of travel literature


History: History The Enlightenment “Philosophes”: humans can discover through reason the natural laws of politics, economics, justice, religion, and the arts 1690: Locke: knowledge through reason, not faith 1762: Rousseau: “Social Contract”: members of society agree to be governed by its general will through participatory democracy 1763: Voltaire: “all men are brothers under God” 1776: Smith: natural laws of economics


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


Adam Smith (1723–1790): Adam Smith (1723–1790) 1776: “The Wealth of Nations” Why do some societies do better than others? Not because of access to natural resources Not because of exporting more than importing (Mercantilism) Answer: Capitalism Utilitarian perspective


Adam Smith: Adam Smith Capitalism is ethical on utilitarian grounds Private property and unregulated free markets produce the greatest net social benefits of any socioeconomic system: laissez-faire Limited role of government: Protect private property Enforce contracts Therefore, government regulation of business is unethical on utilitarian grounds


Critics of Adam Smith: Critics of Adam Smith Free (unregulated) markets only consider the benefits and costs borne by the buyer and seller But are the benefits and costs always borne exclusively by the buyer and seller? Example: water pollution of a river Example: cigarettes Example: college education Externality: a benefit or cost borne by someone other than the buyer or seller


Government Regulation: Government Regulation If there are externalities, then it may be possible to design a government regulation that corrects the externality in a way that maximizes net social benefits. If so, then the government regulation is ethical on utilitarian grounds. Example of external cost: water pollution of a river Example of external cost: cigarettes Example of external benefit: college education


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


John Locke (1632–1704): John Locke (1632–1704) Rights perspective Humans have “natural rights”: Liberty (freedom) Private property Why? Without government, humans would be in a “state of nature” Freedom: Free of all human-made laws Property: Resources combined with work Common fear: theft of freedom or property


John Locke: John Locke Humans therefore invented government Purpose of government: Protect liberty (freedom) Protect private property Capitalism is ethical on rights grounds Based on liberty and private property Government regulation unethical Infringes on liberty and private property


Locke’s Influence: Locke’s Influence US Declaration of Independence (1776) “We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness—That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed, that whenever any Form of Government becomes destructive of these Ends, it is the Right of the People to alter or abolish it, and to institute new Government….”


Locke’s Influence: Locke’s Influence United Nations’ Universal Declaration of Human Rights (1948) “…the equal and inalienable rights of all members of the human family is the foundation of freedom, justice, and peace in the world….” http://www.un.org/Overview/rights.html


Critics of John Locke: Critics of John Locke Are the liberty and property rights of the buyer and seller the only relevant rights? Example: cigarettes If there are rights at stake in addition to the liberty and property rights of the buyer and seller, then government regulation might be justified to protect all the relevant rights. Example: cigarettes


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


Herbert Spencer (1820–1903): Herbert Spencer (1820–1903) Social Darwinism Based on Charles Darwin’s (1809–1882) Theory of Evolution: natural selection / survival of the fittest Spencer applied idea of survival of the fittest to societies Some individuals are better than others Free competition helps ensure only the most capable survive and rise to the top


Spencer’s Social Darwinism: Spencer’s Social Darwinism Government should not interfere If government helps the weak, they survive, pass on their characteristics, and society is thereby weakened Theory fell out of favor when applied to individuals: too cruel? Theory still sometimes applied to businesses: let the weak fail


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


John Maynard Keynes (1883–1946): John Maynard Keynes (1883–1946) 1946: “The General Theory of Employment, Interest, and Money” How could a world-wide depression start and persist? Why don’t market forces automatically fix the depression?


Keynes’s Theory Oversimplified: Keynes’s Theory Oversimplified Businesses find inventories growing So, businesses cut production Cut wages Cut employment: layoff workers Workers’ incomes fall Workers therefore buy less Businesses therefore sell less So businesses cut even more…(repeat)


Keynes’s Theory Oversimplified: Keynes’s Theory Oversimplified Solution: someone with lots of money needs to spend more to buy lots of things But who? Companies won’t Consumers won’t Only the government has the resources to do it


Keynes’s Conclusion: Keynes’s Conclusion Role of government: to help stabilize the economy Recession or depression: increase government spending and cut taxes Inflation: decrease government spending and increase taxes


Keynes’s Conclusion: Keynes’s Conclusion What about the government budget deficit? “When involuntary unemployment exists … ‘wasteful’ loan expenditures may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth…. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


Karl Marx (1818–1883): Karl Marx (1818–1883) Witnessed the early days of the Industrial Revolution Before the Industrial Revolution: Small scale production in local shops Upward mobility: Apprentice Journeyman Master (to “become your own master” was feasible)


Karl Marx’s Observations: Karl Marx’s Observations Industrial Revolution Trigger: application of power-driven machinery


Karl Marx’s Observations: Karl Marx’s Observations Power-driven machinery was expensive Factories got larger Factories were more expensive to set up Upward mobility dramatically reduced Some were wealthy enough to own factories Everyone else had to work in a factory owned by others


Karl Marx’s Theory: Karl Marx’s Theory 2 Sources of Income “Bourgeoisie”: owners of the means of production “Proletariat”: people who have to sell their labor Competition for jobs among the proletariat keeps wages at subsistence levels Meanwhile, the bourgeoisie earn profits


Karl Marx’s Theory: Karl Marx’s Theory Result is that workers became alienated: From their products: workers lost control of the products of their labor From their own work: workers lost control of how they did their jobs From themselves: workers were taught false views of their needs and desires From each other: workers were kept fighting amongst themselves (divide and conquer)


Karl Marx’s Theory of History: Karl Marx’s Theory of History Economic Substructure: Forces of Production: land, labor, raw materials, technology, etc. Relations of Production: methods of social control; in Capitalism, control is based on ownership; creates the social classes Social Superstructure: government and ideologies


Karl Marx’s Conclusions: Karl Marx’s Conclusions Role of government in capitalism: protect the wealth and power of the bourgeoisie Rich get richer, poor get poorer This isn’t fair Solution: replace control based on ownership with control based on authority Hire experts to control resources based on what’s best for society as a whole


Some Noteworthy Philosophers: Some Noteworthy Philosophers Adam Smith John Locke Herbert Spencer John Maynard Keynes Karl Marx


Mixed Economy: Mixed Economy Use property rights and the market system to create wealth But limit the actions of property owners with government regulations. Examples: Property rights, with zoning laws Tax laws Pollution regulations Safety regulations Welfare laws


Government Regulation: Government Regulation Utilitarian: Correct externalities Rights: Protect rights (in addition to liberty and property rights of buyer and seller) Justice: Ensure fairness Care: Care for people


Spectrum of Ideologies: Spectrum of Ideologies


Intellectual Property: Intellectual Property Physical Property: one person’s use limits the use by others. Examples: An automobile A piece of land Intellectual Property: simultaneous, nonexclusive use is possible. Examples: A song A software program


Intellectual Property Rights: Intellectual Property Rights How should we handle intellectual property? Private property view: Utilitarianism: private ownership creates incentives. Rights (Locke): creator has the right to decide use. Socialist view: Creativity doesn’t require incentives. Common good best served by public ownership.