CHAPTER 3
THE MARKET AND BUSINESS
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Learning Outcomes
1. Economic Systems and Conditions
2. Arguments about Market Systems and
there Criticisms
2.1 Free Markets and Rights: John Locke
2.2 Free Markets and Utility: Adam Smith
2.3 Free Trade and Utility: David Ricardo
3. Criticizing Markets and Trade, Marx and
Justice
4. The Mixed Economy, the new Property
and the End of Marxism
5. Conclusion
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1. Economic Systems and Conditions
Introduction
• Globalization:
• The process by which economic and social systems of nations are
connected together so that goods and services, capital and knowledge
move freely between Nations.
• Economic System:
• The system a society uses to provide the goods and services it needs
to survive and flourish.
• Traditional Based – societies that rely on traditional roles and customs to
carry out basic economic tasks,
• Command Economy – government
• Market Economy – based on private individuals making main decisions
about what they produce and for whom
• Free Markets – individuals voluntarily exchange. No government
interference
• Ideology – A system of normative beliefs shared by members of some
social group, eg. Are humans only motivated by economic incentives?
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1. Economic Systems and Conditions,
continues.
• In the 18th century, debates have raged over
whether economies should be based more on
command or on market.
• Today this debate is still going on two levels:
1. Arguments for and against “free markets within
a nation and
2. Arguments for and against free trade between
nations
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2. Arguments about Market
Systems and there criticisms
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2.1 FREE MARKET AND RIGHTS – JOHN LOCKE
Developed the idea that:
• One of the strongest cases for an unregulated market derives from:
Human beings have a two “natural rights” 1. to Liberty and a 2. to
private property that only free markets can preserve.
Assumption: If there were no governments, human
beings would find themselves in a state
of nature:
• 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 depend upon the will of any
other man.
(perfectly free of any constraints other than the law of nature –
that is moral principles that GOD gave to humanity)
• of equality, wherein all the power and jurisdiction (limits within
which legal authority can be exercised) is reciprocal (given and
receiving – mutual), no one having more than another, without
subordination (treating lesser) or subjection (to bring under control)
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Criticisms of Locke’s Arguments
Four major weaknesses were identified:
• The assumption that individuals have “natural right”
(does not override all other rights) , Locke claimed
they have, (wood and water (Robert Nozick)
• The conflict between negative and positive rights (food)
• The conflict between Lockean rights and the principles
of justice (FM creates unjust inequalities, e.g,education)
• The individualistic assumptions that Locke makes and
their conflict with the demands of caring – humans are
not independent – depends on relationships
- rights might conflict with others + rights
Lockean Rights:
The right to life, health, liberty, and property
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ADAM SMITH – 1723 - Scotland
• 1776 – Wealth of Nations (Bible of Econ science)
• 14/15 – Glasgow University
• Self love & Social love = development of human society
• Invisible hand / hidden hand – ruled by demand &
supply, unemployment is impossible
• - each person pursues their own enlightened self
interest to maximize their own utility to mass the most
amount of the wealth for themselves.
• This selfish act will promote the good of everybody, if
not constrained by government division of labour,
specialisation, skill, increased economic efficiency /
rapid economic growth - Cheap labour = cheap goods,
exploit, harsh treatment, replacements, alienated
existence 8
2.2 Free Markets and Utility: Adam Smith
Modifying Locke’s views, Adam Smith argued that:
• Unregulated (uncontrolled) markets and private property
will produce greater benefits than any other system.
Assumption: 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 the industry in such a manner as its produce
may be of the greatest value, the individual intents only
for his gain, this is in most cases lead by the invisible
hand.
• Pursuing his own interest, he frequently promotes that of
the society more effectively than he really intends to
promote it
Invisible Hand: Adam Smith
• “natural price” The market competition that drives
self-interested individuals to act in
ways that serve society
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Criticisms of Smith’s Arguments
Assumes that:
• Based on unrealistic assumptions, impersonal forces of
demand & supply will force prices down to their lowest
levels
• No one seller can control the price of a good
• The manufacturer will pay for all the resources used to
produce a good (pollution)
• Humans are motivated by only natural self interested
desire for profits – give little and get more in return; the
FM system makes us selfish and selfishness makes us
think that the profit motive is “natural” – born with
concern
• Keynes’s claim that government can affect
unemployment 10
2.3 FREE TRADE AND UTILITY: DAVID
RICARDO
• Free Trade:
• (advocated by Adam Smith with his idea of
“Absolute Advantage which was aimed at
showing the benefits of free trade – Wealth of
Nations).
• Absolute Advantage:
A situation where the production costs of
making a commodity are lower for one
country than for another.
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FREE TRADE AND UTILITY: DAVID
RICARDO
• DAVID RICARDO:
• Came up with the “most important” and
most meaningful economic discovery
when he realised that countries can
benefit from both specialisation and
trade even though one country makes
everything cheaply than the other.
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Limitations of Ricardo’s Concept
• Limitations:
• Assumed that the resources used to produce do not move
from one country to another (today resources do move i.e
multinational companies)
• That each country’s production are constant, do not decline as
countries expand their production or as they acquire new
technology
• That workers can easily and unreserved move from one
industry to another (yet when this happens workers are laid off)
• Ricardo ignored international rule setters that international
trade leads to disagreements and conflict. Countries involved
in international trade must agree to abide by same set rules of
that specific country.
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3. Criticizing Markets and Trade – Marx &
Justice
Karl Marx offered the most critical view of modern
private property, free market institutions and free
trade. He claimed that:
Free market capitalism necessarily produces
extremes of inequalities, since capitalism only
offers two sources of income:
1. Owning the means of production
2. Selling one’s labour
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Capitalism and Ethics
According to his claim,
• workers cannot produce anything without the owner of
the productive forces.
• Owners do not pay full value of workers’ labour as they
pay workers what they need to subsist and keep the rest
to themselves and gradually becoming wealthier.
The above according to Marx results into:
• Injustices
• Undermining of communal relationships
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Alienation of Workers
• In Marx’s view capitalism and its private property system results in
ALIENATION of lower working classes by not allowing them neither to
develop there productive potential nor to form satisfying human
relationships.
• According to Marx, capitalism alienates workers in 4 ways:
- In capitalist societies, the products that the worker produces by his or
her labour are taken away by the capitalist employer and used for the
purposes that are antagonistic to the workers’ own interest
- Capitalism forces people into work that they find dissatisfying,
unfulfilling, and that is controlled by someone else
- Capitalism alienates people from themselves by instilling in them false
views of what their real human needs and desires are
- Capitalists societies alienate human beings from each other by
separating them into antagonistic and unequal social classes that break
down community and caring relationships namely bourgeois and
proletariat
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Real Purpose of Government - Marx
Marx’s Historical view of Government role under
capitalism as “to protect the interests of the ruling
economic class”. This view is known as:-
Historical Materialism which states that:
• The forces of production of a society, its
substructures, always have historically, given
society its class and its superstructures (or
government and popular ideologies).
• Those in power promote the ideologies that
justify their positions
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Immiseration of Workers
Karl Marx also claimed that so long as production in modern
economies is not planned but is left to depend on private
ownership and unrestrained free markets, the results could only
harm the working class leaving them immiserated.
Three general tendencies that bring about Immiseration of
workers:
• Capitalist systems will exhibit an increasing concentration of
industrial power in relatively few hands
• Capitalist societies will experience repeated cycles of economic
downward turns or crisis
• The position of the workers in capitalist societies will gradually
worsen due to self interest of capitalist owners to increase their
assets at the expense of their workers
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Criticisms of Karl Marx’s view
Defenders of Free Markets had the following
critics on Marx’s assumptions:
• Marx makes un-provable assumption that
Just means equality or distribution according
to needs.
• Justice requires free market
• Market efficiency is more important than
equality
• Free markets can encourage community
• Immiseration of workers never happened.
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4. Conclusion: The Mixed Economy,
the new Property and the End of
Marxism
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4.1 The Mixed Economy
The Mixed Economy Defined: The amalgamation of
government regulation, partially free markets and
limited property rights
• 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 have been successful in countries
like Sweden, Japan, Norway, etc)
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4.2 The New Property System continues.
• Intellectual Property Defined:
This is a form of Property that “consists of an
abstract and nonphysical object” created by
new technologies especially computers (this
property can be copied and consumed by
different individuals at once).
• Locke’s view and views of some utilitarian, is
that the mental labour that creates the
property creates the property rights
• Socialist point out that artists, writers and
thinkers have always created works without
financial incentives. 22
5. Conclusion…..
• The debate whether new scientific
discoveries be protected as private
property or should be shared with
society that made their discovery
possible?
• Many critics of Marx content that
Marxism is dead, though many socialist
trends and theories are very much
influential 23
Key terms
• absolute advantage
- when one country can produce a good more cheaply than
another.
• aggregate demand
- JM Keynes, the sum of the demand of three sectors of the
economy: households, businesses, and government.
• Alienation
- the effect, according to Marx, of capitalist systems which do not
allow the working class to develop their productive potential or
satisfy their real human needs.
• Bourgeoisie
- according to Marx, the class that owns the means of production.
• command economy
- a system where a single authority makes the decisions about
what is produced, and by whom, and to whom it is distributed.
• Communitarianism
- the belief that government should be authoritative, defining the
needs of the community and seeing that those needs are met.
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• Copyright
- a grant that indicates that a particular expression of
an idea is the private property of an individual or
company.
• economic system
- the system a society uses to provide the goods and
services it needs to survive and flourish.
• economic substructure
- the materials and social controls that society uses to
produce its economic goods.
• forces of production
- the materials (land, labor, natural resources,
machinery, energy, technology) used in production. 25
• FMS
- a system in which individual firms, privately owned, make their
own decisions about what they will produce and how they will
produce it.
• Globalization
- the process by which the economic and social systems of
nations are connected together so that goods, services, capital,
and knowledge move freely between nations.
• historical materialism
- the Marxist view that history is determined by changes in the
economic methods by which humanity produces the materials
on which it must live.
• Ideology
- a system of normative beliefs shared by a group, expressing
answers to questions about human nature, the purpose of
society, and the values of the group; goals expectations,
actions
• Immiseration
- the combined effects of increased concentration, cyclic crises,
rising unemployment, and declining relative compensation. 26
• Individualism
- the belief that government has a limited role, existing
primarily to protect the property of the individual and
keep the marketplace open. Freedom from government
regulation
• intellectual property
- product of the intellect that has commercial value,
copyright property, ideational property, business
methods an industrial processes
• invisible hand
- AS, market competition drives self-interested individuals
to act in ways that serve society.
• Keynsian economics
- JM Keynes, free markets alone are not necessarily the
most efficient means for coordinating the use of societies
resources.
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• law of nature
- according to Locke, the moral principle that since all
men are free and equal, no one ought to harm
another in his life, health, liberty, or possessions.
• Lockean rights
- the right to life, liberty, and property.
• Markets
- an economic system based primarily on private
individuals making decisions about what they will
produce and who will get it.
• means of production
- the buildings, machinery, land, and raw materials
used in the production of goods and services.
• mixed economy
- an economy with both free market and central
planning attributes. 28
• natural rights
- the rights that nature teaches each man that he has
according to the law of nature.
• Naturalistic fallacy
- the assumption that whatever happens naturally is always for
the best.
• Patent
- new inventions invented by a person that are designed as
private property.
• post-Keynesian School
- economists who have sought to challenge and modify
Keynesian economics.
• private property system
- a system that maintains a system of property laws to assign
private individuals the right to make decisions about what
they own.
• Proletariat
- according to Marx, the alienated working class.
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• relations of production
- the social controls used in producing goods (i.e., the social
controls by which society organizes and controls its workers).
• Says law
- all available resources are used and demand always
expands to absorb the supply of commodities made from
them.
• Social Darwinism
- belief that economic competition produces human progress.
• social superstructure
- a society’s government and its popular ideologies.
• state of nature
- according to Locke, the state where each man is the political
equal of all others, perfectly free of any constraints except
the law of nature.
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• surplus value
- the difference between the value of labor
and the wage paid for it.
• survival of the fittest
- Charles Darwin’s term for the process of
natural selection.
• tradition based societies
- societies that rely on traditional communal
roles and customs to carry out basic
economic tasks.
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