Business System Government, Markets, and International Trade

Banda Aceh, November 29, 2008
Taken by, Manuel G. Velasques

An economic system is the system a society uses to provide the goods and services it needs to survive and flourish. This system must accomplish two basic economic tasks. To accomplish these two tasks, economic systems rely on three kinds of social devices:

FREE MARKET AND RIGHTS: JOHN LOCKE

John Lock (1632-1704), is generally credited with developing the idea that human beings have a “natural right” to liberty and a “natural right” to private property. Locke argued that if there were no governments, human beings would find themselves in a state of nature. In this state of nature, each individual would be the political equal of all others and would be perfectly free of any constraints other than the law of nature.

Criticisms of the Locke an defense of free markets have focused on four of its major weaknesses:

(a) The assumption that individuals have the “natural rights” Locke claimed they have,

(b) The conflict between these negative rights and positive rights,

(c) The conflict between these Locke an rights and the principles of justice, and

(d) The individualistic assumptions Locke makes and their conflict with the demands of caring.

FREE MARKETS AND UTILITY: ADAM SMITH

Adam Smith (1723-1790), the “father of modern economics”, is the originator of this utilitarian argument for the free market. 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.

The “invisible hand” is market competition. In a competitive market, a multiplicity of such private businesses must all compete with each other for the same buyers. The competition produced by a multiplicity of self-interested private sellers serves to lower prices, conserve resources, and make producers respond to consumer desires.

Criticisms of Adam Smith:

1. In monopolized industries, it is no longer true that prices necessarily move to their lowest levels. The monopoly power of the industrial giants enables them to keep prices at artificially high levels and production at artificially low levels.

2. Smith failed to take into account the external effects that business activities often have on their surrounding environment, and assumed that the firm is a self-contained agent whose activities affect only itself and its buyers.

3. Smith’s analysis wrongly assumes that every human being is motivated only by a “natural” and self-interested desire for profit.

THE KEYNESIAN CRITICISM

John Maynard Keynes (1883-1946) argued that the total demand for goods and services is the sum of the demand of three sectors of the economy: households, businesses, and government.

Government, according to Keynes, can influence the propensity to save, which lowers aggregate demand and creates unemployment. Government can directly affect the amount of money households have available to them by raising or lowering taxes. Then, government spending can close any gap between aggregate demand and aggregate supply by taking up the slack in demand from households and business (and, incidentally, creating inflation).

THE UTILITY OF SURVIVAL OF THE FITTEST: SOCIAL DARWINISM

Charles Darwin (1809-1882), who argued that the various species of living things were evolving as the result of the action of an environment that favored the survival of something while destroying others: “this preservation of favorable individual differences and variations, and the destruction of those which are injurious, called it natural selection or the survival of the fittest.

FREE TRADE AND UTILITY: DAVID RICARDO
David Ricardo (1772-1823), is usually credited with showing that even if one country has an absolute advantage at producing everything, it is still better for it to specialize and trade.

CRITICISM OF RICARDO
First, Ricardo assumes that the resources used to produce goods do not move from one country to another.
Second, Ricardo assumes that each country ‘s production costs are constant and do not decline as countries expand their production or as they acquire new technology.
Thirdly, Ricardo assumes that workers can easily and causelessly move from one industry to another. Finally, and perhaps most importantly, Ricardo ignores international rule setters.

MARX AND JUSTICE: CRITICIZING MARKETS AND FREE TRADE

Karl Marx (1818-1883) said that capitalist systems offer only two sources of income: sale of one’s own labor and ownership of the means of production. Because workers can not produce anything without access to the means of production, they are forced to sale their labor to the owner in return for a wage. The owner, however, does not pay workers the full value of their labor, only what they need to subsist. Capitalism promotes injustice and undermines communal relationship.

According to Marx, every society can be analyzed in terms of its two main components: its economic substructure and its social superstructure. The economic substructure of a society consists of the materials and social control that society uses to produce its economic goods. A society’s superstructure consists of its government and its popular ideologies. The members of the ruling class will control the government and use it to protect their position and property, and they will popularize ideologies that justify their position of privilege.

Marx also claims that so long as production in modern economies is not planned but is left to depend on private ownership and unrestrained free markets, the result could only be a series of related disaster that would harm the working class.

PROPERTY SYSTEM AND NEW TECHNOLOGIES

On one side are those who take either the Locke or the utilitarian view that intellectual property should be treated like private property. Utilitarian argue that private ownership of intellectual property provides a necessary incentive for people to work hard at generating new intellectual creations. On the other side, Marxist and socialist support the collective or common ownership of intellectual property. They claim that intellectual creativity does not require the financial incentives of a private property system.