Management Ethics, Chapter 4
Chapter Four: The Nature of Capitalism
1
1
Wells Fargo fined $185M for fake accounts; 5,300 were fired
An analysis by the San Francisco-headquartered bank found that its employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers, the officials said.
Many of the transfers ran up fees or other charges for the customers, even as they helped employees make incentive goals.
2
2
Capitalism
Capitalism: An economic system in which the major portion of production and distribution is in private hands, operating under what is termed a “profit” or “market” system
Socialism: The polar opposite of capitalism, an economic system characterized by public ownership of property and a planned economy
Worker control socialism: A hybrid market-oriented socialism
5
Introduction to Capitalism
Capitalism
Capitalism has historically evolved from the Renaissance through several stages – mercantile, industrial, financial, and state welfare.
Many believe we are now at a new stage, globalized capitalism, involving reliance upon foreign labor and services, joint ventures in overseas companies, outsourcing, etc.
Capitalism is constantly changing as new socio-economic and political conditions arise.
7
Key Features of Capitalism
Companies: Capitalism permits the creation of companies or business organizations that exist separately from the people associated with them.
Profit motive: The profit motive implies a critical assumption about human nature – that human beings are economic creatures who recognize and are motivated by their own monetary interests.
8
Capitalist Model - (Free-Market System)
A free market is one that is not controlled either by government or by any small group of individuals.
In a free market, government does not:
set the price of goods
set wages or
control production.
Competition is also vital to a free-market system.
To try to achieve greater returns on investment, perhaps by taking more risk, resources must be free to move within the system to whichever portion of it someone believes will bring the greatest return.
Key Features of Capitalism
Competition: In his famous treatise on political economy, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith explained how free competition makes individual pursuit of self-interest socially beneficial.
Private property: Capitalism requires private ownership of the major means of production (factories, warehouses, offices, machines, trucking fleets, land, etc.)
10
Moral Justifications of Capitalism
The natural right to property: 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 U.S.
13
Moral Justifications of Capitalism
Adam Smith’s concept of the invisible hand: In his Wealth of Nations, Smith argues that when people are free to pursue their own economic interests, they will, without intending it, produce the greatest good for all.
His argument rests on the premise that human beings are acquisitive and have a natural propensity for trading.
14
Moral Justifications of Capitalism
Adam Smith’s concept of the invisible hand – the law of supply and demand: Smith argued that a market left to itself is regulated by the mechanism of supply and demand.
The high demand for certain types of goods in one area of the market will eventually by offset by supply in another area.
The law of supply and demand is equally applicable to the standard of wages.
15
Criticisms of Capitalism
Inequality: Critics argue that poverty and inequality challenge the fairness of capitalism and its claim to advance the interests of all.
Defenders of capitalism respond in three ways:
By blaming government for interfering with the market
By arguing that the capitalist system can be internally modified by political action
By arguing that the benefits of the system outweigh its weak points
16
Human nature and capitalism:
Capitalism wrongly assumes that human beings are rational economic maximizers.
Capitalism offers us no higher sense of human purpose.
Capitalism operates on the assumption that human beings find increased well-being through ever greater material consumption.
Criticisms of Capitalism
17
Competition isn’t what it’s cracked up to be:
Capitalism breeds oligopolies – concentrations of property and resources (and thus economic power) in the hands of a few.
Corporate welfare programs often shelter businesses from competition.
Critics contend that cooperation, rather than competition, leads to better individual and group performance.
Criticisms of Capitalism
18
Exploitation and alienation: In his “Economic and Philosophic Manuscripts” (1944), Marx explains the notion of alienation as the separation of individuals from the objects of their creativity.
This separation in turn results in one’s separation from other people, from oneself, and ultimately from one’s human nature.
Criticisms of Capitalism
19
Criticisms of Capitalism
Karl Marx believed the capitalists to be the most revolutionary and praised capitalism for providing the means for technological advancement and economic growth.
But he had also predicted that problems with capitalism would lead to instability and socialism would eventually replace it.
20
WALTER WILLIAMS George Mason University
Professor of Economics Prager University
Today’s Economic Challenges
The decline of American manufacturing: Whereas manufacturing accounted for 27 percent of GDP in the mid-1960s, it has fallen to about half that.
For the first time since the Industrial Revolution, manufacturing employs less than 10 percent of the U.S. workforce.
In 2007, the number of factory jobs hit a fifty-seven-year low.
Critics worry whether the U.S. can prosper without a strong manufacturing base.
22
Outsourcing jobs: Since the 1980s, many U.S. manufacturers have closed or curtailed their operations and becoming marketing organizations for other producers, usually foreign.
The result is the evolution into a new kind of company, one that does little or no manufacturing.
The firm may perform a host of profit-making functions, but lacks its own production base.
Instead, it outsources, buying parts or whole products from other producers, both at home and abroad.
Today’s Economic Challenges
23
Outsourcing jobs: Over 3.3 million US jobs have moved abroad since 2000.
Outsourcing has affects white-collar jobs.
About 54 percent of the 1,000 largest U.S. companies outsourcing or planning to outsource white-collar jobs.
At least 300,000 white-collar jobs may flow overseas every year through 2016.
This would mean a total loss of 3.7 million jobs. {We will exceed that total loss}
Today’s Economic Challenges
24
Economists disagree about whether outsourcing benefits America overall.
Some economists argue that the economy is hurt by the massive job losses that result.
Some economists argue that a country should produce for the world market those goods in which it has a competitive advantage.
Today’s Economic Challenges
25
The Private Enterprise System and Competition
Businesses meet needs of consumers and are rewarded through profit. Four degrees of competition:
Pure competition
Monopolistic competition
Oligopoly
Monopoly
Four degrees of competition
Pure competition - A market characterized by a large number of independent sellers of standardized products, free flow of information, and free entry and exit. Each seller is a "price taker" rather than a "price maker".
Examples:
Agricultural products such as potatoes and wheat
27
In a nutshell
The competitive environment affects the number, types and behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where competitors offer very similar products and customers see different available products as close substitutes, which forces marketing managers to compete with lower and lower prices, leading to shrinking profit margins.
Monopoly—A situation where one company completely controls a broad product market.
Monopolistic competition—A market situation where several different companies offer marketing mixes that at least some customers view as different—each competitor attempting to obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar products. Wheat, wool and dairy were the first examples of pure competition, where prices could not be controlled. The clothing industry and the snack-food industry are examples of industries where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies. Government regulation of monopolies is common. Utility companies like gas, electricity and water are more deregulated nowadays. Prices set by utility companies must be approved by the government.
Monopolistic competition—There is still competition as many customers perceive alternatives as substitutes. This is typical of the situation faced by most marketing managers in developed economies around the world. Fluffy fabric softener uses the same basic chemicals as other fabric softeners. Marketing managers may attempt to differentiate it from other fabric softeners by offering a non-drip measuring and pouring spout, producing advertisements that demonstrate its softening ability, or by obtaining better shelf position in supermarkets. However, if potential customers view the different offerings as essentially similar, the market will become more and more competitive and a company will need to rely on lower prices to obtain a competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Oligopoly (ala-ga-poly) - A market dominated by a small number of participants who are able to collectively exert control over supply and market prices.
Examples:
Many industrial products such as steel and large consumer durables such as appliances, the top cigarettes, beer companies and the retail gas market. Also now the airlines and cable companies.
Four degrees of competition
28
In a nutshell
The competitive environment affects the number, types and behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where competitors offer very similar products and customers see different available products as close substitutes, which forces marketing managers to compete with lower and lower prices, leading to shrinking profit margins.
Monopoly—A situation where one company completely controls a broad product market.
Monopolistic competition—A market situation where several different companies offer marketing mixes that at least some customers view as different—each competitor attempting to obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar products. Wheat, wool and dairy were the first examples of pure competition, where prices could not be controlled. The clothing industry and the snack-food industry are examples of industries where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies. Government regulation of monopolies is common. Utility companies like gas, electricity and water are more deregulated nowadays. Prices set by utility companies must be approved by the government.
Monopolistic competition—There is still competition as many customers perceive alternatives as substitutes. This is typical of the situation faced by most marketing managers in developed economies around the world. Fluffy fabric softener uses the same basic chemicals as other fabric softeners. Marketing managers may attempt to differentiate it from other fabric softeners by offering a non-drip measuring and pouring spout, producing advertisements that demonstrate its softening ability, or by obtaining better shelf position in supermarkets. However, if potential customers view the different offerings as essentially similar, the market will become more and more competitive and a company will need to rely on lower prices to obtain a competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Monopoly - A market structure in which one firm sells a unique product into which entry is blocked, in which the single firm has considerable control over product price and in which non-price competition may or may not be found.
Four degrees of competition
29
In a nutshell
The competitive environment affects the number, types and behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where competitors offer very similar products and customers see different available products as close substitutes, which forces marketing managers to compete with lower and lower prices, leading to shrinking profit margins.
Monopoly—A situation where one company completely controls a broad product market.
Monopolistic competition—A market situation where several different companies offer marketing mixes that at least some customers view as different—each competitor attempting to obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar products. Wheat, wool and dairy were the first examples of pure competition, where prices could not be controlled. The clothing industry and the snack-food industry are examples of industries where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies. Government regulation of monopolies is common. Utility companies like gas, electricity and water are more deregulated nowadays. Prices set by utility companies must be approved by the government.
Monopolistic competition—There is still competition as many customers perceive alternatives as substitutes. This is typical of the situation faced by most marketing managers in developed economies around the world. Fluffy fabric softener uses the same basic chemicals as other fabric softeners. Marketing managers may attempt to differentiate it from other fabric softeners by offering a non-drip measuring and pouring spout, producing advertisements that demonstrate its softening ability, or by obtaining better shelf position in supermarkets. However, if potential customers view the different offerings as essentially similar, the market will become more and more competitive and a company will need to rely on lower prices to obtain a competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Monopoly examples:
Public utilities: gas, electric, water, cable TV, and local telephone service companies, are often pure monopolies.
First Data Resources (Google, Yahoo and Microsoft are vying), Wham-O (Frisbees), and the DeBeers diamond syndicate are examples of "near" monopolies.
Manufacturing monopolies are virtually nonexistent in nationwide U.S. manufacturing industries.
Professional sports leagues grant team monopolies to cities.
Monopolies may be geographic. A small town may have only one airline, bank, etc.
Four degrees of competition
30
In a nutshell
The competitive environment affects the number, types and behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where competitors offer very similar products and customers see different available products as close substitutes, which forces marketing managers to compete with lower and lower prices, leading to shrinking profit margins.
Monopoly—A situation where one company completely controls a broad product market.
Monopolistic competition—A market situation where several different companies offer marketing mixes that at least some customers view as different—each competitor attempting to obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar products. Wheat, wool and dairy were the first examples of pure competition, where prices could not be controlled. The clothing industry and the snack-food industry are examples of industries where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies. Government regulation of monopolies is common. Utility companies like gas, electricity and water are more deregulated nowadays. Prices set by utility companies must be approved by the government.
Monopolistic competition—There is still competition as many customers perceive alternatives as substitutes. This is typical of the situation faced by most marketing managers in developed economies around the world. Fluffy fabric softener uses the same basic chemicals as other fabric softeners. Marketing managers may attempt to differentiate it from other fabric softeners by offering a non-drip measuring and pouring spout, producing advertisements that demonstrate its softening ability, or by obtaining better shelf position in supermarkets. However, if potential customers view the different offerings as essentially similar, the market will become more and more competitive and a company will need to rely on lower prices to obtain a competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
Monopolistic competition - a market structure in which several or many sellers each produce similar, but slightly differentiated products. Each producer can set its price and quantity without affecting the marketplace as a whole.
Examples:
Grocery stores and gas stations
Four degrees of competition
31
In a nutshell
The competitive environment affects the number, types and behaviour of competitors the marketing manager must face.
Explanation
Pure competition or oligopoly—A market situation where competitors offer very similar products and customers see different available products as close substitutes, which forces marketing managers to compete with lower and lower prices, leading to shrinking profit margins.
Monopoly—A situation where one company completely controls a broad product market.
Monopolistic competition—A market situation where several different companies offer marketing mixes that at least some customers view as different—each competitor attempting to obtain control (a monopoly) in its ‘own’ target market.
Application
Pure competition and oligopoly—Marketers offer very similar products. Wheat, wool and dairy were the first examples of pure competition, where prices could not be controlled. The clothing industry and the snack-food industry are examples of industries where marketers offer products that are very close substitutes.
Monopoly—These are very rare in market-directed economies. Government regulation of monopolies is common. Utility companies like gas, electricity and water are more deregulated nowadays. Prices set by utility companies must be approved by the government.
Monopolistic competition—There is still competition as many customers perceive alternatives as substitutes. This is typical of the situation faced by most marketing managers in developed economies around the world. Fluffy fabric softener uses the same basic chemicals as other fabric softeners. Marketing managers may attempt to differentiate it from other fabric softeners by offering a non-drip measuring and pouring spout, producing advertisements that demonstrate its softening ability, or by obtaining better shelf position in supermarkets. However, if potential customers view the different offerings as essentially similar, the market will become more and more competitive and a company will need to rely on lower prices to obtain a competitive advantage.
10/1/2012
MANAGEMENT ETHICS Wk 6-1 FALL-2015
classroom
The U.S. trade deficit: America today imports twice as much merchandise as it exports.
Our relentlessly growing trade deficit is now over $700 billion annually, equivalent to almost 6 percent of GDP.
With this deficit the country’s reliance on foreign borrowing has increased, and foreign creditors now provide two-thirds of America’s net domestic investment.
Today we owe the rest of the world about $3 trillion—twice what we owed in 2000.
Today’s Economic Challenges
32
Changing attitudes toward work: Americans now work 20 percent more than in 1970.
But the American work ethic is disappearing:
Only one in three persons believes that hard work pays off in the end.
People are less interested in work than in looking out for themselves.
With increased education, we are rearranging our ideas about what we want from life.
People want meaningful and challenging work that offers us autonomy and self-development.
Today’s Economic Challenges
33
Reflection
Questions ?
This weeks (wk 6)
Management Ethics
Reflection Questions
1. What do you see as the strongest moral consideration in favor of capitalism? What do you see as the strongest objection to it?
Chap 4 – The Nature of Capitalism
(pg 173)
This weeks (wk 6)
Management Ethics
Reflection Questions
2. How capitalist is our economic system today?
Chap 4 – The Nature of Capitalism
(pg 173)
This weeks (wk 6)
Management Ethics
Reflection Questions
3. What do you see as the major economic challenges facing our society today and, in particular, your generation?
Chap 4 – The Nature of Capitalism
(pg 173)