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2 Capitalism

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Learning Objectives

After reading this chapter, you should be able to:

• Describe the main features of capitalism and socialism.

• Explain the three main aspects of Adam Smith’s account of capitalism.

• Explain the three main aspects of Karl Marx’s account of socialism.

• Assess the main criticisms of capitalism and socialism.

• Explain how various anticompetitive practices undermine capitalism.

• Describe the reasons and mechanisms for government regulation of the marketplace.

• Explain government bailouts and crony capitalism.

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Introduction

Chapter Outline Introduction

2.1 Capitalism and Socialism Defined

Capitalism

Socialism

2.2 Adam Smith’s Capitalism

Self-Interested Desire for Luxury Goods

The Invisible Hand

Limited Role of Government

2.3 Karl Marx’s Socialism

Alienated Labor

Class Struggle

Revolution

2.4 Assessment of Capitalism and Socialism

Criticisms of Capitalism

Criticisms of Socialism

Moderate Versions

2.5 Anticompetitive Practices

Monopolies and Oligopolies

Price Fixing, Bid Rigging, and Price Gouging

2.6 Regulating the Free Market

Reasons for Government Regulation

Mechanisms for Government Regulation

2.7 Government Intrusions Into Capitalism

Government Bailouts

Crony Capitalism

Conclusion

Introduction Some years ago, protestors took to the streets in Bolivia, South America’s economically poorest country. The reason? The Bolivian government had leased the water rights of several regions in the drought-stricken nation to private companies. One was the U.S. engineering company Bechtel, which agreed to expand and bring efficiency to the water resources of those regions. This meant that all of the area’s water resources fell within its domain, even the gathering of rainwater. Shortly after Bechtel took control, water prices in one city tripled, sparking major protests. The government declared martial law and police were called in, killing at least six

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Section 2.1 Capitalism and Socialism Defined

protesters and injuring over 170 others. The Boliv- ian government subsequently canceled the water contract with Bechtel.

Bechtel was not an inherently evil corporation that intentionally entered Bolivia to extract money from a poverty-stricken population. In their defense, com- pany executives said that the price increases were ini- tiated by the local government, not by them. Bechtel had experience managing water resources and was simply there to do a job. Further, the decision to priva- tize Bolivia’s water in the first place was forced by the World Bank: If Bolivia did not privatize water, it would be cut off from water development loans. Nev- ertheless, Bechtel’s involvement in the privatization of water became a symbol for capitalism’s having gone too far. Once water was privatized, the Bolivians could not even collect rainwater for their own drink- ing without first obtaining a permit. Bolivia’s situa- tion, while dramatic, is not an isolated case, and water privatization in the world’s poorest countries contin- ues to be a multibillion-dollar industry. Even within the United States, a lawsuit against Nestle challenged that company’s right to privatize water from an aqui- fer in Michigan where natural resources—including ground water—are part of the public trust.

The privatization of water appears to be a situation of forcing private market solutions upon what are ultimately public-sector problems. Water access, it seems, is a public right, and when water becomes scarce, the task of managing those resources should fall to the government, whose primary task is to protect the public good.

At the heart of many issues in business ethics, like the privatization of water, is the economic system under which businesses themselves operate. Generally speaking, the two competing economic systems are capitalism and socialism. The one looks to the free market, the other to government control. In this chapter, we will look at the tension between these two ideologies and the ethical implications of adopting one of these systems over the other. We will consider their essential features and the specific theories of their two most famous defenders, Adam Smith and Karl Marx. We will then examine anticompetitive business practices that undermine the free market, and the role of the government in keeping the market competitive. Finally, we will look at practices by the government itself that threaten free market capitalism.

2.1 Capitalism and Socialism Defined There are no official definitions of either capitalism or socialism upon which everyone agrees. One reason for this is that these theories are so multifaceted and all encompassing that they resist being distilled into a single formula. Another reason is that the concepts are at the center

Julie Plasencia/ASSOCIATED PRESS

A Bolivian man demonstrates against the privatization of water and sub sequent water rate hikes in his region. He holds a sign that says, “What is ours is ours and it cannot be taken away.”

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Section 2.1 Capitalism and Socialism Defined

of an intense ideological battle, which often makes it difficult to avoid personal bias even with simple formulations of the concepts. Nevertheless, there are recurring themes within each of these notions that can provide a starting point for discussion. Our discussion will begin with extreme versions of these ideologies, and later we will consider more moderate versions that combine elements of the two.

Capitalism

As an economic theory, capitalism maintains that

• personal self-interest, not community interest, motivates business activity; • the major sources of society’s economic production should be privately owned, not

governmentally owned; and • economic planning should be decentralized through market competition, not cen-

tralized through government policy.

To clarify, the first point maintains that the engine that drives all business activity is the desire for personal gain. This does not necessarily commit the capitalist to the radical theory of psy- chological egoism, which, as we discussed in Chapter 1, states that all human actions are moti- vated by self-interest and that humans are psychologically incapable of performing purely altruistic actions. However, it does imply that, within the arena of business activity, all players do what they do in hopes of financial gain. Whether it is the venture capitalist, the private entrepreneur, the corporate executive, or the worker, the prospect of making money is the carrot that motivates.

In economics, this idea is expressed in the concept of the profit motive: The ultimate purpose of a commercial enterprise is to earn a profit. That is the reason that businesses exist. Accord- ing to this view, it is a psychological fact that self-interest motivates economic activity, and from an ethical perspective, that is the way it should be. Throughout history, the flourishing of civilizations has gone hand in hand with vigorous economic activity—craftsmanship, indus- try, and trade with neighboring countries. Whatever gains societies make through economic development are owed at least in part to this kind of self-interest.

One popular, although less precise, way of expressing this notion is the idea that greed is good: In life in general and in the business world in particular, the human drive of self- interest directs our energy and creativity. The term greed is not the most flattering way of depicting the idea of the profit motive; since the Middle Ages, greed has been listed as one of the seven deadly sins. However, by designating greed as morally “good,” the implication is that this aspect of human nature can be redirected to motivate business activity in a proficient and positive way. In the words of the character Gordon Gekko in the movie Wall Street (who is based partly on the controversial financier Michael Milken), “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit” (Pressman & Stone, 1987).

The second tenet of capitalism is that the major sources of society’s economic production should be privately owned, not governmentally owned. This includes land, raw materials, factories, retail stores, transportation services, communication networks, and any other major component of a country’s economy. According to capitalists, all of these things function

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Section 2.1 Capitalism and Socialism Defined

better when owned and operated by private individuals or organizations than when owned by the government. Part of the reason for this is efficiency: If you own your own business, you will be personally motivated to do everything in your power to succeed. You will be responsive to the needs and demands of consumers; if you are not, you risk going out of business. With govern- ment ownership, that element of personal inter- est is stripped away.

Another justification for private ownership is the very notion of the moral right to private property: The businesses that we create are part of our per- sonal property, and we are entitled to keep them. While the political concept of the natural right to property is only about three centuries old, the human sense of entitlement to personal property is much older and part of human nature itself. At the purely animalistic level, it is a manifesta- tion of territoriality, in the same way that birds own their nests and beavers own their dams. The Italian philosopher Niccolò Machiavelli viv- idly encapsulated the zeal we have for private property: A political ruler “must keep his hands off the property of others, because people more quickly forget the death of their father than the loss of their inheritance” (1532/1988). Accord- ing to capitalists, a government seizing a citizen’s private property commits one of the great- est moral violations.

The third point of capitalism, that economic planning should be decentralized through mar- ket competition, is the basic idea of free market economics. That is, businesses should be governed by the laws of supply and demand, not restrained by government interference. The idea of competition in a free market is sometimes compared with the evolutionary notion of survival of the fittest. In the evolutionary concept, species with the best adaptations, such as long claws, win out over rival species that are less well adapted, such as those with shorter claws. The losers die out and the winners live to compete against future rivals. In business, companies are best adapted to a competitive marketplace when they can offer a higher quality product for a cheaper price. Companies that are nimble and can quickly seize new market opportunities are the ones that will survive; the losers will go out of business. In the process, products improve, consumers are happier, jobs are created, and wealth is generated.

Contrast that with a situation where governments control or severely restrict business pro- duction and the ability to compete against rivals. Prices remain fixed, quality stagnates, and responsiveness to consumer demands is low. According to capitalists, governments should simply stay out of the marketplace—as indicated by the adopted French expression laissez faire, “leave it alone.”

Hemis.fr/Superstock

The Wall Street bull sculpture is for many a symbol of our country’s relationship to capitalism.

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Section 2.1 Capitalism and Socialism Defined

Socialism

We turn now to the concept of socialism, which holds the opposite of the three tenets of capitalism mentioned previously. That is,

• community interest, not personal self-interest, should motivate business activity; • the major sources of society’s economic production should be governmentally

owned, not privately owned; and • economic planning should be centralized through government policy, not decentral-

ized through market competition.

Regarding the first point, socialists do not deny the place that self-interest holds in human motivation. We are clearly self-interested creatures at many levels, and some of that self- interest may be unavoidable. However, we are not at our best when our actions are dominated by self-interested inclinations and we behave more like animals. Within human nature there is another drive—a community-oriented one—that better reflects our true human character. Virtually every political philosopher for the past 2,500 years has acknowledged the social character of human nature: We cannot survive on our own, and we require a community of diverse members to meet our survival needs. We are not lone survivalists, fending for our- selves in the untamed wild; in fact, the human species was never like that. For the vast major- ity of our 500,000-year existence as a species, we lived in tribes as hunter-gatherers. These were small groups, typically extended families, and most tribal activity focused on the sur- vival of the community. The concept of “every man for himself ” did not make much sense in that context. It was only with the emergence of city life 12,000 years ago, during the agricul- tural revolution, that the opportunity even arose for an economic system that could be driven by personal interest.

That chapter of human history has not been a pretty one. Land and other resources have been plundered, workers have been exploited and enslaved. According to socialists, these and other morally heinous acts are the regular consequence of an economic system dominated by self-interest. Socialism, by contrast, involves shaping an economic system in a way that is more consistent with our community interests.

The second tenet of socialism is that the major sources of society’s economic production should be governmentally owned, not privately owned. Private ownership of the economic base leads to the accumulation of wealth in the hands of a few powerful owners and the degeneration of society into a system of those who have and those who have not. The socialist writer Pierre-Joseph Proudhon made the famous statement that “property is theft,” by which he meant that business owners steal profits from the workers. Workers are the ones who essentially create the wealth, but they are coerced into a working situation where they reap almost none of the rewards. To that extent, it is much like slavery. Today this concern is often expressed in the concept of the wealthiest 1%—that is, the tiny percentage of people who hold a disproportionately high share of the world’s wealth.

Further, with regard to private ownership, socialists believe that owners have too much con- trol over how they manage their property and that they can act in ways that harm society as a whole. Owners can wipe out natural resources, such as timber and even water. They can take the best land for themselves, leaving nothing of value to the masses of the poor. They can sell off the nation’s food supply to foreign markets if that becomes profitable. All of these ethical

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Section 2.2 Adam Smith’s Capitalism

abuses of property cease when the property is owned and managed by a government that sees its mission as the betterment of society as a whole, including all of the social classes it contains.

The third tenet of socialism is that economic planning should be centralized through govern- ment policy, not decentralized through market competition. Consider again the “survival of the fittest” metaphor of market competition. What capitalists emphasize is the lower prices and higher quality of goods that result from competition. What they sweep under the carpet, according to socialists, are the more negative aspects of survival of the fittest. For every win- ner there is a loser, and when a company goes under, it is the army of unemployed workers who suffer the most. These workers often have no financial safety net in the way that wealthy business owners do, and they often need to uproot their families and relocate in hopes of find- ing other employment. Further, when competition is stiff, there is pressure for a business to survive at all costs; owners will continually find creative ways to cheat, either in direct viola- tion of laws or with unethical tactics that stay just one step ahead of lawmakers. All of these ethical problems are eliminated when a government itself plans the economy in response to consumer needs. Rather than have businesses claw each other to death as they fight to domi- nate every new consumer market, the government addresses those needs in an orderly way that causes the least amount of social upheaval.

Again, these descriptions of capitalism and socialism express recurring themes in these ide- ologies, and different proponents will have their own points of emphasis. Two economists are associated with the opposing systems of capitalism and socialism, namely Adam Smith (1723–1790) and Karl Marx (1818–1883). No capitalist or socialist accepts as truth every point that these thinkers made. But their writings are still held in almost scriptural reverence, and long after the words of contemporary defenders of those rival ideologies are forgotten, the writings of Smith and Marx will remain as blueprints for the economic systems that they forged. We will look at highlights of their respective views next, particularly ones that are as relevant today as they were in the two men’s lifetimes.

2.2 Adam Smith’s Capitalism The Scottish philosopher Adam Smith was a professor of moral philosophy at the University of Glasgow and the author of two important works in ethics and economics: The Theory of Moral Sentiments (1759) and An Inquiry Into the Nature and Causes of the Wealth of Nations (1776). Although Smith’s theory of capitalism is detailed, there are three concepts central to it:

1. The economy is driven by self-interested desire for luxury goods; 2. economic balance is achieved through a self-regulating invisible hand; and 3. the government’s role in a nation’s economic system should be limited.

Let’s look at each of these concepts.

SelfInterested Desire for Luxury Goods

Self-interest, according to Smith, is a fundamental driving force of human conduct. Although Smith did not go so far as to say that every human action arises from self-interested motives, he believed that self-interest is the foundation of an important segment of our public actions.

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Section 2.2 Adam Smith’s Capitalism

It drives each person to take “proper care of his health, his life, or his fortune,” which are among the most important moral duties that we owe to ourselves (Smith, 1759/1982, 4.2.3). It is also the fundamental motive that determines how we acquire from others what we need for our survival and success. I cannot survive on my own, and my most basic needs for food can only be met through the cooperation of others. To get you to help me, though, I cannot rely on your kindness. Rather, I must find some way for you to personally benefit before you will consider assisting me. Smith wrote:

Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (1776/1981, 1.2)

It will always come down to the old adage that I will scratch your back if you scratch mine. Just as self-interest drives me to acquire life’s necessities, it also motivates me to acquire luxuries, improve my position in society, and climb the ladder of financial success. According to Smith, a poor person envies the easy and comfortable lifestyles of the rich, wants that for him- or herself, and works diligently and with great difficulty to acquire it. The person devotes years to education, acquires a marketable skill, and struggles to build up a client base, often work- ing for people he or she hates. Throughout life, the person is driven by the self-interested belief that achieving an opulent life with wealth and disposable luxury goods will bring hap- piness. The fact is that it will not necessarily make the person happier, and in the end the

person will probably be more miser- able for all those efforts: “Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquil- ity that is at all times in his power” (Smith, 1759/1982, 4.1).

Smith’s point is that we naturally desire luxury items that appear to be a means of happiness, and thus we block out the thoughts of toil and misery that go along with acquiring and maintain- ing those things. If it looks like it will make our lives happier, we will want it and pursue it, even if on balance that effort will make us unhappier. It is this

desire for luxury that drives the economy, and the irony is that it is grounded in a natural deception. Smith wrote:

It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe. (1759/1982, 4.1)

Blend Images/Superstock

According to Adam Smith, the desire for luxury drives the economy.

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Section 2.2 Adam Smith’s Capitalism

In sum, according to Smith, self-interest motivates our desire for both necessities and luxu- ries, and we get what we desire only by appealing to the self-interest of others. The self- interested desire for luxuries is what drives the whole economy.

The Invisible Hand

The second component of Smith’s theory is perhaps what he is most famous for—namely, the idea that by pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand. There is a natural tendency toward self-regulation in economic sys- tems, which creates economic balance within society. Smith used the expression “invisible hand” only twice in his economic writings, emphasizing a different point each time. First he described how the wealth of the rich will be automatically distributed to poor workers. As we accumulate our wealth, there is still only a limited amount that any one person can consume, and the remainder of that wealth will ultimately make its way to workers who make our wealth and lifestyle possible. He wrote:

[The rich] consume little more than the poor, and in spite of their natural self- ishness and rapacity . . . they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the soci- ety, and afford means to the multiplication of the species. When providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. (Smith, 1759/1982, 4.1)

According to this view, to support their luxurious lifestyles, the rich need a network of workers to produce goods and provide services. This occurs when, for example, a rich farmer employs laborers to grow crops and maintain the property. It also occurs when the farmer buys luxury goods, thereby giving work to carpenters, clothiers, artists, and book publishers who might live a hundred miles away or more. This automatic spreading of wealth throughout society is an important moral good.

Smith’s other description of the invisible hand involves international trade; he supported what we now call free trade, namely the concept that trade across national boundaries should take place without interference from the respective governments. In Smith’s day, as now, indi- vidual countries typically tried to acquire more wealth than rival countries. The formula for doing this is to increase one’s exports while, at the same time, decreasing one’s imports. Gov- ernments have used a range of protectionist policies to achieve these goals, such as placing taxes and caps on imported items. Smith rejected these protectionist policies and argued that if we just allow businesses to follow their own self-interest, their country’s economy as a whole will improve. I, as a businessperson, know that my company will perform better when the economy of the whole country thrives. I will thus be naturally inclined to support the domestic economy, even when my principal aim is to increase my own business. Smith wrote:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end

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Section 2.2 Adam Smith’s Capitalism

which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (1776/1981, 1.2)

Although these are the only two instances where Smith used the expression “invisible hand,” in this quote he indicated that “in many other cases” the concept of the invisible hand applies, and a larger moral and social benefit is achieved when we pursue our own interests.

Limited Role of Government

The third component of Smith’s theory is that, although the presence of government is some- times necessary in the economic development of a society, its role should be limited and, when possible, it should allow private industries to assume tasks. Governments often take on the kind of activities that private industries and organizations do. They own and operate post offices, energy services, water utilities, transportation networks, educational institutions, and even religious establishments. Smith argued that there are three fundamental duties of governments, and that beyond those, private industries are better suited to take on tasks. The first governmental duty is defense, the use of military force to protect society from violence and attack from rival countries. The more advanced the society is, the more expensive its weaponry will be, and there is no avoiding those costs to the public. The government’s second duty is to run a judicial system that protects “every member of the society from the injustice or oppression of every other member of it” (Smith, 1776/1981, 5.1.2). The costs of running a judicial system, Smith argued, can to a large extent be defrayed through court fees.

Even among the most extreme critics of big government, there is little dispute about the gov- ernment’s fundamental role in defending the country and operating a judicial system. However, according to Smith, there is yet a third area of legitimate government involvement, and that involves public works and institutions that are of great benefit to society but too unprofitable to be taken on through private industry. These, according to Smith, fall into three categories:

1. There are public works and institutions that are necessary for businesses to oper- ate effectively, including the creation of roadways, bridges, harbors, and other parts of the transportation infrastructure. Smith also mentioned post offices and foreign embassies as institutions that are essential for commerce. Much of the cost of these commerce-based projects can be covered through tolls and user fees, without plac- ing a burden on general public funds.

2. There are government programs devoted to public education. The government has a strong interest in educating “inferior ranks of people,” who, Smith said, seem to be “mutilated and deformed in a still more essential part of the character of human nature” (1776/1981, 5.1.3). Through education, people will be less prone to super- stition, and therefore to public disorder. Also, when properly educated, the masses are “less apt to be misled into any wanton or unnecessary opposition to the mea- sures of government” (Smith, 1776/1981, 5.1.3). Costs of public education, Smith argued, can be paid for through student fees or educational endowments.

3. There are public institutions that are responsible for religious instruction. The United Kingdom, in Smith’s day as now, had a dominant state-funded religion, namely the Church of England. Smith’s view on the public funding of religion was rather radical.

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Section 2.3 Karl Marx’s Socialism

The worst part about religion, he argued, is that it perpetuates fanaticism, supersti- tion, and civil unrest. State-supported religions are particularly bad at this, he argued, and the United Kingdom’s state-run church was responsible for the deaths of thou- sands through religious persecutions. According to Smith, religion would be more moderate if churches were run privately in a competitive free market, where each church would of necessity learn to be tolerant of its rivals. Although state religions should be abolished, according to Smith, the government should create programs to reduce religious superstition even further. For example, the educated class could be required to study science, which, he said, “is the great antidote to the poison of enthu- siasm and superstition.” The government should also publicly fund “painting, poetry, music, dancing” and other forms of art that Smith believed help remove the gloomi- ness of religious fanaticism (Smith, 1776/1981, 5.1.3).

All three of these roles of government, according to Smith, aim at enhancing the well-being of society in ways that private industries are incapable of doing by themselves.

What Would You Do?

You are a congressional representative. Up for debate is whether several popular government programs should continue to be funded through tax dollars or instead be privatized and run as for-profit businesses. The central issues are the social importance of these programs, the question of whether they could be economically viable if privatized, and your responsibility to your constituents.

1. Would you privatize the interstate highway system and have motorists pay for its use through tolls? Why or why not?

2. Would you privatize NASA, and essentially make space exploration a for-profit venture? Why or why not?

3. Would you privatize all K–12 school systems, thereby permitting them to be for- profit companies? Why or why not?

4. Would you privatize Social Security, thereby making Social Security retirement benefits vulnerable to poor investment decisions and market volatility? Why or why not?

2.3 Karl Marx’s Socialism Born in Germany, Karl Marx was trained as a philosopher, but he is best remembered as a political activist and champion of the theory of communism, a radical form of socialism that aims to abolish all social classes, private property, and even government. Although Marx was a prolific writer, his two most famous works are The Communist Manifesto (1848), a docu- ment calling for workers to launch a revolution, and Capital (1867–1894), which critiques the capitalist economic system. Like Smith’s theory, Marx’s is detailed, but there are three main features of it that we will examine:

1. In a capitalist system, workers are alienated from their labor; 2. in capitalism, there is a class struggle between the working class and the business

owners; and 3. workers must improve their situation by revolting against capitalist forces in society.

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Section 2.3 Karl Marx’s Socialism

Alienated Labor

Like Smith, Marx believed that egoism is a strong motivating force for people’s conduct and that people are naturally driven to seek their own benefit in economic matters. However, Marx argued, our egoistic tendencies are a distortion of a more inner and essential part of human nature that is community oriented. Through our community nature, our choices and actions are connected with others around us, not in conflict with others. But according to Marx, capitalist societies and economic systems have embraced the egoistic part of human nature, and this egoism is evident in the so-called natural rights that countries like the United States and France have embraced.

Marx argued that when our entire social and economic systems are directed toward egoistic needs, then we as individual people become fractured and alienated from our inner community nature. This is most evident in how the vast majority of workers are forced into job environments in which they become mere tools for the egoistic benefit of the owners.

Consider a typical factory job. I need money to survive, and in my area my only employment opportunity requires me to labor in a textile factory, performing specific tasks on a textile loom all day, all for the financial benefit of the owner. Although I get paid, I have no choice in what I do, no personal stake or say in what happens to the products that I make, and, most importantly, no opportunity to connect my labor to the community in a meaningful way. Further, the tasks I perform are broken down into a series of smaller, repetitive tasks that give me no satisfaction as a craftsman, and I end up hating the objects that I produce. This is Marx’s notion of alienated labor: I become alienated from my true inner nature when I am forced to give my labor away to the factory owner and do not participate in the total creation of the object.

In Marx’s day, the situation was worsened by the dreadful working conditions in which laborers had no rights or legal recourse for on-the-job injury or death. Workers had noth- ing left to sell to survive but their own labor, and, among the poorer classes, the labor of their children. Marx argued that this is much like prostitution: Out of financial desperation,

the prostitute sells off a critical part of her identity that she would other- wise reserve for the intimate bond- ing with her spouse. In a more perfect economic environment, I would not be coerced into prostituting my labor for a measly paycheck. I would be more in control of what I produce and how I use my labor to bond with the larger community.

For Marx, here is what happens when our labor is not alienated and, instead, our job routines are in accord with our true community nature. Suppose that I have a cottage industry in which I design and manufacture shirts within my house.

Xie Zhengyi/Imaginechine/ASSOCIATED PRESS

According to Karl Marx, factory work involving small, repetitive tasks alienates workers from their labor by preventing them from identifying with the finished product.

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Section 2.3 Karl Marx’s Socialism

1. First, when I produce a shirt through my labor, I impose my creative identity on the world. Who I am as a person in some sense becomes transformed into the physical world, and I can take pleasure in seeing the physical expression of my creative per- sonality with my own two eyes.

2. Second, when you need a shirt and buy it from me, I can take pleasure in the fact that I have satisfied a specific human need that you have.

3. Third, I become the social mediator between you and your human need, and because of that you acknowledge my role in completing a necessary part of your identity.

4. Finally, the shirt that you now wear becomes part of your identity. Through the creative expression of my life, then, “I would have directly created your expression of your life” (Marx, 1844).

The end result is that through my creative expression, I connect with my community. In Marx’s words, “in my individual activity I would have directly confirmed and realized my true nature, my human nature, my communal nature” (1844). The financial exchange between you and me will still be part of the transaction, and I will still need your money in order to survive. How- ever, the financial component will be more of a secondary issue, and the primary issues of our transaction will be self-expression and community bonding. This removes the alienation of labor and places economic transactions on a higher moral level.

Even today we see this community bonding with craftspeople who have a love for their trade and enjoy sharing their goods with others. But this unalienated approach to labor is very difficult to achieve in modern capitalist and industrial work environments. Businesses do what they can to get their workers to identify with their products and the benefit that they bring to society. The more hierarchical terms employee and supervisor have commonly been replaced with the more group-oriented terms team member and team leader. In a sense, this acknowledges Marx’s assessment of worker psychology: We do not want to feel like prostitutes in our jobs, and we want some creative input. The critical issue, though, is whether the reality of one’s job can live up to the managerial jargon of “team membership,” which Marx would undoubtedly say it cannot do.

Class Struggle

According to Marx, within the typical capitalist system, then, workers are coerced into pros- tituting their labor, they are alienated from their true communal nature, and, as a result, they are very unhappy. This leads to the next major component of Marx’s theory: class struggle. Throughout history, societies have evolved through conflicts between the social classes of those who do the work and those who are in charge and benefit from that work. The class conflicts that occurred throughout history were not simple ones involving bad worker atti- tudes; rather, they often resulted in great social upheavals and revolutions. Marx wrote:

The history of all hitherto existing societies is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guild-master and journeyman, in a word, oppressor and oppressed, stood in constant opposi- tion to one another, carried on an uninterrupted, now hidden, now open fight, a fight that each time ended, either in a revolutionary re-constitution of soci- ety at large, or in the common ruin of the contending classes. (1848/1967)

For Marx, the class struggles throughout history revealed a very noticeable pattern between oppressors and the oppressed workers. In Roman times, there was a major class struggle

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Section 2.3 Karl Marx’s Socialism

between masters and slaves. Tensions grew, which included slave rebellions, and in time, that system of slavery was replaced by a slightly different social hierarchy in the Middle Ages, between nobles and serfs. That tension was eventually replaced during the Renaissance with the emergence of the middle class. But the oppression still continued, as the middle class gained financial strength and formed a capitalist economic system that continued to oppress workers.

Marx witnessed firsthand the 19th-century industrial revolution, which radically transformed the manufacturing of coal, iron, textile, and glass. This was the first time that non-aristocrat business owners controlled major industries, and to that extent, it was a social triumph. How- ever, this new class of business people who owned the means of production within society— the bourgeoisie, as Marx called them—were as oppressive to workers as previous members of the ruling class had been. Working conditions were ghastly, pay was minuscule, and work- ers had next to no political representation.

Charles Dickens’s novels, such as Hard Times, give us a glimpse of the oppressive working conditions during the 19th century that Marx was reacting against. In many ways, the eco- nomic realities of the industrial revolution made working conditions even worse for workers than they had been in previous eras. Manufacturing facilities became larger and, through divi- sion of labor, work tasks became more tedious:

Owing to the extensive use of machinery and to division of labor, the work of the proletarians has lost all individual character, and consequently, all charm for the workman. He becomes an appendage of the machine, and it is only the most simple, most monotonous, and most easily acquired skill, that is required of him. Hence, the cost of production of a workman is restricted, almost entirely, to the means of subsistence that he requires for his mainte- nance, and for the propagation of his race. (Marx, 1848/1967)

Workers must sell themselves for the performance of these tedious tasks and become one more commodity in the economic system. Like articles of commerce, they are “exposed to all the risks of competition, to all the fluctuations of the market” (Marx, 1848/1967). The situa- tion for workers gets progressively worse as their value in the market decreases.

Revolution

Marx argued that the time for change had come, and in the next phase of social progress, workers would once more rise up against their oppressors. But this time it would be different. In previous phases of social history, changes in hierarchy did not end oppression: The bosses changed, but the exploitation of workers remained the same. With this next phase, the work- ers would overthrow the ruling class, seize control of the economy, and destroy the institution of private property, which has always been the principal source of exploitation.

For Marx, the long-term goal of the revolution was communism, which, as indicated before, involves the creation of a society without private property, class division, or government. To achieve that ultimate goal, however, Marx argued that after the revolution, society must go through a transitional phase of socialism where the government takes control of major economic resources within society and enacts policies to reduce class distinctions between the rich and poor. Marx recognized that the ruling class would be horrified at the idea of revolutionaries abolishing private property, but, he continued, in existing capitalist societies, “private property

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10.

Abolition of property in land and application of all rents of land to public purposes.

A heavy progressive or graduated income tax.

Abolition of all right of inheritance.

Confiscation of the property of all emigrants and rebels.

Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

Centralization of the means of communication and transport in the hands of the State.

Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.

Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.

Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

Free education for all children in public schools. Abolition of children’s factory labor in its present form. Combination of education with industrial production, etc.

Section 2.3 Karl Marx’s Socialism

is already done away with for nine-tenths of the population” (1848/1967). The abo- lition of private property cannot come about through reforms of existing govern- mental policies, because governments are so embedded with the interests of the rul- ing class. Only a full-scale revolution will make it possible—one country at a time. This, Marx believed, is inevitable.

Once the working class has control, Marx argued, the process of abolishing private property will differ somewhat from country to country, but the more advanced countries will follow a com- mon path. That is, a transitional system of socialism will be put in place, which, step by step, will dismantle the social framework of capitalism and replace it with a more community-oriented set of policies. Figure 2.1 shows, in Marx’s words (1848/1967), the steps that he envisioned; these are now commonly referred to as the Ten Planks of Communism.

Figure 2.1: The ten planks of communism

These are the steps that Marx believed were necessary to transform a society into a communist one.

10.

Abolition of property in land and application of all rents of land to public purposes.

A heavy progressive or graduated income tax.

Abolition of all right of inheritance.

Confiscation of the property of all emigrants and rebels.

Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

Centralization of the means of communication and transport in the hands of the State.

Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.

Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.

Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

Free education for all children in public schools. Abolition of children’s factory labor in its present form. Combination of education with industrial production, etc.

Associated Press

This 1950 poster, which was displayed in Moscow, urged citizens to vote for candidates such as Josef Stalin. The poster reads, “A human being has the right to study, rest, and work.”

Source: Marx, K. (1848/1967). The communist manifesto. New York, NY: Pantheon.

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Section 2.4 Assessment of Capitalism and Socialism

The socialist revolution, as Marx envisioned it, constitutes a thorough moral transforma- tion of society that eliminates the alienation and oppression of workers and makes social benefits available to all people equally. For Marx, when the residue of capitalism has been thoroughly scrubbed away, society will enter an era of true communism. All class distinc- tions will disappear, since there will no longer be a class of workers that is distinct from a class of owners. Without private property, economic conflict will also disappear, at which point the government’s role in social organization will become unnecessary and the gov- ernment will eventually die out.

2.4 Assessment of Capitalism and Socialism The theories of capitalism and socialism have both been hotly debated since they were first forged; we will look at some of the standard criticisms of each. As complex as both theories are, we cannot expect simple criticisms to decisively refute either of them. Further, over time, defenders of both theories have attempted to address problems posed by critics and revise their theories accordingly. Those revised theories are often even more resilient to standard attacks. Nevertheless, general criticisms do reveal potential weak links in the theories.

Criticisms of Capitalism

The fundamental criticism of capitalism is that competitive markets have a built-in bias toward private interests rather than public ones. There are several manifestations of this bias:

• Capitalism leads to dramatic economic inequality and introduces class divisions between the rich and poor, which is precisely what was of concern to Marx.

• It is a system in which the worker’s labor is a commodity to be bought and sold, which often leads to dreadful working conditions. It is true that many companies today realize the value of people and have spent considerable effort and research to create job satisfaction. Nevertheless, job satisfaction remains low among workers in unskilled and semiskilled jobs, such as laborers, packagers, food preparers, cashiers, stockers, and servers (Smith, 2007). And many workers in foreign countries who manufacture products sold in the United States are in situations not much different from those of laborers in Marx’s day.

• It fosters environmental destruction and has no built-in incentive for environmental stewardship.

• It tends to be politically undemocratic by enabling large businesses to use their enormous wealth to lobby the government against consumer interests in favor of their own financial well-being.

• It cannot be trusted to shape national policy in the interests of the public, as wit- nessed by the elimination of public transportation systems throughout the United States and the movement of manufacturing facilities overseas.

• It creates antisocial motivations in both buyers and sellers. Buyers take advan- tage of return policies and are quick to sue companies for even honest mistakes. Sellers mislead buyers about the quality of their products and services. Buyer and seller become more like adversaries in the market, rather than partners.

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Section 2.4 Assessment of Capitalism and Socialism

There are countless examples of how capitalism is inherently in tension with moral responsi- bility to the public, and most of the problems and famous examples covered in this book arise from that tension. In a sense, the entire study of business ethics is a testament to the funda- mental problems of capitalism.

Criticisms of Socialism

Turning next to socialism, we find three main criticisms. First, we cannot restrain our moti- vations of personal self-interest in the manner that socialists advise. Although socialists agree that it is impossible to fully eradicate human self-interest, they recommend subduing it to the point that our community-oriented motivations guide how we develop society’s institutions and economic structure. But even that might be asking too much. Personal self- interest drives us to devote time and energy to better our situation, and without some sub- stantial personal reward, we might not be willing to devote that kind of effort to the greater social good. Personal ambition has been at the forefront of technological innovation and personal progress, and socialists have not adequately explained how we can transfer that drive to public interests.

A second and related criticism of socialism concerns the difficulty in significantly scaling back on private property, as more extreme socialists advise. Like human self-interest, property ownership is deeply ingrained in human nature—even monks, who take vows of poverty and live their entire lives in communal monasteries, still own their own toothbrushes. In a sense, socialists attempt to impose a prehistoric model of communal society on modern economy. According to socialists, just as primitive tribes held their major resources in common, so too should we in modern society hold ours in common. But according to critics, the fit does not work very well in the modern setting. We have moved beyond our hunter-gatherer roots, and through the complex demands of urbanization, we have reinvented ourselves and found a new way to flourish based on harnessing our private desires for wealth and property. The tie that binds together tribal societies is daily contact with each other; the life and activity of one tribe member immediately overlaps with those of others, like a large family. But mod- ern society is too large to be like a real family; it is a mere abstract concept that does not allow for the same bonding experience that is possible in small tribal groups. As the size of society grows, so too does our impulse toward private property.

Finally, socialist policies of cen- tralized planning are ineffective ways of structuring the economy, as the former Soviet Union’s failed efforts with centralized planning teach us. Banking, industrial pro- duction, and distribution of goods and services were organized and carried out based on a master

Bread lines such as this one were a common occurrence in the former Soviet Union because of the inefficiency caused by its centralized economy.

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Section 2.4 Assessment of Capitalism and Socialism

plan devised by the Soviet government. The principal problem with such centralization is inefficiency: It creates unpredictable deficiencies and surpluses. As hard as the Soviet government tried to predict how much bread or toilet paper its citizens needed on a daily or weekly basis, there would nevertheless be great deficiencies in some cities on some days and great surpluses in others. Bread lines were a common occurrence; people would stand outside a bread store all night to buy as much bread as permitted the next morning before supplies ran out.

Moderate Versions

These are just some of the standard arguments against both socialism and capitalism, and again, defenders of each of these ideologies certainly have rebuttals. But when assessing the respective merits of both ideologies, it is important to recognize that there are both extreme and moderate versions of each, which fall along a spectrum from the most extreme capitalism to the most extreme socialism. Very few theorists espouse the most extreme versions, and in the real world, very few if any countries have ever implemented their economies in such extreme ways. Adam Smith himself recognized the need for the government’s involvement in the national economy to provide, for instance, armies, roads, and schools and to undertake certain commercial ventures. Marx himself acknowledged that during the transitional period of socialism, there still would be some private ownership of the country’s economic base.

More moderate versions of capitalism and socialism each aim to allow at least some market- based economy while at the same time providing a social safety net to citizens. One such position on the capitalist side of the spectrum is welfare capitalism, a term that originally referred to social-welfare services provided by employers in the early 20th century, such as paid vacations, medical benefits, and pensions. More recently it has come to refer to eco- nomic systems that are capitalistic but have social programs that the government runs, such as national health care and government-run child care.

On the socialist side there is market socialism. This term originally referred to worker- owned cooperative enterprises that operate within free-market systems but are set up in ways that prevent worker exploitation. Today it refers to economic systems that are socialist in terms of government ownership and control of major economic enterprises, but at the same time incorporate some capitalist policies, such as relying on supply and demand in the market to set prices.

Just as there are a variety of theoretical models of both capitalism and socialism, in the real world there are a variety of capitalist and socialist systems throughout the world. While it is difficult to precisely identify where any country stands on the spectrum between capitalism and socialism, one indicator is a 2014 Pew Research Center survey of nearly 50,000 people in 44 countries throughout the world on how strongly they prefer a free market economy. Figure 2.2 presents a partial list of the responses, with those higher up being more free mar- ket than those lower down.

There is a benefit to a variety of economic approaches among countries, in that each functions like a laboratory experiment in economic policy that others throughout the world can observe and learn from. What are the failures and successes of these countries, and how might this knowledge help us improve our system?

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Section 2.5 Anticompetitive Practices

2.5 Anticompetitive Practices Economists classify the economic system of the United States as a type of welfare capitalism, similar to those of Australia and the United Kingdom. For countries like the United States that are committed to capitalism as an economic system, efforts are needed to keep the market- place competitive and fair and to prevent the free market itself from being destroyed. Let’s look at some of the most notorious anticompetitive business practices that must be guarded against.

Monopolies and Oligopolies

A natural outcome of competition in the marketplace is the emergence of monopolies, where a single company controls all or nearly all of the market for a given type of product or ser- vice. Suppose that a new market opens up for a self-driving automobile, and 10 companies

Figure 2.2: Support for the free market

Percentage of people who responded “disagree” or “agree” to the following statement, by country: “Most people are better off in a free market economy, even though some people are rich and some are poor.”

Source: Adapted from Pew Research Center. (2014). Emerging and developing economies much more optimistic than rich countries about the future.

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Section 2.5 Anticompetitive Practices

manufacture the product. In the normal course of competition, some companies will go under for having inferior technology or poor marketing. Other companies will merge, and in time, only one may be left standing. This scenario has played out again and again in the last few centuries, with notable examples from the past including Western Union, Standard Oil, U.S. Steel, and AT&T® controlling the telegraph, petroleum, steel, and telephone markets, respec- tively. In more recent years, we have seen movement toward monopolies with De Beers® and the diamond trade, Microsoft and computer operating systems, and Monsanto and the com- mercial seed market.

What, though, is so bad about monopolies? If a company wins fairly in its battle for market share, does it not deserve its position of dominance? Critics argue that monopolies destroy the very competitive markets that first created them, and in the process they eliminate the two key benefits of a capitalist economic system. That is, competition is no longer present to drive down prices and improve quality. For example, when AT&T dominated the tele- phone industry, prices were comparatively higher than they were after the company was forced to break up, and consumers had fewer options than after the breakup. Imagine what using the phone would be like today if AT&T were the only game in town. The almost infi- nite variety of cellphone apps that we have come to rely on would likely be only futuristic dreams.

But the companies accused of holding monopolies tell a different story. In the 2001 court case against Microsoft, for example, the software company argued that its dominance in the mar- ket had enhanced rather than harmed the innovation process throughout the entire software industry. Consumers, it argued, had also benefited from the low price of its operating system, its free applications, and the impact Microsoft had had on accelerating computer-software innovation more generally. It would be difficult to demonstrate that all monopolies will lead to a decrease in innovation and higher prices; however, there is a realistic fear that at least some monopolies will do so, and that is enough to make a monopoly a potentially anticom- petitive practice.

Similar to a monopoly is an oligopoly, where the market is dominated by a small number of businesses that collectively exert control over that market’s supply and prices. The petro- leum, telecommunication, automobile, and soft-drink industries in the United States are clear examples, but with other products, oligopolies are more concealed. There are, for example, dozens of national brands of laundry detergents on the market, but the vast majority is pro- duced by only three companies. As with monopolies, the question remains whether the domi- nance of an oligopoly in a given market will of necessity harm innovation and result in higher prices.

Two mechanisms that can lead to both monopolies and oligopolies are mergers and acquisi- tions. A merger is when two companies of roughly the same size agree to combine as equals to form a new company. An example is the 2014 merger of AT&T and DirectTV, the country’s second-largest wireless and pay-TV companies. An acquisition, by contrast, is when a larger company buys a smaller company, which is then swallowed up and loses its identity within the larger one. Nothing is inherently anti-competitive about mergers and acquisitions, and they are in fact a normal part of business transactions. But when these mechanisms are used repeatedly within a given market and produce monopolies and oligopolies, they may create a potentially anticompetitive situation.

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Section 2.5 Anticompetitive Practices

Price Fixing, Bid Rigging, and Price Gouging

Whereas monopolies and oligopolies are only potentially anticompetitive, other business prac- tices are anticompetitive by their nature and are both unethical and illegal. One such practice is price fixing, where business competitors conspire to set their prices at a fixed point. In usual cases, the businesses set their product prices high; without cheaper alternatives available, consumers are forced to buy at the high price. Price fixing often occurs in markets that are dominated by oligopolies, where the small number of competitors makes it easier to enter into price-fixing agreements. A recent example of a price-fixing conspiracy occurred among around a dozen manufacturers of LCD screens for computers and televisions (Boyette, 2012). From 1999 to 2006, it is alleged that senior-level executives from these companies—which included Samsung, Sharp, Toshiba, LG, and Hitachi—secretly met, exchanged information, and agreed on the prices at which each company would sell its products. In all, the companies sold around $70 billion in price-fixed panels worldwide, which were then purchased by many of the top- name electronics companies and used as components in their computers and televisions. The artificially inflated prices of these products were then passed on to consumers. In a class action lawsuit, the LCD manufacturers agreed in 2012 to a $1.1 billion financial settlement with the electronics companies, the largest settlement of its kind in U.S. history.

A variation on price fixing is bid rigging, where competing businesses agree that one of them will place a bid on a contract at a predetermined price. Often this is done in rotation, where the conspiring businesses take turns offering the lowest bid, thereby ensuring that they each win bids. A notable case involved several dozen electrical equipment companies, including Gen- eral Electric and Westinghouse, which engaged in a bid-rigging conspiracy during the 1950s for products such as power transformers and generators (Hartley, 1993). Every four weeks, the companies would rotate who would place the lowest bid, ensuring that each would have a turn. What gave them away was that many of the high bids were identical to each other, which would not likely occur by accident. In one case, 12 of the bids quoted the same delivery price, despite the fact that driving distances from the respective factories varied greatly. In total, 29 companies were found guilty in this “Great Conspiracy,” as it was called, and 30 executives received jail sentences. In addition to criminal fines, customers brought over 2,000 lawsuits against the companies, resulting in hundreds of millions of dollars in damages.

A recent example of bid rigging is a conspiracy among 11 real estate investors who purchased property at foreclosure auctions in California (U.S. Department of Justice, 2014). The inves- tors negotiated payoffs to each other for agreeing not to compete, so that the properties would sell at a lower price than they would otherwise. As of 2014, 47 participants pleaded guilty to criminal charges brought against them by the Department of Justice; they face a possibility of 10 years in prison and a $1 million fine for each act.

A final type of unfair competitive practice is price gouging, which occurs when a business sells a product for a price that is much higher than is considered reasonable or fair or sustain- able in a truly competitive environment. Price gouging often occurs when there are too few competitors in a given market, which would otherwise drive prices down. The pharmaceuti- cal industry is notorious for this, and two factors make it particularly so:

• Drug patents grant a temporary monopoly. When a company produces a new drug, it is granted a legal monopoly on the sale and manufacture of it for approximately

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Section 2.6 Regulating the Free Market

10 years. In many cases—with breakthrough drugs—there is no competition whatsoever. The purpose of drug patents is to encourage innovation by financially rewarding companies that invest in the research and development of new drugs. But the patent itself creates a temporary monopoly until the formula is released into the public domain, when competitors can make generic versions of it.

• Demand for a product does not change according to the price. With normal prod- ucts, price and demand are directly connected. If I charge $100 for a can of cola, the demand for my product will be very low. But if I charge 5 cents per can, demand will be high. Economists call this relation elasticity. But with pharmaceuticals, the rela- tion between price and demand is inelastic: If I need a drug to stay alive, price is no consideration. Whether it costs 5 cents a pill or $100 a pill, I will pay for it if I can.

Here is one classic example of price gouging in the pharmaceutical industry. When the AIDS epidemic emerged in the mid-1980s, the first available treatment was the antiretroviral drug AZT, which came with an initial price tag of $7,000 a year. After intense pressure by HIV- advocacy groups, that price was eventually lowered to $3,000. The manufacturer justified the original cost on a couple grounds. First, it was initially approved for a comparatively small market of 50,000 patients who were seriously ill with AIDS—although it was later approved for anyone who tested HIV positive. Second, since AZT was not a cure and would only delay

death by about 1 year, the market was literally short lived (Hartley, 1993).

Price gouging does not just exist within the pharmaceutical industry, of course. Recently, the transportation company Uber has been heavily criti- cized for its “surge pricing” strategies that can sometimes charge customers up to seven times a normal fare dur- ing peak hours of demand. Custom- ers complain that the company takes advantage of users when they need the service the most, such as during holidays and bad weather. In fact, the company was even accused of jacking up prices during a recent hostage cri- sis in Australia, charging customers a

premium to leave the financial district where the crisis was taking place. Uber’s response to one customer’s complaint was that, during peak demand times, “without Surge Pricing, there would be no car available at all” (Lowrey, 2014).

2.6 Regulating the Free Market To preserve a truly competitive state within the free market, the government must sometimes step in to prevent anticompetitive practices and unfairness. The free market is not so much a natural state of affairs for business transactions but is instead more like a game where partici- pants agree to follow established rules and the government stands by like an umpire to assure

Jeff Chiu/ASSOCIATED IMAGES

Recently, the transportation company Uber has been criticized for price gouging by charging customers higher rates during peak hours.

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Section 2.6 Regulating the Free Market

that the process runs smoothly. To that extent, a pure capitalist system does not seem possible; any functioning free market will involve government intervention of at least some sort.

Reasons for Government Regulation

In the face of the many problems inherent in capitalist economic systems, the solution of choice is government regulation—that is, rules and policies are imposed by the govern- ment on various aspects of commerce within a country. The underlying justification is that responsibility in the business world comes about only through legislating it. Here is a simple example: Some financial investments, such as stocks, are regulated by the U.S. Securities and Exchange Commission (SEC), whereas other investments, such as collectible stamps, are not. A respected stamp dealer was recently called out for making exaggerated claims about his stamp investment plan. One financial analyst explained:

Reading the marketing material made me shiver. It highlights how careful investors have to be when buying unregulated products—like stamps and other collectables [sic]. If I tried to sell investments like this to my customers I’d be shut down by the regulator . . . [The stamp dealer] uses every trick in the book to make people part with their money. There is no attempt to explain the risks involved, or detail potential downsides, like early exit charges. (Ian Lowes, quoted in Simon, 2011)

In this quotation, the financial analyst indicates how important investment regulation is for the protection of consumers. Investment markets without such regulation create opportuni- ties for investment businesses to act irresponsibly and unethically.

There are three fundamental justifications for governmental regulation within capitalist eco- nomic systems:

1. First, regulation aims to protect consumers, workers, minorities, the environment, and any other interest or group of people that could be exploited in a competitive marketplace. The example of stamp investments shows how great the temptation is for financial-investment businesses to misrepresent their products, and, thus, how great the need for rules of transparency and for enforcement of those rules.

2. A second justification is to assure that business markets remain competitive by guard- ing against monopolies and prohibiting anticompetitive practices such as price fixing.

3. There is a third and more controversial justification of government regulation, which is to help redistribute the wealth of society. As the gap between the rich and poor grows, society risks becoming stratified into two classes. At least some efforts at governmental regulations attempt to address this. Minimum wage is a case in point, and the need for government involvement here is demonstrated every few years when Congress debates minimum-wage increases. In 1938, the year of its incep- tion in the United States, the Federal minimum wage was set at 25 cents per hour, and it has been increased around 30 times since then. The longest period without an increase was 10 years, between 1997 and 2007, and during that time the prices of consumer goods rose considerably through inflation. Each time the issue was before Congress—and 2007 was no exception—business groups lobbied against an

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Section 2.6 Regulating the Free Market

increase for the simple reason that increasing wages harms the bottom line. Like the minimum-wage regulation, government regulations that require health-care insur- ance for workers, worker’s compensation, and Social Security all aim at preventing an impoverished underclass.

Mechanisms for Government Regulation

There are two approaches to government regulation, one direct and the other indirect. Direct governmental regulation occurs when specific regulatory policies are established by an actual branch or agency of the government, such as Congress or the SEC. The indirect variety involves governmentmandated selfregulation: In lieu of direct government involvement, the government mandates that a private self-regulatory organization set policies in a given market and the government then defers to that organization. For example, within the finan- cial market, the Financial Industry Regulatory Authority is the private self-regulatory orga- nization that operates in concert with the SEC to assure that the securities industry operates fairly and honestly. Although it is not itself a government agency, it nevertheless operates under the oversight of the SEC.

Antitrust Acts Two laws are particularly important for setting the parameters of the free market in the United States. One is the Sherman Antitrust Act of 1890, the first Federal law to outlaw price fixing and restrict monopolies. In the language of the statute, “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or per- sons, to monopolize any part of the trade or commerce among the several States, or with for- eign nations, shall be deemed guilty of a felony” (Sherman Antitrust Act of 1890, Section 2). The aim of the law is to punish not businesses that become monopolies through fair competi- tion, but only those that do so through anticompetitive misconduct. Monopolies themselves are not illegal, but the abuse of a dominant position is.

The second law is the Clayton Antitrust Act of 1914, which restricts specific types of business practices that might potentially lead to anticompetitiveness, such as mergers and acquisitions that aim to create monopolistic power. Both of these laws laid the groundwork for antitrust policies in the United States that continue to the present day.

An example of the application of these two antitrust laws is the 2013 merger between American Airlines and U.S. Airways into what would be the largest airline company in the United States. The U.S. Department of Justice and the Attorneys General of several states sued to block the merger on the grounds that it would reduce competition and increase prices. A settlement was reached allowing the companies to merge under the condition that they sell off 138 takeoff and landing slots in various airports, thus allowing more competition.

The Federal Trade Commission (FTC) The government agency that is directly responsible for combating anticompetitive business practices is the Federal Trade Commission (FTC), founded in 1914. The initial purpose of the FTC was to prevent unfair methods of competition in commerce that led to monopolies

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Section 2.7 Government Intrusions Into Capitalism

and oligopolies—which at the time were called trusts. Since that time, Congress has given the agency greater authority to police anticompetitive practices. To this end, the FTC performs three central tasks:

• reviewing mergers and acquisitions and challenging those that would likely lead to higher prices, fewer choices, or less innovation;

• seeking out and challenging anticompetitive conduct in the marketplace, including monopolization and agreements between competitors; and

• promoting competition in industries where consumer impact is high, such as health care, real estate, oil and gas, technology, and consumer goods (U.S. Federal Trade Commission, n.d.).

Regarding the first point, the FTC does not scrutinize all mergers but only those that risk undermining market competition. The FTC has the authority to bring civil cases against offending businesses, and when the situation is bad enough, they work with the Department of Justice to bring criminal charges against offending businesses.

What Would You Do?

You are the chair of the Federal Trade Commission, and you are reviewing a possible merger between Subway and McDonalds, the two largest fast-food restaurant chains in the United States. At issue is whether the merger would create an anticompetitive environment in that industry.

1. Would you block the merger? Why or why not? 2. Suppose these two companies were also seeking to merge with Starbucks, Pizza Hut,

and Burger King, the next three largest fast-food restaurant chains. Would you block that merger? Why or why not?

3. Suppose the 25 largest fast-food chains wanted to merge. Would you block that? Why or why not?

2.7 Government Intrusions Into Capitalism Anti-competitive practices such as monopolies and price fixing are threats to capitalism that businesses themselves create, and governmental regulation is an important tool for prevent- ing these problems from getting out of hand. However, governments themselves pose their own intrusions into capitalism. Socialism, in its extreme forms, aims specifically at eliminat- ing market competition and instead centralizing the country’s economy. But even capitalist- friendly governments such as the United States’ can go beyond mere regulation by setting policies that strike at the heart of the capitalist economic system. We will look at two of these: government bailouts and crony capitalism.

Government Bailouts

In 2008, the United States experienced a financial crisis that triggered a recession that, according to many economists, was the worst since the Great Depression in the 1930s. The

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40% Banks and financial

institutions

30.6% Fannie Mae

and Freddie Mac

11.1% AIG

3% Toxic asset purchase*

*An asset whose value has permanenty dropped to the point that it cannot be sold without a substantial loss.

2.3% Other

13% Auto

companies

Section 2.7 Government Intrusions Into Capitalism

immediate cause was the burst of the real estate housing bubble: home prices had been artificially inflated through reckless accounting practices, then prices quickly declined as owners defaulted on their mortgages. When banks and other mortgage holders could not sustain the losses, they verged on collapse, which caused a negative ripple effect across the whole economy. In an effort to save the economy from complete ruin, the U.S. government came to the assistance of nearly 1,000 companies in what is commonly called a bailout—a government practice of giving financial support to a company that has serious financial prob- lems. In this case, the financial support totaled $659.1 billion. The breakdown of the bailout money received by these companies is shown in Figure 2.3.

Figure 2.3: U.S. government bailout money

Percentage of bailout money given by the U.S. government as of January 2015.

Source: Based on Kiel, P., and Nguyen, D. (2015). The state of the bailout. Pro Publica. Pro Publica.

40% Banks and financial

institutions

30.6% Fannie Mae

and Freddie Mac

11.1% AIG

3% Toxic asset purchase*

*An asset whose value has permanenty dropped to the point that it cannot be sold without a substantial loss.

2.3% Other

13% Auto

companies

The majority of the payouts were investment loans that the receiving companies needed to give back, while the minority were subsidies that they could keep. However, note that since 2008, the government has actually received a net profit of $53.1 billion from the bailout through money returned, dividends, interest, and other proceeds. Thus, with this particular bailout, the issue is not so much one of taxpayers giving free money to irresponsible busi- nesses. Rather, it is a question of whether the government had any right to rescue companies that failed because of their own ineptitude or negligence. Competition is at the core of capi- talism, and these are companies that competed improperly, created fatal consequences for

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Section 2.7 Government Intrusions Into Capitalism

themselves, and, some would argue, deserved to be replaced by other companies that did not make those kinds of mistakes.

By bailing out these companies, did the U.S. government abandon its commitment to a free market economy and capitalism? Here are two possible justifications for the government’s involvement:

1. First, we might concede that the government temporarily set aside its commitment to capitalism and adopted a more socialistic solution. The entire economy was at risk, it needed saving, and, as happened during the Great Depression, adopting some aspects of socialism was necessary for recovery. If the diehard capitalists are unhappy with that, some would argue, they only have themselves to blame for not proactively addressing the problem in a capitalist-friendly way.

2. A second justification for the government’s role is that it used a capitalist-like solution to cure the problem. It did not nationalize those failing companies and, in most cases, did not give them free money. Rather, it temporarily played the role of a capitalist investment company, and did so of necessity since more loan money was needed than private investment companies could afford to finance. In good capitalist fashion, it made the loans with the same oversight requirements that banks would impose, and made a profit on its investment. And, when all the loans are all paid in full, the govern- ment’s financial role in the crisis will be over.

This second justification is at least as plausible as the first, but the fact remains that, by seri- ously intervening in the survival of these companies, the government redefined its “hands off ” commitment to capitalism.

Crony Capitalism

Do you like auto racing? If so, there is good news: Congress likes it, too, and recently gave $78 million in tax write-offs to NASCAR. According to one racetrack executive, “This allows us to compete with football, baseball and basketball, whose facilities are often financed with state and local tax money” (Pear & Pilon, 2013). In fact, recent legislation gave a total of $67.9 billion dollars in tax breaks to not just NASCAR but to a variety of industries, including rum manufacturers, asparagus growers, and Hollywood producers.

In all fairness, many of these breaks have reasonable justifications, such as tax credits for construction of renewable energy projects such as wind turbines. The larger problem here, however, is that of crony capitalism, sometimes called corporate welfare, where businesses receive special economic benefits from the government such as tax breaks, grants, economic development subsidies, or contracts. On face value, crony capitalism is contrary to genuine capitalism, where businesses earn income by competing with each other in the marketplace; special gifts from the government give some companies or entire business sectors an unfair advantage. Added to this, there is the problem that the companies that receive the benefits are often the most politically well connected and have a stronger lobby than their rivals. The government thus plays favorites, which is inherently unfair. Yet another concern is that the bulk of the subsidies is going to the largest corporations. A study by Subsidy Tracker titled “Subsidizing the Corporate One Percent” (Mattera, 2014) shows that over the past 40 years, 75% of subsidy dollars have gone to only 965 large corporations, the highest paid recipients being Boeing, Alcoa, Intel, General Motors, and Ford Motor Company.

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Summary & Resources

Again, some special government subsidies may have perfectly reasonable justifications. It may be cheaper for the government to issue a subsidy to a business than deal with the financial costs of unemployment if the business goes under. Some subsidies may also help businesses deal with expensive government regulations. For example, government-created environmen- tal regulations are sometimes financially crippling for specific industries, and government subsidies can be an efficient way of compensating businesses for that financial burden. Nev- ertheless, the tax breaks and subsidies of crony capitalism, like government bailouts, subtly redefine the boundaries of free market capitalism and, at minimum, require a compelling justification.

Conclusion Winston Churchill famously said, “Democracy is the worst form of government, except for all the others.” This may apply equally to capitalism: Capitalism is the worst economic system, except for all the others. Undoubtedly, capitalism has advanced society in remarkable ways, and the long history of capitalism in the United States has made for the world’s strongest national economy. But these successes do not mean that capitalism is without serious prob- lems. We have seen that an unregulated marketplace will lead to anticompetitive practices that can destroy all that is good about capitalism. With the profit motive as strong as it is, it is unrealistic to think that businesses will regulate themselves out of a sense of duty to soci- ety at large. For lack of any better regulatory mechanism, the government must assume that responsibility.

This often places businesses and the government in an adversarial relationship, where busi- nesses lobby against virtually every proposed regulation and, what is more, for the repeal of important regulations that are in place. If businesses achieved everything they wanted with their antiregulatory lobbying efforts, unfair and anticompetitive business practices could reach epidemic proportions. Although the regulatory relationship between business and government is imperfect, it is an important safeguard for capitalism’s health. In our opening example, we saw that Bolivia’s experiment with privatizing water led to massive protests. Marx warned that it could get much worse: Workers might launch a full-scale revolution in reaction to being systematically exploited by capitalist business owners. This worst-case sce- nario has played out in dozens of countries within the last century, and the stakes are too high to risk that happening in the United States and other welfare capitalist countries. This may well be a situation in which doing the ethical thing in business requires the acceptance of government involvement.

Summary & Resources

Chapter Summary We began this chapter looking at three key features of capitalism and socialism, respec- tively. For capitalism they are (1) that personal self-interest, not community interest, moti- vates economic development; (2) that the major sources of society’s economic production should be privately owned, not governmentally owned; and (3) that economic planning should be decentralized through market competition, not centralized through government policy.

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Summary & Resources

By contrast, the three main features of socialism are (1) that community interest, not per- sonal self-interest, should motivate economic development; (2) that the major sources of society’s economic production should be governmentally owned, not privately owned; and (3) that economic planning should be centralized through government policy, not decentral- ized through market competition.

The most famous advocate of capitalism is Adam Smith, who argued for three main points: (1) Self-interest drives the economy. To get what I need to survive, I cannot rely on your kind- ness but must find some way for you to personally benefit before you will consider assisting me; (2) By pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand; (3) The presence of government is sometimes necessary for society’s economic development, but its role should be limited. Among the government’s main respon- sibilities are national defense, the judicial system, and public works that benefit society but are too unprofitable for private industries to take on themselves, such as roads, public educa- tion, science, and the arts.

The leading critic of capitalism and defender of socialism is Karl Marx, who held three princi- pal positions: (1) Capitalist systems put workers in a position where they become separated from their true inner nature when forced to give their labor away to a factory owner; (2) His- tory involves a succession of class struggles between those who do the work and those who own the business or industry; (3) The current class struggle between wealthy business own- ers and exploited workers will end in a revolution that will ultimately put an end to all private property, social classes, and government itself.

The leading criticism of capitalism is that it creates a bias toward private interests rather than public ones. Socialism, by contrast, is faulted for underestimating the importance of per- sonal self-interest, private property, and free-market economic planning. Moderate versions of both capitalism and socialism attempt to strike a middle ground and thereby avoid the problems associated with the more extreme versions of each. Within free-market economies, some business practices are potentially hazardous to capitalism and must be monitored— namely, monopolies, oligopolies, mergers, and acquisitions. Other anticompetitive business practices are so damaging to capitalism that they are illegal; examples include price fixing, bid rigging, and price gouging.

To keep markets competitive, the government can help control business activity by either directly regulating it through laws and policies or requiring that a private self-regulatory orga- nization establish policies within a given market. The government itself, however, may engage in practices that chip away at capitalism, such as government bailouts and crony capitalism.

Discussion Questions

1. Adam Smith argued that self-interest is a critical element in a society’s economic development. Karl Marx, by contrast, argued that society functions better when each of us is more community oriented. Explain each of their views on this issue, and dis- cuss when self-interest in businesses goes too far and becomes a hazard to society.

2. Adam Smith is known for his view of the “invisible hand,” the idea that by pursuing our self-interest, we indirectly promote the good of society. Smith himself provided two examples of this but said that the invisible hand is also evident in “many other

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Summary & Resources

cases.” Explain Smith’s two examples, and speculate about other situations in which the concept of the invisible hand may be valid.

3. Smith held that, even within a capitalist economic system, the government plays a critical role in supporting or running important public projects that are too unprof- itable to be taken on by private industry. Among these are roads, public education, science, and the arts. In the United States, the government indeed funds these proj- ects, and many more. What are some of these other projects, and would they, or the projects that Smith himself mentioned, be best left to private industry?

4. Marx argued that, in capitalist economic systems, workers become alienated from their labor in the sense that they are forced to give their labor away to the factory owner, with no personal stake in the products they make and no meaningful connec- tion to the community. What are ways in which business owners today try to reduce this sense of alienated labor among their employees? Do those methods work?

5. Marx was convinced that worker exploitation would inevitably lead to revolution: It happened in the past with slave and peasant revolts, and it is just a question of time before it happens with workers in capitalist societies. Even in the United States, there are regular protests against unequal wealth distribution; the recent Occupy movement is just one example. How bad would it have to get in the United States before peaceful protests would turn into full-scale revolution?

6. Monopolies and oligopolies are potentially harmful to free-market capitalism, and for that reason the government sometimes breaks companies up or regulates them in some significant way. Think of an example of a monopoly or oligopoly—such as Microsoft, Monsanto, or Coca-Cola and PepsiCo—and discuss the benefits and harms of their dominance over their specific market.

Key Terms

acquisition When a larger company buys a smaller company, which is then swallowed up and loses its identity within the larger one.

alienated labor Labor that a worker is forced to give to a factory owner in a way that does not allow the worker to participate in the total creation of the object.

bailout A government practice of giving financial support to a company that has serious financial problems.

bid rigging When competing businesses agree that one of them will place a bid on a contract at a predetermined price.

bourgeoisie Karl Marx’s term for business people who owned the means of production within society and oppressed their workers.

capitalism The economic theory that maintains that (1) personal self-interest, not community interest, motivates eco- nomic development, (2) the major sources of society’s economic production should be privately owned, not governmentally owned, and (3) economic planning should be decen- tralized through market competition, not centralized through government policy.

class struggle The socialist view that through- out history, societies have evolved through conflicts between the social classes of those who do the work and those who are in charge and benefit from that work.

Clayton Antitrust Act of 1914 U.S. Federal law that restricts specific types of business practices that might potentially lead to anti- competitiveness, such as mergers and acquisi- tions that aim to create monopolistic power.

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Summary & Resources

communism A radical form of socialism that aims to abolish all social classes, private property, and government.

crony capitalism A government practice by which businesses receive special eco- nomic benefits from a government such as tax breaks, grants, economic development subsidies, or contracts.

direct governmental regulation When specific regulatory policies are established by an actual branch or agency of the govern- ment, such as Congress or the SEC.

Federal Trade Commission (FTC) U.S. Federal agency established in 1914 to pre- vent businesses “from using unfair methods of competition in commerce” and to “pro- tect consumers against unfair, deceptive, or fraudulent practices.”

free market economics The view that businesses should be governed by the laws of supply and demand, not restrained by government interference.

free trade The concept that trade across national boundaries should take place without interference from the respective governments.

governmentmandated self regulation When, in lieu of direct gov- ernment involvement, the government mandates that a private self-regulatory organization set policies in a given market and defers to that organization.

government regulation Rules and poli- cies imposed by the government on various aspects of commerce within a country.

greed is good The view that, in the busi- ness world, the human drive of self-interest directs our energy and creativity.

invisible hand The view proposed by Adam Smith that, by pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand.

laissez faire French term; literally “leave it alone,” expressing the free market idea that governments should stay out of the marketplace.

market socialism Socialist economic sys- tems where governments own and control major economic enterprises yet incorporate some capitalist policies, such as relying on supply and demand in the market to set prices.

merger When two companies of roughly the same size agree to combine as equals to form a new company.

monopoly Control by a single company of all or nearly all of the market for a given type of product or service.

oligopoly Market domination by a small number of businesses that collectively exert control over that market’s supply and prices.

price fixing When business competitors conspire to set their prices at a fixed point.

price gouging When a business sells a product for a price that is much higher than is considered reasonable or fair or sustain- able in a truly competitive environment.

profit motive The view that the ultimate purpose of a commercial enterprise is to earn a profit.

Securities and Exchange Commission (SEC) The Securities and Exchange Com- mission was set up in 1934 to oversee and regulate the securities and exchange indus- try in the aftermath of the Great Wall Street Crash of 1929.

Sherman Antitrust Act of 1890 First U.S. Federal law to outlaw price fixing and restrict monopolies.

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Summary & Resources

socialism The economic theory that (1) community interest, not personal self- interest, should motivate economic devel- opment, (2) the major sources of society’s economic production should be governmen- tally owned, not privately owned, and (3) economic planning should be centralized through government policy, not decentral- ized through market competition.

survival of the fittest The evolutionary notion that species with the best adapta- tions will win out over rival species that are less well adapted.

Ten Planks of Communism Karl Marx’s set of 10 policies to transition into socialism.

welfare capitalism Social programs in market economies that the government runs, such as national health care and government-run child care.

Business Ethics Case Study 2.1: Is Eminent Domain AntiCapitalist?

Charles Birnbaum owns a three-story brick building one block from the ocean in Atlantic City, New Jersey. The building has been in his family for 45 years. However, it might not be for much longer: New Jersey’s Casino Reinvestment Development Authority wants the property condemned and claimed through eminent domain—a legal mechanism by which governments can take possession of private property for public use. The plan is for a mixed- use development project to reinvigorate tourism and the state’s slumping casino industry, but there are currently no precise designs for how Birnbaum’s property will be used in that development.

Property taken through eminent domain typically is used to build highways, schools, public parks, railroads, or other necessary utilities. Governments may either retain the acquired land themselves or may assign it to a private company, but in either case the acquisition of the land must be for public use as stipulated by the Fifth Amendment to the Constitution: “nor shall private property be taken for public use, without just compensation.” In Birnbaum’s case, his property would be used for economic development, and most likely assigned by the state to a private developer.

There is nothing inherently anti-capitalistic about eminent domain. It simply involves a conflict between two competing interests—private ownership vs. public interest—and these are situations where public interest wins out. Private property is an important value in society, but it is not the only value, and it is unreasonable for capitalists to expect that property interests will trump every other social value in all situations. In fact, companies themselves use eminent domain as a means of forcibly acquiring land from other private owners. For example, the energy company TransCanada relied on eminent domain agreements with several U.S. states to acquire land for constructing the Keystone oil pipeline from Canada to the U.S. Gulf of Mexico.

The anti-capitalist controversy surrounding eminent domain focuses on situations in which (1) land is acquired for purposes of economic development, (2) it is assigned to a private company, and (3) the public use of the acquired land is debatable. The anti-capitalist situation is worsened if the city hopes to benefit from the economic development through increased taxes. In essence, the city is forcing people off their private land so that private developers can build new and more expensive structures, which will in turn bring in more tax revenue for the city.

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Summary & Resources

This set of circumstances is sometimes called Kelo-style eminent domain abuse, named after the landmark Supreme Court case Kelo v. City of New London (2005). In this court case, the city of New London, Connecticut, used eminent domain to condemn and level several blocks of houses for a comprehensive redevelopment plan that included a waterfront conference hotel, a U.S. Coast Guard Museum, a pedestrian river-walk, restaurants, retail stores, and 80 new residences. The hub of the rejuvenation was a proposed $300 million research facility, which the planners hoped would draw new business to the area and also create more tax revenue for the city. Susette Kelo and eight other homeowners opposed the acquisition of their property on the grounds that the economic development plan did not constitute “public use.” The case went to the Supreme Court, which ultimately ruled against the homeowners and held that the economic redevelopment plan did qualify as public use. The Court reasoned that the concept of “public use” has a history of being interpreted more broadly as “public purpose,” and New London’s economic development plan “unquestionably serves a public purpose.”

The Supreme Court’s decision immediately sparked controversy. Forty-four states subsequently changed their laws to either prohibit or at least narrow the situations in which eminent domain can be used for economic development. As for the City of New London, the developer eventually abandoned the project after failed efforts to gain financing, Pfizer closed its New London facility, and the development area is now an empty lot.

Charles Birnbaum, in Atlantic City, took his case to court but lost. The judge stated that the New Jersey government provided “more than adequate assurances that the property will be used for the public purpose of promoting tourism and assisting the ailing gaming industry.”

But eminent domain is so unpopular that cases of it result in public outcry, and the more Kelo-style it is, the more media attention it receives. Sometimes opposition is so great that the government in question backs down, even if courts rule in their favor. That is what happened with artist James Dupree when the city of Philadelphia attempted to acquire his art studio through eminent domain. It was in a high-poverty area with no nearby grocery stores, and the city sought to have one built on the site of Dupree’s studio. Support for Dupree grew among several organizations, including the Institute for Justice and the American Civil Liberties Union, and the city eventually gave up.

Discussion Questions

1. In the four cases described above (Birnbaum, TransCanada, Kelo, and Dupree), compare the new uses that governments proposed for the acquired land and discuss whether any of these uses justify obtaining those properties through eminent domain.

2. In the Kelo decision, a critical issue involved the links between “public use,” “public purpose,” and “economic development.” Discuss the connection between those three concepts and whether the links are strong enough to justify eminent domain for economic development.

3. List five uses of eminent domain that you think are justifiable, and five that are not. Then discuss the main characteristics of each list that separate them from each other.

4. Are eminent domain cases like Kelo’s a serious threat to capitalism, as many critics would have us believe, or are such critics overreacting? Explain.

Sources: O’Neill (2014), Kelo v. City of New London (2005), CRDA v. Birnbaum ORDER (2014), Sibilla (2014).

Business Ethics Case Study 2.1: Is Eminent Domain AntiCapitalist? (continued)

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