CHAPTER 3

The Business System:

Government,
Markets
And
International Trade
 Content
• 1. John Locke, Government and Private
Property
• 2. Adam Smith, Government and The
Free Market
• 3. David Ricardo and Free Trade
• 4. Karl Marx, Injustices and the Free
Market Capitalism
 Economic System
• A system a society (or group
of societies) uses to provide
goods and services it needs to
survive and flourish
 Economic System
• The system must accomplish two basic
economic task:
– 1. First - deciding what goods and services
to produce and who will produce it
– 2. Second – distributing the good and
services and determining who will get
what and how much
 Economic System
• Three types of Economic System:
- 1. Tradition
- 2. Command
- 3. Markets
 Tradition Based Societies

• Are small and rely on

traditional communal roles
and customs to carry out basic
economic task
 Command Economy
• A government authority (person or group)
makes the economic decisions
• Productive resources (land, factories) are
mostly owned or controlled by the
government and are considered to belong to
the “people”
• Individuals are rewarded or punished by the
government for effort put forth
 Market Economy
• Private companies make main decision
about what to produce and who will get
it
• Productive Resources (land, factories)
are owned and managed by private
individuals
• People are motivated to work by the
desire to get paid
 Free Market
• Where individuals are able to
voluntary exchange goods with
others and to decide what will be
done with what he or she owns
without interference from
government
 Currently Being Debated
• Level 1: Should a nation’s government
regulate business exchanges between its
citizens or instead allow its citizens to freely
exchange goods with each other?
• Level 2: Should a nation’s government allow
its citizens to freely trade goods with citizens
of other nations or impose tariffs, quotas or
other limits that citizens may want to buy
from foreign countries
Free Markets and Rights: John Locke

• An English political philosopher

generally credited for developing
the idea that human beings have
“natural rights” to:
–1. Liberty
–2. Private Property
–3. Life
 Locke State Of Nature
• 1. All persons are free and equal
• 2. Each person owns his body and labour, and
whatever he/she mixes his own labour into
• 3. People’s enjoyment of life, liberty and
property are unsafe and insecure
• 4. People agree to form governments to
protect and preserve their right to life, liberty
and property
 Criticisms of Lockean Rights
• 1. The assumptions the people have the
“natural rights” Locke claim they have
• 2. Conflicts between negative and positive
rights
• 3. Conflicts between Lockean rights and
justice
• 4. The individualistic assumptions Locke
conflict with the demand of care
 Negative and Positive Rights
• Negative Rights – duties others have to not
interfere in certain activities of a person who
hold that rights
• Positive Rights - other agents ( perhaps
society) have the positive duty of providing
the holders of the right with whatever they
need to pursue what the right guarantee
• Contractual or special rights – require people
to keep their agreement
Free Markets and Utility: Adam Smith
• “Father of modern economics”
• Originator of the Utilitarian agreement for
free market
• Stated that when private individuals are left
free to seek their own interests in free
markets, they will inevitably be lead to
further the public welfare by an Invisible
Hand (market competition)
Free Markets and Utility: Adam Smith
• When the supply of a certain commodity is
not enough to meet the demand, buyers bid
the price of the commodity upward until it
rises above its natural price (the price that
just covers the cost of the production
including the rate of profit obtainable in
other markets)
 Criticisms of Adam Smith
• Rests on unrealistic assumption that there are
no monopoly companies
• Falsely assumes that all the cost of
manufacturing something are paid by
manufacturer, which ignores the cost of
pollution
• Falsely assumes human beings are motivated
only by a self interested desire for profit
• Some government planning and regulation of
markets is possible and desirable
 Keynesian Economics
• Theory of John Maynard Keynes
stated:-
–Free markets alone are not
necessarily the most efficient
means for coordinating the use of
society’s resources
 Keynesian Economics
• Keynes argued that:-
–The total demand for goods and
services is the sum of the demand of
three services of the economy:
• 1. Households
• 2. Businesses
• 3. Government
 Keynesian Economics
• Stated that the Aggregate Demand
of the sum of those sectors may be
less than the aggregate amounts of
goods and services supplied by the
economy at the full employment
level
 Social Darwinism
• Doctrines of Social Darwinism named after
Charles Darwin stated:-
– Various species of living things will evolved
as a result of the action of the
environment that favoured the survival of
some things while destroying others
referred to as Natural Selection or Survival
of The Fittest
Free Trade and Utility: David Ricardo

• Usually credited for showing:-

–That if one country has an
absolute advantage of producing
everything, it is better for it to
specialize and trade
–Comparative Advantage
 Marx and Justice
• Karl Marx:- the harshest and most well
known critic of private property institutions,
free markets and free trade and the
inequalities they are accused of creating
• He was an eyewitness to the wrenching and
exploitative effects that industrialization had
on the labouring peasant class of England,
Europe and the world
 Marx and Justice
• Marx claimed that worker exploitation
was merely a symptom of extremes of
inequality that capitalism produces
• Marx stated that capitalist systems offer
only two sources of income:
–1. Sale of One’s Labour
–2. Ownership of Means of Production
 Marx and Justice
• As a result:-
–Those who own the means of
production gradually become
wealthier, and workers become
relatively poorer
–Capitalism promotes unjust
inequality
 Marx and Justice
• In Marx’s View:-
– Productive property should be for social purpose
– The entire community should serve the needs of
all
– Productive property should never be “Private”
– The actual purpose of government have
historically served to protect the interests of the
ruling class
The Real Purpose of Government
• Marx’s View:- is that a society’s
government and its ideologies are
designed to support its ruling
economic class, which is created by
its relations of production, which in
turn are shaped by its forces of
production
 The Mixed Economy
• An economy that retains a
market and a private property
system but relies heavily on
government policies to remedy
their deficiencies
 Property Systems and New
Technologies
• Intellectual Property Rights:-nonphysical
property that consists of knowledge or
information such as formulas, plans, music,
stories, texts, software etc.
• Are granted:
– 1. Copyright – expire 120 years after their
creation or 95 years after publication
• Then become common or public property
 Property Systems and New
Technologies
• 2. Patent:- a second way of creating
property rights for intellectual property-
new nonobvious and useful inventions –
• Expire in 14 years of a new design of an
existing product
• Expire in 20 years for new products
• Then become common or public
property