The Ethics of Capitalism &

Government Regulation
Main Issues
Is capitalism ethical?
Under what conditions is government
regulation of business justified?
Ideologies
Ideology: a system of normative beliefs.
A persons ideology:
Colors perceptions
Influences actions
Spectrum of Ideologies
Individualistic ideology:
Each person responsible for themselves
Role of government limited:
Protect private property
Enforce contracts
Communitarian ideology:
Role of government broad:
Define needs of society & ensure needs are met
Example: it takes a village to raise a child
Basic Methods to Make Choices
Tradition
Command System
Market System
2 Key Components:
Private property
Voluntary exchange
But is capitalism ethical?
History
Middle Ages: 4501350
Collapse of Roman Empire in 476
Feudal society: Nobility, Clergy, Peasants
Little Ice Age: late 1200s to early 1300s
13151317: The Great Famine of Europe
1347: Bubonic Plague (the Black Death)
reached Europe
13471351: 25%50% of Europe died
1938 million people out of 75 million
History
Renaissance: 13501550
Rebirth of Greco-Roman civilization
Period of recovery and revival
Perfecting the individual: culture, art,
knowledge of history
14451450: printing press invented
Education and literacy grows
1517: Martin Luther challenges Roman
Catholic Church; Protestant Reformation
History
Scientific Revolution (15501700)
Knowledge based on reasoning & observations
1543: Copernicus: planets circle the sun
1610: Galileo: observations by telescope
1628: Harvey: observed blood circulation
1637: Descartes: understanding through reason
1668: Cavendish: humans are part of nature
1687: Newton: laws of motion & gravity
Universe is governed by natural laws
History
The Enlightenment: 17001800
Favorite word: Reason
Apply the scientific method to the understanding of
all of life
Kant (1784): Dare to know! Have the courage to
use your own intelligence!
Popularization of science
Skepticism about religion
Growth of travel literature
History
The Enlightenment
Philosophes: humans can discover through
reason the natural laws of politics, economics,
justice, religion, and the arts
1690: Locke: knowledge through reason, not faith
1762: Rousseau: Social Contract: members of
society agree to be governed by its general will
through participatory democracy
1763: Voltaire: all men are brothers under God
1776: Smith: natural laws of economics
Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx
Adam Smith (17231790)
1776: The Wealth of Nations
Why do some societies do better than others?
Not because of access to natural resources
Not because of exporting more than importing
(Mercantilism)
Answer: Capitalism
Utilitarian perspective
Adam Smith
Capitalism is ethical on utilitarian grounds
Private property and unregulated free markets
produce the greatest net social benefits of any
socioeconomic system: laissez-faire
Limited role of government:
Protect private property
Enforce contracts
Therefore, government regulation of business is
unethical on utilitarian grounds
Critics of Adam Smith
Free (unregulated) markets only consider
the benefits and costs borne by the buyer
and seller
But are the benefits and costs always borne
exclusively by the buyer and seller?
Example: water pollution of a river
Example: cigarettes
Example: college education
Externality: a benefit or cost borne by
someone other than the buyer or seller
Government Regulation
If there are externalities, then it may be
possible to design a government regulation
that corrects the externality in a way that
maximizes net social benefits.
If so, then the government regulation is ethical
on utilitarian grounds.
Example of external cost: water pollution of a river
Example of external cost: cigarettes
Example of external benefit: college education
John Locke (16321704)
Rights perspective
Humans have natural rights:
Liberty (freedom)
Private property
Why? Without government, humans would
be in a state of nature
Freedom: Free of all human-made laws
Property: Resources combined with work
Common fear: theft of freedom or property
John Locke
Humans therefore invented government
Purpose of government:
Protect liberty (freedom)
Protect private property
Capitalism is ethical on rights grounds
Based on liberty and private property
Government regulation unethical
Infringes on liberty and private property
Lockes Influence
US Declaration of Independence (1776)
United Nations Universal Declaration of Human
Rights (1948)
Critics of John Locke
Are the liberty and property rights of the
buyer and seller the only relevant rights?
Example: cigarettes
If there are rights at stake in addition to the
liberty and property rights of the buyer and
seller, then government regulation might be
justified to protect all the relevant rights.
Example: cigarettes
Herbert Spencer (18201903)
Social Darwinism
Based on Charles Darwins (18091882)
Theory of Evolution:
natural selection / survival of the fittest
Spencer applied idea of survival of the fittest to
societies
Some individuals are better than others
Free competition helps ensure only the most capable
survive and rise to the top
Spencers Social Darwinism
Government should not interfere
If government helps the weak, they survive,
pass on their characteristics, and society is
thereby weakened
Theory fell out of favor when applied to
individuals: too cruel?
Theory still sometimes applied to
businesses: let the weak fail
John Maynard Keynes (18831946)
1946: The General Theory of
Employment, Interest, and Money
How could a world-wide depression start and
persist?
Why dont market forces automatically fix the
depression?
Keyness Theory Oversimplified
Businesses find inventories growing
So, businesses cut production
Cut wages
Cut employment: layoff workers
Workers incomes fall
Workers therefore buy less
Businesses therefore sell less
So businesses cut even more(repeat)
Keyness Theory Oversimplified
Solution: someone with lots of money needs
to spend more to buy lots of things
But who?
Companies wont
Consumers wont
Only the government has the resources to
do it
Keyness Conclusion
Role of government: to help stabilize the
economy
Recession or depression: increase government
spending and cut taxes
Inflation: decrease government spending and
increase taxes
Keyness Conclusion
What about the government budget deficit?
When involuntary unemployment exists
wasteful loan expenditures may nevertheless
enrich the community on balance. Pyramid-
building, earthquakes, even wars may serve to
increase wealth. It would, indeed, be more
sensible to build houses and the like; but if
there are political and practical difficulties in
the way of this, the above would be better than
nothing.
Karl Marx (18181883)
Witnessed the early days of the Industrial
Revolution
Before the Industrial Revolution:
Small scale production in local shops
Upward mobility:
Apprentice
Journeyman
Master (to become your own master was feasible)
Karl Marxs Observations
Industrial Revolution
Trigger: application of power-driven machinery
Karl Marxs Observations
Power-driven machinery was expensive
Factories got larger
Factories were more expensive to set up
Upward mobility dramatically reduced
Some were wealthy enough to own factories
Everyone else had to work in a factory owned
by others
Karl Marxs Theory
2 Sources of Income
Bourgeoisie: owners of the means of
production
Proletariat: people who have to sell their
labor
Competition for jobs among the proletariat
keeps wages at subsistence levels
Meanwhile, the bourgeoisie earn profits
Karl Marxs Theory
Result is that workers became alienated:
From their products: workers lost control of the
products of their labor
From their own work: workers lost control of
how they did their jobs
From themselves: workers were taught false
views of their needs and desires
From each other: workers were kept fighting
amongst themselves (divide and conquer)
Karl Marxs Theory of History
1. Economic Substructure:
a. Forces of Production: land, labor, raw
materials, technology, etc.
b. Relations of Production: methods of social
control; in Capitalism, control is based on
ownership; creates the social classes
2. Social Superstructure: government and
ideologies
Karl Marxs Conclusions
Role of government in capitalism: protect
the wealth and power of the bourgeoisie
Rich get richer, poor get poorer
This isnt fair
Solution: replace control based on
ownership with control based on authority
Hire experts to control resources based on
whats best for society as a whole
Mixed Economy
Use property rights and the market system
to create wealth
But limit the actions of property owners
with government regulations. Examples:
Property rights, with zoning laws
Tax laws
Pollution regulations
Safety regulations
Welfare laws
Government Regulation
Utilitarian: Correct externalities
Rights: Protect rights (in addition to liberty
and property rights of buyer and seller)
Justice: Ensure fairness
Care: Care for people
Intellectual Property
Physical Property: one persons use limits
the use by others. Examples:
An automobile
A piece of land
Intellectual Property: simultaneous,
nonexclusive use is possible. Examples:
A song
A software program
Intellectual Property Rights
How should we handle intellectual
property?
Private property view:
Utilitarianism: private ownership creates incentives.
Rights (Locke): creator has the right to decide use.
Socialist view:
Creativity doesnt require incentives.
Common good best served by public ownership.
Case: Accolade vs Sega
Accolade is a small software company
located in San Jose, California that had
prospered by making and marketing games
tat could be played on Sega game consoles.
Sega marketed a new game console called
Genesis that had secret codes and security
devices that prevented other game programs
from working the console.
 Accolade gained access to Genesis by reverse engineering
the console and some of its games.
Sega immediately sued Accolade claiming that the
company had infringed on its copyright.
Accolade appealed and claimed that the secret codes and
security devices that Sega had used on the Genesis console
were in effect a public interface standard, which cannot be
privately owned by anyone.
Accolade's arguments eventually won out.
ANSWER 1

From the Perspective

of Locke's theory of
private property :

Accolade trespassed
Sega's private
property rights.
From the perspective
of Utilitarian theory
of private property :

Sega would lose

incentive to create new
ideas beneficial to the
marketplace.
 From the perspective
of Marxist theory of private
property :

The software that Accolade

decoded belongs to the
general public.
 The most appropriate theory in this case is
the theory of Locke. Since Sega created the
device and software then it should be
treated as a private property because it is a
product of their labor.
2. Do you agree that Accolade had really
stolen Segas property? Explain why or why
not.
Yes, because the security devices and secret codes
that Sega had developed were not like the
interface standards that different companies
usually agree on. There was no public interface
standard involved in the case because Sega is a
simple company making use of its own private
technology. When Accolade decided to reverse
engineer Segas Genesis and decompiled several
games they already crossed the line. They stole
information so they could market their own games
3. In your judgment, did Accolade go too far in
trying to discover the underlying source code of
Segas programs? Does a company have a right to
reverse engineer any product it wants?
Yes, Accolade, Inc. did go too far in trying to discover Segas
program source codes, without Segas consent, the company
reverse engineered/disassembled Segas game programs to
obtain the source codes that would make their game programs
work on Genesis, Segas new console. By reverse
engineering Segas copyrighted secret codes, Accolade
violated Segas intellectual property rigt. Companies can
reverse engineer products only if the product owner permits
them to do so, since some products have intellectual property
rights like copyrights, trademarks, and patents. Unauthorized
disassembly or reverse engineering of these patented and
copyrighted products may be a breach of law.