1. The Ethics of Capitalism & Government Regulation
Paul L. Schumann, Ph.D.
© 2003 by Paul L. Schumann. All rights reserved.

2. Main Issues Is capitalism ethical?
Under what conditions is government regulation of business justified?

3. Ideologies Ideology: a system of normative beliefs.
A person’s ideology:
Colors perceptions
Influences actions

4. 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”

5. Spectrum of Ideologies

6. Fundamental Choices What goods and services should be produced?
How should the goods and services be produced?
Who should get the goods and services?

7. Basic Methods to Make Choices
Tradition
Command System
Market System
2 Key Components:
Private property
Voluntary exchange
But is capitalism ethical?

8. History Middle Ages: 450–1350 Collapse of Roman Empire in 476
Feudal society: Nobility, Clergy, Peasants
Little Ice Age: late 1200’s to early 1300’s
1315–1317: The Great Famine of Europe
1347: Bubonic Plague (the Black Death) reached Europe
1347–1351: 25%–50% of Europe died
19–38 million people out of 75 million

9. History Renaissance: 1350–1550 Rebirth of Greco-Roman civilization
Period of recovery and revival
“Perfecting the individual”: culture, art, knowledge of history
1445–1450: printing press invented
Education and literacy grows
1517: Martin Luther challenges Roman Catholic Church; Protestant Reformation

10. History Scientific Revolution (1550–1700)
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

11. History The Enlightenment: 1700–1800 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

12. 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

13. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

14. Adam Smith (1723–1790) 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

15. 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

16. 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

17. 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

18. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

19. John Locke (1632–1704) 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

20. 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

21. Locke’s Influence US Declaration of Independence (1776)
“We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness—That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed, that whenever any Form of Government becomes destructive of these Ends, it is the Right of the People to alter or abolish it, and to institute new Government….”

22. Locke’s Influence
United Nations’ Universal Declaration of Human Rights (1948)
“…the equal and inalienable rights of all members of the human family is the foundation of freedom, justice, and peace in the world….”

23. 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.

24. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

25. Herbert Spencer (1820–1903) Social Darwinism
Based on Charles Darwin’s (1809–1882) 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

26. Spencer’s 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

27. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

28. John Maynard Keynes (1883–1946)
1946: “The General Theory of Employment, Interest, and Money”
How could a world-wide depression start and persist?
Why don’t market forces automatically fix the depression?

29. Keynes’s 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)

30. Keynes’s Theory Oversimplified
Solution: someone with lots of money needs to spend more to buy lots of things
But who?
Companies won’t
Consumers won’t
Only the government has the resources to do it

31. Keynes’s 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

32. Keynes’s 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.”

33. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

34. Karl Marx (1818–1883)
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)

35. Karl Marx’s Observations
Industrial Revolution
Trigger: application of power-driven machinery

36. Karl Marx’s 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

37. Karl Marx’s 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

38. Karl Marx’s 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)

39. Karl Marx’s Theory of History
Economic Substructure:
Forces of Production: land, labor, raw materials, technology, etc.
Relations of Production: methods of social control; in Capitalism, control is based on ownership; creates the social classes
Social Superstructure: government and ideologies

40. Karl Marx’s Conclusions
Role of government in capitalism: protect the wealth and power of the bourgeoisie
Rich get richer, poor get poorer
This isn’t fair
Solution: replace control based on ownership with control based on authority
Hire experts to control resources based on what’s best for society as a whole

41. Some Noteworthy Philosophers
Adam Smith
John Locke
Herbert Spencer
John Maynard Keynes
Karl Marx

42. 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

43. 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

44. Spectrum of Ideologies

45. Intellectual Property
Physical Property: one person’s 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

46. 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 doesn’t require incentives.
Common good best served by public ownership.