BUSINESS SYSTEM

GOVERNMENT,
MARKETS,
& INTERNATIONAL TRADE
INTRODUCTION

GLOBALISASI:
the process by which the economic and social
systems of nations are connected together so
the goods, services, capital, and knowledge
move freely between nations.
ECONOMIC SYSTEMS
IDEOLOGI:
A system of normative beliefs shared by
members of some social group.

ECONOMIC SYSTEMS:
The system a society uses to provide the
goods and services it needs to survive and
flourish.
ECONOMIC SYSTEMS (contd)
Three kinds of social devices:
1. Traditions
2. Commands
3. Markets
ECONOMIC SYSTEMS
(contd)
1. Tradition-Based Societies: societies that rely
on traditional communal roles and customs to
carry out basic economic tasks.
2. Command Economy: an economic system
based primarily on a government authority (a
person or a group) making the economic
decisions about what is to be produced, who will
produce it, and who will get it.
3. Market Economy: an economic system based
primarily on private individuals making the
main decisions about what they will produce
and who will get it.
ECONOMIC SYSTEMS
(contd)
FREE MARKET:
Markets in which each individual is able to
voluntarily exchange goods with others and to
decide what will be done with what he or she
owns without interference from government.
FREE MARKETS & RIGHTS: JOHN LOCKE

John Locke (1632-1704)

Lockean Rights:
Human beings have a natural rights to life,
liberty, and private property.
FREE MARKETS & RIGHTS: JOHN
LOCKE (contd)
Lockes State of Nature
All persons are free and equal
Each person owns his body and labor, and
whatever he mixes his own labor into
Peoples enjoyment of life, liberty, dan
property are unsafe and insecure
People agree to form a government to protect
and preserve their right to life, liberty, and
property
FREE MARKETS & RIGHTS:
JOHN LOCKE (contd)
CRITICISMS OF LOCKEAN RIGHTS
The assumption that individuals have the
natural rights, Locke claimed they have
The conflict between these negative rights
and positive rights
The conflict between these Lockean rights
and the principles of justice
The individualistic assumptions Locke makes
and their conflict with the demands of caring
FREE MARKETS & RIGHTS:
JOHN LOCKE (contd)
WEAKNESSES OF LOCKES VIEWS OF RIGHTS
Locke doesnt demonstrate that individuals
have natural right to life, liberty, and property
Lockes natural rights are negative rights and
he doesnt show these override conflicting
positive rights
Lockes rights imply that markets should be
free, but free markets can be unjust and can
lead to inequalites
Locke wrongly assumes human beings are
atomistic indiviuals.
FREE MARKETS & UTILITY:
ADAM SMITH
Adam Smith (1723-1790)

When private individuals are left free to seek

their own interests in free market, they will
inevitably be led to further thhe public welfare
by an invisible hand.

Invisible Hand: according to Adam Smith, the

market competition that drives self-interested
individuals to act in ways that serve society.
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
ADDITIONAL SUPPORT FOR ADAM SMITH
Ludwig Von Mises and Friedrich Hayek:
Governments should not interfere in markets
because they cannot have enough information
to allocate resources as efficiently as free
markets

Thomas Aquinas:
System of private property with the utilitarian
argument that private ownership leads to better
care aand use of resources than common
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
CRITICISMS OF ADAM SMITHS ARGUMENT:
Rests on unrealistic assumption that there are no
monopoly companies
Falsely assumes that all the costs of
manufacturing something are paid by
manufacturer, which ignores the costs of pollution
Falsely assumes human beings are motivated only
by a self-interested desire for profit
Unlike what Hayek and von Misses said in support
of Smith, some governement planning and
regulation of markets is possible and desirable
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
THE KEYNESIAN CRITICISM
John Maynard Keynes (1883-1946)

Says Law: in an economy, all available

resources are used and demand always
expands to absorb the supply of commodities
made from them.

Aggregate Demand: the sum of the demand of

three sectors of the economy are households,
businesses, and government.
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
THE KEYNESIAN CRITICISM (contd)

Keynes: free markets alone are not necessarily

the most efficient means for coordinating the
use of socientys resources.
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
THE KEYNESIAN CRITICISM (contd)
Keynes Criticism of Smith:
Smith wrongly assumes demand is always enough to
absorb the supply of goods
But if household forego spending, demand can be less
than supply, leading to cutbacks, unemployment, and
economic depression
Government spending can make up for such shortfalls
in household spending, so government should
intervene in markets
But Keynes views were challenged when government
spending did not cure high unemployment but created
inflation
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
THE UTILITY OF SURVIVAL OF THE FITTEST:
SOCIAL DARWIN
Social Darwinism: belief that economic
competition produces human progress.

Survival of The Fittest: Charles Darwins term

for the process of natural selection. (= Survival
of the best)

Naturalistic Fallacy: the assumption that what

happens naturally is always what is good.
FREE MARKETS & UTILITY:
ADAM SMITH (contd)
THE UTILITY OF SURVIVAL OF THE FITTEST:
SOCIAL DARWIN (contd)
Herbert Spencers Views (Modern version of Social
Darwinism):
Evolution operates in society when economic
competition ensures the fittest survive and the unfit
do not, which improves the human race
If government intervenes in the economy to shield
people from competition, the unfit survive and the
human race decline, so government should not do
so
Assumes those who survive in business are better
people than those who do not
FREE TRADE & UTILITY: DAVID
RICARDO
Absolut Advantage:
A situation where the production costs (costs
in terms of the resources consumed in
producing the good) of making a commodity
are lower for one country than for another.
Adam Smiths point of view showing the
benefits of free trade.
FREE TRADE & UTILITY: DAVID
RICARDO (contd)
Free Trade:
Advocated by Smith who showed everyone
prospers if nations specialize in making and
exporting goods whose production costs for
them are lower than for other nations.
FREE TRADE & UTILITY: DAVID
RICARDO (contd)
Free Trade:
Advocated by Ricardo who showed everyone
prospers if nations specialize in making and
exporting goods whose opportunity costs to
them are lower than the opportunity costs other
nations incur to make the same goods.

David Ricardo (1772-1823)

FREE TRADE & UTILITY: DAVID
RICARDO (contd)

The arguments of Smith and Ricardo provide

support for globalization
FREE TRADE & UTILITY: DAVID
RICARDO (contd)
CRITICISMS OF RICARDO
His arguments ignores the easy movement of
capital bhy companies
He falsely assumed that a countrys
production costs are constant
He ignored the influence of international rule
setters
MARX & JUSTICE:
CRITICIZING MARKETS &
FREE TRADE
Karl Marx (1818-1883), harshly criticizing
private property institution, free markets, and
free trade and the inequalities.
Marx claimed that workers exploitation was
merely a symptom of the underlying extremes
of inequality that capitalism produces.
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
Capitalist economies alienate workers in 4
ways:
1. Capitalism alienates workers from their
own productive work
2. Capitalist societies alienate workers from
the products of their labor because
workers have no control over the
products they make with their own hands.
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
Capitalist economies alienate workers in 4
ways: (contd)
3. Capitalism alienates workers by giving them
little control over how they must relate to
each other and by forcing them into
antagonistic relationships with each other.
4. Capitalism alienates workers from
themselves by instilling in them false views
of what their real human needs are
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
Marx on Alienation:
In capitalism, workers become alienated when
they lose control of their own life activities
and the ability to fulfill their true human needs
Capitalism alienates workers from their own
productive work, the products of their work,
their relationship with each other, and from
themselves
Alienation also occurs when the value of
everything is seen in terms of its market price
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
Marx & Private Property
Private ownership of the means of production
is the source of the workers loss of control
over work, products, relationships, and self
Productive property should serve the needs of
all and should not be privately owned, but
owned by everyone
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
THE REAL PURPOSE OF GOVERNMENT
According to Marx, the actual function that
governments have historically served to
protect the interests of the ruling class.
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
THE REAL PURPOSE OF GOVERNMENT (contd)
2 Main components to analyze every society:
Economic Substructure
The materials and social controls that society
uses to produce its economic goods
Social Superstructure
A societys government and its popular
ideologies
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
THE REAL PURPOSE OF GOVERNMENT (contd)
Marxs Historical Materialism:
The methods a society uses to produce its
goods determines how that society oganizes
its workers
The way a society organizes its workers
determines its social classes
A societys ruling social class controls
societys government and ideologies and uses
these to advance its own interests and control
the working classes
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
THE REAL PURPOSE OF GOVERNMENT (contd)

Historical Materialism:
The Marxist view of history as determined by
changes in the economic methods by which
humanity produces the materials on which it
must live
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
THE REAL PURPOSE OF GOVERNMENT (contd)
Marxs Historical Materialism:
The methods a society uses to produce its
good determines how that society organizes
its workers
The way a society organizes its workers
determines its social classes
A societys ruling social class controls
societys government and ideologies and uses
these to advance its own interests and control
the working classes
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
IMMISERATION OF WORKERS
Marx claimed capitalism concentrates
industrial power in the hands of a few who
organize workers for mass production
Mass production in the hands of a few leads to
surplus which causes economic depression
Factory owners replace workers with
machines which creates unemployment; they
keep wages low to increase profits
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
IMMISERATION OF WORKERS (contd)
The combined effects of the above cause
immiseration of workers
The only solution is a revolution that
establishes a classless society where
everyone owns the means of production
MARX & JUSTICE:
CRITICIZING MARKETS & FREE
TRADE (contd)
MARXS CRITICISMS
Marxs claims that capitalism is unjust are
unprovable
Justice requires free markets
The benefits of private property and free
markets are more important than equality
Free markets can encourage community
instead of causing alienation
Immiseration of workers has not occured;
instead their condition has improved
CONCLUSION: THE MIXED
ECONOMY, THE NEW PROPERTY,
& THE END OF MARXISM

Market Economy:
An economy that retains a market and private
property system but relies heavily on
government policies to remedy their
deficiencies
CONCLUSION: THE MIXED
ECONOMY, THE NEW PROPERTY, &
THE END OF MARXISM (contd)
PROPERTY SYSTEMS & NEW TECHNOLOGIES
Intellectual Property that modern technology
have created, consists of a nonphysical object;
can be copied, used, or consumed by
countless individuals at the same time.
Creating property rights for intellectual
property is through a copyright or a patent.
CONCLUSION: THE MIXED
ECONOMY, THE NEW PROPERTY, &
THE END OF MARXISM (contd)
THE END OF MARXISM?
Defenders of free market were greatly
encouraged by the complete abandonment of
communism.

Francis Fukuyama: suggesting with the end of

conmmunism, there will be no more
progress toward a better economic system.
The whole world now agrees that the best
system is capitalism.
CONCLUSION: THE MIXED
ECONOMY, THE NEW PROPERTY, &
THE END OF MARXISM (contd)
THE END OF MARXISM? (contd)
Those historic economist reforms, aimed at
moving communist system toward economies
that are based on the best features of both
socialism and capitalism, the same kind of
mixed economy system.

Followers of Smith and Locke insist that the

level of government intervention tolerated by
the mixed economy does more harm than
good.
CONCLUSION: THE MIXED
ECONOMY, THE NEW PROPERTY, &
THE END OF MARXISM (contd)

THE END OF MARXISM? (contd)

On balance, it may be that the mixed
economy comes closest to combining the
utilitarian benefits of free markets with the
respect for human rights, justice, and caring
that are the characteristic strenghts of
government regulation.
SELESAI