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Lecture 4(1)Capitalism & Corporations

Edited from “Shaw W.H. & Barry V. (2010) Moral Issues in Business, 11th Edition. Thomson / Wadsworth “

Learning Outcomes

• Discuss the reasoning for making ethical judgments in business settings.

• Discuss the role and implication of a socially responsible business entity.

• Analyze the range of moral philosophies towards resolving ethical dilemma in organizations.

• Describe the appropriate conceptual framework to evaluate the impact of ethical issues on business and society.

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ROOT OF PROBLEM

1) Capitalism

2) Agency problem

3) Doctrine of limited liability

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(1) CAPITALISM

Capitalism

An economic system in which the major portion of production and distribution is in private hands, operating under what is termed a “profit” or “market” system.

Socialism

The polar opposite of capitalism, an economic system characterized by public ownership of property and a planned economy

Worker control socialism

A hybrid market-oriented socialism.4

Key Features of Capitalism

1) Separate Legal EntityCapitalism permits the creation of companies or

business organizations that exist separately from the people associated with them.

2) Profit motiveThe profit motive implies a critical assumption about

human nature – that human beings are economic creatures who recognize and are motivated by their own monetary interests.

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3) CompetitionAdam Smith (in An Inquiry into the Nature and Causes of the

Wealth of Nations, 1776), explained how free competition makes individual pursuit of self-interest socially beneficial.

4) Private propertyCapitalism requires private ownership of the major means of

production (factories, warehouses, offices, machines, trucking fleets, land, etc.)

5) The natural right to propertyOne basic defense of capitalism rests on a supposed natural

moral right to property.

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(1) Inequality

• Critics argue that poverty and inequality challenge the fairness of capitalism and its claim to advance the interests of all.

• Defenders of capitalism respond in 3 ways

a) By blaming government for interfering with the market.

b) By arguing that the capitalist system can be internally modified by political action.

c) By arguing that the benefits of the system outweigh its weak points.

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Criticisms of Capitalism

(2) Human nature and capitalism

• Capitalism wrongly assumes that human beings are rational economic maximizers.

• Capitalism offers us no higher sense of human purpose.

• Capitalism operates on the assumption that human beings find increased well-being through ever greater material consumption.

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(3) Competition isn’t what it’s cracked up to be

• Capitalism breeds oligopolies – concentrations of property and resources (and thus economic power) in the hands of a few.

• Corporate welfare programs often shelter businesses from competition.

• Critics contend that cooperation, rather than competition, leads to better individual and group performance.

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4) Exploitation and alienation

• Karl Marx argued that as the means of production become concentrated in the hands of the few, the balance of power between capitalists (bourgeoisie) and laborers (proletariat) tips further in favor of the bourgeoisie.

• Because workers have nothing to sell but their labor, the bourgeoisie is able to exploit them by paying them less than the true value created by their labor.

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5) Exploitation and alienation

• In his “Economic and Philosophic Manuscripts” (1944), Marx explains the notion of alienation as the separation of individuals from the objects of their creativity.

• This separation in turn results in one’s separation from other people, from oneself, and ultimately from one’s human nature.

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(2) AGENCY THEORY

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A corporation is a 3–part organization made up of :

1) Stockholders, who provide the capital, own the

corporation, and enjoy liability limited to the

amount of their investments.

2) Managers, who run the business operations.

3) Employees, who produce the goods and services.

• Shareholders are Principals ; Managers are Agents• “Self-Interested” Executives – agent takes self-

interested actions that are not in the interest their

principals• Example – Agents :o reduce discretionary spending o delay investment in a valuable new project o accelerate recognition of revenueo draw down reserveso Inflated compensation

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o Manipulating financial results to increase bonus or stock price

o Excessive risk taking to increase short-term results and bonus

o Failure to groom successors so that they become “indispensible”

• Information asymmetry between shareholders and managers – lead to conflict of interest

• Principals bear the cost of these actions – Agency costs

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