Ethics Quiz 2

Exit

(leave forever) divorce permanent separation

Boycott

(temporary leave) trial separation with couple's therapy

Corporate Social Responsibility

- a business practice that is involved in benefiting the society - voluntary - goals and results - receives profits, but should also give money to non-economic issues

What types of CSR should corporations be involved in?

- employee welfare - human rights - community development - environment (benefit society and customers, employees' families, suppliers

Milton Friedman (Classical View towards CSR)

- he does not think that corporations should be involved with CSR - should not be involved if it does not benefit the shareholders - executives should not be able to undergo CSR unless it is helping the corporation and benefiting stockholders - the government needs to be involved with the unequal distribution caused by the free market (creates instability)

Free market principles

- legal - voluntary - transparent info - profit maximizing

Wealth of Nations

-Division of Labor -Pricing -Misconceptions

Adam Smith

-Laissez-faire capitalism -1776, philosopher -"The Wealth of Nations" assumes people are selfish, but it is useful -Father of Free Trade and Capitalism

Role of the Government (Adam Smith)

-National Defense -Justice System to enforce contracts and property rights -Public Education -Public Goods (transportation and infrastructure)

Interest Action Group (Civil Regulators)

-Poke at companies to make change -roughly two in three consumers want companies to go beyond their historic role of making a profit and obeying laws, and in particular want business to contribute more to achieving broader societal goals. -Logic of Collective Action Interest groups are important to give consumers be heard.

the lack of information affects the market

-reduces the accuracy of price -supply and demand pricing is less efficient -Affect competition, Creates corrosion

Milton Friedman

-return to self-regulating free market system -modern day economist interpretation is consistent with Smith's on self interested behavior but also recognizes ethical decision making

What are the benefits for the Division of Labor

-specialization -efficiency -increased production

Public Goods

-the benefit or well-being of the public -product that one individual can consume without reducing its availability to another individual, and from which no one is excluded 1) nonrivalrous 2) nonexcludable 3) don't diminish 4) supplies do not provide Examples: defence, public fireworks, lighthouses, clean air, parks, roads

Arnold Schwarzenegger's take on Capitalism

-to him being free to choose is being able to make your own decisions, live own life, without government intervening -no individualism under socialism system -believed the more the government intervened with the market, the worse the country did -everyone should start at the starting line at the same time

Examples of Universal Entitlements or Rights

-votes -equal justice before the law -free speech, religion -procreation -emigration -immunity from enslavement -to have public services

Main Takeaways - Adam Smith Free Market

1) Self-Interest 2) Competition 3)Efficiency 4) Division of Labor 5) Pricing ensure marketplace efficiency

Where did Smith see room for government?

1) To protect society from foreign attack 2) To establish administration of justice 3) To erect and maintain public works and institutions that private entrepreneurs cannot undertake profitably 4) Enforce the performance of contracts 5) Control over the issue of paper money, legal control over interest rates, laws ensuring the security of agricultural tenant, copyrights of limited duration

what are the problems with income gap

1) less empathy and pro-social behavior 2) greater concentration of wealth leads to an increase in illegal behavior 3) greater inherited wealth leads to less wealth distribution 4) greater individual consumatory behavior per wealthy individual 6) entitlement increases and pursuit of self interest the wealthier you are

What are the values of the free market according to Friedman

1) price system requires no central direction 2) societies that place freedom over equality get a fair measure of both Economic and political freedom

governments may intervene in a market economy in order to

1) protect property rights 2) correct a market failure due to externalities 3) achieve a more equal distribution of income

Limitations of Division of Labor

1) worker may lack understanding, "generally becomes as stupid and as ignorant" because labor is divided to the extreme 2) rational thought decreases

What does competitive conditions allow for according to Smith

1)produce goods consumers demand 2)chosen production methods are most efficient, dont waste resources 3)Goods sold at lowest price inclusive of normal profit

Friedman: Pros

1. check government power (Checks and Balances) 2. facilitates innovation 3. preserves freedom 4. protection from coercion 5. protection from discrimination 6. reduces social strains

in order for voice to work:

1. choice for consumers 2. correct information 3. ability to exit

Adam Smith's beliefs

1.) Each economic actor is motivated by their self-interest, not a need to please or facilitate others 2.) Pursuing self-interest provides the greatest good for society 3.) The Invisible Hand of the Marketplace will lead each actor to promote an end which was no part of his intention but which benefits society.

3 Limitations of Interest Group Pressure

1.) Exit, voice and loyalty 2.) Class action lawsuits 3.) Logic of collective action

Government role of free market according to Milton Friedman

1.) Very little: Safety (military/defense/preserve the peace) 2.) Some public health, justice (adjudicate disputes/protect from coercion), treasury (taxes) 3.) No housing development or government land 4.) Ok with monopolies. Self-interest itself will draw/generate competition, historical success strengthens the argument for monopoly in some industries, ex. postal service It is appropriate to use government to protect people form other people's harm, the department of defense, department of justice and the treasury, to create legislation, mediate differences in interpretations, enforcing laws, and neighborhood effects and monopolies.

Friedman: equality vs. efficiency

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.

What did Smith believe about minimum wage?

A worker and his family must survive off of this wage and it must perpetuate the labor supply

Who believed that we are endowed with many impulses including self love and self command, but we should refrain from injuring others

Adam Smith

How can pursuit of individual self interest benefit society as a whole?

Adam Smith believed that the wealth of Nations would increase when individuals were free to pursue their own economic self interest within the law Each individual seeks "only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention...By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

Milton Friedman - Essence of the Free Market

Both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed -legal -information -voluntary exchange

Loyalty effect on interest groups

Bullet Proof Vest - loyalty. Loyal customers are most informed, most educated on genuine quality issues, wont exit right away. -Activate voice first (tell company they have problem) -Apple iphone5 bad mapping problem, customers tell apple (warning) (voice bullet) -Helps preserve profit, notify of genuine quality issue

GOOGLE Debate

Dilema= Whether google should be able to track our searches and sell to marketers. Also whether google should censor its information to china. Whether to conform to other countries beliefs verse theirs Company didn't address stakeholders *problem=internet safety and privacy 1)sacrifice users privacy to max profits? -free market=goal to maximize profits -no personal info given out 2)comply w/China's censorship policies? -policies must be met in globalization -but will change googles mission

What is the role of government according to Smith? To what extent should it regulate the markets? Who should it aim to protect in forming its economic policy?

For Smith, government should work on protecting the rules of the marketplace, while leaving the market to itself. That means that the government should protect property and make sure that the rules of law and justice are ensured (so that parties honor their contracts). Finally, governments should be responsible for defense of the society. Indeed, security is one of the most important preconditions of free and fair exchange. Adam Smith also recognizes that commerce depends on infrastructure. Some public works, he observes, could never repay their costs and therefore would never be undertaken by private entities. In these cases, governments may make themselves responsible for undertaking them. Education, Smith argues, is rather like infrastructure in that it is necessary for commerce to thrive. He touches on the fact that education also increases the quality of life, which increases security and productivity of laborers. While the state should not undertake the entire expense of education, it should certainly subsidize it.

Domain of the Market

Free Market

Who believes that social benefits are achieved when individuals exercise their freedom without limiting the freedom of others

Friedman

Who explained for the need for a limited government with an emphasis to modify rules and be a mediator and enforcer

Friedman

Domain of Rights

Government

Minimum Standard of Living

Government intervenes to incorporate a standard of living. Not possible

What ideas did Adam Smith contribute to economic thought?

His idea of laissez-faire stated that the government should play a very small role in this free-market economy. He was first to recognize that the division of labor leads to greater productivity and therefore to greater wealth.

Friedman: social responsibility of a business

INCREASE PROFITS to use its resources and engage in activities designed to increase its profits so long as it stays within rules of game engages in open and free competition without deception or fraud Nothing beyond what the law requires, anything legal and profit maximizing. social decisions are role of politics

Income Gap

Income Gap leads to more problems which impacts market inefficiency

two main requirements of modern capitalism

Information, Voluntary exchange (no Lack of Corrosion)

Free Market (Adam Smith)

Invisible Hand: factors of productions should be distributed pursuant to market forces when consumers are left to freely choose what they want to buy, and businesses are left to freely decide what they want to sell, the self-interest of both will lead to decisions that result in good prices and the right products in the economy and marketplace. As a result, Smith argued that no government intervention is needed.

Pollution is an example of a negative externality because ...

It is over-produced because companies do not have to pay for it.

Why do monopolies and monopsonies have a negative effect on the market

Leads to inefficient allocation of resources. No supply/demand pricing (higher prices). No competition reduces freedom of choice

What does LIV stand for

Legal information is open, legal, and competitive -voluntary exchange

My Opinion Usually Lacks Information

Monopolies Overproduction of Negative Externalities Underproduction of Public Goods Lack of/Incomplete Information

Public parks are an example of a public good because

No one pays for them because they won't make a profit or keep people out.

CVS Debate

Only consistent with free market if they made the decision because tobacco sales are going down and getting out of market. If for "image" not free market

Primary Values of the Free market

Price system has no central direction. checks gov power, promotes innovation

Quality

Quality is what triggers interest groups into the corporations Anything can be a trigger (mcdonalds deforestation example)

5 categories of Laws

Regulating Competition Protecting Consumers Promoting Equity/Safety Protecting the Environment Incentives to encourage organizational compliance programs

Incentives to encourage organizational compliance programs

Sarbanes Oxy, drive ethical behavior

Dodd-Frank Wall Street Reform and Consumer Protection Act

Seeks to improve financial regulation, increase oversight, and prevent excessive risk-taking, deceptive practices and lack of oversight Created new offices -The Office of Financial Research -The Financial Stability Oversight Council -Consumer Financial Protection Bureau (CFPB) Instituted a whistle-blower bounty program

Sally Can't Eat Dried Peaches

Self Interest Competition Efficiency Division of Labor Pricing

Smith as Utilitarian

Self interest helps everyone When people look out for themselves society benefits because we are more efficient in our use of resources., to promote your own welfare., concern for one's own well being with regard to the welfare of others

Invisible Hand

Self-Interest + Competition= Efficiency- Invisible Hand alludes to spontaneous organization and societal benefit deriving from self-interest, which can create societal benefit.

Why did Smith Support Laissez faire?

Since Laissez Fair allowed business to operate with little or no government of interference. And Smith argued that the free market should be allowed to regulate business activity. tried to show how manufacturing trade, wages, profits, & economic growth were all linked to the market. These two ideas come together to build better businesses, and economy.

Who said "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What does it mean?

Smith The idea is that nothing more than the pursuit of one's self-interest, with self-interest defined in narrowly egoistic terms, is necessary for a market economy to function well, since an invisible hand will guide such actions so as to produce positive effects for society the butcher and baker work to produce meat and bread not because they like us or even know us, but because they want to earn a living by selling the produce of their labor individuals pursuing their own self-interest unknowingly and not by intentional design benefit others and therefore enhance the prosperity of society as a whole.

What are the benefits of specialization and the division of labor?

The division of labor creates an enormous increase in output and occasions technological specialization, which further increases productivity. The enormous supply which results from the division of labor drives down the cost of goods. A society in which the division of labor is highly developed also involves more of its members in production, giving more people access to wages. These two factors make more goods available to more people, and ensure that more people will be able to afford them.

What is the natural price?

The long run equilibrium price; sum of the average rate or wages and average return to capital

Civil Regulation

The most visible driver that translates social and environmental "goods" into positive market signals and related financial gains, often through loose forms of social organization, positive relationship between financial performance and reputation.

How are wages determined?

The rate of increase in national income determines wages by increasing wages fund

Monopoly Video

The wealthier you get from government breaks, you become ignorant and lack empathy.

According to Friedman what is the result of the market reducing social strains

There are fewer are the issues on which explicit political decisions must be made The fewer issues on which getting agreement is necessary, the greater the likelihood of getting agreement while maintaining a free society.

Natural efficient price is not possible when

There is incomplete or asymetric information availability.

What happens when natural price occurs?

There will be exactly enough revenue to pay natural rates of wages, profits, and rents

How do self-interest and competition affect the free market?

They affect the free market by having people 'fight' over resources, money of consumers and investments.

examples of negative externalties

Tragedy of the Commons Pollution 3rd Party costs without theit chouce

Government Role in Freidmans Eyes

Treasuery, Defense, Education. Freedom over equality. Competition clauses.

True or False: Health and social problems are worse in more unequal countries

True, because there is a greater the income divide Example: USA

Is Smith pro-market?

Yes

Friedman's view on profit maximization

argues that business executives should focus on profits if: 1) obey the law 2) follow ethical customs 3) commit no deception or fraud 4) engage in open and free competition (rent seeking and anti-competitive behavior)

Public Company Accounting Oversight Board (PCAOB)

authority to monitor accounting firms that audit public companies

regulating competition

by stopping anticompetitive practice

why are civil regulators are efficient than the government

can target a specific company

What is the key to the invisible hand?

compeition

PCAOB reduces ________________ and increases _______________

conflict of interest; accountability

elastic demand

demand for good/service varies with the price

monopsony

dominant buyer

Sarbanes Oxley Act

established a system of federal oversight of corporate accounting practices

NGO's tools

exit voice boycott

Labor services supplied by households flow to _____

firms

payment for goods and services flow from households to _______

firms

Universal entitlements

free, universal and non-transferrable

Friedman's overriding governing principle is?

freedom

efficiency

fueled by competition

Particularism

greater attention is given to the obligations of relationships and unique circumstances than rules

good and services produced by firms flow to ______

households

payment for labor services flows from firms to _______

households

Pursuit of profit and only profit is legal as long as business owners or managers do not engage in..

illegal, deceptive, or fraudulent practices

Why did Smith emphasize the importance of high wages?

improvement in worker's productivity

reasons for government intervention

income equality

Friedman: Cons

information available? are exchanges really "voluntary"? really free from coercion? income inequality

institutionalization in business ethics

involves embedding values, norms, artifacts in organizations, industries, and society ethical behavior written into law

Adam Smith believed that infinite competition ...

is a requirement, otherwise the invisible hand is limited because the market can not be signaled by the consumer.

Smith's overriding governing principle is?

justice

competition

key to self-interest choices for both buyers and sellers

There is a need for _________ and _________ infrastructure for the invisible hand

legal and moral

inelastic demand

little change to the quantity demanded of the price changes

Competitive behavior driven by self-interest results in...

lower prices or higher quality introduction of new products

monopoly

market structure in which there is only one producer/seller for a product

Voluntary Exchange

means individuals are effectively free to enter or not to enter into any exchange necessary for prosperity and freedom if an exchange between two parties is voluntary, it will not take place unless BOTH believe they benefit

According to Adam Smith, the Division of Labor is ...

natural and necessary.

Is Adam Smith pro-Government or pro-Business?

neither, pro market

Are Milton and Friedman's beliefs all true

no

Market Failures

occur when allocation of goods and services in inefficient 1) monopolies/monopsonies 2) overproduction of negative externalities 3) under production of public goods 4) lack of/incomplete information

Who is Smith's ideal economic actor

person of goodwill, prudence, and self-restraint who operates cooperatively and competively

self interest

produces more wealth and efficiency for all because of self-love cookie lady example

protecting the environment

promoting green work

Per Adam Smith, Profits are the ...

rational outcomes of the system.

What does natural price cover?

rent, wages, and profit land, labor, stock/capital minimal sustainable price

Monsanto Debate

responds to stakeholders issues Possibly ESI. GM seeds can benefit

promoting equity and safety

safety programs

Definition of market failure

situations that some asset justify government intervention into the market, or altering the decisions made my firms acting in their own self interest part of the invisible hand is not working

Division of labor

specialization and efficiency can become mind numbing and boring which is why public education is important

Voice

still continue to buy product but inform company of concern loyal consumer activate voice, tell whats wrong --Three Requirements (elastic demand, competition)

Why does the market price fluctuate?

supply and demand

Pricing (Free Market)

supply and demand indicates to suppliers what is the best natural price market > government no centralized price instead based on supply and demand with a minimum return to sellers when supply is greater than demand, suppliers will enter the market and price will lower

Per Adam Smith, government should ...

sustain competition, prevent collusion and price setting, impose taxes for defense and infrastructure, law and order, enforce contracts; whatever will not be created by businesses acting out of self interest.

Laissez-faire

the concept that the state should not impose government regulations but should leave the economy alone

why do negative externalities have a negative affect on the market

there are too many things we do not want inefficient

Underproduction of Public Good affects the market

things we want that the market doesn't produce inefficiency in market Market should provide it but it isn't such a stoplights

Monopoly Ted Talk

those who have a higher wealth status moralize self-interest and lose empathy. Other studies show that wealthier people have a sense of entitlement therefore they do things like not stop at crosswalks.

How to sustain high prices

trade secrets monopolies restraint of trade

protecting consumers

unbalance of information

Prices below the natural price are

unsustainable

crony capitalism

when someone has concentrated wealth to use the market to limit rights -inconsistent to free market principles -not pursuing self-interests -problematic

The PCAOB gives some legal protection for _____________

whistleblowers

Does the government regulate behavior

yes