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.
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Key Features of Capitalism

1)
Separate Legal Entity
Capitalism permits the creation of companies or
business organizations that exist separately from the
people associated with them.
2) Profit motive
The 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) Competition
Adam 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 property
Capitalism requires private ownership of the major means of
production (factories, warehouses, offices, machines,
trucking fleets, land, etc.)
5) The natural right to property
One basic defense of capitalism rests on a supposed natural
moral right to property.
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Criticisms of Capitalism
(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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(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 isnt what its 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 ones separation

from other people, from oneself, and ultimately
from ones human nature.

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(2) AGENCY THEORY

A corporation is a 3part 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.
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 Shareholders are Principals ; Managers are Agents

Self-Interested Executives agent takes selfinterested 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 revenue
o draw down reserves
o 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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-- END --

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