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The Free Market: The Case for Pure Profit Maximization Case Groups
1. 2. 3. 4. 5. 6. Merck Vioxx Travelocity Home Depot Executive Pay SubPrime Mortgage Wal_Mart Class Action 7. BP/Alaska Pipeline 8. Climate Change 9. Oklahoma League 10. Credit Amigo of Brazil 11. Whistle Blowing Defining Moments Decisions form the basis of character You are what you do Choices determine: Who you are Who we are Role of company in society 8 CSR Models Classical View Civil Corporation Longterm Wealth Public Policy Generator Market Failure Model Sustainability Model Stakeholder Model Philanthropy Model Today Profit Maximization and the Case for the Free Market Adam Smith Context The Wealth of Nations: The Division of Labour Pricing Misconceptions Walmart Adam Smith Historical Context: The Justification of Exchange Relationships Religion Mercantilism Industrial Revolution Adam Smith
17231790 Scottish Political Economist "The Wealth of Nations", 1776 Father of Free Trade and Capitalism Adam Smith Two Sectors: Three Factors of Production & Returns Agriculture Manufacturing Land (Rent) Labor (Wages) Stock (Profit) Assumptions
1. 2. 3. 4. 5. 6. Mankind motivated by desire for Gain Justice: Individuals Restrained from harming each other Specialization of Labor Leads to Productivity Prices Free to Move Free to Keep Profits Free Entry and Exit from Market Adam Smith on:
Role of Self Interest 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. We address ourselves, not to their humanity but to their selflove. And never talk to them of our own necessities but of their advantages.
Adam Smith, Wealth of Nations (Prometheus, 1991), p. 20. Assumptions
1. 2. 3. 4. 5. 6. Mankind motivated by desire for Gain Justice: Individuals Restrained from harming each other Specialization of Labor Leads to Productivity Prices Free to Move Free to Keep Profits Free Entry and Exit from Market The individual pursuing his own self-interest is... "led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for society that it is no part of it. By pursuing his own interest, he frequently promotes that of society more effectually than when he intends to promote it. I have never known much good done by those who affected to trade for the public good." Assumptions
1. 2. 3. 4. 5. 6. Mankind motivated by desire for Gain Justice: Individuals Restrained from harming each other Specialization of Labor Leads to Productivity Prices Free to Move Free to Keep Profits Free Entry and Exit from Market Adam Smith Productivity Increases: Dexterity Time Savings Automation Adam Smith On:
Division of Labor One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations...
Adam Smith, Wealth of Nations (Prometheus, 1991), p. 10. Adam Smith - Labour This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has as its view no such extensive utility; the propensity to truck, barter and exchange one thing for another.
Adam Smith, Wealth of Nations (Prometheus, 1991), p. 19. Assumptions
1. 2. 3. 4. 5. 6. Mankind motivated by desire for Gain Justice: Individuals Restrained from harming each other Specialization of Labor Leads to Productivity Prices Free to Move Free to Keep Profits Free Entry and Exit from Market Adam Smith - Pricing Natural Price: Covers rent, wages and profit Land, Labor, stock/capital Minimal sustainable price Market Price Fluctuates Supply and Demand Adam Smith on Prices:: On Labour... it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and all places. (p. 43) On Stock: In exchanging the complete manufacture either for money, or labour, or for other goods, over and above what may be sufficient to pay the price of materials, and the wages of the workmen, some must be given for the profits of the undertaker of the work who hazards his stock in the adventure. (p. 51) Chapter V: Real and Nominal Prices and Chapter VI: Of the Component Parts of the Price of Commodities Adam Smith on Prices On Rent: As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce (p.52) Chapter V: Real and Nominal Prices and Chapter VI: Of the Component Parts of the Price of Commodities *Natural Price (Pn)=
(Wa)Labor + (Pa)Capital + (Ra)Land Where the subscript "a" indicates the lowest rate of return needed to keep that resource in its current use, a.k.a. the alternative wage (w). profit (p) or rent (r) *Natural Price approximates the lowest price a product can be brought to market, or the price under perfect competition Adam Smith- Pricing Wages are based on: Agreeableness of employments Cost of acquiring skills Constancy Trust required Probability of success The value of stock/capital is based on the value of the stock employed Rent is `fixed' Adam Smith - Pricing Sustaining High Prices: Trade Secrets Monopolies Restraint of Trade Prices Below the Natural Price are Unsustainable Adam Smith Antigovernment? Probusiness? Walmart What is the freemarket case for Walmart's entry into MiddleField, OH? Adam Smith Freemarket Capitalist A Moral Philosopher Selfish/Social Division of Labour Critics Karl Marx Nonowning class (proletariat) vs. owners (bourgeoisie) Labor Theory of Value Morality of profit Schumpeter Schumpeter (1942) Creative Destruction Critics
Karl Marx: "The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie, therefore, produces, above all, are its own gravediggers. Its fall and the victory of the proletariat are equally inevitable." -- The Communist Manifesto Communist Manifesto Schumpeter (1942) Creative Destruction Adam Smith- Labour [the worker]... has no occasion to exert his understanding, or to exercise his invention... He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and as ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble or tender sentiment, and consequently of forming any just judgement concerning many of the ordinary duties of private life. Of the great and extensive interests of his country, he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. Adam Smith, Wealth of Nations (1776) Monday: A more modern View: Free Market & Firms acting in their own Interest Milton Fiedman ...
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