FREE MARKET & PLANNED ECONOMY:FREE TRADE THEORIES

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Business Ethics MGT610

LESSON 15

FREE MARKET & PLANNED ECONOMY

FREE TRADE THEORIES

Economic Freedom: Idea, Performance, and Trends

Economic freedom is characterized by the absence of government coercion or constraint on the

production distribution, and/or consumption of goods and services beyond the extent necessary

for citizens to protect and maintain liberty itself. Thus, people are free to work, produce,

consume, and invest in the ways they choose. The Economic Freedom Index approximates

the extent to which a government intervenes in the areas of free choice, free enterprise, and

market-driven prices for reasons that go beyond basic national needs. Presently, countries are

classified as free, mostly free, mostly unfree, and repressed. Determining factors include: trade

policy, the fiscal burden of the government, the extent and nature of government intervention in

the economy, monetary policy, capital flows and investment, banking and financial activities,

wage and price levels, property rights, other government regulation, and informal market

activities. Over time, more and more countries have moved toward greater economic freedom.

Countries ranking highest on this index tend to enjoy both the highest standards of living as

well as the greatest degree of political freedom

The explanatory power of the theories of absolute and comparative advantage is limited to the

demonstration of how economic growth can occur via specialization and trade. The concept of

free trade (a positive-sum game) purports that nations should neither artificially limit imports

nor artificially promote exports. The invisible hand of the market will determine which

competitors survive, as customers buy those products that best serve their needs. Free trade

implies specialization--just as individuals and firms efficiently produce certain products that

they then exchange for things they cannot produce efficiently, nations as a whole specialize in

the production of certain products, some of which will be consumed domestically, and some of

which may be exported; export earnings can then in turn be used to pay for imported goods and

services. This chapter examines the ethical aspects of the market system itself--how it is

justified, and what the strengths and weaknesses of the system are from the point of view of

ethics. It begins by discussing the economic conditions in the U.S. at the close of the 20th

century, when proponents of industrial policy were urging the government to help declining

industries and their workers to adjust to new economic conditions. Others urged caution,

advising the government to "avoid the pitfalls of protectionism." This dichotomy illustrates the

difference between two opposite ideologies, those who believe in the "free market" and those

who advocate a "planned" economy.

These two ideologies take different positions on some very basic issues: What is human nature

really like? What is the purpose of social institutions? How does society function? What values

should it try to protect?

In general, two important ideological camps, the individualistic and communitarian viewpoints,

characterize modern societies. Individualistic societies promote a limited government whose

primary purpose is to protect property, contract rights, and open markets. Communitarian

societies, in contrast, define the needs of the community first and then define the rights and

duties of community membership to ensure that those needs are met.

These two camps face the problem of coordinating the economic activities of their members in

Business Ethics MGT610

two distinct ways. Communitarian systems use a command system, in which a single authority

decides what to produce, who will produce it, and who will get it. Free market systems are

characteristic of individualistic societies. Incorporating ideas from thinkers like John Locke and

Adam Smith, they allow individual firms to make their own decisions about what to produce

and how to do so.

Free market systems have two main components: a private property system and a voluntary

exchange system. Pure free market systems would have absolutely no constraints on what one

can own and what one can do with it. Since such systems would allow things like slavery and

prostitution, however, there are no pure market systems.

Free Markets and Rights: John Locke

John Locke (1632-1704), an English political philosopher, is generally credited with

developing the idea that human beings have a "natural right" to liberty and a "natural right" to

private property. Locke argued that if there were no governments, human beings would find

themselves in a state of nature. In this state of nature, each man would be the political equal of

all others and would be perfectly free of any constraints other than the law of nature--that is,

the moral principles that God gave to humanity and that each man can discover by the use of

his own God-given reason. As he puts it, in a state of nature, all men would be in:

"A state of perfect freedom to order their actions and dispose of their possessions and

persons as they think fit, within the bounds of the law of nature, without asking leave, or

depending upon the will of any other man".

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