Business and Society Quiz #1 - Capitalism

Main purpose of business

To make the money while providing goods and services to consumers.

Return

Money made or lost on an investment

Risk

Chance of losing money or getting a different result than expected.

3 means of product

Money (capital), people (labour), place (land).

What is Capitalism?

Economic system characterized by private ownership of production (land, labour, capital), where markets are driven by supply and demand. It emphasizes profit motive and competition.

3 central features of capitalism

Wage labour, private ownership of the means of production, production for exchange and profit.

Key assumptions of capitalism - Private property

Legal right to own and use economic goods (means of production) such as land and buildings.

What is “The Pharma Bro” (Martin Shkreli), famous for?

Raising the price of Daraprim from approximately $17.50 to $750 per tablet (over 4000% increase).

What was Martin Shrkeli’s sentence?

7-year prison sentence for fraud, lifetime ban from the pharmaceutical industry, and $64.6 million disgorgement in the antitrust case.

Key assumptions of capitalism - Individualism

The individual, and not society or a collective, is the paramount decision maker in society.

Key assumptions of capitalism - Economic freedom

The fundamental right of individuals to control their own labour and property, making personal economic choices without undue government restrains or coercion.

How is economic freedom measured? (List at least 5)

• Property rights

• Taxation

• Government intervention

• Regulation

• International exchange

• Foreign investment

• Money + inflation

• Wage + price controls

• Corruption

Key assumptions of capitalism: Equality of opportunity

Assumption that all individuals or groups have an even chance at responding to some condition in society.

• Ex: wage inequality

Key assumptions of capitalism - Competition

Many rival sellers seek to provide goods and services to many buyers.

Key assumptions of capitalism - Profit

Excess of revenues over expenses.

Key assumptions of capitalism - Work ethic

Code of values or a body of moral principles, claiming that work is desirable, it is natural activity.

Max Weber - Why did modern capitalism emerge first in certain parts of Europe?

Protestant religious beliefs helped shape the culture that supported capitalism.

Max Weber - Conclusion

Protestant ethics contributed to the rise of capitalism, although they were not its only cause.

Key assumptions of capitalism - Consumer sovereignty

Assumption that consumers have and exercise the power over producers through the decisions they make in purchasing the goods and services provided by business.

Key assumptions of capitalism - Role of government

In perfect capitalist market, government intervention would be virtually non-existing (e.g. enforcing contracts).

Key assumptions of capitalism - Capitalism vs. Socialism

• Capitalism - economic system where the means of production are owned by private individuals.

• Socialism - the means of production such as money and other forms of capital, are owned by the state or public.

Pros and cons of capitalism

• Pros: drives innovation, efficient resource allocation, higher living standards, economic freedom.

• Cons: wealth inequality, market failures and monopolies, negative externalities, economic instability.

Capitalism as a continuum of government intervention

• Pure capitalism = less government intervention

• Socialism = More government intervention

Capitalism varies according to…

Social traditions, economic traditions, and political traditions.

Canadian capitalism

• More state involvement in economy than U.S., less than Germany and Japan.

• History of stable and cooperative relationship between business + government.

• “Peace, order, and good government.”

• Higher union density than U.S.

Business firms

Canadian business system comprises business enterprises varying from sole or single proprietorships to partnerships and incorporated entities.

Corporations

Company or groups of people authorized to act as a single entity (legally a person) and recognized as such in the law.

Privately-owned corporations, advantage + disadvantage

• Owned privately (ex. founders, founding family).

• Advantage: no shareholders to answer to.

• Disadvantage: have to raise capital privately.

• Ex: Samsung, Deloitte, Mars

Publicly-traded corporations, advantage + disadvantage

• Traded on the stock market (anyone can buy shares).

• Advantage: can raise capital stock on market.

• Disadvantage: Must answer to shareholders.

• Ex: Apple, Petro Canada

Crown corporations, advantage + disadvantage

• Wholly-owned federal or provincial companies that function like independent companies.

• Advantage: greater freedom than government departments.

• Disadvantage: still subject to constraints of government.

• Ex: Via Rail, Manitoba Lotteries

Who runs corporations?

• Owners - direct ownership (ex. shareholders), and indirect ownership (ex. mutual fund holders).

• Managers - oversee operations of corporation.

Cooperative

Business owned and operated by a group of individuals.

• Ex: Home Hardware, Assiniboine Credit Union, Peg City Car Co-Op

Non-profit organizations

Organization that uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus income to organizations’ shareholders (or equivalents) as profit or dividends.

• Ex: Humane Society, Ted Talks, Winnipeg Folk Festival

Types of business organizations (players in capitalism)

• Sole proprietorship

• Partnership

Sole proprietorship advantage + disadvantage

• Advantages: solo-decision making, 100% profit

• Disadvantages: not legally a separate entity

• Pay taxes

Partnership advantage + disadvantage

• Advantages: decision-making

• Disadvantages: shared profit

• 2 types: limited partner or general partner

Equality

Provided equal amounts of needs

Equity

Provided resources according to one’s needs

Innovation

Making something new

3 tech breakthroughs in the early 1900s

• Electrical power

• Automobiles

• Gasoline engine

Effects of automobile technology

• Urbanization - farm to city shift

• Interdependence - specialization increased economic interdependence

• Sociological effects - shift in the nature of work

Scientific Management (Taylorism)

• Management theory created by Frederick Winslow Taylor in the late 19th and early 20th centuries.

• Used to analyze workflows and maximize economic efficiency and labour productivity.

Bureaucracy (Max Weber’s features of an ideal bureaucracy)

• Division of labour

• Rules and regulations

• Hierarchy of authority

• Technical qualifications

• Impersonality

Advantages of Weber’s Beaureaucracy

• Predictability and consistency - clear rules = similar outcomes, regardless who decides

• Fairness - division of labour lets workers specialize and build speed

• Clear accountability - A defined hierarchy shows who is responsible for what

• Scalability - Lets large organizations run consistently at scale

Adam Smith’s point of view on division of labour (according to Chomsky)

That division of labour will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be; therefore in any civilized society the government will have to take measures to prevent division of labour from proceeding to its limits.

Winnipeg general strike of 1919

• Large population returning from fighting in WW1, low wages/high unemployment.

• At 11 am on May 15th, 1919, around 30,000 workers walked off the job in Winnipeg.

• Fear of a communist overthrow of the government.

• 2 strikers were shot and killed and 45 more injured.

• Resolution - on June 26th, strike is called off and workers return to work.

Roaring twenties

• Increasing population

• Growth of cities

• Low unemployment

• Increasing wages

Stock market crash + Great Depression

• $30 billion of wealth “disappeared.”

• GDP reduced by half between 1929 and 1933.

• Unemployment soared - ¼ without a job.

Stock market crash + Great Depression causes

• Speculation

• Weakness on the farm (inelastic demand)

• Weakness in the factory (technology and employment)

• Income inequality

FDR becomes president in 1933

• Government intervention in markets

• Rise of national banks

• Monetary policy

2 types of banks

• Commercial banks

• Investment banks

WW2

• Led to great increase in government role in economy.

• Government’s role in the market was not focused on whether to intervene, but how to intervene.

• Emergence of fiscal policy

After WW2

• US and Canada were not devastated like many European cities.

• Productive capacity of US (and Canada to a lesser extent) rapidly expanded as a response to the demands of the war effort.

• Tech efficiency was increased

• Post-war drop in demand never happened.

Golden age of capitalism

• Business was booming

• Workers and managers kind of got along

• Active role for government in economy

Golden Age ends

• 1950-1970 had been a period of prosperous growth that had never been seen before.

• As we’ve seen from the late 1920’s, periods of stability don’t last forever.

• What cause the demise? - OPEC oil shocks, inflation, stagflation and unemployment.

Beginning of globalization

• Precipitating factors - collapse of the Bretton Woods System, flexible exchange rates.

• Globalization of production and finance

• Emergence of international organizations

Neoliberalism and the 1980’s

• Modern politico-economic theory favouring free trade, privatization, minimal government intervention in business, reduced public expenditure on social services, etc.

• In other words, the re-emergence of laissez-faire approach to capitalism.

Great Recession

Severe global economic slump lasting from 2007-2009, marked by massive job losses, housing foreclosures, and failing financial institutions.

Effects of the Great Recession (list at least 3)

• Unemployment doubled and peaked at 10.1%

• World trade flows decreased 38% in 9 months

• 3 major financial institutions failed

• Government bailout of other financial institutions

• $780 billion in spending to stimulate economy

Other developments

• COVID-19

• The “gig” economy

• Artificial intelligence (AI)

Laissez-faire capitalism

• “Pure” capitalism

• Minimum government intervention

• Government strictly limited to police and fire protection

State capitalism

• The state (government) undertakes commercial (for profit) activities.

• State-owned enterprises

Stakeholder capitalism

• Balance the needs of shareholders with stakeholders such as employees, suppliers, customers, local communities.

Clean capitalism

• Incorporates social, economic, and ecological costs (and benefits) into the marketplace and the prices we pay.

• Externalities

Corporate governance

Shareholders → Board of directors → Officers → Corporate organization