Solution Manual for Law, Business and Society 12th Edition Chapter1-18
Chapter 1 Capitalism and the Role of Government Chapter Goals This chapter serves as an introduction to the two fundamental questions examined throughout the entire book: What is the proper role of business, both in America and in the global society? In addition, how much government regulation is necessary or optimal to achieve that role for business? Students are doubtlessly familiar with the broad features of the capitalist–collectivist continuum, but their experience suggests that a brief refresher may be helpful. The most fundamental role of this chapter, however, is simply to clarify for the students the cause-and-effect relationship between economic philosophy and law. The law springs from its roots in political economy (among other sources) and, in turn, the law works to preserve that economic system. Characteristically, the students do not think of the law as an expression of fundamental economic and philosophical choices. The relationship between capitalism and the particular legal system is not clear to most Americans. The chapter begins with an introduction to American Capitalism. It discusses the economic challenges such as the Great Recession, subprime mortgages, banks that are too big to fail, and globalization and its impact on American Capitalism. It describes the moral challenges in American Capitalism through issues such as Wall Street abuses and fairness in pay. This is followed by a discussion of whether America as a nation is headed for a decline due to these economic and moral challenges. Next, the chapter discusses the purpose of the textbook, and it explains the roles of markets and governments and law in a nation. Then, the chapter describes how the proper balance between open markets and government intervention remains perhaps the central public policy debate in American life. This is followed by a discussion of privatization of some industries such as space travel and toll roads, parking meters, and congestion pricing in America. It also discusses privatization of schools and its success. Then, the chapter goes on to discuss communism and communist principles. It also describes socialism and socialists‘ goals. It illustrates the economic and the political challenges of communism in China. Next, it illustrates the economic and political challenges of socialism in Russia. Then, it discusses mixed economy and illustrates the economic and the political challenges of mixed economy in mixed economy such as Sweden. This is followed by a discussion of whether America‘s more libertarian ―cowboy capitalism‖ is better adapted to the globe‘s demands than the ―coordinated, stakeholder capitalism‖ characteristic of much of Europe or not. Then, the economic future of America and factors such as the overall quality of life, poverty, the gaps (i.e., income gaps and wealth gaps), the decline of social connections, and the expanding socioeconomic gap between the children of educated parents and the children of parents barely clinging to economic survival in America is discussed. The chapter concludes with a discussion of whether America should improve the market through judicious regulation or whether it should return to a ―purer‖ form of capitalism with dramatically reduced government.
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Chapter Learning Objectives After completing this chapter, students will be able to fulfill the following learning objectives: 1. Describe capitalism and its relationship to individual rights. 2. Discuss the theory and practice of privatization. 3. Compare capitalism and collectivism. 4. Differentiate between communism and socialism as collectivist philosophies. 5. Discuss the current state of capitalism in China and Russia. 6. Evaluate arguments regarding government‘s proper role in the American economy. 7. Describe the primary characteristics of a ―mixed economy.‖ 8. Analyze the impact of capitalism on equality, fairness, and community in American and global society. 9. Describe the income and wealth gaps in America.
Chapter Outline Part One—Introduction Examining the relationship between government and business is the core of the text. Since the fall of the Soviet Union and the general decline of communist influence, free market reasoning has dominated worldwide economic discourse. Indeed, noted political theorist Francis Fukuyama argued that capitalism and Western democracy have so thoroughly proven their worth that the capitalism/collectivism debate is over. Events, however, have challenged Fukuyama‘s bold thesis. The Great Recession, including the subprime mortgage crisis, the stunning power of the Wall Street banks, and the continuing centrality of governments in economic decision making, have raised doubts about the economic reliability and dominance of capitalism. Furthermore, questionable Wall Street behavior, rampant managerial greed, and growing gaps between America‘s rich and poor have magnified long-standing doubts about the morality of capitalism. A False Promise? Renowned French economist Thomas Piketty has recently strengthened the anticapitalist argument by attacking the crucial claim that a healthy market generates a rising economic tide inevitably lifting the welfare of all. Yet Piketty has acknowledged that markets are vital to efficiency and freedom. I. American Capitalism Challenged: Economics A. The Great Recession In late 2008, America‘s financial markets seemed near collapse. Lending had essentially frozen. Fearing another Great Depression, the George W. Bush and Barack Obama administrations flooded the market with cash, took on much of the debt held by endangered banks, and, through the Troubled Asset Relief Program (TARP), bailed out failing giants such as Goldman Sachs, General Motors, and Chrysler: companies that were deemed ―too big to fail.‖ Critics, however, say the bailouts were illegal extensions of federal power, dramatically increased the federal deficit, expanded the size of the federal government, set the stage for inflation, and encouraged other businesses to believe they would be bailed out if necessary. 1-2 © 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
B. Subprime Mortgages The financial community‘s near collapse was most directly ignited by the subprime mortgage crisis, a situation in which the nation‘s housing bubble burst and millions of Americans were no longer able to pay their home mortgages. Instead of continuing their sometimes-meteoric rise in value, those homes plunged in price and much of the total real estate market had essentially imploded. The resulting mountain of bad debt could not be managed by the American financial institutions that were holding it; fear paralyzed the lending markets, and the government felt obliged to step in to prevent a greater financial tragedy. C. Banks Too Big? America‘s biggest banks were deemed ―too big to fail‖ during the subprime mortgage crisis. Today the five biggest American banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and U.S. Bancorp—control about 45 percent of America‘s bank assets, and their stability remains worrisome should the economy falter again. Some political leaders and economic policy experts favor breaking up the biggest banks, but reforms including Federal Reserve rules requiring some banks to increase the amount of capital they hold (thus giving them a bigger cushion in troubled times) has enabled the big banks to pass annual government ―stress tests‖ indicating they may now be better situated to deal with disaster. The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act also includes provisions designed to reduce the likelihood of big bank failures. D. Globalization Globalization represents the international flowering of capitalism; the power of free markets has been embraced, enthusiastically or reluctantly, almost everywhere on Earth. In a ―hyper-connected,‖ ―flat‖ world, people are linked together in an economic and cultural intimacy scarcely imaginable a few decades back. Largely unanticipated challenges are emerging, however. On average, profits in international markets are lower than in domestic markets, consumer growth in emerging countries has been slow to develop, political strife threatens many markets, and international cyber theft is rampant. Globalization has elevated living standards for hundreds of millions, but losers have been plentiful. Most notable in America are the millions of high-paying manufacturing jobs that went abroad. Some ―reshoring‖ of those jobs has occurred, but for blue-collar America, globalization has been a mixed blessing. II. American Capitalism Challenged: Morality Beyond fears about capitalism‘s economic performance, particularly its instability and harshness, critics point to capitalism‘s indecencies. A. Wall Street Abuses Since the financial collapse, Wall Street banks have paid tens of billions of dollars in penalties for their subprime misconduct, currency manipulations, and other wrongs. Nonetheless, no one seems very happy. The bankers feel wronged, the government remains frustrated, and the American people are angered. B. Fairness in Pay 1-3 © 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Greed CEO salaries for the top 350 U.S. corporations (not limited to bankers) averaged $16.3 million in 2014, or about 300 times the pay of the typical worker, a ratio that has risen from 20 to 1 in 1965. Average Wall Street starting salaries for recent college graduates are now around $85,000. On the other hand, government rules and difficult market conditions have taken a bit of the sheen off the dominance of the big banks. Inequality The CEO–worker pay gap is illustrative of broader income and wealth gaps that continue to grow. The ongoing economic recovery has been welcome, but job growth and wage increases (for workers) have lagged profits and revenues (for owners). Were those gaps the product of superior skill and industry alone, fairness might not be an issue, but critics argue that our economic divide seems to be driven, at least in part, by rent-seeking behaviors (securing economic gains without creating new wealth or otherwise benefiting society, as in the case of corporate lobbying for government subsidies). A recent study in the respected Journal of Economic Perspectives argues that income from rent seeking among the top 1 percent has been ―the primary impediment to having growth in living standards for low- and moderateincome households approach the growth rate of economy-wide productivity.‖ To some significant extent, the evidence suggests that people are redistributing income and wealth not merely by welfare programs for the poor and elderly, but also through rent seeking by the rich and well-connected who, the critics argue, can lobby the government for favors, move their wealth abroad, avoid taxes by employing armies of accountants and lawyers, engage in monopoly antitrust behaviors, and otherwise manipulate the economy to their advantage. III. American Capitalism Challenged: A Nation in Decline? The economic and moral challenges to the American capitalist system, the rise of China, and the ongoing political dysfunction in Washington, DC, have combined to shake people‘s faith in America‘s future. Some critics attribute the nation‘s problems to fundamental flaws in capitalism and in the American character. Wells Fargo Under pressure to meet sales goals, Wells Fargo employees opened some two million accounts for customers without their permission. The bank reportedly began receiving employee complaints about the sham accounts as early as 2005. Eventually Wells Fargo fired 5,300 mostly lower-level employees and refunded $2.6 million to customers. It will pay, at this writing, $185 million in fines. CEO John Stumpf resigned in 2016. He was forced to give up $41 million in stock awards, although he left having accumulated tens of millions in salary. Wells Fargo has publicly apologized, but new account openings have plummeted and a number of state and municipal governments have withdrawn from business ties to the bank.16 Criminal charges seem likely, although the story is unfolding at this writing. A. Vast Resources America has been shaken by terrorism, the Great Recession, and political gridlock, but it remains dominant in economic, military, and international affairs. In advising its clients, Goldman Sachs 1-4 © 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
recently pointed to America‘s attractiveness to investors, the nation‘s vast natural resources (especially oil, gas, and arable land), a workforce that is younger and more energetic than those of its chief rivals, and its continuing leadership in innovation. IV. Purpose: What Do We Hope to Accomplish with This Textbook? Chapter 1 serves as a foundation for the book‘s detailed investigation of the following questions: What is the proper ethical/social role of business in American life? How much, if any, government regulation of business is necessary to secure that role? A. Markets and Governments Most nations are practicing varying combinations of markets and rules that one can label mixed economies. The pure free-market approach assumes that one can operate one‘s business system and one‘s society at large free of all but foundational legal mechanisms such as contract and criminal law. The wisdom of the market—one‘s individual judgments, in combination with one‘s individual consciences—would ―regulate‖ American life. Most forms of government including regulatory agencies, consumer protection, environmental rules, occupational licensure, zoning restrictions, antitrust law, and all but the most basic government services would be eliminated. Substantially open markets have shown themselves to be the stronger vehicle for productivity, efficiency, and personal freedom. B. Law Once a society settles on some broad political and economic principles, it employs the law as a primary method of governance. So to understand the law, people need to understand its roots in the economic, political, and social preferences of America and the world.
Part Two—Capitalism: Reduce Government? Personal freedom and private property rights, combined with extraordinary human and natural resources, ignited a great American economy. Fraud, monopoly behaviors, and abuse of employees followed, however, and government regulations grew, in part, to curb the power of big business. The proper balance between open markets and government intervention remains perhaps the central public policy debate in American life. The disturbing example of young entrepreneur and pharmaceutical executive Martin Shkreli illustrates both the power and the limitations of the market. Shkreli Despite building companies and an estimated $100 million fortune while yet in his early 30s, Shkreli‘s exploitation of the market has outraged the public and some members of Congress. In 2015, Shkreli‘s company, Turing Pharmaceuticals, bought the rights to an established toxoplasmosis medication, Daraprim, and soon raised the price from $13.50 to $750 per pill. Rejecting charges of greed, Shkreli has said he cares deeply about others, and the price increase was necessary to provide funds for medical research. Ayn Rand and Objectivism 1-5 © 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.