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The free market theory refers to the ethical perspective that the sole responsibility of business executives is to maximize profits by engaging in legal activities. A free market is an economy in which buyers and sellers engage in trade based on the forces of demand and supply with no government interference through taxation, subsidies, and regulation.
Milton Friedman supported the free market theory by emphasizing the importance of freedom in all activities, including economic transactions. He asserts that the government’s involvement in the market should be limited to the prevention of fraud and the maintenance of the market’s integrity.
Friedman also argued for the implementation of a negative income tax to ensure equality in the society. Finally, he argued for a free society in which there is a volunteer military, free choice of schools, and elimination of licenses. I will argue that Friedman’s defense of the free market theory fails to explain the realities of contemporary economies.
Friedman stated four main reasons to support his argument for the free market theory. First, he argued that the sole social responsibility of a firm in a free market is to maximize profits. Thus, private firms are expected to channel their resources only to projects or activities that lead to increased profits. This means that businesses should avoid unprofitable corporate social responsibilities such as funding education.
The argument on profit maximization is based on the rights theory, which emphasizes the superiority of an individual’s rights. Concisely, managers have a legal right to maximize profits. Thus, entrepreneurs should be free to engage in any legal business activity that leads to high profits. However, their activities should conform to the constitutional laws and ethical standards.
Second, he argues that government intervention in the economy should be abolished since it is ethically wrong and leads to high inefficiency. This argument is based on the premise that a market that is free of government interference will enable consumers to make the best choices in terms of the goods and services that they want.
According to Friedman, the roles of the government should include the provision of services such as defense, education, and enforcement of laws that facilitate free and fair competition. Friedman believed that the government’s involvement in production leads to the creation of monopolies, which limits the freedom to trade by eliminating the production of alternative goods and services.
Additionally, government interventions such as subsidies and tariffs should be eliminated because they hinder free trade. For instance, import tariffs increase the prices of imported goods thereby, making local products more competitive than imports.
Third, Friedman proposed the implementation of a negative tax to ensure equitable distribution of income. The negative tax involved replacing welfare programs with cash transfers to all citizens whose incomes fell below a predetermined income floor.
This was a utilitarian policy since its aim was to ensure that all citizens are able to access basic needs such as food and shelter. Friedman argued that collecting taxes without the taxpayers’ consent is ethically wrong.
Finally, Friedman believed that a free society should be characterized with the freedom to choose schools, volunteer military, as well as, abolition of licenses and social security programs. He proposed the introduction of the school voucher system to enable students to study in learning institutions of their choice.
Friedman argued that hiring military personnel through the draft system was against the concept of a free society. In particular, individuals should be free to decide on whom to sell their labor to in a free market system.
According to Freedman, licensure programs, as well as, wage and rent controls should be abolished because they reduce market efficiency and prevent free trade. Additionally, expenditure on social security should be abolished because it increases the taxpayers’ burden.
Reasons for the Failure of Friedman’s Arguments
I argue that Friedman’s defense of the free market theory fails to explain the realities of contemporary economies due to the following reasons. To begin with, Friedman’s argument that the sole social responsibility of the firm is to maximize profits is unfounded. This is because it implies that managers are only responsible to shareholders who are interested in profits.
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The premise that businesses should only focus on profits is justified by deontological ethics, in which individuals choose actions based on what is right rather than good. Concisely, managers focus on maximizing profits, which is the right thing to do rather than supporting communities (good act).
However, this justification does not hold because businesses operate in communities; thus, their actions must be driven by utilitarianism. According to the stakeholder theory, managers are also responsible for making decisions that satisfy the needs of the customers and the community.
Thus, the social responsibility of a firm cannot be limited to profits. It is not morally right for a business to maximize profits, while it neglects the communities that it depends on. This explains the massive investments that companies make in social responsibility initiatives such as environmental protection in order to obtain public approval.
The argument that the government should not intervene in the economy does not hold because it is based on the principle of protecting the absolute right to liberty. Conflicts of interests and market failure are likely to arise if individuals are allowed to exercise absolute liberty in business. This can be illustrated by the failures of the economies that have tried to eliminate government regulation.
In America, liberalization of the banking industry led to consolidation of major banks in the 1990s. This led to the concentration of wealth among a few entrepreneurs, thereby worsening the gap between the poor and the rich.
Additionally, minimal regulation of the banking industry contributed, in part to the 2007/2008 financial crisis in America, thereby causing sufferings to innocent employees and customers of the financial institutions that were distressed. For instance, some employees lost their jobs, whereas some customers lost their investments in banks.
In 1975, the government of Chile implemented the free market system by eliminating the minimum wage system, and privatizing its firms. By 1983, Chile’s unemployment rate had tripled, whereas its gross domestic product had reduced by nearly 20%. China, on the other hand, has been able to achieve economic prosperity in the last three decades through government intervention in the economy.
Friedman’s negative tax is supported due to the success it has achieved in the countries that have implemented it. However, it does not solve the problem of unequal income distribution, which is its main objective. This is because the cash transfers can only be made to people who are working.
Thus, the unemployed would remain poor. Friedman’s argument that imposing taxes without the taxpayers’ consent is wrong is unfounded. This is because taxation is based on legislations that are available for reference by everyone. The issue of consent does not arise since taxation has been approved by the public through the constitution.
Finally, the argument for a free society with a volunteer military, school voucher systems, as well as, elimination of licensure programs and social security expenditure is not practical. This is because the country must always have a ready army to protect it from unforeseen attacks. School voucher systems have achieved very little success because education in private schools is often very expensive.
Licensure programs cannot be abolished because not all professionals have the virtues that would enable them to behave ethically. According to utilitarian ethics, expenditure on welfare or social security is necessary in order to help the needy and the old who are not able to support themselves financially.
Friedman supported the free market theory because he believed that it would enhance trade, improve efficiency in the government, and provide individuals with the freedom to engage in any legal human activity. I have argued that Friedman’s perspectives do not hold in the contemporary economies.
For instance, a negative tax only helps the employed low-income earners rather than the unemployed. Contrary to Friedman’s view, recent events such as the 2007/2008 global financial crisis indicate that a mixed economy with considerable government intervention is the most desirable system.
DesJardins, Joseph and John McCall. Contemporary Issues in Business Ethics. Belmont, CA: Thomson/Wadsworth, 2005. Print.
Jennings, Marianne. Business Ethics. New York: McGraw-Hill, 2011. Print.
McEachern, William. Macroeconomics. New York: McGraw-Hill, 2011. Print.