Law, Business and Society, 2024, 14e By Tony McAdams
(Instructor's Manual All Chapters, 100% Original Verified, A+
Grade)
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.
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.
1-1
.
,Chapter 01 - Capitalism and the Role of Government
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
What role, if any, should the law play in your business life? How much government does America need? Is capitalism,
as currently practiced, the best economic system for the challenges facing American society? What, if any, are its
moral implications? These themes—examining the relationship between government and business in America—are
central to this text and especially this first chapter.
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 and the 5,000 Percent Price Rise
Despite building successful companies while yet in his early 30s, Shkreli’s exploitation of the
drug 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.
Shkreli, age 37 in 2020, is serving a seven-year sentence in federal prison for securities fraud unrelated
to Daraprim. He also must pay $7.36 million of his $27 million net worth in penalties to the government.
Reportedly he spent some time in solitary confinement when authorities discovered that he was using a
contraband cell phone in prison to continue running his drug company, Phoenixus AG (formerly Turing).
The price of Daraprim, which benefits only about 2,000 Americans annually, reportedly remains in the
$750 per pill range with no generic equivalent in the United States.
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
1-2
.
,Chapter 01 - Capitalism and the Role of Government
inevitably lifting the welfare of all. Yet Piketty has acknowledged that markets are vital to
efficiency and freedom.
What do we hope to accomplish in this text?
To this point, we have explored some of the strengths of America’s capitalist system, and some
of its moral challenges. The balance of this chapter more carefully examines the philosophical
nature of free-market capitalism, the practice of privatization, and some of the recent economic
challenges. It also introduces alternatives to the free market, and asks where America’s political
economy is headed. Chapter 1 thus serves as a foundation for the book’s detailed investigation of
the following questions:
1. What are the proper ethical and social roles of business in American life?
2. How much, if any, government regulation of business, if any, is necessary to fulfill that
rolethose roles?
Part Two: The Principles of Capitalism
We certainly cannot understand America’s system of laws without a firm appreciation for the principles of capitalism
from which those laws spring. We have embraced an evolving capitalist, democratic approach to life. Other cultures
have placed less faith in the market and more in government planning.
In this chapter, we explore the full economic spectrum, moving from a laissez-faire, free-market approach on the
extreme right to a brief review of command economy principles on the far left. Our attention will then rest on where
the world is at this moment, with most nations practicing varying combinations of markets and government regulation,
or mixed economies. We begin, first, with an examination of the pure free-market approach.
The Pure Free Market Approach
The pure free-market approach assumes that we can operate our business system, and our society at large, free of
all but foundational legal mechanisms, such as contract and criminal law. The wisdom of the market—our individual
judgments, in combination with our individual consciences—should “regulate” American life. Most forms of
government intervention, including regulatory agencies, consumer protection, environmental rules, occupational
licensure, zoning restrictions, antitrust law, and all but the most basic government services, would be eliminated.
Free Market Solution to the Baby Shortage?
The following ad appeared in the Stanford Daily (Stanford University):
EGG DONOR WANTED $35,000 (PLUS ALL EXPENSES) Ivy League Professor and High-
Tech CEO seek one truly exceptional woman who is attractive, athletic, under the age of 29.
GPA 3.5+, SAT: 1400+.
Experts estimate that about 10,000 babies annually are born in the United States from
“donated” eggs and about $80 million is spent on those eggs. Fees range from a few thousand
dollars to $50,000 or more. The U.S. fertility industry is lightly regulated, but most industrial
nations have banned paid “donations.”
Sources: Claire Achmad, “How the Rise of Commercial Surrogacy Is Turning Babies into
Commodities,” The Washington Post, December 31, 2014 [www.washingtonpost.com]; Jim
Hopkins, “Egg-Donor Business Booms on Campus,” USA TODAY, March 16, 2006, p. 1A; and
Tamar Lewin, “Egg Donors Challenge Pay Rates, Saying They Shortchange Women,” The
New
York Times, October 16, 2015 [www.nytimes.com].
1-3
.
, Chapter 01 - Capitalism and the Role of Government
Should We Downsize Government?
Should America shrink the size of government? What combination of capitalism and government best serves the
needs of America and the world? Substantially open markets have shown themselves to be the stronger vehicle for
productivity, efficiency, and personal freedom. Are open markets also the stronger vehicle for improving living
conditions for all citizens, for maximizing democracy, for discouraging crime and corruption, and for building strong
communities? Are America and the world best served by the speed and efficiency of largely unrestrained markets, or
do we still need significantly-interventionist governments to correct the market’s failures?
Ayn Rand and Objectivism
The controversial philosopher and novelist Ayn Rand (1905–1982) was an uncompromising
advocate of free-market principles. Rand’s philosophy, labelled Objectivism, contends that only
free-market principles can produce a rational, moral life.
Government and Objectivism
To Rand, the purpose of government is to protect individual rights. Therefore, the only
necessary components of government are the police, the armed services, and the law courts.
Governmental regulation of business would be dramatically reduced or eliminated. Free market
processes along with individual and organizational morality would guide decision making and
provide the consumer protection currently afforded by those agencies. Similarly, market forces
and charity would replace government in providing social security, education, welfare, and
housing. Taxation would be voluntary.
Rand’s Influence
Rand’s views and her writing style are heavily criticized, but she has been cited as a powerful
influence by some of America’s leading corporate and political figures. Her books, including
Atlas Shrugged and The Fountainhead, are among the best-selling novels of all time. Big
business leaders, who so often are the villains of contemporary American life, are the great
heroes of Rand’s writing in which she champions selfishness and rejects self-sacrifice. To Rand,
big government suppresses individual rights and personal freedom and improperly transfers
wealth from the highly productive to those who are less so.
Capitalism in Practice—“Privatization” in America and Abroad
Most commonly, privatization follows two patterns:
• Contracting out, where government, in effect, turns over a portion of its duties, such as garbage
collection, to a private firm
• The sale or lease of public assets, such as an airport, to a private party
Privately operated prisons, now rather common across America, are a primary example of the
privatization movement. Of course, privatization also brings worries about job losses, reduced services,
reduced responsiveness to consumers, corruption, and so on.
America’s crumbling infrastructure is a prime area for privatization, because it requires trillions of dollars
in investments for repairs, and taxpayers do not want to bear the financial burden. Several jurisdictions
have turned to private companies or public-–private partnerships to build toll roads or convert existing
roads to toll- arrangements. As would be expected, some of those projects have been highly successful,
1-4
.
(Instructor's Manual All Chapters, 100% Original Verified, A+
Grade)
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.
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.
1-1
.
,Chapter 01 - Capitalism and the Role of Government
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
What role, if any, should the law play in your business life? How much government does America need? Is capitalism,
as currently practiced, the best economic system for the challenges facing American society? What, if any, are its
moral implications? These themes—examining the relationship between government and business in America—are
central to this text and especially this first chapter.
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 and the 5,000 Percent Price Rise
Despite building successful companies while yet in his early 30s, Shkreli’s exploitation of the
drug 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.
Shkreli, age 37 in 2020, is serving a seven-year sentence in federal prison for securities fraud unrelated
to Daraprim. He also must pay $7.36 million of his $27 million net worth in penalties to the government.
Reportedly he spent some time in solitary confinement when authorities discovered that he was using a
contraband cell phone in prison to continue running his drug company, Phoenixus AG (formerly Turing).
The price of Daraprim, which benefits only about 2,000 Americans annually, reportedly remains in the
$750 per pill range with no generic equivalent in the United States.
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
1-2
.
,Chapter 01 - Capitalism and the Role of Government
inevitably lifting the welfare of all. Yet Piketty has acknowledged that markets are vital to
efficiency and freedom.
What do we hope to accomplish in this text?
To this point, we have explored some of the strengths of America’s capitalist system, and some
of its moral challenges. The balance of this chapter more carefully examines the philosophical
nature of free-market capitalism, the practice of privatization, and some of the recent economic
challenges. It also introduces alternatives to the free market, and asks where America’s political
economy is headed. Chapter 1 thus serves as a foundation for the book’s detailed investigation of
the following questions:
1. What are the proper ethical and social roles of business in American life?
2. How much, if any, government regulation of business, if any, is necessary to fulfill that
rolethose roles?
Part Two: The Principles of Capitalism
We certainly cannot understand America’s system of laws without a firm appreciation for the principles of capitalism
from which those laws spring. We have embraced an evolving capitalist, democratic approach to life. Other cultures
have placed less faith in the market and more in government planning.
In this chapter, we explore the full economic spectrum, moving from a laissez-faire, free-market approach on the
extreme right to a brief review of command economy principles on the far left. Our attention will then rest on where
the world is at this moment, with most nations practicing varying combinations of markets and government regulation,
or mixed economies. We begin, first, with an examination of the pure free-market approach.
The Pure Free Market Approach
The pure free-market approach assumes that we can operate our business system, and our society at large, free of
all but foundational legal mechanisms, such as contract and criminal law. The wisdom of the market—our individual
judgments, in combination with our individual consciences—should “regulate” American life. Most forms of
government intervention, including regulatory agencies, consumer protection, environmental rules, occupational
licensure, zoning restrictions, antitrust law, and all but the most basic government services, would be eliminated.
Free Market Solution to the Baby Shortage?
The following ad appeared in the Stanford Daily (Stanford University):
EGG DONOR WANTED $35,000 (PLUS ALL EXPENSES) Ivy League Professor and High-
Tech CEO seek one truly exceptional woman who is attractive, athletic, under the age of 29.
GPA 3.5+, SAT: 1400+.
Experts estimate that about 10,000 babies annually are born in the United States from
“donated” eggs and about $80 million is spent on those eggs. Fees range from a few thousand
dollars to $50,000 or more. The U.S. fertility industry is lightly regulated, but most industrial
nations have banned paid “donations.”
Sources: Claire Achmad, “How the Rise of Commercial Surrogacy Is Turning Babies into
Commodities,” The Washington Post, December 31, 2014 [www.washingtonpost.com]; Jim
Hopkins, “Egg-Donor Business Booms on Campus,” USA TODAY, March 16, 2006, p. 1A; and
Tamar Lewin, “Egg Donors Challenge Pay Rates, Saying They Shortchange Women,” The
New
York Times, October 16, 2015 [www.nytimes.com].
1-3
.
, Chapter 01 - Capitalism and the Role of Government
Should We Downsize Government?
Should America shrink the size of government? What combination of capitalism and government best serves the
needs of America and the world? Substantially open markets have shown themselves to be the stronger vehicle for
productivity, efficiency, and personal freedom. Are open markets also the stronger vehicle for improving living
conditions for all citizens, for maximizing democracy, for discouraging crime and corruption, and for building strong
communities? Are America and the world best served by the speed and efficiency of largely unrestrained markets, or
do we still need significantly-interventionist governments to correct the market’s failures?
Ayn Rand and Objectivism
The controversial philosopher and novelist Ayn Rand (1905–1982) was an uncompromising
advocate of free-market principles. Rand’s philosophy, labelled Objectivism, contends that only
free-market principles can produce a rational, moral life.
Government and Objectivism
To Rand, the purpose of government is to protect individual rights. Therefore, the only
necessary components of government are the police, the armed services, and the law courts.
Governmental regulation of business would be dramatically reduced or eliminated. Free market
processes along with individual and organizational morality would guide decision making and
provide the consumer protection currently afforded by those agencies. Similarly, market forces
and charity would replace government in providing social security, education, welfare, and
housing. Taxation would be voluntary.
Rand’s Influence
Rand’s views and her writing style are heavily criticized, but she has been cited as a powerful
influence by some of America’s leading corporate and political figures. Her books, including
Atlas Shrugged and The Fountainhead, are among the best-selling novels of all time. Big
business leaders, who so often are the villains of contemporary American life, are the great
heroes of Rand’s writing in which she champions selfishness and rejects self-sacrifice. To Rand,
big government suppresses individual rights and personal freedom and improperly transfers
wealth from the highly productive to those who are less so.
Capitalism in Practice—“Privatization” in America and Abroad
Most commonly, privatization follows two patterns:
• Contracting out, where government, in effect, turns over a portion of its duties, such as garbage
collection, to a private firm
• The sale or lease of public assets, such as an airport, to a private party
Privately operated prisons, now rather common across America, are a primary example of the
privatization movement. Of course, privatization also brings worries about job losses, reduced services,
reduced responsiveness to consumers, corruption, and so on.
America’s crumbling infrastructure is a prime area for privatization, because it requires trillions of dollars
in investments for repairs, and taxpayers do not want to bear the financial burden. Several jurisdictions
have turned to private companies or public-–private partnerships to build toll roads or convert existing
roads to toll- arrangements. As would be expected, some of those projects have been highly successful,
1-4
.
