Quiz #3

Question 1

What is the capitalist rule?

Answer 1

Make those exchanges that maximize owner wealth, provided you remain within the rules of the game

Question 2

What is meant by exchange?

Answer 2

◦ Money as a medium of exchange. Quid pro quo “something for something”. It’s used to refer to equivalent exchanges, one party gives up something of value for something else of value. True exchange can never be a one-way street.

Question 3

What is meant by the game?

Answer 3

◦ The “game” of exchange, all exchanges the firm may be involved in
◦ Firms function in many markets simultaneously ex. labour markets, financial markets, finished goods market, communities market

Question 4

What are the rules of the game?

Answer 4

◦ The rules of the free market, no interference to demand, supply or price. Forbids:
‣ 1. manipulation of the demand function
‣ 2. manipulation of the supply function
‣ 3. and/or directly manipulating prices
◦ Not the laws of Canada but the laws of the free market

Question 5

What is owner wealth?

Answer 5

◦ Maximize profits = maximize owner wealth
◦ revenues minus expenses, “book valuation”
◦ Owner’s wealth is determined by price of their shares multiplied by the number of shares owned. Wealth is therefore a form of “market valuation” determined by investors

Question 6

What should we maximize Owner wealth?

Answer 6

◦ Firm’s owners are not always shareholders can be owned by employees, suppliers, customers ex. cooperatives
◦ is not to maximize shareholder wealth, but rather maximize owner wealth
◦ Three types of resources that every company needs (Physical, labour, financial)

Question 7

What is a supplier cooperative?

Answer 7

◦ Owned by those that supply the product, provide product at a loss (gives firm flexibility and biggest expense is minimized) in exchange for a percentage of the residual (money earned - money owned = money leftover).
◦ Each quarter firm divides profits and pays them out. Can be risky if there are no profits!
◦ Other expenses may come first ex. operating supplies, monthly bank payments etc.
◦ The choice is to “supply the milk on contract, and have no claim on the residual” Pro - higher assurance of payment (must be paid first), Con - Returns are limited in terms of the agreement
◦ or “Supply the milk as a “gift”, and have a claim on the residual” Pro - profits are unlimited, Con - there is lower assurance of payment accept greater risk for potentially greater returns
◦ Suppliers provide a crucial input for free (or deep discount) in exchange for the residual and control (A vote, pick a good BOD that will run the cooperative effectively and actually generate a residual)

Question 8

What are worker cooperatives?

Answer 8

• Worker Cooperatives
◦ When company’s most expensive input is the labour, when labour is contributed for free
◦ They get: 1) the residual (profits split between them), 2) A vote to determine who serves on the BOD

Question 9

What are consumer cooperatives?

Answer 9

• Consumer Cooperatives
◦ Thousands of different goods, ex. grocery store
◦ Participants must pay a one-time substantial membership, and may also pay ongoing membership fees. The fees are used by the cooperative to finance the start-up and later expansion of the business.
◦ Critical resource (financing) given for free or below market price for the profits. Members rarely receive a quarterly check amounting to their share of profits, rather used to subsidize next year’s prices.

Question 10

What are lender cooperatives?

Answer 10

• Lender Cooperatives
◦ Where large fixed assets dominate a firm’s statement of financial position, ex. mining or airlines. (companies where large sums are money are required to start up and expand)
◦ They are shareholders! provide permanent, interest free loans to firms - can think of them as lenders who give money to the firm for an indefinite length of time to receive claim to the residual and have a vote in BOD elections.
• Summary - that is why we say “owner wealth” and not “shareholder wealth” because shareholders are only one type of owner.

Question 11

What is maximizing owner wealth?

Answer 11

• Maximizing owner wealth (CBA)
◦ Determining of the action is expected to maximize owner wealth: cost benefits analysis (involves determining expected costs, benefits, net outcome by arguing one outweighs the other)
‣ View point matters - done from perspective of owners
‣ It all comes down to revenues and expenses - how is the firm affected - state the effect followed by the cause
‣ Avoid double counting
‣ Provide an argument - determining expected net outcome. Argue and explain (may consider short term versus long term, or for-sure costs and benefits versus merely potential costs)

Question 12

How do you remain within the rules of the game?

Answer 12

• Remaining within the rules of the game: The rules check

◦ The purpose of the three rules is to prevent interference with the market's pricing mechanisms
	‣ No manipulation of demand - cannot impede the ability of an interested party to evaluate the firm's product and effectively compare it to competitors. Information needs to be complete and accurate. Forbids false or even misleading info, or witholding information
	‣ No manipulation of supply - cannot tamper with supply of goods and services available to consumers 
		• 1. Restricting the number of suppliers (dividing markets)
		• 2. Restricting amount supplied (firms cannot collude to try and limit supply within a given market ex. production quotas to force prices up)
		• 3. Linking suppliers together (Force purchasers who want to buy from one company to buy from another company)
		• 4. Linking good together (product bundling, forcing customer to buy two products) 
	‣ No direct manipulation of price 
		• Demand and supply are two components determining prices in a market, tapering with either indirectly affects prices. 
		• You can also directly effect prices. Ex. Price Fixing - where competitors collude on a pricing scheme that permits them to sell in whatever quantities for excess profits. 
		• Only way for a company to directly influence prices is by having considerable market power. 
		• Companies should be price takers not price makers
		• Can only really control prices if they are and should not be permitted:
			◦ 1) monopolist - the only supplier of a good 
			◦ 2) near-monopolist - has dominate market share 
			◦ 3) Oligopolistic - one of few suppliers (collusion)

Question 13

How do we apply the capitalist rule?

Answer 13

1. Maximize owner wealth (CBA) - determining the action that is expected to maximize owner wealth, using cost benefits analysis
2. Next need to remain within the rules of the game

    ‣ The judgement call - determine if the contemplated action is moral under capitalism. If it’s not permissible the company should not do it 
    ‣ You must do both CBA and the rules check

Question 14

• Aren’t capitalism and utilitarianism the same thing?

Answer 14

◦ They both consider pros and cons of the action. But the difference is the perspective. Meso- Theory Capitalism takes a narrow view (firm’s owners) and is narrowly concerned with market activity and assuring functioning markets(Just in the commerce domaine), Macro-theory while utilitarianism takes a broad view (entire society) and is concerned with the overall welfare of society (All societal domains).

Question 15

• Every exchange affects D, S, or P, so morally managers can’t do anything?

Answer 15

• Affecting vs Manipulating D, S, and P
◦ The problem is not affecting it’s manipulating
◦ Firms are allows to react to market forces but problem arises when they act on market forces.
◦ The signal that manipulation may be occurring is “extraordinary profits” sustained over a long period of time. (Ordinary profits = expenses of brining a good to market are covered and a living stipend for the over is provided (middle-class income))
◦ It is possible for extraordinary profits to be legitimately created by innovation and then suistained by ongoing innovation or simply dumb luck
◦ Extraordinary profits does not indicate for sure guilt, but warrants an investigation
• Proving manipulation - in our examples: honestly informing customers through advertising is “in bounds” as it follow the rules of the game: providing complete and accurate information. When someone withdrew from the market they are not going against the four supply rules - she is doing what the market is signally so that is allowed. Raising prices due to increase costs to manufacture is allowed.

Question 16

What is the role of the government and taxation?

Answer 16

• Taxation and the role of government
◦ What should the government be doing?
‣ 1) Protecting the marketplace from threats arising internally to be market, must maintain the judicial system and punish those who undermine the market by breaking rules of the game
‣ 2) Protecting the marketplace from threats arising externally to the market
‣ 3) Maintaining the money supply
‣ 4) taxing the marketplace participants
◦ What shouldn’t the government be doing?
‣ Dividing markets (violation of supply rule)
‣ fixing prices (price violation)
‣ Providing tax rebates for buying certain cars/tuition (demand violation)
‣ Government of a capitalist society should be enforcing the rules of the market not breaking them
◦ Many capitalists lean towards private enterprise as a solution to education, highways etc.
◦ critical infrastructure needed to undergrad a successful market place
◦ But education/transport needed for a smooth functioning market and critical for long term growth

Question 17

What is important about the nature of equilibriums?

Answer 17

Equilibrium=clearing price (demand=supply)
Markets tend to equilibrium. Are all equilibriums the equal? Not to ethicists.

There are good equilibriums and there are bad equilibriums, and their goodness is less a matter of what their market-clearing price is, and more a matter of how that price came about.

Question 18

What happens to equilibrium when you:
1. Falsely Advertise
2. Collude with competitors and divide market

Answer 18

When you falsely advertise demand will increase, people will be willing to pay more! Company will be eager to sell more and will crank production and reach a new equilibrium point.

When a company collude with another competitor and divide the market the supply decreases. With less supply firm can charge more and there will be a new equilibrium price.

Question 19

What is necessary price?

Answer 19

The minimum price at which a product must sell if suppliers are going to supply it. In other words, the price at which it is necessary for a product to sell at if
suppliers are going to be able to cover all the costs of bringing it to market.

Example: Albertan oil comes from the tar sands near Fort McMurray. Because it’s being extracted from sandy soil deep below the surface, it is expensive to
extract and refine. The cost of bringing it to market is about $50/barrel. This means that when the world-wide price of oil drops below that price, the Albertan
oil fields pretty much have to shut down, because they won’t be able to cover their costs of production.

Question 20

What are costs associated with brining a product to market? What the point of this?

Answer 20

COGS (inventory)
Operating Expenses (salaires, utilities, distribution)
Interest (on loans)
Taxes (municipale, provincial etc.)
Dividends

The necessary price of a product is the minimum price a product can sell for as determined by all the costs of bringing it to market. By all the costs, I mean all expenses (inventory, operational, interest, and taxes)
plus remuneration to the shareholders.
Note that different firms can have different necessary price points.Efficient manufacturers can make a product for less cost. Inefficient manufacturers make the same product but for a higher cost.

Question 21

What is important to note about excess prices?

Answer 21

Excess Profits = revenue - expenses - “reasonable” remuneration to shareholders. So the firm is earning profits way beyond what shareholders typically expect to receive from market investments, given those investments’ risk levels.

If a product is selling for less than a firm’s necessary price… then the manufacturer will stop making and selling it. (Think of Canadian oil producers.)

If a product is selling for more than a firm’s necessary price… then this will attract the attention of other potential suppliers (because it’s generating excessive profits—profits beyond all costs, including a
reasonable dividend to shareholders). Some will enter the market, because they’ll want a piece of those profits. Over the long term, then, supply will go up and price will come down, eliminating the profits.

Question 22

What is the purpose of a capitalist market?

Answer 22

Minimally regulated, atomistic, thousands of buyers and sellers for each product, prices are set purely.

Such that in the long term, excess profits are squeezed out and the price of a product sells at its necessary price.

There should be no excess profits over the long-term in a capitalist market.

Question 23

What’s the consequence of market manipulation?

Answer 23

Market manipulation is increasing demand artificially (by lying or withholding information) or by decreasing supply artificially (typically through collusion).

The only reason demand and supply are tampered with is to drive up prices. (So indirectly there is price manipulation.) Higher prices ultimately translate to excess profit.

Capitalists claim that market interference will create long term excess profits—that is, a wealth transfer from consumers to shareholders.

Question 24

What is the “punchline”

Answer 24

Why do capitalists believe that market participants must remain within the “rules of the game,” which have to do with preventing market interference?

When not interfered with the market will achieve the Necessary Price Equilibrium over the long-term, where excess profits will have been eliminated.

Violating the rules ultimately drives up the price of a good, creates excess profit, and thus prevents the market from selling the good at the necessary price.

Question 25

Is a supplier cooperative permissible in a capitalist system?

Answer 25

A group of competing dairy farmers cooperative through a dairy operation is the very nature of the business.

The question you need to ask is “is the purpose of the cooperative to reduce supply in the marketplace?” if yes then it should be disabled.

If no - then it could be helping as a whole to increase supply.

Question 26

1) Is capitalism about economics or about morality?

Answer 26

Economics - descriptive in nature
Ethics - normative
both about how people ought to behave
ex. Adam smith father of economics - philosophy doctor.

Question 27

What are two distinctions worth considering with economics vs ethics?

Answer 27

Prudential (taken to promote one’s self-interest) actions vs. moral (taken to promote some “higher” consideration) actions

Economic actions vs. moral actions
Economic—taken to promote wealth and income
Moral—taken to promote some “higher” consideration

Thus it would seem that a moral rule must promote a higher consideration - some greater good than mere self-interest. So…Capitalism’s rule is clearly economic in nature (it instructs us to maximize owner wealth), but does it promote some higher good.

What higher good does it provide?
- the Necessary Price Equilibrium

Question 28

What does the BBB quote mean?

Answer 28

It’s telling us that we’re social animals (we naturally form communities and live within societies) for a reason—we benefit from exchanges with others.

It’s telling us that others act self-interestedly—that is, trade (make exchanges) to their personal benefit. (And thus when dealing with others we must try to
convince them that a trade will be to their personal benefit.)

But in telling us this Smith is implicitly giving us permission to act in our own self-interest in our interactions (exchanges) with others.

Question 29

What does the invisible hand quote mean?

Answer 29

It’s telling us that if everyone acts to maximally satisfy their personal preferences, we will maximally satisfy collective preferences. Let each one of us focus on our
personal self-interest and in doing so we will end up collectively the best-off possible. (So you needn’t look out for the other guy, let the other guy look out
for themself.) If we act self-interestedly (but within the rules of the game) the invisible hand will lead us to a optimal outcome.

Capitalism as a pricing mechanism converts self-interest into other interest.

Morality in the commercial market is all about protecting the market and enabling it to maximally satisfy the collective consumption interests of society.

Maximally satisfying consumer preferences could be thought of as the commercial domain’s summum bonum

Question 30

What is the morality of business?

Do Mill’s, Kant’s and Capitalism rules all maximize wealth in the rules of exchange?

Answer 30

Yes! Capitalism rules apply to relationships between firms, Mill’s and Kant’s rules apply to relationships within firms.

Question 31

What are adversarial and cooperative arrangements?

Answer 31

Between firms: an adversarial arrangement the goal of the management of a firm is to crush the firms they are competing with while staying within the rules. ex. sports leagues, rights to lawyer

Within firms: a cooperative arrangement everyone is a team to collaborate and prosper together. Team needs to consider welfare (Utilitarianism) and respect (Kantian) the whole team.

Question 32

4) Who takes care of those who can’t take care of themselves? What is the role of welfare in capitalism?

Answer 32

Exchange lies in the heart of capitalism - to do so need 1) things you value available, 2) you have somethings others value, 3) Rationality of choice for personal benefit

But some people can’t exchange/have been dealt a worse hand.

Classical Capitalism - Smith+Friedman - makes no provisions to take care of people who can’t take care of themselves (they are screwed). Unfair! Welfare is a necessary add-on to capitalism (taxes)

Question 33

How to implement welfare?

Answer 33

Who qualifies for welfare?
How much they receive?
How they receive it?
What are they expected to do in return?
System for those trying to take advantage of it?

ALL DEBATABLE!

but what isn’t debatable is that welfare is necessary and that market participants need to be taxed to provide it.