978-0470639948 Chapter 2 Solution Manual Part 2

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CHAPTER QUESTION 3: DESCRIBE HOW THE U.S. ECONOMY GREW BETWEEN

THE REVOLUTIONARY WAR AND WORLD WAR I.

Over the past 200 years industrialized society has doubled life expectancy, eliminated famine,

and developed a non-ending list of technological innovations that enhance the quality of life.

Purchasing power increased ten-fold during the twentieth century.

In slightly more than a century, the United States economy grew from family farms and

general merchants offering a wide range of products into the world’s largest economy.

The nation’s economic system uniquely blends entrepreneurial and large-firm capitalism.

Individuals are free to create or offer just about any product or service, and large-firms

provide mechanisms for bringing new product and service innovations to a global market

at affordable prices.

THE INDUSTRIAL REVOLUTION

The Constitution provided patent rights to inventors, which helped fuel innovation. The

U.S. Constitution, Article I, Section 8, authorized Congress “to promote the progress of

science and useful arts by securing for limited times to authors and inventors the

exclusive right to their respective writings and discoveries.” People could patent their

inventions.

The Industrial Revolution spread from Britain to the United States in the early 1800s.

Technological innovation and the division of labor significantly increased productivity

and reduced the price of products.

For instance, Elias Howe’s sewing machine in 1846 made clothing affordable for more

people. Sewing machines initially replaced laborers, but more laborers were eventually

needed due to the increased demand generated by lower prices.

The growth in the number of factories attracted more European immigrants seeking an

alternative to the poverty they had been experiencing.

Westward expansion required the transportation of goods to new markets, and resulted in

the creation of integrated industries, cheaper products, and job growth; technologies

needed to more quickly connect suppliers and buyers.

oTransportation systems needed iron and steel, and manufacturers of all these

products needed coal, oil, and electricity as sources of cheap energy.

oTelegraphs, telephones, postal services, and computers provided faster means of

communication over greater distances.

oApartments and houses were needed to shelter people, schools and colleges to

educate them, and movies and television to entertain them.

oBusinesses needed accountants to document revenues and expenses, and lawyers

to address legal issues.

ANTI-TRUST LAWS

Capitalism has an inherent contradiction.

oCompetition is good in part because it forces companies to become more efficient

and effective at providing quality goods at affordable prices.

oSuccessful companies increase market share and unsuccessful companies go

bankrupt or are acquired by successful companies.

oAs market share increases, some successful small businesses evolve into

medium-sized businesses and then large corporations.

oThe formerly highly competitive market becomes an oligopoly, where a handful

of large businesses compete against each other.

oThe best competitor acquires more companies, runs less efficient competitors out

of business, and evolves into an anti-competitive monopoly, an end result that is

not good.

 By the late 1800s, over fifty industries were characterized by one corporation controlling

at least 60 percent of market share.

The federal government attempted to counteract these anti-competitive trends by creating

the Interstate Commerce Commission in 1886, which determined reasonable railway

rates.

A few years later Congress passed the Sherman Antitrust Act of 1890, which outlawed

monopolies. Businesses could grow to a certain extent, and then any further growth was

illegal. Large corporations wanting additional growth had to apply their skills and

expertise in other industries.

DISCUSSION ACTIVITY

Small group or whole class discussion: There is a fine line between an oligopolistic market and a

monopoly. What percentage of a market should (your personal belief) a company, such as

Microsoft or Coca-Cola, be allowed to control before it’s considered an anti-competitive

monopoly and be broken up? [The answer depends on many variables, such as ability to dictate

price, barriers to entry are formidable; there is no one correct answer]

CHARTERS

Chartering laws changed in response to corporate growth, complexity, and political

power, but not always as anticipated.

In the late 1800s, states competed against each other by simplifying rules for obtaining a

corporate charter and eliminating restrictions to attract corporations that could increase a

state’s employment levels and tax revenues.

In 1889, New Jersey, seeking to attract businesses away from neighboring New York

City, lowered corporate tax rates and provided corporations the right to purchase stock in

other corporations through a holding company, which led to corporate growth through

mergers and acquisitions.

When New Jersey raised corporate tax rates, Delaware became the most

corporate-friendly state. Half of all publicly traded corporations are now incorporated in

Delaware.

CORPORATE LIABILITIES

Corporate complexity made it necessary to hold corporations, rather than specific

individuals, legally accountable. Who should be held accountable for the collapse of a

bridge that kills people? Should the harmed parties sue the employees who built the

bridge, the manager who established unreasonable work deadlines, or the product

supplier?

Changes in charter laws allowed those harmed to collect financial damages by suing the

corporation in addition to, or instead of, a particular employee. As a result, corporations

gained some obligations, and rights, previously limited to individuals.

The continual growth in corporate size led to the passage of shareholder “limited

liability” laws. If a small business is sued or fails, the owner is responsible for paying off

the lawsuit or debts. But potential purchasers of stock would not invest if personally held

liable for paying off a large corporation’s lawsuits or debt.

The new law limited an individual shareholder’s financial liability to the amount

invested.

CHAPTER QUESTION 4: WHAT PROMINENT LABOR ISSUES CHALLENGED THE

FAIRNESS OF FREE MARKET CAPITALISM?

Contrary to Adam Smith’s reasoned arguments, some people who benefitted the most from

capitalism misused their dominant positions to the detriment of laborers. The most notable

ethical problems included slavery, working conditions, and income and wage inequality.

SLAVERY

The number of slaves grew dramatically just prior to the Revolutionary War, from

120,000 in 1756 to 500,000 in 1776.

STRIKES AND LABOR UNIONS

A labor union is an association of employees that advances its members interests, such

as wages, benefits, work rules, and other conditions of employment, through collective

bargaining with an employer. Unions reduced power imbalances between owners and

laborers by organizing employees to speak with a single voice against what they

considered unethical treatment.

In 1840, Philadelphia strikers won the right to work only ten hours a day. This became

the standard for federal employees. But most still worked at least 10 hours a day.

On May 1, 1886 unions across the nation went on strike for the eight hour work day.

Proponents maintained that a day should be equally divided into three parts: eight hours

for work, eight hours for personal interests, and eight hours for rest.

The Taft Hartley Act of 1947 placed limits on strikes and prohibited Communist Party

members from holding union offices.

WAGES AND COMPENSATION

Income Inequality

Income inequality is not unique to capitalist societies, found in all economic systems.

Capitalism’s emphasis on liberty has increased national wealth more than any other

economic system. In the United States, median family income, adjusted for inflation,

increased from $47,400 in 1977 to $58,400 in 2005. Median income declined during the

2007-2010 financial crisis, dropping to $49,777 for 2009.

DISCUSSION ACTIVITY

Small group or whole class analysis: Assume you graduate from college and over the course of

your career you earn the median salary of a college graduate. How much income will you earn

before you retire ($55,656 x 45 years = $2.5 million)? Assume you drop out of college and over

the course of your career you earn the median salary of someone with a high school degree. How

much income will you earn before you retire ($33,801 x 45 years = $1.5 million)? What is the

income difference between the two groups ($1 million)?

Minimum Wage

The “minimum wage” refers to the lowest wage an employer can legally pay an

employee, an amount higher than what the market would otherwise establish.

In 2008, approximately 2.2 million American wage earners were paid wages at or below

(such as waiters/waitresses) the minimum wage [$7.25 an hour in 2011]. This represents

3 percent of the nation’s 75.3 million hourly wage earners aged 16 and over, a significant

decrease from 13.4 percent in 1979.

Established federally by the Franklin Roosevelt Administration’s Fair Labor Standards

Act of 1938.

The ethical principle guiding the legislation was “a fair day’s pay for a fair day’s work.”

The initial legislative bill proposed for certain industries and extended to other

occupations.

It is periodically increased by Congressional vote, not indexed to inflation.

The minimum wage’s purchasing power peaked in the mid-to-late 1960s and has declined

steadily since then.

Some free market advocates oppose minimum wage laws because the:

oviolate the constitutional right of employers and employees to freely enter into

contracts

oartificially raising wages above free market rates, hurting those it is intended to

benefit by increasing unemployment, contributing to inflation, and discouraging

business investment and growth

othe extra labor costs force employers to hire fewer low-skilled employees and/or

increase their prices

Living Wage

A full-time employee earning a minimum wage does not derive enough income to exceed

the poverty threshold.

A “living wage” refers to the amount of money a full-time employee needs to either

afford the basic necessities in life or exceed the poverty threshold.

It is based on the principle that people working full-time should earn enough money to

financially support their families.

 Living wage proponents typically recommend indexing the minimum wage to the

poverty threshold. In 2006, prior to the 2008 recession, more than 29 million employees

earned wages below the official poverty threshold, defined as $9.91 an hour for a

full-time employee.

Most living wage initiatives are local municipal ordinances. Many, but not all, of them

apply to private companies providing city services.

Proponents argue that city government should not contract services from private

employers who pay below poverty-level wages.

In 2003, San Francisco mandated a living wage for all city businesses with at least 10

employees. By 2007, 134 municipalities had some type of living wage ordinance.

DISCUSSION ACTIVITY

Have each student visit the Economic Policy Institute’s “Basic Family Budget Calculator”

available at http://www.epi.org/content/budget_calculator/. Enter that you are a single

parent with one child, your state, and area. Write down the individual items and amount, and

annual amount. Now calculate how much income a single parent would earn annually at a

minimum wage job ($7.25 an hour in 2011 x 40 hours times x 52 weeks = $15,080). What costs

included in the Budget Calculator would you cut?

Executive Compensation

The average compensation for a Fortune 500 Chief Executive Officer in 2008 was $11

million, which includes stock options.

Assuming a CEO worked 12 hours a day, six days a week, and took a one week vacation,

that amounts to approximately $30,000 a day. Motorola’s 45-year old CEO Sanjay Jha’s

$104 million compensation in 2008 translates into $23,901 an hour, or $286,813 a day.

At publicly held companies, the ratio of CEO pay to that of an average employee

increased over a period of 50 years from 24:1 (the average employee worked 24 days to

equal the daily wage of a CEO) to 275:1 (the average employee worked 275 days to equal

the daily wage of a CEO).

In the 1980s, Ben & Jerry’s addressed the compensation fairness issue by establishing a

five-to-one salary ratio between the highest and lowest paid employees. However, the

compensation plan was abandoned in the 1990s due to difficulties Ben & Jerry’s

experienced trying to recruit skilled senior-level managers willing to accept this pay

limitation.

 Why have the salaries of top executives increased exponentially compared to the salaries

of average workers over the past fifty years?

oTypically, a compensation consultant presents the company’s Board of Directors

with compensation and benefits packages of other CEOs in the same industry.

oBoard members, who are also highly-paid executives and often hand-picked by

the CEO, choose a compensation package toward the high end of the scale so as

not to lose the CEO to a competitor.

oCompanies that do not match CEO compensation increases consider themselves at

a bargaining disadvantage because the CEO could switch to a competitor and

offer higher paying jobs at their new companies to the best members of their

former executive team.

In 2009, the federal government tried to determine “fair compensation” for the

twenty-five top executives at any large financial firm that accepted some of the $700

billion federal bailout money.

oKenneth Feinberg, appointed by the U.S. Treasury Department, proposed a

maximum of $500,000 base salary, no cash bonuses, and the remainder

compensation in “salarized stock” payable in one-third installments between two

to four years from when earned. For instance, a $9.5 million salary for 2010 is

disbursed as $500,000 in cash and $9 million worth of company stock.

One-third of the salarized stock becomes available for sale in 2012

one-third in 2013

and one-third in 2014

DISCUSSION ACTIVITY

Small group or whole class discussion: The ratio of CEO pay to that of an average employee

increased over a period of 50 years from 24:1 (the average employee worked 24 days to equal

the daily wage of a CEO) to 275:1 (the average employee works 275 days to equal the daily

wage of a CEO). Is this fair? Should CEO’s pay be capped at a particular income or ratio? If so,

at what amount or percent?

ADDITIONAL QUESTION 1: HOW HAVE STAKEHOLDER RIGHTS BEEN

EXPANDING SINCE THE 1960S?

Since the 1960s, profit maximization and the rights of owners came under attack by social

activists who believed business was a detriment, rather than a contributor, to improving the

CONGRESS UNDER A DEMOCRATIC PARTY PRESIDENTIAL ADMINISTRATION



Protecting Consumers, Employees, and Communities

Congress approved the Food, Drug, and Cosmetic Act Amendments (1962), Air

Pollution Control Act (1962), Equal Pay Act (1963), Civil Rights Act (1964),

Equal Employment Opportunity Commission (1964), Cigarette Labeling and

Advertising Act (1965), Fair Packaging and Labeling Act (1966), Child Protection

Act (1966), Traffic Safety Act (1966), Coal Mining Safety Amendments (1966),

Flammable Fabrics Act (1967), Age Discrimination in Employment Act (1967),

Consumer Credit Protection Act (1968), and Interstate Land Sales Full Disclosure

Act (1968).

CONGRESS UNDER REPUBLICAN PARTY PRESIDENTIAL ADMINISTRATION

Protecting Consumers, Employees, and Communities

Congress, under Richard Nixon and Gerald Ford’s Republican Party presidential

administrations, approved a similarly large number of regulations and federal

agencies to protect consumers, employees, and communities from unethical

business practices. These regulations and regulatory bodies included the

Securities Investor Protection Act (1970), Poison Prevention Packaging Act

(1970), Environmental Protection Agency (1970), Occupational Safety and Health

Administration (1970), Consumer Product Safety Commission (1971), Employee

Retirement Income Security Act (1974), and Toxic Substances Control Act

(1976).

ECONOMIC DEREGULATION

In the 1980s, Republican President Ronald Reagan argued that the high costs associated

with the onslaught of government regulations outweighed the benefits.

The Reagan and George H. W. Bush Administrations began to deregulate the economy, as

did the administrations of Democratic President William Clinton and Republican

President George W. Bush.

FOUR TYPES OF SOCIAL RESPONSIBILITIES

As noted by Professor Archie Carroll, there is general consensus that businesses have

four types of social responsibilities:

oEconomic

oLegal

oEthical

oPhilanthropic

DISCUSSION ACTIVITY

In small groups or as an entire class: Do you believe the costs of government regulations exceed

the benefits? Why? Do we need more or less government regulations? Why?