GOV 120 Lecture 5: IR discussion questions

Considered by many to be the founder of modern economics, Adam Smith published his masterpiece The Wealth of Nations in 1776. Smith wrote in support of market economies as feudalism in Europe was unravelling. Hence, many of his insights clashed with the ideas of his contemporaries whom continued to be drawn to less modern notions of markets as governed by duties owed, hierarchy, master and servant, and paternalism. In Smith’s view, markets are guided by the self-interests of market participants, not by obligations imposed, moral or otherwise, by religious authorities, aristocracy, and crown.

Consider the following quote taken from The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens….Every individual…neither intends to promote the public interest, nor knows how much he is promoting it….He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part in it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Now suppose that Jim enters the market to purchase a gallon of milk from a local dairy. Jill enters the market to contribute $100 to a charitable cause. Based on Smith’s analysis, which transaction is guided solely by self-interest? How could either transaction contribute to the public interest? Is one superior to the other in that the first transaction confers mutual economic gains to both parties while the other confers a gain to only a single party? Are two gains superior to one? Briefly discuss.

Rules: Limit your thoughts to no more than two pages total, using Microsoft Word, 12 point type in Times New Roman font. Double spaced with one inch margins throughout. Do not worry about being right or wrong, the purpose of this exercise is for you to stretch your mind and to think critically

Terry Zupita is considering how to invest the modest amount ofmoney she recently inherited ($48,000). Based on her knowledge ofdifferent types of investments, as well as the advice of friends,Terry thinks that she should invest her inheritance in a long-termU.S. Treasury bond that promises to pay her $3,690 interest every 6months for 10 years. However, today at lunch, Terry asked her bestfriend Mike how he would invest the money. Mike responded that hethought she could invest in something other than the T-bond andearn a much higher rate of return. In fact, he told Terry that hewas at a company social a few nights ago where he overheard a fewpeople talking about a U.S. automobile manufacturer that ispartnering with the Chinese government to open a manufacturingoperation in Shanghai. The firm, named Universal Autos (UA), wouldhave exclusive rights to manufacture U.S. automobiles in China. Oneof the men involved in the conversation stated that he thought thearrangement presented a huge opportunity for UA to substantiallyincrease its profits during the next 10 years, which shouldtranslate into significant increases in the company’s stock price.All of the other people involved in the discussion agreed.Intrigued, Terry thought it would be a good idea to investigate UAas a potential investment, so she sought advice from her friendsand relatives. One friend advised against UA as an investmentbecause she had heard from another friend that the company does notadhere to the same labor practices as companies do in the UnitedStates. Another friend advised against the investment becauseworkers have no union representation, like those who work forautomobile manufacturers in other countries. And, Terry’s uncle,who works in the U.S. State Department, said that he had heard thatUA made a huge payment, which he called a bribe, to the Chinesegovernment before the deal was signed. Her uncle thought that thepayment UA made to the government might be considered illegal inthe United States. However, Terry’s boyfriend, who happens to beChinese, thinks that she should invest her money in UA. Accordingto information provided by his family and friends in China, theagreement between UA and china represents a historic business dealthat the Chinese government intends to support fully, so there islittle risk associated with the investment. In fact, according toher boyfriend, Terry’s $48,000 could grow to $112,500 in 10 yearsif she invests it in UA. If you were Terry, what would you do?Should you invest in a company that might have questionable laborpractices or pay bribes to foreign governments?

Apex Art has been requested to prepare a bid on 500 pieces offramed artwork for a new hotel. Winning the bid would be a bigboost for sales representative Jason Grant, who works entirely oncommission. Sonja Gomes, the cost accountant for Apex, prepared thebid and calculated full product Costs of $121,000. Based on thecompany policy of pricing at 125% of full cost, Gomes gives Grant afigure of $151,200 to submit for the job.

Grant is very concerned. He tells Gomes that at that price, Apexhas no chance of winning the job. He confides that he spent $500 ofcompany funds to take the hotel’s purchasing agent to a basketballplayoff game where the purchasing agent disclosed that a bid of$145,000 would win the job. He hadn’t planned to tell Gomes becausehe was confident that the bid she developed would be below thatamount. Gomes reasons that the $500 he spent will be wasted if Apexdoesn’t capitalize on this valuable information. In any case, thecompany will still make money if it wins the bid at $145,000because it is higher than the full cost of $121,000.

Gomes suggests that if Grant is willing to use cheaper materialsfor the frame, he can achieve a bid of $145,000. The artwork hasalready been selected and cannot be changed, so the entire amountof the reduction in cost will need to come from framingmaterials.

A note regarding the bidding process:

The hotel would announce that it is seeking bids from suppliersinterested in providing the artwork. The hotel would specify theirrequirements and a deadline for submitting bids. All interestedcompanies, such as Apex Art, would submit bids in sealed envelopes.After the deadline has passed, the hotel company would unseal thebids and, assuming that at least one supplier submitted a bidwithin their maximum price (this is the info that Grant obtainedfrom the purchasing agent which is not normally known to thebidders) would award the job. Generally, but not necessarily, thejob is awarded to the company with the lowest bid.

Approaches to Ethical DecisionMaking

There is a large body of workstretching back thousands of years that discusses ethics. The listbelow is not intended to be either comprehensive or exhaustive. Itis intended merely to provide a basic roadmap of the approachesthat are commonly applied to business situations.

Long Term Self-interest(Egoism) - You should never take any action that is not inyour or your organization’s long-term self-interest.

PersonalVirtue - You should never do anything that is not honest,open, and truthful and that you would not be glad to see in thenewspaper or TV.

Religious Injunction- You should never take an action that is unkind or thatharms a sense of community.

GovernmentRequirements - The law represents the minimal moralstandards of society, so you should never take any action thatviolates the law.

Utilitarian Benefits- You should never take an action that does not result ingreater good for society. (cost vs. benefitanalysis)

Individual Rights –You should never take an action that infringes on others’ agreedupon rights.

Justice - You shouldnever take an action that would result in an unfair sharing ofbenefits or obligations.

Stakeholders are persons orgroups with a legitimate interest in a company. Choose one or moreas the most significant (but not all of them).

Questions:

1. State and describe the issues, if any, which may potentiallyviolate ethical principles. Whose interests could be jeopardizeddue to the potential unethical behavior that you identified?Provide reasons why these stakeholders’ interests can bejeopardized.

2. What is Gomes’ rationale after Grant confides in her? Discussthe alternative courses of action that Gomes can take and thepossible outcomes.

3. What should Gomes do, and why? Elaborate.

4. What can you conclude if Grant were to take Gomes’suggestions, and what could be the consequences? What could be thepossible consequences for taking the suggestion that yourecommend?