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Why do firms exist and should they have a social conscience?

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Introduction

´╗┐Why do firms exist and should they have a social conscience? ________________ Many economists, especially those of a liberal disposition, believe entirely in the market. They state that the free market is the best way to allocate resources to those who need it most and that if it was left to individuals, we?d all be much worse off. Yet in the real world, no-one ever questions whether or not we should get rid of firms, many have become household names throughout the world. So if the market is perfect, why do we also have firms? How do they fit together? Since firms are widely accepted to be part of the community, they provide jobs and supply us with all the products we need, should they have a social conscience? This is often an issue as we here of large companies such as Nike and Apple exploiting workforces and oil producers like BP polluting our environment and there is normally an outcry against them. Whilst the public opinion suggests that they should have a conscience, in pure economic terms, I don?t think they should. Ronal Coase argued that the reason firms existed was to reduce transaction costs. A transaction cost is a cost incurred in making an economic exchange, such as enforcing contracts, negotiating prices and hiring workers. ...read more.

Middle

Planned economies have traditionally been associated with communist dictatorships and if we look at the economic success of them, it?s quite clear that they simply don?t work as well as the free market mechanism. If we compare the GDP of Chile and Cuba, we can see how this planned, government controlled government inhibits economic growth. They both had long standing dictatorships who controlled the economies throughout the 70s and 80s. The difference came that in 1993, Augusto Pinochet fell from power in Chile and since then, there has been huge GDP growth, meanwhile Cuba is still under the control of Fidel Castro and we can see how far it fell behind. Despite in 1979, their economies having equal GDPs of around $20 billion, by 2008, Chile?s GDP had risen to $180 billion, whilst Cuba could muster barely a third of this with $60 billion thus providing clear evidence that a market economy leads to higher growth. Whilst I do believe in this principle, it has to be said that there are other reasons for the disparity in growth such as Chile having some precious metals as well. The role of a firm is to please its stakeholders; therefore, whether or not it should have a social conscience is depending on whether or not it would be in the interest of the stakeholders. ...read more.

Conclusion

This is easy to justify in a number of ways. Firstly, companies pay corporation tax, income tax and several other taxes which are then used to help the rest of society by building hospitals, protecting the environment etc. Secondly, the state has employed a minimum wage and this means that no members of society are exploited by firms and thus it reduces the gini coefficiency of a country. Finally there are a number of pollution laws to prevent firms from just dumping their waste which would leave society at a loss. However, there is a counter argument based upon the Ben & Jerry?s example and that is that current financial laws mean that during a transaction, the board of directors are forced to sell to the highest bidder, thus putting profit before social welfare. To conclude, firms exist because they can act far more efficiently than individual traders, meanwhile historical evidence and public opinion states than governments are also inefficient and handling economies. I do believe firms should have a social conscience but I believe this is fulfilled merely by paying tax. Beyond that, for an economy to flourish, decisions should be taken with economic not social consequences considered. With the revenue from the tax, the government should be able to fix any social issues created by these firms. However, some firms, such as Starbucks and Boots try to avoid paying tax and I believe this is morally and legally wrong. http://www.investorwords.com/8175/planned_economy.html#ixzz29gUGyEQM http://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:CHN&dl=en&hl=en&q=china+gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:CUB:CHL&ifdim=region&hl=en_US&dl=en&ind=false http://en.wikipedia.org/wiki/Chile#20th_century http://www.economist.com/node/17730360 http://opinionator.blogs.nytimes.com/2011/04/11/a-scorecard-for-companies-with-a-conscience/ ...read more.

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