Friday, June 25, 2010

There is (supposedly) no 'exploitation' if people can choose

I recently received a copy of Economics for Life: 101 lessons you can use every day (3rd edition) by Bruce Madariaga. Many of the 'lessons' are perfectly reasonable, but one caught my eye. It was entitled "Sweat Shops Expoit Workers in Poor Countries". As every orthodox student of economics knows, this is nonsense as long as work is not forced. (Forced work and slavery is obviously exploitation and is not as rare as you  might think.)
  Prof. Madariaga explains (p.73) why 'sweat shop' labour is good: "... for many people living in less developed countries, even a very hard, very low-paying 'sweatshop' job is much better than no job at all... They choose to work long hours in unsafe conditions for very low pay, because the alternative (having no income) is worse."
  He adds: "It may seem humane to include, within trade agreements, labor rights standards that require all workers to be provided safe working conditions and minimum wages. But doing so would raise employers' costs of employing workers. Employers would respond by hiring fewer workers and possibly by going out of business. The elimination of work opportunities would end up hurting many of the people such labor rights requirements are intended to help."
  This is a nice example of what Albert Hirschman in his 1991 book The Rhetoric of Reaction calls 'the perversity thesis'. This is a reactionary argument against a progressive-looking policy in which it's claimed that the policy in fact would be perverse by hurting those it's intending to help. (It's a familiar argument made against minimum wages in general.)
  I was reminded of the appeal of this kind of argument recently when reading Paul Krugman's blog of 9 June in which he speculated on the strange appeal of promoting government spending cuts when unemployment is so high: "What I think is happening is that we’re seeing the deep seductiveness, for many economists (and others), of taking what sounds like a tough-minded position in favor of inflicting pain on the economy — and the people who make up that economy." He quotes from Keynes in The General Theory: "That it [classical economics, in this case] reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue."
  So what's wrong with the standard argument that Prof. Madariaga puts forward? 
  Here's an extract from a fine book by Daniel M. Hausman and Michael S. McPherson, Economics Analysis, Moral Philosophy, and Public Policy (Cambridge Univ. Press, 2006):
  "Consider an agreement between a billionaire and a beggar whereby the beggar agrees to work 16-hour days in exchange for gruel and a straw mattress. Both parties may be rational and well-informed and may enter the agreement 'voluntarily'. (As we will see ... in the next chapter, to maintain that any exchange not involving physical force is voluntary is to make a controversial moral claim.) But the billionaire nevertheless is exploiting the beggar. No matter that the beggar may agree without reservations, the arrangement seems to most people unjust."
  The textbook approach dismisses this and indeed insists that any exchange not involving physical force is indeed voluntary and gives its blessing to the outcome. What this obviously misses is that other, more ethically acceptable, outcomes were possible, but did not happen -- in  this case because of the disparity in bargaining power between the two parties.
  A recent report by the Australian Broadcasting Corporation ('Horrendous' sweatshops ditched for Australian made') states: "Work conditions in China have come under fire in the past month, after about a dozen workers committed suicide at an electronics factory in Shenzen." Using the textbook logic, these suicides were also voluntary acts, making the (now former) workers even better off than when they were employed, when they were, in turn, even better off than they would have been without those jobs, so none of this poses any ethical problems.
  As we also note in The Economics Anti-Textbook (p.233), "consumers may care about how the products they buy were produced", a point uniformly ignored in the textbooks. Someone who gets paid 10 cents to sew a $50 shirt could have their income raised by a factor of 5 if consumers were willing to pay an extra 40 cents for the shirt accompanied by a guarantee that the extra money would indeed go to that worker. Kimberly Ann Elliott and Richard Freeman have an interesting essay on this topic with evidence about how much more consumers might be willing to pay for such credible information.