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.

Tuesday, June 8, 2010

Is There a Market Fundamentalist Message in Principles Textbooks?

At the Canadian Economics Association Meetings in Quebec City at the end of May, Tony Myatt and I participated in a panel session we'd organized with textbook authors around the title of this post. From The Economics Anti-Textbook perspective, the answer to the question of whether there's a 'market fundamentalist' message is 'yes'.
  However, as we argue in the Anti-Textbook, the texts are not crude 'free market', laissez-faire tracts, and our critique is not a personal attack on their authors. What's going on is far more subtle.
  While we don't discuss this explicitly in any detail in the Anti-Textbook, I think a case can be made that the economics texts fit into the propaganda system more generally. For me, Edward Herman and Noam Chomsky's Manufacturing Consent provides a good way of thinking about that system. It's 'free market' propaganda, the result of the uncoordinated and decentralized decisions of a large number of people, all pursuing their self-interest. (Here, 'propaganda' just means the systematic propagation of a particular point of view.)
  In thinking about the products of that system, Herman and Chomsky point out that you have to think about two things. One is what is not said -- the ideas that are off-limits, like economic democracy in this case. That's not always easy to do. To paraphrase one writer about the media: the textbooks can't tell you what to think, but they can tell you what to think about.
 The second thing is to examine what's said. In the preface to their book, Herman and Chomsky write: “... even more important [than the things that are not said] ... is the question of the attention given to a fact – its placement, tone, and repetitions, the framework of analysis within which it is presented, and the related facts that accompany it and give it meaning...” (my emphasis)
  So where does 'market fundamentalism' come in here? George Soros, who originated the term explained that "It holds that the allocation of resources is best left to the market mechanism, and any interference with that mechanism reduces the efficiency of the economy." (On Globalization, p.4)
  Briefly, we argued that the textbooks do give this impression by spending roughly the first half of the book presenting a story of 'perfect markets', where indeed all 'interference' with the market does produce inefficiencies. Smith's 'invisible hand' metaphor is used to describe the market economy. Then, later in the book, students are supposed to unlearn this when, one by one, the sources of 'market failure' are revealed in more detail. But the impression of the efficient market economy has already been instilled. Market failures can appear more as exceptions to the general efficiency of most markets rather than the rule itself. But, as Joseph Stiglitz writes in his recent book Freefall, 'The invisible hand is invisible because it is not there.'