- Out of Poverty: Sweatshops in the Global Economy by Benjamin Powell – February 23, 2016
Points to consider in the sweatshops presentation by Benjamin Powell:
Much of the appeal of the lecture comes from the point Dr. Powell makes when he asks about how much you can pay a worker for a day’s work when that day’s work adds $2 to the value of your product. The correct answer is you cannot pay the worker more than $2. Dr. Powell claims that in some places the efficiency of workers (as determined by local infrastructure, not by the skills of the workers) are much lower than in America, and therefore labor is less expensive in those places, and therefore manufacturers will prefer to have labor-intensive operations moved to those low-labor-cost places.
Dr. Powell is obscuring the issue. The efficiency of the worker (how much value the worker adds to the product through processing) isn’t so much the deciding factor; the real issue is how much lower than their efficiency the worker can be paid. There will always be a ratio of labor cost to labor efficiency. If a worker is paid $1 per hour and adds $2 of value to the products that worker is processing each hour, the worker is essentially doubling the capitalist investor’s money. If a much more efficient American worker can add $20 of value to the products that worker is processing each hour (ten times more productive than the third world worker), but must be paid $16 per hour for the labor, the capitalist investor is only getting 120% ($1.20 for every $1.00 spent on labor). Capitalist decisions to invest in overseas production is based not on lower labor costs, but on the lower ratio of labor cost to labor efficiency or value. If workers in a poor country must be paid greater than $1.60 per hour when their productive enhancement of the products they handle only increases value $2.00 per hour, it will be more profitable to hire American workers at $16 per hour who add $20 of value.
On average, employers everywhere pay their workers less than the value those workers add to the products the workers are producing. Partly this is because money must be extracted from the workers’ pay to cover the costs of operating a factory (managers, administrators, custodians, physical plant maintenance, insurance, paperwork related to conforming to safety and anti-pollution regulations, and so forth). Partly this is also because capitalists must have a reasonable expectation that the return on their investment will exceed what they could get elsewhere… that is, if you could earn 10% interest in some safe investment with government-backed securities, you would have no reason to invest money in a more risky proposition (owning a factory) where your return on investment would give you 5% interest. (By the way, employers do not always under-pay their workers to cover other costs related to business operations and the expectations of profit; it is quite possible that some workers are over-paid for their contributions to the firm, often because of cultural expectations or business customs, and it’s only on average when we sum up all the wages of all the workers and compare this to the overall gains of the entire enterprise that we must, in the long-term, always find labor costs below the gains in value).
A key moral and economic argument against sweatshops isn’t that the wages are low. The argument is that there is a “fair level of exploitation” related to the quality of the job and the efficiency of the worker. It is not the case that workers are paid $1 per hour for producing $2 of value to their employers… that is actually a fairly normal ratio, and is, for example, better than the ratio of compensation to value received by professors at UIS. The problem is that in the same countries where wages are low, local elites and capitalists and the government work together to ensure that the ratios between labor costs and value added are much lower. A worker may add $3.30 per hour in value to the product and receive 33¢ per hour in compensation, a ratio of labor-to-value that gives investors about $10 of value for every $1 in labor costs. An argument on fairness and social justice would claim that their ought to be a ceiling to this ratio, perhaps with different ceilings in each society based upon its level of development, but in no society should the ceiling to this ratio exceed some number. Perhaps in a poor country the fair ceiling is $4 of value to $1 paid to the worker, while in a medium-income country the ceiling ought to be $3 of value to $1 paid to the worker, while in a wealthy country the ceiling ought to be $2.50 of value to $1 paid to the worker. But, everywhere, there ought to be some sort of natural limit to how much exploration is still acceptable, and the argument by anti-sweat-shop activists should be that a number that allows reasonable profits without obscene exploitation ought to exist, that “good factories” in poor countries will be able to pay it and still make profits, and “sweatshops” will pay less than it.
For example, let’s say a factory in Sri Lanka or Burma is producing jackets, and a typical team of ten workers can sew 50 jackets per hour, and the pre-sewn parts of the jacket are worth $50 ($1 of materials for each jacket) and after being sewn, if sold to the domestic market from the factory door, each jacket could be sold for $3. This means that those 10 workers took in $50 of jacket materials and produced $150 of jackets by sewing during that hour. That means that the workers added $100 of value in that one hour. As there are ten workers in this team, that means the workers each added $10 in value per hour to those jackets. The argument against sweatshops is that there ought to be a minimum standard of how much those Sri Lankan or Burmese tailors are paid, and if the ratio is $1 paid in labor to $10 given in value, the wage ought to be about $1. In America, with better equipment and more machine tools, it might be possible to run a factory that assembles and sews jackets with 10 workers taking $500 of jacket materials and producing 90 jackets per hour that could be sold for $9 per jacket (materials worth ten times the value of the materials used in Sri Lanka or Burma to produce 90% more jackets that could be sold for three times the price). That would a case of workers turning $500 of materials into $810 of jackets, for a value gain of $310 per hour, or $31 per worker. In America, those skilled workers, working in a highly mechanized plant, might be paid $15.50 per hour. The company could be quite profitable with this arrangement, but the investors would only be earning $2 for every $1 invested in labor, and they would also have higher costs for conforming to regulations or purchasing and maintaining the equipment that allowed their worker to make 9 higher-quality jackets per hour per worker while workers in Sri Lanka or Burma could only produce 5 lower-quality jackets per hour per worker. The investors could make far, far higher profits by investing in jacket production in Sri Lanka or Burma where $1 invested in labor gave $10 in value. It’s not the $1 per hour wage in Sri Lanka or Burma that attracts investors compared to the $15.50 per hour wage in the USA; it’s the ratio of $10 value gained to $1 invested in the labor costs that makes Sri Lanka or Burma attractive.
Now, Dr. Powell is saying something very non-controversial when he says that investment in poorer countries where wages are lower can give higher profits to investors, and therefore it happens. He is also correct that historical evidence confirms that as investors compete to attract low-wage workers in poor countries, wages in the poor countries will rise and working conditions will improve. If labor costs are lower and productivity is similar, or if productivity is lower but wages are much, much lower, we have a situation in labor called “competitive advantage” or “comparative advantage” and investment will flow into labor-intensive production in places with a comparative advantage in low-cost labor. Some places where wages are low relative to productivity of workers are naturally going to attract foreign investment in labor-intensive production. In the example I gave, American workers were able to produce nearly twice as many products per hour than their competitors in poorer countries, and their products were of higher quality so that the lowest prices that would be paid for those products were also three times higher, and in raw terms, the factory owners in America were getting $15.50 more in value than they were paying in labor compared to the $8 in higher value compared to wages in Sri Lanka or Burma. Yet, the ratio of cost to value was what made Sri Lanka or Burma a more attractive place to invest in the jacket factory ($9 for $1 is much better than $31 for $15.50, which is $2 for $1).
With some products, the technology is such that the maximum productivity is approximately the same in the poor countries as it is in the wealthy countries. Let’s imagine a product where, with the best factory using the most up-to-date technology a worker in Sri Lanka can produce 10 per hour and a worker in the USA can also produce 10 per hour… there are almost no efficiency gains at all in the USA. In such an industry it is natural that production will move to poorer countries. If the cost-of-living in India or Sri Lanka or Burma or Kenya is such that we can pay workers $0.65 per hour in the local currency and they can produce approximately the same quantity of goods at approximately the same quality level as what we could get from American workers paid $15.50 per hour, then of course India and Sri Lanka and Burma and Kenya will get the factories. The moral argument against sweatshops is this: if the efficiencies of the workers are about the same, and the quality of the goods is about the same, then there ought to be a society-imposed constraint on the level of extraction of profit from the workers. If the American workers paid $15.50 per hour are generating $31 in value per hour, and the workers in poor countries are also generating something close to $31 in value per hour (let’s assume it’s about $25 in value per hour), then the ratio of wage to value can be somewhat better for the capitalist in the poor country, but not obscenely so. If the workers generate $25 of value per hour, a wage at American levels of profitability ($2.5 to $2 value per $1 of labor) might be somewhere between $10 and $13, and for a medium-income country like Mexico or Turkey or Romania ($3.5 to $3 value per $1 of labor) the wage might be somewhere between $7.50 and $9, and for a low income country ($4.5 to $4 value per $1 of labor) the lowest wage might be between $5.50 and $6.25.
The argument against sweatshops is not that wages are lower. The argument is that while wages ought to be lower, they are too low. In the example above where tailors working in a factory in a low-income country were generating $10 of value per hour making jackets, perhaps the fair wage is $2.00 or $2.50 per hour, and in fact they are only paid $0.50 or $1 per hour. In the example above where the value given was $25 per hour we suggested with a 4-to-1 ratio ceiling the wages ought to be around $5.50 to $6.25 per hour, but perhaps the workers are only paid $2 or $3 per hour.
Dr. Powell’s whole argument is based on the idea that the “market” will make employers bid for good workers and raise wages up to levels that support adequate profits while simultaneously raising wages locally. The counter-argument he never addresses is that the “market” is distorted by artificial constraints on worker’s ability to sell their labor to higher bidders and constraints on factories and investors preventing them from raising wages. That is, in these poorer countries non-democratic tyrannies enforce low prevailing wages and prevent workers from asking for more, and also prevent investors from paying more. Wages do increase, and conditions do improve, but that process is artificially slowed or temporary halted by unfair practices in which elites, capitalists, and investors work together to use intimidation, murder, wage-price fixing (at artificially low levels) and so forth to keep ratios of wages to value of labor in a realm where profits are obscene.
If there were international standards of acceptable limits to the ratio of wages to labor value, the poorer countries could compete against the wealthier countries, jobs would continue to flow to the poorer countries, and investors would continue to make more profits from labor in the poorer countries, but wages would be relatively higher (low skilled worker might make $2 per hour rather than 50¢ per hour in the poorest countries, and more highly skilled workers in more modern factories in poor countries might make $5 per hour rather than $2 per hour). All Dr. Powell’s arguments in favor of low-wage work in poor countries would still hold true, but workers would enjoy immediate dramatic improvements their quality of living, paid for by reductions in capitalists’ profits from super high levels to merely high levels.
One of his counter-arguments is that exploitive wages (say, paying 50¢ rather than $1 or paying $2 rather than $5 per hour) is a better situation for workers in poor countries than no foreign investment at all. There are two problems with this argument. First, he has created a false dichotomy. The correct anti-sweatshop argument isn’t that there should be no low-wage factories in low-wage countries taking advantage of the comparative advantage in labor costs. The correct anti-sweatshop argument he should be addressing is that low-wage factories ought to be forced to adhere to international standards of how much labor can be exploited, and those standards ought to be instituted to counteract tendencies of local business owners in the third world from extracting too much profit from their workers. If low income countries are permitted a $4 value to $1 labor cost ratio as a minimum standard, they will still have an advantage over nations where the prevailing ratio is $3 value to $1 labor cost. And, even if the ratio of value to labor is held the same everywhere (at, say, $3 to $1), the factories in poor countries will still have a comparative advantage in production where labor efficiency is about the same in their country as it is in high-wage countries.
The second problem with this argument that sweatshops are better than nothing is the lack of any valid moral argument behind it. The argument that there ought to be limits to exploitation, and that free societies ought to only trade with societies where these limits to exploitation are set and enforced, is a moral argument about defending workers from excessive profit-taking by capitalists. The argument that investment and competition ought to be allowed anywhere because it raises the standard of living in the poorest places is amoral, and would lead to competition between free workers and oppressed workers so that societies that allowed the oppression of workers would have trade advantages.
For example, if America still had slave labor in the south, profits would be higher in the south, and poverty would be higher there as well, because free labor would experience depressed wages due to competition with slave labor, and slave labor would be poorly compensated). In such a situation, Dr. Powell’s argument would be that we ought to encourage investment in the slave-holding south because the increased investment there would create competition among slave-holding capitalist factory-owners to improve the productivity of their workers, which in turn would create a demand for improved conditions for their workers (better food and medical care, and perhaps shorter hours if it turned out that workers produced more in 50 hours of labor per week than they did in 70 hours of work per week). Dr. Powell’s amoral “moral” argument for investment in the south would also claim that greater wealth from the increased production in the south would generally improve the standard of living throughout the south for both free labor and slaves. Without the investment, Dr. Powell would claim, the slave-holders could just continue with their traditional styles of production and the south would remain in poverty and the slaves would remain miserable in a stagnant economy. Or, take his pro-sweatshop argument to Nazi work camps. He might argue that buying the products of Nazi work camps kept up a demand for the products of those camps, and gave the Nazis incentives to not exterminate the workers. If we hadn’t purchased the products of the labor camps, the workers would have been liquidated by the Nazis, and so there was be a moral imperative for us to purchase the products of those camps. By creating a false dichotomy between the bad situation of supporting hyper-exploitation of workers and investing nothing in job opportunities (even in slavery, even in Nazi work camps, because we will ignore the conditions of the workers in the camps as compared to any absolute moral standard and only compare it to the relative standard of having no investment for new work opportunities for those workers), Dr. Powell gives us an amoral situation that allows us to ignore a range of moral considerations about the means of production because we are narrowly focusing on only the moral argument that something is relatively better than nothing.
The alternative to Dr. Powell’s amoral argument is to make a moral argument that we ought have free trade with free societies that enforce labor and environmental standards with which we agree. High tariffs or outright bans on trading with unfree societies where ratios of value to labor gave obscene profits to local capitalists would direct foreign investment into societies where liberty prevailed and ratios of value to labor compensation did not exceed standards of human decency. This would allow the benefits of free trade to raise standards of living in the poorest free societies, and would prevent the growth of wealth and power among the elites and capitalist classes in the unfree poor societies. Such a situation would create an incentive for elites and capitalists in the unfree societies to adopt universal labor standards and liberate their people so that they could participate in trade and gain the benefits from free trade.
Dr Powell described Hong Kong as one of the societies enjoying the greatest freedom. He claimed that this freedom allowed economic expansion and great wealth in Hong Kong. This is a half-truth. It is true that in 1997 when Hong Kong was taken by the dictatorship in Beijing, the per-capita GDP of Hong Kong was higher than the GDP of the colonizing country, the United Kingdom. It is also true that there is tremendous wealth in Hong Kong. However if we look at standards of living using medians rather than averages, we find that Hong Kong people have had worse conditions than the British. Poverty, and the living conditions for those who are in poverty or near it, are very bad in Hong Kong, and have always been so. Much of the wealth in Hong Kong is not generated in Hong Kong through it’s “free economy.” Instead, money flows out of the dictatorship ruled by Beijing, where great fortunes are amassed but private property is not secure, and this money ends up in Hong Kong, raising prices and inflating the incomes of the professional classes and investors and all those in the upper end of income and wealth distribution. So, Hong Kong has become a safe haven for China’s wealth. Hong Kong is also a tourist destination for Chinese and others in Asia. So, the concentration of wealth brought by visitors and outside investors creates a very high per capita GDP and average personal income and wealth in Hong Kong, but among the lowest half of the population, life is not very good at all. And, Dr. Powell’s suggestion that the cost of living in Hong Kong is not very high seems ridiculous. Hong Kong is ranked by Mercer’s as the second most expensive city in the world for cost-of-living. The most expensive city in the USA is New York City, which ranks 16th in the world. Hong Kong is more expensive in terms of cost-of-living than even Zurich or Geneva. The “freedom” in Hong Kong is not very good. If the institutions were democratic, the working classes would have greater power in the legislature, and minimum wages would increase and the welfare system to protect the poor and working classes would expand. However, Hong Kong is not free, and it does not have free elections to select the majority of its legislative body or its top administrator. The executive leadership in Hong Kong is appointed by a dictatorship installed by a military take-over of China and perpetuated by a police-state based in Beijing that imprisons, tortures, and kills opposition. Lately, journalists in Hong Kong who criticize the regime in Beijing have been kidnapped and removed from Hong Kong to face an unpleasant fate in China.
Dr. Powell showed a comparison of wages in the sweatshops to the prevailing wages in the surrounding economy. Some of the wages in so-called “sweatshops” were much higher than prevailing wages in the local economy. I think Dr. Powell is probably correct that these are unlikely to be real sweatshops. They could be. Perhaps the prevailing wages in that area give investors $10 value to $1 labor cost and the better wages in the so-called “sweatshops” are merely $5 value to $1 labor cost, still excessively exploitive, but not as bad as the prevailing practices. A problem here that Dr. Powell correctly addresses is that too many Americans, ignorant of economics, condemn all low-wage factories in low-wage countries as sweatshops. However, when Dr. Powell shows his graph, there are some places (in Thailand and South Africa, for example) where wages in the sweatshops are far below local prevailing wages. In those cases, he explains, he found that the sweatshops were exploiting refugee or immigrant labor (e.g., South African factories might hire economic refugees from Zimbabwe, and Thailand’s factories might hire refugees from Burma). In these cases, the factories could presumably make decent profits paying the prevailing wages, but pay much less than the local prevailing wages because they have a special power over their refugee immigrant labor force. This is sweatshop work at its worst, because the wages are excessively exploitive. The free market is not working here, because the employers are using a special workforce they can exploit and control.
Dr. Powell’s point is that the refugee workers are relatively happy, as they would rather work for their capitalist employers in South Africa or Thailand compared to the working situation they would face back home in Zimbabwe or Burma, or on the farm. He has again made the same logical error of a false dichotomy. The choice should not be for these workers to either work back home for 35¢ an hour or work in South Africa or Thailand for 75¢ per hour when prevailing wages in South Africa and Thailand are $2.50 per hour. No, the choice should be between working for 35¢ back home or working for $2.50 per hour in South Africa or Thailand just like all the other workers in their community. The problem isn’t the one Dr. Powell pretends it is, that anti-sweatshop activists complain that factories pay 75¢ when they should be paying American wages of $12 per hour. No, not at all. The problem is that the factories pay 75¢ per hour when wages in that area are supposed to be $2.50 per hour. And, a further problem might be that wages in South Africa and Thailand at $2.50 ought to really be about $3.00 or $3.50 per hour, given fair ratios of work value to labor compensation.
Dr. Powell keeps misstating his arguments by arguing the point that wages that are far below western standards are okay. That is already something every serious economist agrees with. Dr. Powell assumes that wages and conditions in the lowest wage factories are set by competition in the capitalist marketplace, but his own data disprove this. If factories can pay much less than the prevailing wage by exploiting refugees, then clearly something other than pure supply and demand are at work. If the market was working as Powell asks us to imagine it does, wages should be fairly similar, and there shouldn’t be cases of some workers being paid one-third the prevailing wages. In the case of the sweatshops where pay is much lower than local prevailing wages and the workers are refugees, it’s clear that capitalist are collecting “rents” (unearned windfalls) by exploiting their workforce’s precarious legal or social situation. A similar situation happens more widely in unfree poor countries where local capitalists and elites collude with foreign investors and use the local police or criminal gangs to intimidate workers and keep wages low.
Dr. Powell’s argument that labor unions do not raise wages is false. He uses historical data to show that wages did not increase suddenly when unionization was made legal. This is not be the correct way to examine the effect of unionization. The correct way to measure the influence of unionization is to examine the wages of unionized and non-unionized labor in similar labor pools within the same economy over the same historical period. For example, today in America, workers in comparative occupations with comparable skill levels make significantly more if they are unionized and engage in collective bargaining than if they are not unionized. And, there are spillover effects, where average wages in highly unionized job sectors are higher, even for non-unionized workers in those fields. Examining total wages in the whole economy when unionization becomes legal would make sense if as soon as unions were made legal almost all workers joined unions and started collective bargaining. In fact, when unions were legalized, it still took decades for union membership to grow. It is a fact that strong USA wage growth between the 1940s and 1970s was associated with a higher rate of unionization than has been present in the past few decades when wages have been (after adjusting for inflation) stagnant while unionization has declined.
Dr. Powell mischaracterizes the argument against child labor, by presenting a false dichotomy between children being allowed to work in sweatshops (or contributing to household income by helping with take-home work brought home by parents who work in sweatshops) versus the alternative of children working in agriculture or traditional non-sweatshop occupations (perhaps goat herding, food preparation, child care). The argument against child labor is that every government on earth rules a society with enough wealth to provide universal education for children from age six or seven up through age 15 or 16, and therefore children ought to devote time to education rather than labor, and the jobs where children aged 6-15 are working out to be taken by adults. Unless there is only frictional unemployment of 3%, any job taken by a child could have been taken by an adult. Non-market forces allow employers to exploit children more thoroughly than they may exploit adults, and protection against child labor is a necessary antidote to the ability of employers to wield these pressures on a vulnerable workforce, and an important protection for adult workers so they need not compete against children for jobs.
It may be true that many children are kept out of school to work on the farm or in family enterprises, but this is a separate problem, involving the state’s ability to both ensure a minimum level of food and housing security and simultaneously enforce compulsory universal education. Dr. Powell’s solution is to say that in the poorest societies, where people are food insecure, child labor helps ensure enough income to prevent malnutrition, and therefore ought to be permissible. This is only true if we start with an assumption that the state could not possibly secure a distribution of enough food to guarantee minimum standards of nutrition and housing to the entire population while also providing education for all children in some age range going up to the level where employment seems legitimate (perhaps at age 15 or 16). If state could collect and redistribute resources to provide universal compulsory education and a minimum standard of food security, then the “problem” ought to be defined as the state’s failure to do this, and promoting child labor as a “solution” to the existing conditions is an argument that takes the premise that the state cannot achieve universal food security and elementary education as a given. I contend that in every country on this earth there are sufficient resources to provide universal food security and elementary education, and child labor is therefore unnecessary. Thus, Dr. Powell is wrong to suggest child labor is a solution while ignoring the problems of governments failing to provide minimal standards of universal access to food and education. He would probably counter that allowing child labor is feasible and pragmatic, whereas forcing governments to effectively distribute resources to achieve universal food security and education is only feasible in theory, and realities on the ground would prevent this from happening, so it is more moral to look for a plausible solution (child labor) than to work toward a goal (universal food security and elementary education) that cannot be achieved without decades of slow improvement in government administration and local practices. I reject such arguments because I reject the moral relativism implied within it. Human rights, such as the right not to be malnourished or starve, and the right to education, belong to all people, even people living in countries with corrupt and inefficient governments.
Dr. Powell never considers the example of Cambodia when it was ruled by the United Nations. While under United Nation administration at the conclusion of a civil war, the nation of Cambodia had western labor standards fairly well enforced, and therefore had high wages and good working conditions, compared to its competitors in Laos, Vietnam, Philippines, and Southern China. Because Cambodia was at the time under United Nations administration, the European Union and other western countries gave it favorable trading status with very low tariffs. Wages were low compared to European and developed economy standards, but there weren’t many sweatshops, working conditions were relatively good, and wages were higher than the sweatshop infested economics of the dictatorships in Vietnam, Laos, and China (and better than in the oligarchic capitalist feudalism of the Philippines). This experience with Cambodia suggests that a similar situation could be created, where poor countries could prosper without sweatshops (but with many low-wage factories). What is required is a political willingness in the West to give favorable trading status to low-income countries that have good labor standards and laws prohibiting sweatshops and the worst exploitation. One reason this doesn’t happen is that capitalist elites, who tend to have more power everywhere, even in Western democracies, prefer to have free trade with societies where the ratio of their investment dollars to worker productivity and value is more suitable for high profit-taking. Since dictatorships constrain the ability of workers to agitate through political processes (minimum wage and pro-unionization laws) or strikes, it is dictatorships where the ratio of labor value to pay is much higher and profits are correspondingly higher. Free trade with China and Vietnam and Mexico, where labor is relatively powerless, tends to be very popular with elites who can make investments in production in such societies. Favorable trade agreements tend to be decided partly by the profitability of trade with the treaty partner, rather than the civil rights and human rights and environmental policies of the treaty partner.
Dr. Powell also tends to believe that capitalism and efficiency maximizing is the ultimate end. However, in a democracy, the majority of the people might decide to have some other ultimate end toward which they assign higher value than economic efficiency or profitability. If the majority of the electorate are wage-earners, and they prefer to elect politicians who will institute trade policies that prevent direct competition between free American workers and the workers who are subjected to dictatorships that prevent their collective bargaining for higher wages and better working conditions, then that is the better policy, because better policies are the policies that reflect the will of the citizens. If Dr. Powell succeeds in convincing a majority of the electorate that they will enjoy a better society and a fairer world if trade barriers are lowed and American workers enter direct competition with low-paid workers in societies that prevent the democratic pressure for wage standards and working standards and environmental standards, then we can have the sort of free trade world he prefers. But, I think it highly unlikely that most Americans will want that. Such a world would drive down wages in wealthy societies. Wages in low-income countries would remain lower than would happen if free trade was restricted to only societies where workers had democratic rights to demand welfare systems and wage standards and pro-union legislation through democratic political processes. In other words, free trade with dictatorships and undemocratic societies would generally slow the spread of human rights and civil rights as profitability of worker exploitation in less democratic societies helped prop up the local anti-worker anti-democratic elites.
The “free market” is not a thing we find in nature. It only exists to the extent that the public sector, the government, creates conditions that allow something that approximates the theoretical free market. In actual fact, the free market is always distorted. In societies without freedom, the market is distorted more powerfully by elites and dictators and their henchmen in the police forces or criminal gangs. In societies with freedom the market may be distorted by workers who elect politicians who create welfare security and social insurance and wage standards and laws promoting unionization and workplace safety and pollution control.
Dr. Powell supports his arguments with surveys of workers in sweatshops, where various improvements in working condition are offered and workers are allowed to say how much lower they would allow their wages to be in order to enjoy those benefits. Again, Dr. Powell is starting from a premise that the free market has already created a situation where sweatshop employers are making profits so low from their workers that any improvement in working conditions would necessarily require a reduction in wages. That is how the case is presented to the workers to demonstrate that the workers value wages above workplace conditions and benefits.
The actual situation is that employers in sweatshop conditions could substantially raise wages and improve working conditions and still continue to make profits with higher returns to investment than they would expect in high-wage economies. Sweatshop owners have such an advantage over their workers in negotiating wages that they can set wages at levels so low that workers would face malnutrition or homelessness if they received any reduction in wages, and therefore, they are unwilling to trade off any reduction in wages (increased chances of malnutrition or homelessness) for any workplace improvements or benefits. However, if workers were given choices where they were aware of the profits made by their employers, saw the alternative investment opportunities available to their employers (where they would shift their investments if wages became too high), and were asked what mix of wage increases and improvements in working conditions they would like and what corresponding reductions in profitability to their employers they would take to get those improvements in wages and working conditions, the workers might have a very different answer to Dr. Powell’s surveys. They would probably squeeze out every bit of extra profit their employers were making, to a point where the investors were still making profits in excess of what they could earn in alternative investments, but the excess was reduced to almost nothing, and the “extra excess” of profit-taking was distributed to the workers as wages and improved working conditions, rather than remaining in the concentration of profits extracted by local sweatshop owners and their foreign investors. Dr. Powell makes the false assumption that almost nothing substantially additional can be taken from the owners, and builds this premise into the questions he asks the workers.
The critical mistake Dr. Powell and conservatives or libertarians like him make is that they assume as a premise that the free market works and investor profits are so low that they cannot afford to improve the conditions or pay for their sweatshop workforce. The correct anti-sweatshop argument is that this is not the case. Rather, sweatshop owners perpetuate political and economic situations where the “free market” is distorted so that they can accumulate extremely high profits, and they do this partly by creating political realities in which workers are not free to create institutions that would protect them from excessive exploitation by sweatshop owners. For example, sweatshop owners, foreign investors, and local elites might all cooperate to consolidate land ownership and remove substance farmers from land where their small cash crop and subsistence crop farms had given them a relatively good life and freedom. The many small holders would be replaced by large plantations that are more efficient, but formerly independent small land-holders would now become landless workers dependent upon selling their labor to earn their livelihoods. Sudden land consolidation and buy-outs of small farmers would create a sudden surge in the unemployed workforce, raising the supply of labor relative to the demand for labor, and lowering wages. In this situation, foreign investment and local investment should create new factories to take advantage of the labor force, and wages should rise. In fact, wages do tend to rise in this case. But, whereas in a free market factories would boom and wages would boom, in actual practice, the government, local elites, and foreign investors can create new factories and hold down wages by fixing labor prices artificially low. Factories boom and average incomes boom, but almost all the income goes the factory owners and investors, and median wage growth for workers is very slow. The owners can do this by paying traditional (very low) wages and pressuring other employers to join them in giving only minimal wage increases. Governments might attract foreign investors with assurances that wages are at a certain low level and will not rise suddenly. Local contractors with sweatshop factories might all agree to pay certain wages and not substantially raise wages. The government might work with local factory owners to intimidate or murder workers who lead attempts to organize and demand higher wages. Dr. Powell pretends this doesn’t happen. In fact, it does happen. It has happened over and over again ever since the days of guilds and feudalistic labor laws, and if Dr. Powell had any familiarity with labor history he would know many examples of how wages were artificially depressed by collusion among elites and factory owners.
Dr. Powell and other libertarians and conservatives who love free markets and capitalism are correct that free markets tend to have many beneficial effects. Clearly, capitalism and free markets will tend to create helpful economic growth, which can directly reduce poverty, or can be redistributed to reduce poverty. So, everyone should have some respect for the uses of free markets and capitalism. But, free markets and capitalism are human institutions, and there will always be human interest groups who seek to use law and physical coercion to shape the human institutions of the marketplace. Geographic variations in the cost of living, prevailing wages, and even perhaps the acceptable moral standards of what can be tolerated in the ratio of labor value to wages paid, will create situations where some labor-intensive production probably ought to move to lower-wage locations. Jobs where the ratios of compensation to value-of-labor are extremely advantageous to workers and less advantageous to investors will tend to migrate to places where those ratios are more favorable to investors and less favorable to workers. But, the distortions of the market that allow local elites and foreign investors to establish production with egregious ratios of profit to labor value are distortions that we ought to oppose. Sweatshops are examples of this sort of unfair distortion of the labor market. Fair distortions of the labor market in which democracy allows workers to elect representatives to the government who will set limits to exploitation and create alternatives (they may be low-wage labor alternatives) to sweatshops, are the sort of market distortions we ought to encourage.
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