David R. Henderson  

Gains from Exchange

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One of the most powerful principles in economics, so powerful that I list it in my "Ten Pillars of Economic Wisdom," is that both sides gain from exchange. This helps resolve the issue stated by commenter "harold" on this earlier post of mine.

harold stated:

Of course, the question of how we should respond to imported good[s] based on harsh working conditions, when the workers have no better options locally, is a somewhat complex one.

Notice that harold agrees with me that the workers have no better options locally. Which is another way of saying that they are choosing their best option.

That makes the question of "how we should respond to imported goods," if we care not just about ourselves but also about the people producing them, not complex, as harold says, but actually very simple. We should buy them.

I have pointed this out in a number of places--my 1996 article in Fortune, "The Case for Sweatshops," my short debate in Fortune with Robert Reich, and my 1999 article, "Markets."

In a 2000 article, I quoted Candida Rosa Lopez on this issue:

Candida Rosa Lopez, an employee in a Nicaraguan garment factory, works long hours over a sewing machine at less than a dollar an hour. Interviewed recently by a Miami Herald reporter, Ms. Lopez has a message for people in the United States and other wealthy countries who are nervous about buying goods from "sweatshops": "I wish more people would buy the clothes we make."


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CATEGORIES: Labor Market



COMMENTS (19 to date)
Rjb writes:

Unless, of course, the workers are being coerced.

Commence debate on what constitutes coercion.

PrometheeFeu writes:

Yoram Bauman has a very nice example of a situation where trade would make everyone worst off. Long story short, very high negative externalities can overwhelm the gains from trade.

I can think of some other instances of such things happening. Let's posit a very inelastic demand curve. You could potentially make most workers better off by setting a minimum wage and compensate the others through a re-distributive scheme.

I think in practice, those situations are very hard to detect, but I think it's a mistake to stop at: "Voluntary trade is mutually beneficial by definition"

Vipul Naik writes:

This article is relevant:

Exploitation and Social Justice by Jason Brennan at the Bleeding Heart Libertarians blog.

See also the sweatshop tag at the Bleeding Heart Libertarians blog.

guthrie writes:

Coercion typically precludes compensation. Why pay someone when it's cheaper to put a gun to their head?

guthrie writes:

Coercion typically precludes compensation. Why pay someone when it's cheaper to put a gun to their head?

Greg writes:

I don't disagree with your articles but I think you need to discuss the alternative to sweatshops, which is often "fair trade" goods. Do you believe buying "fair trade" goods is bad for developing countries or do you just believe that there is no moral imperative to do so?

Methinks writes:

It's not as cheap as you think to keep a gun to someone's head.

But isn't building a slavery straw man argument just a way to avoid the unavoidable - acknowledging David Henderson is right?

Ted Levy writes:

Well, I am buying as many Apple products as I can afford!! :-)

bryan willman writes:

Actually, there is complexity afoot here, but it has little to do with the conditions of free labor outside the US.

It has to do with labor and unions and social and political forces inside the US.

The parties raising the question aren't really saying "you shouldn't buy these things because that encourages these employers to treat people this horrid way" they are saying "you shouldn't buy these things that support this horrid treatment AND creates unfair competition for your neighbors"

And probably many more issues mostly around US politics.

Coercion is hard to define - you could say that making people work for money to live, or else work at subsistence to live, is a kind of coercion. But unless most people do those things, society will simply collapse.

On the other hand, telling people that they can only work certain jobs, for certain rates of pay, for certain terms, is clearly coercion. Doing so based on their gender or racial or ethnic hertiage is certainly so.

Likewise, a kind of wink-wink nudge-nudge in which employers subject employees to vast risk may or may not be "free market correct" - but it's clearly not "good of society" correct.

So, do we have some moral obligation, or strategic reason, to not buy products made by slaves? Yes, there is much to recommend shunning such products.

To not buy products made by people in systems which *in effect* give them no other choice and then subject them to horrible conditions or unnecessary risks? Perhaps.

To not buy products made by people choosing high digh demand jobs for highest wages in a fairly complext society? No, perhaps an oblication TO buy...

Evan writes:
Notice that harold agrees with me that the workers have no better options locally. Which is another way of saying that they are choosing their best option.
I wonder if there are any ways to make that best option a little better. Instead of protesting sweatshops, what if activists started a charity to pay the sweatshops to improve their working conditions? Something like "We've raised $10,000 and we'll give it to you if you agree to spend it buying safer equipment for your factory" or something like that?

On the other hand, maybe that would create an incentive to spend even less on improving working conditions that normal, since the owners would know they could get subsidies from a charity just to raise them back to baseline. But such charities would have to grow huge before such an incentive became measurable.

Rjb writes:
Coercion typically precludes compensation. Why pay someone when it's cheaper to put a gun to their head?

Because you want them fed for the next day and you don't want to feed them yourself, perhaps.

Methinks writes:

Bryan Willman's argument is nothing more than a convoluted justification for discriminating against the poor. And, yet again, he can't get there without the ridiculous claim that people who live in poverty and have few choices are slaves. He does, however, use their poverty of options against them - we are not to buy from them until they get richer and meet our "high" our standards.

Is this the new definition of "humane"?

Bill writes:

I agree with Prof. Henderson, but I do want to learn more about Mike Munger's notion of "Euvoluntary Exchange."

Ken B writes:

David
Have a link to the pillars?

T E Lawrence only needed 7 pillars!

Saturos writes:

I recently had an argument with my friend over the merits of "Fair Trade". I asked her the simple question: if you want to encourage people to voluntarily pay coffee farmers above market incomes, why not do it through direct cash transfer? Wouldn't that be more efficient? Why the middleman, and the bundling with the activity of low marginal utility to consumers? She replied along the lines that cash handouts were a terrible idea, because they weren't a "sustainable" strategy. Pressing her further, I found that she meant that they "fostered dependency".

"And in what way is Fair Trade superior?" I asked her. "It seems to me that a Fair Trade purchase is identical to a market purchase plus a premium cash-handout, passed indirectly to the worker through a middleman (Starbucks). And what is the marginal impact of the discrepancy? Firstly, we are sending a signal to these workers that they should remain mired in an agricultural sector of relatively little export value, instead of transitioning to a more valuable comparative advantage or, better yet, industrializing. We are encouraging their economy to aim in the opposite direction to progress. How sustainable is that? Second, if you regard it as more sustainable to link the income transfer to coffee purchases, paying a "fair price" for the commodity - at least handouts make it clear that it is charity being engaged in, so donors know what they are committing to. Tying giving to purchasing may be an easier sell at first, but in the long run, people will realise that it is a donation, and that they don't wan't to make one every time they feel like drinking coffee. What happens to the people who have built their lives and economies around the inflow of Fair Trade dollars then? How sustainable is that?

Finally, what do you think this policy will do to those farmers in the long run? Do you think the market price can be held artificially high forever? Of course not - workers in other low-paying sectors all over the world will crowd into the coffee business, as soon as it starts paying better than the alternatives. The price will collapse right back down again. When fair-trade consumers realize they are bearing the entire world's poor on the back of their coffe consumption, won't they see the scheme for what it is? How sustainable is that? That is, assuming that the supply at the "fair trade" price doesn't simply exceed the demand (as it likely will), pushing the excess into non-Fair Trade markets and driving down those incomes. Wouldn't it be better just to have free trade? So that they can sell us all the things we're currently paying domestic producers too much for, and grow their whole economy out of poverty without relying on any special favors?" She didn't seem to have an adequate reply.

Saturos writes:

That was for Greg.

As for Rjb, Coercion is when refusing the offer leaves you worse off than if the offer hadn't been made. That is, "an offer you can't refuse".

Ohio Libertarian writes:

Per Harold:

"Of course, the question of how we should respond to imported good[s] based on harsh working conditions, when the workers have no better options locally, is a somewhat complex one."

Aren't we all taking advantage of the best local options in terms of employment?

Who's to begrudge those taking advantage of the best local options in China, India, Russia, Vietnam, et al, and on what moral grounds?

harold writes:

I'm glad that this part of my comment generated some lively discussion.

I would like to remind Professor Henderson that another point in my original comment was that neither his relatively brief stint in a well-regulated, high-paying, almost certainly unionized Canadian nickel mine, nor even my experience of working two physically demanding minimum wage jobs (also within the overall well-regulated environment of Canada), is really analogous to the situation of working in a factory in China.

That point is independently true, regardless of one's normative positions with regard to imports from areas with relatively harsh (relative to, say, Canada) labor conditions.

It is usually the case that "sweat shop" workers regard their jobs as better than the next best locally available alternative, yes. (That cannot be taken for granted, though. There are surely instances of not entirely voluntary labor, or of people being enticed to jobs with false promises, and then for some variety of reasons not really able to quit.)

However, for purposes of discussing import policy or individual import consumption decisions, it probably is best to regard Chinese factory workers as choosing what they see as their best alternative.

Garrett writes:
Unless, of course, the workers are being coerced.

Commence debate on what constitutes coercion.

In simple terms, the leftist dialetic declares that it's coercive to not give poor workers higher wages even if you are not responsible for the more dire circumstances they've come from. Nevermind the economic infeasability, the cascade of additional controls needed to cajole consumer demand, or the cost. Moral obligations supercede all. Therein is the absurd logic infecting our political discourse. Obviously, as a positive charge, it fails the test of philosophical burden of proof (a reason does not equate to justification). But it certainly appeals to simplistic and superficial emotional responses, and it has allowed the annointed to resume using the state as a moral institution.

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