On Ethical Sneakers and Economic Wisdom

[danieldwilliam]

The fourth of David Henderson’s Ten Pillars of Economic Wisdom is

4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.

I think it’s important to remember Pillar number 7, the value of goods is subjective.

A simple example should illustrate the concept and the link between Pillars 4 and 7 before I move on to discuss sweatshops. Imagine a mountain made of iron ore (for those of you who enjoy puerile puns, and I know there are some of you who read this journal, the South Australian town of Iron Knob is where you want to mentally locate yourself).

The value of the iron ore under the ground is pretty low. Why? It’s not of much use to anyone under the ground. Once mined the ore is more valuable. The value increases again once the ore is smelted into iron and slag, the iron increases in value if it is turned into steel and then again increases in value again once the steel is turned into a car. That car is more valuable if it is made by Germans in a Porche factory than if it is made by Russians in a Lada factory.

The increase in value comes from combining different raw materials together and applying both energy and skill to them.

Why is a car made out of steel more valuable than several tonnes of iron ore in Iron Knob? Because I want a car more than I want an Iron Knob.

This value is reflected in the price: the amount of other stuff that someone is willing to trade in order to have the thing bought rendered into money.

This value is subjective.  If instead of Iron Knob being mined the iron was being mined from Arthur’s Seat, a site of special scientific interest and a local Edinburgh beauty spot, I’d be less keen on having the car and more keen on preserving the environment in which I live. A car is more useful to me than iron ore underground in South Australia. A car is less valuable to me than ire ore underground in Holyrood Park.

So, we create wealth by moving things from a lower valued state to a higher valued state.

Sweatshops are pretty widely deplored. And rightly so, and yet they still exist.  Trade doesn’t occur unless both parties consider that they will be better off after the trade. (1) Although, it may be that the better off is only relation to being dead now – a mugging is a form of trade where one economic actor gives up money and items of value in exchange for not being murdered by another economic actor.  Are we to assume that the workers in sweatshops are being forced to work for low wages in horrible conditions?  Well they might be. It’s entirely possible that they have been forced into a form of effective slavery.  If you take a Marxist view of capitalism you might argue that inherent in the capitalist system is an artificial impoverishment of the working class so that they are prepared to exchange labour for low wages.

Marxism - one for the pub there I feel.

It’s certainly possible for people to work in sweatshops without being forced to. People may voluntarily exchange their sweated labour for low wages.  Why?

Because they think they will be better off. Because, compared to working long hours on a subsistence farm for no money, working long hours in a factory for some money is a better trade. A shack in the slums turns out to be better for some than a shack in the sticks.  People don’t need to be forced to work in a sweatshop, they’ll queue up at the factory gates to volunteer for a job.

So, how do we get rid of sweatshops if the sweated labour thinks it is better off being sweated?

We could go after the supply side. We could make the labour a better offer. We could arrange things so the labourer would be marginally better off if she moved her labour from the sweatshop.  We could liberalise our trade so that we don’t subsidise our own farmers and allow poor farmers to compete on equal terms which should increase their incomes and make working in a sweatshop relatively less attractive. We could wait(2) for a shortage of sweatable labour(3) or an increase in skills to allow workers to shift from a sweatshop to a better factory. (4)

We could go after the demand side.  We, in the West as consumers are setting out one side of a bargain. We want cheap sneakers, no questions asked, and we’re prepared to offer a small amount of money in exchange. Turns out things are so bad in the Developing World that people will gladly take that small amount of money.  We could change what we demand. We could start asking for cheapish sneakers with a  side order of solidarity. If we valued sneakers made in a decent factory by happy workers more than we valued sweatshop sneakers and the extra cash we have in our pockets than factory owners would have an incentive to change their factories from sweatshops to good factories.

They would make more money hiring people on a decent wage to make ethical sneakers than they would hiring people on low wages to make cheap sneakers.

The higher value state for their factory would be a well-run-full-of-well-paid-workers state rather than a sweatshop.

By valuing cheap sneakers over ethical ones we incentivise factory owners to set up factories that are cheap to run. By valuing EU and US farm labour employment over cheap food we encourage a tariff, subsidy and standards regime that encourages farmers in developing countries to pay their labourers very little. Between our choices for cheap sneakers and expensive corn we create the conditions where a peasant farm labourer is better off leaving home to work in a sweatshop.

(1) Our old friend marginal utility explains why.

(2) we could encourage the artificial restriction of the supply of sweatable labour by encouraging our brothers and sisters in labour to unionise.

(3) as happened after the Black Death.

(4) where their labour is better at turning lower value stuff into higher value stuff, like a German car factory compared to a Russian one.