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"When Exploitation is Mutually Beneficial


"When Exploitation is Mutually Beneficial

By Matt McIntosh

Source Tech Central Station Daily  

"Exploitation is a word often used but rarely defined. In its most literal meaning -- I 'exploit' you if I in some way benefit from your existence -- it is the reason human society exists. We all benefit from one another's existence. We all exploit each other."
-- David Friedman, The Machinery of Freedom


Let us say that I am poor and you are wealthy. I live a harsh life of bare subsistence farming, while you make several thousand dollars per day as a business owner in the widget industry. One day you hire me to make widgets for you at a rate of $1 per widget, which you then sell to make a profit of $2 per widget. Which of us has benefited the most from this exchange?


If you answered that it must be you, this is wrong. It's true that you are still much, much better off than I am in absolute terms, and that in dollars, you have gained more than I have. But considering our relative starting points and the basic fact of diminishing marginal utility, this transaction has benefited me more than it has benefited you. Simply put, the principle of diminishing marginal utility states that each extra unit of a good provides less subjective benefit to an individual than the last one did: an extra dollar means much, much more to a pauper than to a millionaire. Thus I get much more subjective utility from the extra dollars I now have than you do from the extra dollars you have.


This is a straightforward lesson in basic economics, and yet it's constantly overlooked in discussions about trade with people of developing nations. The image presented to the public is one of transnational corporations benefiting disproportionately from the exploitation of cheap labor. A recent article on Indian sweatshops in the UK Observer, for example, the author discusses the "disturbing consequences" of "soaring sales" by the multinational Austrian firm Daniel Swarovski. The article quotes a charity representative who says that "the firm has created a life of servitude" for young, third-world laborers. Yet what is going on here is basically our little economics lesson writ large. Trade between rich and poor countries almost invariably benefits the poor more than the rich.


The skeptical reader may well say that this theory is all a little too neat, and that reality is not always like that. So, let us set theory aside for the moment and ask whether or not multinational companies really do make poor countries demonstrably wealthier. When we repair to the data, we find consistently that they do. In Fighting the Wrong Enemy, Columbia University economist Edward Graham reports that, on average, total workers' compensation offered by U.S.-owned manufacturing companies is 80 percent higher than the average compensation offered by domestically-owned manufacturing companies in middle-income developing countries; in low-income developing countries this figure is even higher, at fully 100 percent more than the average for domestically-owned manufacturing.


Moving from the general to the slightly more specific, a particularly reviled example of the activities of multinational corporations are Export Processing Zones (EPZs) -- special areas with greatly decreased taxes and labour regulations, whose main purpose is to attract multinationals in order to build up export industries. Often these will focus on single industries: there is a jewelry zone in Thailand, a leather zone in Turkey, a tea zone in Zimbabwe, and so forth. As of 2002, there were approximately 43 million people working in around 3000 EPZs spanning 116 countries, producing clothing, footwear, electronics, toys, and other consumer goods. The products of EPZs are familiar to anyone who's noticed the "Made in China" or "Made in Taiwan" seals on cheap consumer products. The factories in these areas are colloquially referred to as "sweatshops." Surely one could find no greater whipping boy of the anti-globalization movement.


However, the data paint a significantly less damning picture. In Beyond Sweatshops, Theodore Moran of the Brookings Institution reports on surveys conducted by the International Labor Organization (a UN agency which "seeks the promotion of social justice and internationally recognized human and labour rights" -- no lackeys of capital, they). The ILO's surveys "have regularly found that the pay for workers in EPZs . . . is higher than what would be available in the villages from which the workers come." He then reports on studies by the U.S. Department of Labor which find that "firms producing footwear and apparel generally pay more than the minimum wage and offer significantly better working conditions than those in agriculture."


We can drill down further into three particular case studies, to illustrate the general point:


  • Graham reports that the areas along the Mexican border populated with maquiladoras -- U.S.-owned factories for assembling products for reimportation to the U.S. -- have the highest wages in Mexico.


  • Economists Robert Lipsey and Fredrik Sjöholm, in a paper titled "Foreign Direct Investment and Wages in Indonesian Manufacturing", report the results of an empirical study of 20,000 Indonesian manufacturing plants. They found that the average wage was 50 percent higher in foreign-owned plants than private domestic-owned ones, and that total compensation was 60 percent higher. Even after controlling for education, location, plant size, and capital- and energy-intensity, wages were still 12 percent higher for manual labour and 22 percent higher for "white collar" work.


  • Moran explains how women in Bangladesh were forbidden from working in factories before the advent of its clothing industry; now 95 percent of the 1.4 million clothing factory workers in Bangladesh are women, and 70 percent of the women working in the private sector work in such factories. As a result of the wages now earned by Bangladeshi women, family incomes are higher and a higher proportion of that income is spent to obtain better nutrition, health, and education.


That last case is worth dwelling on as an exemplar of a sad trend: as a rule, the poorer a country is the more dependent women are on their fathers, brothers and husbands. It would be unnecessary to go over the well-known details of how women are generally treated in such societies, but suffice it to say that the autonomy granted by wages earned in factories has disproportionately benefited women at the expense of patriarchal social systems. As they gain modest wealth of their own, women attain the leverage to postpone marriage and motherhood, and are better prepared financially for it when the day does come.


Also, Lipsey and Sjöholm explain that the presence of foreign-owned factories tends to drag up wages in domestically-owned factories due to increased labor demand, spillover effects from technological capital, training of workers and managers with basic skills that make them more productive, and so forth. Even here in the poorer countries, competition truly does raise the tide which raises all boats. The recent success stories of countries like China, India and Taiwan are remarkable examples of this. And this is exactly what one would expect given an understanding of basic economic theory.


None of this is to downplay the fact that conditions of life in poor countries are positively awful compared to our own. The point is to emphasize that the surest way to bring these countries up to more tolerable standards of living is through free trade, the process by which the capitalist exploits the worker and the worker exploits the capitalist. To the extent that poverty still exists on our planet, it is due to insufficient exploitation. The only way to defeat absolute poverty is by greater productivity, and that means leaving people free to engage in mutually beneficial exploitation. More, and faster please.  "


Matt McIntosh is a blogger at Catallarchy  "


Entry #292


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