Out of Poverty: Sweatshops in the Global Economy
Benjamin Powell joins us this week to discuss the economics of sweatshops and the wages of workers in the third world.
What qualifies as a sweatshop? Is there one standard definition? Why would someone choose to work in a sweatshop? What are their other alternatives? What happens when companies are made to pay their sweatshop workers more?
Benjamin Powell discusses the economics of sweatshop labor. He argues that the anti-sweatshop movement’s policies actually tend to harm the very workers they intend to help.
Show Notes and Further Reading
Powell’s book Out of Poverty: Sweatshops in the Global Economy (2014).
Powell’s Learn Liberty videos on sweatshops and immigration are well worth watching:
Aaron Ross Powell: Welcome to Free Thoughts from Libertarianism.org and the Cato Institute. I’m Aaron Powell.
Matthew Feeney: And I’m Matthew Feeney.
Aaron Ross Powell: Joining us today is Benjamin Powell. He’s director of the Free Market Institute at Texas Tech University and a Professor of Economics at the Rawls College of Business. Today we’re talking about his book Out of Poverty: Sweatshops in the Global Economy from Cambridge University Press.
Let’s start with what is a sweatshop before we get into how we should think about these things.
Benjamin Powell: Well, that’s actually a challenge when you set out to do research on this because this – the word “sweatshop” has a connotation in everybody’s mind but you can’t look up the precise definition and say that is a sweatshop and something else isn’t. There’s a general bundle of characteristics that sweatshops have. Very low wages by the standards that we’re used to in the developed part of the world.
Poor working conditions which could be dangerous working conditions, unsafe or unhealthy, long term build-up of particles in your lungs or whatever from working inside. Long hours, sometimes variable and unpredictable hours, generally unpleasant working conditions. Sometimes it involves child labor. These are all the general characteristics of a sweatshop and one – when I study them that I don’t include in this is coerced labor. These are places where despite these bad working conditions, that all of us agree are bad, people choose to work and admittedly from a bad set of choices. Otherwise, they never choose to work there. But that choice is important in demonstrating that – the work believes it’s their best available of their battle alternatives.
The other type with coerced labor, then there are instances of, I call that slave labor and it’s not a subject of what my analysis is. I think the appropriate response to slave labor in all instances would be to ban the products, to not buy them, to boycott them, to dry up the demand for enslaving people.
But those same set of conclusions, this is where the anti-sweatshop movement kind of blurs it is they start mixing the two together and thinking the policy implications of one apply to the other. In terms of studying sweatshops, what – in identifying them empirically, I gave you the list of kind of conditions. But how do you draw the line and say that one is a sweatshop, that one is just low wage industrialization?
The way I’ve done an operational is to look at what anti-sweatshop protesters have called sweatshops and studied those instances rather than make up some arbitrary line of my own.
Aaron Ross Powell: So we typically – if I think of sweatshops, I think of people making garments, shoes, other clothing items. Is that accurate or there are other sorts of things that get made in sweatshops?
Benjamin Powell: So there are plenty of places with lousy working conditions around the world. The main one is agriculture. People have this kind of naïve notions of the good life in agriculture but it’s miserable for most people who are in subsistence agriculture around the world. But those aren’t sweatshops.
So yeah, it’s generally a peril production. The vast majority of them is some sort of textiles or clothing, apparel. Some cases now you’re seeing – they’re calling sweatshops things that are labor-intensive but low-skilled manufactured goods that aren’t apparel, some types of technology occasionally here. But the vast majority are apparel industry.
Matthew Feeney: But a lot of these goods that are made especially apparel are the ones that seem to be highlighted a lot and a lot of the apparel they’re making are made for big companies that are worth billions. So the obvious and very often heard complaint is, “Can’t companies that are worth billions of dollars afford to pay people more than what they are?” if these workers are in the Third World.
Benjamin Powell: So two parts of this. One, the multibillion dollar companies are almost never the actual employers of sweatshops. Almost all of the sweatshop employers are some sort of subcontractor to them who gets purchase orders from them and then doesn’t. But of course the response could be as part of their agreement to purchase, they could demand higher wages for those workers from those companies.
But the problem is of course they could do this but we live in a world of trade-offs and if they paid more for – or if they have to pay more for labor, that raises the cost of labor relative to other ways to make the clothes and they’re going to substitute for it because the companies don’t suddenly become charities because we demand them to do more for Third World workers.
They’re still trying to maximize profits. If we change the relative prices, they respond by using less of the one that just got more expensive, sweatshop workers, and they substitute either fewer workers but more machinery or fewer low-skilled workers but more high-skilled workers who are higher cost and more productive.
So you shift – they do this within the Third World as well. So part of it is a shift to the First World. So you can still buy garments made in North Carolina and that’s high cost but high productivity labor. But also you see in general Latin American sweatshops tend to pay more than Asian ones. If you demand the companies pay a higher wage, they don’t just suddenly start paying the Bangladeshi workers more. They just do less in Bangladesh and more in a little bit higher productivity country.
Aaron Ross Powell: But to pick up on Matthew’s question there, it seems like the criticisms that we hear of sweatshops, especially by anti-sweatshop activists, fall into two sorts although they intermingle a fair amount. So there’s the economic criticisms of these are harmful in certain ways or these people could be paid more, which is the one that you just addressed your answer.
But there also seems to be – there’s a moral side to it which says like, look, OK, yeah, I understand that these companies – if the price of sweatshop labor in country A goes up, they’re going to shift to country B where it hasn’t. That they may do that but then it’s – the right answer is to at least morally condemn them for doing it, that if they were better people, they wouldn’t. They would be willing to pay the higher wages even if they could get cheaper wages somewhere else. So is there something to that side of the argument or is that getting it wrong as well?
Benjamin Powell: Yeah, I think that’s getting it wrong as well. So I think the moral arguments are important. I think economics without philosophy can do great evil and I think philosophy without economics is just daydreaming. What we need is to put the two together because economics puts limits on our utopias.
What we have to understand is by interacting and trading with these people, it creates more demand for their workers, which if these workers are voluntarily choosing the job, demonstrates it was better than their other alternative, we’ve actually helped make their lives a little bit better.
Now what I’ve encountered some philosophers and business ethicists would say is they will say, “Well, we don’t have a general obligation to help the world’s poor. But we do have an obligation for anybody we interact with, to interact with them on terms that would be …” Respect their humanity or something like that.
That’s all well and good but if that means we interact with fewer of them, more of them are left in more extreme poverty. That’s a trade-off and without philosophy, we don’t know whether that’s a good trade-off or not but the economics tells us those are the costs and benefits. I think most people who aren’t philosophers anyway, when they realize that you could help some people more than what philosophers tell you is morally required – excuse me, less than what they say is morally required but more than would be helped otherwise, most of us would say that’s a little bit better for those people.
Matthew Feeney: So I want to follow up on that by asking about the conditions on the sweatshops compared to the geographic area. So sitting in Washington DC, the sort of conditions in the Bangladeshi sweatshops look bad and are bad. But why would someone choose to work in a sweatshop when there are other alternatives? Are these jobs really much better than the alternatives? If someone in one of these sweatshops doesn’t work in a sweatshop, what are their other choices?
Benjamin Powell: Yeah. So, the main one if not working in the apparel industry or low wage industrialization in one of these countries is working in agriculture and often subsistence agriculture. That is the main alternative and what we found – what I’ve found when I’ve studied sweatshops is I’ve looked at the cases of the wages paid in these Third World sweatshops. Then I’ve compared it to the domestic living standards there where the sizable chunks of the population are living under $2 or a $1.25 a day and these sweatshops in every country, the average sweatshop, pays more than the $2 a day standard, even Bangladesh. That’s the one that has been in the news most.
The average Bangladesh sweatshop that has been protested in the popular press pays more than $2 a day. But yet, sizable chunks over the time period studied, more than half of the population of Bangladesh lives on less than $2 a day.
Aaron Ross Powell: This brings up something I’ve wondered about when people are talking about sweatshops, that we say like, OK, well they’re making $2 a day say at the sweatshop and that to us living in the United States sounds like a terrible unlivable wage. So it must be bad. Is it – how much of our sense of badness is based on just not understanding differences and cost of living in these countries?
Is $2 a day, even if it’s higher than the average wage, is it still a pretty bad wage that doesn’t support a decent quality of life in Bangladesh or is it actually like a pretty good wage even by their standards?
Benjamin Powell: Yeah. No. Compared to how other people live in that country, it’s a higher wage. But compared to anything that we would call a decent standard of life, it’s not. So yeah, of course $2 buys you a lot more in Bangladesh than it does in Washington DC. But it doesn’t buy you enough that I think any decent person in the United States would look at that and say that’s a good standard of living for that person.
The point is, it’s a better standard of living than the alternatives that exist for them. So unless you’re proposing an alternative that gives them better, you don’t want to take away the option that’s the best they have.
Matthew Feeney: So I’m wondering if you could address a criticism that I often hear about sweatshops when I express free market sympathies which is people might say that free markets provide benefits but only under a certain set of conditions and those conditions do not apply for sweatshop owners. It can’t reasonably be said that they have access to all the right information, that it’s really voluntary. What is your response to those kinds of criticisms?
Benjamin Powell: Yeah. So there’s a whole line of what I would call kind of left libertarian-ish critics of sweatshops and I think they’re all a little bit misplaced because they don’t offer a viable alternative. So the one that I think I agree with is that they will say that these sweatshops aren’t purely a product of a free market. They’re the product of past injustices. So we’ve had colonialism in the past that screwed up the institutions of these countries. So these countries haven’t supported economic freedom the same way. So they haven’t developed.
So now this is the best available alternative to the worker. To that I say, yeah, that’s true. There are lots of – actually, in fact, we in the United States have suffered from injustices of the past as well. The question is, “What is the alternative you’re offering?” We can’t go back and undo history. We’re not actively responsible for their impoverishment now, them not having good institutions on them.
We can interact with them on terms that make them better and that’s better for them than us ignoring them. But this left criticism of it, it’s not purely a product of the free market. I think it’s just – it doesn’t offer them a way out. There’s another aspect to it and this is not a criticism of the sweatshops per se but it’s about the background injustices, what I would call it, that lead to them accepting these employments.
You will find cases where it’s not like the sweatshop who has gone in and tanked their other alternatives. But let’s say you have – and this happened in Indonesia. People who live in the forest there who have an indigenous way of life and it doesn’t look like a high living standard to us but it was what they were choosing.
Then the Indonesia government sells what we might think of as their justly homestead of land to a logging company who comes in, clear cuts it. They can’t live there anymore. Now what do they do? They go to the city. They need employment. They work in a sweatshop. It wasn’t their best alternative until you took aware their best alternative in their mind and I think we as free market types should justly condemn the government giving away what we would call their land to a logging company. But that doesn’t make the sweatshop the exploiter.
If we’re thinking about it in terms of – you know, they were a ship at sea. Somebody came along and torpedoed them. Then the sweatshop is the lifeboat that showed up, but that lifeboat isn’t what torpedoed them. We can condemn the torpedoing while simultaneously endorsing the lifeboat.
Aaron Ross Powell: I’m curious about the history of these things because we get – you often get the sense that these are a relatively new thing or that they are – they’re somehow dependent upon kind of modern capitalism. The sweatshops that we talk about are you’ve got a large multinational corporation that wants some sort of product for very cheap. So therefore sets up or subcontracts with these new sweatshops to make this cheap product. So are they – has that always been how it is? Are they relatively new? Do we have a history of sweatshops say in countries outside of the ones that we typically think about?
Benjamin Powell: Yeah. I know of no country that has a high living standard today that’s not just rich off oil, let’s say. That hasn’t gone through something like a sweatshop stage of economic development. In fact, I grew up around this. I grew up in Haverhill, Massachusetts, Merrimack Valley and I did my undergraduate at University of Massachusetts Lowell.
My hometown of Haverhill was referred to as the “shoe city” for its 19th century shoe production, Lowell of course heart of the industrial revolution that’s going on there. It existed in the 1840s through late 19th century, early 20th century there. We’re essentially sweatshops. They had long hours. They paid wages that were similar.
They had harsh working conditions and workers just like they do in the Third World would leave the farms, come to the city as to work in them because they offered a better alternative and particularly actually, it’s freeing for women in the United States who used to be under their father’s thumb until they got married in the farm. Many of them became the Lowell girls who went to be the – work in the Lowell mills there and earn money. After a year of living in the boardinghouse and working there, they would often have more saved up than their father did who owned the farm. So it’s liberating for them as well.
So we had that here in the United States. We had it in Great Britain. But in Great Britain and the United States, to go from what I would call a pre-industrial standard of living to something that we might call post-sweatshop, it was a period between 100 and 130 years, 150 years maybe. It took a long time because what it – what causes the high standard of living? The proximate causes are the technology, the physical capital and the human capital.
But when the first countries are going through an industrialization, all of this stuff happened – have to be created anew. So it took a long time to build it up and get the higher standard.
Think of what the sweatshop countries were in 1950. What do you think the sweatshop countries were?
Matthew Feeney: Probably countries that we consider quite developed now.
Benjamin Powell: Yeah. Like, how about the Asian tigers? Hong Kong, Singapore, South Korea, Taiwan, to some extent Japan. All of them except Japan had a pre-industrial standard of living prior to the 1950s. Japan of course have been industrialized but decimated in World War Two. All of them attract textile industries in this low-wage sweatshop type manufacturing. But it’s not a 100-year process there. It’s not a 150-year process. It’s about a generation that they go from pre-industrial to First World.
Then Hong Kong in particular but I mean any of these, look at them today. It’s not just that they escaped the sweatshop standard of living. Some of them have a higher standard of living than we do here in the United States. I mean Hong Kong is just amazing. It’s the freest country in the world ever since we’ve been able to measure it. The growth there is just spectacular.
You look at along the skyline and it looks like Midtown Manhattan, except expanded across all five boroughs. Some people mistakenly say, “Well, it’s a global race to the bottom these countries. They have sweatshops and they run and go get cheaper labor.” They make it sound like they were raped and pillaged in the process.
Hong Kong was not raped and pillaged. What happened was the sweatshops were there. They had built up more technology, more capital in Hong Kong. The workers started becoming more productive. As they were more productive, their physical labor was more valuable in other industries. So people bid them out of the sweatshops.
As a result, the sweatshop employers couldn’t hire people. So what do they do? They move on and go find workers somewhere else that they can bid away because they offer a better standard than their alternative.
So really, rather than a race to the bottom, it’s like a ladder to the top and sweatshops are one of those low rungs on the ladders of economic development and as a country goes through that stage of development, they eventually move past it.
Now I said proximate causes of high standards of living. If your underlying or fundamental causes of development are right – and that’s private property rights, rule of law, large degree of economic freedom – when you have those, the sweatshops come in at a very quick stage of the economic development.
Matthew Feeney: And yet despite all of that, a common objection especially from anti-capitalists is that sweatshops or something like them are a fundamental part of a capitalist system, that something like sweatshops will always have to exist. It would be interesting to hear how you respond to criticisms like that.
Benjamin Powell: Yeah. So sometimes, a variant of that would be, “OK, that’s all well and good. You’ve said it’s the ladder of economic development.” But as people graduate, where is the last place it’s going to get sweatshops? They’re just going to be stuck forever in sweatshops. Maybe it’s somewhere in the interior of Africa.
It’s like, well, no, when it eventually gets there, one, it will be better than what Africa currently has. Two, no, as that labor gets more skilled and they have more capital, they also will be more valuable and alternative lines of work. We’re still going to have a need for clothing.
So as the relative price of that labor goes up, the capitalists who try to make the clothing start changing the mix. They use fewer workers who are more high-skilled and more capital with them. So all of a sudden, clothing production in the last country that had sweatshops looks a lot more like it does in North Carolina today.
Matthew Feeney: Right. And something that has occurred to me while reading the book is a little bit about – I suppose it occurred to me that my judgment about the anti-sweatshop movement might be a little naïve. Perhaps I thought they were all college freshmen who decided to go on protest and everything. But what do you think is the anti-sweatshop coalition and what are their motivations?
Aaron Ross Powell: Right, because this is just – I mean we talk on this podcast a fair amount about bootleggers and Baptists and it seems like the college student protesters look like the Baptists. So who are the bootleggers in this?
Benjamin Powell: Yeah. So I think the vast majority of sweatshop activists are the Baptists. They’re misinformed economically, not particularly thoughtful people who honestly care about the poor of the world and want to help them. Part of my message with this book and when I go out and lecture on it is to try to reach those people and – I mean if you care about the world’s poor, you have an obligation to care about price theory, to understand trade-offs so that you make sure when you’re trying to do good, that you actually achieve good and not just feel good about yourself.
Then there’s the bootleggers part of this. Actually that’s where the student anti-sweatshop movement really got their start. That’s the labor unions in the wealthy parts of the world and the United States, AFL-CIO and the United Garment Workers Union. In the mid-1990s, they started doing union summer programs with college students, having them work on exposing sweatshops, then go back – and they went back to their campuses. Afterwards they started United Students Against Sweatshops and this spreads to campuses around the country.
But the unions, they care about it because they do understand the price theory and they understand that Third World labor is a substitute for First World labor and if they raise the price of their competition, Third World labor, then it will increase the demands to have their workers produce more, which either allows them to expand union membership or preserve jobs and have fewer losses or raise the wages and working conditions of their own members.
They would have you believe that some workers of the world unite, solidarity BS that they’re contributing to. But no, a union’s job is to raise the wage and the working conditions of its members. The vast majority of Third World sweatshop workers are not these union members. So why are they advocating for higher wages for them? It’s precisely because they understand the trade-offs and know it will help their members back in their home country. They’re disingenuous when they pick up the cost of – so-called cost of Third World workers.
Aaron Ross Powell: But is it another way to frame that to say that that’s caring about the poor too, just the poor closer to home? Because the union argument is look, we used to have a thriving working class in this country that was making garments. Then we all got super greedy because we wanted – instead of paying a reasonable price for T-shirts, we wanted to pay next to nothing for them. So we ship those jobs overseas and so, OK, let’s accept for the moment that we’ve helped those Bangladeshis a little bit by giving them slightly higher-paying jobs. But it has come with the expense of the American worker who is now poor and those really cheap T-shirts aren’t making it up.
Benjamin Powell: Yeah. So let’s decompose this into a couple of different parts here. So one is the plight of the American worker. We got to get real here because we hear stats about, oh, wages have stagnated since the 1970s. Manufacturing is down. No. We’re at a near all-time high for manufacturing output in the United States.
A number of manufacturing jobs is down because we’re getting more productivity out of each given job and if you think about as productivities increased in the United States, think about how manufacturing productivity has gone up since the 1970s, the mechanization in using technology.
But then think about service productivity. Has that increased nearly as much? I mean it has. But not to the same scale. So if we just have some constant preference between the amount of manufactured goods and services we consume and one gets way more productive than the other, it means we’re going to need more service jobs and fewer manufacture jobs to maintain that mix.
So I would say the average American worker, it’s not stagnated wages because that’s a bad way to measure it when you actually look at total compensation of what it buys. They live much better than they did. Just think about if we would like to be talking into a phone that’s tied to your wall and what has happened to this living standard for your average American.
But then the second part of this trade-off of “I care about the poor closer to home,” I think this is – at least it can be an economically-sound argument, one that I would say is immoral. But that’s a difference of ethics, not of economics. If you recognize the trade-off and realize we’re going to make Third World workers worse off but we will increase the demand for – again, I shouldn’t say poor Americans because your average union worker making garments in the United States is not a poor American.
But let’s say lower middle class American will be slightly wealthier because we will do more of it here and America as a whole will be poorer because we’re making things in a more expensive way that lowers all of our standards of living.
Once that’s – oh, I understand these trade-offs. It screws the world’s real poor, helps out somewhere – somebody in the 30 to 40th percentile in the United States and overall makes the United States poor. I favor it. Economics has nothing to tell you. Those are trade-offs. But they’re not the types of trade-offs that most people talk about in this debate.
Matthew Feeney: So I want to follow that economic point with a philosophy question because we talked earlier about the importance of it. What is someone with free market sympathies like us to do who is also not happy about conditions in sweatshops? What’s the ethical thing to do? Should we be buying more garments that were produced in sweatshops or should we just be buying American T-shirts and American shoes? What’s the ethical thing to do if you’re a free market person concerned about sweatshops?
Benjamin Powell: Yeah. So we need an anti-buy-made-in-the-USA campaign. So let’s – buy foreign increases the demand for products made by them, that increases the number of them that need to be employed and the wages that they garner from it.
Now, related to that, I think we should talk a little bit about what can be done for these workers. So staying within the anti-sweatshop movement. Let’s talk about one more thing that doesn’t usually help them very much, but it’s related to this ethical branding part. So sometimes they will say, you know, it’s – we need products that are made sweat-free and certified – you know, like fair trade coffee equivalent. This doesn’t have to be bad for the workers. But in practice, it often is.
So, one, companies can get them branded sweat-free by paying a “living wage,” having better working conditions or whatever. But one way you do that is you shift where you produce it to where the labor is more productive. So you don’t do it in Bangladesh anymore. You subcontract to Mexico and there the labor is much more productive than it is in Bangladesh.
You’re sweat-free but if we care about the world’s poor, have we really helped them or have we just shifted away from the poorest of the poor to some others? Or worse is this fraud called “Shop with a Conscience Guide” and they claim everything that they sell is sourced from sweat-free factories, except when you actually plot where their factories are located, most of them are in North America, particularly the United States and Canada.
It’s a buy-union, buy-made-in-the-USA campaign in disguise. There are a few scattered through Latin America, a single one in Asia. That’s a shifting of production. But people who go to that think, “I’m helping poor workers of the world,” but it ends up just being a fraud.
So I think we have to be very careful about – they’re catering to buyers who want to feel good but who aren’t willing to invest very much to find out if they’re actually doing.
Aaron Ross Powell: You’ve just described the entire American political system.
Benjamin Powell: It’s fitting when you’re in this city. So I don’t think – so I think the correct answer as a consumer, just buy products. Don’t worry about it. Buy them from foreign countries, unless you find out that it’s made with slave labor. But I can tell you in a decade of studying this, I could count on one hand the number of questionable instances where there might have been something that’s coerced labor. The vast, vast majority, these are places where people choose to work because it’s their best of really lousy alternatives.
But if we really want to help these workers, there are policies we could advocate for. They’re just not the things the anti-sweatshop movement talks about. The number one – so I said sweatshops are a stage in the process of economic development. That means they don’t – disappear overnight. It takes time and it’s quicker now than it used to be. But there is something you could do that would take an impoverished worker and enrich them basically overnight. That’s advocate for more open borders and more immigration from these countries.
If you take a Haitian out of Haiti where there are sweatshops and bring them to the United States, on average his income will go up by 1000 percent. That’s not in a generation. That’s not after years of accumulating capital. It’s overnight and it’s because he comes and interacts with the American capital technology and human capital that’s here. It’s not that he himself intrinsically doesn’t have any skills and he does it in an environment that it better protects property rights and has greater economic freedom so that he can use his skills better.
So if you care about the welfare of these workers, it’s very tough to promote development in another country. It’s hard to force it on them because ultimately they need – the underlying institutions of economic freedom, property rights, rule of law and just writing him a US style constitution or having a military invasion doesn’t do this. Constitutions are pieces of parchment. They don’t enforce themselves. It needs to be the hearts and minds of citizens there who buy into it.
We can’t give that. What we can do though is allow some of them to come to us and that would help more of the workers.
Matthew Feeney: I imagine though that the bootleggers we discussed earlier might be among those objecting to such a policy of increased …
Benjamin Powell: I haven’t heard it done at AFL-CIO’s plank yet.
Aaron Ross Powell: So you mentioned that we can bring – so one of the reasons that you might move from Bangladesh to Mexico if you’re being forced to pay more is because the Mexican factories are more productive than the Bangladeshi ones.
Then you mentioned that bringing – if we open up the borders, we let the Bangladeshi come here. His productivity will go up. So what – tie those together. What is the cause of these productivity differences? Is it that – you know, on the one hand, like – so we say American workers are very productive but very expensive.
Are they more skilled? Are they say better at sewing shirts than the Bangladeshis or is it just a matter of like the sweatshops in other countries have worse technology and so it takes more man hours to make the same shirt? If that’s the case, could we fix it by simply investing in better technology in these other countries? What’s the cause of – what do we mean by differences in productivity between the countries?
Benjamin Powell: Yes. So it’s a combination of all of these things that you’re talking about, right? It’s differences in technological levels, differences in the amount of physical capital they have to work with and differences in the skill levels of the workers and differences in the environment in which you combine these things. I would say that that’s fundamental important one.
So in a lot of these poorer countries, you’re operating in places that don’t have a rule of law, that don’t have secure property rights, that have all sorts of restrictions on your economic freedom. As a result, your cost of doing business is a lot higher, i.e. the worker’s productivity for each dollar invested is a lot lower.
If you have to worry about how many government officials you pay off to get it out, if you have to worry if your profits might be inflated away, if you are restricted into how difficult it is to set up a business, only one big one comes to town instead of a thousand flowers blooming, all of these things – kind of the magic recipe of how to mix the stuff together, the prices – the relative prices, that’s what coordinates an entire economy, are messed up in these countries. That means you don’t get the most bang for your buck out of any of these inputs.
So it’s both the quantity of them and how they’re combined that are differences in productivity across countries, which means it’s not just like a magic recipe. I mean this is the – you know, down – across town here, the World Bank’s problem for 60 plus years of trying to force development into poorer countries focuses on the inputs. It’s aid for investment, aid for education. Like, if we just give them physical capital, if we just give them education, they will get richer.
It doesn’t happen. It never works. The reason is, is because the environment they’re stuffing it into isn’t conducive to growth and higher productivity. Unfortunately there is no magic recipe about how to change that country’s institutions to better respect these things.
Aaron Ross Powell: We talk about like the way to help the sweatshops is to ultimately raise their productivity so that their wages go up. We often point out the kind of oddness of one of the things that free markets do is drives down the price of goods. Like, it costs far fewer in average man hours to buy eggs today than it did in the past and that things tend to get cheaper over time, except in those heavily-regulated industries, except wages.
Wages tend to go up over time and we attribute that to people are more productive. But sweatshops seem to be running in the other direction. Like if it’s the fact that the – say American worker is way more productive than the Bangladeshi, then why are countries paying Bangladeshis when they could be getting much more productive workers elsewhere? Is there kind of a tipping point where like suddenly they’re so – no matter how low the wages are, their productivity is so poor or no matter how high, it’s that we don’t want to hire them or no matter how high the productivity is, the wages are so high that we can’t earn anything? We need to be aware of where that tipping point is as we progress.
Benjamin Powell: So there are tipping points but they’re not like all or nothing ones. They’re all trade-offs on the margin and it’s at least conceivable that you could have a society where there’s nobody making garments at any wages. But it’s not one that we live in whether you’re in Hong Kong or the United States. They have people making garments there but for higher wages who are very productive at doing it.
For a company who’s let’s say subcontracting things to be made and they have the choice, they might pick high productivity, high pay, high cost US or low productivity, low cost Bangladesh and at the equilibrium between these two, the companies should be just about indifferent between choosing high cost but more productivity, low cost but low productivity? Which means whenever we intervene in the name of helping workers to say push up their wages or demand better working conditions, we’ve tipped that equilibrium now.
It’s not that Nike will choose to like close up shops and not make shoes in Indonesia anymore. It’s how many shoes that they make in Indonesia versus somewhere else and it’s going to move that balance towards higher skill, higher productivity away from lower.
Aaron Ross Powell: What do people who work in sweatshops think of the – let’s say the Baptist side of the anti-sweatshop movement? Do they – are they – when these college students – go overseas and say like, “We’re going to help you.” Are the sweatshop workers saying, “Yes, please, help us. We applaud you,” or are they grumbling or is there like an anti-anti-sweatshop movement among sweatshop workers?
Benjamin Powell: Yeah. So I certainly can’t speak for all sweatshop workers around the world nor would I presume to. But what I would say is that often – it’s not unusual at all for them to be able to take a worker from a poor part of the world and have them say, “Oh, we want better working conditions. We want higher pay.”
I do this – I talk on this at universities and I will pick out a professor from the audience sometimes and say, “Hey, would you like higher pay?” Yeah. Would you like a bigger office? Would you like longer sabbaticals? You’ve got one of the cushiest jobs in the world, a tenured professor at a university. He will say yes to all these things.
It’s not a constrained question. So often you will see demands from Third World workers in conjunction with these anti-sweatshop groups and they say these workers want better – yeah, we all do! That’s not just dependent on you being poor.
The question is, “Would you like your mix of compensation to change to have more of those, if you have to give something up?” So I went down to Guatemala and surveyed workers in two sweatshops there that the National Labor Committee had singled out and had workers sign on it. They were protesting and wanted shorter working hours, more predictable working hours. They weren’t giving paid vacation, which Guatemalan law says they have to. They weren’t enrolling them in the state health insurance. The Guatemalan law says you have to.
They had a list of demands from the workers. I went down. I surveyed the workers though and I asked them, “Would you be willing to work for lower pay if …” and listed the number of characteristics that NLC said the workers wanted.
Universally no. More than 90 percent of them on almost every question, save the paid vacation in there, it was like 80 percent or so said, “No, I wouldn’t work for any lower pay,” because there was a follow-up, “¿Que mucho cansades?” which became irrelevant because there’s like zero, because they all wanted what meager pay they were getting, which – because some activists – and I have debated a Labor Union activist who said this one time, who said, “I’m not going to say that the wages aren’t better in sweatshops and the alternatives. I’m just saying that we need to improve their working conditions.” I’m like, “Well, the two are related because the employer doesn’t care. They care about total compensation.” Wages plus whatever other compensation they have to give you.
Employees do care. So, some of them would like higher pay. Some of them would like better working conditions. An employer has every incentive to get them mixed right in line with their preferences. Otherwise, they’re paying workers more than the workers value it. They could reshuffle that and make better profits.
So when we see the conditions as they are, it’s constrained by the overall productivity in compensation the employee is going to get. But people want most of it in pay and if you think about it, all these other things are normal goods. You demand more of them when your income goes up. If you’re desperately poor and trying to feed, clothe, shelter your family, you want the vast majority of your meager pay in money. That’s exactly how employers then provide it.
Matthew Feeney: So are you optimistic about the future of the Guatemalans that you interviewed or their children? So after studying this for a while, what can we expect from the future of sweatshops? Should we be optimistic about the conditions and wages?
Benjamin Powell: So let me separate out from – you asked Guatemala specifically. I’m very mixed on. Guatemala has a wonderful university, the University of Francisco Marroquín where they study the principles of classical liberalism and educate the intellectual lead of that country. I’m optimistic on that. But at the same time, as long as the US maintains its war on drugs, it’s just disaster for Guatemalan institutions there.
It’s hard to believe that they will have something that resembles the rule of law and good property rights while we have a war on drugs from the United States that’s screwing up Central America and Guatemala in particular.
But taking it as worldwide sweatshops, yeah, I’m very optimistic. For some places, they’re the crutch that’s currently the least bad option and a place like Bangladesh doesn’t have great prospects of increasing economic freedom in the near term probably.
But for a lot of them, they’re just a stage of the development where they’re improving their property rights and institutions. I mean take China, China and India, right? In the last decade, we’ve seen more people escape extreme poverty than any other time in human history. Somehow Pope Francis seems to be missing this when he talks about capitalism and the world’s poor. But it’s sheer numbers. We’re seeing more of them escaping.
What has happened now is China – purely capitalist? Of course not. But in terms of its economic freedom, it has made huge improvements from 1980 to now and what we find is not only is a good environment of economic freedom important, but just improving it from whatever level you start at does a lot to increase your growth and get people out of poverty.
So I think as we look around, more genies are going to get out of the bottle where more countries will become more free and that this process will lead to sustained development that gets them out of poverty.
Aaron Ross Powell: Is there though a possibility of a – so not a cycle of sustained development but hitting a point where the cycle goes in the other direction because – so the way you become wealthier is to get more outputs and fewer inputs. So to some extent like the way that we have become wealthier is taking – is getting more of the stuff we want, clothes, shoes, whatever else for cheaper by offloading that to places where you can pay less and then – so we’ve gotten wealthier because of that.
They have gotten wealthier because we have basically funded their industrialization. But if their industrialization rises to a point where now we’re getting poorer because the cost of those goods are going in the other direction say, does that then end up hurting their economic development?
Benjamin Powell: Forget this blowback on us. Just thought experiment, right? Forget military considerations for a moment on this but just in terms – would you like the United States to be a developed country and the rest of the world the level of Sub-Saharan Africa or the United States have a higher standard of living if the rest of the world was a little bit more developed than us? It mean they’re that much more productive and can create that many more goods and services that they can trade with us instead of us innovating the new medicines that spread to the rest of the world. We benefit from cancer being cured in Africa because they’re so developed and then it trickles over to us.
As these other countries get more productive, sure, the cost of making clothing goes up relative to their ability to produce other great things that we would like to trade with and we will have to reshuffle how and where we make clothing as these resources are more valuable doing something else. But that “more valuable” doing something else is a more valuable thing they can trade with us. It’s a wonderful world.
Aaron Ross Powell: One of the problems that I often run into in trying to make these sorts of arguments to people that – like, look, the market has these processes that lead to improvements across the board and that property rights and rule of law really help the poor more than the other things that you want to do. Is kind of long term solutions to acute problems, which is often a hard sell – because the argument that you’re making in favor of allowing sweatshops and allowing this sort of development is, is a long term thing.
Like, look – because you said it took Western countries with 100 to 150 years often to pass through this phase and that’s a lot of generations of people …
Aaron Ross Powell: It’s like a – it’s not only a longer term than like I’m going to raise – I’m going to make a law right now that’s going to increase your wages on January 1st. But it also is kind of a dispersed and nebulous process. Like, look, if we let these things happen and we don’t do – we basically leave stuff alone, which is what we – free marketers advocate.
Then over time, different people doing different things will lead to a process that will improve things which is often when you’re either – someone who’s hurting right now, right? Or you’re someone who deeply feels the pain of someone who’s hurting right now, saying, “Trust us. Things will get better.” It’s like a harder sell than the even potentially harmful but promised – like look, if you vote for me or if we change this one thing or we institute a minimum wage or whatever else, I can fix it right now.
So how do we – as we’re making these arguments to people, is there a better way or how can we sell that kind of harder, long term and emergent process help over the like “I can promise to fix it tomorrow.”
Benjamin Powell: Yeah, it’s the kind of unicorn theory here. I think that’s incumbent upon us to ask. Instead of just defending this nebulous, long term process, OK, how are you going to fix it tomorrow? Name me the policy. Now when you do, let’s use economics. Let’s think about cause and effect so we can identify the trade-offs and invariably, unless their immediate term solution is offer them a visa to the United States, what we find is that their intended interventions will often make the workers worse off in the short run and also impede the very process that would increase productivity and raise them over time.
I’ve done dozens of these debates at universities when I have an opponent. I just keep shooting down each of these things that gets tossed up and then we’re left with at the end process of development, migration, maybe a little bit of ethical branding if it were done more intelligently and free trade. Trade with them more freely.
Aaron Ross Powell: So if the argument is in favor of – I won’t say in favor of sweatshops but in favor of markets in this process are this strong and the economics is this clear – and we’re not talking – I mean this is – you’re not like presenting fringe economics to us. You’re applying basically textbook economics to the situation. Then why do people – why do so many people disagree? Because the argument that you’re making is I’m sure not very popular on college campuses.
It often comes across as like cold or uncaring or even immoral to a lot of people. But if the arguments are so good, the data is so clear, why don’t they agree with you?
Benjamin Powell: Yeah. So this isn’t a fringe economics thing at all. I mean that far right libertarian economist Paul Krugman wrote a column in 1997 called “Bad Jobs at Bad Wages are Better than No Jobs at All”.
So the vast majority of economists who think about this issue are pretty much on my side on it. There are fringe exceptions and I debate them. Usually what they would say is textbook economics doesn’t apply and then they offer reasons for that and I’ve gone through this debate with them in journals and other places arguing actually within different mechanisms they’re identifying. Don’t undermine textbook economics and we end up right back. Yeah, supply and demand. We’re thinking about it at the beginning.
But that’s not the majority of people who don’t find this argument persuasive or who just haven’t heard it. Most of them haven’t heard it or they’re not educated in economics to think about the trade-offs. So they favor policies that feel good. I actually find when I give this talk on the majority of college campuses, your average person in the audience when I start, probably has a negative feeling about sweatshops, but hasn’t made it part of their world view or whatever.
When I start talking about these trade-offs, their opinions move a bit. For your hard, dedicated, anti-sweatshop activist, it usually just makes them feel really uncomfortable because they don’t have good arguments against it. But it’s damaged their world views, so they kind of dig in their heels and get upset. You’re probably not going to change that person’s mind by laying out the logic, at least in the short run. If they really care about the workers, they will study the work harder and then probably change their views or come up with the unicorn that I haven’t seen yet.
Matthew Feeney: Presumably, that’s not a phenomenon just isolated to sweatshops. It seems like mainstream economic views are not widely held in many college campuses.
Benjamin Powell: I mean related to sweatshops, just minimum wage and what we see people around the country react to in that. They pick out one study from the mid-90s that said one thing that they liked and ignore the mountain of evidence that says something else including just the basic price theory. This is the life that we are – lead as economists is often finding the general population as no interest in here. You tell them about the trade-offs that they wish didn’t exist.
Aaron Ross Powell: Well then let’s close by asking about that because you’ve done a few videos at least for Learn Liberty.
Benjamin Powell: Sure.
Aaron Ross Powell: So you’re popularizing economic views, presenting them to non-academic audiences. Why – I mean so if economists are not being listened to, is there something that economists or even just us non-economists who are in favor of this economic free market approach, is there something we’re doing wrong to get these ideas across? Are there ways that we could improve how we can communicate these ideas? Not just about sweatshops but about these economic principles in general?
Benjamin Powell: Yeah, I’m sure the vast majority of economists are boring and turn people off and maybe people have already turned off this podcast from me. I think in general, we can do better at trying to relate to normal people and talking about real world issues instead of playing mathematical models that have little correspondence to the real world and kidding ourselves that it’s advancing science. So if more of us were doing more to reach out to people, I think it could help. But ultimately, it’s a question of whether people want to hear as well and I’m not sure I have any great advice about that.
Aaron Ross Powell: Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more about libertarianism and the ideas that influence it, visit us on the web at www.Libertarianism.org.