Unethical = Uneconomic

John Connolly, in response to my “Why Economics Needs Ethics” post, brings up an excellent point. He says, “What you say is true, but I'm not sure that the argument will hold up as exploitation (I've heard arguments for sweatshop labor at low rates because it keep the workers working harder). The argument could be that with $5 over $2 a day, even though the worker can't buy what he's making, he can buy more of other things in his country. If he's making soccer balls, he probably won't want to buy them anyhow. But we do, so what's the harm in hiring them out to make them at what they consider to be luxurious rates? Everybody wins, right?” This is an excellent point, and needs to be considered.

Let us be clear here: It is not that workers in all countries should be paid the same. Workers should be free to leverage their lower standards of living into a competitive advantage. But this only works if the object is to raise their material well-being above the level of subsistence as defined by their particular society. Obviously, this level will not include everything it includes in our society; it is unlikely to include a car, a big house, or even indoor plumbing. But if workers get subsistence and something to spare, the “something to spare” will support many local businesses, which will then raise the demand for labor and with it the average wage. Further, the excess over subsistence will contribute itself to trade, as workers, or at least the lowest level of businessmen, have incomes sufficient to buy foreign goods. Within a relatively short time, the country becomes a real trading partner and not just a source of cheap labor.

But if, on the other hand, justice is absent, if workers can command no more than subsistence, then subsistence itself will be defined downward; the human capacity to endure hardships will allow for increasingly oppressive conditions. As this process continues, workers will lose what little bargaining power they have, because there will be no excess to support them in times of unemployment, and they cannot withhold their labor, even for a day. In such cases, the only thing worse than being exploited is not being exploited; one must work at the terms offered or starve. At this point, all the positive values of trade disappear into a black hole. Education will not be advanced because only the meanest labor is desired, labor which can be done by mere children, the easiest of all groups to exploit. Women will not be able to attend to the home, since they are the next easiest group to mistreat

Business begets business; the more flourishing businesses there are, the more supporting businesses spring up. But first, business itself depends on having a broad base of customers with sufficient income to support business. With just a little justice, a virtuous business cycle ensues; the little excess fuels little businesses which fuel more businesses, which creates more excess over subsistence, a higher demand for workers, and more businesses. This “virtuous cycle” has been tested in such places as Taiwan, and Singapore, and in many other examples of successful development. But if justice is absent, the reverse happens. If the workers in Bangladesh won't moderate their demands, we'll move to Indonesia. And then we will play Indonesia off against Vietnam, and from their we'll threaten to go to Ghana. The poor in each country are played off against each other, and a vicious cycle results, pushing wages to subsistence and pushing subsistence itself to lower and lower levels.

When we hear of sweatshop conditions, we like to comfort our consciences by saying, “yes, but its a good rate for their society.” Alas, this is not true; the very logic of the trading argues against it, as owners seek greater and greater profits; indeed, the market punishes the owners if they cannot continually increase their gains, and the logic of competition, unrestrained by the natural and customary rights of workers, dictates a continual search for ever-more exploitable labor.

Such systems are unstable. Not only socially unstable, fueling growing resentment and discontent, but economically unstable, as the whole logic of trade is broken, a logic that depends on a certain balance. The unethical is also, ultimately, the uneconomic.