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In Defense of Cheap Labor

Mises Daily: Friday, December 03, 1999 by

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One of the complaints raised at the WTO meetings in Seattle, Washington, echoes the accusations that have for years been leveled at Nike, Kathy Lee Gifford, WalMart and others, all of whom have employed workers abroad who charge far less for their labor than do workers in most Western countries, especially in the US.

It is that it is evil to pay so little for the work being provided in the developing world, and unfair to other workers who have fought long and hard to obtain better wages from their Western employers.

Now, after all this struggle and the benefits finally reaped from it, companies are managing to escape the results by moving to countries where wages are still low, where there is no organized "labor movement," and where other harms befall workers as well (for example, environmental destruction via the costless dumping of wastes, wrought by the lack of legal sanctions).

It is difficult to judge these charges without actually living in the regions of the world where labor accepts the "cheap" wages, at least cheap in comparison to what labor gets paid in, say, Detroit or Dallas.

After all, medical care is less expensive and less up to snuff in most such regions, as well, as is entertainment, transportation, clothing, food, furniture and the rest. "Cheap" is not an absolute concept!

In short, in most regions of the world, the quality of life is lower than in the West. Ironically, that is largely because in most regions of the world free trade had been either outlawed completely or curtailed severely by governments that have ruled there.

Without free trade, labor cannot organize, wages cannot be bid up, the environment suffers, and, of course, the quality of goods and services lags. It is hardly the fault of corporations that do business in these regions that they need not pay more for what they get. But to this the response is that corporations ought to and even be made to pay more for the work.

On a recent TV magazine program Kathy Lee herself said that she wished the minimum wage were higher in Central America, where she does some business--as if she were prevented from raising wages unless the government forced her to do so.

At any rate, there is a widespread sentiment, fueled by the likes of Ralph Nader and Michael Moore (the man responsible for those sentimental movies "Roger and Me" and "The Big One") that it is the obligation of people in business to seek out badly paid workers and raise their wages to what is confusedly called a "living wage."

I don't wish to address the basic moral issue here. Suffice it to note that this complaint very likely does not square with the behavior of most people--I'd bet even those who advance it.

Consider just this much. You are in a grocery store and shop for some item, say tea or chicken or soda pop. If you see that your preferred item comes in both an expensive and a cheap rendition, which do you purchase? At the mall, do you avoid the very expensive stores and the very expensive items and, instead, look for sales or good deals?

When you shop for shoes, do you seek out the most expensive if you can find more reasonably priced ones that meet your needs? When you bid on a house, do you volunteer a higher price than the seller is asking? How about a car?

When considering going to a hair dresser or barber, do you look for the most expensive place to get this service?

I doubt that the answer is that most folks want to part with more rather than less of their wealth as they make their way about the market place. To waste money is is to throw away good opportunities--for saving for a rainy day, or being able to afford something else. It is to behave irresponsibly.

People in the market place aren't there to be charitable: that goes for everyone, not just managers of multinational corporations. If you shopped the way the protestors expect companies to shop, your family would be outraged at your carelessness, your lack of prudence.

But it must be remembered now that just as charity begins at home, so does charitable wage negotiation. If you avoid the stores where goods are expensively priced, you are putting into motion a process that leads to the manufacturer of the goods sold there to seek out the cheaper rather than more expensive labor, overhead, and transportation. Those who buck this trend simply cannot attract customers and will go out of business, thus leaving what used to be cheap now simply unemployed labor!

The fact is that in a free market there are better opportunities to improve one's bargaining power than in a regimented economy of the type the Clinton administration wants the WTO to impose around the world. The latter relies on the non-existent omniscience of bureaucrats to set prices, wages, and production levels, with the result that the entire system is usually very badly mismanaged.

Even such American academic sympathizers with socialism as John Kenneth Galbraith and Robert Heilbroner have admitted that critics of the planned system such as Ludwig von Mises and F. A. Hayek were completely vindicated when the Soviet Union's socialist economy collapsed. These latter economists argued for decades that when there is a lack of freedom to engage in local pricing, communication between the massive number of market agents is impossible, so shortages and other forms of mismanagement will be inevitable. (This is called the famous "calculation problem" of planned economies.)

Nor are heavily regulated--rather than outright planned--economies able to escape the brunt of this criticism. There, too, bureaucrats pretend to be able to know what people ought to want for themselves and under what terms. But this also misfires and leaves costly wastes, all in the name of humanitarian sentiment that lacks economic sense. (But such sentiment is a lazy type of humanitarianism at best!)

What is fundamental to an economic system is freedom of trade among all the participants. This means no slave labor, no restraints on trade by governments and criminals, no protectionism, and no regulations imposed by the WTO. The more freedom, the better the likelihood of economic opportunities of all concerned.

But freedom is not enough. Market agents will have to be alert to new ways of doing business, new technologies and so forth. Complacency is deadly for economic prosperity. Sadly, however, a lot of people believe short cuts can be taken and the flexibility economic progress requires, both in their households and on the global economy, can be dodged by instituting government protection against competition. That is why so many clamor for government interference.

Finally, what about child labor? President Clinton proudly signed an WTO agreement against it, but even that is no help to millions who do not have the option to enter some nice school (which Mr. Clinton dreamily envisioned) instead of going to work. For such kids it is either some kind of work or some level of starvation, in most cases.

In some developing countries sending a child to work can mean the difference between a reasonably solvent family and one that is on the brink of economic collapse--which means also the collapse of medical, educational, and various other areas of their lives.

In Hungary, as a kid of 11, I worked as a baker's assistant, getting up at 4:30 AM and then leaving the bakery for school at 8 AM, pretty run down, in desperate need of sleep. But given that economically mismanaged society, the alternative was for me not to work and for the family to eat far less.

My mother already had to bring soup home from work every noon since we could not afford to buy any. Under such circumstances child labor is a blessing! Had it been forbidden, it would have been a back breaker for our family.

What President Clinton signed in Seattle on December 2nd is probably a back breaker for millions of families across the globe. In the name of resentment against corporations that make profits from the work of children, the president and his colleagues consigned a lot of children to hopelessness.

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Tibor R. Machan teaches business ethics at Chapman University and is an adjunct scholar of the Ludwig von Mises Institute in Auburn, Alabama.


See also The WTO: Threat to Free Trade.