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Volume 23, Number 12
William Art Carden
It is not a short step from poverty to prosperity, and the transition itself has long been exploited by opponents of the market economy. Even today, the myth survives that the Industrial Revolution was characterized by worsening living standards, when it in fact marked a new age of mass prosperity, a time when people were liberated from old methods of production to move and work in newly developing sectors.
The same confusion arises in every country in the process of transition. The New York Times (August 4, 2003) carried an interesting article about Beijing photographer Zhou Hai’s exhibition, "The Unbearable Heaviness of Industry" (the photos are displayed on his website, zhouhai.com). As the title of his exhibition suggests, and his Internet commentary confirms, the exhibition is an artistic lamentation of advancing capitalism and industrialization in China.
Each picture of soot-and-grime- covered Chinese coal miners is designed to elicit an emotional response; specifically, the casual viewer is inclined to say "this is awful. Something must be done to alleviate the suffering of these poor people."
And I’m certainly not going to deny that the life of an industrial worker in the third world is incredibly difficult. I’ve known a number of coal miners, sharecroppers, and assorted "working men and women" who aren’t exactly nostalgic for 16-hour days in the harsh sun or under a mountain. I can only be thankful that I have the ability to write a commentary like this from the comfort of an air-conditioned office.
However, I’m fully justified in pointing out that there are a number of principles we have to consider before we rush to condemn China’s "industrial cauldron," as it was called by the Times. Careful economic reasoning leads us to conclude that the "heaviness of industry" may not be so "unbearable," after all.
First, we have to ask why people are so eager to take these jobs. The simple answer is because they want to. One of the most fundamental principles of economics is that people choose what is, in their opinion, the best available option given the relevant constraints. A number of issues complicate the analysis—China is a communist country, after all, and the Chinese government has a record on human rights that can be charitably described as less than stellar. But this fact remains: a Chinese garment worker works a 17-hour day in a poorly ventilated, dimly lit sewing room because it is better, in the worker’s estimation, than the next best alternative (in most third-world countries, that "next best alternative" is either subsistence agriculture or death by starvation).
Second, we have to remember to make relevant comparisons. Certainly, the work conditions for the Chinese industrial labor force are deplorable—by western standards. Fortunately, most westerners can earn livings without having to resort to sweatshop labor. We can do things like hold office jobs, wait tables, or evaluate photo exhibits for the Arts section of the New York Times. To compare the wages and working conditions of Chinese laborers with those of the West is to make an irrelevant comparison. The relevant comparison is the wages and working conditions of Chinese laborers versus their next-best option in the absence of those wages and working conditions.
Moreover, those photos may look like small slices of heaven to the citizens of countries that are even more impoverished and less industrialized than China. The concept of working for a wage, enjoying a fairly steady income, and not having to worry about your family starving to death every time it rains heavily may be quite attractive to one who isn’t so fortunate to have a job working in a Chinese coal mine. The "deplorability" of a given set of working conditions is relative.
But let’s lay all this aside for the moment. Many will reject the argument predicated on "voluntary exchange" precisely because a lot of people have to make decisions between two undesirable (by western standards) occupations. Also, contentions of "market power" and "monopsonistic exploitation of labor" have traditionally been levied as explanations for low wages and shoddy working conditions. In this light, let’s look at what happens if we pursue different policy alternatives.
For clarity’s sake, we’ll use an example (the conclusions will be general enough). Let’s consider a shoe company, say Nike, which is trying to decide whether or not to expand a factory in China. They expect to sell their shoes for $50 a pair.
Suppose now that a group of reformers, motivated by the heart-rending images of the "unbearable heaviness of industry," descend on the Chinese embassy and convince the Chinese government to adopt western-style labor regulations. Starting tomorrow, Chinese factories have to adopt western-style working conditions and a minimum wage of $5.15 an hour. How will entrepreneurs and business owners respond?
According to conventional wisdom (and Marxian theory), the firm will respond by improving working conditions, producing the same quantity of shoes, and continuing to employ the same number of people at higher wages. The additional costs of doing so will merely reduce Nike’s profits, which are a product of Nike’s capitalist exploitation.
It is important to remember, however, that firms don’t produce in isolation. They respond to incentives, which are determined by the institutional framework. In this case, formal constraints on wages and working conditions will lead to different outcomes.
These institutional changes haven’t affected the prices that entrepreneurs expect to receive. It is possible that some people may be willing to pay higher prices for goods that are produced under better working conditions—see, for example, the popularity of "fair- trade" coffee—but it is unlikely that these changes in wages and working conditions will affect the price that Nike expects to receive for their output. However, these changes will affect the costs that the firm expects to incur.
When firms decide to produce, they estimate a price that they expect to receive for their goods (in this case, $50 for a pair of shoes). They then bid for factors of production—skilled labor, tools, unskilled labor, machines, land, etc.—by offering wages and prices. Profit-seeking firms try to produce a quantity of goods at which the revenue received from the last good produced is only slightly greater than the cost of producing that last good—in other words, where marginal revenue is only slightly higher than marginal cost (neoclassical economics claims that firms maximize profits when marginal revenue is equal to marginal cost; however, Murray Rothbard has demonstrated that the two can never be precisely equal). The firm’s costs will skyrocket when the state intervenes, and the profit-maximizing level of output will be much lower, all other things equal.
The firm responds by doing one of two things: (1) They restrict production, because production of higher levels of output will no longer be profitable, or (2) They move to a different country with less-stringent labor laws (this merely moves the example, so we’ll go ahead and assume that the firm doesn’t do this).
A firm’s decision to restrict production may manifest itself in one of two ways. Either the firm will close a plant that is already in operation, or it will not invest in a new plant. In either case there may be apparent winners. Some workers will have higher wages and better working conditions, at least in the short run. This is what we will see. However, we have to take a page from the great French economist Frédéric Bastiat and take account of that which is not seen.
Lower output requires that firms invest fewer resources in labor and capital. In our example, Nike produces fewer shoes. This means fewer jobs, lower wages, and fewer "perks" like improved working conditions. These comprise the unseen costs of intervention—we don’t see the shoes that aren’t produced, the capital that isn’t invested, the workers who aren’t employed, or the wages that aren’t paid.
This even hurts the apparent "winners" in the long run. It may well be the case that wages and working conditions improve; however, it is also true that the tendency in an unfettered market is for wages to increase and for working conditions to improve anyway. The short-term improvements will be obvious and apparent, but they will come at the expense of the future improvements that don’t occur when production isn’t as profitable as it would be on an unfettered market. In sum, everyone is made worse off. Firms are less profitable. Fewer shoes are produced. Workers are involuntarily unemployed. Capital isn’t invested. Future improvements in wages and working conditions are retarded.
What happens if our crusaders decide to leave well enough alone and refrain from intervening in the Chinese labor market? Assuming that all exchanges between employers and employees are voluntary—i.e., assuming the conditions of laissez-faire capitalism—the results will be quite different. Let’s suppose that Nike is able to reap a healthy profit by producing shoes in China. Two things will occur. First, Nike will have an incentive to expand production. Second, Nike’s competitors will have an incentive to enter the market. Both result in capital flows to China, higher wages, improved working conditions, and a bigger social "basket" of goods.
Let’s consider Nike’s actions if they decide to expand their plant. They will have to offer some inducement to laborers to get them to accept jobs at the factory—this inducement will come in the form of wages and working conditions that the new laborers find superior to their other options.
What about the incentives of Nike’s competitors? If athletic-shoe production is sufficiently profitable, Reebok, Adidas, and other firms will be induced to build factories in China. They will try to lure away (a) Nike’s workers (and other workers), by offering higher wages and improved working conditions, and, (b) Nike’s customers, with lower prices and greater quality. This, in a nutshell, characterizes the long-run tendency of a market economy: wages, working conditions, and quality tend to improve while real prices tend to fall.
In sum, Mr. Hai is quite right that industry is characterized by a certain "heaviness;" however, he errs in saying that this "heaviness" is unbearable. The demonstrated preferences of Chinese workers indicate that the "heaviness of industry" is much more bearable than "the heaviness of subsistence agriculture" or "the heaviness of starvation."
What’s more, the tendency on the market is for the load to get progressively lighter. It was true in the eighteenth century and it is true in the developing world in 2003. The alternative to progress with the market economy is continued poverty. There is no third option.
William Art Carden, a former summer fellow of the Mises Institute, is a graduate student at Washington University in St. Louis ( firstname.lastname@example.org).