TCS Daily

When Exploitation is Mutually Beneficial

By Matt McIntosh - May 5, 2006 12:00 AM

"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.



nobody forces people to work for these foreign countries.

That people freely choose to work for them is evidence that the people themselves view such jobs as better than the next best opportunity for them.

"The Capitalist Manifesto" Refutes Exploitation As An Anti-concept
David Friedman's definition of the Marxist term "exploitation" is "I 'exploit' you if I in some way benefit from your existence".

This definition perverts every morally good, mutually beneficial, mutually agreed upon (i.e. voluntary) TRADE into a morally evil act of exploitation of a victim. This concept's perversion of the facts of reality makes the concept of "exploitation" completely invalid. Author-philosopher Ayn Rand identified terms like "exploitation" as anti-concepts because the sole purpose for creating the concept was to destroy a reality-based valid concept, in this case free trade. Marx and David Friedman created the invalid anti-concept "exploitation" to destroy the concept of "free trade" and to induce undeserved guilt in honest "traders" by falsely claiming that they create victims. The recent term "price gouging" is another anti-concept designed to destroy the valid concept of free trade plus the economic fact of the law of supply and demand.

Matt McIntosh's well-intentioned attempt to protect capitalism and all of its life-enhancing benefits by calling for more mutual "exploitation" must fail because he accepts the invalid Marxist anti-concept "exploitation" and all of its baggage. The author must follow Dr. Andrew Bernstein's example in his new book "The Capitalist Manifesto: The Historic, Economic and Philosophic Case For Laissez-Faire" and first refute all of the Marxist anti-concepts before he can effectively defend and promote capitalism.

Bernstein validates the reality-based concepts from which the life-enhancing system of capitalism was derived. He also inspires the reader with the historical facts about intellectual giants who brought us the Scottish Enlightenment, the Industrial Revolution, Capitalism, and the birth of America. Bernstein also refutes all of the philosophical, historical and economic lies about capitalism that socialist academics and their stooges in the media have spread in society for over one and one-half centuries.

No Subject
Capitalism is good.

Exploitation is bad.

(Thinking about what you read or hear is very good or you will prematurely swallow whatever you are being fed, truth or lies - only to eventually become sick with an insiduous virus that affects the mind and heart if it is the latter. Those around you eventually will, too, if you gain enough power to affect their lives. We all play a part, wittingly or not.)

One dollar does have a much larger impact on the life of someone who is poor than rich. It means milk for a few days or some bread. It rarely is enough for meat, cheese or luxuries like fruit and vegetables.

You, too, would lose your energy, get sick, suffer with painful teeth that would eventually end up gone, leaving you very much unattractive and unable to function well - as you watch your fat (by comparison, of course) neighbors eat well (every day!), own (!) a house, own (!) and drive a car, wear shoes (!) in summer and boots (!!!) in winter, buy and wear new clothes every season, wear glasses - new ones every five years, buy a hearing aid when their ears don't work well anymore, go to the dentist (their children, too!) every year and even have their teeth cleaned, get their hair cut at a salon, enroll their children in music/dance/tae-kwan-do et. al. lessons month after month for years ...

The demoralization and destruction of poverty doesn't only happen to people with black skin who live on the continent of Africa - outrageous behavior is chosen everywhere to one degree or another.

We must take care of our own at home first - or the wolf will be coming to our own door soon enough.

Respond or withhold. Encompass or judge. Who is the poorer?

Your hypothetical farmer
Let's take this hypothetical example a step further. Suppose our subsistence farmer-- let's say he runs a chicken farm in Mexico-- is forced out of business because subsidised American chickens undercut his operation, and he can no longer make a living. So he has to go to an American maquiladora on the border and look for work making widgets.

He gets a job doing piecework at a dollar a widget. But he can only make eight or nine of them in a day. So he still can't support his family. Is he being exploited?

The difference between capitalism and communism
An old Russian joke: A student confronts his history professor and asks what the difference is between capitalism and communism.

The professor answers "It's very simple. Under the capitalist system, man exploits his fellow man for his personal gain. Whereas under communism, it's the other way around."

1. What was the chicken farmer's take home before being 'forced' out of business?

2. What was the Mexican government's subsidy to the chicken farmer?

3. How are chicken farmer's is the US subsized?

4. Why is there no other employment in Mexico?

5. The article made no mention of subsidies and I gather the author would not be in favor of them. Agriculture is subsidezed around the world to the detriment of all and should be abolished.

6. What is the average salary of the Ford and GM employees in Hermosillo? How many people apply for those jobs?

Many questions
You're going to put me to a lot of work if I have to answer all these questions-- so I'll be perfunctory.

1. What was the chicken farmer's take home before being 'forced' out of business?

Enough to keep a family. Then, after NAFTA, it wasn't. You can look at the curve on illegal immigration and see how many Mexicans have been displaced, and when they came here looking for work.

2. What was the Mexican government's subsidy to the chicken farmer?

Mexico doesn't have the kind of money floating around to be able to subsidise farmers who aren't competitive, the way the US has always done. So when they can't compete they go under. And come to the states to find work.

3. How are chicken farmer's is the US subsized?

This is as good a one page explanation as I've seen:

4. Why is there no other employment in Mexico?

There's plenty of other employment in Mexico. NAFTA has in fact tremendously increased the volume of agricultural sales to the US, and Mexico even enjoys a positive balance of trade with the US. All that means hundreds of thousands of Mexican jobs. But they have a lot of mouths to feed, and their ag sector has been very depressed. For that matter, manufacturing is unable to satisfy the needs of everyone looking for work. So as the jobs go north, so must the people follow them.

5. The article made no mention of subsidies and I gather the author would not be in favor of them. Agriculture is subsidezed around the world to the detriment of all and should be abolished.

6. What is the average salary of the Ford and GM employees in Hermosillo? How many people apply for those jobs?

I've never spent time in Hermosillo so I'll describe life in the maquiladora towns up along the border.

Average salary is as low as they can set it and still have people show up for work. That's what we call a market mechanism. However there are many, many more people applying for them than are hired. This makes life in the border towns a true hell on earth, in terms of crime, drugs, despair and exploitation.

Chicken Farmers
If your example of Mexican chicken farmers was meant as a critique of the article, you did not succeed.
Do you feel the same about the loss of small family farms in the the midwest?

false premises
Since the first part, the claim that the chicken farmer was forced out of business by subsidized US farmers is false, the rest of your question is irrelevant.

The loss of small family farms
You asked me many questions, apparently uselessly. And I responded.

I felt the question related to the article because the author is going on about what a great thing the maquiladoras are for Mexico. Ans my comment went to the fact that while that aspect of NAFTA may have created jobs for some Mexicans, at the same time a robust industry employing some two million people (chicken farming and processing) was wrecked. The Mexican economy is just not so flexible that it can stand that many newly unemployed coming onto the market. So many of them came to the US to look for work. If American subsidies were withdrawn, those people could again make a living back home.

I hope you read the article I cited.

And yes, I felt the same way about the loss of several million American farms back in the 1980's. These farms were lost for some of the same reasons and for some other reasons. Capital-intensive farming was not very friendly to the family farmer, who hadn't the resources to wait out a couple of bad years when he had half million dollar loans outstanding. This was an instance, IMO, when the capitalist model of driving prices down at the expense of every other consideration destroyed a way of life many found rewarding. We could have put up with higher food prices. But we didn't.

Farm prices
Farm prices are held down by subsidies.
Farmers get hooked into a subsidized market and cannot get out without selling out.
If their were no subsidized markets, they would have had incentive to diversify.
Organic farms, grass fed beef and other small farmers are starting to break out.

This is one of those rare moments when we're in agreement. I'm not a farmer, but it stands to reason that if an artificial proce floor is maintained you have overproduction, thus the ceiling gets lower. So if you want to make more money and live a more satisfying life, you go into a niche market that emphasizes quality.

Let's back up a minute....
The vulgar libertarian cliche about sweatshops being the "best available alternative" neglects the role of Third World government policy--often in collusion with Western capital--in reducing the range of "available alternatives."

One example is land expropriations, modern day reenactments of the enclosures, which abrogate subsistence farmers' traditional property rights in the land in favor of absentee landlords. These policies, usually carried out by landlord-and-general oligarchies, have often been made by Third World governments *in collusion* with Western capital. The U.S. is a traditional ally of Latifundismo in Latin America.

And such authoritarian regimes are also prone to persecuting independent union organizers. There's a reason sweatshop employers have gravitated toward "workers' paradises" like China, Central American banana republics, and places like Indonesia where the right to organize exists mainly on paper.

When I break your leg then give you crutches, it's somewhat misleading to say that I give you a "better alternative."

nice theory, too bad facts don't support it
If you can show where these US corporations paid govts to force people off of their land, that would be nice.
Most third world countries do this, even when they have no prospect of US investment.

No Subject
How about where the U.S. government, under the influence of U.S. corporations, overthrew regimes that wanted to give peasants property rights in the latifundia they were working? Ever hear of United Fruit Company? About the fastest way to get classified as a "communist" during the Third World was to attempt land reform that hurt the interests of an American agribusiness company.

No Subject
And one of the things provoking riots in China is government seizure of land to which villages have some sort of communal right, so it can be used to set up industrial parks for Western-owned industry.

And by the way, "most third world countries" started "doing this" back when they were governed by the British, French, and Dutch. For example, the British colonial administration in Kenya cleared the population off the best 20% of the land and gave it to settlers, and turned tribal common land into crown land. When this wasn't enough to drive subsistence farmers into wage labor, they imposed a poll tax on the population so they'd have to enter the wage labor market and earn the money to pay it.

The collusion between state land expropriators and wage employers has been continuous since the days of colonialism.

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