Tuesday, December 06, 2005

Clear Thinking on Legislative Interventions in Development

Fred L. Smith, Jr., president and founder of the Competitive Enterprise Institute, a free market public policy group established in 1984, contributing to a three-way discussion in the Wall Street Journal (online), 6 December: “Corporate Social Concerns: are they good citizenship or a rip-off fro investors?”, writes:

As civilization advanced from closed autarkic communities to the (relatively) open economies of today, it was necessary to go from the "deal with your own kind, marry your own kind" nativism of the past to the "treat a stranger as a friend" anonymous market transactions of today. As Adam Smith noted, we do not have to like our butcher (or he us) to enjoy the benefits of trade. The desire to feel good about the lineage of every transaction -- was this coffee grown by badly treated workers in a polluted environment where governments oppress their citizens -- would move the world back toward the poverty of the past.”
The market reduces transactions costs by treating a product as what it is -- a price and a quality -- the means by which it was produced and processed are irrelevant. This is a basic premise of free trade - a rule of the WTO (the PPM rule). The CSR movement would move us back toward the "deal only with PC-family members" and would lead to massive economic losses.
Trade -- and globalization generally -- do not directly address all the great values of our day. But the wealth creation effect of globalization makes it possible to have a world that is cleaner, fairer, healthier and less racist/sexist. That's not a virtue to be discarded to appeal to utopians.”

An example of profound clear thinking from Fred Smith, especially in that first paragraph. Markets, through the division of labour, are anonymous. But we have come a long way from the simple commercial, mainly localised markets of mid-18th-century Britain. Even the great supply chain in “Wealth of Nations” (WN I.i.,11, pages 22-23) needed to produce the simple labourer’s coarse woollen coat took no interest in how its elements were produced and under what conditions and wages of the other labourers.

The 19th-century ‘industrialisation’ of Britain brought with it what poets called the ‘dark satanic mills’, and women and children worked in mills and mines for ‘low’ wages (the alternative was no work and no 'pittances', and no 'welfare state'). Legislation was passed (against resistance) to limit hours, to impose through the Factory Acts (its chief Inspector, Leonard Horner, was also the founder of the predecessor institution that became Heriot-Watt University), health and safety measures that both added to employment costs and to safer working by labourers.

With free press and the freedom of association and assembly, conditions compatible with Adam Smith’s Natural Liberty, electoral and other pressures exert themselves on work conditions considered well below those practised (and afforded) in the developed economies. Much agitation for removing ‘sweat shops’ (a trade union euphemism for any workshop likely to compete with the well-protected work environments of a high-wage developed country) is ‘protectionist’ in its motivation and not purely driven by concern for those affected, as was much of the agitation by sympathetic individuals from the agricultural interests in the 19th century who agitated from shorter hours in mills and mines.

Many of those campaigning against ‘cheap’ and ‘sweated’ labour show no awareness of the poverty of alternatives facing those who work in such places. One reporter on BBC radio, with long experience of India, told the story of a young Indian boy, 12 years old, who was ‘rescued’ by western agitation on a MNC producing sports goods for the equivalent of a few pence a day. Before getting the local job in the ‘sweat shop’, the reporter knew him as a ‘rent boy’, to which ‘living’ he was compelled to return when the ‘sweat shop’ was closed.

It is not just the costs of production that rise when standards in one place are imported into another. The surer way to raise people out of poverty is to allow economic growth and the division of labour to do their work. It is significant that in the closed political economy of China, as it industrialises and brings millions from the countryside into factories, there have been regular recent reports of labour ‘unrest’, including demonstrations, strikes and violence, aimed at raising wages and acquiring other rights (many of the larger modern plants use high-tech equipment, which requires clear, air conditioned environments). These are natural, and expected, developments; in tiem they win something, but not at once.

Fred Smith’s general point is correct; wealth creates remedies to poverty. The questions are: at what pace and what price to the lives of people and their environment?


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