In “Exploitation Part IV (a), Exploiting Exploitation−The Cause” I described how the torment and higher costs that modern anti-sweatshop activists (“Sweatshop Activists”) visited on rich country sweatshop owners (“Sweatshop Owners”) inflicted net harm on the people they thought they were helping, i.e., desperately poor people in poor countries. The Sweatshop Activists picked on rich country companies (as if those companies were causing the depicted people to be poor). To avoid being counterproductive, activists must understand why Indonesians were so poor. Lacking that understanding, it would have been happenstance had their campaign actually helped the poor. It should come as no surprise that the Sweatshop Activists advocated policies that were counterproductive.
To sort out what was counterproductive about the activists’ policies, one must understand what enables poor countries to become sustainably richer countries. Perhaps the easiest way to forge a path from poverty to prosperity is to identify what prosperous countries have that poor countries do not and then figure out what would enable a country to have those things. To cram into one sentence a summary of hundreds of books on this topic[i], to be rich, a country must have a culture with a relatively high reverence for and quantum of the rule of law, equal protection under the law, property rights, literacy, free markets, mutual trust among members of society, reasonable levels of taxation, and, perhaps above all, an ethic that confers dignity on people engaged in business (e.g., inventors, developers, manufacturers, service providers, traders, and entrepreneurs—even to those who honestly try but fail[ii]), as well as institutions that enable and preserve those things. In such cultures, humans can create wealth and thrive—which bot improves their own lives by producing things needed or wanted by others.
Note that having wealth (“capital”) is not on the list of prerequisites. With the above list of essential ingredients in place, humans can and do create wealth. History is replete with examples of poor countries with little or essentially no natural resources or much wealth becoming astoundingly wealthy. Hong Kong and Japan are great examples of this phenomenon. Conversely, history is even more replete with countries with great natural resources or wealth either failing to exploit their natural resources or squandering their wealth due to a lack of prerequisites for a sustainable prosperous culture/economy. Middle Easterners and the natives in the Western Hemisphere before the 17th century are examples of people making very little of their vast resources. Spain after the plunder of South America and Venezuela today are prime examples of countries squandering vast resources. Rome had an exceptional (for its time) amount the prerequisites as it rose to power, and returned to the norm when it abandoned too many of the prerequisites. [This blog is my small contribution to the effort to prevent America from suffering the same fate.]
Note also that benevolence by entrepreneurs is not a prerequisite. As Adam Smith taught us so long ago, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” This is relevant because demanding that an employer spend more on employees than is necessary to entice people to sign up for the work is a demand that the employers pay more for labor than the labor is worth. A plan that relies on the benevolence of others is unnecessary and suboptimal for poor people in poor countries. Fewer employers will want to set up shop or expand operations in places that requirement is imposed. Of course, the result of that is fewer jobs for desperately poor people — the exact opposite of what is needed for the country to become more prosperous.
Had rich countries given Indonesians muti-billions of dollars in “aid” before Indonesia developed the culture and institutions to put the money to productive uses, before long all of that wealth that was not grabbed and stored in foreign bank accounts of politicians and other grifters, would have wound up in a sewer system or latrine, i.e., it would have created nothing but a short-lived bubble of prosperity followed by the devastating loss of both wealth and hope.
To his great credit, Jeffrey Sachs has devoted his life to trying to figure out how to enable poor peoples to become rich. “He is known as one of the world’s leading experts on economic development and the fight against poverty.”[iii] I doubt anyone has conducted more experiments to find how to prime the pump of prosperity for poor people. He literally wrote the book on “The End of Poverty.” He has improved the lives of people in many ways. Most of those improvements, however, were short-lived, and many of them left the object of his benevolence in much worse shape than when he showed up. Neither he nor anyone else has figured out how to use foreign aid to kick-start a sustainable prosperous economy in places that do not have the prerequisites for prosperity.[iv] Without the prerequisites for prosperity described above (which must be developed from within), casting money or idealistic “development” projects on a country is like casting seeds on rock soil.
A similar mistake was made with the1965 War On Poverty. The U.S. federal government has spent $22 Trillion on welfare programs that were part of that war. While the War On Poverty did significantly reduce hunger in America, that $22 Trillion of beneficence has not caused America’s poor to thrive or become less aggrieved — despite the fact that wealth of America’s poor is greater than the world average (the sum of every human’s wealth divided by the number of people on Earth), i.e., if wealth was distributed equally across the world, most Americans in the bottom 20th percentile would have to contribute some of their wealth into the world pot. In short, benevolence is a band-aid at best, it does not create prosperous people. [v] What poor countries need most is more prosperity. Beneficence cannot deliver that.
Though Jeffery Sachs has not found the magic bullet, he has learned something very important about the role of sweatshops in getting a country on the path to prosperity. He puts it thus: “[S]weatshops are the first rung on the ladder out of extreme poverty.”[vi]
In fact, all rich countries went through a sweatshop phase in the process of becoming rich. As bad as the working and living conditions of poor workers in poor countries appeared to be in the videos made by Sweatshop Activists, those living and working conditions are comparable to the preindustrial working and living conditions of poor people in every countries that is rich today. For example, the absence of indoor plumbing and air conditioning and the presence of horse dung in the paths to the public outdoor latrines were a common feature of New York City factories in 1900[vii]—which was well into the industrial revolution, i.e., well along the path to prosperity. Much worse working conditions and child labor in factories were commonplace at the beginning of the industrial revolution of the 1700s.[viii] There is no magic wand to be waved over impoverished countries to create enough productivity and wealth to support rich-county working conditions. They must go through the processes of creating a productive and sustainable economy first. (As will be explained in future posts, trying to jump-start the process with benevolence actually slows the process.)
For example, as I explained in “Wealth” about America:
“Factory labor was dehumanizing, sometimes led to child labor, and caused many to leave their “idyllic” farm lives. Despite these negative results, people took factory jobs because they could live better lives than would have been possible with their alternatives. One should realize that having young children working on farms was already necessary for survival. At first, there was nothing unnatural about children working as they had always done. Child labor only became dispensable after the factory machines (made possible and available by capitalism) improved the productivity of ordinary workers so they could produce enough to provide for their families. Even then, there was not enough productivity to dispense with all child labor. The first child labor laws restricted the employment of children younger than 9 years old, and the next wave of laws only required employers to provide a certain amount of education to young workers. It took more than 100 years for capitalism to produce sufficient productivity per worker so the legal age of an adult could be set at 18.”
For a country to dispense with child labor, it must be rich enough to do so. Quixotic do-gooding, such as Keady and Kretzu’s, hinders a country’s ability to become rich enough to dispense with child labor.
A common reason impoverished countries are impoverished is that economic conditions in those countries are not conducive to wealth creation, i.e., the odds that a new business would make enough profit to be worth the necessary effort, money and time are too low to induce enough people to attempt new businesses. Consequently, poor business environments generate neither the financial or human capital necessary to have a self-sustaining prosperous society. To create the necessary economic conditions for sustained prosperity, the odds of profitability of doing business in a poor country needs to increase. The greater the prospects for profit, the more and faster a country will move along the path to prosperity. Requiring employers to pay (either in payroll or working conditions) more than is necessary to attract and keep workers destroys wealth, i.e., it slows the process of wealth creation.
Economic conditions that inhibit profitability can exist for a wide variety of reasons. Regardless of the reasons, however, no foreign company can substantially alter the economic conditions of another country. Under the right conditions, however, they can help countries get started on the right path. In particular, if (1) the foreign company is large and wealthy enough to take on distant, complicated, problematic,[ix] and risky operations in a foreign land and (2) opening a factory in a foreign land is profitable enough to deal with all issues of building and running a factory there, then the job opportunities its factory makes available to poor people in that country will increase the workers’ financial and human capital (wellbeing) — all of which increase their productivity—and will put the country in a better position to improve its economy. As more people get jobs, the supply of labor shrinks. A shrinking supply of labor increases the value of labor, and pay. The faster this virtuous cycle works it magic, the faster working conditions and pay will be increase. Sadly, the opposite is true when Sweatshop Activists slow the process by imposing uneconomic requirements.
A hallmark of poor people in poor countries is that they have few, if any skills when hired, know nothing about how to become a more productive (valuable) employee, and have no way to gain that human capital. Working in a sweatshop starts the process of building those skills. Building and operating factories in poor countries necessarily provides to poor people (1) brick and mortar capital, (2) employment income that will (a) improve the standard of living of the employee, and (b) be traded with local businesses, thereby improving the lives of the owners and employees of those other businesses, and (3) education (human capital) to workers (a) who learn skills and/or what causes workers to be rewarded or punished for various behaviors, and (b) for some, how to run a business.
As I hope is now obvious, “Sweatshops themselves are part of the very process of development that will lead to their own elimination.”[x]
To those who are more interested in actually helping poor people than enhancing their own self-esteem, the more poor countries can receive the benefits of sweatshops, the better for the poor.
“The “fail fast, fail often” mentality is at the center of the entrepreneurial approach in the U.S., and investors regard a track record of failures as a sign of boldness, intelligence, and ambition.
Not so much in the EU: While in Germany, for example, a failed entrepreneur, manager or professional is at best regarded with contempt, there are countries like Italy where a personal bankruptcy essentially means that you will not be able to build any other business for the rest of your whole life — and in some cases not even own anything at all, like a car, a house or an armchair.”
[viii] See “The conditions in these early sweatshops were worse than those in many Third World sweatshops today. In some factories, workers toiled for sixteen hours a day, six days per week. Attendance at traditional festival days was curtailed because factories would fine workers for absences. The working conditions were unhealthy and dangerous. Dust from textile fibers was inhaled in poorly ventilated rooms, and workers were maimed by fast-moving machinery (Stearns 2007, 35). Child labor was common.2 Factories employed orphan children from London and other major cities in exchange for providing them room and board.” Also see, “Meet the Old Sweatshops, Same as the New,” Page 110, VOLUME 19, NUMBER 1, SUMMER 2014.