Wal-Mart and sustainability

UPDATE: In response to some thoughtful criticism I got from a container shipping industry executive, I edited a portion below. I had said that the state helped break transport unions, but in reality they are still a force in the industry. It would be more accurate that the state forced them to accept change.

I got interested in some of the responses on this post on Environmental Economics. If Wal-Mart had claimed altruistic motives for some of their policies, that would properly be called "greenwashing". However, they weren't. Tim Haab was basically pointing out a truism: Wal-Mart's interest in sustainable measures (including hawking CFLs, incorporating passive solar for lighting and active solar for electricity, and so on) is done for selfish reasons: to make money. Like any post involving Wal-Mart and sustainability, it became a lightning rod for people with definite policy agendas. Given that I am likely to either defend or attack Wal-Mart and sustainability, depending on the context, I have an opinion but no definite laundry list of policies I'd like to see enacted.

You could summarize the many variables and value judgements in truth table format with about 27 variations (3^3) and assign each to an ideology. The variables are Wal-Mart, sustainability, and planning/government, each of which people may label as good, bad, or benign/irrelevant. Wal-Mart good, sustainability irrelevant, government bad is the default position for the vulgar libertarian. Wal-Mart bad, sustainability good, planning good is the default position for the Progressive. W-M bad, sustainability irrelevant, gov't good is the default for the populist/conservative. W-M good, sustainability bad, gov't benign is the evangelical right (she drives an SUV and has 6 kids).

I think my entry in the table would be "Wal-Mart benign, sustainability good, planning/government bad". Wal-Mart doesn't "drive" the system the way both the Progressives and the vulgar libertarians say that it does. Rather, the system created Wal-Mart. Going by Chandler's Visible Hand, people responded 100 years ago to the first department stores (Marshall Field's) and then to the mail-order stores (Sears, Woolworth's) the same way they do to Wal-Mart today: by claiming they would eat away at local businesses. Well, if it wasn't Wal-Mart, it would be someone else.

So I tried to point this out and emphasize the fact that it is state capitalism that creates the unsustainability, of which Wal-Mart is just a delivery boy. Our system looks like a giant vacuum cleaner that hoovers up resources in the developing world and kicks them out back here; Wal-Mart is the least fancy exhaust portal. We the people continue to support policies which produce "efficient" systems for delivering products to us. Those systems are a combination of transportation, energy, and credit subsystems that interact with cultural values to both create the demand and impose costs on the use of alternatives.

For example, we have national energy policies that ensure the profitability of large electrical monopolies who generate from coal and natural gas. This will be defended as efficient because it is highly engineered to look that way from the standpoint of the producer and the consumer. However, from other standpoints, there are externalities that are not accounted for. Those externalities include both the pollution and the intangibles, including the isomorphism around the chosen system. This is still something I'm working out, but the isomorphism includes high voltage AC-based transmission and distribution (which increases the cost of using alternatives, like LEDs, or introducing alternative sources, like solar[1]), an emphasis on greater supply (rather than demand-based solutions such as increased insulation or more efficient motors), centralization (rather than distributed generation), and isolation (rather than integral with the users so that the externalities fall on them). When the design was established 100 years ago, AC was a brilliant improvement over DC, regulated monopolies were promoted as the only viable alternative for generating and distributing AC power, and the accumulated engineering successes within that political framework have been impressive. But nothing is so impressive as the socio-political engineering, including a nearly invincible cloaking device and a strong superstructure made of an alloy of the Edison Institute, politicians, populist regulation cheerleaders, discount rate receiving electricity-based industries (like electrical steel furnaces), coal miners unions, dividend receiving widows and pension funds, and soccer moms worried by the so-called de-regulation that is nothing of the kind. Given a different political framework, the counterfactual engineering successes would be just as impressive, but the overall social efficiency (including the external costs) could be much better.

We furthermore have policies that promote and protect the use of petroleum, including "free" taxpayer-supported road systems and the Carter Doctrine. We have policies that promote and subsidize long distance shipping of goods, including eminent domain and taxpayer support of railroads (mostly as a historical fact, not current policy, though the pension plans still receive special tax recognition and grade crossings are your problem, not the railroads') and container ships. The container shipping history is more recent and includes several very interesting factors. Not only did the state (including the federal government) help break [force] the longshore unions who opposed [to accept] the shift to container ships, but the cities, states, and federal government paid for the infrastructure, including the highway systems, harbor improvements, and dock facilities (cranes, rails, etc.). Today, taxpayers foot the operational costs, including infrastructure maintenance (harbors and roads) and cargo inspections (thanks to our interventionist foreign policies, the great transportation system that brings goods from the world is also a potential Trojan Horse for WMDs), but the investments are promoted as tax-yielding investments rather than the revenue consuming corporate welfare programs that they are.

All of this infrastructure, what W. W. Rostow would call social overhead capital, was put in place in the 60s and 70s, long before Wal-Mart became a force. And yet, having taken advantage of it, Wal-Mart is seen by some as the bad guy. Those who hold that view are mostly self-designated Progressives, the same people who favor central planning for efficient management of the economy. This is the main reason why the two groups -- those who see the infrastructure as the pinnacle of efficient engineering, Wal-Mart as benign, and sustainability as irrelevant, and those who see globalization as the evidence of Western greed, Wal-Mart as the embodiment of evil, and sustainability as the new religion -- talk past each other. One looks only at the engineering and sees none of the underlying political structure that brought it about (and perhaps even opposes any government interference with this "free market" system), and the other refuses to admit that their policy preferences are simply the most recent incarnation of the same policies that got us into this mess in the first place. They want another patch on the binding on the dressing on the bandage on the abrasion caused by the crutches they promoted for a fit patient in the first place.

And to top it all off, we have the same social engineers looking to solve the sustainability problem by imposing unsustainable, modern, Western values onto the undeveloped countries whose citizens are the victims of this system. For them, the real problem in the world is not Western-style consumerism, it's those other people who breed like flies because they're ignorant and poor. This obviously plays into biases some have against swarthy "others", but does not necessarily spring from those motives. And it seems to have escaped the attention of the planners that such lifestyles, having been practiced for millennia, are inherently sustainable.

But no, we're going to retrain them rather than us. First, as the story goes, we have to promote growth. In a recent post, Dani Rodrik says,

"What kind of a growth strategy should this [developing] country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run?"

He concludes the latter. But he isn't the first: Rostow explicitly proposed that strategy in his Stages of Growth: increase the efficiency of farming to free up and feed a substantial labor pool that can move to urban areas and work in heavy industry. You can do this by subsidizing cash crops (for export) instead of traditional crops (for consumption) and by providing social overhead capital (transportation). Diana Davis' history of the French colonization of Algeria in Resurrecting the Granary of Rome shows that they accomplished the former by several means: confiscate public lands used by nomadic herders, outlaw traditional farming methods (like using fire to clear scrub), and ban the payment of taxes with in-kind payment (force a switch to a cash economy). People who suddenly couldn't sustain themselves by traditional means and now needed to raise money to pay taxes migrated to the cities to look for jobs with French employers. Note how the preferred policies of modern social engineers are remarkably similar to the policies of colonial powers in an unenlightened age.

After claiming that "The joint stock company owes its existance [sic] to [increasing returns], not so much to state (or other) promotion," in response to which I pointed out the above, one of the commenters on the Env-Econ post, Reason, listed his favored set of policies to reduce population growth:

1. Increasing the duration of education which increases the costs of having children
2. Providing social security which reduces the benefits of having children
3. Better public health so that people can be confident their children will survive
4. Peace (same reason as above)

Having selected government policies to solve a problem, he found no opportunities for anarchism to solve the same, as if he had actually searched for any. I'm not going to defend outright anarchy in a world unused to anything but increasingly active states where force is the first resort, but I should think it obvious that smaller states are generally not pugnacious, so he was wrong about his fourth point not being addressed by anarchism. [2] More importantly, though, he failed to explain how 1, 2, and 3 were going to be funded in a pre-takeoff, sustainable society of the type found in the undeveloped world.

Such societies are marked by their traditional, subsistence farming practices, and their children are a necessary source of labor and the primary retirement pension for their parents. Trade is frequently made by in-kind payment. For example, Diana Davis notes the achaba property arrangement in which herders exchanged their labor for pasture rights in Algeria. In order to introduce education and social security systems to take away the parents' labor and pension incentives, there must first be a system of taxation and management. These emphasize the state rather than the community as a central cultural institution and establish the state as central collection and dispensation authority in addition to, or perhaps in place of, its role as night watchman. More importantly, however, it forces the people to abandon traditional methods of trade and agriculture and to switch to crops and methods or other uses of their labor which are easily traded for cash. That means that they must switch to crops or labor of value to people who have cash, i.e. the developed world. The cash crops must have an export value, or the labor must be in an export industry.

Now, just where do they think The Gap, Nike, and Wal-Mart get their labor, sweatshop or otherwise? This is exactly the point made by Ellenita Muetze Hellmer (about which I wrote here).

Given that the greatest advances in public health are typically made by applications of civil engineering rather than medical science, Reason's third point is the step which usually gets the state involved first in sewage projects, then in national transportation infrastructure (roads, rails, ports), and then in "other" engineering projects (oil field development, power facilities, civil defense, air bases, nuclear fuel processing). I know that's a very unconvincing linkage, but I predict that you could draw these direct lines if you only knew enough of the underlying history. After all, if you have the spontaneous creation of private engineering capability and a weak or decentralized state, those engineers won't go looking to develop a military capability because the politicians and bureaus won't exist or have the means to pay for it. Compare the early US -- where military facilities like Ft. McHenry were still conceived as defensive structures; the design and construction were ad hoc, Golden Carrot-type contracts (award a prize to the best designer); and community-based (the federal government granted money to local communities and provided the construction design) -- to modern US military-industrial arrangements where contractors conceptualize, design, build, and endlessly refine offensive weapons while the spin-offs are touted as beneficial to the public (the internet from DARPA, Tang from NASA, etc.). Or consider the military pedigree of modern quality control theory.

When people in the developing world are employed by consumer-oriented industries, what values are transmitted? The employees at Nike factories in Viet Nam first bought bicycles (sustainable) and then motorbikes and now look forward to moving up the consumer ladder to a car. In China, cars (especially with "foreigner" plates) are a highly desired commodity and the sustainable bicycle culture is all but dead. The developing world, with encouragement from the social engineers in the developed world, is building a sketchy replica of the type of economic system whose money they wish to attract. They believe they can attract that money by feeding the West's insatiable maw with container ships full of cargo. I called this (tongue-in-cheek) a Cargo Cult (which seemed to offend odograph, though I don't understand why). Unlike the actual Cargo Cults, it may succeed in attracting the money. For some people, for a while. However, it is not the road to sustainability and it is unlikely that 9 billion people will succeed in enjoying the lifestyle currently enjoyed in the West. The problem lies with us and our chosen means, not them and theirs. The solution lies with change in our society, not with them choosing our existing means.[3]

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[1] Yeah, I know: where would the LEDs and solar cells come from absent the system that provided the R&D resources to discover them? This is perhaps not as strong of a counterargument as you might think: Einstein theorized the photoelectric effect long before the R&D resources were available, and perhaps more would have gone into searching for practical applications it if the political support for large, central, coal-fired generation had not been as successful. No legal monopoly means higher cost and more awareness of the externalities because nobody could afford to build large, centralized systems. That in turn means more searching for alternatives. Also, it would be more feasible today to install a small solar or wind system (like many farmers had before the REA) because you would only be replacing or plugging into a decentralized subsystem.

[2] It is at least arguable that an unstable anarchy is potentially very violent - even David Friedman admits as much in noting that Saga Iceland collapsed in a series of blood feuds, albeit after 300 years of stability. But a stable anarchy can't raise the money or army to go looking for a fight.

[3] Yes, I'm also concerned about population issues. But I think that a less important problem compared to that of Western consumerism. I also think it foolish to believe that a proper list of policies and a certain amount of money is going to solve the former, or a sudden majority of libertarian politicians the latter. Solutions to both problems require wholesale changes in cultural attitudes and values; politics and economics only take you so far. Sometimes the state can lead cultural change, but not always. And not always for the better. Saying self-evident things like, "education of women is important to control population growth" doesn't mean much in Islamic or other traditionalist societies where women are relegated to second class status. I doubt you could fund or force anything which would work. Creating change in those climates requires something that operates on a more personal level than a United Nations program, something that flies under the states' radars, something that cannot be denounced by Imams.

Risks of libertarian societies

In this article, the technomadic packratt points out a risk of living in a libertarian society. To wit, involuntary servitude could occur in a place where laws against it and police to enforce those laws do not exist. As evidence, he cites four real occurrences; one in modern Florida, the Pullman strikes, Colorado mining communities, and the Ludlow Massacre.

The Packratt's post is extremely valuable. No matter how many times these stories and especially their interpretations are refuted, they bear repeating. It shows a high level of concern by the author to make sure that truth never goes unchallenged by compelling narratives.

One of the most instructive aspects of such narratives is the author's ability to distinguish between minarchy and anarchy. By pointing out that minarchists would not have laws, least of all against fraud, kidnapping, or assault, they find that minarchists are really anarchists. Then they argue that anarchist societies would look exactly like today's society, only without a police force. In this way, they can find the result they want: that large corporations would come to dominate anarchist societies, and from there, that large corporations would dominate any libertarian society.

It would seem that an obvious retort would seem to be that both the Pullman Strike and the Ludlow massacre depended not on a private army, but on the actual army (or national guard). Another obvious retort to this might be that we have such things as existing slavery despite the fact that we do not live in either a minarchist or anarchist society. Fortunately, people like the Packratt are here to show us that such rationalizations have no place in their understanding of the debate. We should not contemplate the fact that most slaves in the US today are caught on the wrong side of immigration laws, the fear of which is used to keep them in line. Neither should we consider whether workers could raise their own armies in an anarchist society. We should definitely not accept libertarians' hackneyed argument that fraud, kidnapping, and assault would still be illegal in a minarchy, or anarchists' dubious claims that management and owners would not be able to hide behind the the liability limiting legal fiction of "the corporation". For the Packratt and his fellow travelers, the fact that those four examples of slavery were real and that private actors benefited from them is enough to confirm the possibility that a minarchist or anarchist society would be a Dickensian Dystopia. That should be enough to persuade even the most committed anti-libertarian that we are blinded by our biases.

End of the Race?

I have a passing interest in analogies which cause people (including me) to question their basic beliefs and mythical stories. This one makes an analogy between fossil fuels and education which is designed to make people question their commitment to "free" public education or to fuel taxes.

What about natural resources in general? There is an analogy which suggests the earth is like a spaceship, equipped with all of the things we need for life*. As we race to consume those resources, we are only depleting them faster and racing towards our own doom. Eventually, so the theory goes, we will run out of new places to explore, prices will shoot up, and we will wish that we hadn't been in such a hurry.

Does the same logic apply to labor? As transnational corporations search for the cheapest labor, they thrash from one previously uncharted territory to the next: first Japan, then Mexico, then Korea, then Vietnam, then China. This is the so-called "race to the bottom".

What happens when that labor race is over? The consequence claimed by "pro-labor activists" is that all labor will be paid at the same low rate as the cheapest labor, but this relies on such assumptions as equal productivity and zero transportation costs (those activists are frequently either self-interested, i.e. union workers, or mistaken in their theory and therefore anti-labor in practice). The actual consequence is that once you have hired the last untapped laborer, the same thing will happen as when you open the last natural resource mine and still have unsatisfied demand: the price of labor goes up.

That is exactly what is happening in China. See, for example, here at Gapminder (check off the China and USA boxes and watch Chinese income start to catch American income, noting that American income does not fall, directly contradicting the "race to the bottom" theory), here, here, here, and the latest, which I have both on good authority and from here is that there is now a shortage of stitchers on the apparel fabrication lines. They are no longer living in abject poverty, and they are becoming consumers who will eventually demand more of China's manufacturing output. Eventually, they may even move up to importing high quality goods - the type that are still manufactured here in the US. Thus, we have little to fear from export-based foreign countries, and they have much to gain. By blocking them out with trade protection, we also grant truth status to the claims of their demagogues that claim America wants to keep them poor.

Go back to the Gapminder graphic and note something: Africa is the home of last remaining unexploited workers. They could use a sweatshop or two to pull them out of their poverty.

* In reality, the earth was randomly equipped. We happen to have discovered uses for many of those resources, adapting them to our needs. We have barely scratched the surface. "Spaceship earth" is an idiotic parable.

Quality: The Anti-Sweatshop

Normally, I buy coffee from a display of local product at Wal-Mart. A one-pound bag of beans costs something like $7. Come again? Yes, a local roaster sells his (her?) wares at Wal-Mart. However, for the past few months, the French roast I like has not been re-stocked.

So the last time I was in Sam's Club, I picked up a 3 pound bag of French roast beans for $10. Quite a savings, and looking at it, I discovered a few things about Marques de Paiva:

• Marques de Paiva is a 4th generation coffee-growing family (the company name is Cafe Bom Dia) in Brazil
  
• The coffee is kosher by OU. I don't know exactly how difficult it is to produce kosher coffee. The wife suggests that they only kill the beans by slitting their throats, and we can assume that until I drop the cream into it, it doesn't come into contact with any dairy.
• It is certified organic in several countries (Germany, US, etc.).
  
• Marques de Paiva is certified ISO 9001 and 14001. The former is a statement of quality, the latter is a self-certification of environmental friendliness.

So what do you suppose that says about the way the treat the workers and small farmers with whom they work? I have claimed that the best solution to sweatshops is not sweatshop free certification, but rather quality certification. I have been through the ISO 9001 process, so I have my doubts, and recent events at Delphi make me equally dubious about Shingo prizes, but I think that truly quality organizations (insert truism here: quality is its own reward, prizes don't confer quality, etc.) are more likely to treat their workers fairly than not.

Is Marques de Paiva a quality company? The fact that they are ISO 9001 and 14001 certified only says to me that they have gone to some trouble to standardize and document their work practices, but that may be a marketing ploy (read what ISO consultants have to say about it). The OU kosher certification impresses me more, but I'm not sure how difficult that is to obtain for coffee. But maybe this will impress sweatshop doubters:

• Marques de Paiva is certified Fair Trade by TransFair USA.

Shocked that Sam's Club is selling a FairTrade product? You shouldn't be. For one thing, quality processes are less expensive processes. And, as Fair Trade also points out, Fair Trade certification can be used as a marketing tool to differentiate your product (read: charge premium prices). As this press release shows, Sam's, Café Bom Dia, and TransFair USA all gained some exposure from the decision to market the new premium coffee through Sam's.

BTW, the incredibly low-priced coffee is also very good.

Sam's Club
sweatshop
ISO 9001
ISO 14001
Fair trade
kosher
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organic

Counterpoint to Sweatshop Thinking

From the Mutualist Blog, another viewpoint. First you have the anti-sweatshop activists and scholars. Then the anti-anti-sweatshop scholars and hangers-on. Now, anti-anti-anti-sweatshop scholarship from Ellenita Muetze Hellmer. JLS editor Roderick Long writes this about her article (not free, as of this writing):

In "Establishing Government Accountability in the Anti-Sweatshop Campaign: Toward a Logical, Activist Approach to Improving the Working Conditions of the Poor," Ellenita Muetze Hellmer questions the logic of this response, given the fact in many of these cases the employment is not truly chosen voluntarily -- either because the government literally and directly forces people to work at certain jobs, or else because government policies that displace farmers from their land leave sweatshop labor as their only alternative. Where multinational corporations are the beneficiaries of state-mandated slave labor or something close to it -- Hellmer cites instances from Burma, Indonesia, Nicaragua, and El Salvador -- the libertarian impulse to defend sweatshops is no longer valid. In such cases, Hellmer argues, it is a mistake to think that boycotts and embargoes hurt the workers, since most of the "wages" from such schemes are going to government officials rather than the workers anyway, and disinvestment could have the salutary effect of discouraging these tyrannical policies, or of weakening oppressive regimes by reducing their revenue. Hence Hellmer recommends, not abandoning the anti-sweatshop campaign, but rather reorienting it so as to focus on genuinely coercive arrangements.

I am forced to adjust my definition of a sweatshop, justified here:

Any factory where the workers are legally prevented from quitting, striking, or organizing, and/or where the employers have perpetrated a fraud upon the workers by successfully misrepresenting the conditions of work, and/or where the workers were forced out of their (now) second-best choice of work by government policy.

Kathleen gave me another way of thinking about this; workers should control the condition of their employment, specifically whether or not they can quit at will. I will read the Hellmer article when it becomes free (yeah, I'm that cheap), as I think it adds another wrinkle to this debate.

technorati tags: sweatshop

Sweatshops all in one post

To wrap up the series I wrote on sweatshops, here are all of the relevant links:

• Sweatshops - Introduction
• Sweatshop Definitions - an attempt to define sweatshops
• Sweatshops and Pay - a discussion of pay, living wage, evidence, questions
• Average wages and average consumers: a mistake - how critics can go off the rails
• My solution to sweatshops - certify quality, not compassion

I believe that the term sweatshop is thrown around far too frequently, that bad assumptions are made, that much of the relevant discussion hides an agenda. The informal definition of sweatshop seems to be, "Any domestic factory that hires foreign labor, any factory operated outside the US, any apparel factory, or any factory used by one of the non-PC companies (Nike, Gap, etc.)." This is disingenuous and does not reflect any deep thinking or research by the speaker/writer. A slightly deeper, yet still not very serious definition seems to be commonly expressed as, "Any factory in which people work long hours in bad conditions for low pay." I don't believe this is serious because it poses more questions than it answers, since "long hours", "low pay", and "bad conditions" are not defined. Long, bad, and low ... relative to what? Certainly not to the next best alternative for many of the laborers; certainly not relative to what was thought to be long, bad, and low just a few years in the past; and certainly not relative to some non-apparel industries in the present. Therefore, I proposed to separate factories (whose hours, conditions, and pay may yet be unacceptable to present day, average Americans who have better alternatives) from sweatshops by this definition:

Any factory where the workers are legally prevented from quitting, striking, or organizing, and/or where the employers have perpetrated a fraud upon the workers by successfully misrepresenting the conditions of work.

My definition assumes that workers are in the best position to make judgements about their alternatives. Under this definition, prison factories, factories staffed by humans smuggled and held captive by organized crime, and other such factories qualify as sweatshops. Factories that you turn your nose up at, but which locals line up to work in, should simply be called factories, and the workers that work there should be able to retain their dignity rather than be wept over as victims by average Americans with a strong urge to treat everyone else as a child.

The next point I wished to make was that it is a mistake to think about the effects of paternalist policies in terms of how they effect the average prices, average laborers, or average consumers. It isn't the average that matters: it's the marginal price, marginal laborer, and marginal consumer that matter. This was the essential insight that broke economic price theory away from the cost-of-production misunderstanding that kept the classical economists from piercing some apparent paradoxes that riddled their explanations. Today, it keeps social critics from understanding why their theories seem to result in unintended consequences and perverse outcomes that need to be swept under the rug in the interest of not being confused by facts.

One solution suggested for sweatshops was to force everyone to pay higher prices because this would force factory owners to increase their workers' productivity. I believe the thinking on this was backwards, not only because it was based on average workers and average consumers, but because the evidence suggests that this will have one of those perverse outcomes. I think it's always more constructive to provide a solution in addition to a criticism instead of just a bare criticism, so I suggested my own solution to the problem of sweatshops. Rather than insisting on raising wages and prices with no compensation to consumers, I think that activists and others should insist on improved quality in their apparel and footwear.

Companies that make good quality manufactured goods should use management techniques that guarantee continuous improvement, standardized and documented processes, and flow. The production system developed by Toyota, whose family background was in textile manufacture, is now known as Lean Manufacturing. Experience shows that workers immersed in this type of factory management are more satisfied with their jobs, that they are more productive, and that they learn more about the craft of design, development, and production. There is a reason that the Toyota factories in the US have resisted unionization: the workers are already satisfied with their pay, work environment, and hours. Consumers are happy with the results. Toyota is preparing to challenge GM for leadership in world production.

sweatshops

My solution to sweatshops - certify quality, not compassion

How do you know the UL symbol really means your lamp cord is safe? Do people generally buy computers from the kid up the street, who can make them "cheaper than Dell", or Dell? In a strange town, do you eat at a strange restaurant or a national chain? Pulling off the highway in Kansas City, do you stop at Joe's Garage, or Meineke? These are all examples of the value of reputation. Whether you know it or not, you are relying on the fact that it is in their best interest to make sure you get consistency at national chains. If they are recognized for good food, service, etc., then they get a reputation for quality, but if they are recognized for bad, they suffer from a reputation of low quality. Wendy's suffered a hit when the finger was found, Jack in the Box suffered when outlets in Seattle served tainted meat (1993), and that's why Johnson & Johnson took such a hard line on the Tylenol scare.

Underwriters Laboratory is just one of many companies who earn money by offering assurance to customers that the products and the company meet some minimum standards.

Standards Providers

UL is not the only standards provider. Consumers sometimes need to know not only that they are dealing with a reputable company, but they want to be able to compare one set of products with another, or even use products from several manufacturers together. This is such an important matter that standards have become a cottage industry unto themselves. The following is a partial list of standards providers; some of them not only write standards, but provide inspection and assurance services.

• ISO - International Standards Organization
• IEEE - Institute of Electrical and Electronics Engineers
• ANSI - American National Standards Institute
• EIA/TIA - Electronics Industry Association and Telecommunications IA, the people who bring you such standards as the Cat 5 and RS-232 cable and connector standards.
• IEC - International Engineering Consortium
• ASTM - American Society for Testing and Materials
• UL - Underwriters Laboratories, writes standards and performs inspections
• OUKosher.org - Orthodox Union, performs inspections (the standards are thousands of years old!)
• Good Housekeeping - inspects products
• TRUSTe.org - third party certifiers for online establishments like Intuit, Apple, Allstate, Medicalert, Mercury News, etc.
• ECRI.org - ECRI (formerly the Emergency Care Research Institute) "is a nonprofit health services research agency and a Collaborating Center of the World Health Organization (WHO). It is designated as an Evidence-based Practice Center (EPC) by the U.S. Agency for Healthcare Research and Quality. ECRI's mission is to improve the safety, quality, and cost-effectiveness of healthcare. It is widely recognized as one of the world's leading independent organizations committed to advancing the quality of healthcare."
• American Forest and Paper Association (AFANDPA)
  

Training and 3rd party certification

But setting standards is not the only thing you can get. You can also get third party certification and training. That is, if you want to hire an employee, how do you know he is worth what he says he is? All of the following provide a set of training standards and tests to validate their performance/skill/knowledge. Other companies provide training and even test facilities. There is literally a market in reputation.

• Microsoft
  
• Cisco
  
• Apple
  
• Novell
  
• Adobe
  
• RSA
  
• CompTIA i-Net+, RFID+, Security+, Linux+
  
• LPI Standard

Users

Who uses such standards? Just a few glances at the links provided above will show you that people readily make use of such standards.

• eBay uses Paypal
  
• Intuit, Apple, Allstate, Medicalert, Mercury News, etc. use TRUSTe.org
• QSU Publishing Company "strives to provide accurate, consistent and unbiased reporting with respect to third-party registration of management systems in accordance with international standards such as"
  
• The Plastic Pipe and Fittings Association
  
• etc.
  

Standards Theory

For background on this topic, I heartily recommend anything Daniel Klein has to say about it. Specifically, you can look at the numerous websites to which he contributes as well as his publications. On his own website, look under the heading "Papers on how private, voluntary practices and institutions achieve assurance and trust". Also check out his FDAReview website, or read Reputation, which he edited.

Government failure

If standards are so good, what is wrong with government standards? Consider this innocuous quote from this article about organic certification:

"Currently, 'certified organic' indicates that the farming methods employed were verified by one of the approximately 40 private or state certification programs nationwide. Genetically engineered foods cannot be currently labeled as 'organic.' [emphasis added]

"Many certifiers are concerned that the proposed USDA federal regulations will make it illegal for them to uphold stricter standards than what the USDA allows. Currently, organic standards vary among certification boards. California and Oregon have tough standards, while several states such as Illinois, have vague or nonexistent standards."[emphasis added]

Suffice it to say that I think that the sweatshop solution should not involve standards set by government agencies (more here).

Factory certification (sweatshop-free)

There is a cottage industry in organizations dedicated to providing certification of sweatshop freeness. Furthermore, there is another cottage industry in being a sweatshop-free, politically correct manufacturer.

• Brown, Deardorff, and Stern (NBER 9669) point out that the Clinton Administration established the Apparel Industry Partnership (AIP) in 1996, but after they released their Fair Labor Association (FLA) standards, the Union of Needle Trades, Industrial, and Textile Employees (UNITE) complained that "…the code failed to require payment of a living wage; had weak language with respect to union rights in nondemocratic countries; and had a weak monitoring and verification system."
  
• Subsequently, UNITE and Students Against Sweatshops formed the United Students Against Sweatshops, and the Workers Rights Consortium (WRC). The WRC code is consistently more stringent than the FLA code; no surprise since manufacturers were invited into the FLA in the beginning. A flare-up ensued when several trade scholars (Academic Consortium on International Trade) pointed out that WRC had extorted universities into supporting its protectionist agenda, prompting a response from other academics styling themselves as Scholars Against Sweatshop Workers.

From my standpoint, that's sorta good: at least there's some healthy debate instead of a government monopoly.

• Brown, et al, also list Social Accountability International and its SA8000 code, the Collegiate Licensing Company, Worldwide Responsible Apparel Production, and Verité. Many of these standards are monitored by PriceWaterhouseCooper and Ernst and Young.
  
• Subsequently, I have run across a dozen or so similar organizations such as the Olive Creative Charities' Fair Working Conditions label. FWC is unique in that they require interviews with 100% of the employees and approval of a majority of them (via CSR-Asia).
• There is a historic example of a very effective standards-setter: remember the Union label? It was the trademark of the International Ladies Garment Workers Union (ILGWU). ILGWU has since merged into UNITE, which appears to have devolved into nothing more than a rent-seeking machine.

Finally, those PC factories and labels that are run as "sweatshop free."

• The most prominent example of those was Aaron Feuerstein's Malden Mills, maker of Polartec. Mr. Feuerstein won widespread approval when he kept all 3,000 employees on the payroll after the mills burned down. In so doing, though, he took on so much debt and the mills became so uncompetitive that he was forced out by his creditors.
  
• We also have the recent example of SweatX, the brand of TeamX, a factory run by UNITE. They're out of business now.
  
• Finally, we have American Apparel, the favorite PC t-shirt label, and its fight to keep UNITE out of its operations. See here and here.
  

I think the PC factories tend to fail for two reasons: first, they are based on management's word to share the pie more equally, but that management "philosophy" may actually be marketing in sheep's clothing, and second, serving the employees is no guarantee of the long term success.

My suggestion

My suggestion is to try something nobody seems to have tried: apparel manufacturing standards. Never mind work conditions or pay, a factory that conforms to tough manufacturing standards will probably have to hire the best employees and they won't put up with low pay or bad conditions because they have skills to go somewhere better.

This month's Reason Magazine features a debate with Milton Friedman, T.J. Rodgers, and Whole Foods' John Mackey on corporate social responsibility and the relationship between employees, investors, customers, and community. Milton and John seem to be saying the same things, albeit with different emphasis. T. J. Rodgers, whom I regard in about the same way as Chris Hitchens and a car accident (interesting, but I can't stand to watch), didn't contribute anything substantive. The salient point in that debate with respect to this post is that it is possible to run a profitable company that people want to work for and buy from if you are committed to quality.

Here's my point: incentives matter. The company has to get something out of the standards, and marketing to a few dozen PC consumers and broke-but-concerned college kids just ain't gonna pay the bills. A standard that emphasizes high quality means the company can set higher price points. To pay for those, the customer has to get something out of it, and they do: higher quality. To get the higher quality, the employees need to be trained, but perhaps not nearly so much as management. The entire footwear/textile/apparel (FTA) manufacturing process from conception to design to production to sales must be improved.

The best management practice in existence today is lean manufacturing. ISO 9001 is perhaps more widely known, but it is a documentation system; you can document a non-lean manufacturing process as well as a lean system. As far as I know, there is no lean certification system other than working with a recognized lean company, such as Toyota. That’s a de facto standard, but what I am suggesting is a de (private) jure standard. (I googled "lean certification", but the results were consultants pushing an initial consultation/primer as a certification program, with the possible exception of TC2). You can win awards for your leanness after the fact, e.g. Deming and Baldwin, but that is no reliable gauge. Also, if you google "lean apparel manufacturing", you tend to get lots of references to pseudo-lean, like "just-in-time retailing". From what I can tell, JIT retailing means "software that manages your warehouse and supply chain 'better.'" It doesn't seem to have much to do with certifying suppliers or supply chains as lean in the way Womack, Jones, and Roo describe. For example, see this or this. The sole exception (haha) appears to be shoe manufacturer New Balance, as described here, courtesy of of the Lean Manufacturing Blog here (also here) and blogged here.

What would those standards look like? Lean demands that you analyze your value stream and determine what processes add value, and eliminate everything else. Rework does not add value, it adds cost, and implies a need to fix problems in the development, test/prototype, and/or design stage. A lean manufacturing environment requires standardized work, consistent work practices, materials testing, and documented work practices.

A key lean principle is flow. Flow cannot exist until you understand the value stream and streamline it. Flow cannot exist until everyone is performing standardized work. Flow requires pull-driven system. Flow means no rework (and all that implies, see above).

Another lean principle is pull, meaning that the downstream processes complete their work and pull from upstream, rather than everyone working as fast as possible and piling stock everywhere. It means one piece at a time, produce what is demanded. It means that you only do one thing at a time, but you do it very quickly.

So let's pull a few things out: Eliminating rework means the designs and materials have to be carefully vetted early in the process. That's something that management has to do well. Lean should apply to every process: product development as well as manufacturing. That means standard approaches to pattern making, design testing, and integration of the factory floor and design skills. Even the lowest skilled worker gets exposed to the highest skills in the process. In the FTA industry, the best practice of which I am aware is the Spanish company Zara. They have good products, smart marketing, high price points, but the most obvious sign of lean is the speed of product development and introduction. Zara never has to discount: the constant turnover in demand, small batches, and high integrity mean they drive their own scarcity.

Side note #1: Eiji Toyoda started in the textile business

Flow and standardized means that the value of piecework is deterministic. It essentially wipes out the distinction between hourly wage rates and piece rates, making it easier for the employee to compare this job to another. Flow also means that the factory runs at the pace of the slowest worker, not the fastest. Since they are all doing standardized work, it means that you have to enhance the productivity of the least productive worker by training them and solving all of the problems they have with designs, rework, and other distractions. As Womack, Jones, and Roo describe it, the Japanese system leads to lots of factory-oriented training because the system is constantly undergoing improvement and it becomes very much a competitive advantage. Knowing "how Toyota does it" doesn’t in and of itself mean that you will be an asset to Nissan, because you don’t know "how Nissan does it." This therefore avoids the free rider problem that Rothstein runs into. In fact, Womack et al criticized the Japanese system because it led to too little specialization and too much identification with the company. As I recall, they said that Japanese tend to describe themselves as "Toyota employee" or "Honda employee", whereas Americans tend to describe themselves as "electrical engineer" or "mechanical engineer". There was therefore little emphasis on development as an engineer and therefore little development of those trades (Japan produces far less original and "pure science" research than the US, but far more industrial efficiency of existing products). Again, I see this as advantageous to low-skilled workers: after all, learning to be a "men's coat development team member" is likely to carry more prestige, employability, and pay than "low-skilled laborer" (their second-best alternative). Team members are likely to learn a little about design, a little about pattern-making, a little about materials, a lot about manufacturing, and a little about marketing/retailing, whereas now they learn a lot about the one small part of manufacture in which they participate. Specialization like that makes them vulnerable to shifts in industrial organization and consumer tastes.

Comments

• Well-managed companies with bad employees may occasionally put out a bad product, but (a) those are usually caught before they get out the door, and (b) the "problem" is generally fixed, one way or the other.
• Badly managed companies with bad employees don't tend to stay in business long.
• Badly managed companies with good employees may stay in business for a while, but the products are always bad. Bad designs means bad execution, no matter how talented or dedicated the employees are. Look at the performance of the US Basketball team in the last Olympics; arguably, they were the best players in the tournament when compared head-to-head against any other team, but their design was badly suited to the task. Badly managed companies make products that are either too expensive to sustain market share, or so bad that they always command low prices. That’s the problem with the Rothstein approach: it is to force prices up in order to force management to solve one of its problems, but that approach doesn’t force bad management to address the main problem: itself. If prices everywhere are driven up by forcing wage hikes everywhere, as Rothstein demands, then it only provides cover for bad management everywhere, including here in the US.
  

The solution is to demand higher quality, not higher levels of PC. I don't know how you impress that on consumers, though. Consumers have grown cynical about apparel. As Kathleen puts it, as long as the only products available are shit, then at least give me cheap shit. Some consumers are willing to pay for slightly more expensive shit as long as it’s PC shit, but it's still shit.

Instead of "campus" activists (UNITE workers and socialists) extorting universities into feel-good solutions, we ought to demand that our universities subject the athletic apparel to an engineering review. Get the engineering department and the business management people to get together in a Lean Activist club. Only buy good stuff from lean suppliers. Note, too, that the Rothstein approach is to insist that consumers simply give up more of their wealth out of the goodness of their hearts, whether or not they can afford it, with no compensation. There are consumers who will do that, but relying on the kindness of others and the wisdom and coercion of governments is no path to utopia. High quality goods command high prices because they are worth the extra value to the consumer. There is no transfer required because it is an equal exchange. In the marginal article, I mentioned that you would only buy something whose utility is equal to or greater than the price: most people assume it is always "equal to", but that is only true for consumers and sellers at the margin. For all other trades, the utility of the good is "greater than" the price; Marshall called this "consumer surplus". It is directly analogous to the better known and more widely maligned seller surplus, better known as the profit (the difference between the price and the cost to the seller).

Side note #2: the ILGWU established an industrial engineering department in the 1930s (from the NAS paper cited above).

Technorati tags: sweatshop

Sweatshops & Pay

What is pay that is so poor it warrants protest from third parties?
What is a "living wage"?

In the last post, I cited these two definitions

• A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers. (www-personal.umich.edu/~alandear/glossary/s.html)
  
• a factory where workers do piecework for poor pay and are prevented from forming unions; common in the clothing industry (wordnet.princeton.edu/perl/webwn)

I have a few questions about those definitions:

• Is "low pay" pay which is lower than the national average (or median, or GDP per capita) in the country of the factory? If so, then are factories which pay at or above the national average not sweatshops, ever?
  
• Why compare to the national average? Is it because of local living expense?
  
• Why not to some international average? And specify an international living expense? Isn't that what activists mean when they protest that they want wages in all countries raised, in counterpoint to the observation that raising wages in any one country will drive multinationals to another country?
  
• The "living wage" is frequently substituted, but that doesn't help much (see below).
  
• If pay is by piece, and if some workers are able to make a "decent wage" because they are bigger, stronger, or faster, should we ban less able workers from that trade because we don't agree with the effective hourly wage they are making?

A note about average and median: median means that half of the people make more, and half make less. If you use median wages as your yardstick, half of the people will always make less than that, no matter how high you set minimum wages. Average means that you add the wages up and divide by the number of workers; this statistic can be skewed upward by a few large outliers. For example, say you have workers making (in pisets per yarblek) 100, 200, 300, 400, and 1000. The median is 300 (2 workers make more, 2 make less, and 1 makes 300 exactly), the average is 400 (the worker making 1000 skews it upward). If that last worker made much more, like 9000, the median would remain the same, but the average would go up to 2000. Only 1 worker makes more than the average in that case, so it could be extremely misleading. That is why the more conservative "median" is preferred to the "average" in such discussions.

According to the BLS, the median weekly income in the US for 2004 was $638. That works out to about $15.95/hour on a 40 hour week. Do we really need to raise everyone to that, no matter how much experience, skill, or other desirable qualities they possess? If so, where is the motivation to actually acquire difficult skills? Incentives matter.

The phrase "living wage" is bandied about, but this is a rhetorical flourish intended to imply that below this people must be dying. It therefore makes no sense to say that someone is surviving on a wage below a "living wage". The counterargument is usually that the below-living wage doesn't provide for their needs. What are "needs"? Needs, properly understood, are those things which cannot be done without. If people are living without the things without which they cannot live, then they must not be needs -- strong "wants" perhaps, but not needs.

What then is an acceptable compensation? This depends on place and time. $15.95/hour would have made you the King of New York 200 years ago, might barely pay your bills in Manhattan but would be quite nice in El Paso today, and would make you a wealthy man in Indonesia at any time. Your compensation -- which includes all of the things you receive, including benefits -- must be worth to you at least the value of the time you spent at the second best option. Your cost to the employer -- the compensation plus the cost of complying with other requirements like administrators, payroll tax, etc. -- must be worth to your employer at least what you add to the firm's value. Does that sound harsh? If the employer pays everyone more than they earn, he goes out of business. Eventually, everyone must be employed by someone who earns what they receive because all other employers seem to disappear. It's like ... magic. In between your minimum and the employer's maximum, there may be room for negotiation, and it is within those two constraints that successful negotiations must conclude.

Let's suppose that you have a job where the pay is such that there are approximately as many people as these kinds of jobs. The pool of people who consider those particular jobs is a well-defined, steady set of people. Now, double or triple the pay -- don't you suppose that there will be new people lining up for those jobs who never considered them before? So just guess what it means when workers are lined up for these jobs that don't pay a living wage -- what does that say about the relative pay and availability of alternatives? It says, to me, that this kind of job is paying enough to draw workers away from other possible means of earning a living. What does it mean when workers go on strike over overtime, not because management is cutting overtime wages, but because management is cutting back on overtime hours? (Via MarginalRevolution) It says, to me, that the workers believe their time is better spent working in the factory than in any other pursuit open to them.

The real problem in developing countries is that there aren't enough jobs to go around for the people there. I suspect that many of those countries are in the transitional period from an agricultural society where 50% or more are farmers, to one in which modern farming methods have freed up most of that workforce for other pursuits ... but they haven't developed "other pursuits" yet. What they need is capital, both physical and human. They need an environment in which capital will flow freely to its highest valued use, not one in which capital might suddenly be grabbed by politicians and declared to be for public use or national security.

Another note: you will frequently come across the claim that workers need to be able to afford the product they are building. Really? Does Boeing underpay their engineers? After all, not a single one of them could afford a 747 - and they are unionized! I doubt most Ferrari artisans could afford a new, top-of-the line Ferrari. What about mansions? This dictum is obviously silly, even as a universal goal. At best, I think you could say that garment workers should be able to afford some garments, though not necessarily the garments they happen to be making if they happen to be high end garments, and certainly not at the prices they will bring in the target market. Worker nudity is not a problem which I have ever heard anyone protest. And no, I don't know why anyone would pay $100 for a pair of Nikes -- but that price is driven by demand in a country where we can afford to pay it, so it makes no sense to point out that they aren't affordable in a country where everything else -- everything! -- costs less than it does here, sometimes by orders of magnitude.

The key measure here is purchasing power parity (PPP) to convert between host country currency and US currency instead of the all too common market rate. The PPP of the renminbi is three times the market exchange rate, meaning that exchanging $1 into renminbi at the market rate would yield about 3x the amount of goods as it would in the US.

Not only do activists rely on readers' ignorance of purchasing power parity to dramatize the plight of workers, but they also rely on the average reader's ignorance of apparel manufacturing processes. I found an article in which it was lamented that Nicaraguan workers were only making $0.66 in piece-rate-plus-benefits to sew a pair of jeans. That sounds bad, right? However, I have it on good authority that you should be able to sew a pair of jeans in between 11 and 17 minutes. That works out to between $2.33 and $3.60 per hour. Not so bad, now, eh? And given that Nicaragua's PPP is about 5x its market rate of exchange, this translates into about $11.65-$18 per hour. Now how bad does it sound?

Here are some definitions I came across for "living wage":

• A wage sufficient to meet the basic needs of a worker and their dependents (www.web.net/rain/glossary.htm).
• a wage sufficient for a worker and family to subsist comfortably (wordnet.princeton.edu/perl/webwn)
• Living wage refers to the hourly wage that one deems necessary for a person to achieve a basic standard of living. In the context of developed countries such as the United Kingdom or Switzerland, this standard is generally considered to require that a person working forty hours a week, with no additional income, should be able to afford housing, food, utilities, transport, health care and a certain amount of recreation. This concept differs from the minimum wage because the latter is set by law (en.wikipedia.org/wiki/Living_wage)

Note that a wage is different than piecework, so already we have a problem with these definitions and the sweatshop definitions above. Piecework is the rate paid per task or piece of work (per pair of pants, for example), as opposed to an hourly rate, or wage.

• Why must a factory pay enough for the worker and his/her dependents? Even the American middle class raises its families on two wage earners, but not all jobs can let all people lead middle class lives. If so, why would you want to become a supervisor when part-time clerk is mandated by law to pay just as well?
• How many dependents? Do we include spouse and children, or siblings and parents? Do we look at a worker's family and decide what to pay him/her? Incidentally, it's currently illegal to ask a potential employee if he is married or how many children he has. Do you figure out the worst case and then pay everyone according to that? If so, what effect do you think this will have on family and career planning? In the first case, we can predict that people will maximize the number of people they claim are dependents, maybe they even have more children if the wages provide for more than the child actually costs (not a bad assumption since actual third-world laborers manage to live despite what activists tell us). In the second case, I think we can safely predict that single men will lack ambition compared to their family-rearing co-workers, since they will, after all, be making just as much money, but will have a lot more disposable income. In any case, we can agree that mandating wages that allow a family to be supported leads to family planning by central authorities. Just as in China, we can foresee that this will mean increasing government involvement in personal decisions such as mandatory fertility controls. On the other hand, if activists simply want corporations to be responsible without government mandates, then they are effectively asking for corporations to involve themselves in workers' family planning decisions. Social planning busybodies such as Henry Ford and the author of this would be proud: "Our absurd way of regulating salaries, which concerns itself much too little with the question of the family and its sustenance, is one more reason that makes many an early marriage impossible."
  

According to the calculator at this website, a family of 2 parents and one child must make at least $29,244 to live above the povery line here. That includes $479/month in child care. That comes to $14. 06/hour on a 40 hour/week basis if only one person works, but in that case they wouldn't need the child care, so they really only need earn $11.29/hr. If both parents work, they only need make $7.03/hr each. So which is the living wage: $14.06, $11.29, or $7.03?

• What is "comfortably"? What if the worker and his family share a house with another family? Two families? Sharing housing is an age-old trick, employed by college students everywhere to save on expenses. Is there a specific minimum amount of floorspace they need? I heard about a man in California who sells complete houses that take up less than 100 square feet - how does that sound (thanks, Morning Edition)? Does the government or employer need to take housing into consideration when determining pay?
• Why 40 hours per week, especially when farmers work much more? In England circa 1832, Parliament formed the Sadler's Committee to consider the Ten Hours' Bill, and one Tory press editor exclaimed that his staff put in 15-17 hours per day to agitate for the bill (The Factory System of Early Nineteenth Century, W. H. Hutt, in Capitalism and the Historians, F. A. Hayek, ed.). Is 10 hours a day for 4 days okay? How about 14 for one and 13 for 2? Don't laugh -- that's how medical students, Emergency Room workers (including physicians), and lawyers work, except they may do it for a lot longer than 3-4 days.
• What kind of utilities? Water, obviously. Sewer, okay, though subsidizing central sewage systems supports the non-sustainable society that many activists loathe. Electricity, maybe, but same caveat about sustainability. Telephone? I don't think so; there are plenty of alternatives, and talking to people a long ways away is not a need, as I understand "need". Cable TV? No. Broadband? No. In the future, people are probably going to perceive cable and broadband as identical, and as ubiquitous and indispensable as the phone. Heat and cooling? How much? In other words, there is a trade-off between the thermostat and another sweater (as Jimmy Carter reminded us).
• How much recreation, especially when playing in the park is free? Also, I would have included enough for education before I included recreation.
  

These definitions, to me, appear silly. The authors are not serious because they appear to have never thought about the distinction between "needs" and "wants". A "need" is something required to sustain life. If it is something people don't have now but they continue to live, then it is not a need, no matter how much of an inconvenience it is not to have it. Water and several hundred or thousand calories per day are basic needs which sustained human life for thousands of years. Clothing and shelter are wants; they aren't required to sustain life, but they certainly extend it and make it more enjoyable. Electric appliances, communications devices, and recreations are all conveniences. Even if I agree that some basic amount of these is desirable, why should providing these become the business of the government and/or employers? How can you determine what recreational activities are or are not appropriate or worthwhile, especially in light of the fact that we both the government and corporations have limited resources?

Something that neither these authors nor Rothstein seem to have accounted for is the fact that all wage laws discriminate against a class of people. In his essay, Defending Sweatshops: Too Much Logic, Too Little Evidence, Rothstein refers to a SCOTUS case, Adkins, but systematically fails to note that Adkins was about a gender-specific minimum wage law. It mandated minimum wages for women for the purpose of getting women out of the workforce in order to make room for men. That isn't accidental: all such laws discriminate by outlawing certain types of contracts with politically disenfranchised, unpopular, or vulnerable classes of potential employees. There is a Baptist-Bootlegger connection between people who genuinely believe that they are acting in the interest of some oppressed group, and another group of people who stand to gain from the law, and the former provide the moral cover for the latter. Adkins was about a law that discriminated against women, Davis-Bacon and the original federal minimum wages laws were meant to discriminate against contractors who hired black employees, and the original justification for Social Security was to encourage older workers to retire (a mandatory retirement age was originally proposed) to make way for younger workers and thereby raise employment among younger men during the Depression. Since nobody would ever support such laws if their basis was really known, someone has to provide the moral cover for those laws.

It is no accident, then, that the biggest supporters of these living wage campaigns are unions. There is nothing as hypocritical as an American union that includes the term "International" in its formal name (IBT, IAMAW, etc.), since there is nothing American unions want more than to stop the competition from other workers, of whom foreigners are the easiest political target.

In a sense, a union behaves exactly as a corporate monopolist, albeit a considerably more politically correct monopolist. The union wants to stop competition from non-unionized workers so that it can hold some labor back from the market and extract a monopoly rent. Sounds bad, but it depends on your view. To union members, it sounds pretty good. An employer who freely negotiates reveals that negotiation with the union is a better alternative than not negotiating with them; if that is the case, all the union has done is negotiated a better share of the company's profits. Recall my comments about the negotiating room between an employee's minimum and the employer's maximum above. In the free negotiation case, the company reveals that it is better off, the union members are better off, and consumers are no worse off.

The use of laws, quotas, tarriffs, and blackmail to achieve the same ends is not the same thing. A union utilizing campus activists as moral cover, for example, is only engaging in naked self interest. The union members may be better off, but the companies and the foreign workers may both be made worse off, and consumers certainly are made worse off to the extent that price increases are passed along to them.

I thought I would end with a round-up of evidence from scholarly resources available to me (available to you, too, if you want to pony up the $5 for the NBER studies).

• As noted in this study by Powell and Skarbek, apparel workers in nearly every country except Bangladesh and Indonesia make more in the apparel industry, on average, than the average national wage.
  
• As noted in NBER Working Paper 9669, The Effects of Multinational Production on Wages and Working Conditions in Developing Countries, Brown, Deardorff, and Stern, it is possible to construct theories showing that the effect of foreign direct investment (FDI) on host country wages is either positive or negative, depending on your assumptions about technology, technology transfer, skill sets, and so on. However, the evidence is overwhelmingly positive. They survey smpirical studies and find (among other things)
• Affiliates of US multinationals pay a wage premium (above the local prevailing wage) of between 40% and 100%
• Footwear and apparel factory workers in Vietnam are in the top 20% by household expenditures
• In Nike plants, workers earned $670 compared with a local average of $134. The figures for Indonesia alone were $720 and $241
• Nike contract workers consistently earned wages that were above national minimums
• An International Youth Foundation study found that 72% of workers surveyed considered their wages fair, and 60% were able to accumulate savings
• Controlling for education and industrialization (efficiency of scale), Lipsey and Sojohlm found that multinationals raised local white and blue collar wages 22% and 12%, respectively
• Cooke and Noble found that FDI was positively associated with ratification of International Labor Organization standards
• The OECD found a positive correlation between FDI and right to strike, right to unionize, and protection of union members
• Rodrik found a positive correlation between FDI and Freedom House democracy index, but a negative correlation with a high index of child labor
• There is some evidence that factory work entices rural workers to come into the city, causing crowding and bringing down the average wage (because workers standing around hoping for work make less than the lowest paying farm job), but this is evidence of the high pay of foreign multinationals and the lack of enough work to go around
  
• This paper was extremely informative in its synopsis of the response of the Clinton Administration to activists in forming the Apparel Industry Partnership (AIP), the Fair Labor Association (FLA), and the subsequent response of campus activists to form the Workers Rights Consortium (WRC). The campus activists, probably correctly, understood that government agencies are subject to capture by the interested parties. The article also discusses the union support for the campus activists, and goes on to document the blackmail tactics used to coerce universities into joining the WRC. This led to dueling letter writing campaigns by the Academic Commission on International Trade (ACIT) and Scholars Against Sweatshop Labor (SASL).
  
• In another NBER paper, Moving Up or Moving Out? Anti-Sweatshop Activists and Labor Market Outcomes, Harrison and Scorse find that (A) activists had an impact on the minimum wage in Indonesia, and that subsequently (B) more foreign firms exited Indonesia. This is a very technical and specific study.
  
• Johann Norberg has an excellent first-hand observation of the effects of Nike in Viet Nam here and a speech on globalization here. Among other points:
  
• The average pay at a Nike factory close to Ho Chi Minh is $54 a month, almost three times the minimum wage for a state-owned enterprise.
• Ten years ago, when Nike was established in Vietnam, the workers had to walk to the factories, often for many miles. After three years on Nike wages, they could afford bicycles. Another three years later, they could afford scooters, so they all take the scooters to work (and if you go there, beware; they haven't really decided on which side of the road to drive). Today, the first workers can afford to buy a car.
• Sure, [Tsi-Chi] makes five times more than she did, she earns more than her husband, and she can now afford to build an extension to her house. But the most important thing, she says, is that she doesn't have to work outdoors on a farm any more [10-14 hours].
• the Nike job comes with a regular wage, with free or subsidised meals, free medical services and training and education. The most persistent demand Nike hears from the workers is for an expansion of the factories so that their relatives can be offered a job as well.
• A generation ago, [Tsi-Chi] would have had to put [her son] to work on the farm from an early age. But Tsi-Chi told me she wants to give him a good education, so that he can become a doctor. That's one of the most impressive developments since Vietnam's economy was opened up. In ten years 2.2 million children have gone from child labour to education.
  

Referring back to my definition of sweatshop, I believe that in the absence of coercion and fraudulent practice, "foreign direct investment" does not translate directly into "sweatshop", nor does "multinational" equal "race to the bottom". I think that activism has its place: in identifying, exposing, and discouraging those areas where coercion and misrepresentation is used as a routine business practice. However, when it comes to wages, activists ought to consider the damage they are causing. Perhaps a little Econ 101 in addition to Poli Sci 101? I know there's a little more math and logic required, and of course outcomes matter in Econ but not in Poli Sci, but aren't good outcomes preferable to good intentions?

sweatshop
sweatshop

Sweatshop Definitions

Should beautiful, single women be required to conceal their appearance?
Should wealthy, old, single men be required to hide their wealth?

In my previous post, I stated my frustration with the dearth of a good definition of "sweatshop". From what I can glean from the web, sweatshop seems to have the following definitions, based on the context, and depending greatly on the author:

• Any apparel or footwear factory
• Any apparel or footwear factory in a developing country, especially if they make products for export to the West
• Any apparel or footwear factory in a developing country that does contract work for a well-known person or company (Nike, Reebok, Gap, Kathie Lee Gifford)
• Any apparel or footwear factory in the US that hires immigrants, especially undocumented immigrants
  
• Any place of work that the author finds to be undesirable
• A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers. (www-personal.umich.edu/~alandear/glossary/s.html)
• factory where workers do piecework for poor pay and are prevented from forming unions; common in the clothing industry (wordnet.princeton.edu/perl/webwn)

Some of these are just plain silly on their faces, and the others are simply too vague. I don't accept the accusation that I am cherry-picking these definitions, just being obtuse, or denying the existence of actual sweatshops. I believe that people have overused the term to the point that they have watered it down and, as usual, have divided into two camps that talk past one-another in an attempt to score rhetorical points.

Here is what I am prepared to accept as a definition of a sweatshop worthy of protest:

• Any factory where the workers are legally prevented from quitting, striking, or organizing, and/or where the employers have perpetrated a fraud upon the workers by successfully misrepresenting the conditions of work.

If a country has laws that allow prisoners to be used as quasi-slave labor, I am uncomfortable with products from those factories. China reportedly has such factories, but I don't know how to determine which Chinese-made products are made at those and which are made at other types of factories. The US has prison-staffed factories, and while I am sympathetic to the idea of victim compensation, I am uncomfortable with factory prisons as I know them because of the potential rent-seeking that may go on.

Many foreign countries have laws that prevent union or other organization. I am as opposed to those as I am to laws which allow closed shop contracts or which require employers to recognize unions. In the US, closed shop contracts are illegal (Taft-Hartley), but there is a loophole which unions routinely exploit: you can't compel employees to join the union, but you can compel them to pay dues. You can't require them to pay for non-bargaining activities (Beck), but the burden is on the employees to get their money back from the Union. Everyone should be allowed to talk and to coordinate their activities with everyone else who agrees to do so, but should not be required to coordinate with someone they don't want.

I read about shops where women may be compelled to have sex as a condition of employment, but it isn't clear how common this is. If this was not an explicit part of the arrangement, I believe that this is a fraudulent arrangement perpetrated by the management. If it's one rogue manager, fire him, but if it's a pattern of behavior, then I agree that the place is worthy of protest. Likewise a factory where other side deals are made as a condition of employment, or where corporal punishment is used.

If the factory shows one face to the employee before they agree to work (which means quitting other jobs and leaving other commitments), and then another when they actually start working, that's fraud. If they make claims about safety or working conditions (1) that they know to be untrue and (2) that they make for the purpose of deceiving the employees, that is fraud. On the other hand, if the employees know about these things from other sources (friends and family), and agree to them anyhow, I don't see the problem with that. Many factories in developing countries probably keep up fronts for ill-informed, busybody activists, and the workers are probably well aware of the reality behind the facade, so I qualified "misrepresenting" with "successfully" in my definition.

Finally, I am assuming that we are talking about people who are capable of rational decision-making. That may or may not be the case for everyone. Caveats apply for the mentally handicapped and for children. However, the relevant difference between children and adults is not age, but maturity and understanding. Unfortunately, we don't have a good test for maturity, so we choose a bright line rule and say that everyone under 18 years of age is not an adult. We let children as young as 14 work in non-farm settings, though they still don't enjoy the other privileges and responsibilities of adulthood. We don't let anyone under 21 drink, but we do let them enlist, so these rules are not necessarily logical. I think it is perfectly reasonable for every culture to make their own decisions about the appropriate adulthood rule, since in many societies children are more self-reliant than they are in our own culture. Even in our own society, we make concessions to farming, where children learn work habits much younger because they actually participate in it. As cultures become more complex, it takes longer to learn all of the rules (anyone remember the comparison in The Gods Must Be Crazy?), and I think that we made a mistake by banning children from work. After all, it means that we sit them in warehouses schools where they learn nonsense instead of participating in meaningful apprenticeship programs such as they still have in Germany.

Kathleen suggests a good test for determining if a factory meets all of my requirements for not being a sweatshop: if they are willing to let you come in and visit or inspect, they are not a sweatshop. A sweatshop is likely to be an illegal operation, hiding from the public in more ways than one. The El Monte sweatshop discovered in 1995 was staffed by (mostly) girls who had immigrated illegally from Thailand and were kept in involuntary servitude to an organized crime ring which saw alien smuggling to be a profitable adjunct to drug smuggling.

The definitions of sweatshop that seem to be a little serious also seem to me to be vague. It used to be claimed that software companies treated their workers "inhumanely", forcing them to work long hours. Since the dot-com implosion, those same workers' biggest complaint is unemployment, which they increasingly blame on offshore software development from India. Guess what they call those factories full of professionials that trained in foreign universities? (Be sure to check out the "selected occupations" highlighted in Figure 1 on the link)

NFL linemen have a lifetime expectancy of about 55 years old, so it would seem that the NFL is a sweatshop if you use "demanding levels of performance that are harmful to the workers" as a criteria. The same is largely true of professional cyclists, yet I saw very few protestors along the route or the Tour de France.

Here is what I am not going to accept as a definition of a sweatshop (can we come up with another word?):

• A factory in a developing country where the employees know about the work conditions and pay and freely choose those over their other options despite the fact that, in comparison to the West, the pay is much lower and the conditions much worse than those to which we are accustomed.
  

There are thousands of factories and jobs that would be too dangerous, harsh, harmful, or low-paying for me, but that doesn't mean that everyone agrees or that nobody should work there. The real test is whether the employees find the tradeoff between the known unpleasantness or risk on one hand, and the known pay on the other, to be acceptable to them given their other options. Roofing is a dangerous and highly regulated job. Installing flooring is supposed to be really bad on your knees and shoulders. Where are the protestors?

And "poor pay"? This is probably the least well defined phrase on the internet. It's so bad that I'm going to leave it to another post.

I like my definition of "sweatshop" much better than anything I could find on the internet, but I might be biased. Most writers on the subject are so poorly informed that you cannot believe they are serious. Applying their vague formulations to the apparel industry is insulting to the people who actually enjoy working in the industry. People who write about this seem to forget that while pay in other countries is much lower than what they would accept, it is not as bad when you consider their cost of living, and almost always better than their other options. These activists think they are doing those workers a favor when in fact they are attempting to take away their only competitive advantage.

Those activists would put bags on the heads of beautiful women and chains around the wallets of old men and then send us all out to find a mate on the claim that this would "force" beautiful women to develop a personality and rich old men to develop a sense of youth. But what if rich old men just want beautiful women and women just want rich, old men? Nobody is going to be happy under the bag-and-chain scheme, but at least everyone will be equal in their misery.

Sweatshops

Yes, I am the Eric mentioned in this post. I first picked the news about the Christian Science Monitor Op-Ed up from Cafe Hayek (where orders emerge). I have three main things I'd like to say about it, but not before pointing out that this is a topic about which Kathleen is passionate, exceptionally well-informed (and experienced), and surprisingly not very PC (at least, not in a conventionally PC way). Surprising to PC people, that is, not surprising to me any longer.

The four points I'd like to address will take a while to get through, but here's an outline:

• What is a sweatshop, anyhow?
• Rothstein raises some interesting points, but his main argument is seriously flawed
• Despite this flaw, he and Kathleen raise an interesting angle to the subject of worker education
• I have a potential solution to the problem

Next time: what is a sweatshop?

Meanwhile, this Haitian website picked up on Kathleen's post.