Recently, there has been a scandal in the luxury fashion industry concerning “unethical business practices,” and without going into the history or nature of these industries, somethings are particularly disconcerting about the scandalizing itself. The practices may be causes of disturbance; however, that is not our aim in this article. What I seek to put under scrutiny is the journalistic slandering of these corporations.
Perhaps a skeletal summary would be useful before we begin: Company X in a first-world country, say Italy, hires the labor and manufacturing services of company Y in a third-world country, say Ghana, where the work conditions are harsh and dangerous. This is usually done to cut costs. Company Y prices the manufacture of the merchandise by the standards of company X around $5 per widget, whereas X sells the merch at the staggering price of $505, an ‘obscene’ 100X markup. A court in Italy convicts X for their profiteering, their lack of oversight, their transparency, and so on. The courts fine X, they are also socially condemned, the price of their shares drop in the market, and the journalists move on to the next ‘scandal.’
Many of us might feel that such shallow information about the case is enough to condemn and boycott X: And this, indeed, can be done under the allowances of the freedoms of speech and association. However, we are simply factually ‘wrong’ to think that our ethical reasoning is sound and valid. Let us consider how little the skeletal summary above provides to the reader.
First, what is wrong with outsourcing production? By itself, the action is ethically neutral. It is neither condemnable nor commendable. We find fault only when the production is done by exploited labor. But how can we decide who is the exploiter and who is exploited? If someone works for below the minimum wage, is he exploited? Surely not, for he is free to choose the work that is offered to him. Had he not been able to choose due to the violent obstruction of an arbitrary third party, coercion would have been involved and both employer and employee may be exploited.
However, the employer is not necessarily responsible for the menu of available jobs the individual might choose from; he is responsible for the offer he presents alone. If the would-be employer engages in other illicit activities to ward off competitors or to monopolize the industry through lobbying, that is a completely different matter and need not be addressed here. And why not consider the employer to be exploited, since the firm needs employees? This asymmetry in our judgments is not quite justified. If need determines fairness, then there are other firms, and it is not obvious on whom the responsibility ultimately falls, if not on all of them. (But then again, if the latter was the case, why not also on the exploited for not offering a job to himself?)
Perhaps, then, the exploitation comes from the dangerous conditions the employees are subjected to. However, this objection fails. If there was no reasonable way for the worker to know that the conditions of his workplace are dangerous, then someone else truly might be responsible – if the information was withheld. The situation is often different, though: Often, both employer and employee know that the work place is dangerous and uncomfortable, and the worker is compensated by the risks he is willing to endure. Planet earth is not a safe haven, nor a protected bubble of security. There are risks in every profession, and commuting alone to work has its risks. Employers are faced with a trade-off of damage to reputation, providing high compensation benefits for injuries, and sustaining lawsuits, for lower costs; and economists and accountants can think the matter through to advise the company on the best path forward. Whereas employees are faced with a trade-off of the risk of physical injury, death, or a shortened lifespan, for higher wages or training experiences that will allow them to improve their future prospects.
Legislation does not necessarily improve the circumstances of any when they regulate the industry, as they may tip the scale in one side’s favor, or remove the business from the market altogether, and leave the inherently more dangerous, but socially necessary, jobs that the employee was avoiding anyway like working on construction, waste-management workers, and so on. These are some of the unintended consequences that Bastiat points out when he talks about ‘the unseen.’ The American economist, Benjamin Powell, demonstrated well what these unintended consequences could be on both employer and employee, in his book “Out of Poverty: Sweatshops in the Global Economy.”
Finally, are the consumers exploited by the ‘obscene’ markup? The concept of the ‘markup’ by itself is nebulous. In pricing a merch, part of the price tag is used to pay the salaries of the lawyers of the firm. This, of course, is not reflected immediately in the $5 price of the manufacturing of the merch. Nor is the costs of advertising, market research, and storage, none of which are free, and each may vary from season to season. Furthermore, the retained earnings from the profit of each merch sold can be used to expand the business, provide for charity, repair depreciated assets, and so on: The consumer is oblivious to all these factors. How can he be exploited, when in the end, he purchases the handbag, or the videogame, or the headphones irrespective of all these things? The short answer is that even the most ‘conscious’ consumer can’t know for sure. This is ethically permissible, because he does not have access to such information and does not intend harm and is very rational in assuming that no atrocity was committed in the manufacturing of this merch.
In the end, it does not matter if the markup is 5X or 5,000X. If the consumer is willing to dispense with his money for it, it will continue to sell for whatever marked up price. Competitors will notice the profit opportunities, and profits will tend to equilibrate. The ultimate price of a merch is determined by competition in the market, the scarcity of resources, and many other factors the most important of which is the consumer’s desire of it at some quality at such price. The case for both reproducible and nonreproducible goods are not too unsimilar, and to quote from Rothbard’s History of Economic Thought (V1, p. 452): A problem with the “cost-of-production theory is that it necessarily abandons any attempt to explain the pricing of goods and services that have no cost because they are not produced, goods that are simply there, or were produced in the past but are unique and not reproducible, such as art works, jewellery, archaeological discoveries, etc. Similarly, immaterial consumer services such as the prices of entertainment, concerts, physicians, domestic servants, etc., can scarcely be accounted for by costs embodied in a product. In all these cases, only subjective demand can explain the pricing or the fluctuations in those prices.”
If exploitation is having the better end of the bargain, barring aggression, then it is often impossible to say who the exploiter/exploited is, because their valuations differ, and this is why they trade.
