Are corporations evil?

A coworker, upset at some of the arguments I was making, told me I should watch a video called "The Story of Stuff" to see the world from her point of view. These sorts of exercises are useful, because they force you to go through and think about why you believe the things you believe. I don’t have Jonathan Chait's grace, but I can hopefully discuss some of the arguments made during the video, and along the way give you a better idea of how I see the world.



A note about the format of the video:
I distrust arguments that are made using video, where the arguer attempts to tell a story, introducing facts with no citation, making a short argument and then making a new argument before fully developing the previous one. I don’t like it when Michael Moore does it, or Glenn Beck, or any other demagogue. A story requires unambiguously good characters and unambiguously bad characters. The truth is often more messy.

A note on imposing personal beliefs on others:
In the past three years, I think I’ve purchased two shirts and two dress shirts. I spent about a week over winter break systematically throwing out and giving away stuff in my room, and vowing to try harder to avoid introducing clutter in the future. I plan on giving away most of the clothes I brought with me to India, and on choosing a job after school that I enjoy doing, rather than one which maximizes my income. I am aware of things like ‘the hedonic treadmill.' These personal beliefs are not inconsistent with the following points:

  1. Most of the arguments in this video are misleading.
  2. Just because I believe that a worker is being exploited does not give me the right to pass a law prohibiting the employer from offering that type of work, especially when I do not know anything about the worker’s circumstances, and the worker has entered into a voluntary contract with the employer.
  3. Just because I believe that some consumption is wasteful and causes clutter doesn’t give me the right to legislate against someone else’s style of living, even if I believe it’s wasteful.
  4. Capitalism, in particular, an economy which promotes the purchasing of items which make people's lives easier, spurs innovation and raises productivity, both of which are responsible for allowing people around the world to earn higher wages and enjoy better standards of living.


A note about the growth of countries: Every nation around the world once had an agrarian economy, including the United States. On the way to becoming modern, service-based economies, nearly every developed country went through a phase where the primary industries were sweatshops and dirty manufacturing jobs. The conditions in these types of jobs in the United States in the 1800's are awful, and well documented. People who have spent their entire lives working on the land do not have the skills, or the institutional capital, to perform jobs which demand more skill than sweatshop work, which pays marginally higher wages than ordinary farm labor. The key point is that as workers wages rise, they begin to demand more services and better rights, and at some point when workers could make enough money doing other jobs, the sweatshops close their doors.

Countries like South Korea, Taiwan, and Singapore, which are generally well developed today, had agrarian economies as recently as the 1950’s, and had sweatshops as recently as the 1970’s. As workers wages rose, they demanded better jobs and better working conditions and the sweatshops moved elsewhere. The sweatshops though were a key step in the transition from an agrarian economy to a modern economy.

Here’s a chart showing the first and most recent countries to reach $2000 in average income, and subsequently how long it takes them to reach $4000. Source: Arnold Kling and Nick Schulz, “From Poverty to Prosperity,” New York: Encounter Books, 2009.

Country          Year reached $2000     Years to reach $4000

New Zealand         1821                   65

Australia           1831                   42

United Kingdom      1835                   54

Netherlands         1855                   64

Belgium             1856                   55

United States       1856                   44

Syria               1961                   12

Jordan              1964                   15

Taiwan              1965                   10

Turkey              1965                   23

South Korea         1969                   8

Thailand            1977                   13


The process of transitioning from a subsistence economy to a modern economy is speeding up, which is indisputably a Good Thing. Countries are reaching higher wages fairly quickly and thus, in my loose economic shorthand, spending less time in the sweatshop/dirty factory phase of growth.

Using GDP and average income as barometers:
GDP and average income are not perfect measures of how countries are doing. If Bill Gates lived in Uganda, the GDP and average income figures for Uganda would look very different. While qualities like Amartya Sen’s notion of capabilities may be important factors in growth, capabilities would be extremely difficult to measure.

I believe, and I think the statistics will back me up, that the majority of people in Third World countries (and I will use the word “Third World” because the narrator of the movie does as well) desire higher income, which allows them to purchase things like better health (nutrition as well as medicine), convenience (a car, computer, washing machine, or access to the Internet), better living standards (a home), or better living standards for their children (saving up enough to provide a large dowry or a private education for their child, in the hopes of sending him/her to a better college). Anecdotally, I see this at my school, where the majority of foreign students are interested in the field (finance) that allows them to earn the highest income out of college.

Again anecdotally, the people saying things like “It doesn’t matter what job I have after graduation, as long as I am happy” are the students who come from relatively wealthy backgrounds. I am reminded of a scene in the movie Platoon, when the other (black) soldiers ask Charlie Sheen what he’s doing in Vietnam, and he responds using an ideological argument about fighting communism and doing the right thing. “Man,” one soldier says, “you gotta be rich to think like that.” Furthermore, contrary to popular belief, higher income is correlated with higher levels of happiness everywhere around the world. These data points suggest that a development or political effort designed primarily to increase the income of Third World country inhabitants is not misguided.

To conclude, GDP and average income may not capture every important variable about a country, or people's livelihoods, but they are fairly easy to measure, and give a rough idea of how the inhabitants of that country live.

Sweatshops:
The narrator points out that pregnant women in Third World countries sometimes work in dangerous conditions. “What sort of woman would work in a factory like this except one with no other option?” she says. How, then, is the solution to remove the option? Poverty is the main cause of being option-less, not sweatshops. Increasing average income is the way to give pregnant women more options, like the ability to afford maternity leave, and the way to increase average income is, generally, to participate in the global economy, not shun it.

Assume we know nothing about the life of an average citizen in a Third World country. The worker has employment options A, B, C, or unemployment. The worker chooses option A, which is working in a sweatshop. While sweatshop work may be horrible and the hours long, clearly the worker prefers it to options B, C, and being unemployed. To say that we should take the worker out of the sweatshop implies that we know better for the citizen than the citizen knows for himself, which violates the assumption.

The fact that workers choose to work in sweatshops, which have generally poor conditions, should indicate to most people that the alternatives to sweatshops are even more horrific. Nicholas Kristof and Paul Krugman point out that alternatives for many people might be scavenging in a garbage dump, or going hungry. With few exceptions, which are rightfully being rooted out and banned, sweatshop workers enter into voluntary paid contracts with sweatshop owners, which they can quit at any time.

People may feel bad that the sweatshop workers are being employed making products for our use. Even assuming that most sweatshops in Third World countries produce products which are directly sold to customers in the West, raising the wages/improving conditions in those sweatshops would not allow Third World countries to compete for business; if my wage costs are the same, would I rather place my factory in India or in the USA? Moving the factory to America takes jobs away from the poor; industrial growth is generally good for the workers in a third world country.

Some people argue that sweatshop workers aren’t learning useful skills. On the contrary, they are learning how to produce goods at a level of productivity per worker that approaches Western standards. In the excellent book The Elusive Quest for Growth, Bill Easterly gives the example of the Bangladeshi garment industry, which started from practically nothing. Noorul Quader partnered with a Korean garment firm, Daewoo, and sent some of his workers to learn from Daewoo. Using the new techniques, and with the benefit of high productivity and technology levels, Quader’s firm, Desh Ltd., grew rapidly. Soon after, workers in Desh Ltd. quit and started their own garment companies, using the lessons they learned from working at Desh. Now the Bangladeshi garment industry is a largely homegrown $2 billion industry.

The use of misleading statistics throughout the video:
In a world where incomes are not evenly distributed, it’s natural that the people on the high end of the income distribution consume more goods than the people on the low end of the income distribution. The USA has an extremely high concentration of people on the high end of the income distribution. Thus I do not feel guilty when the narrator says that the USA has a small share of the world’s population, but consumes such a large proportion of its resources. People may feel guilty because they believe it is not fair or just that the people on the high end consume more than the people on the low end. Most systems aimed at reducing this inequality have failed miserably, and even in communist countries, the leaders ate and owned dachas on the lakes while the people starved. I would be more moved by a study showing that people in the United States consume more stuff than other similarly rich people, and this is because of consumerism, government regulation, etc.

The narrator wants to scare the viewer by mentioning the horrible chemicals that go into everyday products. Specifically, she mentions brominated fire retardants, which are used in pillows. Pillow manufacturers have reputations; if their pillows were killing people, or if a study came out linking the materials in their pillows with a higher risk of cancer, they would remove the chemical from the product, because otherwise, people wouldn’t buy it.

Reputation effects are a key component of capitalism; we do business and we buy products from companies that have earned our trust, especially because we don’t have the time to inspect the materials and safety of each and every product that we purchase. If an airline skimped on maintenance and one of its planes crashed, or if Toyota didn’t fix its gas pedals and a driver died, the PR effects would far outweigh the tiny savings from skimping on maintenance or environmental standards. And if reputation systems aren’t strong enough, we have things like consumer advocacy groups that do the research, educate consumers about the problems and demand better products from businesses.

It would be a horrible abuse of correlation/causation, but I could produce a chart demonstrating a positive correlation between average length of life around the world, which has steadily increased over time, and the number of chemicals being used in commercial products, which have steadily increased over time.

The narrator also wants us to feel guilty about the statistic that after six months, only one percent of consumer products are still being used. Rent, food, gasoline, utilities, and entertainment (vacations, movies, CD’s – and note that music is becoming a digital product, in response to consumer demand) are all large categories of consumption that are exhausted soon after they are purchased. Thus I don’t feel very guilty about the fact that a small percentage of consumer goods are still being used six months after use, because many products are not designed to be used continually. I would be more moved by a study examining how the average life of a TV, couch, or shirt has changed over time (and whether those products are being recycled more or less).

When workers move out of rural communities and into cities, their communities are destroyed:
Assuming that this actually is a problem, how would you solve it without restricting the mobility of the working class? I don’t think we should be able to restrict someone else’s freedom to move.

Two hundred years ago, 90% of people in the United States used to be employed in rural agriculture, and in farming communities. Now, less than two percent of the United States workforce is involved in farm labor, and a larger, yet still small percentage of the US is in rural areas, yet I don’t know anyone that would argue that the US lacks vibrant communities. People generally appreciate conveniences like toilets, laundry machines, cars and cheap food. Yet how did we move from 90% farms to less than 1%? At some point, people had to move off of the farms, away from their communities, and pursue other work.

Throughout history, most of the available jobs are in towns and cities. In fact, one clear sign that an economy is in dysfunction is when people in urban areas move back to the rural areas. At the peak of Roman civilization, the city of Rome had over 1 million inhabitants. When Rome collapsed, and Europe sank into the doldrums of the Middle Ages, the population of Rome fell. We didn’t see another city with 1 million inhabitants until the 18th century. Workers move to cities because that’s where they can find jobs.

There’s a missing variable, and that’s what economists call productivity. Let’s say that a village has two farmers. Farmer A – maybe his child is sick and he can’t afford treatment, or farming only generates enough income to feed the family for 5 nights a week, or farming is a profession with a highly variable income based on weather - decides that he is going to sell his land to Farmer B and move into the city in pursuit of a higher-paying job. Farmer B now needs to cultivate twice as much land, but he also has the potential to earn twice as much at harvest time. Because of the additional expected income, Farmer B invests in technology that makes him more productive – a tractor that lets him till the land more quickly, a dal mill, seeds that produce better yield, or additional farmhands. At harvest time, Farmer B cultivates twice as much land – in other words, he’s become twice as productive. Furthermore, former-Farmer A is earning a higher wage in another job, so he’s more productive as well. Both Farmer A and Farmer B are earning higher incomes than they were before. This is the story that has played out in the USA, where today's farmers can cultivate much more land than they could in the 1800’s. Futhermore, thanks to technological progress, each piece of land can support much more food than it could in the 1800’s. This makes food cheaper and means that we can use less land to support everyone, leaving more for forest conservation or other uses.

As workers become more productive, wages rise and prices decline. Everyone around the world today can purchase far more for an hour’s worth of labor than they could two hundred years ago. Here’s a chart detailing the number of hours necessary to purchase various household goods in 1895 and the time necessary to purchase them today. Source: Arnold Kling and Nick Schulz, “From Poverty to Prosperity,” New York: Encounter Books, 2009.

Commodity              Time (hours) to   Time (hours) to
                       earn in 1895      earn in 1997

Horatio Alger books    21                0.6

One-speed bicycle      260               7.2

Office chair           24                2

100-piece dinner set   44                3.6

Hairbrush              16                2

Gold Locket            28                6

Oranges (dozen)        2                 0.1

Ground beef (pound)    0.8               0.2

Milk (gallon)          2                 0.25
These drops in price (and increases in wages) have allowed people to live easier lives, and at the margin where Seva Mandir works, made basic goods, especially food, cheaper. Do ever-lower prices mean that producers like farmers are always going to be screwed over? No, because increasing productivity and better technology mean that most people are able to produce more goods in the same amount of time; this is the factor that drives prices lower in the first place.

Because prices of basic goods get lower, some people with lots of money may purchase goods like clothes and then dispose of them shortly thereafter. This is probably bad, but on the other hand, the cheapness of basic goods might allow a rural child to own a pair of shoes or a few shirts.

Pollution:
The narrator isn’t the first person to point out that pollution is warming the world, and that we are generating lots of trash. I agree that these are problems; maybe not the world’s most pressing issues, but issues nonetheless. What should and shouldn’t we do about pollution?

Solutions that harm rather than help:
  1. Engage in costly signaling that is not going to do much about the problem. Because global warming is such a large problem, one state or town’s reducing their pollution is not going to make a meaningful difference. Thus, rather than do anything about the actual problem, governments have an enormous incentive to “show that they care” by commissioning new public works projects or demanding/subsidizing expensive clean sources of energy, and little incentive to actually reduce the amount of pollution. Most evidence is that adding things like solar panels or wind turbines increase the amount of energy consumed; there isn’t much of a substitution effect away from polluting sources of energy.
  2. Shut down factories in Third World countries. At low levels of average income, there’s a tradeoff between clean air and economic productivity, and the way to settle the debate in favor of clean air is to raise everyone’s income enough that they start to demand the shutdown of the factories. China is just starting to lift millions of its citizens out of poverty and give them a chance at leading a life away from a rural village; draconian legislation would send those millions back to lives barely above the subsistence level. Yes, these pollutants are causing respiratory problems on a wide scale, but they are also engines for economic growth, so there’s a tradeoff there.
  3. Raise import and export tariffs. This is bad policy; here's an article that lays out the basic arguments.
Solutions that help solve the problem:
  1. Raise the price of polluting. There is a flipside to pollution, which is that pollution is a byproduct of producing things that we really value. For example, flying halfway around the world generates a significant amount of pollution. But we also value the freedom to travel and live in India. So if we want to reduce pollution, we should also be careful not to reduce people’s freedoms to do things that they enjoy. What we can do is raise the price of doing things that happen to generate lots of pollution, like driving cars or using electricity. The easiest way to do this without creating lots of skewed incentives in an economy is to use a carbon tax, or to cap emission levels and allow firms to trade permits. Heavy-polluting firms would then have an incentive that would allow them to save money and help the planet at the same time.
  2. Educate consumers about pollution and waste and encourage them to recycle. Which this video does, although the reasoning behind it is mostly flawed.
  3. Non-intrusive measures that help cut down on smog. For example, some cities in Thailand offered free tune-ups to especially smoggy vehicles, which helped lower the overall pollution level in those cities. A study from McKinsey suggests that most companies could save money and help the planet at the same time; the net effects from switching to cleaner technology are positive. Specific subsidies for replacements of especially bad pollutants wouldn’t hurt either.
  4. The average company takes in about six percent more in revenue than it spends in expenses. That’s not an obscene amount of profit. Furthermore, for most companies, pollution isn’t profitable; most pollution is directly tied to energy use, so companies have an incentive to cut down on energy use, which cuts down indirectly on the amount of pollution.
  5. Fashion: The narrator blames fashion, and consumers always needing to buy new products, on firms. If firms were responsible, then we would expect fashion anywhere and everywhere to be a monetary phenomenon. This is not the case. For example, children wearing school uniforms have fashionable and unfashionable ways of wearing them; styles like sagging become trendy and then become un-trendy. Companies were smart to notice this, and marketed their products accordingly. Should we pass a law so that Apple can only come out with one new product every two years, or that you can only buy new clothes once a year? No.
  6. Fashion also serves a valuable social purpose, by letting us know who’s desirable and who isn't. Fashion trend-setters of all socioeconomic classes are generally high status people. Trend followers are medium status and people who don’t follow trends at all are generally low status. If you can follow fashion well, then you’re probably well in tune with the needs of others and a desirable person to be around. Copying others, or getting others to follow our trend, thus has a valuable sorting purpose, leading to better matching, lower divorce costs, etc. We shouldn’t shame or judge people for following fashion, or hate companies for helping us sort people in this way. If I had to pick one argument out of the bunch that readers of this post are likely to hate, it’s this one.
  7. Note that in some circles it’s become fashionable to reject corporate fashion and instead shop at goodwill or wear old clothes, and that’s cool too.
Conclusion
For the relatively well off in the West, purchasing fewer goods and finding a social group where members judge other members for things unrelated to the purchases they make may make a person better off. Educating consumers about the aims of marketing, and publicizing the problem of pollution, cannot hurt either. But companies are not evil, and we should not impose our belief systems upon others, especially people in the Third World, who grow up in cultures and socioeconomic situations radically different from our own.

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