When Exploitation is Mutually Beneficial

When Exploitation is Mutually Beneficial is an excellent article in TCS Daily about why free trade works.

"Exploitation is a word often used but rarely defined. In its most literal meaning -- I 'exploit' you if I in some way benefit from your existence -- it is the reason human society exists. We all benefit from one another's existence. We all exploit each other."
-- David Friedman, The Machinery of Freedom

Let us say that I am poor and you are wealthy. I live a harsh life of bare subsistence farming, while you make several thousand dollars per day as a business owner in the widget industry. One day you hire me to make widgets for you at a rate of $1 per widget, which you then sell to make a profit of $2 per widget. Which of us has benefited the most from this exchange?

If you answered that it must be you, this is wrong. It's true that you are still much, much better off than I am in absolute terms, and that in dollars, you have gained more than I have. But considering our relative starting points and the basic fact of diminishing marginal utility, this transaction has benefited me more than it has benefited you. Simply put, the principle of diminishing marginal utility states that each extra unit of a good provides less subjective benefit to an individual than the last one did: an extra dollar means much, much more to a pauper than to a millionaire. Thus I get much more subjective utility from the extra dollars I now have than you do from the extra dollars you have.

This is a straightforward lesson in basic economics, and yet it's constantly overlooked in discussions about trade with people of developing nations. ....

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• Graham reports that the areas along the Mexican border populated with maquiladoras -- U.S.-owned factories for assembling products for reimportation to the U.S. -- have the highest wages in Mexico.
• Economists Robert Lipsey and Fredrik Sjöholm, in a paper titled "Foreign Direct Investment and Wages in Indonesian Manufacturing", report the results of an empirical study of 20,000 Indonesian manufacturing plants. They found that the average wage was 50 percent higher in foreign-owned plants than private domestic-owned ones, and that total compensation was 60 percent higher. Even after controlling for education, location, plant size, and capital- and energy-intensity, wages were still 12 percent higher for manual labour and 22 percent higher for "white collar" work.
• Moran explains how women in Bangladesh were forbidden from working in factories before the advent of its clothing industry; now 95 percent of the 1.4 million clothing factory workers in Bangladesh are women, and 70 percent of the women working in the private sector work in such factories. As a result of the wages now earned by Bangladeshi women, family incomes are higher and a higher proportion of that income is spent to obtain better nutrition, health, and education.

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Also, Lipsey and Sjöholm explain that the presence of foreign-owned factories tends to drag up wages in domestically-owned factories due to increased labor demand, spillover effects from technological capital, training of workers and managers with basic skills that make them more productive, and so forth. Even here in the poorer countries, competition truly does raise the tide which raises all boats. The recent success stories of countries like China, India and Taiwan are remarkable examples of this. And this is exactly what one would expect given an understanding of basic economic theory.

None of this is to downplay the fact that conditions of life in poor countries are positively awful compared to our own. The point is to emphasize that the surest way to bring these countries up to more tolerable standards of living is through free trade, the process by which the capitalist exploits the worker and the worker exploits the capitalist. To the extent that poverty still exists on our planet, it is due to insufficient exploitation. The only way to defeat absolute poverty is by greater productivity, and that means leaving people free to engage in mutually beneficial exploitation. More, and faster please.