Wednesday, March 28, 2012


Last week, one of our readers (or perhaps simply someone who ran into one of our posts on sweatshops) contacted me with a link to a rather chilling infographic. In it, we find rather awful tales of environmental damage, poor working conditions and industrial carnage. This in service of the consumer electronics market (though I must wonder to what extent the switchgear and server hardware production process differs, if at all), suggesting that it is the wealthy West's unslaked thirst for electronic geegaws that is responsible for these terrible, unseen consequences. Indeed, this non-euvoluntary market is rife with uncompensated externalities (chiefly, it seems, in the form of environmental damage and poor working conditions).

In the past few days, I've been slowly mulling over the externalities argument. The GTM claims that condition #4 is "no uncompensated externalities". I have no cause to gainsay this, but I would say that there's an interesting lacuna in the development of shifting to a manufacturing-based economy where many externalities are not merely uncompensated, but uncompensatable. Liquidity and credit constraints, restrictions on Foreign Direct Investment and even political barriers prevent firms from internalizing all the costs of production.

All is not lost however. One stylized fact from economies that have successfully transitioned to a more modern economy (Madagascar, Taiwan, heck, even the US in the 19th Century) is that as wealth grows, these restrictions ease. Workers want healthy, safe workplaces, well-educated kids (who may or may not prefer cheese) and clean natural environs. They get wealthy by producing stuff other people want, then trading with them. All that awful, non-euvoluntary production, left unhampered by (usually well-intentioned) meddling will transform, as a matter of empirical regularity, into something more closely approximating the euvoluntary markets we all love.

I might be willing to lend a conditional exception for extractive industries as described by Acemoglu, Johnson and Robinson, but that's a topic for another day.

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Do you have suggestions on where we could find more examples of this phenomenon?