Wednesday, April 29, 2015

The Moral Intuition of Supererogatory Production

Billion-dollar-a-year company A runs hellish factories in some of the most poverty-stricken places on earth. Their money-grubbing executives ruthlessly shave labor costs to just barely above workers' BATNA of subsistence farming.

Billion-dollar-a-year company B is fully domestic. They pay above-market wages, have generous 401(k) matches, and pick up most of the premium on their low-deductible health plans. They contribute to the local children's hospital and the employees can often be found building playgrounds in their off-time.

Billion-dollar-a-year company C is international, but unlike company A, they have sanitary, safe, modern factories in developing countries thanks to generous grants from large charitable foundations. They have worker training programs and offer full academic scholarships to the children of employees.

Neither A nor B nor C violate any local laws or labor practices. In the popular press, A is routinely excoriated for sweatshop abuses, while B is held as an example of ethics in business. Think WalMart vs Costco if you like. C, however, is supererogatory. They could be more like A, they might even be profit-maximizing by being more like A, but they choose not to. Perhaps it's out of a sense of duty, perhaps it's to signal to social-minded customers at home, but whatever the reason, they exceed their fiduciary responsibilities (maybe: it's an empirical question whether or not stock price suffers for the decision).

Economists are quick to point out that company A does more to directly improve the lot of workers with dismal alternatives (company B adds to worldwide productivity, which reduces the relative prices of all goods, but it's a fly eructation in a hurricane in a general equilibrium plagued with real-world frictions). In this sense, the hidden assumption is that the natural alternative to A is B. Anti-sweatshop protesters and workers' rights organizations assume that the alternative to A is C. At least I hope that's what they assume. Which assumption better matches reality?

Well, that's an empirical question. Intuitively, the sort of rattletrap operation in A should rely on shallower capital requirements: build a shabby factory, have it crank out t-shirts just long enough to cover costs and don't worry too much about what happens next. This, intuitively anyway, should be more likely in places with particularly nasty political, social, or industrial risk. Domestic production in B is a business decision like any other. Maybe overseas factories are impractical for whatever reason, maybe not. Keeping production at home is still erogatory. There is no common law duty for firms to hire desperate foreign workers or to indulge in the fantasies of international development. The experts can't even get that stuff right. To get C, again—intuitively, you need some combination of low labor costs and stability. For folks in those types of countries, it's a pretty sweet gig, so long as you can get it. Of course, it's a pretty sweet gig even if you can't get it. Higher productivity means lower relative prices, and even if it's just a matter of public infrastructure improvements, everyone benefits from having a more productive economy.

I return to G.K. Chesterton's admonition about knocking over fences. Before you demand changes to company A's policy of running a fly-by-night operation in a developing nation, it might be wise to carefully consider their business logic and what might happen afterwards. It may very well be related to risks beyond the control of the firm. If the alternative to A is B rather than C, clamoring to shut down sweatshops could further damage the plight of the poor in the target economy. Maybe it's better to suffer A types long enough for C types to become feasible.

Then again, it's not always clear how effective name-and-shame campaigns are over the long run anyway, particularly for firms without much of a public face. Most business volume is B2B. How many raw semiconductor manufacturing concerns can you name off the top of your head? If you can't clearly pin an end product to a naughty firm, how can you effectively boycott?

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