The ongoing debate about Apple’s supply chain in China has me wanting to put down a couple of quick thoughts on corporations and whether they should, to put it broadly, promote laws and standards around the world. This isn’t an attempted knockout punch to any position, and while I am often a critic of regulations, and will be here in some places, this is just as much of a rebuttal to Milton Friedman’s argument that the only social obligation of business is to maximize shareholder profits.
In many developing nations, the legal system functions poorly, and international corporations are often more capable of enforcing efficient laws throughout their supply chain than anyone else. This can be, to some extent, due to pressure from U.S and other western customers to “behave ethically”. This can be good both because it enforces efficient and desirable laws, and because getting a supply chain to be able to conform to any standards, whether they are quality, ethical, or efficiency standards, is a necessary step in moving up the manufacturing value chain. One example of this would be how Walmart is able to enforce environmental laws that are likely closer to efficient than what the local governments enforces. Pollution can do a lot of costly and unfortunate damage to health and the environment in developing areas with weak rule of law.
Another benefit of corporation enforced standards, which applies to environmental, labor, and other kinds, is that corporations are more likely to find the least cost ways to comply. A corporation with a broad goal can be more efficient than specific government mandates.
Friedman argued that shareholders, workers, managers, or CEOs can contribute to social causes with their own money outside of the corporation. But stakeholders of Walmart can get far higher social return for $1 spent within the company than outside it. And as Friedman agrees in his essay, if a manager loses money for a corporation by behaving with social responsibility, free markets will ensure that it comes out of their wages. So if it is CEOs making the decision to sacrifice $1 of profits for $10 of social returns, then the corporation will take that $1 back through lower compensation, creating $9 of value. But if a CEO chooses to operate outside the corporation, it may cost him $9 to get the same $10 of return, creating only $1 of net value. Consider the example of a CEO who refuses to sign off on $1 million in pollution to save the company $100k. In contrast, if the CEO allows the spill to happen and then tries to clean it up with his own money it will probably cost closer to $1 million than $100k.
This argument requires efficient markets for executive wages, and an obligation to not hurt society to save yourself a fraction of the cost. Nothing too radical. Importantly, such spending will often be far more profit maximizing than is assumed, so the $1 of nominal cost to the company is often much less when private returns, for example marketing value, are considered.
Despite these positive aspects of corporate standards and social responsibility, when these corporations are responding to the demands of U.S. and other western customers there is a downside risk that they will enforce standards in accordance with our preferences that are less in accord with the citizens of the affected countries than if they simply profit maximized. This is a real concern with respect to labor laws. People tend to have the misconception here that our standards of living are disproportionately a result of our labor laws, and that the way our jobs became safer, healthier, and higher paid is mostly about regulation instead of mostly about economic growth. People also tend to believe that we have “exported” bad jobs to China, rather than understanding that as far as manufacturing jobs go in China, working for foreign corporations, including Apple, are above average quality. If American companies were very responsive to consumer demands, labor laws in China would very likely be far too strict.
Even when the labor laws come from the developing countries themselves than can be problematic. Here is what Tim Culpan, who has been covering Foxconn for 10 years, had to say about what he sees there:
In our reporting, as “Inside Foxconn” detailed, we found a group of workers who have complaints, but complaints not starkly different from those of workers in any other company. The biggest gripe, which surprised us somewhat, is that they don’t get enough overtime. They wanted to work more, to get more money.
Why would these young workers want to work what look to us like extreme amounts of overtime? Culpan explains:
Rather than forced labor and sweatshop conditions, workers told of homesickness and the desire to earn more money-two impulses that seemed to drive each other for workers planning to go home once they’d earned enough.
If labor laws mean that workers can’t do as much overtime as they’d like, one of the unintended consequences of this looks like it could be to force these workers to stay at the factories for a longer period of time before they earn enough to go home. Should labor laws, either domestic or imposed by foreign corporations, prevent workers from taking on as many hours as they are willing?
Maybe, I suppose. These are young workers after all, and maybe there is a clear level of hours beyond which health is clearly at risk. But you have to know an awful lot about the workers, the factories, the local culture, and a lot of things that American consumers probably don’t have a very good grasp of. Furthermore, the journalists who have spent years in China and know the most, like Adam Minter and Tom Culpan, seem to have the least criticism for Foxconn and the manufacturing in China for international corporations. I am reminded of what Freddie DeBoer wrote about Libyan intervention:
What interventionists ask of us, constantly, is to be so informed, wise, judicious, and discriminating that we can understand the tangled morass of practical politics, in countries that are thousands of miles from our shores, with cultures that are almost entirely alien to ours, with populaces that don’t speak our same native tongue. Feel comfortable with that? I assume that I know a lot more about Egypt or Yemen or Libya than the average American– I would suggest that the average American almost certainly couldn’t find these countries on a map, tell you what languages they speak in those countries, perhaps even on which continents they are found– but the idea that I can have an informed opinion about the internal politics of these countries is absurd…
…A colossal, almost impossible arrogance underpins all interventionist logic. Beneath it all is a preening, self-satisfied belief in the interventionist’s own brilliance and understanding. So I ask you, as an individual reader– are you that wise? Are you that righteous? You understand so much? When was the last time you read a Libyan newspaper? Talked at length with a Libyan? A year ago, what did you know of Libya and its internal struggles?
Labor laws aren’t war, and Apple critics aren’t Neocons. I don’t want to take this analogy too far. But some of the criticism Freddie makes here apply to arguments about demanding companies in China comply with U.S. labor standards. You can counter that all that is being asked is that the companies comply with Chinese laws, but this is not always the case. Furthermore, the decision to not enforce a law is also a legitimate decision a nation may choose to make. And to the extent workers wish to not comply with the laws, we are asking companies to override their wishes. Just as we should have humility about our ability to know what is best for another country, we should have humility about a country’s ability to know what is best for workers and their employers.
Freddie elsewhere wonders:
Would Ira Glass ever allow his children, when grown, to work 60 hours a week? In those factories? In those conditions? Of course not.
But these aren’t Ira’s children, and he shouldn’t act as if they are. Neither Freddie, nor Ira, nor I really knows what Chinese workers want. Even within this country, let alone across the world, people have vastly different preferences with regards to how many hours they want to work, what risks they are willing to take for what compensation, and all of that. I don’t think Ira would allow his children to be crab fisherman in the United States either, but that does not mean we want these jobs to be regulated until they are safe enough and well paid enough that Ira Glass would send his children to work there, or until they are regulated out of existence, which in many cases are the same thing.
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Thursday ~ March 22nd, 2012 at 9:27 am
BSEconomist
You had me to start, but as this post went on you really lost me. This is a shame, because at least in the case of Foxxconn I think I’m basically in agreement with you.
First of all, none of this is really about what Chinese workers want. This is about what American consumers want, and American consumers do not want blood on their hands. Someone else can build American’s their IPads, maybe for a little more money, and it’s perfectly reasonable to think that Americans would be willing to pay a little bit more money to ensure this outcome. To me, this suggests a certain uncaring about Chinese economic well-being even while it demonstrates care, or at least moral discomfort for Chinese lives.
Secondly, I have issues with your particular view of corporate responsibility. First, if Friedman is right (I don’t think that he is) than social goals must be reached through political means, since corporations will not fully internalize social welfare. This strengthens the case for regulations. It does take heroic assumptions about the efficiency of markets to reach the opposite conclusion that profit maximization will do that for you. Second, if Friendman was wrong (as I would argue he was) and corporations really ought to be maximizing more than just shareholder value, then public opinion once again ought to have some influence on these ancillary goals. Either way you look at it, public opinion has a role to play in shaping the boundaries and goals of corporate social responsibility.
Maybe this is what you meant, its not entirely clear to me.
Still, one thing I agree with you on, is that local knowledge matters here. I think its better thought of as a problem of price discrimination. Apple/Foxxconn supposedly have some “pricing power” for labor contracts in China which arises from a lack of good outside options for Chinese workers. In this case, it increases efficiency to offer two different types of contracts. This only serves to highlight, though, that Apple is extracting rents on the backs of Chinese workers and therefore the moral discomfort I mentioned above comes into better focus. I for one can’t entirely blame Ammerican consumers for that even if I don’t agree. I WANT Chinese workers to become prosperous enough to demand better conditions for themselves.
Thursday ~ March 22nd, 2012 at 10:21 am
Adam Ozimek
Corporations not internalizing all social costs strengthens the case for regulations but only relative to the scenario where corporations internalize all social costs, which nobody anywhere is saying. And even this very minimal argument is only true to the extent that regulations make outcomes more compliant with social welfare, but regulators are agents themselves and assuming a benign dictator regulatory agent is a heroic assumption itself.
I would say corporations should consider social preferences, not opinion, since the former are what determines welfare. These can be very different.
I’m not sure what evidence there is that monopsony power is present. Wages are going quickly in China and labor shortages are occurring, so much so that the companies are looking to move to robots more and more. Doesn’t sound like rent extraction to me.
Thursday ~ March 22nd, 2012 at 10:25 am
teageegeepea
I’m in agreement with a lot, but I’m less confident the market for CEO wages is efficient. I recall Robin Hanson showing that wages seem more determined by size of company than value-added, and that mergers/acquisitions tend to be good for the CEO but not the parent company. Also, corporate boards are rather notoriously easily captured. Private companies seem to outperform public ones (the private equity industry relies on that sometimes being the case), indicating some problems with public corporate governance.
Thursday ~ March 22nd, 2012 at 11:03 am
elboku
Of course workers would want to work more: if you are making 10 cents an hour, you NEED to work more to survive. As Dylan would say: when you have nothing, you have nothing to lose. Morally, we know what is the right answer; economically, the choice is between the company and the worker. Gee, I wonder who wins that one?
Thursday ~ March 22nd, 2012 at 11:55 am
Eric
It seems to me there is a lot of hypocrisy in the position that Americans and by extension, the rich first world population in this Apple/China meme.
First, its not just a question of Chinese factory workers and a few dollars onto the cost of an iPad, the issue is equally applicable to the vegetables and fruits, clothing, shoes, coffee, tea, electronic goods in general and practically everything else which is grown or assembled in the developing world and sold to first world consumers. We mindlessly through away stuff without a care which is then sent to Bangladesh for poor people to dissemble and risk any number of problems from dangerous chemicals. All of these give price and benefit advantages to first world consumers at a social “cost” to developing world workers. We demand these advantages by voting with our dollars/pounds/euros and then we scream when prices go up and buy even cheaper goods to our financial advantage.
To my mind the focus shouldn’t be on Apple, it should be on our drive to have a better life at the cost of others. This is the uncomfortable full story behind the Apple-China story.
You make the point that is not being widely discussed in the national debate at The New York Times or This American Life or any of the other media outlets that are pumping the particular Apple story, is that there are many positive improvements in the lives of the people employed to do back breaking or mind numbing labour to our benefit. That we wouldn’t want such jobs is not relevant to a young Chinese rural peasant who sees an opportunity to work at Foxconn as a speedy way to improve his/her own life. Indeed the USA saw similar migrations of poor workers to take advantage of jobs at any cost in its own history.
We want the story to be a simple fairy tale with a simple ending in which the prince and the princess live happily ever after. The fact is that Americans and first worldians in general don’t like to deal with complexity in their issues, they like the sound bite approach where a few lies or oversimplifications to tell the larger story seems legitimate and preferable to actually trying to understand the facts on the ground.
This leads me to believe that the real story here is first worldian hypocrisy. Apple is bad because Chinese workers have a hard lot.
It’s laughable if it weren’t so pathetic.
Thursday ~ March 22nd, 2012 at 10:11 pm
WaltFrench
Yes, the issue arises here in the US in a way that, for example, Chinese workers’ deaths in coal mines or smelters or even agriculture does not. I’ve taken it as a variant of the White Man’s Burden.
My argument is exemplified by just one of the highlights of news coverage of Apple. was a 2011 explosion at an iPad plant in Chengdu. News accounts show dozens of people harmed, two killed, and of course, the dramatic explosion is not the only tragedy at that plant. But the plant is far from the big story about deaths there. It is not three years since 70,000 people perished in an earthquake in Chengdu, the huge majority of them from living in, or going to school in, substandard buildings that are a natural accompaniment of poverty in big cities. The area is building safer, more sturdy housing, based not on billions of international aid relief from well-off Americans, but the earnings of people in the area. Without actually claiming this, one might almost argue that buying iPads is the way that concerned Americans have most helped the people of Sichuan recover from the disaster.
This juxtaposition stays stuck in local examples, so I’ll try to take your lead of a more theoretical thought process. I think the issue of corporations extracting rents from market inefficiencies is a good one, but hugely inadequate to the larger picture. The Special Enterprise Zones are part and parcel of the 1978 reforms that also de-collectivized agriculture and started the process of privatization of state enterprises.
Just as a war imposes huge costs for some “greater” social goal, Reform and Opening explicitly sacrificed the existing economic and social institutions for future results. That nobody here would find much sacrifice in abandoning the Cultural Revolution is part of the point: I wouldn’t want my relatives in these factories, but in fact I have relatives in Chinese industry, and am tremendously grateful that they have jobs better than the peasant agriculture, e.g., goat-herding that left them uneducated, impoverished and guaranteed of poor health. In place of the open sewers I saw in Beijing in 1980, I see subways and highways going into provincial cities in 2012. A splendid variety of meats and vegetables have replaced a daily diet of cabbage in chicken-flavored broth over rice. People retire at 60 instead of dropping from exhaustion.
The factories would not exist without the reform movement, and the huge economic advances would not exist without the foreign capital and jobs that the factories brought. The promise of reduced corruption is unfulfilled, as is the hope for real democracy. But you don’t have to subscribe to any of the self-serving variants of American Exceptionalism in order to understand how much more fulfilling people’s lives have become in the 30 years of this policy.
Even including the tragedies that we all abhor.
Friday ~ March 23rd, 2012 at 3:28 am
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