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.