The Economist’s Question

An economist was once asked how his wife was. His answer: “Compared to what?” This old economics joke illustrates one of the central lessons of economics. In decision making, it does not matter how good or bad a particular option is in the abstract. What matters is how good or bad it is compared to the available alternatives.

Let’s consider the question of so called sweatshops, i.e. workplaces, typically in the developing world, where workers work long hours for little pay under unpleasant conditions. Sweatshops are almost universally reviled as being exploitative and inhumane. But the critics have failed to ask the economist’s question: Compared to what?

I wouldn’t want to work in a sweatshop, but that’s because I have much better alternatives. This is not true of most people living in developing countries. Sweatshops might pay very low wages by First World standards, but by local standards their wages are typically quite high. We might deplore the fact that sweatshop workers earn as little as 30¢ per hour for hazardous and physically damanding work, but we must always ask: Compared to what? Earning 30¢ per hour is better than 20¢ or 10¢. If those are your only options, 30¢ sounds rather appealing by comparison.

Economists Benjamin Powell and David Skarbek did an empirical study of sweatshop wages and found that in ten countries accused of exploiting sweatshop labour, people working in the apparel industry (which is particularly notorious for sweat shops) had incomes which ranged from being about on par with the national average to far exceeding it. As Powell writes in an Econlib article In Defense of “Sweatshops”:

Working in the apparel industry in any one of these countries results in earning more than the average income in that country. In half of the countries it results in earning more than three times the national average.

The supposed friends of humanity who are as well-intentioned as they are ill-informed have failed to ask the economist’s question. If they succeeded in getting rid of sweatshops, people in Third World countries, far from being liberated from exploitation, would become even poorer. Someone who has to choose between several very bad alternatives is not helped by being deprived of what he sees as the least bad option.

Most Third Worlders might not be as educated as us, but they are not stupid. If they flock to the cities to work in sweatshops, it’s not because they are too dumb to realise they are being exploited. Rather, they are choosing the back-braking and dangerous work in a sweatshop over the no less unpleasant and typically less renumerative subsistence agriculture. They have asked the economist’s question and determined that work in a sweatshop is the least bad alternative for them. It is not for any of us to gainsay their decision.

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