Monday, November 24, 2008

Does capitalism need cheap labor?

I heard recently from someone that one of the things wrong with capitalism is that it depends upon cheap labor. They were arguing for some form of democratic socialism with the workers owning the company they work for. I won't talk about that, simply focusing upon this idea that capitalism depends on cheap labor.

On the face of it, it is in a sense true. But we need to remember what "cheap" means. It is a relative term, so just as there will always be those who are less wealthy, and thus there will always be a group of relative poor, so there will always be people with lower skills and qualifications who are to be considered "cheap labor." But the person in question was making more of a claim than this. The idea is not just that the labor capitalism requires is relatively cheap, but is actually at what is indisputably a very low wage, barely enough to live off of. The evidence for this, is the way that, in wealthy countries, as their workforce becomes more highly paid, jobs are moved to cheaper locations, and cheap factories are opened that charge "slave wages." Of course, the people aren't slaves, voluntary taking the job and generally making enough to subsist off of, and with a consistency of income that makes it considerably more attractive than other options (considering how bad the conditions in a sweat shop are, I leave it to you to imagine these other options). But, to be fair, their wages are far from enviable, and do not give them a attractive livelihood. The question is, does capitalism depend on this cheap labor?

Lets look at a similar case. I have a job and need to keep myself clean and presentable, which involves daily bathing. In my apartment I have a shower and a bath. I use the shower, but do I need the shower? I could bathe solely using the bath, but I prefer the shower because it's quicker, more convenient, more water conservative, etc. I use the shower because its there, not because I need it. Similarly, the companies that use cheap labor, may not need the cheap labor, but rather simply use it because it's there. One fact that suggests that capitalism doesn't need cheap labor, is that companies are not drawn to the places with the cheapest labor, since these would probably be in some of the poorest African nations. These countries are too risky: unstable government, corruption, and weak laws and law enforcement. They seek out places that are stable and reliable that also have cheap labor, but certainly not the cheapest labor they can find.

Even more damaging to this position, is a recognition of the harm that cheap labor can do. It can be seen in the Roman empire, who had ample amounts of cheap labor in the form of slaves. But their slaves discouraged innovation. If you want to develop a new form of automation that would require less man hours, this requires time, investment, resources--in short, long-term risk. But if you've got slaves to give you all the man hours you need, why delve into the risks of innovation? The same goes with cheap labor nowadays. If the labor was expensive, the relative advantage of developing new technology to do it faster with fewer man hours would be much higher, so there would be faster increases in productivity and overall wealth. If there are abundant supplies of cheap labor its not worth it to innovate as much. Cheap labor creates a disincentive to innovate. Capitalism admittedly doesn't need innovation any more than it needs cheap labor, but in the long run it is a key source of wealth for all, and something capitalism is particularly good at encouraging and taking advantage of.

Of course, in the long run, free trade will tend to increase the wealth of these cheap laborers and essentially force greater innovation and less reliance on man power. But of course, that's the long run--years, in fact, generations into the future. Most critiques of capitalism along these lines seldom consider the long run and tend to seek out short-sighted politically exigent solutions. And that is something that capitalism definitely does not need.

1 comment:

navigio said...

Hi. Ran across this blog post and found the question thought-provoking. I would be interested to know whether your thoughts have changed in the 4 or so years since you wrote this.

I am most interested in your one sentence, 'On the face of it, it is in a sense true.' Because you then follow that up with a list of reasons you think its not actually true (or maybe that it just doesnt matter?).

In any case, I see the importance of the question of cheap or slave labor as one of a continuum more so than an absolute. I think in absolute terms, you're right that it is true. But I think the reason the question matters is that the availability of cheaper labor provides a particular type of business opportunity that does not otherwise exist. I also think your point that cheap labor can stifle innovation is an important one. I think this has actually happened and the result has largely been that 'innovation' has happened only in the domain of the business model (as opposed to the technology--obviously not entirely but mostly). That said, I do think the realization of the availability of cheap labor will incentivize innovation (based on the promise of a more likely eventual manufacturing of whatever it is being created).

Lastly, I noticed this holiday season how I looked at some technology devices and thought to myself, its not worth it for me to spend even this small amount of money for this product because I dont need it. In some sense, all our computer-based technology falls into this realm (at least at the consumer level). So the question for me is how will producers make this technology 'accessible' to me? One theory is to continually reduce cost until its low enough that I'd bother. I think in some sense, this is why we all (mostly) have computers nowadays. In that sense, I think its very clear that this concept can actually entirely create product markets and looking at our economies over the past handful of years, I think its clear that at some level, this kind of access to cheap labor is absolutely required to be anywhere near where we are today.

I will abstain from saying whether this is a net benefit or not, but would be interested in your opinion.