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Beggars Can Be Choosers

Mises Daily: Wednesday, June 23, 2004 by

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When it comes to "armchair economics," a popular and effective technique is the reductio ad absurdum. Rather than attacking a view head-on, it is often simpler to take the argument to its logical conclusion, at which point its inherent fallacy is obvious (or at least, should be obvious). 

For example, in order to refute the doctrine that saving is bad for the economy (because it reduces expenditures, lowers business confidence, etc.), Eugen von Böhm-Bawerk pointed out that this view would also mean that one shouldn't "save" a portion of each weekly paycheck in order to pay his monthly rent. This is clearly silly, and so, Böhm-Bawerk argued, was the claim that someone deciding to set aside 10 percent of his income for the future was thus somehow stifling economic growth.

I personally like to use a reductio ad absurdum when it comes to international trade, and the widespread fear of "cheap imports." When arguing with someone along these lines, I first ask, "So are you saying that it would it be better for the US if foreigners shipped us expensive imports?" This usually causes some hesitation. Then I follow up with what is, in my opinion, a zinger: "So if cheap imports are bad, does that mean foreigners would really be hurting us if they shipped us goods for free?" I think this question makes something click for many people, because no matter how much they've read about domestic job destruction, they still harken back to the childhood truth that it is good to receive presents.

Unfortunately, a recent article in The Observer may force me to go back to the drawing board. According to reporter Nick Mathiason, free clothing donated from British charities is making Zambia poor:

For millions of Zambians living on less than $2 a day, it is the only way to buy new clothes. It seems like a win-win situation. Cast-off clothes given to charity by Britons are exported to poverty-stricken Africans who otherwise cannot afford new outfits. But [the practice] has decimated Zambia's textile trade.

Sury Patel used to run Swarp, one of the country's biggest clothing manufacturers. In its heyday he employed more than 200 people producing 2,400 shirts a day. Today only 20 people work in Patel's factories and, instead of finely tailored shirts, Swarp's main business has been reduced to churning out cloth which sells for a pittance. Patel has been ruined.

It seems far-fetched that the destruction of Patel's enterprise is caused by Britons giving clothes to charity. But economic reforms forced on Zambia by the World Bank and International Monetary Fund gave the country a stark choice: privatise state-run enterprises and open up industry to overseas competition or lose international aid.

In recent years the IMF's free-market doctrine applied throughout the developing world has lifted restrictions on imports. In a bizarre spin-off, the Zambian textile industry has seen a glut of imported second-hand clothes which UK charities cannot sell. They are exported by private companies and it is this which has, in effect, killed Zambia's clothing manufacturing base.

As I said above, this article has engaged in a preemptive strike against my usual approach. These people understand the similarity between cheap imports and free imports, and—with the consistency of a hobgoblin—reject them both as destructive. It is thus necessary to refute these errors the old-fashioned way, by tackling them head-on.

The Goal is Consumption, not Employment

The ultimate purpose of economic activity is consumption. The whole point of engaging in a productive process is the final end product, which you get to consume. Now it's true, some tasks are more onerous than others, and you certainly should take that into account before deciding what to do with your scarce labor resources. But in no case should you treat labor as "its own reward." If you get a special, psychic kick from a hard day's work, that's great—but while you're at it, spend your day working on something useful.

If jobs were really all that counted, we could cure unemployment very quickly: Half the unemployed people could dig holes, and the other half could fill them up. But this "solution" wouldn't increase the total amount of goods and services produced, and so the only way to allow these newly employed people to go to restaurants, watch movies, and buy cars would be to reduce the average level of consumption by everyone else (who was originally employed doing something productive). The problem of unemployment is to find an efficient way to channel unused labor resources into projects that at least some consumers will actually appreciate. (Incidentally, theory and history have shown that this is a problem best left to free markets, not central planners.)

Even though the above observations are painfully obvious, there is nothing of their kind in Mathiason's article. His concern is entirely for Zambia's unemployed textile workers, and has only a passing reference to Zambia's consumers (who after all are the ones benefiting from the donated clothing). Clearly somebody must be gaining from the British donations. After all, if every single Zambian were poorer, then why don't they all burn the offending garments the first chance they get? Or, better yet, why not send them back to Britain, and ruin their textile industry?

Aha! These last rhetorical questions have opened up another promising reductio ad absurdum. If Mathiason believes that giving Zambians free clothing makes them poorer because it reduces jobs in the textile industry, then would Mathiason endorse clothing raids by British thieves on Zambian households? These would be similar to the childish "panty raids" popularized in American films, but in this case the benevolent thieves would be sure to include shirts, trousers, and socks, and would not restrict the raids to sorority houses; after all, we want to create as many jobs as possible. I do not ask this tongue-in-cheek. If giving the Zambians free clothing makes them poorer, then stealing their clothing should make them richer.

Comparative Advantage

Of course, the standard protectionist response to my reasoning is to point out that if everyone is unemployed, then nobody can afford any goods, no matter how cheap. Such analysts believe that it is incredibly foolish and short-sighted for free traders to applaud low prices for consumers, when entire domestic industries are going under.

But this overlooks the fact that other domestic industries must necessarily be expanding. In the case of standard trade, it's simple: If Zambia imports goods from other countries, then Zambia must ultimately export goods to pay for them. (Now it's true that this rule has some exceptions, such as if foreigners buy ownership in Zambian assets. But even here, the original Zambian owners of the assets must perceive an advantage or else they wouldn't agree to sell.)

In the case of pure charity, what happens is this: Britain sends Zambia free clothing, thus obviating the need for a Zambian textile industry. This frees up Zambian labor for other tasks. And into which tasks should these unemployed be directed? Whatever goods and services the now much richer Zambian consumers buy with their extra money (previously spent on clothing).

As with free trade in general, the case of charity is a win-win proposition: British individuals feel better about themselves by assuaging guilt or executing their perceived Christian duty, and the average Zambian has a higher material standard of living. What is particularly ironic about this case is that it's the reverse of what we normally hear: Notice that Mathiason is blaming cheap imports from a First World country to explain job destruction in a Third World country. I think it's clear that these critics just don't like trade, period.

World Bank and IMF "Austerity Plans"

Before ending this article, let me address two caveats. The first is that we shouldn't so quickly dismiss the article's criticism of "experts" from the World Bank and IMF who come in to fix up Third World economies. Although many planks of their "shock therapy" reforms are sound from a free-market perspective, in practice the poor, impoverished nations are often worse off after their dealings with these arrogant, supernational bureaucracies. For example, if the World Bank lends millions of dollars to a corrupt "right wing" dictator so long as he agrees to lower trade barriers by five percent, it is not clear that this should be labeled "liberalization."

Charity Corrupting?

The other caveat is that yes, we can imagine situations in which giving someone free goods is not in that person's long-run interest. For example, if an eccentric billionaire promised to pay people $10,000 to experiment with heroin, we can certainly understand moralists who would be horrified, even if all participation were completely voluntary.

However, Mathiason's article was not making an argument from paternalism. He was making a fairly straightforward economic argument, that cheap imports destroy jobs. And it was this argument that I hoped to refute in my above analysis.

The international division of labor works just as effectively when it comes to free goods as it does with merely cheap goods. I'm not saying whether or not you should donate your clothing to impoverished foreigners. But what I do say is that you shouldn't worry about hurting their economies.

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Robert Murphy is an adjunct scholar of the Mises Institute and is an adjunct scholar at the Mackinac Center in Midland, Michigan. He teaches economics at Hillsdale College. robert_p_murphy@yahoo.com. See the Murphy  Archive. Discuss this article on the blog