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Sweatshops: A Way Out of Poverty

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03/20/2014Benjamin Powell

Associate Scholar Benjamin Powell’s new book Out of Poverty: Sweatshops in the Global Economy was recently published by Cambridge University Press. Dr. Powell spoke with the Mises Institute about his new book.

Mises Institute: Describe for us what you mean by “sweatshop.”

Powell: Here’s an example: Abigail Martinez earned only 55 cents per hour stitching clothing in an El Salvadoran garment factory. She worked as long as 18 hours a day in an unventilated room; the company provided undrinkable water. If she upset her bosses they would deny her bathroom breaks or demand that she do cleaning work outside under the hot sun. Abigail’s job sounds horrible.

MI: But you assert that jobs like this make the workers better off.

Powell: These so-called sweatshops are part of the development process that leads to better conditions. Austrian economic theory teaches that people choose purposively to improve their situation. Thus, it is not startling to an Austrian to hear that a job such as Abigail’s made her better off than she was before, so long as violence wasn’t used to make her accept the employment.

The pure logic of choice is crucial to understanding what actions help sweatshop workers and what actions hurt them. But the logic of choice gets us only so far. It is the task of the applied economist — what Mises would label a historian — to apply the logic of choice to current events and historical phenomenon to understand their relevant institutionally contingent features and empirical magnitudes.

Mises Institute: So you take an empirical look at the improvements that sweatshops produce?

Powell: My new book does exactly that. I find that sweatshops in the third world today benefit the workers who toil in them and aid in the process of capital accumulation that leads to higher living standards in much the same way that factories in Great Britain and the United States did during the Industrial Revolution.

Ludwig von Mises wrote that during the Industrial Revolution, “The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless more than these paupers could earn in any other field open to them.”1 This is precisely what I find in third-world sweatshops today.

I found 83 cases of supposedly exploitative sweatshop wages reported in popular press sources and compared those earnings to the living standards in the countries where they were found. In every country where the sweatshops were located, more than 10 percent of the population lived on less than $2 per day. In more than half of the countries, more than 40 percent did. Yet, in 77 of the 83 cases, the sweatshop wages exceeded the $2 a day threshold. Five of the six exceptions occurred in Bangladesh, where the workers earned more than $1.25 per day — something that more than half the population of that country failed to achieve at the time.

MI: But how do these jobs compare to other jobs in that same country?

Powell: In fact, sweatshop earnings even compared favorably to the average incomes in the countries where they were located. In six of the 17 countries, the average reported sweatshop wage exceeded the average income in the country — in Haiti, Honduras, and Nicaragua it was more than twice the national average. In another six countries, the average reported sweatshop wages were around the national average. In four of the five countries where sweatshop wages were 50 percent below the national average, the workers were immigrants (sometimes illegal) from other countries and their sweatshop wages exceeded the average wage in their native country.

In short, sweatshops provide the least-bad option for the workers who work in them. But sweatshops are better than just the least-bad option. Sweatshops bring with them the proximate causes of economic development — capital, technology, and the opportunity to build human capital. If countries respect private property rights and economic freedoms, these proximate causes of development lead to higher productivity, which eventually leads to higher pay and better working conditions.

MI: It seems the problem many critics have is that the economic improvement is not fast enough.

Powell: That process of development took roughly 150 years in Great Britain, because much of the capital had to be created anew and the technology invented. The United States transformed from a pre-industrial society to a post-sweatshop society more rapidly, because it imported technology and capital from Great Britain.

In 1950, Hong Kong, Singapore, Taiwan, and South Korea were just beginning the process of development with sweatshops. In about a generation and a half, they catapulted from pre-industrial levels of development to first world living standards. All of these countries embraced property rights and economic freedom and grew rapidly.

MI: Some people believe that these countries have high living standards today because of labor laws.

Powell: Regarding the Industrial Revolution, Ludwig von Mises commented that, “The nineteenth century’s labor legislation by and large achieved nothing more than to provide a legal ratification for changes which the interplay of market factors had brought about previously.”2 This remains true for countries where sweatshops locate today.

Take child labor for example. Anti-sweatshop groups universally condemn child labor and call for laws banning products made with it. But the process of development is the best cure for child labor. In countries with average incomes above $12,000, there is virtually no child labor. But for countries whose incomes are below $2,000, more than 30 percent of children work.

As families escape poverty, they remove their children from the labor force. Child labor laws go unenforced or force children to work in informal sectors when they are passed prior to achieving a level of development that would have removed children from the labor force anyway.

It’s no accident that the United States didn’t pass meaningful national child labor legislation prohibitions until 1938. At that time, average per capita income was more than $10,000 (in 2010 dollars). It was simply codifying what the market process had already achieved. The same is true of other workplace health, safety, and maximum hour legislation in countries with sweatshops today.

MI: But why are so many of these areas still so very poor?

Powell: Of the poverty in the West prior to the Industrial Revolution Mises wrote, “It is deplorable that such [impoverished] conditions existed [outside the factories]. But if one wants to blame those responsible, one must not blame the factory owners who — driven by selfishness, of course, and not by ‘altruism’ — did all they could to eradicate the evils. What had caused these evils was the economic order of the pre-capitalistic era.”3

Unfortunately, parts of the third world are still mired in poverty caused by the statist economic order of the pre-capitalist era. Economics is a science of evaluating whether means are capable of achieving desired ends. My book is concerned with ending poverty in the third world. The main lessons are that many of the means of the anti-sweatshop movement are incompatible with that end. Instead, embracing an environment of property rights and economic freedom that allows the process of economic development, which includes sweatshops, to occur is the greatest cure for poverty.

  • 1. Human Action. 1949 (1998) Scholars Edition. p. 615.
  • 2. Ibid., p. 612.
  • 3. Ibid., p. 615.

Contact Benjamin Powell

Benjamin Powell is the director of the Free Market Institute and a professor of economics in the Jerry S. Rawls College of Business Administration at Texas Tech University.

Professor Powell is the North American Editor of the Review of Austrian Economics, past president of the Association of Private Enterprise Education, and a senior fellow with the Independent Institute. He earned his B.S. in economics and finance from the University of Massachusetts at Lowell, and his M.A. and Ph.D. in economics from George Mason University. Prior to joining Texas Tech University, he taught economics at Suffolk University and San Jose State University.

Powell is the author of Out of Poverty: Sweatshops in the Global Economy (Cambridge University Press, 2014), editor of The Economics of Immigration: Market-Based Approaches, Social Science, and Public Policy (Oxford University Press, 2015), Making Poor Nations Rich: Entrepreneurship and the Process of Development (Stanford University Press, 2008) and co-editor (with Randall G. Holcombe) of Housing America: Building Out of a Crisis (Transaction Publishers, 2009). He is the author of more than 50 scholarly articles and policy studies. His primary fields of research are economic development, Austrian economics, and public choice. Prof. Powell's research findings have been reported in more than 100 popular press outlets, including The Wall Street Journal and The New York Times. He also writes frequently for the popular press. His popular writing has appeared in Investor's Business Daily, The Financial Times (London), the Christian Science Monitor, and many regional outlets. He has appeared on numerous radio and television outlets, including CNN, MSNBC, Showtime, CNBC, and he has been a regular guest on FOX Business Network's shows Stossel and Freedom Watch.