Response to Tom West
By David Henderson
On Wednesday, Tom West asked:
Let me ask you again, David. Are they any non-fraudulent contracts between capable parties that you believe *should* be disallowed by law?
If your bargaining power is strong enough, is there anything you shouldn’t legally be allowed to ask for? Conversely, if your bargaining power is poor enough, is there anything you shouldn’t legally be allowed to offer?
I’m not playing gotcha. I really am curious.
I promised to answer him. Here’s my answer.
I think many such contracts that should be disallowed. Here’s the general category for disallowance. Take any action that I think should be disallowed–rape, murder, theft, etc. Contracts between two or more people to do these things should be disallowed.
However, if I think action X should be allowed, then person A should be allowed to combine contractually with others to carry out action X. So, for example, if it’s legitimate for me to produce a shirt, then it’s also legitimate for me to hire someone else to produce a shirt.
Tom raises the issue of bargaining power. But bargaining power is positively correlated with the number of options. The way to give someone more bargaining power is to give him more options, not to take away his ability to bargain. In a Fortune debate about so-called “sweatshops” that I had with then-U.S. Labor Secretary Robert Reich in 1996, I castigated him for trying to take away the best opportunities that poor workers in poor countries had. He responded that he wanted them to get out of sweatshops and into schools. I pointed out that he wasn’t doing or advocating anything to give them schools and that even if he did give them schools, then they still should be able to decide.
A couple of months later, Paul Krugman came in on my side of the argument in an article in Slate. He wrote:
Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I say “inevitably” because their employers are not in business for their (or their workers’) health; they pay as little as possible, and that minimum is determined by the other opportunities available to workers. And these are still extremely poor countries, where living on a garbage heap is attractive compared with the alternatives.
And yet, wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing–and of the penumbra of other jobs that the new export sector creates–has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise. Where the process has gone on long enough–say, in South Korea or Taiwan–average wages start to approach what an American teen-ager can earn at McDonald’s. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)
BTW, Krugman’s whole article is worth reading.