Exploitation: a word so overused by the political Left, so ignored by the political Right, and so misunderstood by both sides. A straw-man attack against capitalism that is so often so poorly defended by Libertarians (myself included). That all said, this is an important issue that demands a reasonable response from Capitalists, rather than talking past the often valid concerns (with completely unrealistic solutions) of the Left and attempting to turn the problem around on Government as the exploiter (which can and often is the case, but not in the ways the Right likes to claim). This is an attempt to both consolidate my thoughts about exploitation from an ethical/morality perspective, and also attempt to reconcile my free-market ideology with the fact that unregulated firms can and will find ways to exploit consumers.

What is Exploitation?

First, we have to start with the basics: What is exploitation? According to Rebecca Kukla at the Kennedy Institute of Ethics, the broadest definition of exploitation is simply one party “taking unfair advantage of someone else” (see her video clip on Exploitation for EdX). She goes on to clarify that exploitation is not coercive. Coercion is something else entirely for the purposes of ethical and economic discussions. Instead, the decision made by the exploited party is voluntary and can still make that party better off, but the available alternatives are themselves very unattractive as well. In the terminology of Dr. Mike Munger (Duke University), the choice is voluntary, but not euvoluntary (or voluntary the way we think of voluntary in common vernacular and economic assumptions). This could be because the exploiter has somehow limited the available choices or not, though there should be some exclusion for natural consequences of poor decisions–e.g. It’s not exploitation for a spouse to make an ultimatum after the other partner was caught in an affair. In any case, the exploiter benefits from the fact that the exploitee has extremely limited/poor available alternatives.

Taking the example of sweatshops, it’s true, as most libertarians like myself are quick to point out, that the workers are free to take other jobs if they can find them and are remaining employed voluntarily. It’s also true that manufacturing, even in the horrible conditions that many manufacturing workers face, can lead to substantial improvements in well-being, particularly in the next generation. And it’s true that the sweatshop owners do not adequately protect their workers, treat them more like capital than people, and continue to pay exceptionally low wages (to keep prices for Americans low) because they know their workers don’t have any better alternatives. In other words, these manufacturers are profiting off the fact that these workers were born in a place with few economic opportunities. Furthermore, they are benefiting disproportionately more than the workers (who are still receiving a perceived net benefit). Therefore, I think it’s fair to say that sweatshop owners are behaving in an exploitative manner.

Although sweatshops in developing countries make for great examples of exploitation, I want to focus on more first world problems, because those are better for highlighting different policy approaches to prevent, or at least mitigate, exploitation.

First World Problems (That aren’t exclusive to the developed world)

Low Wages and Benefits

Although Donald Gracchus Trump managed to turn the conversation of the election away from policy and towards his Twitter feed, Bernie Sanders seemed poised to try to make minimum wage a key point in his platform had he gotten more news coverage. By no stretch of the imagination are minimum wage workers in the US being exploited like sweatshop workers in third world countries, but it is true that companies like WalMart, McDonalds, Burger King, KMart, etc. play legal games with part-time vs. full-time employment and other tactics to avoid paying benefits, avoid paying overtime, prevent employees from gaining the needed human capital to get promoted, underhandedly push people out, etc. All of this takes advantage of the fact that most of their entry-level workers don’t have better options; if they did, they probably wouldn’t be working in entry-level retail or fast food. In this way, there is a level of exploitation going on. Proportionality is also something to consider: a high schooler working at minimum wage is gaining valuable experience and resume building beyond just the paycheck; the 30-something single mother is not benefiting from this job as much as that teenager, but needs it more. Therefore I don’t think paying entry-level workers minimum wage and working them part time is inherently exploitative, but it can vary based on the situation and future prospects of the worker. As an aside, while I don’t believe the ratio between CEO salary and entry-level workers is meaningful metric, I also don’t really buy the “maximize shareholder value” argument since economic fundamentals have a very limited role in stock price, and it is true that most of these companies would still be profitable if they didn’t play these employment games.

Price Gouging

In the wake of storms and other natural (or manmade) disasters gasoline, generators, water, ice, etc. become in very high demand and the supply of these things is either fixed or falls, so Econ 101 supply and demand models suggest that the prevailing market price will spike up to equilibrium. And it typically would, except most states have anti-gouging laws, and Governors and Mayors love to tout their enforcement of these laws in the wake of such an event. Of course, jacking up the price of something right before everyone in town needs it (e.g. Bottled water) does feel like kind of a dick move, and liberals in general tend to have a visceral reaction that this is wrong and exploitative: “what about the people who can’t afford the higher price?”. Take this practice to its logical, even if hypothetical, conclusions, and you can have stores arbitrarily upping their prices the night before a storm (as Russ Roberts does in his book, The Price of Everything) or resellers buying up all the bottled water in an area before a storm and reselling it after the storm for a substantial profit–effectively arbitraging across time. Such price hikes or intertemporal arbitrage can make a very large profit as a result of others’ misfortune, and there’s always something a little ethically uncomfortable about that.

Captive Markets

In what can be thought of as a very particular form of Price Gouging, we have Captive Markets. In cases where a provider of a service (usually) has a secondary product (usually food or drink), they can create a local monopoly for that product: if you (voluntarily) buy the service they provide and would like to (voluntarily) buy the ancillary product, then you must buy it from the service provider at monopoly prices. For example, after jumping around in a mosh pit at a rock concert, you must buy water from the venue; when seeing a movie, you can only buy popcorn and soda from the concession stand in the theater. Other classic examples of Captive Markets include food/drink on planes, trains, and boats, college textbooks, and food/drink at sports events, or really any place you go to for a reason other than food, can’t leave easily, and can buy food at (but bringing in outside food is banned or discouraged). Captive Markets are localized monopolies, so they tend to charge the monopoly profit maximizing price as opposed to the (much lower) market price. In this case, this is exploitation because your options are very explicitly limited by the supplier of the primary service (even though that primary service is still competitive).

The Wrong Approach

Exploitation is unethical, and while it can range in severity from degrading human dignity at it’s worst to be merely being a dick thing to do at best, it’s in the interest of society to prevent exploitation as much as possible and provide a legal recourse for the exploited when we can’t prevent it. Unfortunately, most proposals I hear (from the Right and the Left, but mostly the Left), would not, in my estimation, actually work. 

Teach People to be Nicer

This is really more of a general comment about policy, but it’s a good starting place for this conversation. Any solution that relies on people doing the right thing, even the wrong thing (ethically speaking) is more profitable and difficult to prosecute is going to fail. You can wax all you want about how people should be more loving and less motivated by money, but that won’t change the hearts of humanity. To quote Milton Friedman, “I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing.” Even though most people, most of the time, aren’t out to get you, a few bad apples will spoil the bunch and break down the system.

None of the games employers play to avoid paying employees benefits (e.g. Health insurance) are illegal, which is why employers play them. After the ACA mandated that employers offer health insurance for workers who worked at least 30 hours a week, many employees saw their hours cut to 29 hours a week. Many democrats responded by recommending that the threshold be changed to 25 or even 20 hours a week. Most Republicans just ignored the issue or pointed to this as evidence that the entire bill is flawed, but I did hear one congressman (I don’t remember who) actually give an intelligent response: We should increase the cap to 40 because no matter what threshold we set, large employers’ legal teams will find a way around it, but at least if the threshold is 40 instead of 30, hourly workers will get an extra 10 hours of paid work. The specifics of this policy aside, this congressman understood that you can’t legislate that people do the right thing.

Ban It!

The problem with just outright banning something, is that sometimes things that look like (or maybe even are) exploitation are still justifiable. In an essay on this topic, Munger tells the story of price gouging laws gone wrong. After a storm, there were widespread power outages, which meant that by day 2 or 3, refrigeration was starting to become an issue and food was spoiling in people’s homes and in stores. Two “hooligans” from a neighboring town heard about this plight and saw a business opportunity. They rented a refrigerated truck and some chainsaws, and bought hundreds of pounds of ice. They drove to the affected down–using the chainsaws to clear the roads of fallen trees where necessary–and began selling ice for $12 a bag. This is an extremely high price for ice, yes, but ice was still limited and important to keep medications and the like cool, so the marginal benefit exceeded the marginal cost. However, these two guys were eventually arrested for price gouging. After that, two things happened: the ice was confiscated and not made available to people, and no one else tried bringing ice in from outside. Munger’s larger point is that even while exploitive practices can be unethical, the alternative can be even worse. If we accept the premise that exploitation is non-coercive, then this becomes a tautology: the transaction is still voluntary, so removing the option to make this transaction (that is further limiting the already bad list of options) makes the exploited individual worse off, and is, in fact, exploitive in its own right. This same logic will generally apply to most if not all price control efforts. (Further discussion along these lines).

Deregulation

Equally undesirable is the response from the Right (the previous two proposals usually coming from the Left), which is typically some version of Trickle-down Reaganomics and deregulation. I’m generally a big fan of deregulation, but the whole concept of exploitation implies that one actor has market power, which constitutes at least a partial market failure and therefore justifies measured government intervention. Granted, most government intervention actually makes the problem worse (as shown above), but the kind of “deregulation” usually proposed by the right actually exacerbates the issue as well by giving the exploiter more market power. I don’t say this often, but the above injustices can and should (I believe) be corrected via government action; just not the kind typically proposed.

Reconciling Free Markets and Government Intervention

The root of exploitation is the lack of alternatives. This is part of the definition, but I feel it often gets overlooked in favor of blaming/hating the exploiter. Most, probably all, attempts to legislate away the possibility of exploitation away by targeting the exploiters are destined for failure. Though they do stand a slightly better chance if you pull a Henry VI and first kill all the lawyers. The best way to end exploitation is not to stop exploiters, but to give the exploited better options, and we can (in most cases) do that with better market competition. Sometimes though, government is needed to facilitate or allow competition (see Roth for several examples of government designing markets so they become more competitive).

Although this is by no means intended to be a complete list, here are some ideas for a market-based approach to the issues listed above. Again, all of these focus not on preventing a firm from exploiting others–workers or consumers–but on giving the exploited parties more/better alternatives.

  • Low Wages and Employment Law Games
    • Minimize opportunities for discrimination in the hiring process. For example, initiatives like “Ban the Box” seek to make it easier for individuals with a criminal record to get a job interview and not be immediately eliminated from the candidate pool based on that record. Similarly, we know that white men are more likely to get interviews than women or minorities with identical resumes, so instituting some kind of quasi-standard nameless resume/cover letter could also help even the playing field.
    • Make it easier and safer to change jobs. THis would include reforming the laws around non-compete clauses in contracts as well as making things like health insurance either easily transferable or not tied to employment in the first case. Although the ACA made this slightly better by ensuring coverage for pre-existing conditions, much of the current Republican Replacement plan (AHCA) would undo many of these gains and make it harder for people, particularly people with illnesses or sick family members to change jobs.
  • Price Gouging
    • In some cases, as Munger notes, price increases are desirable to allocate resources based on highest need, rather than order in the queue. While all allocation methods have issues (pricing, queuing, rationing), the price mechanism is organic and therefore adaptable, which is exactly what’s needed in a crisis situation where this would be needed.
    • Furthermore, the price increases should be evanescent. We as a society have decided (or at least our representatives have) that we want to provide essentials (water, foodstuffs, first aid supplies) to victims of storms, etc. Any price hikes should only last until FEMA comes in and floods the market with water, etc.
    • Ultimately, if they want to avoid problems the State needs allow for price increases or increase the supply of certain goods to compensate for increased demand and decreased supply. Unless they do that, there will be shortages or price shocks. There is no way around this.
  • Captive Markets
    • In cases where the primary service provider is also the ancillary service provider–such as in the case of the movie theater where the theater is providing the primary service of the movie and the ancillary services of popcorn and soda or water sold at Rock concerts–making the provider allow outside food and beverage would lower prices by effectively making the ancillary service compete with all outside providers.
    • In cases where the providers are different–e.g. A restaurant where a particular tour group stops for lunch–kickbacks from the ancillary to the primary should be banned. Since the primary provider is acting in a fiduciary capacity when they select the ancillary provider, there should be nothing done by the ancillary to influence the primary’s decision (besides compete to provide the best product).

Again, this is not, nor is it intended to be a comprehensive list of free market-based interventions to prevent exploitation. The point I’m trying to make is two-fold: (1) market-oriented government interventions for these problems exist (oxymoronic as that phrase may sound) and (2) these interventions are often negative–meaning they prevent some action rather than forcing a firm to comply with some action, such as preventing non-compete clauses or banning outside food/drink as opposed to some kind of (positive) price control. The goal of all these interventions is to make the market “thicker”–that is, to add options.

It’s the Market Structures, Stupid

Tying these pieces together, it’s worth reiterating that the problem isn’t with capitalism, or evil corporations or CEOs, or profit maximization or self interest. The problem is that in some cases the market is too thin for competition to be effective, and people engaging in those markets as price takers aren’t going to get a good deal. Rather than trying–usually unsuccessfully–to change how people act in this thin market, the policy response should be to make the market thicker: provide more options, not further restrict the available options–whether directly, as is the case in banning certain secondary markets or indirectly, as was the result of policies like rent control.

I don’t favor market-based solutions because I trust businessmen. I don’t; I think most of them are full of shit. I favor market-based solutions because I think most politicians are full of shit too, and I definitely don’t trust them. I want a system where even people who are full of shit can do the right thing by the most vulnerable in society because it’s in their self-interest to do so, and people doing what is in their own, perceived self-interest is one of the few things people will reliably do.

 

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