Where Do The Savings Go?

Innovation and exchange can be frustratingly uninspiring, particularly given that there are concentrated, vivid costs (in the form of lost jobs and struggling communities) and benefits dispersed across millions of people who might not even notice. Is it worth shutting a textile mill in the United States and opening a “sweatshop” in southeast Asia, so Americans can save a few cents on socks?

Opponents of exchange and innovation tend not to put much weight on the dispersed benefits. Some people think it’s especially virtuous to pay extra for clothes that aren’t produced in “sweatshops” or to support local businesses. But as Henry Hazlitt reminds us, the art of economics consists not merely in looking at the effects on the most visible groups, but in tracing the effects on everyone.

Suppose free trade means Amalgamated Textiles moves its operations to the Philippines, where it pays workers a paltry $11 a day, some people at Amalgamated’s factories in the United States lose their jobs, and Americans each save one cent per year on socks. The effects on American workers who lose their jobs are real and painful. Is it worth putting them through such pain just to save a measly penny on socks made by people exploited in jobs that pay them less in a day than the average American worker earns in a little over twenty minutes?

Once we account for all the effects, it’s pretty clear the move is a net win for the world. Let’s look at how it affects not just one group (American workers who lose their jobs), but all groups.

First, there are Filipino workers, for whom the extra dollar a day is huge. The minimum wage for non-agricultural workers in the capital region of Manila is 570 Philippine pesos per day. That’s about $10. An extra dollar a day for someone working at the minimum wage is a substantial improvement in standard of living, and this doesn’t account for the fact that the working conditions in the textile factory are probably better than working conditions in other jobs, and certainly better than in agriculture. It might not eliminate pagpag from the family diet, but it might limit it. It could be the difference between life and death. Poverty is an evil to be lamented, but to dismiss such a substantial improvement is to look a gift horse in the mouth.

Second, there’s what happens with that extra penny people save every year. For simplicity, assume they just bank their almost impossible-to-notice savings. One penny likely isn’t enough for anyone to notice, but 330 million pennies mean an extra $3.3 million every year in new loanable funds.

What can people do with that extra $3.3 million? When I first started writing this, it was right after a visit to Bowling Green, Kentucky, where I visited a Freddy’s Custard and Steakburger restaurant. As I don’t have a Freddy’s near me (there are some south of Birmingham), I wondered what it would cost to bring one in. A look at the website shows that prospective Franchise Owners can expect an initial investment of “$641k-$2.1M,” and there’s a requirement of $1M net worth and $400,000 in liquid assets. That’s a lot, and it is probably out-of-reach for someone who just lost her job at the sock factory. When we put them together, however, the pennies Americans save on socks can finance about one-and-a-half new Freddy’s franchises every year for the rest of eternity. And of course, those restaurants will need cooks, managers, and other personnel. They may not hire the specific people who lost their jobs at the sock factory, but they will be able to hire someone and create an opportunity that wouldn’t exist if the savings weren’t there. American consumers, of course, are better off: instead of just getting socks, we now get socks plus the capacity to make new burgers and custard.

But what about the American workers who lost their jobs? The fact that there are net benefits to society is probably cold comfort for the textile workers who now don’t know how they’re going to pay the rent or buy groceries. This is why the institutions of civil society, like churches and fraternal societies, are so important. It’s also why there is, at least, a case to be made for replacing the dog’s breakfast of contradictory programs constituting the American welfare state with a basic income guarantee.
The objection to markets saying “are you really willing to make people suffer so you can save a few bucks?” is sort of intuitive and superficially appealing. That’s not what happens when we have innovations and reductions in trade barriers. There are short-run transitional costs, but the institutions of well-functioning civil societies should be more than sufficient to take care of them. When we save resources, we save resources, and the savings make it possible for us to produce even more than we could before. This, in turn, makes it easier for us to solve even-more-pressing problems we face daily.

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