Mr. Palmer is a doctoral student in philosophy and economics at Indiana University.
One of the most dangerous economic myths of our time is the notion that the relative affluence of the Western industrial nations is somehow responsible for the grinding poverty of the so-called "third world." According to this view, greedy Western businessmen who invest in underdeveloped countries "exploit" the inhabitants by paying them starvation wages and draining their country of its natural resources. The effect of this double exploitation, so the liberal doctrine goes, is to reduce a once happy and prosperous people to slavery and abject destitution. As a solution, we are told that the ill-gotten wealth of the richer nations, especially the United States, must be globally redistributed to raise the living standards of the poorer lands. There is only one thing wrong with this liberal fairy tale: it is false. Foreign investment in underdeveloped countries, far from reducing the inhabitants’ standard of living, has made it possible for them to enjoy a material abundance which they otherwise could not even have imagined. It is easy to understand why dictators in these countries make the irresponsible charge of "exploitation" to justify seizure of foreign capital; it is not easy to understand why this accusation is so readily accepted by intellectual leaders of the West.
Let’s examine the three main parts of this doctrine of economic exploitation.
Are Workers Exploited?
Does Western business exploit the laborers of underdeveloped countries? The liberal reasoning seems to go like this: A business will not invest in an underdeveloped country unless it has something to gain by doing so. If someone gains, then somebody else has to lose. Therefore, since foreign business gains by investing in underdeveloped countries, the inhabitants must lose; and one way they lose is by being forced to work for lower wages than are paid in the advanced countries.
The first thing to notice here is that the liberals have misunderstood the nature of voluntary exchange: they believe that if one person gains, another must lose. That is true if the relationship between the two people involves force or coercion. If you have an apple and I grab it away from you, then I have gained and you have lost. But suppose that, instead of using force, I offered to trade an orange for your apple and we made a voluntary exchange. Then I would have gained, because I wanted the apple more than the orange. If I hadn’t wanted the apple more than the orange, I wouldn’t have made the trade. But you have gained, too, since you wanted the orange more than the apple—otherwise you wouldn’t have made the trade. In a voluntary exchange, both participants benefit and nobody loses.
What is true of trading apples for oranges is also true of trading labor for wage payments. If a worker in an underdeveloped country feels that the wages an employer offers him are too low, then he is free to devote his time and effort to tasks which he regards as more profitable. This is true whether or not the employer is a foreigner. If, however, the worker agrees to a specified wage, then he demonstrates that the money he gets is worth more to him than the time and energy he gives up; otherwise, he wouldn’t have agreed to the exchange. Since he voluntarily enters into and profits from the exchange, there are no rational grounds for claiming that he is "exploited."
Does the worker in a backward country make a high wage by Western standards? No; and this brings us to another argument which purports to prove that he is exploited. Suppose that a worker in New York City makes $5 an hour, while a worker in Venezuela makes only $1 an hour for exactly the same work. If the man in New York City is being paid what his work is worth, then doesn’t that prove that the Venezuelan—who does exactly the same work—is being exploited to the tune of $4 an hour? After all, if it’s the same job and it’s worth $5 an hour in New York, then it must be worth $5 an hour in Venezuela.
The fallacy in this argument comes from a failure to understand that the value of labor—or, for that matter, anything else offered for sale—is not objective and unchanging but is determined by market conditions. For example, here in southern Indiana eggs are much less expensive than they are in New York City. Because of local market conditions, i.e., a large supply of readily available farm products, the price of eggs is lower here than in the New York market which draws supplies over great distances. In the same way, the large supply of labor in underdeveloped countries, often combined with a lower level of skill than would be found in the advanced nations, tends to push down the price of labor (wage rate) for local workers.
Does the worker in such a country make as much money as he would like to make? No. Obviously, from his point of view, the best wage would be a million dollars an hour. The company, on the other hand, would prefer to pay him nothing at all. The fact that worker and company are able to arrive at a compromise figure provides no justification for the claim that either is "exploiting" the other.
Are Natural Resources Drained?
The next part of the exploitation doctrine was the accusation that industrial nations drain underdeveloped countries of precious natural resources without proper payment. Let us make it clear at the outset that we are discussing a situation in which a foreign firm has discovered and brought into use a natural resource which was previously unused. What are we to make of this charge?
Let’s think about it for a minute. The fact that the resource in question was previously unused means, most likely, that no one had seen a way to profitably make use of it—and hence had not bothered to assert any claims to ownership. If a foreign firm discovers a profitable use for it and makes a claim, then—for a moment, at any rate—it has made the only such claim to ownership and is at least the pro tem owner. When the use for the resource becomes known, as it inevitably will, others may also wish to exploit the resource, and may make competing claims to own it.
It is easy to see that, since the country’s government has legal jurisdiction, the competitors for title to the resource must look to that government to arrive at a reasonable adjudication of their claims. But if anyone regards the settlement which results as unreasonable—as unjustly benefiting the foreign firm at the expense of local claimants to the resource—then he should lay the blame where it belongs. The local government, not the foreign firm, decides on the conditions under which the firm may use the resource. If there is exploitation, then it is exploitation devised and sanctioned by the country’s rulers, and the problem is not between the people and foreign business but between the people and their government.
Do the Rich Rob the Poor?
The third and final charge was that Western business has caused the poverty of the underdeveloped nations, and that the industrial countries are rich because they have taken advantage of these unfortunate lands. We have already seen, in the preceding discussion, that neither of the first two charges will stick: the West is "not guilty" of economic exploitation. But rather than simply washing our hands of the matter, let’s ask the question: Why are the industrial nations rich and the third-world nations poor?
Why does an American who pushes a button eight hours a day enjoy a higher living standard than an Asian peasant who pushes a hand-plow sixteen hours a day? It will do no good to say that the American works harder; he doesn’t. The answer is that the American has more and better tools to work with than the Asian peasant—tools which enormously magnify the productivity of his labor. And there is only one way that these tools can be made available: through capital accumulation.
Capital accumulation means a diversion of labor and resources from purposes of current consumption to the creation of tools needed for higher future productivity.
Consider the simplest case. Robinson Crusoe, washed up on his island, may find that if he labors ten hours a day chasing rabbits he can enjoy a diet of two rabbits a day. Suppose he then decides that if he had a bow and arrow, he could enjoy a diet of ten rabbits a day. In order to get the bow and arrow, he must use some of his time and labor to make it: time and labor he would otherwise use to chase rabbits. Thus, if we assume he devotes five hours a day to chasing rabbits and five to fashioning a bow and some arrows, he has reduced his present standard of living to one rabbit a day in the hope of having ten rabbits a day when he finishes the tools.
What is true of Robinson Crusoe is true of whole societies. The only way for a poor nation to improve its living standard is by increasing the number and quality of tools which its people work with. Not just any tools will do, either. If Crusoe, like so many governments of third-world nations, decided to build a steel mill or an atom bomb instead of a bow and arrow, we would justifiably question his sanity. The tools required are those to help satisfy the most urgent needs of the consumers—in this case, Crusoe’s need for food rather than steel.
Since present living standards must be curbed in order to produce tools (accumulate capital), we can see that the process must take place slowly if at all in a land whose inhabitants are already on the verge of starvation. It would be a tremendous stroke of good fortune if the members of some other society were willing to provide the local laborers with the tools needed to increase their production and make better lives for themselves. And that is precisely what happens when a business from an advanced nation invests in an underdeveloped country. Anything, therefore, which discourages such investment or makes it impossible, only prolongs the poverty and suffering of the people.
The people of underdeveloped countries really are the victims of exploitation—but not by Western business. Who are the real exploiters? The real exploiters are their rulers, who make economic progress impossible by punishing domestic success and by taxing, regulating, and nationalizing foreign investment right out of the country. The victims who would avoid such exploitation must first throw off the yoke of socialist dictatorship. Then Western business may serve them. ®