Milton Friedman – a birthday tribute

Milton Friedman was born on July 31st 1912.  He was one of the two most influential economists of the 20th Century, the other being John Maynard Keynes, and he promoted monetarism as an alternative to Keynesian orthodoxy.  His economic scholarship was unimpeachable, and won him the award of the Nobel Memorial Prize in Economics in 1976.

He was no less influential in promoting free market economics as an alternative to the once fashionable mixed economy consensus that prevailed in the post-war era.  He did this at a popular, as well as at a scholarly, level, with a series of articles in Newsweek and other popular journals.  He was an excellent communicator, able to explain complex ideas in simple, easily understood language.  His “Capitalism and Freedom” remains a classic to this day, still relevant, still persuasive.

His TV series, “Free to Choose,” together with the book he co-authored with his wife Rose, were immensely popular, and were hugely influential in gaining popular support for the economics of free enterprise, choice and incentives, and a widespread skepticism of government intervention.

He pioneered many ideas that eventually gained traction, including an end to military conscription in the US, floating exchange rates, and school choice amongst many others.  His monetarist views influenced the Federal Reserve’s response to the 2008 financial crisis.

He was a supporter of the Adam Smith Institute and took a keen interest in its work in translating sound economic ideas into viable policy options.  He addressed ASI meetings, and regularly chatted with its members at meetings of the Mont Pelerin Society, which he continued to attend until his death in 2006.  He went out of his way to help others, to support student groups and to lend his wisdom and advice to free market organizations.  He even acted as my referee when I applied to Cambridge, with a hand-written note endorsing me.

He was engaging, personable and likeable, nearly always with a smile on his face and a twinkle in his eye as he corrected economic nonsense from his opponents.  Happy birthday, Milton; we miss you.

Well done to Enough Project and Global Witness over conflict minerals

You may or may not be aware of the provisions of the Dodd Frank act over conflict minerals. These were pushed by the Enough Project and Global Witness as a way of reducing the violence associated with the mining of tin, tantalum, tungsten and gold in the Eastern Congo. We were originally told that this would cost some $10 million, one cent on each mobile phone made, and pacify the region. Even the SEC says that this has cost some $4 billion just in its first year of implementation. And it appears that it doesn’t in fact work either:

There is widespread belief that violence in poorly governed countries is
triggered by international demand for their natural resources. We study the consequences
of U.S. legislation grounded in this belief, the “conflict minerals” section of the 2010
Dodd-Frank Act. Targeting the eastern Democratic Republic of the Congo, it cuts
funding to warlords by discouraging manufacturers from sourcing tin, tungsten, and
tantalum from the region. Building from Mancur Olson’s stationary bandit metaphor, we
explain how the legislation could backfire, inciting violence. Using geo-referenced data,
we find the legislation increased looting of civilians, and shifted militia battles towards
unregulated gold mining territories. These findings are a cautionary tale about the
possible unintended consequences of boycotting natural resources from war-torn regions,
and the use of international resource governance interventions.

The money quote:

The evidence suggests the legislation significantly increased the incidence of
looting and the incidence of violence against civilians by at least 291 and 143 percent

Lord preserve us from well meaning Social Justice Warriors, eh?

Currently Dodd Frank applies only to listed US companies. Global Witness is among those campaigning to have the same provisions written into European Union law for all companies, even down to the level of sole traders.

Should increase the level of violence they say they want to reduce quite nicely that, eh?

Sweatshops make poor people better off

Sweatshops are awful places to work. But they are often less awful than other jobs sweatshop workers could take. And this is the basic argument in defence of sweatshops. When people argue against them, the question we should ask is: “Compared to what?”.

Most evidence suggests that sweatshops pay better than the alternatives. It’s hard to collect reliable data in many poor countries, but Ben Powell and David Skarbek’s 2006 paper “Sweatshops and Third World Living Standards” uses wage data given by anti-sweatshop campaigners­ to estimate wages for sweatshop workers in ten countries compared to average National Income. This, if anything, should underestimate sweatshop workers’ earnings.

Again, it’s difficult to know how many hours the average sweatshop worker does every week, but most anti-sweatshop campaigners suggest that it is more than 70 hours per week. The results should be taken with a pinch of salt, but Powell and Skarbek found that sweatshop wages exceed average income in between eight and ten out of ten countries surveyed, depending on how many hours were worked.

In nine out of ten countries, “working ten-hour days in the apparel industry lifts employees above (and often far above) the $2 per day threshold.” And “in half of the countries it results in earning more than three times the national average”! (Powell’s defence of sweatshops, here, is excellent. His book on the topic is self-recommending.)


Critics of sweatshops point to the 1,000+ people killed and 2,500+ people injured by the collapse of the Rana Plaza sweatshop in Bangladesh in 2013. This was indeed grotesque, and evidence of the poor conditions that many sweatshop workers have to work in.

But what is their next-best alternative? Subsistence farming still dominates many of the countries that sweatshops operate in – in Vietnam, 59% of workers are self-employed in farming; 1.5% work for businesses owned partially or fully by foreign firms. And farming – particularly subsistence farming – is one of the most dangerous occupations in the world.

The International Labour Organisation estimates that agricultural workers suffer 250 million accidents every year, and say that in some countries the fatal accident rate is twice as common in agriculture as in other industries. “Out of a total of 335,000 fatal workplace accidents worldwide,” say the ILO, “there are some 170,000 deaths among agricultural workers.” As horrendous as the Rana Plaza incident was, anti-sweatshop campaigners have not shown that sweatshops are more dangerous than sweatshop workers’ next-best alternative.

Sweatshops seem to have good impacts on women in particular. A study by researchers at the Universities of Washington and Yale that I blogged about last year looked at different villages in Bangladesh – some close to sweatshops, some not.

In the villages close to sweatshops, girls were substantially less likely to get pregnant or be married off (28% and 29% respectively, and this effect was strongest among 12-18 year olds) and girls’ school enrolment rates were 38.6% higher. The authors say that these effects were likely due to a combination of wealth effects (richer families need to marry off their daughters less early, and can afford to send their daughters to school for longer) and the fact that garment factory jobs reward skills, increasing the value of education.

And what do workers themselves think of sweatshops, given not just wages but other non-monetary compensation as well? Using field interviews with thirty-one sweatshop workers in El Salvador, David, Emily, Brian and Erin Skarbek found that “workers perceive factory employment to provide more desirable compensation along several margins.”

This is not to condemn all work done ‘against’ sweatshops. Using data from Indonesia, the World Bank’s Ann Harrison and Jason Scorse found that 1990s campaigns to improve conditions for sweatshop workers in the developing world seem to have led to real wage increases without significant unemployment effects, though some smaller factories did close.

The lesson here may be that work that focuses on improving wages and conditions for sweatshop workers, not closing down sweatshops and trying to wash our hands altogether, may be the best approach. Persuading consumers to continue buying things from sweatshops, but to pay a higher price to give those workers a better wage, might be a decent way of essentially ‘bundling’ a charitable donation into a normal purchase. Unfortunately, most campaigns in Britain seem to be straightforwardly anti-sweatshop.

And even the most noble-seeming campaigns can backfire. UNICEF argues that early 1990s campaigns to reduce child labour in Bangladesh’s formal economy led to children looking for income in much worse places: stone-crushing, street hustling, and prostitution.

It is understandable that anti-poverty campaigners find sweatshops appalling, and work done to improve conditions in sweatshops might be valuable, but too often people forget that blunt campaigns against sweatshops probably end up hurting people. Instead, people should use the awfulness of sweatshops – and even greater awfulness of other jobs – as proof that we need to do more, much more, to give better options to poor people in other countries.

One option might be guest worker programmes, targeted at people from the poorest countries in the world, to allow them to come and work in the developed world so that they can send more money back home for investment. And lower trade barriers to goods from poor countries would help them grow, too.

Sweatshops are particularly horrifying because they make us feel complicit in the suffering of the poor. They are not a good option, but they are the least bad option currently available to many people. Washing our hands of the situation and just closing the sweatshops would make their workers worse off, potentially much worse off. If we want to help people, we should give them new options, not take away existing ones.

A difficult problem but we’d really better try and find a solution

Disturbing news about social mobility in the UK. To he point that something really must be done:

Well-off parents create a “glass floor” for their less academically inclined children ensuring they “hoard the best opportunities” over poorer peers, a study has suggested.

Children from wealthier families but with less academic ability are 35% more likely to become high earners than their more gifted counterparts from poor families, according to findings from the Social Mobility and Child Poverty Commission.

Clearly something just must be done. The report itself is here and commenting upon it we get:

Study author Dr Abigail McKnight from the London School of Economics said: “The fact that middle class families are successful in hoarding the best opportunities in the education system and in the labour market is a real barrier to the upward social mobility of less advantaged children.”

“Children from less advantaged families who show high potential at age five are struggling to convert this potential into later labour market success.”

“Schools could do much more to help children from less advantaged families build on high early potential.”

Difficult to know what to do really. Perhaps some system could be devised whereby we identified those bright but poor children and then gave them the academic, specialist, education which would enable them to make the best use of those talents? Would it be too, too, odd to suggest that they might even be sent to separate schools?

The value of remittances

When it comes to doing development properly, the role of remittances in helping the poorest in other nations plays a pivotal role and yet is considered by many to be a cost to the UK economy – a resource that would otherwise have been spent in the UK, being diverted elsewhere. The efficacy of remittances is also questioned: developing countries have been receiving remittances for years, and what do they have to show for it?

These are all false questions and positions.

First, the net cost of remittances to the UK is negligible. In 2013, remittances from people in the UK to people outside of it totalled $2.2bn (outflows). Inflows (remittances into the UK from people outside of the UK) totalled $1.7bn. The net impact on the UK from remittances is $510m, which represents 0.0195% of the UK’s nominal GDP in the same year. Hence, the impact of belonging to a world where remittances are possible, and belonging to one where remittances are condemned, is “negligible” by my reading.

Bearing in mind it is low-cost to us, the only other plausible objection is that it doesn’t do any good. One example of how this criticism is levelled is when it is argued that all remittances do is increase consumption amongst recipients, and is not invested in such a way as to create long-term opportunities for growth.

It’s not clear to me that this is a proper criticism. For one, increasing the amount of resource that is available to an otherwise poor family may result in more consumption, and potentially better consumption. Imagine if the consumption takes the form of food stuffs: although the immediate effect of remittances is on non-investment purposes, these can be seen as an investment in the individuals’ long-term health. And, ultimately, a world in which people eat until they are full rather than going to bed hungry is a better world to live in. But lots of other types of consumption are also effective at improving people’s quality of life – for example, if a family has more resources with which to buy more sources of light, they may be able to work longer in the day and avoid health risks associated with working in more dangerous (i.e. unlit) conditions. Even if there are no such gains, increased consumption is associated with increased welfare – which is in itself good, particularly since the welfare gain is enjoyed by people on the lower end of the income spectrum. It’s not evident a priori that spending remittances on consumption is a bad thing.

But the evidence indicates that remittances have significant supply-side effects, and aren’t solely consumption-affecting. A study in Ghana found that remittances were spent in the same way as any other income – split between investment and consumption, rather than focused on consumption. In Mexico, households without healthcare insurance spend on average 10% of remittances on healthcare. Remittances substantially lower the likelihood that children in El Salvador do not enroll into school at all, or leave before the 6th grade. A study of 11 Latin American nations showed that in households with relatively low levels of schooling and healthcare, households receiving remittances had higher health outcomes and were more likely to keep their children in schools.

When it comes to poverty reduction, current studies may, in fact, overplay the impact. The study of Latin American nations argues that many research papers assume a higher impact on poverty than is really plausible, because they do not factor in the fact that the emigrant who is sending their remittances back to the home country would likely have been working had they not left. Nevertheless, even when controlling for this, they find a modest positive effect of remittances on poverty reduction.

The fact that remittances cost the UK relatively little in net terms, combined with the improvements in lifestyle metrics in recipient nations, is a convincing case for them. If we want to do good for those in need, on a global level, we must be committed to permitting remittances and avoid the rhetoric that posits them as being ‘bad’ for the UK. They enable us, as the source nation, to benefit from the skills of the migrants coming to the UK to work, whilst providing welfare and investment opportunities elsewhere. Remittances earn developing nations three times as much as they are sent in aid – rather than forcing transfers via tax, they enable workers to make their own spending decisions with their own earnings from their own labour.