Mr. Daisey Goes to the Apple Factory – A Lesson in Comparative Economic Systems

One of the core lessons that I try to get across in my introductory Comparative Economic Systems classes is that economic systems are complex. Reality is much more complex than either simple theory or ideology.  Countries simply cannot be easily categorized with simple labels such as capitalist, socialist, or communist.  Those labels usually obscure more than they illuminate.

The labels are the work of ideologues and theorists.  Pure capitalism or socialism or communism exists only in the mathematical axioms of textbooks, the novels of Ayn Rand, or the writings of some political power grabber. Real economic systems are the creatures of politics, history, the available resources, culture, religion, and some economic theory.

Another lesson I try to impart is that while we might all want to improve economic conditions, how to do that effectively is also complex.  There are no silver bullets or universal magic solutions.  There are costs and benefits to any proposed policy or practice.  The key to progress is evaluating those costs and benefits wisely and making conscious decisions.

Last weekend I heard  a story on the This American Life radio.  It was called Mr. Daisey Goes to the Apple Factory.  It’s about a man who goes to visit the workers at Foxconn, the company that manufacturers Apple products in China.  It’s a long story, but it’s gripping and powerful.  It struck me that it also powerfully illustrates the two lessons I’m trying to teach in class:  economic systems aren’t that simple and making things better isn’t always obvious.

To listen for yourself, go to: This American Life #454 – Mr. Daisey and the Apple Factory. Here’s their summary:

Host Ira Glass speaks with an Apple device about its origin. (2 minutes)

Mike Daisey performs an excerpt that was adapted for radio from his one-man show “The Agony and the Ecstasy of Steve Jobs.” A lifelong Apple superfan, Daisey sees some photos online from the inside of a factory that makes iPhones, starts to wonder about the people working there, and flies to China to meet them. His show restarts a run at New York’s Public Theater later this month. (39 minutes)

What should we make of what Mike Daisey saw in China? Our staff did weeks of fact checking to corroborate Daisey’s findings. Ira talks with Ian Spaulding, founder and managing director of INFACT Global Partners, which goes into Chinese factories and helps them meet social responsibility standards set by Western companies (Apple’s Supplier Responsibility page is here), and with Nicholas Kristof, columnist for The New York Times who has reported in Asian factories. In the podcast and streaming versions of the program he also speaks with Debby Chan Sze Wan, a project manager at the advocacy group SACOM, Students and Scholars Against Corporate Misbehavior, based in Hong Kong. They’ve put out three reports investigating conditions at Foxconn (October 2010, May 2011, Sept 2011). Each report surveyed over 100 Foxconn workers, and they even had a researcher go undercover and take a job at the Shenzhen plant. (15 minutes)

 

 

Not in Your Micro Textbook: The High Price of iPads and iPhones

From Business Week online we get this story:

Why Apple and Others Are Nervous About Foxconn

The Chinese maker of iPhones and iPads has seen a rash of suicides—which may be a price of turning out low-price, high-quality goods

Terry Gou says he has no idea why so many of his employees are killing themselves. Gou is the founder and chairman of Foxconn, the world’s largest electronics contract manufacturer—the maker of iPhones and iPads for Apple (AAPL), computers for Dell (DELL), and countless other devices for well-known high-tech customers around the world. So far this year, 10 Foxconn workers have committed suicide. “From a logical, scientific standpoint, I don’t have a grasp on that,” Gou told reporters on May 27 at a press conference at the company’s vast production facility in Shenzhen, China. “No matter how you force me, I don’t know.”

Ask around among the more than 250,000 workers at the Shenzhen complex, and you’ll find explanations. One 21-year-old assembly-line worker, who asked that his name not be used, says conditions at Foxconn make his life seem meaningless. He says conversation on the production line is forbidden, bathroom breaks are kept to 10 minutes every two hours, and workers get yelled at frequently.

No one disputes that Taipei-based Foxconn, also known as Hon Hai, has cultivated a tough culture. The company generates more revenue in a year than Apple, Dell, or Microsoft (MSFT). It has grown in profitable obscurity to become an industry juggernaut for a simple reason, says Pamela Gordon of Technology Forecasters, a supply-chain research firm: “It’s the prices. Their prices are lower for high-quality work.” Foxconn won Apple’s order to make the iPhone after Gou directed the business units that make components to sell parts at zero profit, according to two people familiar with the chairman’s actions…

Obviously the “high price” I’m referring to is the senseless loss of human life through suicide of workers.  But it’s more than that, it’s also the loss of freedom and sense of meaning that Foxconn’s working conditions create for the surviving workers.  In standard micro textbooks, these costs are ignored.  The standard neoclassical treatment of both international trade theory and labor markets pretty much ignores such issues.

IMO, one of the failings of standard, neoclassical tales of international trade theory as told in most Principles of Econ textbooks is how they ignore the institutional arrangements of trade while assuming that all trade is transactional.  In other words, in the models everything comes down to a price for a particular good in a particular transaction.  If the buyer changes her mind or learns something about the source that makes the product less attractive, well, just stop buying from that vendor and shop somewhere else.  In the real world, that’s not so easy.  In the real world we have “switching costs”.  Like it or not, buyers and suppliers have long-term relationships that are very, very difficult to change or break.  Legally, Apple Computer and Foxconn may be seperate companies that buy/sell with each other and therefore have options.  But realistically and behaviorally, they are one integrated production enterprise. They’re married at the hip (to mix metaphors):

Gordon, the supply-chain expert, says it would be hard for a tech company to switch from a partner the size and sophistication of Foxconn. “Separating from a contract manufacturer can be painful,” she says, because of the complexity of reworking assembly lines and supply chains. A divorce would be especially difficult for Apple, given that it’s already behind in producing its hit iPad tablet computers.

Another failing is that by not describing the institutional arrangements (the real working conditions and employment relationships) in other countries, students are led to assume that life in other countries is much like in the U.S. only with less income.  Not so.  In the U.S., workers, even low-paid workers, are free to live their own lives:  they live where they want to (and can afford) and do what they want on their off-hours.  Yes, when you’re “on the clock” you pretty much have to dance to the boss’s tune, but not off-the-clock.  That’s why we have so many pop songs over the ages about “living for the weekend”.  But in China, that’s not how it works.  If you work for a major industrial firm, you’re pretty much just a serf on the company’s plantation:  you live in a dorm, you eat what they serve, you do what they want, and you  don’t talk to anyone unless they say so. Grim.

Meanwhile, work goes on in Shenzhen. Foxconn’s facility is three square kilometers (1.16 square miles) and is crisscrossed by tree-lined streets with a fountain at the center. There’s a hospital and a collection of restaurants. Workers live in dormitories, eight to ten people to a room. The company provides worker counseling, according to supervisor Geng Yubin. “For many of the young people who are here, this is the first time they’ve been away from home,” Geng says. “Without their families, they’re left without direction. We try to provide them with direction and help.”

Foxconn says it’s taking other steps to get the situation under control. It has installed netting around outdoor stairwells of dormitory buildings to prevent people from jumping. Workers will also be getting a 30 percent raise. The additional money may not be enough to prevent further tragedies, says Xiao Qi, a college graduate who works at Foxconn in product development. He earns 2,000 yuan a month, or $293, more than twice as much as a line worker. “I do the same thing every day,” says Xiao, who says he has considered suicide. “I have no future.”

Trade theories that assume away these differences and then conclude that trade barriers or trade conditions are always liberty- and efficiency-reducing are simply not realistic.

Trade today is different

From Econospeak (and cross-posted at Angry Bear). When it comes to international trade statistics & analyses, we are flying blind. Our models and theories (the ones that conclude that “free trade” is always best policy) are all based on the idea that private firm A in country B trades with private firm C in country D. But that isn’t the world today. Today it’s private firm A trades with itself between it’s privately owned and controlled facilities (wholly-owned sub-corporations) in countries B, D, and E. This means that maybe “free trade” isn’t the best policy for the residents of country B.

Global Trade Imbalances as a Statistical Artifact

Today, the latest spin that purports to describe the still unfolding global economic crisis is that of ‘global trade imbalance’, with particular attention being focussed on the US and China.

The US, we are told, has a huge trade deficit and China is conveniently blamed for this. “They say China’s currency manipulation hurts the U.S. economy” [1] making China’s goods much too cheap relative to those produced in America.

This tale does not reflect the contemporary reality and it is all the stranger because, on the other hand, it’s never been a secret about the manner in which the large global corporation has evolved its operations over the last 4 decades. These huge networked businesses now have production systems that most often span a large number of countries at the one time. That means, in effect, that world trade is now mostly defined by the nature and extent of the global corporation and its networks. The nation is no longer the core economic entity.

In 2006 Samuel J. Palmisano, Chair of the Board, President, and Chief
Executive Officer of IBM described the evolution that has occurred in the nature and function of the international corporation.[2]Since the early 1970s economic nationalism has abated, Palmisano says. Trade and investment barriers consequently receded. A revolution in information technology also occurred and this development improved the quality and cut the cost of global communications and business operations “by several orders of magnitude”. The large transnational corporation was then much more able to standardise technologies as well as its business operations all over the world. This, in turn, led to the interlinking and facilitation of work both within and among companies.

“New perceptions emerged as to what was possible and permissible…. The focus shifted from products to production.” State borders defined less and less “the boundaries in corporate thinking and practice….”

More ominously, as we now see with the global fad for deregulation, Palmisano eulogises

“the growth of horizontal, intergovernmental networks among the world’s regulators and legislators [that are] built on shared professional standards and relationships among cross-national communities of experts.”

Almost anyone with more than a fleeting interest in economics understands this new reality. The most dominant global enterprises have embedded themselves in one nation after another and most of those businesses are US and European in origin. The economic reasons for these entities doing so appear quite obvious. Labour is cheaper in Asia. Corporations find it much easier to avoid tax and engage in transfer pricing to maximise profits, and so forth.

So, it’s not surprising, and somewhat belated, to find a 2007 paper published by the Asian Shadow Financial Regulatory Committee that finally raises the very serious issue of false accounting in international trade by governments around the globe. Quote:

“MNC affiliate sales within their host countries are not included in trade balances, but are counted in host country GDP. MNC affiliate sales from the host country to other countries are counted as exports of the host country. This accounting practice overstates the current account surplus of a country like China with heavy inward foreign direct investment (FDI). This surplus would be reduced if sales outside China by affiliates of foreign-owned MNCs were excluded from its exports and sales within China by affiliates of foreign-owned MNCs were included in its imports. The trade accounting system overstates the current account deficit of a country like the US, with heavy outward FDI. This deficit would be greatly reduced if sales outside the US of overseas affiliates of US MNCs were included in US exports and sales back to the US of overseas affiliates of US MNCs were excluded from US imports.” [3]

For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations. Walmart, for instance, has 700 factories in China. And ‘China’ (whatever accounting entity this word constitutes) has ‘trade deficits’ with “the rest of Asia”.

“In effect, China aggregates the trade surplus of East Asia with the U.S. and Western Europe, takes the political heat, but captures relatively little of the value that it adds to final products.”

We need to know more than just the fragments of data that government bureaucracies, mainstream professions and the media serve out. A true understanding of the nature of the crises now confronting us is absolutely essential, and yet deliberate obfuscation is occuring as to the cause and nature of our collective dilemma.

“Were it part of our everyday education and comment that the corporation is an instrument for the exercise of power, that it belongs to the process by which we are governed, there would then be debate on how that power is used and how it might be made subordinate to the public will and need. This debate is avoided by propagating the myth that the power does not exist.”

John Kenneth Galbraith, The Age of Uncertainty, 1977

Change in Econ Systems: The era of US-dominated Globalization ending

I will comment further at LCC Global Perspectives Conference, but

All the idols of capitalism over the past three decades crashed. The assumptions and presumptions, paradigm and prognosis of indefinite progress under liberal free market capitalism have been tested and have failed. We are living the end of an entire epoch: Experts everywhere witness the collapse of the US and world financial system, the absence of credit for trade and the lack of financing for investment. A world depression, in which upward of a quarter of the world’s labor force will be unemployed, is looming. The biggest decline in trade in recent world history – down 40% year to year – defines the future. ...The ‘market’ as a mechanism for allocating resources and the government of the US as the ‘leader’ of the global economy have been discredited. (Financial Times, March 9, 2009) All the assumptions about ‘self-stabilizing markets’ are demonstrably false and outmoded. The rejection of public intervention in the market and the advocacy of supply-side economics have been discredited even in the eyes of their practitioners. Even official circles recognize that ‘inequality of income’ contributed to the onset of the economic crash and should be corrected. Planning, public ownership, nationalization are on the agenda while socialist alternatives have become almost respectable.

With the onset of the depression, all the shibboleths of the past decade are discarded: As export-oriented growth strategies fail, import substitution policies emerge. As the world economy ‘de-globalizes’ and capital is ‘repatriated’ to save near bankrupt head offices – national ownership is proposed. As trillions of dollars/Euros/yen in assets are destroyed and devalued, massive layoffs extend unemployment everywhere. Fear, anxiety and uncertainty stalk the offices of state, financial directorships, the office suites the factories, and the streets…

via Atheo News: World Depression: Regional Wars and the Decline of the US Empire.

worst global economic crisis since the 1930s

I will have more to say on Tuesday at the LCC Global Perspectives Conference, but it’s not pretty.  The planet’s in trouble.

Both the IMF and World Bank are now forecasting an outright fall in global output in 2009, with a larger contraction than previously forecast in the advanced economies and sharply lower expected growth in the emerging world. I am not sure that even Nouriel Roubini was forecasting an outright fall in global output a year ago. Anything below 2% is generally considered a global recession.

The most visible manifestation of the scale of the downturn continues to come from Asia — with the sharp fall in Asian exports to the world mirroring the sharp fall in global demand. Japan’s exports are now down 50% from last February. The IMF is now forecasting a 6% of GDP contraction in Japan in 2009. That is a contraction of magnitude as emerging economies experience during their crises.

via Brad Setser: Follow the Money » Blog Archive » “This is unquestionably the worst global economic crisis since the 1930s”.