Markets: Exploitation or Empowerment?

Antony Davies,

Release Date
May 26, 2011


Free Markets and Capitalism

Prof. Antony Davies empirically examines the question of whether or not markets are exploitative. In his analysis, he finds that trade is positively correlated with wealth creation, jobs, reductions in child labor, and increasing wages. Markets, therefore, empower individuals rather than exploit them.

Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.

Markets: Exploitation or Empowerment?
When it comes to thinking about globalization, there are two camps. One camp thinks that markets are about exploitation. And the markets–as-exploitation assumption says that markets lead to a centralization of political and economic power, decreased competition, and the concentration of wealth. The other camp thinks of markets as empowerment. And the markets–as-empowerment assumption says that markets lead to a decentralization of political and economic power, increased competition, and a dissemination of wealth. So the question is which of these two assumptions does the data tend to support?
Let’s look first at the markets–as-exploitation claim applied to globalization and income. Markets-as-exploitation would say globalization should result in a transfer of income from the less wealthy to the more wealthy nations. Here you’re looking at all the nations of the world. Across the horizontal are the nations measured in terms of their per-capita income, this is in U.S. dollars, so it’s adjusted for differences in exchanges, in currencies, and it’s adjusted for differences in cost of living. So when you see $25,000, that’s $25,000 as we would think of $25,000 today.
Up the vertical, we’re looking at per-capita trade, again measured in U.S. dollars adjusted for cost of living. There are exceptions, but what we also see is this clear trend. Countries that engage in greater levels of trade enjoy higher per-capita incomes. Now, the counterargument to this is that what you’re seeing is what we call the large country effect. Large countries tend to have high per-capita incomes, and they also tend to engage in more trade, so of course you should see this sort of thing. But notice, if we restrict our vision back to this section of the graph, these are the poorest of the poor countries. Even amongst the poorest of the poor countries, you still see this same phenomenon. There are exceptions, but on average, as countries engage in more trade, they experience higher per-capita income.
The markets-as-exploitation assumption would argue that globalization should result in an increase in the exploitation of peoples. Demographically, there are two groups that historically have tended to be more exploited than others, and those are women and children. Here again you see each dot is a country. The further up the dot is, the more trade the country engages in. Across the horizontal, we’re measuring the UN’s gender-related development index. The gender-related development index asks the question, what is the quality of lives of women in a country versus men in that same country? The further to the left you are, the greater the disparity in the quality of lives for males versus females. The further to the right, the more equal the quality of lives for males versus females. What you see is, there are exceptions, but on average, there’s also this trend. Countries that engage in more trade tend to enjoy better gender equality amongst their peoples.
Now, let’s look at children. One of the arguments that you frequently hear is that trade is bad because multinational corporations move into small countries and they employ children, child labor, and this is exploiting children. Here you’re seeing child labor rates against trade. The further to the right, the greater the incidence of child labor; the further to the left, the lesser the incidence of child labor. There are exceptions, but on average, there’s also this trend. Countries that engage in more trade actually have lower rates of child labor than countries engaged in lower trade. Now, the large country effect applies here as well. You can argue that large countries of course have lesser rates of child labor and they also engage in more trade. But this phenomenon you see also amongst the poorest of the poor countries. Amongst the poorest of the poor countries, those that engage in more trade, greater levels trade, tend to exhibit lower rates of child labor.
Here, you’re looking at the middle- and lower-income countries, as classified by the United Nations. Again, you see this trend. The argument that you hear frequently in the United States is that trade and globalization results in unemployment, and we see these American jobs going abroad and unemployment resulting. Here, you’re looking only at the United States. Each dot is a month from January ’75 to June 2006. The further to the right we are, the more trade the United States is engaging in. Further to the left, the less trade the United States is engaging in. Up is more unemployment, down is less unemployment. What you see is exceptions but also a trend. When the United States engages in more trade, its unemployment rate tends to be lower. When it engages in less trade, its unemployment rate tends to be higher.
Now, the counterargument to this is, yes, but it may be the case that when we engage in more trade, we get lower unemployment, but all that’s happening is that we’re giving up high-paying jobs in exchange for low-paying jobs. Here again is the United States, and you’re looking at the average wage rate and this is adjusted for inflation. So the further up we are, the higher the wage rate is, adjusted for inflation; the further down the lower it is. Again, exceptions, but also a trend. On average, when the United States engages in more trade, our average wage rate is actually higher. So we’re getting not only less unemployment on average, but higher-quality employment on average.
If you hit a light bulb with a hammer, do you make a mess? Everyone says yes. This picture is evidence that indeed you do not. See, nice light bulb, hitting with hammer, not much of a mess. The problem is, this is a snapshot. If you ran time forward, you would see glass falling on the floor and a large mess accruing. This same problem is what you encounter when people talk about the developed world and the lesser developed world. We take a snapshot of the world and we think that that snapshot is what the world looks like. We don’t play time forward. Observe. This application comes from the folks at Gap Minder and they take data for all countries over time and animate it. What you’re looking at, each dot is a country, color-coded according to where they are geographically. The size of the dot represents the population. So here’s China, here’s India. The further to the right, the higher the income per capita is for the country. This is adjusted for cost of living and it’s adjusted for inflation. So the dollars you see here are dollars that you would think of normally. Up and down is life expectancy. These are the two things people typically look at when they distinguish between developed and lesser developed countries.
The developed countries have better health care, higher life expectancy, and higher incomes. Lesser developed countries have lesser life expectancy, lesser incomes. So what you see is clearly there are countries that have more, and countries who have less. This is in 1901. Now, let’s play time forward. And what you see is that countries start to move. Here we come into World War I. We’re now in between the two wars. This is the Great Depression, World War II, and the 1950s. Now, we have increases in technology, we’re moving into the ’60s, the ’70s. There are exceptions, but the countries on average are moving up and to the right. As time has progressed, people’s, countries’ incomes have risen, and countries’ life expectancies on average have risen also. We still have the more developed countries and lesser developed countries, but everybody in general is better off than they were.
Now, what does this have to do with trade? One of the things that’s happened over the past century is a greater increase in trade and a greater increase in market liberalization, market freedoms. These are the things that are driving this phenomenon. As people become more free to make decisions and to engage with buyers and sellers in other countries, everyone improves in terms of both their life expectancy and their incomes.