Beats the Alternative

EconTalk Extra
by Amy Willis
Chris Blattman on Sweatshops... Mark Warshawsky on Compensatio...

queue.jpg If you were a poor person in a poor country, would you prefer steady work in a factory or to be your own boss, buying and selling in the local market? That's the opening question for this week's episode, in which host Russ Roberts welcomes back Chris Blattman of the University of Chicago to discuss his research on employment alternatives in poor countries. The results Blattman and his colleague found surprised him, and me, too.

If we assume that a long queue for job openings in a factory means that such employment beats the other alternatives, what do we miss? Let's hear your thoughts in this week's conversation. We love to hear from you.

1. Blattman notes that one-time cash transfers to people in poor countries do have the effect of raising the individual's income, yet without any discernible effect on economic growth. Why is that the case? To what extent does this suggest that such aid programs are misguided?

2. Blattman's project is described as taking the line of (qualified) applicants for factory jobs in Ethiopia and dividing them in thirds. What happened to the members of each group, and what was the effect of their experimental treatments? Which effects(s) surprised you the most, and why?

3. Blattman's current project is described as starting with the following idea: that "firms not only help achieve growth, but...might actually be tools of poverty mitigation." What did Blattman mean by this, and to what extent was this hypothesis born out in his research? What implications do his findings have for development aid going forward?

4. In one of the most popular Feature Articles ever, economist Ben Powell makes his case in favor of sweatshops. How does this compare to Blattman's, and whose arguments do you find more convincing, and why?

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COMMENTS (1 to date)
SaveyourSelf writes:

1. The question states that cash transfers increase individual’s income yet do not cause discernible effects on economic growth. That can only be an averaging phenomenon. Either the increases described for individuals are too small or too infrequent to affect a change in the overall average or the cash transfer benefits the recipients but somehow harms the non-recipients, leading to a net neutral effect on the overall average.

In any case, I’ve been reading a lot about economic growth recently and it is a bewildering subject. In a recent post by Scott Sumner, Growth or Jobs , there is mention that “Economic growth can happen two ways: More hours are worked, or more economic output is generated from each hour of labor.” Sumner adds that, “the other way to raise growth is immigration.” Wikipedia says Economic growth “is the increase in the inflation adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as a percent rate of increase in real [inflation adjusted] GDP, usually in per capita terms.”

I think maybe it takes a PHD to understand GDP, so "growth" which is derived from GDP must be even more vexing. That said, the GDP formula above seems to assume that Real-GDP/total population = average productivity and that an increase in average productivity is “growth” and that “growth” is good. Thus questions of economic growth are really questions about changes in productivity over time. Given those definitions, what increases one individual’s productivity without decreasing anyone else’s productivity is unquestionably “growth”—a truism which allows us to think of growth at the individual and the micro level, instead of a macro level. This is advantageous since the research I’ve read [Including the article cited by Amy and Econtalk with Solow ] don’t seem to support macro models well. At the micro level going back to Adam Smith we assume, safely I think, that specialization, over time, will lead to productivity gains compared to generalization. We also know that working more hours generally results in increased total productivity. Outside of those two general statements, I’m not sure there is much else we can say with confidence about productivity at the individual level.

Specialization requires trade. Thus changes that lower the costs of trade should allow for greater specialization, which means trade-assumptions should have a strong, indirect impact on individual productivity. Assumptions necessary for trade include 1) stable, predictable property rights 2) enforcement of voluntary contracts 3) easy access to information 4) large number of buyers and sellers 5) absence of violence 6) absence of coercion [including but not limited to: 6a) freedom to make voluntary contracts and 6b) freedom to transfer property rights] 7) absence of subsidy [both coercion and subsidy add noise to price signals.]

One of the ways specialization leads to productivity gains is through information capture. Through frequent repetition, forgetting [an unavoidable human condition] is minimized, allowing for faster and more complete recall of information relevant to the specific task. Also specialization allows for capture of more detailed information about the restricted area of interest—more minutia if you will. Often, the minutia matters when it comes to individual productivity. Similarly, writing and reading; filing and sorting; maintaining databases and search engines should all improve memory and recall and, thus, improve individual productivity.

Specialization also allows individuals the time and incentive to shape their brain and their environment to support the specific tasks required by the specialty. The macro models call the shaping of the environment, “capital accumulation,” but I think that is overly simplistic. Oftentimes a simple rearrangement of the environment can affect productivity independent of any accumulation. Also accumulation of any kind is subject to diminishing returns, so a blanket statement that “adding more capital will lead to greater productivity” must be false in some instances.

In addition, energy and time are limits on individual productivity. It is probably true, therefore, that greater access to energy—either from other people or from the universe at large—should have a positive impact on productivity. Also, anything that makes longer work hours possible should increase total individual productivity. Things like improved ergonomics, lowering risk of injury on the job, caffeine, and childcare should all increase individual productivity.

In summary, facilitating specialization, access to energy, and work hours should improve individual productivity. However, all of the details that contribute to those broad categories are subject to the law of diminishing returns. Thus changes that improve individual productivity should eventually stall at a new—hopefully higher—equilibrium point. Does that mean, then, that there exists, in some perfect world, a maximum level of individual productivity?

Perhaps in the short term, yes, a ceiling on productivity exists. But history suggests that there is no limitation on productivity in the long term. The law of diminishing returns is pretty reliable, so we must have a different explanation for individual productivity gains at the frontier of productivity. For the sake of clarity, let us call productivity gains leading up to the productivity frontier, “catch-up growth” and productivity gains at the productivity frontier, “innovation.” Where, then, does innovation come from? FA Hayek suggests innovation comes from “competition.” In, The Fatal Conceit chapter one, he says, “Competition is a procedure of discovery. A procedure involved in all evolution that led man unwittingly to respond to novel situations. And through further competition—not through agreement—we gradually increase our efficiency.”

So there you have it, my best model of growth to date: changes which reduce the costs of specialization, reduce the costs of access to energy, or increase the time available to work leads to catch-up growth and competition leads to growth through innovation.

So, given that model, what is the predicted effect of cash transfers? Cash transfers have the effect of lowering the cost [through subsidy] of any and all aspects of productivity. The cash can be applied to the purchase of energy or tools or time. Unfortunately subsidies also add noise to price signals, which increases costs of trade, which then increases the cost of specialization. So cash transfers are both a boon and a bust for recipients.

Additionally, cash is not always invested for work, it might be consumed. Consumption is worth a moment of scrutiny. "Consuming" can take many forms. Consuming food is an increase in energy, which may improve productivity. Consuming sex or drugs or entertainment is a form of generalization, which is antithetical to productivity since it is a move away from specialization. Thus consumption is a mixed bag [from a productivity perspective.]

And, finally, what about Scott Sumner's comment regarding immigration causing growth? Where does immigration fall in this micro-model of growth? Immigration would fall under, "increasing the number of buyers and sellers," which is a trade assumption. Increasing the number of buyers and sellers reduces the cost of trade which reduces the cost of specialization. Thus immigration, in the long run, should improve catch-up growth rates. Additionally, more buyers and sellers means more competition. Competition drives innovation. So in the long run, immigration improves both catch up growth and growth from innovation.

[Amy, both of the articles you linked in the questions this week were wonderful. I learned a lot. Thank you so much.]

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