Poverty does not respond to incentives

I wrote a post a while back saying that preventing ‘exploitative’ trade is equivalent to preventing an armed threat by eliminating the ‘not getting shot in the head’ option. Some people countered this argument by saying that it doesn’t account for how others respond. If poor people take the option of being ‘exploited’, they won’t get offered such good alternatives in future as they will if they hold out.

This seems unlikely, but it reminds me of a real difference between these situations. If you forcibly prevent the person with the gun to their head from responding to the threat, the person holding the gun will generally want to escape making the threat, as now she has nothing to gain and everything to lose. The world on the other hand will not relent from making people poor if you prevent the poor people from responding to it.

I wonder if the misintuition about the world treating people better if they can’t give in to its ‘coercion’ is a result of familiarity with how single agent threateners behave in this situation. As a side note, this makes preventing ‘exploitative’ trade worse relative to preventing threatened parties acting on threats.

4 responses to “Poverty does not respond to incentives

  1. As a side note, this makes preventing ‘exploitative’ trade worse relative to preventing threatened parties acting on threats.

    I’m guessing this should read:

    As a side note, this makes preventing ‘exploitative’ trade worse relative to preventing threatened parties not acting on threats.

  2. Paul, the original is what Katja intended. She’s saying that a poor person is like a person threatened by a man with a gun, and that sweatshop labor (to prevent starvation) is like complying to prevent being shot. Or at least, she’s saying that anti-sweatshop thinking may be motivated by this analogy. She’s saying that the analogy is wrong, and that it’s morally worse to block sweatshops than to force people to conform to “never comply even if he has a gun” (because the former won’t actually feed the starving, but the latter has a chance to stop the gunman from shooting people).

    I think this is obvious: if the gunman relents, then the victim is fine. If the sweatshop owner relents, the worker is still poor. In other words, it’s not the sweatshop operator that’s causing the problem; he’s merely presenting an option that’s not a sufficiently great deal for the worker.

    I liked Katja’s first post on this topic. However, I don’t know how many people are using the erroneous analogy she described (or a similar intuition) when they oppose sweatshops.

  3. An interesting side discussion would be sweatshop labor that merely delayed starvation. i.e. the payment of “less than a living wage”.

  4. Poverty does not respond to incentives, but sweatshop owners do.

    The sweatshop owner could hire workers at sweatshop wages, hire workers at higher wages, or not hire anyone at all. By taking away the ability of people to work sweatshop wages, we reduce the choice set of the sweatshop owner; if the would-be worker is lucky, he ends up getting higher wages. If he isn’t lucky, he gets nothing.

    If we take away the ability of workers to accept low offers – by, say, imposing a legally binding minimum wage – then we do run the risk of hurting them, but we can also help them, too. If it’s a choice between “exploitative” trade or nothing, by all means open up the sweatshops, but if we can induce the sweatshop owner to make better offers, then doing that would be even better. Whether restrictions on “exploitative” trade (such as minimum wage laws) result in better offers or no trade at all is an empirical question that can’t be answered by armchair theorizing on a blog, so I’ll leave it at that.

    Historically, though, places that have had sweatshops at one time do tend to end up richer than places that never had any, so that’s at least one thing in their favor.

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