Capitalism Works When Workers Are Productive

Moneybox
A blog about business and economics.
Feb. 20 2012 10:16 PM

Capitalism Works When Workers Are Productive

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A group of protestors from SACOM (Students and Scholars Against Corporate Misbehaviour) demonstrate outside the Foxconn annual general meeting (AGM) in Hong Kong on May 18, 2011.

Photo by MIKE CLARKE/AFP/Getty Images

I think I understand what David Autor is trying to say here about rising wages at Foxconn, but it's pretty misleading:

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.
“But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”
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The implication here seems to be that the reason the average American in 2012 earns a much higher wage than the average American in 1912 is that consumers have become much more willing to pay high prices. But of course that's wrong. The issue is the greater productivity of workers. This happens two ways. One is that when production of air conditioners becomes more efficient, the real wage of everyone who buys air conditioners goes up. The other is that as production of air conditioners becomes more efficient the producers of air conditioners make more money and the owners, managers, and workers bargain with one another to get a share of the returns.

The big story in China is that China has lots of very poor people living and working on farms. Average productivity, in other words, is very low so owners and managers have been able to get away with paying very little money. But as more and more high productivity factories get built, average productivity is rising and workers have more ability to bargain for higher pay in the factories. But this dynamic isn't going to result in higher prices for consumers of manufactured goods, it's going to lead to a bounty of manufactured goods as the world's total capacity to create manufactured goods increases. That is how capitalism is supposed to work—more output per worker means more goods per consumer which means that when the consumer is at work he's earning a higher wage.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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