Whimsley

Happy Shoes IV - Activists and Consumer Magazines

In Happy Shoes II I argued that if the market is left to isolated consumers and companies, the prospects for ethical consumption are bleak. The primary barrier to establishing fair trade is reliable information about production conditions, not the ethical standards of those in the boardrooms. When individual consumers cannot verify ethical production and when even well-meaning companies cannot prove that they are walking the walk, the outcome is as if we didn't care about ethical production at all. In the absence of reliable information ethical companies are punished; in the presence of reliable information even scummy companies may find it worth their while to behave ethically.

So how do we get reliable information? One thing is for certain: as individual consumers we are not going to collect that information ourselves. It costs a lot more than the $20 premium our archetypal consumer is prepared to pay to verify factory conditions in Bangladesh.

Free-market enthusiasts says that self reporting and brand reputation will do the trick, because brands tell consumers what the company stands for (essentially the Potter & Heath argument I quoted in Happy Shoes I). But brands are cheap talk: smart consumers know that for every company claiming to stand for decency that actually does the right thing, there's another one mouthing the words while screwing its employees, and that we can't tell the difference. What a company says about its own behaviour is inherently untrustworthy - it has too many reasons to bend the truth. That's obviously why voluntary "codes of practice" have been taken with such a big shovel of salt (two examples: see Charles Fishman on Wal-Mart here, or the Nike Andrew Young affair from a few years ago). That's not cynicism, that's realism.

Nevertheless, many kinds of verification bodies have appeared to put varying degrees of teeth into the codes, from the use of professional auditors (Ernst & Young for example) to industry self-government bodies (the Fair Labor Association in the USA) to independent specialist groups (Verite being an example) to bodies with roots in activism (Workers' Rights Consortium). Some monitor, some provide complaint-handling mechanisms as an alternative.

But there are incentives at work for these monitoring bodies too. There are incentives for those paid by the companies to develop a collusive relationship over time; those acting on behalf of activist may have incentives to exaggerate. More ambiguity and puzzlement.

And what's more, the variety of verifiers is matched by the variety of possible criteria for "ethics". Ethical production is not, after all, an all-or-nothing affair. Wages, rights, conditions, harassment, broken employment contracts and so on are all issues that come into play.

In the face of all this complexity (which will differ from product to product, market to market) is there anything general that we can say? Obviously the specifics of each case are of overriding importance - and you should look elsewhere for them - but perhaps we can get just a little something out of simplistic thinking.

Information about production is a public good. Consumers are in a particularly bad place when it comes to producing such public goods for a few reasons: we cannot easily cooperate with other consumers because shopping is such an individual act, we are a heterogeneous bunch with differing preferences, and we live in many different places, each of which makes it more difficult to coordinate our actions.

It is no surprise, then, that the biggest successes of the anti-sweatshop movement came at universities, and in particular from student activists putting pressure on the production of university-branded goods. First, university students are a relatively homogeneous crowd. Second, they are all lumped together on campus, so there is a lot of peer pressure over who wears what. Third, they can influence production not just as consumers at the till of the university store, but as students who have a voice in university governance. The fact that the Collegiate Licensing Company was agent for 160 universities provides a focus for political pressure across campuses, and one with enough clout to transmit that pressure to the producers. So political action becomes the mechanism for collectively expressing individual consumer preferences for ethical production.

Seen in this light, rag-tag groups of black-clad, drum-pounding anarchists are performing a role not too different to that of consumer magazines. They are highlighting the information needed to enable consumers to make better choices, and to help markets function better. Not a role they would identify with, perhaps,but a useful one nonetheless.

One thing about information is that it may cost a lot to find it out, but it can then be easily made available to many people. The codes and practices adopted as a result of activist pressure have been used in the wider marketplace as a way for other consumers to identify ethically-produced goods, and giving companies prepared to make such a commitment a chance to make money off it.

We get to free-ride off the efforts of activists but this is not, I guess, a form of free-riding they would object to.

There's one other thing I think can be said from simple thinking about information, but I'll save it for tomorrow (or so).

Happy Shoes III - A few references

Thanks for the comments, both here and on Brad DeLong's blog.

The message of the previous post was supposed to be that, if left to only isolated consumers and companies, the prospects for ethical consumption are bleak. As several people pointed out, in the real world things do look a little brighter. But all the useful action in credence goods - whether it is the kosher certification market or fair trade labelling organizations or trade restrictions - happens because of groups other than the usual competitive market actors.

Also, if there is nothing new under the sun there is definitely nothing new on this blog. I'm just trying to work out some things about consumer activism and labour standards "in my own words" after finishing reading Can Labor Standards Improve Under Globalization? by Kimberly Ann Elliott and Richard B. Freeman which, despite being a candidate for the most boring title in the history of publishing, is a fine and practical survey of everything from the role of activist groups to governmental and transnational institutions like the WTO and the ILO. I highly recommend it.

For anyone interested, here is a selection of other writing on and around this subject that is available to those of us who don't have everyday university access to journals (most are PDF links):

The evolution of credence goods in customer markets: exchanging `pigs in pokes', Esben Sloth Andersen and Kristian Philipsen Draft, revised January 10, 1998

Monitoring Labor Standards in a Macroeconomic Context Bill Gibson, April 2003

LABOUR AND ENVIRONMENTAL STANDARDS: the “Lemons Problem” in International Trade Policy EUGENE BEAULIEU AND JAMES GAISFORD, May 2001

Is There Consumer Demand for Improved Labor Standards? Evidence from Field Experiments in Social Labeling, Michael J. Hiscox and Nicholas F. B. Smyth, 2006?

Timothy J Feddersen, Thomas W Gilligan (2001)  Saints and Markets: Activists and the Supply of Credence Goods  Journal of Economics & Management Strategy 10 (1), 149–171.

Fair Trade as an Approach to Managing Globalization Michael J. Hiscox, conference on Europe and the Management of Globalization, Princeton University, February 23, 2007.

Signaling Social Responsibility, Jason Scott Johnston, Robert G. Fuller, Jr., November 2005, Working Paper No. 14, A Working Paper of the: Corporate Social Responsibility Initiative

Corporate Social Irresponsibility by Aaron Chatterji and Siona Listokin, Democracy, Winter 2007 (via Economist's View)

PREFERENCES FOR PROCESSES: THE PROCESS/PRODUCT DISTINCTION AND THE REGULATION OF CONSUMER CHOICE, Harvard Law Review Douglas A. Kysar, December 2004

Next post - back to some actual content.

Happy Shoes II

At the end of the previous post it looked as if, so long as enough consumers  are prepared to pay a premium for ethically-produced goods, Happy Shoes should be able to make a profit, pay its workers better than Sweatshoes, and satisfy customers all at the same time.

But -- contrary to what Potter & Heath claim -- it is difficult for companies to make money by selling "shoes made by happy workers" because "ethical production" is a credence good.  When you buy shoes, you can tell if your new shoes fit well, you can tell what they are made of, and you can tell whether you like the style. But you can't tell what the person making them got paid. Like the benefits of fluoridated toothpaste and organically-grown vegetables, it's something you basically have to take on trust.

This lack of information provides an opening for unscrupulous vendors. To understand this market we have to think not only about Sweatshoes offering their $100 shoes and about Happy Shoes offering their $120 pair, but also about a third company. "Ethical Feet" comes to town with some fine-sounding words about their commitment to fairness and decency, offering to sell you an ethically made pair of shoes for $115 -- $5 less than Happy Shoes. It sounds like a good deal -- the benefit of ethical consumption, and an extra $5 left in your pocket.

But the difference is that Ethical Feet doesn't actually pass on any of the extra $15 you pay to the people making the shoes. It just keeps your money. Ethical Feet would sell the shoes cheaper than Happy Shoes, but make more profit -- $25 profit per pair rather than $20.

It looks like Ethical Feet may drive Happy Shoes out of business by making unverifiable false promises, but the story does not stop here. This is not a tale of corporate trickery and consumer stupidity. As George Akerlof writes: this problem of trust is "as old as markets themselves. It concerns how horse traders respond to the natural question: "if he wants to sell that horse, do I really want to buy it?"

Smart consumers who are prepared to pay more for ethically produced goods are still not prepared to be suckers. We are not going to pay $115 or even $120 for a pair of shoes just because a company says they are made by happy workers -- a claim we cannot verify. In a market of smart consumers wanting to buy shoes made by happy people, the $115 Ethical Feet shoes and the $120 Happy Shoes  - stay on the shelf.  As consumers we can't tell the difference between Ethical Feet and Happy Shoes, and we know that a company that carried out its promises is vulnerable to unscrupulous competition.

The company that stays in business is Sweatshoes. It pays cheaply and sells cheaply, and as consumers we pay $100. We may not feel good about this, but at least we are not being tricked. The end result is just the same as if we didn't care about the salaries at all. As consumers, it seems we are not sovereign when it comes to ethical production.

The next post will probably deal with ways around this problem.

Happy Shoes I

This is the first in a meandering, loosely-related series of posts about consumer activism. I haven't worked things out to the end so I won't say where I think it's going, and the series may fizzle out but this is, after all, just a blog - and a slow-moving occasional one at that.

Here is a quotation from Andrew Potter and Joseph Heath's book The Rebel Sell (based on a provocative 2002 This Magazine article you can find here ):

If consumers are willing to pay more for shoes made by happy workers -- or for eggs laid by happy chickens -- then there is money to be made in bringing these goods to market. It's a business model that has already been successfully exploited to great effect by The Body Shop and Starbucks, among others. [p2]

True, or not?

Here is how it is supposed to work. Suppose you want to buy a pair of shoes and you only have one choice -- the only shoes available are from Sweatshoes Inc. , which makes their shoes in a sweatshop, pays their employees very little, sells shoes for $100, and makes a profit of $10. You buy them because you need shoes.

Along comes Happy Shoes, which makes shoes "ethically" and pays their employees better. Because you are a decent person, you're willing to pay an extra $20 for an ethically-produced pair from Happy Shoes.

Happy Shoes could pay its employees $10 more than Sweatshoes pays theirs, sell you the shoes for $120, and still collect a hefty $20 profit. The Happy Shoes employees are happy because they get paid more, the Happy Shoes customers are happy because they have got their ethical shoes at a price they're prepared to pay, and Happy Shoes shareholders are happy because they have made $20 profit rather than $10. Everyone is better off if you buy Happy Shoes, except for Sweatshoes - and good riddance to them.

There have been some successes for ethical consumer products. Ben and Jerry's ice cream and The Body Shop were long-time standard bearers of companies that have traded on their ethically-spotless image. Smaller businesses that sell organic foods or village-produced trinkets do the same. Even Adbusters has got into the buying and selling game with their Blackspot shoes. It's an appealing idea: replace the moustache-twirling, cigar-smoking sweatshop-runners with enlightened and decent people, and you can change the world.

But after a decade or so of consumer activism the successes are still few and far between. As Bill McKibben writes in the November 2006 Mother Jones:

Ben and Jerry didn't change the way Haagen and Dazs viewed the world. Somehow, Bounty has been willing to leave the thoughtful paper towel market to Seventh Generation. For several decades now, environmentalists have been citing the work of Ray Anderson and Interface, and it's a great example -- but why is there still only one Ray Anderson?

When it comes to actually putting down cash, are we not prepared to pay the additional money for Happy Shoes? That's the next post.