Free Trade and Multinational Corporations
"corporation" has become a very loaded one in today’s political discourse; often "corporate" is used as a synonym with "evil" — especially when it is combined with the word "multinational". In assessing the ill effects of multinational corporations on people and the environment, we must be sure to clearly define our terms and identify causal relationships. What is it about corporations that makes them bad? Is it that they are too big? That they operate across national boundaries? That they bribe corrupt governments into granting them privileges? Are they an inescapable outgrowth of the inherently exploitative market system?
A corporation is a particular type of business entity, or "firm". Publicly-owned corporations raise capital for expanded operations by shelling shares of ownership of the firm’s assets, or "stock". Corporations are granted the privilege of "limited liability", which means that a corporation can only be held liable for the assets of the firm itself, not those of its individual shareholders. If a corporation goes bankrupt, for example, its stock will lose its value, but shareholders are not required to pay its debts out of their own assets. Limited liability was initially devised as a useful way for firms to raise the large sums needed to engage in capital-intensive industrial production. Limited liability is a privilege, for it allows investors to benefit from a corporation’s growth while being shielded from its responsibilities. Because of this, the US government levies an income tax on corporations. However, over the years, the US tax code has gathered many breaks and loopholes, which often absolve large corporations of most, or even all, of their tax liability.
Like any firm, a corporation seeks to gain the highest profits possible. But profits do not always come from the creation of useful wealth. Sometimes great profits are gained by taking over the assets of another corporation in a "leveraged buy-out", then selling off that firm’s undervalued real estate on the open market. Shareholders don’t care whether profit has its source in the production of wealth or merely the shuffling of assets — but it does matter to the society at large.
Other ways in which corporations can increase their profits are:
Using economies of scale: Businesses respond to competitive pressure by getting bigger when they can — particularly in an economy where the burdens of rent and taxation are onerous. In such an economy (like ours today) conditions are very difficult for small businesses. We saw in Lesson 3, for example, how indirect taxation favors large businesses. However, there are disadvantages to a corporation becoming too large. Layers of management become self-sustaining. It is often more difficult for large businesses to respond to a quickly changing marketplace.
Increasing worker productivity: Historically, high-paid workers have always tended to be more productive. This is because wages are determined by the labor market, not the goods market (as we saw in Lesson 4). Where employers must pay high wages, they respond by investing in technology and training to get more production out of workers. In many cases today, however, highly-efficient technology, initially developed in high-wage markets, is being transferred to developing countries where wages are very low.
Lowering production costs: There is a great deal of extra cost associated with hiring labor in the US and other "first world" countries, particularly full-time labor. Employers must pay payroll taxes and health benefits, and must comply with safety and environmental regulations. Today, many businesses are taking advantage of the opportunity to relocate production to places where these costs are far lower (or to replace full-time workers with part-timers who are ineligible for many benefits).
Securing higher prices for their wares: Goods can be exported to places where people are willing to pay higher prices for them — this is a major advantage of international trade. But, well-funded corporate lobbies can also secure higher prices through privilege — by tariffs or subsidies, often granted in return for large contributions to ever-more-costly political campaigns. These privileges are how large corporations cushion the "dis-economies of scale" mentioned above.
It may be noted that industrial workers in the less-developed countries are often eager to take the jobs that are offered by multinationals, even though those jobs are seen as undesirable by those in wealthier nations. Indeed, the poverty of much of the world is so extreme that corporations see a nearly irresistible advantage in making use of the cheapest labor, and the lowest-cost regulatory environment.
These are some of the opportunities that are profitably exploited by today’s multinational corporations.
The problems of poverty in the world’s poor countries predate the arrival of multinational corporations, who merely used underlying conditions to their advantage. Therefore, although it is true that the amoral actions of businesses in response to those underlying conditions have done little or nothing to improve them, removing the multinationals would not solve the problems.
Is "Comparative Advantage" Obsolete?
Many people see the suffering and want in which so many people live in these "days of miracle and wonder" (as Paul Simon put it) and blame the economists, as if slavish devotion to the law of comparative advantage and the logic of markets were what had created the whole mess. The law of comparative advantage works as well as it ever did (see Lesson 3). Privileged interests can undermine its benefits, however. Consider the example of sugar. The United States can, with its world-leading agricultural technology, produce sugar more cheaply than various poor Caribbean nations can. However, in a free market, there is a greater comparative advantage in buying imported sugar and raising other more profitable crops in the US. But, alas, special interests exert an influence on US trade policy: tariffs on imported sugar and price supports for domestic sugar producers wipe out the gains of comparative advantage. US consumers pay a bit more for sugar, but the burden is widely spread, and is tolerable to our relatively affluent society. The Caribbean sugar producers, however, are devastated. This is clearly a case of market failure, brought about by privileges granted to a special interest: an example not of free trade, but of protection.