Sunday, 8 December 2013

Ethical trading as profit sharing: An alternative perspective on the terms of international market transactions


The increase in cross-border trade around the world during recent decades has been accompanied by a growing concern with the terms under which international market transactions occur. The claim that these terms are often morally problematic has come to play a prominent role in theoretical debates as well as in political initiatives such as the Fairtrade movement. While it is not always clear what the exact normative basis for this claim is taken to be, defenses most commonly focus on the low absolute levels of welfare enjoyed by trading parties in developing countries. My aim in this contribution is to suggest that this focus tends to ignore what appears to be a justified independent concern with the relative distribution of the economic benefits that result from international market transactions.

According to what appears to be the predominant perspective, the terms of international market transactions are morally problematic if they leave one of the trading parties badly off in certain absolute terms – for example, if the price that producers of coffee or other agricultural commodities are being offered is insufficient to provide for even their basic needs. Common as it is, this perspective faces a well-rehearsed objection. First, badly off as a party may be in absolute terms, she typically derives an economic benefit from the transaction; and second, it is not obvious why the mere act of engaging in a mutually beneficial exchange with a party that happens to be badly off should be taken to give rise to a particular (role-specific) responsibility for that party’s absolute level of welfare.

For the present purpose, I am going to set aside the question of whether this objection is successful or whether transacting parties can indeed be held responsible for each other’s absolute welfare. Instead, I am going to present an alternative perspective on the evaluation of the terms of market transactions that is immune to the mentioned objection and that seems to be neglected in current debates. According to this perspective, trading parties have a responsibility to transact at a price that ensures that each of them receive a fair share of the economic benefits that result from a transaction.

In rough terms, the argument in support of this view takes the following shape. International market transactions represent a form of mutually advantageous cooperation: they are typically beneficial for both parties involved, and the realization of each party’s benefit depends on the other party’s material contribution to the exchange. At the same time, trading parties generally face a range of possible mutually advantageous prices. The limits of this range are defined by the respective price at which an exchange would cease to be beneficial to each party, such that the choice of the price at which the transaction ultimately takes place determines the size of the benefit that each party derives from the transaction. Given the cooperative character of market transactions, parties ought to be disposed to transact at a price that ensures a fair amount of benefit to each of them.

This second perspective imposes clear constraints on the morally permissible terms of international market transactions even if we assume that parties have no responsibility for each other’s absolute welfare. In one way, the demand of a fair distribution of transactional benefits is more limited than the initial perspective described above. Conceptually, the demand is constrained by the range of mutually advantageous prices in a given situation, and it may well be that no price on this range is sufficient to fully provide for a party’s basic needs. There is another way, however, in which fairness in the distribution of transactional benefits is significantly more demanding. According to the first perspective, there would appear to be no moral constraint on the profit that a party may make as a result of a transaction above and beyond what is required to guarantee that each party enjoys the relevant absolute level of welfare. To stay with the example, provided that her foreign suppliers are sufficiently well-off, a European coffee importer would be morally free to make whatever profit she is able to obtain in the market. Any such profit, however, is a reflection of the price at which the initial transaction took place and thus subject to a fair distribution of transactional benefits. Following the perspective I have described, then, rather than focusing on absolute levels of welfare, we should think about ethical trading in terms of profit sharing.

11 comments:

  1. Florian, thanks for this interesting post. I like the general argument, but I wonder what it amounts to in more practical terms. First, which relative share *is* fair? (Couldn't one read the arguments about producers receiving at least a certain absolute amount (such that their basic needs can be met) as an attempt to quantify the intuition that they must get *some* fair share?) Do you want to put numbers on this, or do you have some other suggestions? Is is the same in all kinds of transactions, or could it be different, and which reasons would justify deviations? Second, I wonder what this arguments means given that what we are talking about are *markets*. Typically, to regulate markets you need to regulate the framework, for example by changing the rules of the game such that one side gets more bargaining power. Is that what you have in mind, or are you thinking about more direct duties to market participants? For example, the first strategy might call for a unionization of agricultural workers in developing economies, whereas the second might lead to appeals to multinational corporations to pay them more (maybe via a consumer boycott in the Western countries). Does it matter, morally speaking, which strategy is more likely to be successful?

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    1. Thanks for these comments, Lisa. I haven’t said anything about what a fair distribution of transactional benefits would amount to in substantive terms, or how transactional fairness could be promoted politically, and the defensibility of my view of course depends on whether there are any plausible answers to these questions.

      As far as the first question is concerned, I agree that ensuring certain absolute amounts can be seen as a significant move towards a fairer distribution of benefits. The underlying criteria of fairness, however, would – in my view – not be defined in absolute terms. Instead, the perspective that I suggest would pull us towards a criterion of relative distribution that can be applied to the cooperative surplus generated by a transaction. On one possible conception, this surplus is defined by the difference between the minimum price at which a seller would be willing to sell and the price at which the buyer would cease to make any profit from the transaction (assuming that buyers in international market transaction are typically traders rather than end consumers). A possible candidate for a criterion of fairness would be the price that divides the surplus into equal shares.

      With regard to the second question, I think that both of the avenues that you describe can in principle contribute to the promotion of transactional fairness. Regulatory approaches can go a long way by changing the distribution of bargaining power. At the same time, they may be somewhat inflexible and lead to unintended consequences (in terms of welfare losses). Promoting the idea of profit sharing as a principle of corporate responsibility, supported through consumer pressure and increased transparency (for example through appropriate forms of product labeling), may represent a more targeted strategy.

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    2. I'd happily sign up to both of these policies.

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  2. Florian, really interesting post. Of course, I absolutely agree that more research on these issues is invaluable!! But let me raise two questions that you might have expected from me. First, while the ‘fair shares’ argument has great appeal, I wonder whether defending it requires a clearer example. It is very hard to utilise, e.g., transnational supply chains to prise the intuition that we should care about relative gains because our instincts are blurred by the first problem you mention (care for absolute welfare of the worse-off). To defend your intuition, I think you need a case where the latter is not at issue, where someone with no major welfare disadvantage receives very little, such as the Michael Bloomberg salary case. Here, I am not sure I have the same worries about relative gains. If not, it would suggest our concern in the transnational supply chain case is more to do with absolute positions and their consequences for exchanges than actually with relative gains. So, perhaps you can offer an example where the pull is more persuasive? Second, though connectedly: could I ask you to develop the claim that the relative gains position is more demanding. My sense in your post was that the claim works because we imagine that the comparison is between relative gains and sufficiency. But the general duty perspective could be a cosmopolitan egalitarian perspective, which would not only impose demanding duties on those who benefit greatly from international economics per se, but I suspect more than a relative gains position (e.g., because the duties will be of a greater extent and owed to more individuals). At any rate, perhaps you could say a little more on whether you think the relative gains position is always more demanding, or whether only in comparison to certain specific views?

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    1. Thank you Andrew. You are right - when I said that the relative gains position was more demanding, I did so with a sufficientarian alternative in mind (which is what appears to be reflected in a significant part of the ‘ethical trading’ discourse). I agree that a perspective based on absolute requirements may, depending on the extent of these requirements, be more demanding on better-off parties than the relative gains perspective. The main point I was trying to make is that the relative gains positions provides a principled basis for considering all transactional benefits (including profits) as subject to fair distribution; following the absolute requirement perspective, in contrast, the extent to which a party is morally constrained in the benefits that she may derive from a transaction is contingent on the degree to which the relevant absolute requirements are unmet.

      As for the question of whether there is actually reason to care about the distribution of transactional benefits once we bracket discrepancies in background welfare, I take the point about the difficulty of isolating our intuitions here. I do think that in cases in which trading parties are comparably well off, transactional fairness still matters. Think, for example, of a transaction between a wealthy U.S. farmer and a European grocery chain. My intuition is that it would still be unfair for either party to capture a disproportionate share of the cooperative surplus. The material consequences of this unfairness will be less existential, but I think the moral concern remains.

      To turn to the example of Michael Bloomberg who received a salary of 1 dollar in his capacity as the mayor of New York City, I think there are two ways to accommodate this and possible similar cases (in addition to the fact that this is a domestic scenario, whereas my primary focus is on international transactions). First, in the case of Bloomberg in particular, a plausible interpretation appears to be that the payment received was not in fact intended as a form of compensation, but merely a formal requirement to comply with the rule that prevents the government from employing unpaid volunteers. Second, there may be cases in which individuals receive a disproportionately low salary that is in fact intended as compensation, but do so on a voluntary basis, effectively ‘donating’ part of their fair wage to their employer. This would be consistent with the view that they would have a moral claim to a higher wage if they insisted on a fair level of compensation. What would be your take on an explanation of this kind?

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  3. Florian - I really enjoyed this post, especially as it teases at a point that economists have been very poor at developing, namely that the idea that individuals are paid their marginal productivity is a complete joke.

    A standard economist’s response to your point would be that the range of mutually beneficial agreements available to both parties is very small. If Starbucks start offering Costa Rican coffee farmers more money for their coffee, Nicaraguan farmers will quickly become a cheaper alternative – in such a scenario why would Starbucks have an obligation to buy from Costa Rican farmers?

    The problem with this analysis is that ignores the fact that Starbucks has monopoly power (primarily through economies of scale and branding(barriers to entry)) allowing it to exert downward pressure on prices. This can be seen from the large profits generated which aren’t competed away and aren’t transferred to suppliers. The Costa Rican and Nicaraguan farmers don’t have easy access to an alternative buyer – sadly it’s not that easy to quickly switch from being part of Starbucks supply chain to Costa’s.

    I would argue that 1) Power structures far more than (other) economic factors such as marginal productivity determine compensation, 2) What we really object to in international trade is very strong bargaining positions being used to pressure very weak ones, where outcomes seem to have little link with what people actually do. Something akin to what we object to in blackmail? (After all this could be described as a mutually beneficial transaction – “you give me your car and I don’t eat your cat.”)

    My question is, is there anything special about international trade here? Or is this just the extension of how we should analyse the justice of any bargaining? I would tend towards the latter, however I appreciate the lack of (effective) international institutions make trade a harder situation to deal with and we are more likely to view instances of the most extreme power inequalities in international trade.

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    1. Thanks for your comments, Will, and for bringing in some more technical detail. I absolutely agree about the role of power disparities in determining terms of transaction and the unrealistic assumption that actual levels of compensation reflect marginal productivity. (As an aside, I do have some reservations as to whether compensation according to marginal productivity could serve as a plausible criterion of fairness.) One interesting question when approaching the problem from the perspective of bargaining power is whether the concern with power disparities is fundamental, or whether power disparities are problematic because they lead to unfair outcomes, where a fair outcome is defined in independent substantive terms. What do you think?

      Your example points to another interesting question, namely how exactly the range of mutually advantageous prices should be understood. In situations where bargaining actually occurs in the market, the limits of the range are usually taken to be defined by the best alternative offer that each party would be able to obtain from other buyers or sellers. As your example of the competition between Costa Rican and Nicaraguan farmers shows, this definition may lead to a very narrow bargaining range indeed. An alternative approach would be to think of the upper limit of what Starbucks is willing to pay not in terms of the lowest alternative offer in the market, but in terms of the price at which the transaction would cease to generate any profit for Starbucks. This approach would of course be quite fundamentally at odds with the way business is currently conducted, but may provide a morally more plausible basis for measuring transactional benefits. On my perspective, Starbucks would not be under no obligation to transact with any party in particular, but rather an obligation to transact fairly with whomever they decide to transact. Transacting fairly would then require negotiators to abstract from alternative market offers in negotiating prices.

      As for your last question, I agree that there is nothing structurally specific about international trade compared to market transactions in general. As you say, power inequalities will in many cases be more extreme in international cases. Another reason for my focus on international trade is the idea that in the domestic context there may be a case for suspending concerns of transactional fairness and rely on the basic structure to remedy the material consequences of unfairness in the market. In the international sphere, this option seems unavailable.

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    2. To take up the last point: in a national context, you cannot only build remedial structures (e.g. unemployment insurance), but you can also shape markets to some degree. For example, you can break up monopolies or cartels via anti-trust law, or you can force market participants to internalize certain costs that they would otherwise internalize. These are all ways of influencing the bargaining power of participants and hence the distributive outcomes (see Peter Diezsch's 2011 paper - he focuses on competition, but the point is more general). In international markets, this is much more difficult, especially if companies use "regulatory arbitrage" to evade restrictions by relocating to other countries. This is why there is an increased responsibility on market participants themselves in the international context, I think.

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    3. These are all very relevant points. As a tangential note, with regard to the distribution of profits across international supply chains, import tariffs represent another regulatory dimension that can have strong distributive implications. In the case of goods that involve several stages of production or processing (such as coffee), tariffs often escalate as the good moves towards its intended end state, making advanced stages of production or processing unprofitable for foreign suppliers and securing the economic gains from these stages exclusively for domestic agents.

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  4. Florian , thanks for the interesting post. Could you say a bit more about why we should be concerned with the fairness of singular transactions. In your response to Will above you talk about suspending our concern with fairness of transactions in the domestic context given the corrective role of the basic structure. But does a just basic structure correct the unfair outcome of transactions? Doesn’t it rather work to ensure fair bargaining positions of the transacting parties and then perhaps let the market measure the value of objects? I guess what I am trying to say is, if fairness of transactions is important in its own right then it should remain a concern even under a domestic context.

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    1. Thanks for following up on this, Siba, this is a very good point. I see two possible responses to the question your raise. To the extent to which transactional fairness is taken to be reducible to the distribution of bargaining power, and provided that a just basic structure is sufficient to ensure a sufficiently fair distribution of bargaining power between market actors, the basic structure can be taken to ensure transactional fairness in individual cases. My own tentative view is that bargaining power determines the ability of market actors to negotiate unfair benefits, but that transactional fairness cannot be reduced to the distribution of bargaining power. For this reason, I don’t think that a just basic structure could guarantee transactional fairness, nor that the redistributive mechanisms of the basic structure are fine-grained enough to strictly speaking ‘correct’ unfair transactional outcomes.
      When I referred to a possible ‘suspension’ of the concern of transactional fairness, I had a different idea in mind, namely that in a domestic society there may be a case for not conceiving of individual market transactions as discrete instances of cooperation, but rather as an element in a wider practice of social cooperation made up by society as a whole. Concerns of distributive fairness would then arise at a holistic level, rather than at the level of individual transactions, and the responsibility for ensuring holisticly fair outcomes could be assigned to the basic structure. In the international sphere, in contrast, the possibility of such a holistic interpretation appears at least currently unavailable, and market transactions ought to be taken seriously as instances of cooperation of their own.

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