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Tuesday, January 24, 2012

The changing nature of Capitalism

We love our iPhones and iPads.

And that's why it's disconcerting to remember that the low prices of our iPhones and iPads - and the super-high profit margins of Apple - are only possible because our iPhones and iPads are made with labor practices that are that would be illegal in the United States.

The manufacturing processes of Apple and other electronics companies have come into sharp focus of late, with the revelation of details about how difficult life is for the Chinese workers who make the world's gadgets.

Here are some details:
  • Foxconn, one of the companies that builds iPhones and iPads (and products for many other electronics companies), has a factory in Shenzhen that employs 430,000 people.
  • According to estimates, about 5% of the workers are underage.
  • The official work day in China is 8 hours long, but the standard shift is 12 hours. Generally, these shifts extend to 14-16 hours, especially when there's a hot new gadget to build. 
  • The workers stay in dormitories. There are 15 beds, stacked like drawers up to the ceiling in a 12-by-12 cement cubic room.
The workers are paid ~$1 per hour or less. Manufacturing an iPhone in the United States would cost about $65 more than manufacturing it in China, where it costs an estimated $8. This additional $65 would dent the profit Apple makes on each iPhone, but it wouldn't eliminate it. (The iPhone average selling price is about $600, and Apple's average gross margin is about 40%. So Apple's gross profit on each iPhone is probably in the neighborhood of $250.)

But the reason Apple makes iPhones and iPads in China, is not just about money. The real reasons Apple makes iPhones in China are as follows:
  • Most of the components of iPhones and iPads - the supply chain - are now manufactured in China, so assembling the phones half-a-world away would create huge logistical challenges. It would also reduce flexibility - the ability to switch easily from one component supplier or manufacturer to another.
  • China's factories are now far bigger and more nimble than those in the United States. They can hire (and fire) tens of thousands of workers practically overnight. Because so many of the workers live on-site, they can also press them into service at a moment's notice. And they can change production practices and speeds extremely rapidly.
  • China now has a far bigger supply of appropriately-qualified engineers than the U.S. does - folks with the technical skills necessary to build complex gadgets but not so credentialed that they cost too much.
  • And, lastly, China's workforce is much hungrier and more frugal than many of their counterparts in the United States.

Marx made it clear that capitalism could not exist unless the worker produced a value greater than his or her own subsistence requirements. If a day's labor was required in order to keep a worker alive for a day, capital could not exist, for the day's labor would be exchanged for its own product, and capital would not be able to function as capital and consequently could not survive - If, however, a mere half-day's labor is enough to keep a worker alive during a whole day's labor, then surplus value results automatically

This surplus value does not arise in exchange, but in production. Thus the aim of production, from the capitalist's standpoint, is to get surplus value out of each worker. This is what Marx meant by the "exploitation of labor." Exploitation exists because the extra value contributed by labor is expropriated by the capitalist. Surplus value arises not because the worker is paid less than he is worth but because he produces more than he is worth.

Karl Marx was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital, could lead capitalism to self-destruct. As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.

Marx argued capitalism had an internal contradiction that would cyclically lead to crises, and that contradiction - at minimum - would place intense pressure on the economic system.

The  "exploitation of labor" has effectively moved from US to China, the extent of which differs though. And it would move to another country after China. The class struggle has also begun. High unemployment and stagnant wager, according to economist Nouriel "Dr. Doom" Roubini, was triggered by the failure of laissez-faire, unregulated capitalism and free markets.

Companies are motivated to minimize costs, save money, and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies, thereby weakening the capitalist system.

The bottom line is that iPhones and iPads cost what they do because they are built using labor practices that would be illegal in this country - because people in this country consider those practices grossly unfair.

That's not a value judgment. It's a fact.

So, next time you pick up your iPhone or iPad, ask yourself how you feel about that.