An edited transcript of my podcast with Paul Romer is now up at the Library of Economics and Liberty. Paul has a lot of fascinating things to say. Check it out. One of my favorite parts is where he explains the benefits of multinationals in poor countries:
Russ Roberts: What’s the mechanism? Does Nike improve the life of that worker out of kindness or does competition force them to?
Paul Romer: Oh, I think it’s overwhelmingly competition. There’s
sometimes a little bit of pressure which makes them do what is
basically charitable giving. But look at China right now or India right
now. Why are foreign firms that are operating in China and India or
Vietnam—why are they paying workers more than they used to?
What happened was that it wasn’t just Nike that came in. The
government let in a lot of other firms. All of those firms started to
compete for the best talent there in the nation, and that process of
competition started to drive up wages. You don’t want to use the Indian
strategy of saying, "Okay, we’ll let in one big firm and then we’re
pulling up the drawbridges and, you know, you can do whatever you
want." What you want to do is open it up and say, "Hey, any firm that
wants to come in, go for it. Compete as hard as you can to get our best
And that’ll reward the workers who have the best skills. It’ll give
incentives for those other workers to acquire skills and it’ll give
them opportunities to do things with their skills that they couldn’t
have otherwise done.
Russ Roberts: In what sense are those workers using the knowledge that that multinational has? I love that idea. What do you mean exactly?
Paul Romer: Nike’s discovered a recipe for taking rubber and
cloth and a few other things and then creating something that people
value in the United States for a price of, say, $100. They can take raw
materials worth probably pennies and create something that I might go
to the store and pay $100 for.
To create that additional value, they have to go out and find somebody
who does the rearranging according to their recipe. If they could get
somebody at an extremely low wage to do that rearranging, then they’d
pay that low wage. But over time what they find is they’re competing
with other employers. They have to pay higher and higher wages to get
people to do that rearranging.
Now if there are lots of people like Nike trying to find workers to
do high-value rearranging tasks, they’ll be willing to pay quite a bit
as they compete with each other. But imagine that Nike only had ideas
that could produce things that were worth, say, $10. Nike could never
afford to pay—and its competitors could never afford to pay—very high
wages to get people to rearrange something to make something worth $10.
But when they’re making something that’s worth $100, they’ll
compete and ultimately start to pay higher and higher wages. So the
fact that they’ve got an idea, a recipe, that can create quite a bit of
value means that they’ll pay quite a bit to have somebody follow that
There’s lots of people out there with good recipes competing for
workers. They’ll bid up those wages and, in a sense, part of the value
that Nike creates will in some sense be taken away by those workers,
and taken in a way that we feel is good for the world as a whole. It’s
good that workers throughout the world will have higher wages in the
future than they have now.