From Profit Maximization to the Power of Consumer Demand: A New “Ethical” Deal for Globalization

Adam Smith wrote in his famous “Wealth of Nations” that supply is always determined by the level and extent of demand. By this assumption it would appear that the market is driven by demand, not supply. Simply put, this means that supply, when production factors are properly accounted for, satisfies the quantity and quality of demand. Demand is the motor of production, and supply is the fuel that provides traction. Only in a perfect world of course, or better yet, the perfect market, and although our reality is far from perfect, we should not forget the principles set forth by Mr Smith.
When taking a look at the dynamics of the industrial sector over the past 20 years, it easy to conclude that the direction of economic development was driven overall by the interests of multinational corporations and the low cost investment opportunities provided by developing nations. During that period, multinational companies were given the opportunity to realize a new extended worldwide production system, commonly known as globalization. Indeed, the allocation of production factors was applied almost exclusively by the final localization of the demand and was driven solely by the desire to maximize profits. We may have forgotten that during the 90’s, the New York Stock Exchange Dow Jones Index had the [most important rise] in its value up until that point. This increase was in part, and perhaps overall, thanks to the record profits posted by manufacturing companies at the time. These “extra” margins were realized by the reduction of production costs while keeping the sale prices of products at more or less the same level. The majority of those reductions were due to multinational companies moving production to where it cost less: developing nations.
Some might say that this is a simplistic way of portraying the era of globalization, but those that were directly involved in that process can confirm the cause and effect. Others might also say that market leaders pushed the rest of the field into moving their manufacturing in order to stay relevant, and that the leaders themselves were forced to globalize by the emerging economies, to stay competitive with the lower overall costs in the developing world. The reasons are many but the final effects are certain: during the 90’s, the average profits of multinational companies skyrocketed, and it certainly was not the consumers who bought toys or t shirts in US big-box stores that decided to produce in China and the Far East.
Remembering the teachings of Adam Smith and the determining power of demand, there is a way to channel this power in an ethical direction. It was the latent effect of demand that in recent weeks gave Apple a sudden urge to investigate the ethical sustainability of its supply chain in China, contracting the Fair Labour Association to conduct an independent assessment of worker conditions inside the factories of the Foxconn Group, its most important supplier. It does seem strange when Apple and other multinational corporations suddenly begin to investigate the social accountability of their Far East supply chains (as if they didn’t already know the truth about conditions in factories of the region), but we can also appreciate the impact it would have on the ability to satisfy consumer demand if we were to depend only on products that are made in ethical ways by companies that we consider to be ethical. Too often do we consider the consumer as an individual, and fail to understand the power of the united multitude when individuals act together. It is time for the multitude to wake up and create a new, ethical kind of globalization, proactively, using its power of choice in the end-user market. When we buy something, let’s ask ourselves if we know exactly how it’s made and if it is made ethically, with respect for the environment and the conditions of the workers involved in the manufacturing and distribution process. Only then will we have a chance to drive the deal for a better and more balanced future.