Thursday, May 10, 2007

What's The Problem With Outsourcing?

Atanu Dey writes on his Blog ‘On India’s Development’ about Alan Blinder’s breach of his free trade preferences (Washington Post):

“It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.”

I am not sure why ‘off-shoring’ should ‘rattle’ Professor Blinder in the manner his Washington Post article suggests or why he is in a panic about his prediction that ‘India may pose major problems for tens of millions of American workers over the coming decades’.

That’s problem with economists who get into the prediction business (of which the ‘global warming’ doomsayers are another current example). Economists have enough trouble explaining the past, immediate and distant, without trying to predict the ‘coming decades’. Adam Smith refrained almost completely from predicting the future, but then he studied history which most neoclassical economists tend to avoid. He took a ‘rear-view’ mirror approach to the economy and tried to explain how his contemporary economy arrived at where it was and left the future to ‘whatever it would be’.

Why is ‘off-shoring’ a unique and special problem? Many global industries and almost all manufacturing industries since whenever – including Smith’s example of the inter-sector links that helped produce the day labourer’s coarse woollen coat in Wealth of Nations – had some elements of their products sourced from outside the home economy. The US economy has never been fundamentally different.

Trade creates job elsewhere than at home. Self-sufficiency is a job destroying phenomenon; that’s why international trade is better than self-sufficiency. Those of us who live in the European Union can see the ‘food security’ policies of the Common Agricultural Policy as a protectionist measure that raises food prices for Europeans and keeps poorer countries poorer than they need to be. Food subsidies do not go to the protection of poor European small farmers because with the subsidies available large farming businesses squeeze out smallholdings, a trend very noticeable in the region of France where I spend the summer months.

I am leaving for a couple of months in the Bordeaux wine region next Tuesday, and neighbours are selling off bits of their land because French wine consumption is giving way as its European markets are succumbing to ‘New World’ competition, including from California. Dinner tables are outsourcing their wine products. I take calls from outsourced (mainly Indian) call-centre services and some of my books on negotiation are typeset in India, China, Hong Kong, and Malaysia. The latter country provided the copy-editing services and proofs were exchanged via the Internet, using a Dell computer made all over the world, on Microsoft programmes (Seattle?). Should I be ‘rattled’ about this? I do not see why.

If ‘tens of millions of American workers over the coming decades’ are going to be ‘rattled’ by the transition and the US economy is going to decline into mass unemployment, there will not be much effective demand for the products of off-shoring, if that is what Blinder envisages. The structural composition of the US workforce changed dramatically over the last decades; it probably will change over the ‘coming decades’ with or without ‘off-shoring’.

If Blinder is thinking that the ‘pie’ is fixed, an old fallacy of mercantile political economy, then he has forgotten Wealth Of Nations. I suspect it all has more to do with the coming Presidential election than the prospects for ‘American workers over the coming decades’.


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