Sunday, August 07, 2005

Outsourcing is Good

Some good sense from a Cato Institute article, “In defense of outsourcing”, published in, a publication I have quoted from before:

“In other words, you outsource in your personal life. Everyone does, and with good reason. I am not grotesquely less competent at the ordinary tasks of life than my fellow citizens. But if I tried to produce personally all or most of what my family consumes, my family would face a dirt-poor standard of living. Adam Smith ([1776] 1994: 48586), patron saint of economists, recognized this lesson two centuries ago, writing, "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." Smith also noted that the logic of outsourcing applied to nations as well as householders. He continued: "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."

Of course change has awkward consequences for some, which are visible and obvious to those affected by them, and therefore politicians are reactive to the consequences, as are trade unions, and they make ‘noise’ about them. But the obvious benefits which are every bit as real as the negative consequences are not as obvious as a real person who loses a job. This does not deny the existence of compensatory benefits of the changes.

Some years ago the great Singer Sewing Machine company in Clydebank, Glasgow, closed down and there were huge consequences for the thousands employed in it as the factory gates shut for the last time. Denial, anger and disgust swept across the media presentation of the ‘calamity’ and politicians made great noise about the ‘end of Clydebank (i.e., civilisation) as it has been known’, with nostalgic folk memories stirred unashamedly (‘the plant that Hitler failed to close’, etc.,).

Within a few years the entire Singer factory site had been levelled, transformed, cleaned-up and rebuilt with new, modern office blocks and warehouses, employing thousands at wages well above those paid to the former labour force at Singers. To have kept Singers going would have left the area a bleak, dank spot, a monument to the pre-first World War factory system for as long as the subsidies continued, only to delay the day when the new places of employment would have been erected.

Outsourcing is an example of the division of labour. Where it reduces a firm’s costs, it adds to revenues, either for re-investment or for lower unit prices. New investment adds to productivity; lower prices increase real wages (what wages can buy), which also adds to employment from the suppliers of the extra baskets of wage goods.

These benefits are real, visible and every bit as worth having, but they do not occur at once, unlike the images of the persons sacked from their old jobs. I often wonder, whenever I drive past the old Singer Sewing Machine Company site, whether those who made such dramatic fuss about its closure have ever stopped to ask themselves if they are still proud of what they tried to stop and if the new site is a worse use of scarce capital than Singer’s?

I also wonder if they are among those today who protest today about ‘outsourcing’ in the same terms? It’s not so far from Singer’s old site at Clydebank to the University of Glasgow site, by the Cathedral, where between 1752-64, Adam Smith taught his class about the benefits of the division of labour and the principle of only making in-house what is cheaper for you than buying it from someone else.


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