Saturday, March 29, 2008

Correct Vision of Outsourcing (though not about Adam Smith)

In the 360° Vendor Management Blog (An Outsourcing Vendor’s Business Continuity and Disaster Recovery Plan) HERE: there is an article on outsourcing, which correctly notes that it is developing poorer economies and providing markets for richer countries. It’s what happens next that is crucial: legislate against outsourcing and ignore the opportunities to innovate into further degrees of ‘round-about’ production to add to future disasters’ or use the opportunities to increase market specialization.

Pro-Globalism View of Outsourcing and Outsourcing Critics”

‘Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox. The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages. These wages improved, creating new economies in once poor countries.

Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.

Your only choice is preservation of self-interest - to become rich and wealthy through innovation.

In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.

Now the metaphor of the invisible hand ‘contains a balancing paradox’! Adam Smith’s use of an invisible hand (Wealth Of Nations IV.ii.9: p 456) was about the consequences of risk avoidance among traders who preferred the domestic trade to foreign trade. No paradox was involved.

If this is meant to be about growth then it may well be on to something, but Adam Smith did not feature the metaphor in his chapters on growth (Books I and II). Allyn Young’s 1928 article in the Economic Journal explains brilliantly what Smith was saying about the role of the division of labour and specialization and innovation that more correctly addresses the point that 360° is advocating.

I agree that ‘self-interest is tied to creation, not preservation’ if this means that self interest should be tied to innovation. That it isn’t underlines my remarks in the previous post that self interest is not a catchall synonym for something that always has ‘positive’ outcomes.

Unless we realise this, unlike the Chicago epigones who have created a different Adam Smith than the man born in Kirkcaldy, we could make errors in equating a business person’s, any and every business person’s, behaviours and actions as being in the best interests of society. They may be and should be so but the evidence suggests they are not always so.

Which is not an error that the Kirkcaldy Adam Smith never made.


Blogger Unknown said...

Gavin, thanks for the comments! Feel free to leave a pingback/trackback next time so that I can find you faster! Great review and thanks for correcting my historic error!

2:00 pm  

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