The Irony of Outsourcing
The greatest destroyers of American manufacturing jobs are now themselves victims of another technology known as outsourcing. What's next for Silicon Valley?
Question: Since 1995, two million American manufacturing jobs vanished. How many manufacturing jobs did China add during the same period?
Answer: None. China lost sixteen million manufacturing jobs since 1995, a higher percentage of their manufacturing workforce than the US.
So where are the jobs going? Is there some other country with costs that make China's salaries seem as high as Yao Ming's NBA pay? In a way, yes -- you might have heard of it. That place is called "Silicon Valley", where engineers are producing machines that work cheaply and make businesses the world over run more efficiently.
Running more efficiently means you can produce more things with less capital --and less people. Companies in America have been working very hard over the last eight years at becoming more efficient, and have succeeded. Economists attribute those productivity gains more to investments in information technology than to trade.
In other words, the greatest destroyers of manufacturing jobs in the US economy are not Chinese workers, but Silicon Valley engineers. How ironic that their own jobs are now threatened by another technology: international trade in engineering services.
Trade is just another technology
Economically, trade is no different than other technologies. Economist David Friedman of Santa Clara University puts it most succinctly: there are two ways to make a car -- you can either make it in Detroit or grow it in Iowa. You already know how to make it in Detroit. You get a bunch of iron ore, smelt it into steel, and have an assembly line of robots and workers shape it into a finished vehicle.
To grow it in Iowa, you plant car seeds in the ground (also known as "wheat"), wait until they sprout, and harvest them. Take the harvest and put it into a big boat marked "to Japan" and let it sail off. A few months later a brand new car comes back.
As far as the economy is concerned, it has exactly the same effect on workers and consumers if we use a boat marked "to Japan" or a fantastic new technology invented in Silicon Valley called the "wheat-to-car-converter". Either way, if it takes you less effort to grow wheat into a car than it does to make it in Detroit, then you should grow wheat. Either way, jobs in Detroit would be lost, and either way people get cheaper cars. Trade is just another technology.
And now this revolutionary technology of trade is hitting the same Silicon Valley engineers that have revolutionized other industries in America. Every engineer knows a company that is outsourcing engineering work to India or China, and many are wondering if their jobs are next. Engineers in Silicon Valley are now waking up to the same angst that their technologies have caused in workers elsewhere. Silicon Valley, welcome to America.
They suffer, we suffer, we all win
Of course, the Chinese government is not worried that their economy is tanking because manufacturing jobs are vanishing. The Chinese economy is producing 8% more this year than last. The only way to achieve that with a stable population is more efficient use of labor. Being able to produce more with less people means there is more to go around. People are moving from poverty to self-sufficiency at a faster rate in China than anywhere else in the world. All of this management and information technology helping companies become more efficient is good for China. As the economy grows at a rapid clip, people put out of work find other useful things to do.
The same applies to America -- more efficiency means more production with the same people, and more to go around. Productivity gains are the source of long term economic growth, and long term income growth for Americans. This economic growth brings with it demand for new services, creating new jobs for Americans.
Well, most Americans anyway. Ask Detroit residents whether they think the remarkable technology boom has been good for their lives. Or, to stick with the theme of trade being just another technology, ask the horse and buggy whip makers how they feel about the advent of the automobile from Detroit. Of course it would be possible to keep the jobs in America through measures to prevent corporations from outsourcing development, just as it would be possible to keep high buggy-whip industry salaries by banning autos.
But we won't, because technological progress makes us all wealthier. Our bargain with each other is that we can't stop the technology that hurts our own jobs (trade) as long as others can't stop us from producing the technology that hurts theirs. In the end, we'll do better living in a society that is advancing rather than one that protects all our current positions by preventing innovation.
Silicon Valley isn't Detroit
It is unlikely that Silicon Valley will be the next Detroit. More likely, Silicon Valley will be the next Hong Kong. Hong Kong was formerly the source of cheap manufacturing labor for the West. The country quickly outgrew that stage as its workers became more productive. When China opened up, all the manufacturing jobs left for the neighboring ultra-low-wage territories. Hong Kong did not hollow out, however -- the highly skilled Hong Kong residents quickly adapted to more value-added positions. For example, they are coordinating the outsourced manufacturing and doing the design work. Per capita income in Hong Kong is now higher than its former colonial power, Britain.
Silicon Valley is similar. Highly skilled, highly educated engineers will adapt to the work necessary to leverage the new overseas work force: engineering project management, sales support, and next generation technology development. Their job will be to re-invent Silicon Valley, as it has been reinvented so many times before.
While nobody can predict the next trend, it is certainly possible to predict that there will be one. Today's crop of talented engineers will be a part of it even as their current functions are being outsourced.
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http://www.ventureblog.com/articles/indiv/2003/000208.html... Read More
Kevin Laws contemplates The Irony of Outsourcing. "Question: Since 1995, two million American manufacturing jobs vanished. How many manufacturing jobs did China add during the same period? Answer: None." There is no way to stop the market.... Read More
Fantastic entry by Kevin Laws titled "The Irony of Outsourcing." Great lead-in: Question: Since 1995, two million American manufacturing jobs vanished. How many manufacturing jobs did China add during the same period? Answer: None. China lost sixteen m... Read More
http://www.ventureblog.com/articles/indiv/2003/000208.html Good piece on outsourcing by Kevin Laws: "Economically, trade is no different than other technologies. Economist David Friedman of Santa Clara University puts it most succinctly: there are two ... Read More
over on ventureblog they've got a really good essay that conceptualizes trade as a technology. like (most?) technologies trade increases... Read More
Kevin Laws has taken on the macro economic view and concludes that outsourcing (as a trading tool) is economically just another technology that increases productivity. David Friedman, who Kevin refers to, has written a very educating but easy to unders... Read More
Une réfutation des méfaits de la mondialisation et des délocalisations, intéressante sur VentureBlog.... Read More
Stefan points to an article about the booming software industry in India. There is a certainly a lot written about this subject lately. But wait a moment - why do we think the software industry is any different than any... Read More
There has been a lot of coverage lately with the issue of technology transfer. Yes, in know-how but mainly in the form of jobs. From American and Canadian companies to foreign low-labour cost nations. Lou Dobb's from CNN's MoneyLine has been running a... Read More
There has been a lot of coverage lately over technology transfer. Yes, in know-how but mainly in the form of jobs. From American and Canadian companies to foreign low-labour cost nations. Lou Dobb's from CNN's MoneyLine has been running an extensive s... Read More
Ahora que se ha pasado un poco el revuelo de las desinversiones de multinacionales en España (gracias a otra noticias con mayor calado aún en la opinión pública), me gustaría retomar un tema, que ya tocamos de pasada,... Read More
Ahora que se ha pasado un poco el revuelo de las desinversiones de multinacionales en España (gracias a otras noticias con mayor calado aún en la opinión pública), me gustaría retomar un tema, que ya tocamos de pasada... Read More
Une réfutation des méfaits de la mondialisation et des délocalisations, intéressante sur VentureBlog.... Read More
Une réfutation des méfaits de la mondialisation et des délocalisations, intéressante sur VentureBlog.... Read More
Une réfutation des méfaits de la mondialisation et des délocalisations, intéressante sur VentureBlog.... Read More
Excellent point. Mirrors something I was thinking only a couple of days ago.
And there's another twist to the story in this article: The Flight to India
[quote]
The jobs Britain stole from the Asian subcontinent 300 years ago are now returning. There is a profound historical irony here. Indian workers can out-compete British workers today because Britain smashed their ability to compete in the past.
[/quote]
http://www.outlookindia.com/full.asp?fodname=20031029&fname=monbiot&sid=1
The cars for wheat proposition is weak.
2002 World wheat production (MTons):
China 89, India 71, Russia 50, US 44
Of course many countries consume much or all of what they grow. Total world trade of wheat is only about 100 Mtons/year. This is at a price of about $150 US dollars per ton.
Conclusion: Annual US wheat export revenues are chump change that wouldn't even pay enough to stocks the shelves at the Walmarts in the state of California.
Steve:
what a bizarre conclusion as relates the article's central premise. And yet, by itself it is perfectly correct. Very impressive.
China has been under taking a process of reform for the last twenty four years, that process largely consists of closing unproductive factories. This has caused tens of millions of jobs to be lost, many in manufacturing. Talk to the people on the street anywhere outside of Hong Kong and Shanghai and they can tell about a factory where they or or their family used to work that is now closed.
Given the size of China's population it is possible that China lost many more jobs then the 16 million listed but gained many of them back because of free trade. For example is the overall process of reform caused a loss of twenty million manufacturing jobs, but trade with the US recoved four millions then the U.S. could still have lost jobs to China.
Even if China had choosen to not engage in trade at all it the economy would still have lost jobs. You might well be correct that manufacturing jobs are lost becuase of technology not trade but I don't see how the numbers support the position in regard to United States jobs.
Also the production of wheat to cars relates to the first Bush administration comment that is doesn't matter if we produce "Microchips or Potato chips". That comment was widely critized at the time. You might find the debate interesting.
Best outsourcing argument I've seen so far has been from the guy who writes the Private Equity Week Wire. He's got a whole blog thing on outsourcing at the http://www.privateequityweek.com. Go to: "PE Week Wire -- The Outsourcing Debate"
Eventually our lives will get surrounded by automation, that we'll forget to vaccum, cook, wash dishes (I have already forgotten how to wash my clothes), drive to work and even WORK. Our work will be taken either by someone in Asia, South America or just about any place where its cheap.
As we continue to invent things that facilitate our daily lives, one day, we will reach the point where everything gets automated and the machine has full control over it.
For eg: A robot in the Ford factory gets AI and it decides to screw up in the manufacturing process by 1mm. It goes naked to the human eye, but somewhere, sometime down the line it will crop up. Imagine the millions of $$$$'s lost and the man-hours required to find the fault and _fire_ the robot.
Personally, we trust machines just too much. Tomorrow if my calculator says : 2*4-1*log(343)/83*1-ln(21)*e^2 = 324, I'll believe it blindly, and not bother to check it. If the correct answer is 32.4, I mess up not only with my answer but the error cascades in to the system.
Its just a matter of time till we get affected by this, or is it that it has already started affecting us?
-Anurag
The ultimate irony has not yet happened. It will happen when the offshore management consulting business matures, and the top domestic management consultants start trying to convince their clients that it is *not* in their best interest to hire the offshore competition.
-rich
I just found this thread from random browsing and feel like sharing some thoughts.
If you think of it for a while you just feel something isn't right. Technology doesn't make all o f us wealthier. It will just make a few people being able to do all the jobs, so the other people will have no job. Somehow the Chinese people have the same effect. You know when the American firms put their manufacturing in China because they earn more money from doing this. They get the bigger part of the cake while leave the smaller part to the Chinese. So the existance of Chinese people enables the few American managers to do all the jobs that require millions of Americans to do. The Chinese are just some other kind of robots in term s of the effect they have on American's economy. However people doesn't get as mad when they lose their jobs to robots as when they lose their jobs to some humble hard working low-paid Chinese. But the truth is, they are the same. In a free market, if you will allow robots, you have to allow the Chinese to take the jobs.
Imagine that Bush's effort has paid out and he get the jobs back from the Chinese. But the united states won't take the jobs back and give them to the people who lost them. They take the jobs back and give them to robots. Now people get nothing to say. Maybe they will just go take on some other country that manufactures for America and ask the jobs back. .... then give them to robots.
cheers,
Ke
In response to Ke's post, the reality of any
comparative advantage is that the businesses don't
make any more profits, except for a brief time if
they are "first out" and have a brief competitive
advantage. Once the market is aware of a working
comparative advantage (to, say, Chinese or
Indian workers or any other mechanism that
reduces operating costs), profits for companies
who do _not_ take advantage will drop or
disappear, since the market prices tend to drop.
(Walmart deflation?) The real "winners" are the
customers of those companies, who see falling
prices, and if there isn't too much general
wage deflation by too many businesses doing this
at the same time, a net gain in "wealth" through
improved purchasing power.
As to whether workers are "more" angry when robots
take their jobs versus foreign workers - not sure
what basis there is for this assertion, but it
would be irrational - and frankly, most workers
I've talked to over the years about this sort of
thing are more resigned to the fact that jobs
are fairly ephemeral nowadays than they are
"angry".
I suppose it is easier for politicians
(Americans, Chinese, or otherwise) to blame
foreigners over machines for replacing jobs, but
Ke is right that once the jobs are gone, they're
gone.