Outsourcing: Symptomatic of the Transition to the Idea Economy


Outsourcing is a concept that has been around for quite a while where a company can pay another company to run a portion of their business.  Carlson was one of the first companies to make a bundle by taking advantage of the opportunity to run the travel departments for large corporations.  Nowadays, outsourcing is commonplace in manufacturing, call centers, and back office functions and often means that work is placed offshore or nearshore, although that isn’t always the case.

Brym and Lie (2007) suggest that outsourced manufacturing to China is the cause of the manufacturing decline in the U.S, based on manufacturing job loss and then go on to note that free trade advocates would describe productivity gains as the culprit.  In their final analysis, Brym and Lie (2007) suggest that offshore and foreign outsourcing results in the loss of good American jobs which are replaced which bad jobs, laying average income decline and class inequality at the doorstep of free trade.  I think Brym and Lie are missing a couple of important points, namely the way in which trade raises everyone’s standard of living, technology’s role in job loss and job creation, and U.S. leadership of the knowledge economy.

Specialization has been creating surplus for workers since the beginning of work.  Smith (1776) first articulated the way in which trade benefits everyone, however Mankiw (2012) describes the concept more simply, noting that “trade allows countries to specialize in what they do best and enjoy a greater variety of goods and services” (p. 10).  Because of the law of comparative advantage, each party benefits during a trade, irrespective of who holds any absolute advantage (Mankiw, 2012).  Therefore, the notion of foreign outsourcing or offshoring is economically beneficial for both parties, despite the disruption to the lives of U.S. workers that lose their job.   The economic benefits are of using low cost labor pools is clear, as lower cost labor results in higher margins and lower prices for consumers (Brainard & Litan, 2004).  Of course, neither foreign workers nor greedy multinational corporations are to blame for job loss.  Instead, the culprit is technology.

Technological change is the number one cause of job destruction in the United States.  According to Drezner (2004) more than 22 million manufacturing jobs were destroyed between 1995 and 2002 through improved productivity, the result of improved factory technology.  Even the current ability to take advantage of low cost labor finds its origins in technology, the result of a global transportation network, a global communications network, and information technology.  The process of creative destruction is going to continue as businesses and governments develop new technology to create sustainable competitive advantage, bringing about further changes.  “For many, these changes will be acutely painful and impart serious consequences, while for others; technological change will bring unexpected opportunities and rewards” (Collins & Ryan, 2007, p. 7).   Some even think the growth of technology is changing our economy in fundamental ways.

While Brym and Lie (2007) describe the major economic revolutions as agricultural, manufacturing, and most recently services, each characterized with serious disruptions in the labor force; they do not suggest that the labor disruptions occurring now are part of another revolution.  Reich (2009) recognizes that the nature of skilled work is shifting towards what he calls symbolic analytic work, acknowledging that “a growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create” (p. 1).  I prefer to think of the latest economic revolution as a shift from the manufacturing and service economy to the idea economy.  Consider that in 2011, the global population grew past seven billion people, the majority of which are educated, and connected to the rest of the world through a global communications network.  What new ideas will be shaped as billions of people connect with each other through the Internet in a many-to-many communications medium?  Shirky (2010) is optimistic that humanity’s cognitive surplus will be put to good use, bringing new levels of creativity and generosity to our economies.  Another way to think about the idea economy is through the lens of symbolic interactionism.  Blumer (1969) noted that “humans act toward things on the basis of the meanings they ascribe to those things [and] the meaning of such things is derived from, or arises out of, the social interaction that one has with others and the society” (p. 2).  It stands to reason, that as more humans begin interacting with each other and society more often, and sharing their interactions, that new meaning will be creating and more human action will occur on the basis of that meaning.  In practical application, consider how quickly the concept of microfinancing spread, with one study identifying more than 750 million accounts in alternative financing institutions, a clear example of a creative idea that caused a shift in human action (Christen, Rosenberg, & Jayadeva, 2004).

In economic terms, the idea economy represents a shift from neoclassical economic theory to endogenous growth theory, diverging “by making technological change a function of economic incentives and behaviors” (Freeman, 2000, p. 9).  Cortright (2001) conveys the notion more succinctly in suggesting that while physical capital is subject to the notion of diminishing returns, ideas suffer under no such constraint.  The implication is that government can create conditions for economic growth by supporting technology innovation (Romer, 2008).

So is offshoring and outsourcing a good trend, bad trend, or a natural trend? And why?

Offshoring and outsourcing are good trends that provide short-run economic benefit and harm to displaced workers.  I believe that the outsourcing and offshoring of manufacturing and service jobs is the beginning of an economic revolution to an economy based on ideas, an area that the United States is poised to dominate because of our history of technological innovation and our leadership of the existing idea industries, like high technology, media and entertainment, healthcare, pharmaceuticals, life sciences, telecommunications, and information technology (Rock, 2011).  Workers displaced as a result of the shift will either find low-skilled service labor and take a pay cut, or obtain an education in the fields based on symbolic analytic work.

References

Blumer, H. (1969). Symbolic interactionism; perspective and method. Englewood Cliffs, N.J.,: Prentice-Hall.

Brainard, L., & Litan, R. E. (2004). “Offshoring” service jobs: Bane or boon and what to do? Brookings Policy Brief(132), 3.

Brym, R. J., & Lie, J. (2007). Sociology : your compass for a new world (Brief ed.). Belmont, CA: Thomson/Wadsworth.

Christen, R. P., Rosenberg, R., & Jayadeva, V. (2004). Financial institutions with a double bottom line: Implications for the future of microfinance (pp. 1-20): CGAP.

Collins, D., T. , & Ryan, M. H. (2007). The strategic implications of technology on job loss. Academy of Strategic Management Journal, 6, 27.

Cortright, J. (2001). New growth theory, technology, and learning: A practitioner’s guide Review of Economic Development Literature and Practice (Vol. 4, pp. 1-36). Portland, OR: U.S. Department of Commerce, Economic Development Administration.

Drezner, D. W. (2004). The outsourcing bogeyman. [Article]. Foreign Affairs, 83(3), 22-34.

Freeman, R. (2000, October 2000). What does modern growth analysis say about government policy toward growth. Paper presented at the HM Treasury Seminar, London, England.

Mankiw, N. G. (2012). Principles of macroeconomics (6th ed.). Mason, OH: South-Western Cengage Learning.

Reich, R. B. (2009). Manufacturing jobs are never coming back. Forbes. Retrieved from Forbes.com website: http://www.forbes.com/2009/05/28/robert-reich-manufacturing-business-economy.html

Rock, R. (2011, February 20). Endogenous Growth: The Future of U.S. Economic Dominance through Technology.  Retrieved from https://journey24pointoh.com/2012/02/13/endogenous-growth-the-future-of-u-s-economic-dominance-through-technology/

Romer, P. M. (2008). Economic Growth. The Concise Encyclopedia of Economics.  Retrieved February 12,, 2012, from http://www.econlib.org/library/Enc/EconomicGrowth.html

Shirky, C. (2010). Cognitive surplus : creativity and generosity in a connected age. New York: Penguin Press.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. London, New York,: Printed for W. Strahan and T. Cadell. A. M. Kelley.

 

 


Endogenous Growth: The Future of U.S. Economic Dominance through Technology


Coming off the heels of the greatest financial crisis since the Great Depression, many policymakers, academics, politicians, business people, and everyday Americans are wondering how the U.S. economy can return to growth and more importantly, what government can do to affect future growth and productivity.  The situation is complicated by a crippling U.S. debt of more than $15 trillion dollars (usdebtclock.org, 2012) and a divisive legislative branch of government that politicizes each policy debate, rather than seeking bipartisan solutions for the restoration of long run U.S. economic growth.  How then, in this environment, does government contribute to long-run growth?  What policies will have the most affect on long-run economic growth?  The neoclassical growth model would suggest that government policy primarily has an affect on leveling out short-run variances in the economic system to optimize short-run efficiency, rather than on long-run growth (Solow, 1956). Whereas, endogenous growth models suggest that government can have an affect on long-run growth by promoting policies that contribute to knowledge, innovation, and technological progress (Romer, 2008).  “Endogenous growth analysis diverges from neoclassical analysis by making technological change a function of economic incentives and behavior” (Freeman, 2000, p. 9).  Using endogenous growth theory as the theoretical basis for recommendations, this author recommends that the U.S. government further use fiscal policy to promote education and innovation, revise the taxation system to promote national saving, and remove policies that support industry entrenchment and a maintenance of the status quo.

According to Mankiw (2012), “at the very least, government can lend support to the invisible hand by maintaining property rights and political stability” (p. 256).  While this is strictly true, the government can do much more to promote long-run growth.  Economic prosperity, measured by GDP, reflects a nations ability to produce goods and services to raise the standard of living for economic participants (Mankiw, 2012).  Determinants of productivity include physical capital, human capital, natural resources, and technological knowledge (Mankiw, 2012).  Government economic policy should help American institutions use the determinants of productivity efficiently to maximize technological progress.

As capital is factor of production, access to affordable capital is an important aspect of national economic fiscal and monetary policy.  Because government deficits reduce national saving and investment, the $15 trillion U.S. government debt serves to stifle growth.  (Mankiw, 2012) In addition, the current income tax system also encourages private debt, rather than promoting saving and investment with its system of interest-based deductions.  These policies can be considered to enhance individual quality of life by reducing the tax burden of individuals, choosing to defer tax revenue and borrow instead.  However, in the end, these policies inhibit economic growth and may trade quality of life today for future innovation and growth.  Rather, U.S. fiscal policy should place more emphasis on private savings and reduced government deficit to promote capital investment in new technologies.

Technological innovation and improvements are at the heart of endogenous growth theory.  The reduction of U.S. manufacturing jobs bears witness to the impact of technology to American industry.  While many bemoan the loss of technology jobs to outsourced, offshore manufacturing, most technology jobs have been lost to technological progress through the process of creative destruction, rather than to offshore labor (Collins & Ryan, 2007; Reich, 2009).  Manufacturing has simply followed the path of agriculture and the job destruction is the direct result of government investment in technological innovation.  Consider that automated, outsourced manufacturing is the result of information technology innovations that allow product and factory design to occur electronically, and irrespective of geographical boundaries.  In essence, without Internet technology, outsourced manufacturing and factory automation would hardly be practical.  The necessary computing technology came from DARPA, a government innovation agency; (Van Atta, 2010; Waldrop, 2010); a classic example of how government investment in technology has powered the creative destruction of manufacturing and the dawn of the knowledge economy.

Today’s economic powerhouses of the corporate world are not the manufacturers of yesteryear; rather, companies that specialize in information and knowledge are the titans that dominate the business landscape.  Energy, financial services, life sciences, telecommunication, information technology, and Internet services companies are the industries benefiting from and driving the growth of the knowledge economy.  The government should reducing barriers to innovation in these industries, considering deregulation wherever there is not a clear public interest in regulation.  For instance, the FCC is grappling with how to continue to control the airwaves, when hardly anyone is using the airwaves and when they should simply get out of the way.  New legislation is seeking to change the fundamental architecture of the Internet, when there are simpler and better ways to protect property rights online (Electronic Frontier Foundation, 2012).  Perhaps the best example of an industry where the government needs to promote rather than stifle innovation is the energy market.  U.S. interests have historically been aligned with the extraction and production of fossil fuels, most notably oil.  The U.S. government heavily subsidizes the U.S. fossil fuel companies to the point that renewable and alternative fuels cannot compete effectively (Leonard, 2011).  Rather, the government should level the playing field to allow alternative and renewable energy sources compete fairly with the fossil fuel market (Rock, 2011).  Furthermore, the government should continue to direct DARPA to invest in alternatives to fossil fuel, given the DOD’s mission could be compromised because of Middle Eastern politics.  When done right, government industry investment can enhance quality of life by helping companies bring new technologies to market.  Government fiscal policy should be carefully manipulated to reduce unnecessary government industry interference, while aligning government industry investment with the development of new technologies.

Of course, technological progress is not simply the result of government and private investment.  Technological progress requires a commensurate investment in human capital.  Mankiw (2012) notes that “education is at least as important as investment in physical capital for a country’s long-run economic success” (p. 247).  In fact, to those economists subscribing to the ideas represented in endogenous growth theory, human capital investment is perhaps the most important because of the positive externalities it creates, or simply put, the ideas created that benefit others (Freeman, 2000; Mankiw, 2012).  For example, Wikipedia is a byproduct of many positive externalities, as people the world over contribute their knowledge to the rest of humanity into a single, global, free, encyclopedia.  The knowledge economy is entirely dependent on education as the basis for its success.  Think about investment in education as an investment with limitless potential.  Physical capital is subject to the notion of diminishing returns, whereas ideas suffer under no such constraint (Cortright, 2001).  Consider the impact of a global population of seven billion people (Sanjayan, 2011), each contributing their cognitive surplus to the advancement of human progress through the physical infrastructure of the Internet (Shirky, 2010) and the idea of long-run economic growth the world over is imaginable.  Today, the U.S. government invests significantly in the greatest research university system in the world, and has policies that promote secondary education like student loans and Pell grants (U.S. Office of Management and Budget, 2012).  However, the $77 billion dollar budget is a paltry sum when considered as a percentage of either total budget or GDP.  Given the potential of ideas to create economic growth, the U.S. government should consider the diversion of budget from physical capital to human capital.

When considering the U.S. government’s policies through an endogenous growth lens, it is difficult to suggest that the government should maintain the same historical economic investment portfolio.  Rather, policymakers should make investments that further promote technological innovation and the spread, rather than the control, of ideas.  Rather than continuing to subsidize industries that represent the status quo, subsidies should be shifted to those industries with the most future potential.  Rather than continuing to promote policies aimed toward consumption and debt, those policies should be moderated with policies that encourage private and public saving, and a lower government deficit.  Rather than promoting a fiscal policy where a mere 2% of the budget is allocated education, what could happen should it be increased to 3%?  What new ideas are possible should we send twice as many students to college for science, technology, engineering, or math degrees?  In the final analysis, this author concludes that government fiscal policy should further invest in education and technological innovation, promote private and national saving, and promote industry investment in new technology, particularly in industries that make up the knowledge economy.

References

Collins, D., T. , & Ryan, M. H. (2007). The strategic implications of technology on job loss. Academy of Strategic Management Journal, 6, 27.

Cortright, J. (2001). New growth theory, technology, and learning: A practitioner’s guide Review of Economic Development Literature and Practice (Vol. 4, pp. 1-36). Portland, OR: U.S. Department of Commerce, Economic Development Administration.

Electronic Frontier Foundation. (2012). Internet Blacklist Legislation  Retrieved February 12,, 2012, from https://http://www.eff.org/issues/coica-internet-censorship-and-copyright-bill

Freeman, R. (2000, October 2000). What does modern growth analysis say about government policy toward growth. Paper presented at the HM Treasury Seminar, London, England.

Leonard, J. (2011, February 2011). Get the energy sector off the dole  Retrieved December 9, 2011, from http://www.washingtonmonthly.com/features/2011/1101.leonard-2.html

Mankiw, N. G. (2012). Principles of macroeconomics (6th ed.). Mason, OH: South-Western Cengage Learning.

Reich, R. B. (2009). Manufacturing jobs are never coming back. Forbes. Retrieved from Forbes.com website: http://www.forbes.com/2009/05/28/robert-reich-manufacturing-business-economy.html

Rock, R. (2011). Free market energy: advantage renewables.  Retrieved from https://journey24pointoh.com/2011/12/11/free-market-energy-advantage-renewables/

Romer, P. M. (2008). Economic Growth. The Concise Encyclopedia of Economics.  Retrieved February 12,, 2012, from http://www.econlib.org/library/Enc/EconomicGrowth.html

Sanjayan, M. (2011, October 31, 2011). A Letter to #7,000,000,000. HuffPost Green  Retrieved November 20, 2011, from http://www.huffingtonpost.com/m-sanjayan/7-billion-people_b_1067143.html

Shirky, C. (2010). Cognitive surplus : creativity and generosity in a connected age. New York: Penguin Press.

Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics,, 70(1), 65-94.

U.S. Office of Management and Budget. (2012). The budget for fiscal year 2012: Department of Education.  Washington DC: OMB Retrieved from http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/education.pdf.

usdebtclock.org. (2012, February 9, 2012). U.S. National Debt Clock  Retrieved February 9, 2012, from http://www.usdebtclock.org/

Van Atta, R., Dr. (2010). Fifty years of innovation and discovery.  Washington D.C.: Department of Defense Retrieved from http://www.darpa.mil/About/History/History.aspx.

Waldrop, M. (2010). DARPA and the internet revolution.  Washington D.C.: Department of Defense Retrieved from http://www.darpa.mil/About/History/History.aspx.