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.

 

 

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Out of a Job: Offshore Labor, Outsourcing or Something Else Entirely?


Image from: vlima.com

As the United States economy rebounds from the effects of the latest recession, many in the media are calling the recovery another jobless recovery, citing the growth of the gross domestic product coupled with a high unemployment rate.  Both the media and politicians frequently suggest that the trend to outsource manufacturing and move service jobs offshore is the culprit for our economic woes.  As a result, legislators are attempting to stem the tide of offshore labor and outsourcing through protectionist policies that mandate the use of American goods and services, tax corporations that use offshore resources or other draconian measures (Sealover, 2011).  Both the media and politicians are spending their time and energy on the wrong problem.  According to some estimates, offshored jobs will only make up 2% of the jobs lost by 15 million Americans annually (Lael & Robert, 2004).  If outsourcing and offshore labor are not the cause of job loss, who or what is the real culprit?  In short, the culprit is good-old-fashioned, American know-how.

Since before the creation of the Computing- Tabulating- Recording Company in 1911, the predecessor to IBM (“IBM Archives: 1900s,”), businesses in the United States have sought the means to improve business performance through the use of technology.  From advanced robotics and computers on the factory floor to self-service kiosks at airports and grocery stores, automation has displaced far more United States workers than have migrated offshore (Collins & Ryan, 2007).   Daniel Drezner, Associate Professor of Political Science at the University of Chicago also sees technology innovation as the root cause (2004):

There is no denying that the number of manufacturing jobs has fallen dramatically in recent years, but this has very little do with outsourcing and almost everything to do with technological innovation. As with agriculture a century ago, productivity gains have outstripped demand, so fewer and fewer workers are needed for manufacturing. (p. 27)

Former Secretary of Labor, Robert Reich described a tour taken at a U.S. factory, where the entire plant was run by two employees instructing more than 400 robots on the factory floor (Reich, 2009).

The capitalistic process of creative destruction, first described by Engels and Marx is alive and well as new industries consume the flesh of the old (Marx & Engels, 1974).  For example, the newspaper business is a shadow of its former self because of Internet technologies.  It would stand to reason that if millions of jobs and whole industries were destroyed via the relentless advance of technology throughout the last 30 years, then the total number of jobs in the United States would be shrinking.  Yet, even given the current unemployment rate of 9.6% for 2010, the United States has added nearly 47 million jobs over the last 30 years of technology innovation and achievement; therefore additional contributing factors are likely at work (Bureau of Labor Statistics, 2011).

“Historically, the number of jobs has closely followed the growth of the labor force, despite major increases in foreign trade and the advent of a host of new job-displacing technologies” (Lael & Robert, 2004, p. 3).  U.S. Bureau of Labor Statistics historical data for the since 1980 confirms that the labor force has grown at an annual rate of 1.18% while the number of employed workers has grown at a corresponding rate of 1.09% (Bureau of Labor Statistics, 2011).  “When the U.S. economy gets back on track, many routine jobs won’t be returning–but new jobs will take their place. A quarter of all Americans now work in jobs that weren’t listed in the Census Bureau’s occupation codes in 1967” (Reich, 2009).

It is in the nature of journalists to make the public aware of problems.  Equally so, it is in the nature of politicians to attempt legislative solutions.  Henry Louis Mencken once wrote, “There is always an easy solution to every human problem—neat, plausible, and wrong” (Mencken, 1949, p. 443).  The backlash against offshore and outsourcing is the classic example of focusing on the wrong problem.  Instead of focusing on the relatively few jobs moving to lower cost labor pools, the United States should focus on quickly retraining workers displaced because of innovation.  So the next time your hear the media blast the evils of outsourcing or your local politician suggest some new form of protectionist policy to prevent the use of offshore labor; picture them as the Dutch boy with a finger in the dike, trying to stem the tide of innovation, progress and good-old-fashioned, American know-how.

References

Bureau of Labor Statistics, U. S. (2011). Employment status of the civilian noninstitutional population, 1940 to date. In cpsaat1.pdf (Ed.). Washington D.C.: United States Department of Labor.

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

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

. IBM Archives: 1900s. IBM – United States  Retrieved May 11, 2011, from http://www-03.ibm.com/ibm/history/history/decade_1900.html

Lael, B., & Robert, E. L. (2004). Services offshoring: Bane or boon and what to do? Brookings Policy Brief(132), 3.

Marx, K., & Engels, F. (1974). The Communist manifesto. Belmont, Mass.: American Opinion.

Mencken, H. L. (1949). A Mencken chrestomathy ([1st ed.). New York,: A. A. Knopf.

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

Sealover, E. (2011). Colorado House kills bill about overseas jobs. Denver Business Journal. Retrieved from Denver Business Journal website: http://www.bizjournals.com/denver/news/2011/05/04/house-kills-bill-about-overseas-jobs.html