Home > Micro > Technology and Outsourcing

Technology and Outsourcing

This post is inspired by the following question on Twitter.

Does anything need to be done to deal with the loss of jobs due to technology or outsourcing?

To which I replied:

 short answer: no (long answer more than 140 characters)

The poster then pointed out that the long answer would fit in a blog post, which was a good point, so here we are.  Let’s start with the long version of the short answer.

In a free market it would not be necessary to do anything about this.  This assertion is standard fare in introductory econ classes and is based on the notion of comparative advantage.  Essentially, the disconnect between economists and others on this issue comes down to a difference in thinking about the labor market.  Many people think about the market being made up of a fixed supply of jobs that have to be distributed among some number of workers.  They then conclude that these things reduce the number of jobs.  This is not a very good way to think about a market.

Economists see an exchange between two parties with a supply and demand for labor.  In a free market we expect “jobs” to exist if the cost of labor is lower than the value of the produce.  Jobs that are worth more will pay more and people will find their most productive occupations by seeking the highest wage/compensation.

Essentially, if there were a totally free market, it would make no sense to say jobs were created or lost.  If someone invented a robot that could build widgets really cheap and all the widget makers got laid off, they would simply find other jobs.  Their comparative advantage would go from making widgets to making something else.  This may make those individuals worse off (though it may not) but the total output of society and the total benefits would increase because it would get cheaper to make widgets which would make them cheaper and everyone would be able to have more of them.  (The same argument applies to outsourcing.)

By the way, these concerns have been around for hundreds of years and so far technology has not destroyed the working class.

Now for the actual long answer.

As I said, the above analysis assumes a free market.  In reality, what we have is far from a free market.  There are a ton of laws and regulations which gum up the works of this process.  Here are some examples

Minimum wage: If the value of your labor in your most efficient production is less than the minimum wage, you’re out of luck.  You might be willing to work making widgets for $6/hour and somebody might be willing to hire you and it might cost people in China $6.50/hour worth of other goods, but if the minimum wage is $7.25 then the widgets get made in China anyway and you end up unemployed.  This makes you worse off as well as the consumers of widgets who must pay more for them.

Unions: Similar situation.  You might be willing to work at a certain wage but the union won’t let you because they have “negotiated” a higher wage for themselves by creating barriers to entry to keep you out.

Licensing: Let’s say after losing your job at the widget factory your new comparative advantage is as a hair stylist.  But you can’t just go out and do that.  You have to go to beauty school for two years, pay a bunch of fees and pass some tests.  Don’t have the time/money for that?  Too bad for you.

Labor Laws: So you could make a widget cheaper than the Chinese but in order for someone to hire you to do so, they would have pay a bunch of taxes, get insurance incase you stub your toe on the way to work and try to sue them, comply with a million OSHA regulations, provide you with healthcare etc.  If the benefit of your labor is not great enough to make it worth it to them to do all of this, again, you are out of luck.

Here are some cases from an older Stossel show.  The moving company who had to get permission from their competition to enter the market is my personal favorite.

So the real answer to the question “should anything be done” is yes, we should liberalize the labor market by getting rid of all these ridiculous regulations which are designed to protect some special interest group.  If we did that, then no further meddling would be necessary.  Of course the other side will argue that we have to do a bunch of other interventions in the economy to try to mitigate the damage that they blame on things like outsourcing and technology but that damage is really the result of those things combined with all the interventions we already have.

Advertisements
Categories: Micro
  1. J Thomas
    March 2, 2014 at 4:50 pm

    “In a free market we expect “jobs” to exist if the cost of labor is lower than the value of the produce.”

    Sure, that’s true in the Econ101 fantasyland. But how would it work in a real-life free market?

    Jobs don’t just appear by magic when cost of labor is less than value of product. Somebody has to see that there’s a profit to be made, and choose to chase it, and do all the steps of setting up a business and hiring and managing.

    So oversimplifying, let’s imagine that there are three different kinds of production — that owners and workers and drones on the dole buy three different classes of product. Suppose you find a way to make a dole product cheaper. then you can fire some people who go on the dole until they find jobs.

    Should you put them to work making more dole product? No. People on the dole take what you give them, you don’t need to give them more or better stuff.

    Should you put them to work making more worker products? Probably not. Workers already get enough to reward them for working hard, and they already spend all their money. If you make more for them to buy then either prices must fall or some other product — likely one you make — will not sell. Competing to sell to workers is at best a zero-sum game.

    Should you put them to work making owner-class products? Yes, if owners want to buy more. But what if they want to use their earnings to invest, to make more money, and not to consume which leads toward spending capital — the biggest no-no?

    We hypothesized that you make something cheaper and have more profit, and we immediately assumed that you would look for investments that would leave you hiring more people. We never considered that you would want to spend that money on owner-class luxuries for yourself, and let somebody else invest to meet your demand.

    Is it possible for consumer demand and investment to get out of synch? If somehow we get too much investment money looking for profitable products to invest in, and too little consumer demand to buy the products of new investment, then the investment money might sit there waiting for an opportunity, or get invested in Ponzi schemes etc. While demand never rises because people on the dole can’t spend more, and working people can’t spend more, and owners are looking for investment opportunities and not more luxuries….

    Is there a mechanism in place to get owners to spend their investment money on consumption when they can’t find good investments? I haven’t heard of one. Certainly the Econ101 assumption is that there are always jobs.

    Of course, without a minimum wage if many of the jobs are at starvation wages, then supply-and-demand will drive the population size downward until the supply of labor falls to meet demand for labor….

  2. Free Radical
    March 2, 2014 at 8:10 pm

    This is basically nonsense. There is no concept of economic equilibrium here there is just a lot of arbitrary assertions about behavior. If you think this is an accurate characterization of an economy and econ 101 is “fantasy land” then there’s probably no reconciliation possible between us.

  3. J Thomas
    March 2, 2014 at 11:42 pm

    “…there’s probably no reconciliation possible between us.”

    That may be, but put it aside?

    Do you believe that the economy is arranged in a way that will optimise the ratio between consumption and investment? If so, how does it work?

    I can imagine that free markets might automatically handle that, but I don’t have a mechanism in mind. Do you?

  4. Free Radical
    March 3, 2014 at 5:50 am

    Yes I do but, at least more or less. I don’t think markets are perfect but I think they are far better than the alternative. Of course you and I may not have the same idea of what “optimal” means (I mean Pareto efficient, most people who talk about things like “owner-class luxuries” have other, more normative notions of optimal)

    The mechanism IS the market. Explaining exactly how this works in every situation would take a long exposition. The short version is that people try to make themselves better off by engaging in exchange. Every exchange makes both sides (at least ex-ante) better off. If they can exhaust all possible mutually beneficial exchanges it (whatever “it” is) will be optimal. Does this always happen perfectly? Probably not. But in most cases it probably gets pretty close and at least people all have an incentive to get as close as possible.

    • J Thomas
      March 3, 2014 at 4:20 pm

      “I don’t think markets are perfect but I think they are far better than the alternative.”

      I don’t think there’s just one alternative, just as there’s no single free market design. Ideally we would find ways to design free markets to fit particular circumstances. So for example the design of the NYSE when it was first created was adequate for very low volumes. Over time it was improved to better meet the needs of brokers, not so much their customers. Now as volume has increased beyond human ability we get something unprecedented….

      “Every exchange makes both sides (at least ex-ante) better off.”

      Yes, both sides must think they are better off or they won’t agree to the trade. And if the other guy is not at least a little bit better off then he won’t keep trading with you.

      People generally consider an economic system optimal when it maximises the wealth production. How the wealth gets distributed is some sort of moral question that isn’t really economics. Like, if I can make a whole lot of trades that benefit me a lot and benefit my trading partners a little, I get rich and that’s OK. It’s often even hard to measure how much both sides benefit, but we can assume both sides do benefit if they agree to the trade. But we imagine we can measure the wealth created.

      An economic system that has a bunch of people unemployed who could be chopping down forests and mining ore and growing crops etc, creating wealth, is not as good as a system that actually creates the extra wealth.

      But what if nobody needs more wood or metal or food etc? Then it isn’t extra wealth at all. If you put people to work making stuff that nobody needs, you aren’t creating wealth.

      Well, but likely the people who don’t have jobs need wood and metal for houses etc. They wouldn’t be homeless if they had jobs they could buy stuff. But they are homeless and broke and nobody wants to pay them to work. They can’t get permission to cut down other people’s forests or mine other people’s ore or farm other people’s unused land, so their labor is worthless.

      Is there a problem with that? If there’s nothing wrong with that, then I guess we’re done.

      Would it stop happening if we finished deregulating the labor market?

  5. Free Radical
    March 3, 2014 at 6:03 pm

    There is only one alternative to free markets, that is government control. There are only different degrees and types of control. They are almost all worse than free markets (there are some cases that are a bit complicated as they come down to defining property rights). The NYSE is (or at least was originally) the product of a free market. It evolved as market conditions evolved to better meet the needs of its users. You say it is only good for brokers and not customers but this is a completely arbitrary assertion. If they aren’t providing a desired service to “customers” then they won’t have any. They have to serve everyone involved. The greater the mutual benefits they allow brokers and customers to create, the more they will be able to capture themselves.

    You are confused about what economists consider optimal. No economist thinks “maximizing production of wealth” is optimal. Economists do address distributional issues, we just try not to insert our own normative judgments at every turn…

    There is no such thing as unqualified “need.” As long as you are using that word, you are not saying anything meaningful.

  6. J Thomas
    March 3, 2014 at 11:15 pm

    “There is only one alternative to free markets, that is government control.”

    Woo! This is honest-to-god two-valued thinking! Look, you can have a bunch of companies with suppliers and distributors and so on. Or you can have a big corporation with a lot of divisions, that organizes its divisions however it chooses. Like GM did in the early days of automobiles. The latter approach is not “free markets”, it’s one giant corporation that replaces a collection of free markets. Suppliers don’t supply components to producers on a free market, they do it within the corporation. Auto divisions don’t build automobiles independently and compete with each other in a free market, they do it under direction from top management. It is not government. It might be considerably more profitable than a pile of separate companies, or it might be perceived to be less profitable in which case it may choose to spin off a lot of them. There are emphatically more than two choices.

    “The NYSE is (or at least was originally) the product of a free market.”

    Read your history, the NYSE was officially designed to be a monopoly. Individual brokers could compete if they chose, though they were forbidden to compete on price. But the market itself was chartered as a monopoly.

    “You say it is only good for brokers and not customers but this is a completely arbitrary assertion.”

    I don’t say it was not at all good for customers, but the focus was entirely on making it good for brokers. When things got so bad that customers were scared to do business with them, they made a big show of self-regulation and government-regulation to persuade customers that they were not too crooked to do business with. There is nothing controversial about this.

    “If they aren’t providing a desired service to “customers” then they won’t have any.”

    Traditionally, in any one area a single market dominates. There might be a second market with wider bid-ask spreads used mostly by people who have been thrown out of the dominant market.

    Given two markets for the same stock, and easy communication, it was easy to arbitrage prices. Buy from the market with the lower price and sell to the market with the higher price. The smaller market had a whiplash effect. A market has to get *really bad* before a smaller competitor can overcome the giant disadvantages of being second and become first.

    “Economists do address distributional issues, we just try not to insert our own normative judgments at every turn…”

    Yes, agreed.

    “No economist thinks “maximizing production of wealth” is optimal.”

    OK, what do you think is optimal? What does it mean for an economy that produces less wealth to be better?

    “There is only one alternative to free markets, that is government control. There are only different degrees and types of control. They are almost all worse than free markets (there are some cases that are a bit complicated as they come down to defining property rights).”

    What is it that makes some alternatives worse than others? I had thought it involved misallocation of resources and reduced production of wealth. What is the better/worse you use instead?

  7. Free Radical
    March 4, 2014 at 3:43 am

    You’re attaching a lot of additional (and arbitrary) meaning to “free market” that is causing you to not see the clear distinction. The fact that a company is big doesn’t mean it isn’t a free market…? (“free” is different from the economic notion of “perfect competition,” this might be where you are getting confused). The simple fact is that people are either free to do what they want with their lives and their property or they are restrained. There is no third option. You can prefer certain restrictions to freedom but don’t deceive yourself by blurring the distinction.

    • J Thomas
      March 4, 2014 at 6:26 am

      “The fact that a company is big doesn’t mean it isn’t a free market…?”

      Right. Do you run a free market inside your family? Do you run a free market inside your business? Employees compete to do each other’s jobs, and you pay them piece-work rates? Your janitors compete to clean the floors, and you reward the best of them with a larger share of the work and more pay? Your most profitable profit centers get extra money they can do whatever they want with, while the less profitable get nothing? No, businesses siphon money from their current cash cows into operations that have potential. And they try to cut off the groups that don’t look like they’ll make it, instead of let them drag along for a long time slowly failing.

      Businesses are not usually run internally as free markets. They are managed by managers who try to do a degree of central planning. If someone takes a chunk of a free market and replaces it with a vertically-integrated corporation, the amount of free market has decreased.

      “(“free” is different from the economic notion of “perfect competition,” this might be where you are getting confused).”

      Yes, probably. Also the concept of “market”. Walmart corporation has over 2 million US employees and its cash flow is larger than many nations. If Walmart was a nation (with a population approaching albania), it would be very much a centrally-planned nation. Saying that the Walton family is free to run their nation however they want does nothing to decrease the amount of central planning or increase free markets.

      “You can prefer certain restrictions to freedom but don’t deceive yourself by blurring the distinction.”

      Employees are of course not free at all while they are on the job. At least usually. I have heard of a few Silicon Valley corporations where employees are encouraged to look around for something valuable to do, and they get paid according to their value to whoever in the corporation they benefit. Very free-market. The concept has not caught on much, yet.

    • May 15, 2017 at 2:11 pm

      I was going to write a similar blog cocinrnneg this topic, you beat me to it. You did a nice job! Thanks and well add your RSS to come categories on our blogs. Thanks so much, Jon B.

    • August 30, 2017 at 5:41 am

      Agora sim… Ou não. Fica liberado o jogo de equipe, desde que não venha a ferir o esporte.Ficou claro… Ficou? Quando se fere o esporte e quando não?Na verdade, penso eu, deveria se proibir e punir com muita força quem fizesse. Exclusão total de pontos na temporada sem choro e nem vela.Queria ver fazer.De resto, vamos ver no que dá quando as regras novas e nem tanto forem realmente acionadas.

  8. J Thomas
    March 4, 2014 at 6:28 am

    “There is only one alternative to free markets, that is government control. There are only different degrees and types of control. They are almost all worse than free markets (there are some cases that are a bit complicated as they come down to defining property rights).”

    What is it that makes some alternatives worse than others? I had thought it involved misallocation of resources and reduced production of wealth. What is the better/worse you use instead?

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: