The Logic of Outsourcing

In the Feb 24th edition of BusinessWeek Online, Russell Roberts comments on the benefits of outsourcing for the American economy. The article simply points out that the benefits of free trade — and the transition of an economy from an agricultural to manufacturing to a post-industrial economy — follow a logicalprogression that leads to a richer economy. Of course, politicians are often inclined to cater to the perceived anxieties of the voters and I am sure that the candidates in the race for the US presidential elections will fiercely compete on who can reassure the “American people” that they will stop all this outsourcing of jobs. Here is Roberts for the record.

If the U.S. had insisted on making all its own cars, watches, TVs, radios, or shoes, resources wouldn’t have been available to channel into creating the jobs of the last 50 years in telecommunications, software, and biotech. People wouldn’t have been available to work in those industries, and the American standard of living would be dramatically lower.

PROTECTED BUT POORER. But what if India gets all the software jobs? I doubt that will happen. I suspect that for most information-technology jobs, Americans will still be more effective than foreign workers. But suppose Indians decided to work for free and give away the software, the ultimate competitive threat. If outsourcing work to low-wage Indians is bad, surely free software from zero-wage Indians is even worse.

Free software would be hard for the U.S. workers in the software industry to compete with. But it would be a boon for America — plenty of U.S. outfits would expand. Having free software would let a lot of new companies come into existence that couldn’t have been profitable before. Programs at no cost would mean lower prices across the board. That would liberate resources to do new things all over the economy. Many of those out-of-work American programmers would find new jobs. The same effect occurs when the software is merely cheaper, rather than free.

The hardship that results from economic change always tempts politicians to limit individuals’ freedom to buy what they want and businesses to hire whom they desire. Such political restraints will make life more secure — but poorer and less dynamic. Ultimately, it will have no effect on the number of jobs in the U.S. but only make the ones that survive pay less.

Why education is underprovided in India

Gary Becker, a Chicago economist, has an opinion piece in the Business Week of Feb 16th titled What India can do to catch up with China.

Unsurprisingly, he makes the point that education is the primary requirement for India to lift itself out of grinding poverty.

To compete effectively in world markets, India needs to expand its secondary school education. It also has to vastly improve its health services. There is abundant evidence that returns on such investments in India’s human capital would be high.

Economists are deservedly known to disagree on many issues. But on one matter there is consensus: the absolute necessity of an educated population for an economy to develop. This fact has been known for ages by almost all who have ever pondered the question of economic development and growth. The puzzle therefore is to explain why education is broadly neglected in India. What is it about education that makes it a scarce good in any poor economy? I believe that there are two factors that explain this unfortunate phenomenon. First, education is a public good. And second, the socially optimal provisioning of public goods require collective action. India is particularly prone to a failure of collective action, which in turn leads to an under-provisioning of public goods, including the most fundamental of public goods — education.

It is important to distinguish between public goods and private goods. To start off, public goods are not goods that are provided by the public sector, although the public sector is often required to provide public goods. What makes a good a public good is not who provides it but rather the nature of the good itself. Public goods are best defined as goods that are not private goods. And private goods are those goods that are rival, excludable and do not have externalities in consumption. By contrast, public goods are nonrival, non-excludable, and have positive consumption externalities. These are terms that need to be defined precisely so that we can reason further why a collective action problem leads to an under-educated population. Only by fully understanding the causes of the failure can be begin to find a solution to the problem. I hope to investigate this more in the days to come.