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.