Outsourcing: Do You Like My Sod House?

There is a lot of press coverage today given to outsourcing and the movement of jobs from the US to other countries. On John Kerry?s website there is even a section entitled ?Keep Jobs in America,? in which he outlines a plan to slow the shipment of jobs abroad (disclosure: I am a registered Democrat). Are actions to stop job losses to other countries wise? The answer, like many things in economics, is not cut and dry and depends on how we value the winners or the losers. Economics, however, does give us a framework with which to address the issue.

A call center in Banglore, India At the heart of the issue is the principle of comparative advantage which can involve drawing lots of tables that show how we are better off doing the things we are best at and letting someone else do the things we are worse at. Comparative advantage is a difficult topic to wrap your brain around, but it comes down to this simple idea: if I concentrate on doing what I am best at, and leave the other stuff to someone else, there will be more wealth for everyone in the end. The driving idea here is that when I do a task, say writing this article, I am explicitly not doing something else, with my time, say doing my taxes. It is vital, when talking about trade, to remember this fact; when you do something the cost is not only the time, effort, and materials you put into that task; it?s also whatever benefit you give up by not doing something else. When I write this article, I am expending what little brainpower I have, but I am also not getting the benefits of having my taxes done.

So, let?s talk about trade. First, let?s start off in a world with no trade. Dave is a resourceful guy living in the early 1800s during the US expansion westward. He moves out to the middle of Illinois, and builds his own sod house. He then tills the land him self to grow some corn. At sundown, he cooks some dinner and goes to bed?everything he needs to survive. What has he gotten for himself, pretty much a crappy house, some crappy corn that he has to eat every night, and no nightlife. Pretty much sucks.

Now suppose, some guy, Ryan, comes along and says I know how to grow both corn and squash, and I can grow more than you can. To do it, I?ll just take some portion of the corn and squash for my trouble. Dave jumps at the chance. Now, not only does he have more and more varied choices of dinner (he can have corn and/or squash), but he has all day free to do other stuff, such as build a house out of wood and write a book or paint a painting. Soon Dave becomes such a good builder that he builds a house for everyone in town, and they pay him with something else he values. The townspeople don?t have to build their own houses, freeing up more time, and the cycle goes on. One benefit of trade is that it allows us to specialize, and in the end everyone in the town is better off.

Now, let?s introduce some controversy into the story. Let?s say that Luke lives in the next town over, and he has soil that is much more fertile than in Dave?s town. In the same season, Luke can grow twice as much food as Ryan can grow, and since he has to spend less time to grow the same amount of food, he can take a smaller percentage, and still make plenty of money. What will happen, either Ryan has to match what Luke can do, or people will switch their business to the next town over. Is this a bad thing? Well certainly it is for Ryan, he is now out of a job, and he has no foreseeable source of income. Well, what about some other people? Luke is better off, because now he gets the business Ryan used to have. Dave is richer, because now he can get the same amount of food at a lower price. All the other townspeople are richer too for the same reason. With his extra money, Dave might choose to buy Ryan?s old farm and start a factory that makes better coats for everyone. Now, instead of freezing in the winter, people are able to go out and ice fish and not get sick. They have more food and more happiness in the winter, partially because Ryan lost his job to Luke. This is how outsourcing (which is a form of trade) works; it makes us, as a society, more productive and richer as a whole. Please make sure to understand, this is not a zero-sum game, we are not taking money away from Ryan and giving it to Luke. Rather, this is a positive-sum game. We are making both Dave?s town and Luke?s town better off (except for Ryan).

The question still remains, what about Ryan, who is most certainly the loser here? Economics does not have a lot to say about this issue, except that as a society, we really ought to care. Moving Ryan to poverty has a lot of negative influences on our society as a whole (economists call these externalities), and we have a stake in how well Ryan comes out of this in the end. For certain, we should make sure Ryan could still eat, and pay his basic bills, and maintain a level of dignity. We should do this because we as a society got richer partially by making Ryan poorer, and we really, in most cases, should not ignore this fact.

If you are still not convinced that trade is not a beneficial thing, let me give you one final example. Suppose that the state of New York passed a law stating that importing things from other states is illegal because we want to protect jobs in New York State. This is an extreme example of what happens when nations enact trade barriers. Now, I can?t get my Florida orange juice. Also, I can?t write this article because the Mac Powerbook that I am using was made in Taiwan. I am poorer, and so hopefully, are you because you can?t read this article. In the end, I might lose my job because my skills are less productive without trade. The point is that trade barriers often hurt exactly the people we are trying to help.

Trade is a complicated and difficult issue. There most certainly are winners and losers, and the losers lose big and unequally. It seems that some people always lose out and some people just seem to get richer and richer. All of this is true, to a point. If you still doubt the benefits of trade (and technology, which is greatly advanced by trade), just think back to the crappy world our friend Dave was living in before Ryan and Luke came along. Without trade, we would still be there. Enjoy your creamed corn for the 10th night in a row.