We’re probably all familiar with the controversy surrounding outsourcing. Protectionists condemn it because it “ships American jobs overseas” leading to unemployment here in our country. Many humanitarians are also opposed to outsourcing because it “takes advantage of poor nations.” On the other side of the aisle are the capitalists praising outsourcing as “good for businesses” and therefore good for the economy.
That’s all fine and good but what I’m interested in, and what I think most people really want to know, is how outsourcing affects real people – not employment rates, hypothetical businesses and invisible markets. However, to understand how flesh and blood people are affected we first need to know how outsourcing works.
First, we need to understand what is meant by “outsourcing.” According to the Werriam-Webster dictionary outsourcing means “to procure (as some goods or services needed by a business or organization) under contract with an outside supplier.” However, when politicians like Obama talk about outsourcing their definition is more specific: they are referring to American businesses procuring goods or services from foreign suppliers, most notably China. This is purely a political distinction and not an economic one. What this means is that, from a purely economic perspective (that is to say, removed from political rhetoric), inter-state outsourcing functions the same way as international outsourcing. For example, consumers in both Maine and Florida desire oranges. Obviously it would be more economical for Florida to specialize in orange growing in order to meet the demand for oranges in both Maine and Florida. Thus, orange production is outsourced to Florida.
Protectionist policy, however, like Obama’s insourcing scheme, when applied to the state level would make such an inter-state agreement impossible. By preventing Maine to procure oranges from outside and thus “insourcing” orange production to Maine, jobs would be created: Maine would have an orange growing industry where it did not before and more people in Maine would be employed. However, the costs of such an intervention is obvious: expensive greenhouses would have to be built in order to grow oranges in Maine’s cold climate. Less oranges would be produced and at a higher cost. Additionally, the limited resources used to develop Maine’s orange industry cannot now be used in other areas of Maine’s economy where they would be put to more efficient use, like the production of maple syrup for example. Businesses might be hurt like the capitalists claim but others have been created (the Maine-based orange growing companies). However, the net result is that the people of Maine are poorer. Not only must they pay more for oranges but, because limited resources are being used inefficiently (not just capital but the labor of the orange growers as well!), the economy as a whole is that much poorer.
Florida, too, is hurt. Now that they have lost Maine’s business, demand for their product is reduced meaning that they will have to make cut backs in the orange industry. People get laid-off, and less oranges are produced even though Florida has the capacity to produce them in larger quantities and more cheaply than almost anywhere else in the world. Its a lose-lose situation for both Maine and Florida.
The exact same principles apply to the international market. When governments prevent outsourcing they prevent the most efficient use of resources. After all, the only reason businesses outsource is because its more efficient than not outsourcing. Why is this so important? Because there are a limited amount of resources in the world. There is only so much capital and there is only so much labor available; that’s why we even have economies at all. The purpose of economics is efficiency, and the purpose of efficiency is conservation. By forcing the economy to resort to less-efficient means we waste precious resources. The result is that everyone is poorer.
This not only hurts Americans in the form of more expensive goods in smaller supplies but it also hurts the foreign nations that we outsource to. Of course many humanitarians denounce American outsourcing as harmful to foreign countries because its essentially “slave labor.” Often, the conditions for foreign workers are very bad indeed and, when American companies abuse and take advantage of impoverished people our government should intervene and put a stop to such activities. However, those are the exceptions. Most of the time outsourcing helps poor nations because outsourcing represents an investment. Poor nations are poor because they lack the capital to produce goods efficiently. Foreign workers are paid so little in comparison to their American counterparts, not because they are being taken advantage of, but because they lack the capital and the skills to be as productive as we are. The only way, however, for these poor workers to rise up, earn more and achieve a higher standard of living is to develop the tools and the skills that will make them more productive – and that process is accelerated by the investment of richer nations in the form of trading and outsourcing. We must remember that, in the absence of the jobs provided by American companies, these foreign workers would be working for less or, worse, would be unable to find employment at all. They are just like you and me: they take the best job available to them and, while its sad that taking the best opportunity means working long hours for a very meager income in an American factory, its not as sad as their other options.
Also, what’s interesting to note is that many companies actually outsource to the United States. The Japanese company Toyota for example has numerous factories in the states and employs thousands of Americans. This is an obvious example of outsourcing that benefits both Japan and the United States but you never hear about it because it doesn’t fit the political paradigm that outsourcing is bad for American workers or that its good for American businesses’ bottom line. In fact, Japanese outsourcing is quite the reverse: its proved very good for American workers, employing thousands of them in some of the highest paying and best run factories in the country while proving very bad for the bottom lines of many less-efficient and more poorly run American companies (remember when Ford, GM and Chrysler failed and we erroneously bailed them out at the taxpayer’s expense?).
When a government body inhibits a social interaction (like outsourcing) or enables an anti-social one (like insourcing) it works in favor of a few people at the expense of everyone else. That is, it works in the favor of the special interest groups with the most political clout at the expense of those without the same influence. By inhibiting outsourcing, that is to say by limiting trade between two willing entities, the government works in favor of a select few: the workers in a particular industry who would otherwise be laid-off. However, this occurs only at the expense of lowering the standard of living for everyone else – not just in this country but also in the countries that our companies outsource to. To put it another way, by inhibiting social interactions the government dishes out larger proportions of the proverbial pie to some groups than they would otherwise receive but at the cost of shrinking the pie as a whole: meaning everyone gets less. That’s the definition of anti-social economic behavior in which someone can gain only at the expense of someone else. While outsourcing at worse can represent a win-lose scenario in which some people may suffer temporary unemployment it usually becomes a win-win scenario in which both the United States and foreign countries benefit and resources are freed up for new industries being created. “Insourcing”, on the other hand, is win-lose in the short-term and, over time, as the restricted growth of the economy affects everyone including the favored special-interest groups, becomes a lose-lose scenario.
So, the effect of outsourcing on real people is this: often it results in short-term hardships for small groups of people as workers are laid off in shrinking American industries but overall it leads to a higher standard of living for everyone, it accelerates poor countries’ climb out of poverty, and it frees resources for use where they are more needed (including labor). In the end, everyone is better off.