The Politics and Economics of Outsourcing

[RedEarth]

The Politics and Economics of Outsourcing
By PAUL CRAIG ROBERTS

Offshore outsourcing is misunderstood by economists and policymakers. The phenomenon is misperceived as an extension of the mutual benefits of comparative advantage-based trade.

Comparative advantage has two necessary conditions, neither of which is met today. One condition is that capital is immobile internationally relative to traded goods. The other is that the trading countries have different opportunity costs of producing the traded goods. (The economic concept of opportunity cost is an in-kind measure; for example, the quantity of wine that is not produced in order to make a yard of cloth.)

The condition of capital immobility is required to insure that a country's capital seeks comparative advantage at home instead of absolute advantage abroad. Different internal cost ratios of producing one good in terms of another are necessary if low- and high-cost countries are to experience mutual gains from specializing and trading.

David Ricardo discovered comparative advantage when he investigated the question of why a country that could most cheaply produce all tradable goods would trade with a higher cost country.

Ricardo's answer is that the opportunity cost of producing one good in terms of the other was different in the two countries. He was able to show that total output would increase if each country specialized in the product in which it had relative advantage. He then showed that the increased output would be shared by the terms on which the countries would trade one product for the other.

http://counterpunch.org/roberts05192005.html

[orwell]

1. Good Article

I read it yesterday. Everyone who is interested in the so-called "slam dunk" of neoliberal economics should read this.

PCR has really been writing some great things lately. Very insightful.

[Tux]

3. Neo?

What is with neoanything and free trade? Don't they understand that it leads to monopolies, bad business ethics, and recessions if not depressions? I'm sick of this crap. Free trade already hurt manufacturing and IT. Hell, I'll be lucky to get a job at Best Buy selling PCs instead of fixing them. I say let's get back to the way we where in the 90's with some regulation and push for some more fair trade.

[orwell]

5. There is Little Difference

between neoliberal and neoconservative. It is just marketing gloss put on the same old policy of wealth and power transfer to elites.

As far as the 90's, that may have been the last great gasp of empire. The so-called "economic miracle" will hopefully be seen in hindsight as the final stacking of the house of cards.

All I see is debt upon debt, the relentless growth of imperialism, and the final destruction of what political fabric we still had left.

Alas, the emperor has no clothes...

[BillZBubb]

2. Roberts has undergone a remarkable transformation

He used to be a certified wingnut and avid Bushist. Now, he's writing stuff that's right on the money.

[mcscajun]

4. Here's the hammer and the nails for the coffin of US economic interests:

The international mobility of capital and technology and the advent of production functions that operate the same regardless of location mean first world labor will be displaced in tradable goods and services until there is a global equalization of wages and living standards.

In other words, the race to the bottom is ON.

As I report each month following the BLS release, so far in the 21st century the US economy has been able to create jobs only in domestic nontradable services. Independent studies by economists at Northeastern University (reported in The Boston Globe by Charles Stein, Feb. 20, 2005) and by Edwin S. Rubenstein conclude that most of the new jobs in domestic services have gone to new legal and illegal immigrants. If these studies are correct, employment growth of native-born Americans has ceased in the 21st century.

In the 21st century, the US labor force has been acquiring the complexion of a third world country, with new jobs available only in domestic services. In contrast, China and India are acquiring high tech manufacturing and professional service jobs, the mark of first world countries.

Referring to the work of Ralph E. Gomory and William J. Baumol in 2000, "Global Trade and Conflicting National Interests", Roberts continues:

It will take economists a decade or longer to absorb this work. In the meantime, they are operating with a defective trade model that leads them to incorrect conclusions and disastrous policy advice.

We're So Doomed.