Worstall on Wednesday HL Mencken once told us that in a democracy the electorate should get what they voted for – and good and hard too. So, on that basis, I present to you a piece on outsourcing, as requested by one Gordon 10.
The commenter in question wrote:
What would be really nice is [an article] on the race to the bottom on labour outsourcing and how long we have until a global equilibrium of sorts is reached … where the incremental savings from outsourcing are not enough to pay for the cost and disruption of that outsourcing. Most companies in my industry are already on their 3rd or 4th offshoring country because the previous ones have become too expensive.
Well, there are two answers to this one and they are: around 2080 (2090 maybe) and never. And there are two flavours of that “never” answer too.
The thing is that we have got two very different kinds of outsourcing and it is never really entirely certain which type any specific example of the practice is.
The first is the one we usually think of, the bastard capitalists nipping off in the search of cheap labour and leaving their devoted domestic workforces starving in the gutters. That one has very definitely got to the third and fourth levels. Cheap plastic tat came from Japan in the ’50s, Hong Kong in the ’60s, Taiwan and South Korea in the ’70s and ’80s, China in the ’90s and now its migrating to places like Vietnam and Indonesia. What happens is that people sate their lust for cheap labour in a place until that labour’s not all that cheap any more and thus another move for that lifeblood of predatory capitalism is necessary.
On the other hand, making cheap plastic tat is a leg-up for the local economy. OK, that first generation of jobs is pretty shitty, but as we’ve seen in all of those nations, things do develop. People work out how to do things – how to run a factory, serve a customer, make more complex things – and as the value chain is climbed, that labour gets paid more and we move, over the decades, from poor country to thriving modern economy.
Of this first type of outsourcing, the end is presumably going to be when there’s no more really poor places where the plutocrats can go oppress people. Exactly when that’s going to be, well, I would like the King of Sweden to give me a gold medal one day and he would if I knew when this was going to happen. But we can have a good guess by using our old friends the IPCC. If you follow the link, you’ll see the economic models that provide the emissions numbers for everyone to run through their climate simulation software. They’re not perfect for our use here but they’re still a damn good look at how the global economy might develop in the remainder of this century.
‘Convergence’ – or how does your poor country grow
One model (A1 family) provided by the organisation tells us that if the 21st century is much like the 20th (although preferably without the wars, but similar economic growth in general, similar fertility patterns etc*) then we’re going to get most of the world up to decent living standards around 2080, 2090 or so.
This concept is called “convergence” and is based upon the idea that – absent really bad public policy – a poor country should be able to grow faster than a rich one. This is simply because the poor one is, by definition, nowhere near the technological frontier and can thus copy those that are, while the rich ones are the people doing the difficult work (and making investments) in trying to expand that frontier. We expect, in essence, to reverse The Great Divergence that was the Industrial Revolution, before which average living standards might have diverged by two or five times by locality, but by nothing like the 10 to 50 times that is global inequality today.
With those sorts of living standard (and by definition, wage) difference, the idea of plonking the factory 11,000 miles away to save a bit on the 10 per cent of the budget that is wages just isn’t going to be an attractive proposition – and so the plutocratic bloodsucking capitalist bastards aren’t going to do it.
It is worth noting that if globalisation doesn’t continue, currently, to seek out those lower labour costs, then the convergence might well not happen – meaning that there still will be places to go exploit poor people. So it’s a case of: exploit it now – so that it no longer exists to be exploited – or don’t exploit it now, leaving it to exist to be used in the future.
But that’s not the only thing going on here. A simple way of slicing up economic growth is to divide it into three different types: Malthusian, Promethean and Smithian. With Malthusian growth, that new barley baling machine means that there’s more food, resulting in more children surviving to have more children, and two generations later no one is any richer as a result of that advance in technology – there are just more people at the same old living standards. With Promethean growth, we use fossil fuels (and nuclear, renewables etc) instead of human and animal muscle power. The last one is the one we want here: Smithian. This refers to the division and specialisation of labour and trade in the resultant production.
Labour can be too finely divided, as both Adam Smith and Karl Marx pointed out: complete division into each worker doing just the one simplest task repetitively turns him into a dullard. Fortunately, we tend to fob that sort of work off onto machines these days and use humans to do what they’re good at: thinking. But while that division and specialisation can go wrong – as with the boredom of an assembly line – there’s also no obvious limit to the number of people we ought to be dividing and specialising with: and thus trading with. It’s obvious that we should split some work with people from outside our household, outside the village… but there’s no obvious point short of the entirety of humanity at which we should stop doing so.
We’ve talked here before about that glue factory in Japan that burned down – whereupon everyone realised that there was only one glue factory in the world making the stuff to stick DRAM together.
There was also a period of a few years where I was absolutely the only person at all supplying scandium into the global light bulb industry. Only two companies made the iodides for the halide bulbs, I was supplying both of them and thus the entire planet full of people buying interesting downlights for over the kitchen stove was dividing and specialising labour with that one individual: me**.
And this would continue along, even after convergence. We would still be dividing and specialising labour in this manner, still trading the resultant production, even after full convergence had been achieved. Lower labour costs in general aren’t the only reason we do this: we can still gain greater efficiency through the specialisation, even if wage levels in general are equal. After all, City lawyers and City accountants get about the same amount of money each but we still end up with better contracts if the lawyers write them and better accounts if the lawyers don’t, but let the accountants do so.
So, when is offshoring going to stop? In terms of the straight pursuit of cheap exploitable labour, it will be around and about when there’s no more cheap labour to exploit. At best, this is 65 to 70 years away as that’s how long it will take for the current pursuit of such labour to have given us convergence in labour costs. And if it never does manage that, we’ll also obviously never see the ends of the attempts at such exploitation.
However, even if we do manage that convergence, we’re still going to be continuing to offshore tasks just as a regular part of the standard division and specialisation of labour – even if that labour itself generally costs the same amount in different places. So I’m afraid it’s bad news: this other form of offshoring just isn’t ever going to end. ®
* That tomorrow is going to be much like today is often the most accurate economic forecast anyone can make.
**Running a global monopoly is actually less profitable than you might think it would be.