Economists are Making a Grave Mistake
The economic concept of "comparative advantage" is the
holy dogma of "free trade", economic globalization, and offshore
outsourcing of jobs. Although comparative advantage is
generally true for what economists traditionally measure,
economists have ignored some important counter-factors.
It indeed does optimize economic output
under ideal conditions. However, there are important factors
which make the situation less than ideal:
- Disruption of distribution or communications paths
- Restrained flow of labor
- The theory mostly addressed output (goods and services); ignoring
job availability, stability, bubble risk, and other important factors.
- Past trends may not be indicative of future trends.
- Distribution of the benefits of free trade can be
very uneven.
- Some countries are more interested in military
advancement than in consumer prices, and
subsidize
certain specialties.
- Some countries sacrifice benefits, retirement programs,
safety, environmental safeguards, and human rights to achieve
low labor rates. In other words they scorch both people and planet
to "beat us".
Disruption of Distribution or Communications Paths
When sailing ships used to go on exploring trips, they generally
would go in pairs of ships instead of one single ship. Sometimes
a single larger ship would have been more economical, but two
ships were used in case one failed. If one ship had a problem
that could not be overcome, then the crew of the problem ship and
perhaps supplies were transferred to the remaining good ship.
Space probes will similarly have redundant or "backup" tools and
instruments in case something fails. It costs more to launch and
build probes with redundant parts, but the backup systems can
save a mission from disaster.
The "comparative advantage" philosophy of economics generally
ignores this principle. It in essence encourages economies to
put all their eggs in one basket because under ideal
circumstances it is more efficient. However, Murphy's Law usually
lurks around the corner. Full-out comparative advantage is at odds with
Murphy's Law and portfolio-diversification, turning economies
into one-trick ponies.
Distribution is Safety
Every major "industrial" country
should strive for some level of self-sufficiency in major or critical
categories, such as manufacturing and technology.
Although I don't necessarily
propose an even mix for each country, entire industries and professions
should not be allowed to simply disappear from a given country in a
blind 100% adherence to "comparative advantage" dogma. A rule of thumb
for "balanced trade" is to keep about half of the original
pre-globalized industry in the home country (unless of course it becomes an obsolete
industry such that no nation specializes in it). Further,
a newly globally-targeted industry
should be allowed to shrink via a natural attrition rate rather than
sudden decimation.
See blog article for more.
Let's take a specific example from the United States.
Manufacturing and computer programming jobs are leaving the US
for lower-cost countries such as China and India. If a country or
terrorist group wanted to attack the US, rather than use missiles
or bombs aimed at the continent, an enemy only has to disrupt the
flow of goods and services coming across the ocean. They could
cut the high-speed cables that run along the bottom of the ocean,
making international internet and phone communications difficult
and expensive. They could fire regular military missiles at cargo
ships carrying goods to the US from China. The US economy could
be crippled for a while, perhaps triggering a nasty recession.
Another possible scenario is that India and Pakistan get involved
in a war in which their nuclear weapons are eventually used.
India and Pakistan have long been at odds with each other, so
this is not just a remote possibility. Under such a scenario it
is likely that Pakistan would target the key economic centers in
India. Those centers currently handle software development,
maintenance, and many other services for many large US companies
and banks, and are increasing their portion of such services as
time goes on. Attacking such software centers would put the US
economy at great risk. It would take a good while to rehire or
retrain all the programmers and service workers to replace them
and learn each company's software from scratch.
In fact there are indications that Muslim fundamentalist
terrorists based in Pakistan have planned attacks on India's
economic centers. Thus, war between nations is not necessary
to trigger some of the scenarios presented here.
Or suppose the US goes to war with China over the long-standing
Taiwan disagreement. Much of our economy, infrastructure,
and even military equipment depend on parts and equipment from
China. They too could choke off our economy and make us
physically vulnerable, especially if such a conflict lasts
several months. A sneaky software "gift" from the US once caused a
large explosion
in the Soviet Union. For a while, part of the
Soviet Union looked just like our left-corner logo.
The "Do Nothing" Nation
The US is increasingly relying on other nations to provide basic
and important goods and services that keep our nation running.
Actual production of the goods, services, and knowledge that
consumers, businesses, and the military rely on are done by other
nations in increasing levels. We are becoming a nation of
owners, managers, and marketers that no longer know how to work
the front lines.
"Real work" is
not being done in the US anymore. Corporate bosses bicker
in boardrooms over
whether blow-dryers should be beige or translucent
instead of invent, improve, or manufacture blow-dryers.
Aside from the economic risks of losing access to the front-line
"economic soldiers" to other nations, there are less training
paths in which future managers and marketers can learn their
trade. How can a US manager of software development learn how to
manage software developers without ever having the chance to be a
software developer? Software development will no longer happen
in the US frequently enough to cultivate future managers.
Can we have generals who never experienced live battle? Are we going
to have to start sending manager jobs overseas also because we
lack the experience at home?
An alarming number of my experienced
techie friends are fed up with a dwindling
demand for their skills, and are preparing to move out of
tech and into fields such as interior decorating, massage
therapy, landscape architecture, herbal consultant, lawyer, etc. Although
these are fine careers, they don't really provide the kind of expertise
that is going to keep US a forward-moving economic power.
We are handing over our economic keys to other countries,
and they will drive away with more modern workforces and
industries.
Uncle Foo Foo
The US is increasingly losing jobs that
actually produce something tangible or
directly contribute to technical progress.
Instead we are moving toward marketing, social,
and "fluff" jobs. Not to disrespect
social fluff jobs,
but we
need to balance the mix. Our "jobs portfolio"
is losing diversity. Lack of diversity usually
leads to mayhem in the longer run.
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Dependency Kicked Us Once Already
One of the reasons that the Great Depression of the 1930's was so
severe is that when times grew tough after the stock burst of
1929, nations reduced trade with each other in order to
protect their own industries and workers. This cycle spiraled out
of control, leading to horrible economic conditions for many
nations, including the US. These desperate conditions were a
major catalyst to Hitler's rise and Word War II.
Free trade proponents will argue that this is evidence that
wide-open trade is good. However, it is really evidence of the
opposite: The more you depend on other nations, the more their
problems become your own. I am not for shutting off all
trade, but rather having
balanced trade.
Balanced trade is
where enough foreign trade is allowed to promote diversity and
competition, but not enough to eliminate entire national
industries and professions.
Even in 1997, before I was aware of the global threat to my
software career, I felt uneasy about how fragile the global
economy was. During that year a financial collapse in many Asian
banks was starting to spill over into other continents. Many
economists worried about a domino effect resulting in a
global recession or perhaps depression. By shear luck, the
dot-com bubble was growing at that time and probably saved
the world from a big recession. Next time there may be no
such lucky bubble to save us.
Too much interdependence
increases risk. Just as investors are encouraged to
diversify their investment portfolios, countries should
keep their specialties and services similarly diversified.
Those who didn't diversity were burnt badly in the dot-com
melt-down, for example.
We should heed history's consistent lesson: Don't put all our
economic eggs in one basket.
Restrained Flow of Labor
"Free Trade" is lopsided in practice. Although goods and services
can readily change borders to find the "lowest cost producer",
labor cannot. This creates an imbalance between skills available
and skills used. For example, a computer programmer in the US
cannot directly compete with one in India whose typical salary is
one-seventh that of the US. The US programmer would have to
accept minimum wage to be comparative cost-wise. He or she is
economically better off becoming a plumber or Walmart sales
clerk. A perfectly good skill goes to waste. (More about
education and retraining options is discussed later.)
Someone who would otherwise be an above-average computer programmer
cannot compete with an average-skilled computer programmer
in India because of the huge labor rate difference. Resources
are NOT being efficiently allocated by "free trade"
because the one who is technically better qualified will
not get the job.
It would be like giving the job
to the "C" student, not the "A" student. Free trade
is failing to allocate based on merit. (The example is not
to imply that Indian programmers in general are less skilled, just
that the allocation of jobs currently depends more on location
than skill.) It is a clear
case where free-trade is not producing the most efficient
allocation of goods and services. One could argue that
the alternatives have their own flaws, but they cannot argue that
free-trade is producing the optimum solution here. Mental fruit
is left rotting in the field. (Free traders will suggest
one can readily switch fields, but past statistics
on those displaced
by globalism are generally not rosy.)
India may
allow a few visa workers into their country, but surely they will
not allow every displaced American programmer in. Free-trade is
only half free. True market fluidity would allow people to cross
borders to find a better fit for their inherent abilities.
Adam Smith Does Not Guarantee Jobs
Contrary to popular belief, market economics theory does not
guarantee jobs or a middle-class society. Perhaps it has worked
out that way for the past 200 or so years in the US, but as any
good investor will tell you, past performance is no guarantee of
future performance. The pace of change in technology is
accelerating, and the economic issues and problems that result
from this is new, unexplored territory.
Current economic thinking seems to emphasize creating inexpensive
goods and services rather than creating good jobs. Some
economists say they are one in the same, but there is no
decent evidence that this is the case. It is only speculation
on their part. Is having
cheap Walmart trinkets more important than having satisfying,
productive, and diverse jobs? Should we risk global economic
collapse (see above) and limited jobs just to enjoy a few decades of
cheap trinkets?
Further, comparative advantage does not aim to optimize human
happiness. Taking something away from somebody, such as a job, creates
strong suffering; but not getting the future benefits of something, such as
cheaper goods, and not really knowing much about it does not make a very big
emotional impact in the population. People generally don't miss what they
don't have.
In other words, the pain of the downsides of comparative advantage tends to be
stronger than the happiness caused by less-expensive goods. A loss of a good
job is often a very personal life catastrophe, while cheaper goods is
perceived as a nice little bonus. There have been far more riots and
protests over lack of jobs or low pay than over expensive goods throughout modern
history (the possible exception may be food availability). Economists and
politicians cannot ignore the "human factor" in democracies because people
will vote on the weight of their emotions far more than on an abstract
benefit. The proof is in the tears falling in the pudding.
It is ironic how "brain workers" now have to focus more on "soft
factors" such as diplomacy and customer service in order to survive the
globalization of their careers. However, economists keep focusing on widget
output instead of human suffering. It seems the economists should be required
to take People Skills 101 along side us nerds.
The Next Big Thing, Where are You?
The Next Big Thing usually came around to save displaced
workers in the past, but we don't know if that will always be the
case. Usually the disruption was in relatively low-skilled or
physical-labor-intensive areas. Thus, the transition to another
low-skill occupation was not that difficult. One could simply
trade in one low-skill occupation for another with a bit of
training. When farming disappeared there was factory work or
mining to take it up. When mining and factory work started
dwindling in the 1960's, there were more low-skill jobs in food
services, retail, phone support services, etc.
Also, semi-skilled and specialized trades
such as electrician and plumbing came of age.
The higher-skilled workforce was mostly immune to all this. A
four-year degree in a technical or knowledge-intensive field
generally gave one a relatively safe middle-class or
upper-middle-class career.
Until now. The internet and high-speed communications is eating
into many technology and knowledge-based professions, rendering
them a dead-end career or long-term unemployment risk. Unlike the
prior blue-collar migrations, one cannot easily just hop on to
the next profession. Formal education is more expensive and
time-consuming than most blue-collar training.
Plus, the college degrees offered that are not at risk
of being globalized are rapidly dwindling.
One could perhaps go from being a farmer to a factory worker to a
retail clerk in one life-time, but it is not realistic to expect
everyone to get three college degrees and master 3 different
professions in a lifetime. The only option for a displaced
"knowledge worker" may be to go back into the blue-collar trades.
They might as well burn their college degree to risk not
appearing "overqualified". Some of my programmer friends who
attempted to switch into blue-collar trades found that their
technical background created a stigma against them.
Education is not the Answer
Many politicians, CEO's, and even
Alan Greenspan
are suggesting that yet more education is the magic savior of US
knowledge workers. But they are almost always not
specific. When pressed for
details,
they usually just
make references to historical Next Big Things that saved jobs
in the past. Let's more closely examine the options of a hypothetical
displaced computer programmer that we will call "Sue". (I was
a computer programmer/analyst myself, I would note.)
What kind of new training or education should Sue get
so that she can work again?
Supposedly there are "higher-level" computer positions such as
project manager, business analyst,
software engineer, etc.,
but these are skills
that come mostly from experience, not from a book or college
course. Sure, college may help some, but these are mostly
experienced-based positions because they require a lot of "soft
skills" such as interacting with users, customers, managers, and others
in a diplomatic fashion and understanding business habits,
business culture, and
office politics.
Computers make many non-technical people nervous
because they don't understand them, yet at the same time don't want to appear
ignorant. I have seen office workers cry and throw fits over
computer issues more than any other thing, with the possible
exception of layoffs. Thus, liaisons between computers and people have to
know how to comfort people without hurting their feelings.
It is often a tricky tight-rope act.
But, computers don't care if
you hurt their feelings; they only want precision,
clarity, and consistency regardless of how terse
or dry the delivery. They welcome the ugly truth without
even a hint of a drooping brow. Software can be like a loyal
dog who only demands the right kind of food. You can frown
and cuss at the dog, but he always happily comes back for
more input (food).
The resulting logical nature of computer programmers
tends to make them strait-forward and sometimes blunt. This is
the opposite of what is needed
for machine-to-human liaison and IT manager
positions. Making the transition requires more than just
additional book knowledge; it may require a personality overhaul.
Most companies appear to prefer someone with A-level people
skills and C-level tech skills over the reverse for such
liaison positions. (I've met very very
few who master both.)
These are the kinds of skills one obtains from skipping class and
partying away the night, not digging ones nose into a calculus
book for tomorrow's exam. George W. Bush is the new role model for a more up-to-date
education "curriculum".
Further, there is often only about one such
position for every five or so programming positions. Thus, this
path is not a general solution for most displaced programmers
because there is "not enough room at the top" to accommodate them
all, even if they could obtain the needed soft skills.
What about entrepreneurship? I have personally tried to start up 2 businesses of my own with dismal results. It takes a wide variety of skills, especially marketing, to succeed. Statistics will show that a heavy majority of new businesses fold within 5 years. Entrepreneurship is not a general solution for all displaced white-collar workers.
Will more formal education in the same field make Sue more
desirable in the eye of employers so that she is competitive
compared to cheaper overseas labor? My experience is that formal
education makes only a few percentage points difference in the
eyes of most employers of programmers. A five percent difference
in perceived value is not going to help much when they are
comparing to the up to seven-to-one ratio of labor rate
differences. Even if we factor in the overhead of managing
overseas labor, it may be a difference of roughly five percent
versus fifty percent: an entire order of magnitude. Plus, having
a masters or PhD often just makes a citizen look too expensive --
in other words, "overqualified".
Formal education tends
to be out-of-date anyhow. The higher the course number, the
more detached the professors tend to be from the real world
and technology trends. The pundits and lobbyists who claim
that American tech workers lack sufficient formal education
are simply either naive about the computer industry or are
lying because
they can.
What about going into a new technology field?
Biotechnology is rumored to be hot. However, the current
employment quantities for this field are not anywhere close to
what computer programming was. Plus, biotechnology work is
probably just as offshore-able as programming. Why spend another
three years in college just to have your new field also stripped
away by the hungry sharks of globalism?
The US has no monopoly on science and technology
education. Asian countries tend to put a lot of value in
education, and are making sure they are competitive in that
arena. The US still has a (perceived) edge in cutting edge
research universities, but as far as rank-and-file "techies", the
US has nothing special. It just costs more here, that's all.
Probably less than one in ten technology jobs are in
cutting-edge research,
and cutting-edge research is increasingly moving
offshore also. Trying to out-compete Asia via education is
race to the bottom. The laws of physics are the same in Asia, but
not the labor rates. Thus, it is more logical business-wise
to do physics and math-related research over there.
The variety of alternatives dwindles with each off-shoring round.
First it was just manufacturing, but now all "knowledge-based"
careers and phone-based customer-service careers
are being threatened (see illustration below). Ironically,
technology, knowledge-based careers, and phone-based customer
service were supposed to be
some of the anecdotes to loss of manufacturing jobs.
What remains is marketing-oriented
positions and positions that require more direct customer
interaction. Many techies went into technology in part to avoid
heavy human interaction because they knew they lacked such
skills. Now they have fewer alternatives. Schooling has not
proven very effective at teaching social and marketing skills.
In fact, retraining in general has not proven very effective:
"A 2001 Labor Department audit found that only 1 in 5
who participated in programs for displaced workers found jobs for which they had been retrained;
nearly 40% ended up working part time or for less than they had earned before;
28% had not yet found any work at the end of their training." -
Time Magazine, Feb. 2004, (Emphasis added)
Getting back to our Programmer Sue example, the other kinds of
semi-skilled jobs remaining are those that
involve physical work, such as plumbing, office equipment repair,
building electrician, and so on. These are probably the best bets
for most displaced ex-software experts. However, they pay only
about 2/3 as much as computer software-related careers, and
often involve risk of physical injury or electricution. (At first
it looked like jobs were moving away from physical dangers found
in the likes of mining, farming, and hunting. But now it seems
like we are moving back toward physical dangers again in order
to make a buck.)
Further, many of these jobs will probably be under the globalism
gun when
remote-controlled robotics
comes into age. Technology reminiscent
of NASA's Mars rovers or the
planned Hubble repair robots
may soon enable people from low-wage
nations to perform plumbing, equipment repair, wall painting,
cashiering, food service, and many other jobs in the US. Remote
robots will probably even be able to repair each other.
Such technology does not require any giant breakthroughs to
work; it does not require "artificial intelligence" because it
uses cheap real intelligence: offshore human labor.
Such machines may not be as fast as a hands-on human, but with labor
rates of 20-cents an hour in some parts of the world, it may not
matter much. Two may be possible for less than the price of
one local human. Plus, they could work 24-hour shifts as remote
workers in different
nations with different time-zones can participate in a project.
The main technical obstacle to this right now is overseas
communications bandwidth.
However, sufficient bandwidth for such
remote robots is roughly less than a decade away, based on
current rates of growth. Where will it all end?
Even now, to a displaced programmer such as Sue, it is
a lot like being eighteen-years-old
all over again, except this time there are less options,
and if one has a family, more responsibilities.
So much for "family values".
Less Places to Hide -
This illustration shows each "cycle" of offshoring reducing the
kinds of jobs available. Although there may be some
"vertical" growth in the remaining categories, the disappearance
of whole categories currently seems to be moving at a faster
pace than such growth. Even if this was not the case,
the larger-scale variety of career
options shrinks. For example, there may be more varieties
of sales clerk jobs available, but not everyone is cut
out for sales, at least not enough to replace their
pre-offshore wage level. This reduction in the variety
of jobs available may be a reason for the dwindling
middle class. If the kinds of jobs narrows, then fewer
will posses the narrower talents needed, creating
sharper wage and opportunity differences. Perfectly-good
talents may be wasted or poorly rewarded.
More on sprawling losses.
