By Russell Roberts Outsourcing is all over the news. U.S. businesses are hiring foreigners, often in India, to do things that Americans once did. The tasks range from manning call centers to writing software code. We often hear that this economic phenomenon is bad for America, that the benefits of free trade no longer hold. The world has changed.
We're told that information moves more quickly than in the past. Capital is more mobile. The fall of communism has unleashed thousands of new workers into the global labor force. The U.S. is shedding service jobs, having already lost millions of manufacturing positions. Now white-collar jobs are being lost.
All of these are true. But none of them change the benefits from open trade with our neighbors -- nor its costs.
CREATIVE CYCLE. When an American outfit creates a call center in India or sends some of its software-design business there, it's able to do more with less -- more output with fewer workers, less capital, and fewer raw materials. Costs go down.
These savings come from different sources -- innovation and productivity changes, importing goods rather than making them, or using foreign labor for services that used to be done in-house. All of these allow companies to get more from less, which means America is more productive as a nation. The result is higher wages and a better standard of living for the average American.
That's the story of the last 100 years of the U.S. economy. In 1900, 40% of the country's work force was in agriculture. Today, the percentage is about 2%. That transition was driven by innovation, getting more from less. Prices fell. People spent less money on food. That freed cash to to be used on new products, and new companies could be created.
FEWER FACTORIES, MORE OUTPUT. During the transition, farm employment dwindled, but tens of millions of new, higher-wage jobs were then able to come into existence. The U.S. would be a lot poorer if the country had insisted on keeping those farm jobs. The change was hard on a lot of farmers, but it was good for almost every American. The children and grandchildren of those farmers enjoy the benefits today.
The same transition has happened in manufacturing over the last 50 years. Businesses have found new ways to get more from less. Some of those ways involve new technology or importing goods that were once made here. Both result in fewer manufacturing workers and greater output.
If the U.S. had insisted on making all its own cars, watches, TVs, radios, or shoes, resources wouldn't have been available to channel into creating the jobs of the last 50 years in telecommunications, software, and biotech. People wouldn't have been available to work in those industries, and the American standard of living would be dramatically lower.
PROTECTED BUT POORER. But what if India gets all the software jobs? (See BW, 3/1/04, "Software".) I doubt that will happen. I suspect that for most information-technology jobs, Americans will still be more effective than foreign workers. But suppose Indians decided to work for free and give away the software, the ultimate competitive threat. If outsourcing work to low-wage Indians is bad, surely free software from zero-wage Indians is even worse.
Free software would be hard for the U.S. workers in the software industry to compete with. But it would be a boon for America -- plenty of U.S. outfits would expand. Having free software would let a lot of new companies come into existence that couldn't have been profitable before. Programs at no cost would mean lower prices across the board. That would liberate resources to do new things all over the economy. Many of those out-of-work American programmers would find new jobs. The same effect occurs when the software is merely cheaper, rather than free.
The hardship that results from economic change always tempts politicians to limit individuals' freedom to buy what they want and businesses to hire whom they desire. Such political restraints will make life more secure -- but poorer and less dynamic. Ultimately, it will have no effect on the number of jobs in the U.S. but only make the ones that survive pay less. Roberts is a professor of economics at George Mason University and a research fellow at the Hoover Institution at Stanford University. His novel, The Choice: A Fable of Free Trade and Protectionism (Prentice Hall), looks at the human and economic costs and benefits from trade