U of Chicago professor Dan Drezner has a long article supporting outsourcing in Foreign Affairs. Once again, we're wrong and those pink slips we got - imaginary. Now Dan is a nice guy - and someone I've debated with before. But it is clear to me that Dan needs to get out of Hyde Park more often. His argument is based on the theory of comparative advantage, with dashes of faith mixed with a pinch of skewed statistics (Dan, for crying out loud, STOP using statistics from McKinsey Global Institute - the research arm of one of the world's great outsourcing firms. It's like citing Japanese gov't statistics to justify whaling.)
The greatest mistake Drezner makes is the assumption that only low-value jobs will go abroad. "The parts of production that are more complex, interactive, or innovative -- including, but not limited to, marketing, research, and development -- are much more difficult to shift abroad." Difficult? If so, then the financial analyst positions that JP Morgan-Chase outsourced last September, and the design unit Intel is building in India prove that it is not as difficult as Drezner would have you believe. In fact he fails to state why these jobs should remain, given the vast pool of highly educated talent in India and China. This is also news to India which is predicating its future growth on these industries in the hopes that they can take over in place of the low-value added jobs like call-centers that will shift to even cheaper places eventually.
To quote this article by Paul Craig Roberts, former Assistant Treasury Secretary under Reagan, (http://www.businessweekasia.com/magazine/content/04_12/b3875614.htm) "For comparative advantage to work, a country's labor, capital, and technology must not move offshore. This international immobility is necessary to prevent a business from seeking an absolute advantage by going abroad." Roberts believes that there is no longer any reason for differentials to exist in the cost of production of goods and services - the very basis of the comparative advantage theory. In layman's language, that means that there is a global price for a service, say will writing, and in such a global market the cheapest lawyer will win - and chances are, the winner will not be your kid in her second year of law school.
Roberts' point is that when the theory was being formulated by David Ricardo in 1817, there world was quite different than it is today when it comes to processes and communications. He argues, as we have, that information technology has changed the dynamics of economics in ways that cannot be adequately accounted for in 18th and 19th century theories. The bottom line is: if a radiologist can read your x-ray in Bangalore for $5, and it costs $50 at the local lab down the block - how can the American radiologist compete?
Drezner would say that he cannot, and that he must retrain for something else where America has a comparative advantage. But where? The only profession we seem to have a comparative advantage in is free-market oriented economists.
