The Outsourcing Controversy and a Mistaken Theory of Value

0:00paper, it's called Outsourcing and a Mistaken Theory of Value, and it came about, I've had an interesting relationship with Paul Craig Roberts, he actually influenced me a lot in legal, right about here, okay, influenced me a lot in legal thinking, and unfortunately, the guy who helped give us supply-side economics is now giving us what I think is a really crank theory on on Outsourcing, but unfortunately, again, often crank theories start getting legs, especially during a recession. During a recession, let's just face it, that the last thing people want to know is the truth. They're not particularly interested in the Austrian business cycle theory because the Austrian business cycle theory says, by the way, we're going to have a recession and it's going to be nasty and on the other side of it we can have a recovery because we have people like of course Paul Krugman who believe that you can just perpetuate the boom conditions forever by printing money.

1:04By the way, I would like to make a plug, I do have a blog called Krugman and Wonderland and it's got dashes between Krugman and End to End and Wonderland and it's one of the Blogspot ones so I would urge you, urge you to go to that site sometime and make me feel Outsourcing in a Mistaken Theory of Value

1:54Free Traders are resurrecting class war, not because they are Marxists, but because they confuse free trade with global labor arbitrage. Free Traders turn cold shoulders to US job losses from offshore outsourcing because they They Mistake the Losses for the Beneficial Workings of Comparative Advantage Committed to a 200-year-old theory that they no longer understand, free traders are cheering on the destruction of middle-class jobs and the dismantling of the ladders of upward mobility that make large income disparities politically acceptable.

2:44It's a mouthful and they probably, I suspect those free traders also beat puppies and stick pins and dolls and things, but nonetheless this is the claim. Now according to Roberts, we have the theory, everybody knows the theory of comparative Advantage, and so what he writes though is it holds only when capital cannot cross international borders. In other words that if, now labor can cross borders kind of, but what Roberts is saying is that when in 1815 when Ricardo wrote his principles of political economy and taxation that factors of production were relatively fixed in each country and so you could therefore get a real clear advantage, I mean a real clear picture of what comparative advantage would look like.

3:57So he says, Ricardo imposed the condition of relative capital immobility internationally in order that specialization according to comparative advantage could occur, otherwise a capital, a country's capital would flow to absolute advantage abroad. When U.S. firms substitute foreign labor for domestic labor in their production for domestic markets, capital is flowing to absolute advantage. Now I have no idea what he's saying, and I'll get into that in a minute, but that's where Roberts is coming from. And so it's that, okay, once capital flows, then all bets are off, we're back to absolute advantage again, okay?

4:45And I will deal with that specifically. The following scenario, US firms, the greedy capitalists, unilaterally decide to outsource because they can make more profits, especially they outsource the high-wage, what he calls the high-wage, high-value added jobs. The loss of that value added is a net loss to the US economy. This is important to keep in mind as well. Furthermore, workers are unemployed and future workers become discouraged as they know their jobs will be outsourced. Even if capitalists make net profits, they gain at the expense of workers and the income disparities weaken the economy. So this is his whole point about income disparities.

5:37Now this is very interesting. These net losses have a dual effect. Number one, we're no longer manufacturing, these high value added, you know, we no longer have the high wage, high value added jobs, all right, and so now these, and these people are making goods abroad with the idea of importing them back to the, you know, into the US economy, however, however, that because we're producing less, now they can't import back what they were making abroad Thus, according to Roberts, the economy becomes a third-world economy, all because firm owners decide to engage in outsourcing abroad.

6:25So this will be our future. And kind of cute, really, but they need to recycle those bottles, and if they can just What is happening is that foreign labor is substituted for U.S. labor in the production of the goods and services that Americans consume. Americans lose the income and employment associated with the production of the goods that they consume. This is really starting to sound a little bit like Marx and alienation, but I'm not going to call them Marxists. The loss Lots of these jobs is, quote, fool's gold for companies.

7:12Corporate America's short-term mentality, stemming from bonuses tied to quarterly results, is causing U.S. companies to lose not only their best employees, their human capital, but also the consumers who buy their products. Employees displaced by foreigners and left unemployed or in lower-paid work have a reduced presence in the consumer market. They Provide Fewer Retirement Savings for New Investment. So you can see how the dynamic is going here. And with Roberts, it all begins with outsourcing. That's ground zero. The outsourcing that what happened, all of a sudden corporations became greedy. And not only that, but you started having, you know, these people abroad got rid of communism.

7:57It's terrible. I mean, the Chinese, I know that they've got a communist party, but they're just not very And all of a sudden you've got an educated workforce that will work for less than what we work for. As proof, what he does, I've got a quote here, plus an email that he received from somebody. As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle-class families who are being driven into penury, here is one recently arrived, and it goes on, how much time do I have, oh yeah, it would take me at least 15 minutes to read that, But thank you for your continued truthful commentary on the new economy.

9:03My husband and I, it's poster children, nine years ago when we were married we were both working good paying secure jobs in the semiconductor manufacturing industry. Our combined income topped 100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, I thought that happened a little bit and decided to leave the labor force to care for our infant son. Fine, we tightened the belt, and then we started getting squeezed. Expenses rose, we downsized, yet my husband's job stagnated. After several years of no-pay races, he finally lost his job a year and a half ago. But he didn't just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry-level corrections officer.

9:57We had to take it at almost a 40% reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car and any assets we had left. A salary last year, less than $40,000 to support a family of four. Year and a half later, we were still struggling to get by. I can't find a job that would cover the cost of daycare. We were stuck. Every jump in gas and food prices hit us hard. Without help from my family, we couldn't have made it. So I could tell you just how that new economy has worked for us, but I'd rather not use that kind of language. And what Roberts does, he said, this is going to be the scenario for all of us. So get ready to climb into that barrel and look for those empty bottles. Okay. All right. Well, that's just true, okay.

10:42Does outsourcing actually, does the dynamic that he gives us actually destroy the U.S. economy from within? All right. Alright, well, obviously if I'm calling my title a mistake in theory of value and other things, well then I'm going to say no! Alright, I start with Bob Murphy, the same Bob Murphy who spoke this morning. The case for free trade really isn't about jobs at all, but rather living standards. In a free labor market, wages and salaries would adjust until all who wanted to work at the prevailing market rates could do so. In such a scenario, dropping Tariffs wouldn't create jobs, it would merely shift workers from less to more productive lines. Okay, now Robert's points, he says, look, we're not even talking about trade, we're talking about factor mobility. This has nothing to do with actual trade, because with Robert's trade is only in finished goods. Okay, finished goods, that's trade, nothing else is trade, I don't know, and it's kind of like he shifts the goalposts a lot in his arguments, but nonetheless, the issue, I think that one of the things we're talking about is not jobs.

11:58Okay, it actually is living standards. Do we have higher living standards now than we had, say, 30, 40 years ago, whatever? Yes, we do. I know Paul Krugman says we're poorer now than we were in the past. As one who moved to Chattanooga in 1964, and one of the places I hated to come to was the state of Alabama because I'd never seen so many shacks in my life. I don't see those shacks now. I mean, living standards have arisen. Rothbard. Now, at the time, I mean, believe If Murray were alive, I'm sure he'd have plenty to say to Craig. And by the way, I will also point out, I get a lot of emails from him, about 10 a day.

12:48Most of them deleted. Most of them say things like, I won't use the language that he uses, but Americans are all stupid, economists have their head in the sand, you libertarians have your head in the sand, you don't see what's happening. And I sent him a letter once, I tried to engage him a little bit, and he writes back and says, You sound like what you're saying is you want the entire economy to be outsourced. It's okay. Every once in a while, Lew sends him an email. I just gave up on it. On some areas, like on law, he's still pretty good, but things like war and all that, pretty good, but unfortunately here, well, he's not pretty good. All right.

13:34Now Rothbard does say something interesting, I think very important about trade. The best way to look at tariffs or import quotas or other protectionist restraints, by the way, because ultimately, what Roberts recommends are tariffs and quotas, okay? He actually, I remember seeing an email, I asked him, and he said that we need to have quotas and all that, okay? Or other protectionist restraints is to forget about political boundaries. The Federal Boundaries of Nations may be important for other reasons, but they have no economic meaning whatsoever. Now this is important, because Rothbard is saying we are talking about exchange, there isn't anything that's going to allow America to become wealthier by making it more difficult to engage in exchange abroad.

14:28Now that is pretty much standard free trade policy. Now he talks about what happened when we did have quote outsourcing, the very thing Roberts is complaining about, if you remember back in the 30s and really on to about the 1960s, that you had textile factories closing in the north and other kinds of factories as well, closing in the north and then moving to the south, places like North Carolina and South Carolina, Georgia, Alabama. So he says during the 1966 congressional battle over higher federal minimum wage, for example, The late Senator Jacob Javits freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, business firms hit hardest by an increased minimum wage and the workers struck by unemployment will be located in the south.

15:27Again Roberts would argue, by the way, it's those high wages in the north, if you locate to the South, then we'll all be poor. All right, now, I'm going to come at Robert's from two different points. First, his value theory, speaking specifically of value added, which I have at the bottom. It's an accounting concept, it's not an economic concept, that we begin with, as Austrians, begin with the final product. For that matter, you've got Marshall and derived demand. To begin with the final product, you impute backwards. Even though produced good, yes, at different stages it adds on and adds on, I can assure you folks you don't want to buy a Ferrari without an engine.

16:17It's not like, okay, now it's worth $90,000, we'll put this $10,000 engine in, I know it's a lot more than that, but just bear with it. with the $10,000, and now instead of being worth $90,000, now it's $100,000. No, Ferrari without an engine is not going to be worth $90,000. His value theory really is a little more than a restatement of the cost of production theory of value. This is what it is. What is he saying? He's saying that the production itself and the wages paid and all that is what creates value here. And it obviously conflicts with the Austrian theory. On comparison, Comparative Advantage is not really a theory, it's not speculation, it's a restatement of opportunity cost.

17:05Okay, let's change the wording. Put another way, Roberts is saying, if capital is immobile across international borders, opportunity cost no longer matters. This is interesting. This is rewriting the fundamental laws of economics. What he's saying is that if capital goes across borders and boom, everything changes. There is no more opportunity cost. That's interesting. Nobody makes decisions based on opportunity costs anymore. Very strange. Question is, why do firms outsource? Well, one, it's a productivity Issue, where I'm not giving in the paper, which I haven't finished sourcing and the paper is way too long and it sucks, and I would not recommend reading it right now.

17:58But it is finished, it's just, I've got to do some stuff to it. But you have a situation where, for example, the Kia plant moving in, all right, that's going to put upward pressure on wages elsewhere in the area. There's a productivity issue there. What was happening in New York was that there were other kinds of businesses that were having higher wages, that in fact forcing up wages, that would make it so the owners of capital and of certain kinds of goods are going to have to go where the public is going to be willing to buy the final product that doesn't have a higher price because, well, I've got The second one I think is much more important. Governments force up the opportunity costs of labor, but they don't add anything to it. There's no productivity. They just make it harder and more expensive to do business, but you don't get anything for it. They just raise your costs. They raise business costs. In fact, Roberts is arguing for laws and regulations

19:12and the like that will force up business costs with the idea that somehow this will make us wealthier. And so I think that, in fact, here's my concluding paragraph, if we've watched anything or anything watching the disasters, you can't create prosperity by fiat, okay? Furthermore, Roberts wants us to believe that the bloated wage contracts at places like General Motors and Chrysler somehow are responsible for creating wealth instead of actually destroying it. Henry Ford doubled his labor costs, or doubled the wages that he paid the workers, and that's what created the middle class. Yeah, a little factory in Dearborn creates the middle class, and without people realizing the opportunity cost reasons why Ford made that particular move.

19:58And so, here's the thing, in the end, it really sounds good. I mean, he had an op-ed in the New York Times with Senator Charles Schumer, and yeah, we We understand that all the rules are different now. We have mobile capital, so therefore comparative advantage no longer operates. So what he's really saying is opportunity costs no longer exist. And the rest of us are sitting back and saying, you know, that doesn't make much sense. Thank you.