Outsourcing and Economic Illiteracy

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Dear Mr. Corrigan, you mentioned something about Chancellor Schroeder’s “economically-illiterate invective against outsourcing.” Let’s imagine that if all German manufacturers were to somehow outsource all their operations, then prices of their goods would surely drop, but then only their shareholders would afford those goods. Now I ask you, at what point does “invective against outsourcing” stop being “economically-illiterate?” When half the manufacturing is outsourced?

Sir, I understand your attempt at reductio ad absurdum, but, in essence, the simple answer is that such protestations will never stop being wrong-headed, not even unto the outsourcing of the last available job!

To see this, I would first ask you to consider that you are drawing arbitrary lines at national borders, divisions which are only imaginary political constructs, possessed of no fundamental economic significance whatsoever.

Indeed, since you raise the issue, there is a classic case in Germany itself, that of ‘outsourcing’ to the East of the country.

Had this happened before the Berlin Wall came down, no doubt there would have been much wringing of hands and gnashing of teeth, but afterwards — when the national border had been dissolved amid the collapse of Communism — there were even government grants of credit and tax relief to promote it!

We wrote somewhere a while ago about a small town with a single, expensive and unreliable car mechanic, which poor servant is suddenly threatened when a more reliable man in the next village, happy to work better for less, sets up in business to compete with this shoddy monopolist.

We asked how the first community could possibly think it would benefit if its Town Council were to pass an edict banning the neighbourhood from doing business with the newcomer, or penalising any with extra taxes (tariffs) if they did — and the answer was, naturally, that it couldn’t.

Now, scale the towns up to ‘countries’ and, though emotions undoubtedly run higher and the diatribes grow more lurid, we have the same underlying argument to rehearse.

If Germany were to shut down large swathes of its manufacturing tomorrow because the Poles and Czechs did the same work cheaper (as might indeed happen if the Schroeders of this world keep driving jobs beyond the Pale with their unsupportable Welfarism and their pernicious assaults on entrepreneurialism), there would undeniably follow a major human upheaval and many tales of genuine woe (and a major loss of capital, as well as of jobs) would ensue, but that would still not mean that overall material progress had in any way been retarded.

On the contrary, the jobless Germans’ old customers — having spent less on what was formerly made in the Heimat — would now have more free income at their disposal — as would the newly hired Polish and Czech factory workers — and this would quickly provide a market opportunity for those displaced to find a new livelihood offering different and novel goods and services to the owners of such monies.

This would therefore work to the good of all, eventually, by increasing the division of labour — one of the crucial features of an evolving society — even as it expanded the variety of economic goods on offer, so increasing the choices available to — and thus the potential satisfaction of — all.

To imagine that we should forestall this by penalizing the more economically efficient, or that, by subsidising the old, vested interests at the expense of their customers (who are also citizens, the economic chauvinists should recall), we can be better off is to say Henry Ford should have been locked up when he automated his first factory, lest he put his non-Dearborn, or non-Detroit, or non-Michigan, or non-US, (draw your own borders here) competitors — not to mention the hosts of outmoded horse and buggy workers — out of a job!

As the National Association of Manufacturers — never a group shy of lobbying the politicians when it feels disadvantaged — itself admits (indeed, campaigns to have recognised), ‘outsourcing’ costs very few jobs, but rather regulations, taxes, and the threat of legal violence are much more the factors which make each worker relatively less (NOT more, as the prevailing fiction has it) productive of economic value — and so less employable — in the US than he or she would otherwise have been!

Our misguided Collectivist politics and our corrupted legal system are thus more to blame than is any perfidious foreigner, supposedly scheming to steal our jobs, but, in order to address this, it means those in power pointing the finger at themselves — hardly a vote winner and so a cause highly unlikely to replace the current upsurge of economic xenophobia!

Finally, think about how it is a family or a neighbourhood, a town or a county, a canton or a nation, manages to buy more goods from its neighbours than it sells back to them.

To do so, either it must draw down on its reserves of cash, it must sell its vendors its assets, or it must borrow the goods from them in some form — whether utilizing their credit or another’s.

However, at some point, in a free market, this would become so unattractive at the margin — to the buyers, as well as to the sellers — that the flows would dry up as the patterns of trade adapted themselves to the changed schedule of ends and means.

To reiterate, as these marginal wants and relative preferences changed, so would prices and, through the signals these generated, economic activity itself would be modified, until a mutually beneficial balance was approached once more.

From the buyers’ perspective, the relative surfeit of goods would become appreciated less than the increasing perception of a shortage of assets or cash, or than the mounting burden of their debts.

From the sellers’ point of view, they would, in time, come to want something tangible today in exchange for their wares and the labour which went into making them, rather than relishing the chance to pile up an ever larger hoard of money or ever more claims on goods tomorrow.

Simply put, the buyers would run out of things they would wish to sell, or cash with which they would be happy to part, and so would bid lower and lower prices for the goods on offer.

This perceived shortage of money would, of course, also force ALL other domestic prices lower and so the costs of production at home would fall to the point that industries here would become more competitive vis-à-vis those of the outsiders. Lower selling prices, it should always be remembered, are no impediment to profits and real growth, if only costs are also allowed to adjust in due proportion.

Meanwhile, the sellers would want to spend their new, less desired funds at an increasingly rapid rate, driving up all prices in their neighbourhood, and they would soon find they were not able to justify their own costs of production for sale abroad out of the lesser sums being tendered by their former customers.

This is how matters used to work, by and large, before the Great War, in the halcyon days of the classically liberal, laissez faire order — when, incidentally, both personal liberty and economic progress made a more rapid and sustained advance — and that advance was shared over an unprecedented number of the swelling roll of humanity — than in all the annals of history before and, arguably, since.

However, if the Keynesian Serpent were now to intrude into this Eden of Say’s Law and to arrange for the buyers to be given access to more and more credit; if the buyers’ money could be instantly and near costlessly replaced once spent, things would be very different, indeed — if, perhaps, a little more familiar to us all today.

Then, if the buyers were also constantly subjected to the propaganda that, by succumbing to their most venal and intemperate instincts — and, thus, by consuming more than they, in turn, produced — they were somehow increasing everyone’s well being, there would be little chance of the process moderating itself as a result of actions on their part.

It should now be recognised that such a noxious expansion of money and credit could only occur when the market was not, in fact, free, but only when it operated under what is perhaps the most harmful and insidious of ALL modern government interventions upon the property rights of its citizens — that of a state-endorsed, unbacked, limitlessly issued, intrinsically dishonest money.

Under this mechanism, Western under-producers/over-consumers, as we have seen, could continue to provide a market for Eastern over-producers/under-consumers for a period beyond its natural span and so Western businesses would naturally seek to become involved in this process as profitably as possible, by selling at home what they have often helped to make abroad.

For this, too, we should not uncritically blame the corporates: maximizing shareholder value by most economically serving consumer needs is nothing less than their raison d’tre— even in a world of Tycos and WorldComs.

Nor should we excoriate the foreigners who, after all, did not impose the imperial dollar standard on an unwilling world.

Neither Czechs nor the Chinese, no-one from Hungary nor Hanoi, can be held responsible for inventing the politics of Military Keynesianism, of sempiternal and swelling budget deficits, of fiat currencies and financial shamanism.

No, these innocents merely signed up to our rules, voluntarily or otherwise.

But, even under this perverted system, the basic rules of economics cannot be indefinitely suppressed, no matter how hard governments — theirs or ours — try to do so.

Sooner or later, the sellers will come to distrust the value of the money they have acquired — and, eventually, that of the claims they hold, too — and they will seek to spend the first as soon as they receive it, and to liquidate their holdings of the second (while demanding payment in kind, not mere IOUs for any new goods sold).

Soon, limitless credit will run up against all too limited things and shortages of key materials and inputs will become painfully evident.

Then, the buyers will find that prices are rising, that their welfare has become lessened, that the calculations of their businessmen have become disrupted, that their household budgets have gone sadly awry, and that they have all too little of unalienated real value left to sell to make up the difference.

In several key respects — though not yet in all — this is the situation we in the West are facing today.

But, since the people will have been brought to these straits by the malign agency of loose money and big government, will they cry out to have both these evils thrust back firmly into the Progressivist Pandora’s Box whence they escaped?

No! For sadly, their reasoning has been dulled by two generations of the application of the drug whose side effects now so sorely afflict them.

Thus they will, instead, clamour — in the pain of their addiction — for more of both; for more plentiful credit and cheaper money (i.e., for more inflation) and for those whose only work is to feed that hungry Leviathan which is the State to earn their privileges and retain their sinecures by u2018doing something’ about it.

At which point, we have come full circle to Herr Schroeder and his all-too numerous peers whose u2018economically illiterate invective’ is, at root, only an articulation of demands made by those with far more excuse not to know better, but who are yet only ill-served by their leaders’ cheap and empty populism.

Sean Corrigan [send him mail] writes from London. If you subscribe to Capital Insight, LRC benefits.

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