Creative Destruction

WSJ.com – Creative Jobs Destruction
Joseph Schumpeter famously called capitalism “creative destruction”. It’s an excellent description and it’s hitting white-collar workers now via outsourcing. I’ve addressed this recently and don’t have a lot new to add to it.

Suffice it to say that education will take on a new importance, even later in life, and the same economic principles, such as comparative advantage, that make us richer through trade apply equally well to labor and white-collar jobs. How we handle this will determine how we perform economically in the future.

Any attempt to prevent outsourcing via the internet will just result in the relocation of operations overseas. We will, as with other difficulties, have to face this head-on. As the article points out, it’s the simpler jobs — the white-collar equivalent of mule work — that is being transferred overseas. The more difficult jobs will remain here and we will have to keep continually improving if we wish to prosper.

We always have in the past and I doubt the future will be different, unless we embrace illiberal economics, in which case we’ll end up with a static labor market — and economy — like Europe. We’ll be much poorer for having done so as well.

Companies such as the bankrupt Global Crossing created the cheap fiber-optic bandwidth that allows Indian programmers and call-center operators to serve the needs of companies multiple time zones away. So if high-tech and service work can now be done more cheaply in the Third World, the argument goes, won’t standards of living in the U.S. inevitably fall? Even many serious people — such as Intel Chairman Andrew Grove — are raising new questions about the law of comparative advantage as the cost of communicating across continents shrinks to zero.

The “outsourcing” phenomenon is real enough. IBM recently said it will transfer almost 5,000 programming jobs overseas, mostly to India. The consulting firm Accenture, which handles outsourcing for other companies, plans to double its staff in India to 10,000 in the next year. Meanwhile, such Indian software companies as Wipro and Infosys are approaching $1 billion in annual revenue and growing staff by about 25% a year.

So at first glance this looks like a win-lose proposition, with India gaining jobs and the U.S. shedding them. Unemployment among U.S. software programmers is now above 7%, compared with 1.6% two years ago. Part of that is due to the aftermath of the dot-com bubble. But let’s not shrink from the truth: Jobs are migrating to India.

What’s important to understand, however, is that the labor market for programmers and software engineers is highly complex. You can’t simply substitute one worker for another. At the bottom end, some coding has become comparable to semi-skilled labor; some training is required but not a lot of brain power. These are the jobs moving to India.

Western companies are still keeping their most crucial work close to home. Just as in manufacturing, U.S. companies will use the cost savings from job transfers to pursue the cutting-edge advances that produce the highest profit margins. A study by the McKinsey Global Institute found that U.S. companies save 58 cents for every dollar transferred in jobs offshore. That money is available for new investment, or to pay top dollar for Americans with world-leading skills.

In economic principle, all of this is little different from the “hollowing out” of low-skilled manufacturing jobs during the 1980s. Now it is happening in services. The result is another inevitable round of creative destruction, in Joseph Schumpeter’s famous phrase, that will see some current jobs vanish while increasing productivity in ways that will assist companies in creating new jobs we often can’t yet imagine.

That’s the difficulty in arguing with protectionists: you’re left arguing about jobs that don’t exist yet while they point at existing jobs being shed, completely oblivious to the jobs of the future that haven’t been created yet.

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