Douwe Osinga's Blog: Why jobs moving overseas isn't so bad

Tuesday, October 7, 2003

The same people complaining that economics isn't a science tend to not understand the writings of Ricardo about competive advantages. An article on O'reilly's recently had all the old arguments about computers destroying jobs and jobs going overseas without paying any attention to economic theory.

Simply said, Ricardo argues that if everybody does what he is best at relatively, than everybody will profit the most. Not everybody will profit the same, though. So, if Indians are better in programming than in marketing relative to Americans, then it is best if the Indians program and the Americans do the marketing. But isn't the American economy hurt when the good jobs like programmers move to India? No. Let's consider the American economy as a system. Let's assume it spends 100 on software development. Now, the Indians come and they'll do the same job for 30. That is good for the system, because it is cheaper.

Some programmers become redundant and they'll have to find new jobs. Granted, not nice for them. If they find a job in which they make more than 30, the American economy wins. The programmers in India make more than the otherwise do, so the Indian economy wins too. But what if the programmers can't find a job for more than 30? Well, it that case they can stay programmers and work for the new wage of 30.

So wages are driven down by international competition until everybody earns what they earn in India and we're all poor? Wrong again. The American economy as a system produces a certain amount of wealth. The more people work, the more wealth. The more efficient the system, the more wealth. This is where economic growth comes from. Moving programming jobs to India increases the overall performance of the system and thus the overall wealth production of the system. So, in total people become richer.

This is where it gets tricky. Economic theory doesn't tell us where the extra wealth ends up. Everbody might get richer, or only the people that are already rich. Employment might rise or it might fall. But that is a point where a lot of confusing seems to be about. People tend to reason that employment falls with rising productivity because you need less people to do the same amount of work. This is what the economists call the falacy of the lump of labour.

People are 10x as productive as say a 150 years ago. If the lump of work falacy would hold true, 90% of us would be out of a job. Instead these people moved out of the factories and farms and started to do the things that make our lives so much nicer. So all is well with the moving of jobs overseas? Not really. It would be better to let the people come and work here that are motivated and capable. But the general population doesn't want that for fear of their jobs. Don't get me started on that.