Wed, 07 Jan 2004

Offshoring

Sigh. This is all nonsense, nonsense, nonsense. Outsourcing, or offshoring is very simple to understand, if you but take a moment. Let's take a typical reaction to offshoring and reduce it to the absurd:

Indianans think that money sent to India somehow disappears, or is lost to Americans. Let's say that, to stop that from happening, Indiana hires an on-shore firm. They're still sending their money out of Indiana. Were they to hire me to upgrade their state's computers, I must surely admit that I have absolutely no plans to buy anything from Indiana. Their money is equally as lost to them by spending it on-shore in New York as it is off-shore in Bangalore.

So let's say that the state government in Indianapolis hires somebody in Bloomington. Trouble is, that money is lost to the state government, since the Bloomington company spends it on Michigan outsourcers.

So they hire somebody in Indianapolis. They, in turn, have outsourced the work to somebody in Elkhart, Indiana, and that money has no return path to Indianapolis.

So they give up, and hire an Indianapolis resident to actually work full-time in the state IS department. Trouble is, nobody currently in Indianapolis is qualified to do the work. So they move from Bangalore, New York, Michigan, Bloomington, or Elkhart into Indianapolis, and no employment for any current Hoosier is created.

I'm running out of imagination, but the eventual end of this process is that Indiana Gov. Joseph Kernan has to perform every state job himself, because otherwise, some Indiana dollar might leave Indiana.

Can everyone see the absurdity here? There are no dollars that say "Indiana" on them. There aren't even any dollars that say "India" on them. It's too bad that Indians can't stamp the dollars that we pay them with "India Money". If they did, then we'd start to see India dollars in circulation inside the US.

The economic fallacy being promulgated by offshoring complainants is simple to explain but hard to internalize: The dollars that we pay to Indians don't get magically converted into rupees. They stay as dollars, and have absolutely no value to Indians unless they are ultimately spent as dollars back in the good old USA. Perhaps those dollars take a side trip to France, and then Britain, before coming back to the USA, but it should be emphasized again and again and again: we buy other countries products so they can buy our products.

You want to support Americans? Buy other countries products.
You want to support Indianans? Buy New Yorkers products.
You want to support Indianapolisians? Buy Bloomingtoners products.
You want to support Main Street Indianapolis? Buy Elm Street Indianapolis products.
Buy from whoever provides you with the most value regardless of their country, state, city, or street of residence.

There should be no confusion about how value is created: when two parties trade freely, each of them gains. The more that each of them thinks they got the better of the other, the more value created and the better the trade. Don't worry so much about who is getting the value. Worry more that the value created should be as large as possible.

Let me make this as absolutely simple as possible: nobody, but nobody refrains from outsourcing their own personal needs. I don't wash my toilet paper--I buy new, with the full confidence that, if I continue to do things that other people want, I'll get that money back as pay.

If there is to be a great hue and cry about offshoring, it should not be about the lost jobs, but about the new jobs that will be created once those dollars find their way back home.

Update: John Parmater's response was published on Dave Farber's Interesting People list. He says much the same as I, but probably more eloquently.

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