I know I shouldn’t be coming to the intellectual defense of global outsourcing (There but for the grace of God… ). But there is a tendency for its critics to attack it without considering the flip side of economic activity, and to imagine that . Today, Noam Schreiber at the New Republic takes on a New York Times’ op-ed (by Chuck Schumer and Paul Craig Roberts) and does an excellent job at explaining comparative advantage and why the case of outsourcing is theoretically no different than trade:
Comparative advantage, though frequently confused with absolute advantage, is actually a concept about relative relationships, not absolute ones. What the principle of comparative advantage actually implies is that each nation should specialize in what it does best relative to all the other things it could be doing and then trade with others for other needs…..
Suppose that the only two goods in the world are T-shirts and computer software. For the sake of simplicity, let’s say it costs us $10 to produce a single T-shirt, and $100 to produce a computer program. And let’s also say it costs the Indians $5 to produce a single T-shirt, and $95 to produce a single computer program. In other words, the Indians can produce both T-shirts and computer programs more efficiently than we can.
Does that mean that the Indians will produce everything and that we’ll produce nothing–and that, before long, the Indians will own…? The answer is, emphatically, NO. The reason is that it’s still in both countries’ interest to specialize in the good they have a lower opportunity cost of producing.
Now, the left could argue that the effeciency gains from comparative advantage aren’t worth the short-term pain of economic dislocation and thousands of white-collar workers losing their jobs. They could also argue that right now it’s harder to change government policy to address this dislocation than it is to mobilize support against outsourcing in general. But they’d first need to acknowledge that productivity gains are at stake - and that productivity gains mean not simply factories producing more but a raise in the aggregate standard of living as well.
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