April 03, 2004

Productivity, Wages, and Outsourcing

This is in response to Bob Cringley's January 22 and January 29 articles on IT outsourcing, but can be read as a general set of musings on the trend of outsourcing to India.

I do not think outsourcing actually "hurts" the economy in the long run, but it does lead to a lot of uncertainty.

Paul Krugman has a very good book called Pop Internationalism that collects articles & essays about this; the book is easy to read and quite eye-opening. Countries are not corporations. International trade is not a zero-sum game. Competitive advantage applies to corporations, not countries. Sure, governmental policy has a major effect on the climate of business, with a major impact on the competitiveness of individual businesses. Most presidential economic advisers don't even understand this. Trade between countries is about comparative advantage, the idea that two countries can produce things and trade with each other and have more resources overall -- and it has nothing to do with any "innate" quality about the country that gives it a leg-up on a particular kind of work -- that's "absolute advantage".

The real issue for the American economy is NOT trade and outsourcing. It's productivity. Wages and productivity are linked at the hip, and America (and Canada's) productivity growth since the 1970s has been poor. This is why we haven't seen (besides a spurt in the 1990's) the productivity and resulting standard-of-living growth that we saw in the post-war years, and why inequality is becoming rampant: something happened circa 1970 that depressed our productivity growth.... I'd say it was point where manufacturing started its long downwards slide in importance, lessening the role of Scientific Management in generating productivity. At this point, the service and knowledge industries began their upward climb to dominance. The trade & outsourcing trend is happening primarily because of this low productivity growth, but the impact actually quite small compared to the domestic impacts of low productivity.

We are at a transitionary state with India. They have industries with productivity levels that compete directly with ours -- but very low national productivity, and hence low wages. We can exploit this and get highly productive, cheap labour.

How could this happen? Today's work is knowledge work. Knowledge is the central resource of our economies, more so than capital, natural resources, or labour. And it's unlike other resources -- it's easily transferrable through training, it's rapidly changing and gets stale, and companies can't control their knowledge -- it can just walk out the door. The above coincides with everything you've been saying: get rid of 100 programmers in a software company, and you've gutted the company's knowledge. But this also means that knowledge can be transferred elsewhere in relatively short order, to a place like India, and be just as productive, assuming the right economic climate (i.e. education + incentives) is put in place by their government and supporting corporations.

We actually know very little about knowledge worker productivity. We've been talking about the factors surrounding knowledge worker productivity for over 30 years (since Gerry Weinberg's Psychology of Computer Programming was released) and STILL don't have mass acceptance of this pressing issue, nor a truly shared understanding. We can't compete with India because we don't know how to sustainably raise our own knowledge worker productivity.

India has a series of language and cultural barriers (especially dealing with women) that will hamper its growth, but as their national productivity rises, wages will rise, and India's productivity advantage will wear off. But this will take many years. The solution is not to prevent outsourcing - that's a stop-gap. The long-term solution is to improve American knowledge worker productivity.

When it comes to knowledge workers, we pretty much hire smart people and leave them alone. No quality measurements, no Six Sigma, no reengineering. We haven't formally examined the flow of work, we have no benchmarks, and there is no accountability for the cost and time these activities consume. As a result, we have little sense of whether they could do better (Davenport, 2003).

This isn't something the government can control, though it can provide the right conditions (such as better education), and recognition that we need a Frederick Taylor for the 21st century.

Some say "[Globalization] is inevitable so stop complaining." 

The last economic system that was thought to be "inevitable" was Marxism. It's as if these neo-conservatives believing in "inevitable globalization" are framing everything in terms of their former enemy and have just reversed who should win the battle of the inevitable march of history.

If the economy must grow, companies will seek out ways to cut their costs. That means they'll go to low-cost/high-productivity suppliers, every time. American wage earners are the ones that get screwed, lest they increase their productivity.

Posted by stu at April 3, 2004 02:00 PM