The Logic of Outsourcing
Politics / US Politics Feb 19, 2011 - 09:13 AM GMTBy: Gary_North
Recently, I wrote an article on why every business that has an in-house staff of video production specialists should shut down the department. I argued that it would be far better to encourage the staffers to create their own video production company. Then the business can let the newly created company bid on projects.
There is no question that this would be better for the business. But would it be better for the now-unemployed staffers? If they are talented, yes. If they are not, yes.
Why "yes" in the second case? Because unemployment, like one's looming execution, focuses one's attention marvelously. The earlier that a person who is unsuited for a career finds out that a salaried position has been shut to him, the better it is for him. He has time to shift gears. He can find a new line of work.
With respect to the first case, where a talented person loses his job, starting a small business could be his liberation from the limited opportunities he was given in his salaried job. I speak from experience. In 1976, I got fired. It was the first time I ever got fired. For six months, I scrambled. I had money saved. I had no debt. I had a frugal wife. I had a small newsletter publishing business that brought in money. But it was tough going.
Six months later, a subscriber hired me. His name was Ron Paul. He had just been elected to Congress. I became his research assistant.
Four months later, Dr. Paul got fired by about 150 swing voters out of 180,000. On January 1, 1977, I was back on the street again. I thought of something my friend Steve Gillette had written a decade earlier, which had made him a pile of money.
I'm back on the street again
Gotta stand on my own two feet again
I'm walking that lonely beat again
Remembering when, woah-oh, remembering when
Fortunately, I still had my newsletter. Within a few weeks, I got hired by Howard Ruff to work with "The Ruff Times." He had started his newsletter a few months after I started "Remnant Review." His operation was taking off. I got to enjoy the ride. I stayed with him until late 1979, when I quit to run my own business full time. I also quit my one-semester job teaching free market economics at Campbell College. I never worked for anyone else again, other than for my subscribers.
Had I not been fired, my career would have been very different. It would not have been nearly so profitable financially. I would not have the audience I have now. I think my ex-boss had made a mistake. I was learning the basics of direct-mail advertising, all by myself. He lost me about a year and a half before I finally learned how to write copy that sells. I had been writing the ads for his publications. He never found another copywriter.
In the list of the best things that ever happened to me, getting fired twice in one year probably rank in the top five. Winning 3 million 1986 dollars in the FCC lottery for cellular phone spectrum was lower. Those two gut-wrenching events forced me to branch out on my own. Like a young bird that gets pushed out of the nest, I had to fly. So, I flew.
If I had been in debt, my goose would have been cooked. I understand the pressure that people feel today when their mortgages are more than the market value of their homes. They face eviction if one of the breadwinners gets fired. Mobility is gone, too. In both cases when I lost jobs, I moved.
I also had a second income. A small home business that was not tied to geography let me move to where I got offers.
Leverage – debt – always brings uncertainties. Before the Federal Reserve's master of leverage, Alan Greenspan, sucked tens of millions of American families into a debt trap that Ben Bernanke then sprang on them, leverage was seen as a one-way ticket to Easy Street. Then came the detour. A lot of people did not see the detour sign, and either crashed or went off the road into a ditch.
CUSTOMER AUTHORITY
In the two jobs from which I was fired, there was no profit-and-loss statement. The first job was working for $1,000 a month for a non-profit foundation. The second was working for Congress. There was no profit-and-loss system based on open entry and customer satisfaction. I was at a competitive disadvantage. I could not prove my worth to the organizations by way of a profit-and-loss statement.
I can now.
I say this to anyone who has recently been fired. I say it also to anyone who is thinking about firing someone. The person who counts most is the customer. He wants people to serve his wants, because he is paying to be served. He who pays the piper calls the tune, at least in a free market.
To the person who has lost his job, I say this. There are customers out there who would like to hire you . . . at some price.
To the person who is considering firing someone, I say this. There is a customer out there who wants a better deal, and if you don't give it to him, he will hire someone else.
Customers bid with money. People respond to offers of money. Not everyone responds, but some do. Customers can therefore get deals. So can those who sell to them.
Customers buy final results. They are not self-consciously buying a system of production. They are buying the output of a specific system of production. So, if you have been fired, then either the customer did this through your ex-boss, or else your ex-boss made a mistake. If it's the first case, don't blame your ex-boss. Blame the customers. If it's the second, the customers will blame him eventually. You don't have to. Move on. Forget about it.
Every success manual offers a secret of success. Here is mine: find out what people want to buy, and sell it to them.
The high-tech, college-certified people in Silicon Valley who have no jobs, and who have been unable to find work for over two years, are unemployed for reasons of their own making: too much mortgage debt, too much specialization, too little confidence in the power of wage competition, and too little mobility. I think the co-founder of Sun Microsystems is correct: the days of wine and roses are over for Silicon Valley, where it costs $3 million to buy a middle-class house, and unemployment is over 10%.
These very bright people need street smarts. They need to pay attention to customers. It is not enough to have marketable skills. You have to locate the market where these skills are in demand. Then you have to meet its demands.
Labor is the most unspecialized of all production assets. People are versatile. They adjust. Specialization produces high income for a time, but when demand for specialized labor falls at yesterday's price, specialization is a liability. Like a wildly popular singer who faces changing musical tastes, the specialist has to adjust. A refusal to adjust creates unemployment.
When governments do not regulate the job market, there is little long-term unemployment. The mark of a regulated market is unemployment. People are not adjusting when they can adjust technically. They are not being allowed to adjust.
WHEN RESISTANCE IS FUTILE
The free market is like the Borg in its attempt to bring more and more people into its circle of influence. But, unlike the Borg, the free market does not eliminate individuality. On the contrary, it fosters individuality. It encourages people to assess their talents and opportunities. This way, individuals can locate other individuals who are happy to pay them for their services.
It is the state which operates in a Borg-like quest for conformity. It tries to get everyone to meet its standards, despite the desire of customers to buy something else.
In every economy, someone has the legal authority to bid for other people's services. When the state possesses this monopoly, it can say, "resistance is futile." There are no alternative sources of legal income.
In contrast is the free market. Resistance to one bidder is anything but futile. There are other bidders. Furthermore, the original bidder may find that he is driving too hard a bargain. The potential sellers are not interested in selling. The buyer then faces a choice: not buying or increasing his bid.
In a free market, resistance is never futile. There are always other bids available . . . at some price. This is the greatest single economic benefit of the free market. There is the moral benefit of liberty, but here I am speaking of economics.
When the state interferes with people's legal right to make offers, the social order moves toward the Borg model. Any deviation from the group is a threat to the group.
Today, we are being told that the rate of unemployment is due to the failure of the free market to assimilate all those sad people who are unable to persuade anyone to hire them. We are told that greater Federal deficits are required, or greater quantitative easing by the Federal Reserve. In the meantime, the state sends them money, in order to keep them from facing the consequences of heartless businessmen, who will not pay them a living wage.
In short, businessmen and unemployed workers are supposed to join hands under the umbrella of Federal deficits and fiat money. This is the Borg solution to recalcitrant people – employers and workers – who keep holding out for a better deal.
What ever happened to "let's make a deal"? What ever happened to the willingness of people to settle for less?
Borged.
THE INCENTIVE TO ADJUST
During the Great Depression, Will Rogers quipped that America was the first nation to go to the poorhouse in an automobile.
The debt-ridden owners of bankrupt small farms got into their cars and headed west. They become Okies and Arkies. They figured that it could not be worse in California, employment-wise, and the weather was better. They were right.
The government provided no aid for this trek west. People made the decision on their own. They searched for better opportunities.
In China, we are witnessing the greatest mass migration in the history of man. People are leaving ways of life that have prevailed, despite repeated military invasions, a millennium of bureaucracy, and half a century of Communism. Nothing changed those rural patterns. Yet today, because of the offers of businessmen, hundreds of millions of farmers' sons and daughters have moved to cities. China builds the equivalent of Houston every month. I don't mean the notorious handful of empty cities constructed by an irrational central government. I mean acre by acre, apartment complex by complex, in the great cities and dozens of new ones.
The specific patterns of migration would have been different, had the central bank not inflated to stimulate the economy. But the overall story would not have changed. What centuries of coercion could not change, the free market has changed and is changing. China will never be the same. India is not far behind.
People do adjust . . . at some price. Resistance to the free market is not futile. It is merely unprofitable. The opportunities that are available need not be taken advantage of. Like ripe fruit hanging on a vine, no one is compelled to pick them.
The Federal government and the monetary base are growing relentlessly. The media are beginning to publish reports on the unpleasant long-run consequences of these growing phenomena. But the Establishment continues to announce the same old Party Line: this is temporary, and it will be reversed at the appropriate time, when conditions are ripe, when the financial crisis is over, when unemployment returns to normal, when there is no more excess capacity, when there are no more excess reserves, and, above all, when pigs learn to fly.
Citizens are expected to adjust to an annual Federal on-budget deficit of $1.5 trillion, but without asking for a higher rate of interest on money lent to the government. Citizens are expected to adjust to the expansion of money, but without asking for a higher rate of interest or higher prices of consumer goods. Citizens are expected to adjust to change we can believe in, or at least tolerate.
But what if we decide not to adjust on these terms? Sorry. "Resistance is futile."
CONCLUSION
In Tunisia and Egypt in the first six weeks of 2011, the citizenry discovered that resistance was not futile. Two dictators who had held power for decades found that their resistance to an unseemly departure was indeed futile. They adjusted. They were both outsourced.
Outsourcing is an inevitable concept. It is not a question of outsourcing or no outsourcing. It is always a question of who gets outsourced and on what terms.
The free market lets people make offers. Digital technology is lowering the price of making offers. When people are left free to respond, they adjust . . . at some price.
The fact that jobs are being outsourced to China is no more shocking than the fact that they were outsourced to California in the 1930s. People make offers. Other people accept them. Those whose offers were rejected then must adjust. They must find new offers to accept, or else they sit, hoping for a check from the government.
There will be a time when the government that today sends the checks will be outsourced by citizens who will adjust in ways similar to the citizens who adjusted in Tunisia and Egypt.
Facebook, Twitter, and Al Jazeera did it twice. It can happen again. . . without Al Jazeera.
Resistance is not futile.
Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .
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