Outsourcing: an extreme scenario

Imagine a future where India has billions of people, they are all as productive as American workers, and they all will work for a penny a year (forget the possible contradiction between the last two assumptions).

Or imagine a nanotechnology machine that can produce the world’s output, and then some, for a nickel. If you wish, take this one step further. The machine produces robots, which compete with human labor, and cost only a penny a year to maintain.

The economics of outsourcing resemble the economics of technical change. Advanced robots would put many people out of work, just as computers have eliminated many jobs. Yet few people complain about this scenario, it is somehow emotionally more resonant to complain about “foreigners taking jobs” than to complain about “machines taking jobs.” Of course the empirical reality is that technology takes away (and also creates) many more jobs than do foreigners.

Now I am not going to give you the line “in the long run robots would create more jobs than they destroy.” For most plausible parameter values that is in fact true. But let us say that robots, or foreigners, could produce all of our current output for a mere nickel. Total wages, of course, could not exceed a nickel in such a scenario. Since this is below subsistence, no one would work for money (some wealthy capitalists might still work for fun).

If you are truly worried about outsourcing, you must have in mind something in this direction, albeit with less extreme parameter values. But as a perverse kind of reality check, consider the extreme case, how bad would it be?

National income would be enormous, the catch is that virtually all of it would go to capital. But capital is very very cheap. You need only save a nickel to command the equivalent of today’s global output. How many poor Americans today cannot save a nickel?

If you fear radical outsourcing you also should favor privatization of social security, with investment of the funds in the stock market. (Personally I am skeptical of the idea, but I don’t fear radical outsourcing either.) This would make us all very very wealthy.

Furthermore you should buy stocks immediately. If you are not devoting your portfolio to stocks, as rapidly as possible, and you fear radical outsourcing, you probably hold inconsistent views.

And of course you shouldn’t criticize the fiscal policies of the Bush administration, or call for a tax increase, if you think the stock market will skyrocket in this fashion.

Now I don’t ever expect to see parameter values so extreme. But neither do I expect that outsourcing will lead to a net destruction of jobs. The worrywarts wish to have it both ways. Outsourcing will be so significant as to take away American jobs, but not so significant to bring large benefits through the ownership of capital.

Link added: For this post I am indebted to conversations with Robin Hanson, and his paper on a robot economy.