WEBVTT NOTE The Outsourcing Controversy and a Mistaken Theory of Value 1 00:00:00.000 --> 00:00:07.120 paper, it's called Outsourcing and a Mistaken Theory of Value, and it came about, I've had an 2 00:00:07.120 --> 00:00:12.960 interesting relationship with Paul Craig Roberts, he actually influenced me a lot in legal, 3 00:00:13.600 --> 00:00:21.360 right about here, okay, influenced me a lot in legal thinking, and unfortunately, the guy who 4 00:00:22.960 --> 00:00:29.840 helped give us supply-side economics is now giving us what I think is a really crank theory on 5 00:00:29.840 --> 00:00:37.040 on Outsourcing, but unfortunately, again, often crank theories start getting legs, especially 6 00:00:37.040 --> 00:00:38.040 during a recession. 7 00:00:38.040 --> 00:00:42.160 During a recession, let's just face it, that the last thing people want to know is the 8 00:00:42.160 --> 00:00:43.160 truth. 9 00:00:43.160 --> 00:00:46.400 They're not particularly interested in the Austrian business cycle theory because the 10 00:00:46.400 --> 00:00:51.720 Austrian business cycle theory says, by the way, we're going to have a recession and it's 11 00:00:51.720 --> 00:00:55.720 going to be nasty and on the other side of it we can have a recovery because we have 12 00:00:55.720 --> 00:01:01.820 people like of course Paul Krugman who believe that you can just perpetuate the boom conditions 13 00:01:01.820 --> 00:01:04.160 forever by printing money. 14 00:01:04.160 --> 00:01:11.520 By the way, I would like to make a plug, I do have a blog called Krugman and Wonderland 15 00:01:11.520 --> 00:01:17.360 and it's got dashes between Krugman and End to End and Wonderland and it's one of the 16 00:01:17.360 --> 00:01:24.380 Blogspot ones so I would urge you, urge you to go to that site sometime and make me feel 17 00:01:24.380 --> 00:01:30.380 Outsourcing in a Mistaken Theory of Value 18 00:01:54.380 --> 00:02:09.320 Free Traders are resurrecting class war, not because they are Marxists, but because they 19 00:02:09.320 --> 00:02:15.380 confuse free trade with global labor arbitrage. 20 00:02:15.380 --> 00:02:21.760 Free Traders turn cold shoulders to US job losses from offshore outsourcing because they 21 00:02:21.760 --> 00:02:26.840 They Mistake the Losses for the Beneficial Workings of Comparative Advantage 22 00:02:26.840 --> 00:02:33.520 Committed to a 200-year-old theory that they no longer understand, free traders are cheering 23 00:02:33.520 --> 00:02:39.800 on the destruction of middle-class jobs and the dismantling of the ladders of upward mobility 24 00:02:39.800 --> 00:02:44.640 that make large income disparities politically acceptable. 25 00:02:44.640 --> 00:02:57.580 It's a mouthful and they probably, I suspect those free traders also beat puppies and stick 26 00:02:57.580 --> 00:03:03.560 pins and dolls and things, but nonetheless this is the claim. 27 00:03:03.560 --> 00:03:08.240 Now according to Roberts, we have the theory, everybody knows the theory of comparative 28 00:03:08.240 --> 00:03:18.880 Advantage, and so what he writes though is it holds only when capital cannot cross international 29 00:03:18.880 --> 00:03:19.880 borders. 30 00:03:19.880 --> 00:03:28.360 In other words that if, now labor can cross borders kind of, but what Roberts is saying 31 00:03:28.360 --> 00:03:41.200 is that when in 1815 when Ricardo wrote his principles of political economy and taxation 32 00:03:41.200 --> 00:03:48.640 that factors of production were relatively fixed in each country and so you could therefore 33 00:03:48.640 --> 00:03:55.600 get a real clear advantage, I mean a real clear picture of what comparative advantage 34 00:03:55.600 --> 00:03:57.440 would look like. 35 00:03:57.440 --> 00:04:03.480 So he says, Ricardo imposed the condition of relative capital immobility internationally 36 00:04:03.480 --> 00:04:09.240 in order that specialization according to comparative advantage could occur, otherwise 37 00:04:09.240 --> 00:04:15.360 a capital, a country's capital would flow to absolute advantage abroad. 38 00:04:15.360 --> 00:04:20.720 When U.S. firms substitute foreign labor for domestic labor in their production for domestic 39 00:04:20.720 --> 00:04:24.640 markets, capital is flowing to absolute advantage. 40 00:04:24.640 --> 00:04:34.000 Now I have no idea what he's saying, and I'll get into that in a minute, but that's where 41 00:04:34.000 --> 00:04:35.400 Roberts is coming from. 42 00:04:35.400 --> 00:04:42.200 And so it's that, okay, once capital flows, then all bets are off, we're back to absolute 43 00:04:42.200 --> 00:04:45.120 advantage again, okay? 44 00:04:45.120 --> 00:04:46.880 And I will deal with that specifically. 45 00:04:46.880 --> 00:04:56.320 The following scenario, US firms, the greedy capitalists, unilaterally decide to outsource 46 00:04:56.320 --> 00:05:03.180 because they can make more profits, especially they outsource the high-wage, what he calls 47 00:05:03.180 --> 00:05:08.360 the high-wage, high-value added jobs. 48 00:05:08.360 --> 00:05:16.300 The loss of that value added is a net loss to the US economy. 49 00:05:16.300 --> 00:05:20.620 This is important to keep in mind as well. Furthermore, workers are unemployed and future 50 00:05:20.620 --> 00:05:26.020 workers become discouraged as they know their jobs will be outsourced. Even if capitalists 51 00:05:26.020 --> 00:05:31.880 make net profits, they gain at the expense of workers and the income disparities weaken 52 00:05:31.880 --> 00:05:37.260 the economy. So this is his whole point about income disparities. 53 00:05:37.260 --> 00:05:41.860 Now this is very interesting. These net losses have a dual effect. Number one, we're no longer 54 00:05:41.860 --> 00:05:49.380 manufacturing, these high value added, you know, we no longer have the high wage, high 55 00:05:49.380 --> 00:05:56.300 value added jobs, all right, and so now these, and these people are making goods abroad with 56 00:05:56.300 --> 00:06:03.940 the idea of importing them back to the, you know, into the US economy, however, however, 57 00:06:03.940 --> 00:06:11.240 that because we're producing less, now they can't import back what they were making abroad 58 00:06:11.240 --> 00:06:22.360 Thus, according to Roberts, the economy becomes a third-world economy, all because firm owners 59 00:06:22.360 --> 00:06:25.320 decide to engage in outsourcing abroad. 60 00:06:25.320 --> 00:06:27.440 So this will be our future. 61 00:06:27.440 --> 00:06:38.180 And kind of cute, really, but they need to recycle those bottles, and if they can just 62 00:06:38.180 --> 00:06:51.180 What is happening is that foreign labor is substituted for U.S. labor in the production 63 00:06:51.180 --> 00:06:58.340 of the goods and services that Americans consume. Americans lose the income and employment associated 64 00:06:58.340 --> 00:07:02.060 with the production of the goods that they consume. This is really starting to sound 65 00:07:02.060 --> 00:07:07.620 a little bit like Marx and alienation, but I'm not going to call them Marxists. The loss 66 00:07:07.620 --> 00:07:12.240 Lots of these jobs is, quote, fool's gold for companies. 67 00:07:12.240 --> 00:07:18.680 Corporate America's short-term mentality, stemming from bonuses tied to quarterly results, 68 00:07:18.680 --> 00:07:23.960 is causing U.S. companies to lose not only their best employees, their human capital, 69 00:07:23.960 --> 00:07:28.080 but also the consumers who buy their products. 70 00:07:28.080 --> 00:07:32.220 Employees displaced by foreigners and left unemployed or in lower-paid work have a reduced 71 00:07:32.220 --> 00:07:33.940 presence in the consumer market. 72 00:07:33.940 --> 00:07:39.020 They Provide Fewer Retirement Savings for New Investment. 73 00:07:39.020 --> 00:07:42.080 So you can see how the dynamic is going here. 74 00:07:42.080 --> 00:07:45.180 And with Roberts, it all begins with outsourcing. 75 00:07:45.180 --> 00:07:46.180 That's ground zero. 76 00:07:46.180 --> 00:07:50.740 The outsourcing that what happened, all of a sudden corporations became greedy. 77 00:07:50.740 --> 00:07:57.900 And not only that, but you started having, you know, these people abroad got rid of communism. 78 00:07:57.900 --> 00:07:58.900 It's terrible. 79 00:07:58.900 --> 00:08:02.740 I mean, the Chinese, I know that they've got a communist party, but they're just not very 80 00:08:02.740 --> 00:08:13.240 And all of a sudden you've got an educated workforce that will work for less than what we work for. 81 00:08:13.240 --> 00:08:21.740 As proof, what he does, I've got a quote here, plus an email that he received from somebody. 82 00:08:21.740 --> 00:08:29.740 As I write about the economic hardships created for Americans by Wall Street and corporate greed 83 00:08:29.740 --> 00:08:36.940 and by indifferent and bribed political representatives, I get many letters from former middle-class 84 00:08:36.940 --> 00:08:51.660 families who are being driven into penury, here is one recently arrived, and it goes 85 00:08:51.660 --> 00:08:58.940 on, how much time do I have, oh yeah, it would take me at least 15 minutes to read that, 86 00:08:58.940 --> 00:09:03.760 But thank you for your continued truthful commentary on the new economy. 87 00:09:03.760 --> 00:09:07.780 My husband and I, it's poster children, nine years ago when we were married we were both 88 00:09:07.780 --> 00:09:13.140 working good paying secure jobs in the semiconductor manufacturing industry. 89 00:09:13.140 --> 00:09:16.660 Our combined income topped 100,000 a year. 90 00:09:16.660 --> 00:09:17.660 We were living the dream. 91 00:09:17.660 --> 00:09:18.660 Then the nightmare began. 92 00:09:18.660 --> 00:09:24.520 I lost my job in the great tech bubble of 2003, I thought that happened a little bit 93 00:09:24.520 --> 00:09:29.840 and decided to leave the labor force to care for our infant son. 94 00:09:29.840 --> 00:09:32.800 Fine, we tightened the belt, and then we started getting squeezed. 95 00:09:32.800 --> 00:09:37.800 Expenses rose, we downsized, yet my husband's job stagnated. 96 00:09:37.800 --> 00:09:42.280 After several years of no-pay races, he finally lost his job a year and a half ago. 97 00:09:42.280 --> 00:09:44.560 But he didn't just lose a job, he lost a career. 98 00:09:44.560 --> 00:09:48.240 The semiconductor industry is virtually gone here in Arizona. 99 00:09:48.240 --> 00:09:53.480 Three months later, my husband, with a technical degree and 20-plus years of solid work experience, 100 00:09:53.480 --> 00:09:57.320 received one job offer for an entry-level corrections officer. 101 00:09:57.320 --> 00:10:01.560 We had to take it at almost a 40% reduction in pay. 102 00:10:01.560 --> 00:10:03.340 Bankruptcy followed when our savings were depleted. 103 00:10:03.340 --> 00:10:06.160 We lost our house, a car and any assets we had left. 104 00:10:06.160 --> 00:10:10.520 A salary last year, less than $40,000 to support a family of four. 105 00:10:10.520 --> 00:10:13.120 Year and a half later, we were still struggling to get by. 106 00:10:13.120 --> 00:10:16.000 I can't find a job that would cover the cost of daycare. 107 00:10:16.000 --> 00:10:17.000 We were stuck. 108 00:10:17.000 --> 00:10:19.920 Every jump in gas and food prices hit us hard. 109 00:10:19.920 --> 00:10:22.320 Without help from my family, we couldn't have made it. 110 00:10:22.320 --> 00:10:26.920 So I could tell you just how that new economy has worked for us, but I'd rather not use 111 00:10:26.920 --> 00:10:28.340 that kind of language. 112 00:10:28.340 --> 00:10:32.640 And what Roberts does, he said, this is going to be the scenario for all of us. 113 00:10:32.640 --> 00:10:36.960 So get ready to climb into that barrel and look for those empty bottles. 114 00:10:36.960 --> 00:10:37.960 Okay. 115 00:10:37.960 --> 00:10:38.960 All right. 116 00:10:38.960 --> 00:10:42.480 Well, that's just true, okay. 117 00:10:42.480 --> 00:10:48.560 Does outsourcing actually, does the dynamic that he gives us actually destroy the U.S. 118 00:10:48.560 --> 00:10:49.560 economy from within? 119 00:10:49.560 --> 00:10:50.560 All right. 120 00:10:50.560 --> 00:10:56.240 Alright, well, obviously if I'm calling my title a mistake in theory of value and other 121 00:10:56.240 --> 00:11:01.840 things, well then I'm going to say no! Alright, I start with Bob Murphy, the same Bob Murphy 122 00:11:01.840 --> 00:11:09.760 who spoke this morning. The case for free trade really isn't about jobs at all, but 123 00:11:09.760 --> 00:11:14.640 rather living standards. In a free labor market, wages and salaries would adjust until 124 00:11:14.640 --> 00:11:20.160 all who wanted to work at the prevailing market rates could do so. In such a scenario, dropping 125 00:11:20.160 --> 00:11:26.160 Tariffs wouldn't create jobs, it would merely shift workers from less to more productive lines. 126 00:11:26.160 --> 00:11:32.560 Okay, now Robert's points, he says, look, we're not even talking about trade, we're talking about 127 00:11:32.560 --> 00:11:39.920 factor mobility. This has nothing to do with actual trade, because with Robert's trade is only 128 00:11:40.720 --> 00:11:45.680 in finished goods. Okay, finished goods, that's trade, nothing else is trade, I don't know, 129 00:11:45.680 --> 00:11:58.680 and it's kind of like he shifts the goalposts a lot in his arguments, but nonetheless, the issue, I think that one of the things we're talking about is not jobs. 130 00:11:58.680 --> 00:12:09.680 Okay, it actually is living standards. Do we have higher living standards now than we had, say, 30, 40 years ago, whatever? 131 00:12:09.680 --> 00:12:17.520 Yes, we do. I know Paul Krugman says we're poorer now than we were in the past. As one 132 00:12:17.520 --> 00:12:23.480 who moved to Chattanooga in 1964, and one of the places I hated to come to was the state 133 00:12:23.480 --> 00:12:28.440 of Alabama because I'd never seen so many shacks in my life. I don't see those shacks 134 00:12:28.440 --> 00:12:39.440 now. I mean, living standards have arisen. Rothbard. Now, at the time, I mean, believe 135 00:12:39.440 --> 00:12:42.440 If Murray were alive, I'm sure he'd have plenty to say to Craig. 136 00:12:42.440 --> 00:12:48.440 And by the way, I will also point out, I get a lot of emails from him, about 10 a day. 137 00:12:48.440 --> 00:12:50.440 Most of them deleted. 138 00:12:50.440 --> 00:12:57.440 Most of them say things like, I won't use the language that he uses, but Americans are all stupid, 139 00:12:57.440 --> 00:13:03.440 economists have their head in the sand, you libertarians have your head in the sand, you don't see what's happening. 140 00:13:03.440 --> 00:13:08.440 And I sent him a letter once, I tried to engage him a little bit, and he writes back and says, 141 00:13:08.440 --> 00:13:11.800 You sound like what you're saying is you want the entire economy to be outsourced. 142 00:13:11.800 --> 00:13:12.800 It's okay. 143 00:13:12.800 --> 00:13:16.080 Every once in a while, Lew sends him an email. 144 00:13:16.080 --> 00:13:18.000 I just gave up on it. 145 00:13:18.000 --> 00:13:27.200 On some areas, like on law, he's still pretty good, but things like war and all that, pretty 146 00:13:27.200 --> 00:13:32.720 good, but unfortunately here, well, he's not pretty good. 147 00:13:32.720 --> 00:13:34.280 All right. 148 00:13:34.280 --> 00:13:38.000 Now Rothbard does say something interesting, I think very important about trade. 149 00:13:38.000 --> 00:13:42.400 The best way to look at tariffs or import quotas or other protectionist restraints, 150 00:13:42.400 --> 00:13:51.280 by the way, because ultimately, what Roberts recommends are tariffs and quotas, okay? 151 00:13:51.280 --> 00:13:57.980 He actually, I remember seeing an email, I asked him, and he said that we need to have 152 00:13:57.980 --> 00:14:01.320 quotas and all that, okay? 153 00:14:01.320 --> 00:14:07.240 Or other protectionist restraints is to forget about political boundaries. 154 00:14:07.240 --> 00:14:11.520 The Federal Boundaries of Nations may be important for other reasons, but they have no economic 155 00:14:11.520 --> 00:14:12.520 meaning whatsoever. 156 00:14:12.520 --> 00:14:19.000 Now this is important, because Rothbard is saying we are talking about exchange, there 157 00:14:19.000 --> 00:14:26.520 isn't anything that's going to allow America to become wealthier by making it more difficult 158 00:14:26.520 --> 00:14:28.280 to engage in exchange abroad. 159 00:14:28.280 --> 00:14:33.500 Now that is pretty much standard free trade policy. 160 00:14:33.500 --> 00:14:38.500 Now he talks about what happened when we did have quote outsourcing, the very thing Roberts 161 00:14:38.500 --> 00:14:44.760 is complaining about, if you remember back in the 30s and really on to about the 1960s, 162 00:14:44.760 --> 00:14:49.180 that you had textile factories closing in the north and other kinds of factories as 163 00:14:49.180 --> 00:14:54.540 well, closing in the north and then moving to the south, places like North Carolina and 164 00:14:54.540 --> 00:14:56.740 South Carolina, Georgia, Alabama. 165 00:14:56.740 --> 00:15:02.500 So he says during the 1966 congressional battle over higher federal minimum wage, for example, 166 00:15:02.500 --> 00:15:08.020 The late Senator Jacob Javits freely admitted that one of his main reasons for supporting 167 00:15:08.020 --> 00:15:12.540 the bill was to cripple the southern competitors of New York textile firms. 168 00:15:12.540 --> 00:15:16.660 Since southern wages are generally lower than in the north, business firms hit hardest by 169 00:15:16.660 --> 00:15:21.500 an increased minimum wage and the workers struck by unemployment will be located in 170 00:15:21.500 --> 00:15:27.100 the south. 171 00:15:27.100 --> 00:15:31.380 Again Roberts would argue, by the way, it's those high wages in the north, if you locate 172 00:15:31.380 --> 00:15:33.540 to the South, then we'll all be poor. 173 00:15:33.540 --> 00:15:40.660 All right, now, I'm going to come at Robert's from two different points. 174 00:15:40.660 --> 00:15:45.860 First, his value theory, speaking specifically of value added, which I have at the bottom. 175 00:15:45.860 --> 00:15:51.980 It's an accounting concept, it's not an economic concept, that we begin with, as Austrians, 176 00:15:51.980 --> 00:15:54.340 begin with the final product. 177 00:15:54.340 --> 00:15:57.900 For that matter, you've got Marshall and derived demand. 178 00:15:57.900 --> 00:16:03.980 To begin with the final product, you impute backwards. 179 00:16:03.980 --> 00:16:11.460 Even though produced good, yes, at different stages it adds on and adds on, I can assure 180 00:16:11.460 --> 00:16:17.020 you folks you don't want to buy a Ferrari without an engine. 181 00:16:17.020 --> 00:16:23.820 It's not like, okay, now it's worth $90,000, we'll put this $10,000 engine in, I know it's 182 00:16:23.820 --> 00:16:26.820 a lot more than that, but just bear with it. 183 00:16:26.820 --> 00:16:31.940 with the $10,000, and now instead of being worth $90,000, now it's $100,000. No, Ferrari 184 00:16:31.940 --> 00:16:37.940 without an engine is not going to be worth $90,000. His value theory really is a little 185 00:16:37.940 --> 00:16:43.020 more than a restatement of the cost of production theory of value. This is what it is. What 186 00:16:43.020 --> 00:16:48.180 is he saying? He's saying that the production itself and the wages paid and all that is 187 00:16:48.180 --> 00:16:55.180 what creates value here. And it obviously conflicts with the Austrian theory. On comparison, 188 00:16:56.820 --> 00:17:05.820 Comparative Advantage is not really a theory, it's not speculation, it's a restatement of opportunity cost. 189 00:17:05.820 --> 00:17:17.820 Okay, let's change the wording. Put another way, Roberts is saying, if capital is immobile across international borders, opportunity cost no longer matters. 190 00:17:17.820 --> 00:17:25.460 This is interesting. This is rewriting the fundamental laws of economics. What he's saying 191 00:17:25.460 --> 00:17:31.640 is that if capital goes across borders and boom, everything changes. There is no more 192 00:17:31.640 --> 00:17:37.340 opportunity cost. That's interesting. Nobody makes decisions based on opportunity costs 193 00:17:37.340 --> 00:17:46.100 anymore. Very strange. Question is, why do firms outsource? Well, one, it's a productivity 194 00:17:46.100 --> 00:17:50.940 Issue, where I'm not giving in the paper, which I haven't finished sourcing and the 195 00:17:50.940 --> 00:17:58.180 paper is way too long and it sucks, and I would not recommend reading it right now. 196 00:17:58.180 --> 00:18:04.940 But it is finished, it's just, I've got to do some stuff to it. 197 00:18:04.940 --> 00:18:10.020 But you have a situation where, for example, the Kia plant moving in, all right, that's 198 00:18:10.020 --> 00:18:13.660 going to put upward pressure on wages elsewhere in the area. 199 00:18:13.660 --> 00:18:17.580 There's a productivity issue there. 200 00:18:17.580 --> 00:18:23.300 What was happening in New York was that there were other kinds of businesses that were having 201 00:18:23.300 --> 00:18:32.260 higher wages, that in fact forcing up wages, that would make it so the owners of capital 202 00:18:32.260 --> 00:18:37.780 and of certain kinds of goods are going to have to go where the public is going to be 203 00:18:37.780 --> 00:18:43.420 willing to buy the final product that doesn't have a higher price because, well, I've got 204 00:18:43.420 --> 00:18:54.920 The second one I think is much more important. Governments force up the opportunity costs 205 00:18:54.920 --> 00:18:59.580 of labor, but they don't add anything to it. There's no productivity. They just make it 206 00:18:59.580 --> 00:19:04.220 harder and more expensive to do business, but you don't get anything for it. They just 207 00:19:04.220 --> 00:19:12.060 raise your costs. They raise business costs. In fact, Roberts is arguing for laws and regulations 208 00:19:12.060 --> 00:19:15.780 and the like that will force up business costs with the idea that somehow this will make 209 00:19:15.780 --> 00:19:19.380 us wealthier. 210 00:19:19.380 --> 00:19:24.860 And so I think that, in fact, here's my concluding paragraph, if we've watched anything or anything 211 00:19:24.860 --> 00:19:30.540 watching the disasters, you can't create prosperity by fiat, okay? 212 00:19:30.540 --> 00:19:34.700 Furthermore, Roberts wants us to believe that the bloated wage contracts at places like 213 00:19:34.700 --> 00:19:40.140 General Motors and Chrysler somehow are responsible for creating wealth instead of actually destroying 214 00:19:40.140 --> 00:19:41.140 it. 215 00:19:41.140 --> 00:19:47.020 Henry Ford doubled his labor costs, or doubled the wages that he paid the workers, and that's 216 00:19:47.020 --> 00:19:48.180 what created the middle class. 217 00:19:48.180 --> 00:19:54.660 Yeah, a little factory in Dearborn creates the middle class, and without people realizing 218 00:19:54.660 --> 00:19:58.900 the opportunity cost reasons why Ford made that particular move. 219 00:19:58.900 --> 00:20:04.420 And so, here's the thing, in the end, it really sounds good. 220 00:20:04.420 --> 00:20:10.380 I mean, he had an op-ed in the New York Times with Senator Charles Schumer, and yeah, we 221 00:20:10.380 --> 00:20:16.620 We understand that all the rules are different now. We have mobile capital, so therefore 222 00:20:16.620 --> 00:20:21.240 comparative advantage no longer operates. So what he's really saying is opportunity 223 00:20:21.240 --> 00:20:27.020 costs no longer exist. And the rest of us are sitting back and saying, you know, that 224 00:20:27.020 --> 00:20:29.460 doesn't make much sense. Thank you.