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Ricardo is not an easy man to believe in

A brilliant article on outsourcing.

<<Ricardo isn't an easy man to believe in. But so far — 180 years after  his death — he still seems right.>>


http://www.usatoday.com/money/industries/technology/maney/2004-02-03-maney_x.htm

Karthik
Monday, February 09, 2004

No one has given a satisfactory "what's next" scenario.
It was OK when everyone stopped working in the agricultural economy, because they had the new industrial economy to work in. It was ok when everyone stopped working in the industrial economy, because we had the new knowledge economy to work in. However, once all the knowledge economy jobs are outsourced, what exactly is next? The service economy? 

I'm all for outsourcing boring shit like programming, but it is worrisome when no one is coming up with any sort of good ideas for what to do next. I certainly don't want to live in an economic state where everyone is either a rich overlord or a wal-mart greeter. 


Monday, February 09, 2004

I found this paragraph and the analysis fascinating. I still remember how paranoid American used to be about japan.
There were a lot of people like Tom Peters who made a hell lot of money from it. Ultimately, it was win-win for both japan and american. both these nations won.

I hope the same thing happens to India and US.

<<
Real life gets a lot more complicated than that, but in general the theory has been proved over hundreds of years. In the 1980s, the USA lost tens of thousands of auto and steel jobs to Japan, but because of comparative advantage, we gained those jobs and more in fields that were new "most bests," like high-tech and financial services. And though some people back then predicted we were going to become Japan's servants, and congressmen symbolically bashed a Toshiba boom box on the Capitol lawn, in the end the standard of living in Japan and the USA rocketed>>

Karthik
Monday, February 09, 2004

The part where this gets problematic _is_ the "seed corn" problem.
Tech gurus, innovaters, and startup CEO's - and even most VC's
that have a clue about technology - have to come from
somewhere, and that somewhere is typically programming, or
other R&D activities like lab science.  While some outsourcing won't
hurt this, a complete outsourcing of all of this will lead to a collapse
of innovation, simply because those who should be leading and
funding the innovating won't know where to start.  In order to have
the well-tuned "bullshit detector" that a good tech executive has to
have, they usually need to have been a "practitioner" of at least some
form of R&D at some point in their careers.

Fortunately, R&D programming tends to have different economics than
IT, so its less likely to be outsourced, but there's always the threat that
shortsighted beancounters will get impressed with "salary
arbitrage" and not realize their mistake until it's too late.

x
Monday, February 09, 2004

I think we ARE in the service era, commercial, personal, communitry, all sorts of services. We'll keep on riding new technologies until we kan order a pizza and appear in court all through our refrigerator door.
Then we'll have integrated all the services, but unfortunatelly lost all the jobs.

What's the next "most best"? i dont know but i think we've been in debt to art and culture for a long time, maybe we'll all become craftsmen :)

About R&D it will always stay close to home.
German car companies spread their production sites all around the world, and they still make the best cars.

Swyt
Monday, February 09, 2004

technology innovation is different from programming? Alright, so build me a flying car!!!! Does that make me an innovator or a PHB!

Also, ask indian companies they they see themselves as the innovators, and they are right,

Oh well, when a fast database that duplicates all of Oracle's functionality exactly costs a hundred bucks I am sure the anguished screams will be palpable. And will all be hearing Oracle's compliants about these low cost foreign competitors

the artist formerly known as prince
Monday, February 09, 2004

What's next you ask?

The next big thing according to the outsourcing mavens is biotech.

I have difficulty believing that we need 180 million genetic engineers in the US.

I also have difficulty believing that the majority of people are qualified for, would be interested in, or are suitable to become genetic engineers.

Maybe we need all those people to develop particularly virulent bioweapons.

Dennis Atkins
Monday, February 09, 2004

The cream rises to the top.  I guess you know where you fit in.

Laurel
Monday, February 09, 2004

"Maybe we need all those people to develop particularly virulent bioweapons."

Well there has to be a plan for the future once the Indias and the Chinas of the world understand they own the entire means of production and the knowledge required to use it.

Gotta keep them under control somehow. ;)

Sum Dum Gai
Monday, February 09, 2004

Ricardo's theories were based on a closed system.  In effect, the benefit of transforming technology was felt immediately in its source location.  In a global economy where free trade is not fair trade the system falls apart.

Consider India.  The are not only outsourcing programming jobs, but engineering.  These jobs are replaced by Malmart jobs or a net loss of 50k/year/worker.  In a closed system this was fine, as Malmart would need to pay workers more or they would not get workers and somewhere between 0 and 50k a balance would be reached.

However, we are allowing not only the job, but the mechanism by which new jobs are created to leave. In addition, the free trade spoken so fondly of, is not fair trade.  The ability for an American company to compete in India is near zero.    It is not price, it is their government is based on a policy that protects its workers.  In addition, there is a culture of closed selection.  If you somehow manage to get around the government imposed bureaucracy, companies will bankrupt a defector, for buying from outside.  To be fair, that is not even a real threat as it is culturally unacceptable.

In the end, we have outsource both the job and the ability to create new ones, to a place where the rules favor a protectionist establishment.  This naive belief that by opening our markets to them, will make them reciprocate is a joke, why should they, we gave them the business lesson with Ricardo.  There is no advantage to playing fair, when your objective is to win.

Anonanonanon
Monday, February 09, 2004


> The ability for an American company to
> compete in India is near zero.

This is absolutely false. I am Indian so I know what I'm talking about.

There are many products here that are made by US firms.

Of course, they are the more expensive products.


> It is not price, it is their government is
> based on a policy that protects its
> workers.

Every government protects it's workers.

Yes, as an Indian, I can come to the US and work on a H1B (I think) work visa.

There is a similar visa US people need to get in order to work in India.

Jammer
Tuesday, February 10, 2004

Free trade is not fair trade but nearly all the unfair advantages are held by the USA, EU and Japan.

Your grain farmers are receiving subsidies for produce, which then speeds along subisidized roads and can reach an Indian city quicker and cheaper than the same grain from an Indian farmer only a few hundred miles away.

And where the Third World can produce cheaper than the First it often finds itself facing tariffs or quotas. Under Reagan at one time a quarter of US imports were subject to restrictions.

There are many Indian workers that are being laid off as a result of downsizing or the collapse of inefficient industries as a result of slow opening to free markets that has been going on there since 1990, and they don't have a Walmart to get a job as a greeter at.

Stephen Jones
Tuesday, February 10, 2004

The USA Today article is complete junk incidentally. Claiming that Indians are the "most best" at programming whilst Americans are "most best" at "innovative creativity" is a facile stereotype and the split doesn't seem appropriate to software creation anyway.

Incidentally, the global economy was the norm, almost until the First World War. There were certainly few impediments to free trade in Ricardo's time. Even in wartime - Napoleon imposed economic sanctions on the British in an attempt to force them to the negotiating table, but he still bought his army's  uniforms from British textile manufacturers.

Stephen Jones
Tuesday, February 10, 2004

Stephen,

<The USA Today article is complete junk incidentally. Claiming that Indians are the "most best" at programming whilst Americans are "most best" at "innovative creativity" is a facile stereotype and the split doesn't seem appropriate to software creation anyw<<

Amusing. Complete junk?. You need to read some economics my friend. "Most Best" is an economic terms. It does not have the connotation you seem to imply and is not a stereotype. I suggest before you damn someone else, try to understand what they are trying to say.

"Most best" means Indians are better in programming than in innovating.  "Americans" are very good at innovating.

He is  not comparing indians to americans, but indian programming to indian innovation .

Karthik
Tuesday, February 10, 2004

I am quite aware what he was saying and  read large chunks of Adam Smith before you were even born.

What I am saying is that the distinction he makes between American innovation and Indian programming is a facile stereotype, and bears no relation to reality. Innovation and grunt work are not easily split, unlike steel manufacturing and chocolate making. They are not separate activities.

And don't forget that in 1816, the one year before Ricardo published "Political Economy", Luddites, who found themselves put out of work by power looms which could be operated by women and children who would receive lower wages for twelve hour days, were smashing up the factories. The "most best" did nothing to save the handloom weavers from destitution.

The 'most best' does not help everybody. There are winners and losers, and although the American taxpayer and Indian programmer may gain if government work is offshored, the American programmer quite likely won't.

Stephen Jones
Tuesday, February 10, 2004


Well, I think that this is more of a disconnect between the macro and micro levels. Comparative advantage is true on the macro level. If followed, you economy as a whole will grow faster. But, what is doesn't address is the problems on the micro level. Specifically, how are the individual workers supposed to change careers quickly and painlessly.

But, be fair to Ricardo, comparative advantage isn't about the micro problem. It's a big picture theory. It's about relationships between big economics systems over long periods of time. It's not a panacea that is supposed to answer questions like: what is this particular laid-off programmer supposed to do for rent next month?

Well, you ask, what about the micro problem? Well, to be deliberately vague, we need to look at other theories, mechanisms, and programs to address that problem. And governments should be working hard at making it easier for workers to change careers.

But the existance of the micro problem doesn't invalidate comparative advantage. And if we try to solve the micro problem with protectionism and trying to produce everything in our economy (ie. ignore the lesson of comparative advantage) then we condemn our economy to slower growth than we might otherwise enjoy.

Bill Tomlinson
Tuesday, February 10, 2004

One thing nobody has sufficiently explained to me yet about offshoring:  One of the supposed benefits of offshoring is that American consumers will get cheaper goods.

I call bullshit.  The real supply of an instance of intellectual property is effectively infinite.  The legal supply is the only thing that is limited.  Therefore, the cost of Intellectual Property is unrelated to supply and demand and solely determined by what consumers are willing to pay for that product (with the small exception of cheap intellectual property being adjusted for the cost of the physical media).

It doesn't matter one bit how much it costs to develop Oracle to the consumer.  Oracle will charge whatever maximizes profits.  Cheap foreign programming, if it saves any money, will do nothing but line the pockets of CEOs who are already not paid based on actual performance.

While supply and demand do not determine the MSRP once the product is made, the demand for the product and the cost of development will determine whether or not it gets made in the first place.  So I will concede that consumers will benefit that some things which wouldn't have been made with expensive american programmers might get made by cheaper foreign programmers.  However that is a much weaker point in favor of offshoring than "american consumers will get cheaper software".

The only reason american consumers might get cheaper software as a result of offshoring would be because the ability of american consumers to pay for software had already lowered.

Richard P
Tuesday, February 10, 2004

The main use of offshoring has little to do with IP, IMO,
at least in the sense of software produced by ISV's or
other IP producers.  While some ISV's may try it with
functions like QA, it is too hard to kick the core
development offshore, particularly to a country which
has specious IP protection.  It is in-house IT that is the real
offshoring issue...

Many companies regard their IT departments as
a necessary evil and peripheral to their core business. 
These are most likely to do bigtime offshore
outsourcing.

But many business types disagree vehemently that IT is
so peripheral that it can be kicked out the door, since
skillful use of IT can add value to the core business,
even if it seems to have nothing to do with IT.  The
market will decide who wins: those who cleverly use IT
to enhance their position with respect to their competitors,
or those who engage in salary arbitrage to lower their
cost basis.  You can't easily do both - if IT is overseas, it
is really hard to get the IT people close enough to the
in-country business people to "cross-fertilize".

My suspicion: it will depend on the business.  Some
businesses will find that having IT close at hand makes
them very flexible and able to grab opportunities quicker
than their competitors.  Others will be in slower-moving
markets where IT may not matter as much and would
benefit most from offshoring.

x
Tuesday, February 10, 2004

"One of the supposed benefits of offshoring is that American consumers will get cheaper goods."

hmm...im not sure thats true....who made this claim?

the benefit of offshoring software development is that overall that development will cost less, if we, for arguments sake,assume thats true then one obvious benefit occurs:

The company paying for the development now has a greater quantity of spare cash that they can use as they wish.

They may choose to pass that saving onto the consumer, thus lowering the cost of the product...this obviously benefits the consumers directly.

they may choose to, for instance, pay off debt...that increases the amount of spare cash they have by reducing interest costs.
..which leads to something of a cycle :)

..or they may choose to invest the money somehow, hopefully leading to even greater rewards further down the track.

ultimately the cash they have gained is most likely to end up in the hands of shareholders in some form or other, prolly through increased dividends.

which means that the shareholders now have a greater sum of money to spend.

which means that they can, for instance, pay of debt quicker....make further investments, etc etc etc

all of which generally will lead to improvements and increases in job numbers.

will those benefits outweigh the costs in jobs caused by the initial decision to outsource the work?  beats me, but the answer according to generally accepted economics appears to be 'yes, over the long term'

"Oracle will charge whatever maximizes profits."

yep, which will in turn maximise the payouts to shareholders.  (is oracle actually a public company?  I dont recall...)

"Cheap foreign programming, if it saves any money, will do nothing but line the pockets of CEOs who are already not paid based on actual performance."

salary increases is, of course, another possibile use of the money.  Interestingly enough that _also_ aids the economy because the grossly overpaid CEO will have to spend his money somehow, he may do so by investing it (causing economic growth) or by paying ridiculous sums for a fancy house to be built (causing economic growth) or however else he likes...but the bottom line is that he _will_ spend it.

"The only reason american consumers might get cheaper software as a result of offshoring would be because the ability of american consumers to pay for software had already lowered."

<g>

FullNameRequired
Tuesday, February 10, 2004

"yep, which will in turn maximise the payouts to shareholders.  (is oracle actually a public company?  I dont recall...)"

since when did public tech companies start paying dividends? the only way to make money on oracle stock is to buy low, and sell high.

z
Tuesday, February 10, 2004

Currently India does NOT have a comparitive advantige in computer programming.  There is a perceived advantage, but all variables such as the cost of communication have not been considered.  From personal experience India produces lower quality software, and requires a specification with such detail, that you be better off just doing the work yourself.  One of the largest costs in software , and this is where offshored projects are always underestimated, is communication.  The cost of communication is always underestimated, and rarely added to the equation when comparing software groups in the US to those in India.  If you were to calculate the cost of communication you would find that US teams are significantly more productive.

Additionally as we offshore more work, we are training the rest of the world to create software business, and innovate.  If we give up our innovation, and software business,  again -- what's left?  Now I have to go back an retrain for bioengineering?  Or maybe I should just move to India, and teach computer science?

I refuse to train India, to take my job!  If they must have my job they have to figure out my program without my help -- that's for sure.  I urge others to refuse to train the Indian taking there job.

articulate fool
Saturday, February 14, 2004

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