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Outsourcing Is a Natural Force in the Free Market

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The other day, while performing an emergency operation on a patient with a bleeding ulcer, it occurred to me that surgeons don’t see many ulcer patients these days. Back in the 1970s and early 80s I would operate for ulcer disease every week or so. But with the advent of new anti-ulcer drugs, most ulcer surgery has been “outsourced” to non-surgical medical specialists. Surgeons have more than made up for this loss of business through the explosion in laparoscopic surgical techniques, whereby people can have gallbladder and other operations as an outpatient through small scopes passed through the navel.

Surgeons are not alone when it comes to outsourcing. In the 19th century more than 80 percent of American workers were agriculturally based. Technological advancements have increased American farm productivity to the point where only 2-3 percent of Americans work on the farm. Agricultural jobs were outsourced to developing nations as Americans moved into manufacturing, tech, and service sector jobs.

The last 5 decades have seen a steady outsourcing of manufacturing jobs to countries in the developing world — the US has lost less manufacturing jobs than have the rest of the economically advanced nations. In turn, the advanced nations’ economies have evolved into more finance, service-sector, and high-tech oriented industries.

Meanwhile, people in developing countries increase their wealth as they advance from poor agrarian societies to modern industrial ones. They become new consumers of technological, financial, and other services that developed countries have to offer.

This has been the story of mankind since the beginning. Free markets provide what the great economic historian Joseph Schumpeter called a process of “creative destruction.” Always dynamic, always progressive, free markets constantly generate new products, new jobs, and new wealth on the foundations of earlier creations. In the end, they replace these earlier creations. Free markets propel society forward.

Where are the blacksmiths and candle makers? Cars and light bulbs have nearly completely eliminated these jobs. But everyone in society is better off today than in the days when blacksmiths and candle makers were indispensable.

To be sure, as societies transition from one stage of economic development to another, real people feel real pain as their jobs are “creatively destroyed.” But in the long run, looking at the big picture, as those whose jobs are lost find new positions in newly created fields of work, everyone prospers.

The latest example of “outsourcing” relates to low tech jobs — mostly telephone-based tech support — being outsourced to newly emerging India, with a billion potential new customers for American products. While low tech jobs are going to India, the Indians are performing these jobs on equipment made in the US, and their newfound wealth is being spent on US exports. Ultimately this will increase U.S. jobs in areas where the Indians can’t compete. The Americans wind up doing more of what they do best while the Indians do the same. Both societies increase their net wealth in the process. It’s ultimately a “win-win.”

This creative destruction phenomenon is driven, in the end, by consumers, who are always king in a free market. The consumers demand the lowest price for the best possible product. If not, they will take their business elsewhere — perhaps to foreign imports. In order to compete for the consumers’ business, U.S. companies must constantly find ways to keep costs down while keeping quality up.

All of this was originally elucidated by the great classical economist David Ricardo. He called what he discovered the Law of Comparative Advantage, a spin-off of the division of labor principle. In his day, he would have said, “If the French make better wines for less money than the English, and the English make better sweaters for less money than the French, then they both would be better off if they drank French wine and wore English sweaters.”

Today, ambitious political demagogues try to take advantage of the public’s general lack of understanding of economic principles, as well as everyone’s dismay when people are displaced by creative destruction, and they call for the government to intervene against “outsourcing.” This is nothing new. They have been doing this since the days of Adam Smith.

In the interest of the health and wealth of society, Americans must resist the temptation to defy the laws of economics. They must try to understand and appreciate the benefits free markets provide to all societies.

This article originally appeared in the March 29 issue of the Arizona Republic.

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    Dr. Jeffrey Singer is a Phoenix-area surgeon who writes and lectures on regional and national public policy. He serves on the board of directors of the Goldwater Institute and is a contributor to Arizona Medicine, the journal of the Arizona Medical Association, and is a member of the Maimonides Society of the Jewish Federation of Greater Phoenix.