The Outsourcing Tragedy

by Ernest Partridge
My computer and I have been through a bad spell these past couple of weeks. First, my router/modem developed a terminal malfunction, and then my new anti-virus software failed to install. Thankfully, three very capable and patient gentlemen at various technical support facilities found solutions.

These three gentlemen were, respectively, from India, the Philippines, and once again, India. If you or someone in your family is about to graduate with a degree in computer science, don’t expect to find a job in the U.S. any time soon.

Amidst my computer worries, I bought a dozen or so electrical supplies from the local hardware: a surge protector, extension cords, a phone, that sort of thing. Glancing at the labels, I found that each and every one was made in China. And a new hard drive? From Malaysia.

No need to go on with this, you know about it already. It’s called “outsourcing.”

Damned greedy capitalists are dismantling our manufacturing base and shipping it overseas!

Were it as simple as that, it would be a waste of my effort writing about it, and of your time reading yet another complaint about that which is painfully familiar.

But outsourcing, and the consequent loss of millions of American manufacturing and service jobs, is not the plain and simple result of corporate greed. It is, instead, an inevitable result of a combination of factors, including:

 

• the successful enactment of the right-wing dogmas of “the invisible hand” and “trickle down,” namely the conviction that individual entrepreneurs and corporations will, by seeking only their own economic gain, obtain the best results for society at large.   These are "dogmas" because they are "proven," not by historical evidence or practical experience, but rather through repetition.
  

• the corollary libertarian dogma that government has no justification whatever in interfering with the economic activities of private individuals and corporations. In the words of Milton Friedman, “There is nothing wrong with the United States that a dose of smaller and less intrusive government would not cure.”
  

• fiduciary responsibility: the legal requirement that the primary responsibility of the corporation is to its stockholders, not the public.

Thus the necessity of outsourcing is beyond the control of any single corporation’s executives or board of directors. It is a thus a tragedy, in the sense defined by the philosopher Alfred North Whitehead: a consequence of “the remorseless working of things.” (See Garrett Hardin’s “The Tragedy of the Commons.”). As long as these conditions obtain, jobs will gravitate toward the individuals accepting the lowest wages, i.e., those abroad, and the middle class will wither as wealth flows from those who create the nation’s wealth to those who own and control the wealth. These are conditions that are destined to ruin the economy of the United States.

• “As long as these conditions obtain...” The obvious solution, then, is to change “these conditions.”

So why don’t corporate executives simply behave like good Americans, and keep those jobs stateside?

Because, quite frankly, if they were to do so, they would be taken to court by the stockholders and sued. And they would lose.

Near the close of the Nineteenth Century, railroad tycoon William Vanderbilt famously said, “The public be damned, I work for my stockholders.” And in 1970, The New York Times Magazine published an article by Milton Friedman, “The Social Responsibility of Business is to Increase its Profits.” The title says it all.

The knee-jerk liberal response is that these quotations are expressions of plain lousy attitudes. Sadly, it's much worse than that.


The fiduciary responsibility of corporations, first and foremost to their stockholders, has been articulated in numerous court decisions, and in the statutes of several states. And so, as Daniel Brook writes in Huffington Post

“Corporations have a fiduciary responsibility to maximize profits even if it means betraying the nation, trashing the environment, or fomenting unconscionable levels of inequality. Nothing is unconscionable for a corporation because they don't have consciences; they're not really people, whatever the courts may say.”

Accordingly, my internet service provider and the company that makes my anti-virus software simply had no choice: they had to hire tech support workers in India and the Philippines and to fire their American technicians. Had they not done so, they would have been put at an insurmountable competitive disadvantage with their rivals who have no qualms about outsourcing. The profits and stock value of the “socially responsible” corporations would drop, causing losses to their stockholders – i.e., those to whom they owed “fiduciary responsibility.”

And then the company would find itself in court, facing a winning suit by the stockholders.

Obviously, corporate activity affects more than managers, employees and stockholders. Corporations also involve customers who are entitled to be protected from fraud and from defective products. Civil courts exist to reimburse customers for damages from corporate abuses, and few if any libertarians would object, in principle, to the exercise and enforcement of civil law. Because civil suits can be costly and impact upon the corporate bottom line, corporations have a fiduciary responsibility not to engage in fraud or to sell defective products. (Unfortunately, as the recent Supreme Court decision on the Exxon Valdez suit reminds us, corporate-friendly courts can reduce civil settlements to trivial sums that fail to deter corporate malfeasance).

In addition to injured customers, there are unconsenting third parties, “stakeholders,” who are affected by corporate activities. These include persons residing downwind and downstream from industrial polluters, teen-agers “hooked” on cigarettes leading to a shortened life of addiction, taxpayers who pay for the public health costs of smoking, ecosystems damaged by pesticides, citizens whose government is corrupted by corporate lobbying and campaign contributions, and humanity at large the future of which is imperiled by global climate change.

Add to this, American workers who lose their jobs to outsourcing; victims of “collateral damage” resulting from the fiduciary responsibility of corporations to reduce labor costs and thus to increase profits and the return on the investments of the stockholders.


Who Speaks for the “Stakeholders”?

Who else, but the government?

Many, and perhaps most, corporate executives, when confronted by the economic and social devastation brought on by outsourcing, might reply: “Yes, it’s horrible! But what can I do about it? If I insist on hiring American workers at American wages, my firm will go broke or, before that happens, the Board of Directors will fire me. I’m helpless!”

Sad to say, they are right.

Alternatively, one might bring together the CEOs of all the competitors, and try to persuade them to agree not to outsource. Problem is, that might be collusion, which is illegal. Or if not, there would be no sanctions against violating the agreement, and enormous advantages would be gained by any renegade firm that did so.  It's a paradigm case of the prisoner's dilemma: that which is good for all is bad for each.  Without the enforcement of sanctions there is an irresistible temptation to defect from the agreement.

In any case, missing from that assembly would be delegates representing those unconsenting but seriously affected third parties, the “stakeholders.” Their claims against the corporations would exact costs that would adversely affect “the bottom line:” profits and returns on investments. And the corporations, by law, have that fiduciary responsibility to maximize the bottom line.

Leave it to the unregulated free market, the profit motive, and fiduciary responsibility, and the stakeholders, which is to say the general public, is screwed. Given these conditions, there is no escape from this “remorseless working of things.” It is a tragedy.

So the solution is compelling: abolish the conditions that bring about the tragedy.

The stakeholders must be given a place at the table that determines corporate policy.

And there is one and only one institution qualified to represent the stakeholding general public. That would be a representative government, such as that established by the founders of our republic.

“To secure these rights, governments are established among men, deriving their just powers from the consent of the governed.”

"We the people of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

How strange and sad it is that we have allowed the right-wing dogmas of market absolutism, libertarianism, “the invisible hand” and “trickle down” to cause us to forget the founding principles of our republic, and to forget the lessons learned from a difficult history since that founding.

We’ve tried laissez faire capitalism, and each time it has failed all but a very few wealthy and privileged individuals, and eventually those too when the economy collapses.

We learned from the crash of 1929 and the depression that followed, that corporate greed, unconstrained and unregulated, can lead to a ruined economy. Then we recovered, not by abolishing capitalism, but by reforming it and regulating it with agencies of government acting in behalf of "we the people," i.e. the stakeholders.

Through tax incentives, tariffs, and other laws and regulations, the government can end and reverse the outflow of jobs from the United States.  Goodness knows there's abundant work to be done within our borders.  The physical infrastructure of the U.S. is in an advanced state of decay, and only government appropriations can repair it, with jobs that by their nature can not be outsourced. Like it or not, the petroleum age is on its way out, opening the necessity for the development and implementation of alternative and sustainable energy sources. Here is a compelling opportunity to re-establish our dismantled manufacturing base. And be assured that if we don’t take the lead in ushering in the solar age, some other country will do it and we will be left behind.

The lessons of history notwithstanding, we have tried market absolutism and minimal government once again, and they are failing once again. The United States of America is near bankruptcy, our currency is in decline, we are massively in debt to our rivals, our manufacturing base has been dismantled, and we are despised the world over.

• “When you are in a hole, the first thing to do is stop digging.”

 





For a further and more extensive elaboration of these issues, see my “The Scorpion, The Frog, and The Corporation,” (The Crisis Papers, September 12, 2006 ), and “Market Failure: The Back of the Invisible Hand” (The Crisis Papers, June 19, 2007).
 

Copyright 2008 by Ernest Partridge 

Ernest Partridge, Co-Editor
The Crisis Papers
August 5, 2008

 

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