Give that man the Bastiat Award!

Here’s the sort of thing we teach our students in basic economics:

A fable by James Ingram also illustrates that free international trade is production efficient. In his book, International Economic Problems (John Wiley, 1970), he tells of a mysterious entrepreneur, Mr. X., who announces to the world that he has found several amazing discoveries that allow him to produce cheap televisions, automobiles, cameras, and other goods. He sets up a plant on a large tract of land along the coast of North Carolina; hires 5000 employees who are sworn to secrecy; and begins buying grain, coal, and machinery. As the trains of grain and coal roll into his factory, other trains full of televisions and automobiles roll out of his factory into showrooms across the country. Mr. X is hailed as another Edison or Bell, and his company becomes a favorite with Wall Street investors.

Consumers love Mr. X because his products are so much cheaper than what they could buy before. Of course, his competitors dislike him, but their attempts to get laws restricting his operations get nowhere. The Houses of Congress ring with speeches saying that some economic adjustment is an inevitable by-product of technological progress.

Then, one day a small boy trying out his new skin-diving gear accidentally penetrates Mr. X’s security shield and learns Mr. X’s secret. Nothing is produced at the factory. It is all a front for a giant import-export business. Mr. X transforms grain and coal into autos and televisions by trade. His secret revealed, Mr. X is reviled and his factory shut down. Members of Congress proclaim that the American standard of living has had a narrow escape from the threat of cheap foreign labor and urge more money for research in industrial technology.

And here’s what happens if you apply what you’ve learned in econ:

There’s a story floating around the internet that’s so good that it can’t be true – but I really, really want it to be. According to a Verizon security blog, a developer employed by an American company has been caught outsourcing his own job to China – giving him much-needed extra time to watch YouTube videos about cats.

.  .  .

Verizon investigators found that [Bob] had hired a software consultancy in Shenyang to do his programming work for him, and had FedExed them his two-factor authentication token so they could log into his account. He was paying them a fifth of his six-figure salary to do the work and spent the rest of his time on other activities.

What did those other “activities” consist of? Apparently it was:

9:00 a.m. – Arrive and surf Reddit for a couple of hours. Watch cat videos
11:30 a.m. – Take lunch
1:00 p.m. – Ebay time
2:00-ish p.m – Facebook updates, LinkedIn
4:30 p.m. – End-of-day update e-mail to management
5:00 p.m. – Go home

Throw in a steady diet of custard cream biscuits and this is my idea of heaven – and it wasn’t doing Bob’s productivity any harm, either. According to one source, “His [work] was clean, well written, and submitted in a timely fashion. Quarter after quarter, his performance review noted him as the best developer in the building.”

The Register reports that Bob got canned, which is a great tragedy.

As I said yesterday, the public has utter disdain for the economic way of thinking.


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23 Responses to “Give that man the Bastiat Award!”

  1. Gravatar of Max Max
    17. January 2013 at 06:47

    It takes a moderately sophisticated argument to show that common sense is wrong…and an even more sophisticated argument to show that common sense was right all along.

  2. Gravatar of Geoff Geoff
    17. January 2013 at 06:47

    Great stories.

    Somewhat tangentially related, one of my favorite econ stories is I, Pencil.

  3. Gravatar of Geoff Geoff
    17. January 2013 at 06:48

    Thanks Max, that one is going into the vault.

  4. Gravatar of Saturos Saturos
    17. January 2013 at 06:49

    That parable can also be found in Mankiw’s introductory textbook, where it ends with (paraphrase) these classic lines: “The man had been found to be a fraud and a charlatan. He was not a genius after all. He was just an economist.”

  5. Gravatar of RPLong RPLong
    17. January 2013 at 06:50

    I’m utterly certain someone told exactly the same story on EconLog 1-2 years ago. Give them the Bastiat Award instead. :)

  6. Gravatar of ssumner ssumner
    17. January 2013 at 07:44

    RP, As I wrote this I assumed someone else must have done it earlier. If someone can find a link I’ll add it.

  7. Gravatar of ssumner ssumner
    17. January 2013 at 07:45

    Saturos, Mankiw would love this story.

  8. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    17. January 2013 at 08:20

    What I have found most disturbing about this story is that 99% of online comments I have read are indifferent or downright hostile to the foreign worker’s interests. Mostly, just ignore it even as an issue.

    After reading a bunch of these, I thought to myself: this is how people who thought they were good people sustained slavery, just ignored the interest of the slaves because they were of a different race.

  9. Gravatar of johnleemk johnleemk
    17. January 2013 at 08:33

    RP/Scott:

    I’m pretty sure Steve Landsburg mentioned this years ago, in his 1993 book the Armchair Economist: http://www.swifteconomics.com/2011/02/08/iowa-car-crop/

    “There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa…”

  10. Gravatar of johnleemk johnleemk
    17. January 2013 at 08:39

    Luis:

    For some reason many advocates of free trade find it fashionable to be blase about the interests of the oppressed. Sure, they’ll occasionally toss in a word about how it benefits the people of the developing world, but it’s not their main selling point — it’s at best something they pull out to counter the bleeding-hearts who disagree with them — and rarely is it the actual primary reason they favour free trade (Krugman is likely the main exception to this I can think of, assuming he still affirms his defence of sweatshops).

    It’s interesting to see how quickly many free trade advocates turn into protectionists once the issue of freedom of movement comes up. It’s ok to move goods and capital around the world apparently, but heaven forbid that someone who can find a job in another country actually be allowed to take it.

  11. Gravatar of Saturos Saturos
    17. January 2013 at 08:50

    Scott, oh yes he did: http://gregmankiw.blogspot.com.au/2013/01/the-gains-from-trade.html

  12. Gravatar of Peter Parkes Peter Parkes
    17. January 2013 at 09:02

    Thanks for the link – as I say in my post on the subject, this sort of labour arbitrage is something we should encourage.

  13. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    17. January 2013 at 09:11

    johnleemk: I was mostly talking about the opponents of free trade, but, yes, I see your point.

    (It’s particularly glaring when the same opponents of free trade accuse their political enemies of heartlessness for not caring about low-income workers in rich countries.)

  14. Gravatar of Ritwik Ritwik
    17. January 2013 at 09:47

    What does the 2nd example say about marginal productivity theory?

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    17. January 2013 at 10:05

    It’s also the plot of What Makes Sammy Run by Budd Schulberg.

  16. Gravatar of Kyle Hale Kyle Hale
    17. January 2013 at 12:28

    Let’s be clear: he was fired for sending his RSA token overseas to China and allowing developers there to login to the company’s VPN and do work.

    Obviously in practice it was working out, but that’s a major security breach waiting to happen.

  17. Gravatar of Doug M Doug M
    17. January 2013 at 13:20

    Bob should be promoted! Clearly, he is mangement material.

  18. Gravatar of Cameron Cameron
    17. January 2013 at 13:49

    Bob should be fired for proving that he was being well over-paid. As should his coworkers, no? I submit that firing him (and subsequently outsourcing all of the labor) IS the economic way of thinking.

  19. Gravatar of Peter N Peter N
    17. January 2013 at 14:39

    You wonder why micro gets no respect. Well if you present nonsense like the factory story in such a condescending tone, what do you expect?

    1) “He sets up a plant on a large tract of land along the coast of North Carolina; hires 5000 employees who are sworn to secrecy; and begins buying grain, coal, and machinery. As the trains of grain and coal roll into his factory, other trains full of televisions and automobiles roll out of his factory into showrooms across the country.”

    If he’s producing overseas what is he doing with all these resources? Digging a hole and burying them? Can he really make a profit despite this? And he’s smuggling the automobiles in through a tunnel from China?

    Of course in real manufacturing outsourcing you generally source your inputs with consideration for cost and just in time delivery. That usually means locally.

    So in the real world this guy has an operation like Sears. It’s local resources are a conference room somewhere in the Sears tower.

    2) If there are no downstream benefits from local spending, then they must derive from stockholder’s profits, cost to sell, market and distribute and lower prices for the finished goods, assuming they are imported – the Wal-Mart model. Now the advantages come with disadvantages, and a total utility calculation is difficult and its basis subject to argument.

    3) Most of the outsourcing complaints are about outsourcing existing operations, so we’re not hiring 5000 people, we’re firing 5000 people. Whether equivalent job utility is the result is arguable. You destroy x number of jobs doing y and paying z and replace them with u number of jobs doing v paying w, plus additional social benefits and costs.

    4) The profitability of much outsourcing depends heavily on the Federal Tax code and other legislation. The Bain model exploits this by taking advantage of a) deductibility of interest b) carried interest as capital gains c) dumping the pension costs on the government. The public benefits of this form of outsourcing are very hard to see. It looks more like corporate welfare due to lobbying.

    5) Outsourcing is, in part, a management fad. A lot of management practices have been fads with no provable financial basis. Now insourcing is coming into vogue. Apple is building a Mac $100 million plant in the US.

    GE outsourced its white goods operation and mothballed a huge plant. Labor-management relations were very bad and productivity was low.

    Now they are reinsourcing. They are cooperating with workers to minimize production costs including practicing design for manufacture. Costs are less, and quality is better. Plus their market response time is reduced.

    6) Yes, I’m aware of comparative advantage. I’m also aware that its proof is based on a number of counter-factual suppositions, like immobile capital and friction free redeployment of labor.

  20. Gravatar of Bababooey Bababooey
    17. January 2013 at 15:25

    Re: Peter N’s #5.

    That GE story was covered in depth by The Atlantic article, The Insourcing Boom. I thought they soft-pedaled the energy boom and union deterioration as reason for hope, but otherwise an interesting article.

    Re: #2, How do carried interest compensation and deductibility of interest lead to outsourcing? They seem neutral to cross-border planning. (Certainly, dozens of tax laws produce bizarre cross-border results, but those 2 don’t come to mind).

  21. Gravatar of Peter N Peter N
    17. January 2013 at 17:48

    Bababooey,

    It’s kind of a formula. Outsourcing is just one ingredient of the scam. It’s a hot button issue with me, since so many people voted for the scamster-in-chief in the name of free enterprise. Talk about irony.

    There is plenty of outsourcing for which there is a business case (as opposed to take the money and run).

    David Stockman has a book coming out:

    The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy

    http://www.amazon.com/The-Great-Deformation-Capitalism-Democracy/dp/1586489127/ref=sr_1_1?ie=UTF8&qid=1358471688&sr=8-1&keywords=david+stockman

    He really tears into Bain. Stockman isn’t exactly a flaming liberal.

  22. Gravatar of asdf asdf
    18. January 2013 at 08:11

    “Consumers love Mr. X because his products are so much cheaper than what they could buy before.”

    How can consumers love his products if they don’t have jobs and therefore can’t purchase them at any price high or low? You can’t consume if you don’t produce.

    My Dad’s union recentely got smashed and they took a 40% paycut plus lost their health benefits. This despite being in an industry that is doing well. How exactely does slightly cheaper plastic shit at Walmart make him better off?

    1) Destroy jobs
    2) ???
    3) New better jobs with higher standard of living.

    There seems to be this magical thinking with the ???. I know we all love the invisible hand but even the guy who invented it knew its limitations. You’ld think high persistant unemployment in the west would be empiracle proof that ??? wasn’t working.

    Oh yeah, ??? will work as soon as we through more credit at it. Because that worked great in the 2000s with no repurcusions.

  23. Gravatar of ssumner ssumner
    18. January 2013 at 14:51

    Bababooey, Thanks for responding to Peter. I assumed the story was intended as a joke, not a realistic example. Certainly this post was meant to be a joke.

    asdf, Europe has a much smaller trade deficit, and 11.8% unemployment. We had a much bigger trade deficit in 2007 than today, and 4.5% unemployment. Australia’s had the biggest current account deficit as a share of GDP of any major country in recent decades, and hasn’t had a recession since 1991. In other words, no, there’s no evidence that trade correlates with the unemployment rate. Nor is there any theory that would predict such a correlation.

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