The Outsourcing Tragedy

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.”1 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.”

The Problem of Fiduciary Responsibility

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.

It’s the law!

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.”

Time to stop digging and to start climbing out.

  1. See Garrett Hardin’s “The Tragedy of the Commons.” []
Dr. Ernest Partridge is a consultant, writer and lecturer in the field of Environmental Ethics and Public Policy. He has taught Philosophy at the University of California, and in Utah, Colorado and Wisconsin and is the co-editor of The Crisis Papers. His e-mail is: gadfly@igc.org. Read other articles by Ernest, or visit Ernest's website.

15 comments on this article so far ...

Comments RSS feed

  1. Donald Hawkins said on August 9th, 2008 at 7:50am #

    NPR news
    An Iraqi farmer tends to his parched crops. Farmers across Iraq have been devastated by drought and generally poor conditions.
    Across Iraq, farmers are struggling with the worst drought the country has faced in years. Some say it’s the worst they’ve seen in their lifetime – and not just because of the lack of rain.

    Some Iraqi officials blame waste and regional politics, as well as the continuing war in some of Iraq’s bread baskets – such as in Diyala, just northeast of Baghdad, where a joint U.S.-Iraqi operation is under way to oust al-Qaida in Iraq from safe havens.
    The view from an Army helicopter confirms why farmers in Diyala are in a panic. Instead of crops, shriveled, dusty fields stretch as far as the eye can see.
    Standing on the tarmac at the American base outside the provincial capital, Majid al Khalid, Diyala’s top agriculture official, says he has never seen it this bad. He says the drought has damaged more than 120,000 acres of farmland and killed any summer vegetable crop. One-third of the fruit orchards are also in bad shape.

    This of course is just Iraq. China and India same and this is happening Worldwide. Outsourcing jobs to China from the US is in many way’s speeding up the destruction of there country. The pollution in China now the pollution that you can see is incredible and what you can’t see is on the rise. India because of coal burring is not to far behind. The United States well we have cleaned what you can see but not what you can’t see American is funny like that. There does need to be some outsourcing of clean energy as it is my opinion without that the rest is just academic but first you need research into clean energy and in the States funding has just been cut for research, don’t figure or maybe the figuring was done but using twisted logic the kind of logic that this article put so well:

    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.

    This is the battle going on and so far nobody will win this one. James Hansen just wrote one of the best I have ever read. Just go to his web site Google James Hansen there it is and his last post you will see it “trip report” At the end page 18 read those e-mails odd style of writting.

  2. Richard Posner said on August 9th, 2008 at 8:54am #

    Take the old adage about self-reliance: “Give someone a fish and you feed them for one day. Teach them how to fish and you feed them for life.”
    The capitalist/corporatist/libertarian would add a third line something like: Acquire ownership, by whatever means necessary, of all places where you can catch fish and then charge everyone exorbitant fees for the privilege of eating.
    http://coldwarproductions.blogspot.com/2008/06/noblesse-obligein-your-dreams.html

  3. Kevin Carson said on August 9th, 2008 at 11:07pm #

    Actually, fiduciary responsibility to the stockholders is a myth. The claim to represent stockholders is as much a legitimizing myth of management under American corporate capitalism, as the claim to represent the workers or the workers’ state was a legitimizing myth of the state bureaucracy under Soviet bureaucratic collectivism. Management uses its alleged responsibility to shareholders mainly as an ideological defense of the managerial class’s own prerogatives against internal stakeholders. Corporate management is almost completely insulated against hostile takeovers or proxy fights, through its ability to rig the internal rules of corporate governance. And any lawsuit by shareholders for socially responsible behavior would be laughed out of court; there’s no socially responsible corporate policy that couldn’t be plausibly defended as serving shareholder interests, through creating public good will or the like. They’d have the devil’s time proving it was undertaken for reasons other than creating long-term shareholder value.

    If anything, shareholders and workers would have a common interest in some form of self-management and residual claimaincy by workers, based on what their human capital contributes to the total equity of the firm; it would benefit shareholders as well as workers because it would increase the total size of the pie.

    The problem is, management prefers having a larger slice of a small pie. The typical management approach is to gut human capital, strip long-term productive capabilities, and hollow out firms, in order to promote illusory short-term profit and game their own bonuses and stock options. Management salaries have risen from around a quarter to around 40% of total labor compensation over the past thirty years. Total labor compensation, including management salaries, is a greater share of the GDP than it was then. So in fact management is feathering its own nest at the expense of shareholders. If shareholders can’t sue for that, on the grounds that management salaries and perks contribute to overhead at the expense of profit, how could they sue for any other deviation from profit-maximization.

    None of this is to suggest that the shareholders are the good guys, or to deny that the rentier classes are a parasitic drain on labor. My only point is that the managerial classes are at least as parasitic, and regurgitating the myth of shareholder responsibility is just playing into their hands.

  4. MrSynec3 said on August 10th, 2008 at 3:51pm #

    Unless out-sourcing and open borders for illegal immigrants is
    curtailed , the situation of US workers will get worse and worse.
    With all due respect to managmnet mumbo jumbo and law suits
    and counter law suits and all the hot air, that is the situation right
    now.

  5. Hue Longer said on August 10th, 2008 at 3:56pm #

    Good article and Kevin Carson makes an interesting point on the illegality of a CEO going against shareholders.

    In the least the outcome of acting responsible to the environment and the stakeholders would get someone fired…I’d think that’s all the lesson the rest of them would need for even considering it.

  6. Peter Falvo said on August 11th, 2008 at 8:31am #

    Ernest these thoughts have been scattered throughout my head, thank you for orgainizing them into one thought for me.

    Of all my history lessons, the only time period that I was fond of governement intervention was the post-depression era. The New Deal has always been that spark of hope, that despite the great adversity of capilistic absolutism and fiduciary responsibility, the people, and our leaders can make just decisions on reforming a failing system.

    The time is now to reinvent our industries. As Ernest warns, if we do not move to the solar industry without a complete backing and support from the government, then we will lose the true power struggle of the world, the control of energy.

    There are great advances going on as we speak. Read my Tumblr about solutions to energy independence.
    http://energydepository.tumblr.com/

  7. Peter Falvo said on August 11th, 2008 at 2:57pm #

    Ernest, I had all of these thoughts scattered throughout my mind. Thank you for bringing them into one thought.

    In my history lessons, the New Deal has always been a highlight of how a governement can react when absolute capitalism and fiduciary responsibility put a choke hold on the people.

    I agree that we as a people need to embrace the industry of solar power. Not only in use to generate electricty, but to manufacture as well. There are some great advances recently in new solar designs to increase efficiencies. Read about it on my tumblr.

    http://energydepository.tumblr.com/

  8. Gliscameria said on August 12th, 2008 at 1:21am #

    I’d love to agree. Really I would.

    Follow how the united states kept it superiority through the decades.

    We started with food then raw materials, once other countries got in the game we moved to refining. Then we moved to finished products. Then we moved to service. Now we’re into banking and value added.

    This way we keep our raw materials, finished material production and everything else for ourselves when things go bad. Think about it. We have the best infrastructure in the world and have managed to get rich quick without really tapping into our natural resources.

    If a bunch of people who never even saw a computer until they were 20 years old can do your job as a computer tech support after 4 years of training, then you don’t even deserve your job.

    What happened to americans being the best by far? We’re getting lazy and it’s starting to show. When labor was the trade we worked harder and longer than everyone else. When college education was the trade we were smarter than everyone else. Now we need to be the best at post graduate education to keep our edge, and we’ve gotten lazy and are falling behind.

    If you don’t want a third world student who was raised in a house without a phone stealing your tech job, train harder or find a new job. I refuse to live in a country full of whiners.

    In case anyone hasn’t noticed, crime is the new industry. The bigger the better and safer. I recommend going to college for embesslement an fraud, because we are still the best at that.

  9. MrSynec3 said on August 12th, 2008 at 3:49am #

    To Glisamerica wrote:
    “Now we need to be the best at post graduate education to keep our edge, and we’ve gotten lazy and are falling behind.
    If you don’t want a third world student who was raised in a house without a phone stealing your tech job, train harder or find a new job. I refuse to live in a country full of whiners.”

    Glisamerica,

    Your “whining” comment reminds me with Phil Gramm’s stupid comment!!
    So, you want every American to have a master or doctorate degree or
    have the ability to work in finance or Wall Street!! Is that practical
    or realistic expectation or demand??!!
    Where people find living wage jobs if most manufacturing jobs and
    now engineering , professional and semi professional jobs are being
    out-sourced to abroad. Even summer jobs are hard to find these days,
    they are taken by illegal immigrants. Just ask any high school or college kid who was looking for a summer job.

  10. Gliscameria said on August 12th, 2008 at 11:30am #

    MrSynec3

    It is all about the value of your work. If you’re getting paid $15/hr to do a job that someone with no skill and hardly speaks the language can be trained to do in a few weeks, then you were getting paid way to much from the start.

    I’m not saying that everyone has to be educated to have a job. I’m saying as a country we need to be educated. Our best minds need to be the world’s best minds. Innovation at home leads to good jobs for everyone. We’ve gotten lazy because people get paid too much for mindless entry level jobs. Why learn a trade when you can anwer a phone and make a decent living? Now that the TeleTechs are going overseas that dream is gone. Some of what could have been our next big innovators wasted their mid 20s answering phones and trying to move up in a company that didn’t care about them.

    History has proven that jobs that require little skill or endurance, generally don’t pay well. If an illegal immigrant ‘stole’ your job you’ve clearly made some mistakes in life.

    I will agree that the tax structure for companies that outsource are completely corrupt. If you’re a company that does business in the US and has factories/service centers overseas you should have to treat those employees as if they were working on US soil, otherwise it’s just a fancy name for slavery.

  11. MrSynec3 said on August 12th, 2008 at 3:57pm #

    gliscamerica,

    You wrote:
    “I’m not saying that everyone has to be educated to have a job. I’m saying as a country we need to be educated.”
    But we are educated and as matter of fact overeducated. You have
    no ideas how many people with advanced degrees in engineering and
    and sciences are unemployed or under employed.
    As I mentioned the outsourcing is not restricted to manufacturing jobs but extend to many professional and semi-professional jobs from
    engineering and programming to drafting and detail design to accounting and writing medical reports and even interpreting X-ray
    and ultrasound pictures and more.
    The US is very rich and evryone who works and toils should get a living
    wage that enable a reasonable decent life.
    What was wrong with the forties, fities, sixties and early seventies
    when workers were paid fairly. People were still getting education and striving to improve themselves and did not get lazy and
    the USA was the center of innovation and sciences and emerged as a super power second to none
    Fortunes were still being made and there was optimism in the land.
    With the current obscenely high salaries and bonuses of upper corporate management regardless of performance coupled with massive tax cuts for the wealthy and the continuing cuts of wages and salaries of the working people and outsourcing their jobs and flooding the job markets with illegal immigrants, this country in the near future will be composed of a upper very thin layer of filthy rich group with the rest of the populations poor and struggling and it will be new America, land of the poor and oppressed. At that time
    you can kiss the constitution and democracy good bye. It will be a
    new era.

  12. Gliscameria said on August 12th, 2008 at 7:03pm #

    MrSynec3:

    I couldn’t agree more. The middle class is being wiped out. Working in the middle class used to mean one parent brought home the dough for 4 people, and they lived well, and got to retire before they were completely useless… that class is all but extinct.

    I’m with you on tax write-offs, the super rich… basically anyone that is making money they really don’t deserve. If you work an honest 40hrs a week you should have enough money to live well above the poverty line, but not necessarily provide for a family if you are doing entry level labor. By entry level labor I mean a job that anyone can walk in the door and do. Basically ‘starter’ jobs that you are meant to have temorarily and be promoted out of. Even a single mom working as a clerk knows that she has to eventually move up in order to provide for her kid. I agree with you that the system used to work to take care of honest workers, but now it doesn’t. It seems if you are a good employee you have a target on your back, or if the company has to shell out extra cash for medical/childcare you are really in danger. Either way, if you are working a McJob you should not expect to raise a family comfortably.

    This may sound negative, but it stems from an idealist belief that any good american worker can find steady well paying work, but it takes some grit, and in these times it takes a little more grit than a few decades ago. This is not the america we grew up in, but that doesn’t give us an excuse to stop being the americans we once were.

  13. MrSynec3 said on August 13th, 2008 at 12:48am #

    Glisamerica wrote:
    “idealist belief that any good american worker can find steady well paying work”

    Glisamerica,

    On what reality do you base your “idealist ” belief?? We are not talking
    about idealist fantasies here but we are talking about real life for
    real millions of people. Where those poeple will find living wage jobs
    if the current trend continues?? And what effect that will have on America as we know and knew it. You did not answer these questions but responded with sophistry.

  14. Gliscameria said on August 13th, 2008 at 12:20pm #

    Can you restate the question you are talking about?

    I’m speaking of my own idealist belief. Everyone I know that has a good work ethic has a good job, or at least one that is paying the bills. I know a lot of poeple who complain about their job, but do nothing to change it.

    I won’t dispute the fact that things are harder now, and it’s because of massive corruption and greed. I also won’t dispute that things look dire if we continue down this same road. I will argue that anyone capable and willing can make a living and that we have become somewhat soft and dumber, making this transition in to harder times very tought to adapt to.

    American workers now have to compete on a global scale, and as it stands now, with the taxes and lax labor laws, we are fighting an uphill battle. I think we don’t see eye to eye on the temporary fixes and long term solutions, along with their impact on american/foreign lives.

    It’s still a fun debate.

  15. MrSynec3 said on August 13th, 2008 at 3:49pm #

    Gliscamerica,

    I think we agree on at least one point which is that we do not agree on many points. Anyway, it was fun and see you around. Bye for now.