TIME magazine's cover article "Is America flunking science?"

sakky
Sun, 26 Feb 2006 04:43:32 +0000

Thanks for the clarification, I now better understand your assertions. Your points about social circles, intuition and strategic positioning seem to make sense. These certainly make intuitive sense, but don’t explain why outsourcing is INCREASING. The IT industry, for example, is relatively new in India and is expanding rapidly.



Obviously outsourcing is increasing in certain fields. The reasons for this basically have to do with political/economic reforms and technology. China and India are far more advanced today in terms of legal and political reforms than they were in the past. That is why both countries have been such large beneficiaries of FDI (foreign direct investment) recently. Technology too has greatly benefitted both countries, particularly in the case of the Indian IT outsourcing industry. Experience from Y2k debugging coupled with supercheap bandwidth and global networks has allowed India to become a major player in IT outsourcing.

However, just because India is growing its IT industry doesn’t mean that other countries have to lose. A perennial fallacy of people’s understanding of economics is that all markets are a zero-sum game where I win only if somebody else loses. Healthy markets are rarely zero-sum games. Just because one country gains a job doesn’t mean that another country has to lose one. Both sides usually gain. And in fact, that is exactly what has happened. In fact, the latest study, as profiled by the NYTimes, states that US Information Technology employment is actually HIGHER today than it was during the boom.

“…employment in the information technology industry was higher today than it was at the peak of the dot-com bubble, despite the growth of offshore outsourcing in the last few years.”

http://www.nytimes.com/2006/02/23/technology/23outsource.html?_r=1&oref=slogin

So you might ask how is that possible? Why wouldn’t companies just simply outsource their entire IT staff to India to take advantage of cheap labor there? And my response is that they won’t do that for the same reason that the Wall Street banks don’t all relocate their offices to some cheap village in rural Mississippi. The fact is, many jobs out there, even in IT, require close proximity among workers to be useful. Those IT and engineering jobs that require close interaction with marketing, with sales, with finance, with procurement, and with other business functions are better performed locally using local engineers. Those IT and engineering jobs that require a close intuitive feel for pop culture will obviously be performed best by people who understand that culture. That’s why many of the Internet sites that are so popular with the US youth movement, like MySpace or Xanga or Facebook.com were created by Americans.

However, I think the biggest factor that outsourcing brings to the table is that it allows for different types of jobs to emerge. I’ll give you an example. IT outsourcing allows for easier entrepreneurship. For example, MyYearbook.com was largely coded in India. Keep in mind that this Internet site was founded by 2 high school kids on a shoestring budget. If Indian outsourcing was unavailable, and expensive American developers had to have been hired instead, MyYearbook would probably have never even gotten off the ground. Hence, Indian outsourcing allows for more people who have interesting and innovative ideas to bring them to market, without being deterred from either having to learn how to do heavy coding themselves, or bringing on expensive coders-for-hire. So in this case, you can’t really say that outsourcing didn’t really ‘destroy’ any IT jobs at Myyearbook. Myyearbook wouldn’t exist at all without outsourcing.

There are also jobs available in managing the outsourcing process. For example, I know a guy who is graduating from MIT who is taking a job in Apple in which he will manage the sourcing of Ipod components and parts from Asia, especially China. So basically, he will serve as the liaison between the Ipod designers in California and the 3rd party parts-makers in China. The job will entail a lot of travelling to China. In fact, that travel was a big reason why he took the job - he wanted the opportunity to travel to China. These are the kinds of middleman jobs that will be expected to grow because of outsourcing.

{In case you’re wondering, he’s not a Chinese-American. He’s white and cannot speak any Chinese.}

Finally, outsourcing allows companies to save money, which companies will inevitably use to invest into other functions. Again, using the Ipod as an example. When Apple was developing the Ipod in the early 2000’s, Apple made the decision to outsource most of the manufacturing of the Ipod. That allowed Apple to pour more money into Ipod development and design. Apple hired and continue to hire hundreds of design and development engineers to come up with the next version of the Ipod. If Apple had never outsourced Ipod manufacturing, then Apple would never have been able to hire all those designers. Let’s not forget that the major reason why the Ipod has been so successful is because it is so well designed. If Apple had never hired all of those designers, then the Ipod would probably not be as well designed, and the Ipod might never have been a hit. The point is that outsourcing gave Apple the flexibility to optimize its resource allocation to create a hit product. Outsourcing in general allows companies to devote more resources to other fields.

Now, don’t get me wrong. Obviously there will be a number of specific jobs in the US that will clearly be eliminated. In particular, those jobs that involve nothing but coding with few interactions with anybody else will probably be outsourced. While that’s obviously gut-wrenching for those people who are affected, that is the nature of a dynamic economy. Sometimes, certain jobs have to be destroyed (or never created at all) in order for other jobs to be created. For economic growth to happen at all, it means that some economic players have to start doing things differently. How can you expect your country to grow economically if everybody is just going to do exactly the same thing that they have always done? Economic growth means change. For example, for the PC industry to grow, the typewriter industry had to die. That was obviously bad for the people working for typewriter companies, but it had to happen if you want economic growth. What if the government had intervened and shut down the PC industry in order to save the jobs of those typewriter company employees? Does anybody think the country would have been better off?

To that, I would say that those people who are affected have to learn different skills. I agree that the company should help those people to develop those new skills, but those people have to make the decision to move to where the economy is. For example, I would say that engineers need to develop skills in business, in sales, in public speaking, in communication, and in management. Somebody who can combine engineering knowledge with the ability to articulate that knowledge to non-engineers will be valuable in this country. Pure engineers who just want to sit in front of a computer and code away and never interact with anybody face-to-face will probably see their jobs outsourced.



but I don’t get how low supply (in terms of engineers) and an evident demand, wouldn’t increase salary. "
yeah this part also has me confused…



But that’s the fallacy right there - that there is such demand. From what I can tell, there really isn’t as much demand as some people think there is.

Now, don’t get me wrong. I think there is definitely a lot of demand for mediocre engineers. People who get engineering degrees from no-name schools make almost as much as those who come from elite engineering schools. For these people, engineering is a really sweet deal. So I perfectly agree that engineering is a great deal for a lot of the masses. While there may not be a huge aggregate demand for engineers, there is even LESS demand for all those other majors out there like “Leisure Studies” or “Peace and Conflict Studies” or “American Studies” or some of these disciplines. I believe that a lot of these people who are majoring in these fields would be far better off becoming engineers. For example, a guy who is decently intelligent but not a genius can go to a no-name school to get a chemical engineering degree and make 50k to start. That’s a pretty sweet deal for that guy.

However, it seems to me that there really isn’t that much demand in the US for superstar engineers. For the superstars, I would say that you’d probably be better off becoming a lawyer, a doctor, a banker, or a consultant. For whatever reason, the engineering companies in the US are simply unwilling to pay a premium for superstar engineering talent.