The main reason the lump of labor theory is wrong is that it is based on the assumption that everything that is going to be invented has been invented, and that therefore economic competition is a zero-sum game, a fight over a fixed lump. This assumption misses the fact that although jobs are often lost in bulk—to outsourcing or offshoring—by big individp. 228ual companies, and this loss tends to make headlines, new jobs are also being created in fives, tens, and twenties by small companies that you can’t see. It often takes a leap of faith to believe that it is happening. But it is happening. If it were not, America’s unemployment rate would be much higher today than 5 percent. The reason it is happening is that as lower-end service and manufacturing jobs move out of Europe, America, and Japan to India, China, and the former Soviet Empire, the global pie not only grows larger—because more people have more income to spend—it also grows more complex, as more new jobs, and new specialties, are created.
Let me illustrate this with a simple example. Imagine that there are only two countries in the world—America and China. And imagine that the American economy has only 100 people. Of those 100 people, 80 are well-educated knowledge workers and 20 are less-educated low-skilled workers. Now imagine that the world goes flat and America enters into a free-trade agreement with China, which has 1,000 people but is a less developed country. So today China too has only 80 well-educated knowledge workers out of that 1,000, and it has 920 low-skilled workers. Before America entered into its free-trade agreement with China, there were only 80 knowledge workers in its world. Now there are 160 in our two-country world. The American knowledge workers feel like they have more competition, and they do. But if you look at the prize they are going after, it is now a much expanded and more complex market. It went from a market of 100 people to a market of 1,100 people, with many more needs and wants. So it should be win-win for both the American and Chinese knowledge workers.
Sure, some of the knowledge workers in America may have to move horizontally into new knowledge jobs, because of the competition from China. But with a market that big and complex, you can be sure that new knowledge jobs will open up at decent wages for anyone who keeps up his or her skills. So do not worry about our knowledge workers or the Chinese knowledge workers. They will both do fine with this bigger market.
“What do you mean, don’t worry?” you ask. “How do we deal with the fact that those eighty knowledge workers from China will be willing p. 229 to work for so much less than the eighty knowledge workers from America? How will this difference get resolved?”
It won’t happen overnight, so some American knowledge workers may be affected in the transition, but the effects will not be permanent. Here, argues Stanford new economy specialist Paul Romer, is what you need to understand: The wages for the Chinese knowledge workers were so low because, although their skills were marketable globally like those of their American counterparts, they were trapped inside a stifled economy. Imagine how little a North Korean computer expert or brain surgeon is paid inside that huge prison of a nation! But as the Chinese economy opens up to the world and reforms, the wages of Chinese knowledge workers will rise up to American/world levels. Ours will not go down to the level of a stifled, walled-in economy. You can already see this happening in Bangalore, where competition for Indian software writers is rapidly pushing up their wages toward American/European levels—after decades of languishing while the Indian economy was closed. It is why Americans should be doing all they can to promote more and faster economic reform in India and China.
Do worry, though, about the 20 low-skilled Americans, who now have to compete more directly with the 920 low-skilled Chinese. One reason the 20 low-skilled Americans were paid a decent wage before was that, relative to the 80 skilled Americans, there were not that many of them. Every economy needs some low-skilled manual labor. But now that China and America have signed their free-trade pact, there are a total of 940 low-skilled workers and 160 knowledge workers in our two-country world. Those American low-skilled workers doing fungible jobs—jobs that can easily be moved to China—will have a problem. There is no denying this. Their wages are certain to be depressed. In order to maintain or improve their living standards, they will have to move vertically, not horizontally. They will have to upgrade their education and upgrade their knowledge skills so that they can occupy one of the new jobs sure to be created in the much expanded United States–China market. (In Chapter 8 I will talk about our society’s obligation to ensure that everyone gets a chance to acquire those skills.)
p. 230 As Romer notes, we know from the history of our own country that an increase in knowledge workers does not necessarily lead to a decrease in their pay the way it does with low-skilled workers. From the 1960s to the 1980s, the supply of college-educated workers grew dramatically, and yet their wages grew even faster. Because as the pie grew in size and complexity, so too did people’s wants, and this increased the demand for people able to do complex work and specialized tasks.
Romer explains this in part by the fact that “there is a difference between idea-based goods and physical goods.” If you are a knowledge worker making and selling some kind of idea-based product—consulting or financial services or music or software or marketing or design or new drugs—the bigger the market is, the more people there are out there to whom you can sell your product. And the bigger the market, the more new specialties and niches it will create. If you come up with the next Windows or Viagra, you can potentially sell one to everyone in the world. So idea-based workers do well in globalization, and fortunately America as a whole has more idea-driven workers than any country in the world.
But if you are selling manual labor—or a piece of lumber or a slab of steel—the value of what you have to sell does not necessarily increase when the market expands, and it may decrease, argues Romer. There are only so many factories that will buy your manual labor, and there are many more people selling it. What the manual laborer has to sell can be bought by only one factory or one consumer at a time, explains Romer, while what the software writer or drug inventor has to sell—idea-based products—can be sold to everyone in the global market at once.
That is why America, as a whole, will do fine in a flat world with free trade—provided it continues to churn out knowledge workers who are able to produce idea-based goods that can be sold globally and who are able to fill the knowledge jobs that will be created as we not only expand the global economy but connect all the knowledge pools in the world. There may be a limit to the number of good factory jobs in the world, but there is no limit to the number of idea-generated jobs in the world.
If we go from a world in which there were fifteen drug companies and fifteen software companies in America (thirty in all) and two drug companies and two software companies in China (four in all) to a world p. 231 in which there are thirty drug and software companies in America and thirty drug and software companies in China, it is going to mean more innovation, more cures, more new products, more niches to specialize in, and many more people with higher incomes to buy those products.
“The pie keeps growing because things that look like wants today are needs tomorrow,” argued Marc Andreessen, the Netscape cofounder, who helped to ignite a whole new industry, e-commerce, that now employs millions of specialists around the world, specialists whose jobs weren’t even imagined when Bill Clinton became president. I like going to coffee shops occasionally, but now that Starbucks is here, I need my coffee, and that new need has spawned a whole new industry. I always wanted to be able to search for things, but once Google was created, I must have my search engine. So a whole new industry has been built up around search, and Google is hiring math Ph.D.’s by the bushel—before Yahoo! or Microsoft hires them. People are always assuming that everything that is going to be invented must have been invented already. But it hasn’t.
“If you believe human wants and needs are infinite,” said Andreeseen, “then there are infinite industries to be created, infinite businesses to be starte
d, and infinite jobs to be done, and the only limiting factor is human imagination. The world is flattening and rising at the same time. And I think the evidence is overwhelmingly clear: If you look over the sweep of history, every time we had more trade, more communications, we had a big upswing in economic activity and standard of living.”
America integrated a broken Europe and Japan into the global economy after World War II, with both Europe and Japan every year upgrading their manufacturing, knowledge, and service skills, often importing and sometimes stealing ideas and equipment from the United States, just as America did from Britain in the late 1770s. Yet in the sixty years since World War II, our standard of living has increased every decade, and our unemployment rate—even with all the outcry about outsourcing—stands at only a little above 5 percent, roughly half that of the most developed countries in Western Europe.
“We just started a company that created 180 new jobs in the middle of a recession,” said Andreessen, whose company, Opsware, uses aup. 232tomation and software to replace human beings in the operation of huge server farms in remote locations. By automating these jobs, Opsware enables companies to save money and free up talented brainpower from relatively mundane tasks to start new businesses in other areas. You should be afraid of free markets, argued Andreessen, only if you believe that you will never need new medicines, new work flow software, new industries, new forms of entertainment, new coffeehouses.
“Yes,” he concluded, “it takes a leap of faith, based on economics, to say there will be new things to do.” But there always have been new jobs to do, and there is no fundamental reason to believe the future will be different. Some 150 years ago, 90 percent of Americans worked in agriculture and related fields. Today, it’s only 3 or 4 percent. What if the government had decided to protect and subsidize all those agricultural jobs and not embrace industrialization and then computerization? Would America as a whole really be better off today? Hardly.
As noted, it is true that as Indians or Chinese move up the value chain and start producing more knowledge-intensive goods—the sorts of things Americans have been specializing in—our comparative advantage in some of these areas will diminish, explains Jagdish Bhagwati, the Columbia University expert on free trade. There will be a downward pressure on wages in certain fields, and some of the jobs in those fields may permanently migrate abroad. That is why some knowledge workers will have to move horizontally. But the growing pie will surely create new specialties for them to fill that are impossible to predict right now.
For instance, there was a time when America’s semiconductor industry dominated the world, but then companies from other countries came along and gobbled up the low end of the market. Some even moved into the higher end. American companies were then forced to find newer, deeper specialties in the expanded market. If that weren’t happening, Intel would be out of business today. Instead, it is thriving. Paul Otellini, Intel’s president, told The Economist (May 8, 2003) that as chips become good enough for certain applications, new applications pop up that demand more powerful and more complex chips, which are Intel’s specialty.
p. 233 Once Google starts offering video searches, for instance, there will be demand for new machines and the chips that power them, of which no one was even dreaming five years ago. This process takes time to unfold. But it will, argued Bhagwati, because what is happening in services today is the same thing that happened in manufacturing as trade barriers were lowered. In manufacturing, said Bhagwati, as the global market expanded and more and more players came onto the field, you saw greater and greater “intra-industry trade, with more and more specialization,” and as we move into the knowledge economy, you are now seeing more and more intra-service trade, with more and more specialization.
Don’t be surprised if your son or daughter graduates from college and calls you one day and says he or she is going to be a “search engine optimizer.”
A what?
A slew of firms has started up around Google, Yahoo!, and Microsoft to help retailers strategize on how to improve their rankings, and increase the number of click-throughs to their Web sites, on these major search engines. It can mean millions of dollars in extra profits if, when someone searches for “video camera,” your company’s product comes up first, because the people who click through to your Web site are those most likely to buy from you. What these search engine optimizers (SEOs as they are called in the trade) do is constantly study the algorithms being used by the major search engines and then design marketing and Web strategies that will push you up the rankings. The business involves a combination of math and marketing—a whole new specialty created entirely by the flattening of the world.
And always remember: The Indians and Chinese are not racing us to the bottom. They are racing us to the top—and that is a good thing! They want higher standards of living, not sweatshops; they want brand names, not junk; they want to trade their motor scooters for cars and their pens and pencils for computers. And the more they do that, the higher they climb, the more room is created at the top—because the more they have, the more they spend, the more diverse product markets become, and the more niches for specialization are created as well.
p. 234 Look at what is happening already: As American companies send knowledge work to India, Indian companies are turning around and using their earnings and insights to start inventing new products that poorer Indians can use to lift themselves out of poverty into the middle class, where they will surely become consumers of American products. BusinessWeek cited the Tata Motors factory, near Pune, south of Mumbai, “where a group of young designers, technicians, and marketers pore over drawings and examine samples of steel and composite plastics. By early next year, they plan to design a prototype for Tata Group’s most ambitious project yet: a compact car that will sell for $2,200. The company hopes the car will beat out Suzuki’s $5,000 Maruti compact to become India’s cheapest car—and an export model for the rest of the developing world. ‘This is the need of the day in India—a people’s car,’ says Ratan Tata, chairman of the $12.5 billion Tata Group. Indians are increasingly demanding better products and services at an affordable cost. Strong economic growth this year will only enlarge that demand. The phrase ‘Made in India’ may come to represent low-cost innovation in the new global economy” (October 11, 2004).
Raghuram Rajan, the director of research for the International Monetary Fund, sits on the board of a company that puts Indian students to work tutoring students in Singapore. The students, from the Indian Institute of Technology in Madras, go online to help students in Singapore, from grades six to twelve, on their math homework. They also help teachers in Singapore develop lesson plans and prepare PowerPoint presentations or other jazzy ways for them to teach math. The company, called Heymath.com, is paid for by the schools in Singapore. Cambridge University in England is also part of this equation, providing the overall quality controls and certifying the lesson plans and teaching methods.
“Everyone wins,” says Rajan. “The company is run by two Indians who worked for Citibank and CSFB in London and came back to India to start this business . . . Cambridge University is making money from a company that has created a whole new niche. The Indian students are making pocket money. And the Singapore students are learning better.” Meanwhile, the underlying software is probably being provided by Microsoft and the chips by Intel, and the enriched Indian students are p. 235 probably buying cheap personal computers from Apple, Dell, or HP. But you can’t really see any of this. “The pie grew, but no one saw it,” said Rajan.
An essay in the McKinsey Quarterly, “Beyond Cheap Labor: Lessons for Developing Economies” (January 2005), offers a nice example of this: “In northern Italy’s textile and apparel industry . . . the majority of garment production has moved to lower-cost locations, but employment remains stable because companies have put more resources into tasks such as designing clothes and coordinating global production networks.”
It is so easy to demonize free m
arkets—and the freedom to outsource and offshore—because it is so much easier to see people being laid off than being hired. But occasionally a newspaper tries to dig deep into the issue. My hometown paper, the Minneapolis Star Tribune, did just that. It looked at exactly how the Minnesota economy was being affected by the flattening of the world, actually daring to run an article on September 5, 2004, headlined, “Offshore Jobs Bring Gains at Home.” The article, datelined Wuxi, China, began like this: “Outside the air is dank, dusty and hot as tropical fever. Inside, in an environment that’s dry, spotless and cool, hundreds of former farm laborers covered head to toe in suits looking like something out of NASA are performing work for Bloomington-based Donaldson Co. Inc. . . . In Donaldson’s case, the company has twice as many workers in China—2,500—as the 1,100 it has in Bloomington. The Chinese operation not only has allowed Donaldson to keep making a product it no longer could make at a profit in the United States, it also has helped boost the company’s Minnesota employment, up by 400 people since 1990. Donaldson’s highly paid engineers, chemists and designers in Minnesota spend their days designing updated filters that the Chinese plant will make for use in computers, MP3 players and digital video recorders. The falling disk-drive prices made possible by Chinese production are feeding demand for the gadgets. ‘If we didn’t follow [the trend], we’d be out of business,’ said David Timm, general manager of Donaldson’s disk-drive and microelectronics unit. In Minnesota, Global Insight estimates that 1,854 jobs were created as a result of foreign outsourcing in 2003. By 2008, the firm expects nearly 6,700 new jobs in Minnesota as a consequence of the trend.”
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