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
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
the successful enactment of
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
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.”
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
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.”
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
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
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
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
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
The stakeholders must be given a place at the table that determines
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.
For a further and more extensive elaboration of these issues, see my
The Frog, and The Corporation,” (The Crisis Papers, September 12,
2006 ), and “Market
Failure: The Back of the Invisible Hand” (The Crisis Papers, June
2008 by Ernest Partridge