Saturday, August 14, 2004

Offshoring: Anti-Capitalistic part II

I asserted in a previous screed that offshoring was anti-capitalistic because a) it undermined specialization of labor and b) it diluted capital by capital flight and asset-stripping. Stirling was kind enough to explain in his King Copyright post what the corporate end of that asset-stripping looks like, and now Ian moves in to explain why return on investment (ROI) and capital mobility explain why offshoring is anti-capitalistic.

But, since you can't put all the money back into production you've got to stick some of the money elsewhere. And what we have going is a nice reinforcing trend. Oldman has called it strip mining the US economy. The money is used to buy your customers' assets or leant to your customers. In exchange they put up as collateral either the full faith of their government (we'll see how good that is in a few years) or their assets - which in the current case means mortgage backed securities, bonds, and common shares in companies (which represent ownership of assets.) They then use that money to buy your goods and the cycle continues.

This vicious cycle (or virtuous if you're the one getting rich and you get out in time) results in excess productive capacity, a slow decline in employment in the low surplus domicile and an increase in debt in the low surplus domicile. It also pushes costs in the low surplus domicile lower (meaning wages and taxation, primarily.)

In the meantime, if the developed world (and specifically the US) were to stop borrowing to buy - the entire engine would collapse. This is not a sustainable development - if the US was to buy only what it could afford based on its own exports then there would be an economic shockwave not just in the US but in China, India and other high surplus, low cost domiciles. And right now the dynamic is being funded by taking money out of the US and other high cost domiciles - which must ultimately end in a reduction of demand. If the low cost domiciles which have been getting the capital investment are not capable of soaking up the excess capacity when the US's consumption comes in line with what the US can afford, then you will have a worldwide recession at the least - likely a depression.

It was Stirling who really nailed the issue on the head though with a comment.
Go one step further. It is then profitable for the US company to outsource to India, because it doesn't have enough capital and the US company can get a great return by offshoring to India - more than it could by just investing in the Indian stock market, because, well, it owns what it outsources.

Which means that, over time, wages go down in the US, and up, though not nearly by as much, in India. And india still can't raise capital... Because the return on offshoring is better than native investment.

Winners? Those who have lots of money, and the growing middle class in offshorable countries. Losers? everyone else.

Posted by: Stirling Newberry at August 13, 2004 12:22 AM

That's what the oldman means by anti-capitalistic. These capital mobility issues mean that capital is actually flowing in such a way that it retards and discourages capital investment and domestic development in both the country it's fleeing from and the country it's fleeing to. Weird huh? People in India and China have a hard time starting up their own businesses because it's cheaper (or more profitable) to invest in businesses exporting to the USA. Even if they wanted to stop exporting, the capital inflows would make that difficult.

However they don't want to, and they purposely manipulate their currencies to keep them from moving to convergence with the United States. By purchasing power parity China is already approaching the USA. In a normal currency environment, its currency should have floated up and there would have been less incentive to invest in China. Only the Chinese are buggering the currency by pegging it to the dollar.

But in reality our government doesn't want them to stop, because to stop lending to us would mean that our consumption would have to drop drastically - and governance would again entail hard decisions and pragmatism would become valued over ideology again. And it's a lot easier to run and win on ideology than it is on pragmatism, because the latter involves selling people things they will probably dislike and involves actual problem solving. The former just requires a big mouth and the willingness to appeal to the lowest common denominator in the basest human instincts in the culture.

Globalization was a jinxed idea as conceived of from the beginning, and far from being inevitable it was doomed from the start by unsustainable dynamics. The only thing that made it possible was continued political collusion on both sides of the trade. That and the shilling of a lot of poor dumb bastards and willing dupes.


At June 25, 2005 at 11:56 PM, Anonymous MB said...

The comment "Winners? Those who have lots of money, and the growing middle class in offshorable countries. Losers? everyone else." makes one ponder... Why did this debate not take place when Wal-Mart was procuring most of its products from China....or the Big-3 Auto loosing out to the Japanese?
- MB

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