Tuesday, August 22, 2017

The Capitalist Business Model – Efficiency and Innovation

 

During the 1980s and 1990s, America followed a national strategy of competitiveness that was based upon promoting R&D across all sectors of the economy, improving education and training, and keeping the cost of capital low to encourage business development. During that period of time America created over 35 million new jobs, spawned an entirely new information technology sector, produced the longest period of economic expansion in its history, and spread a higher standard of living throughout much of the world.

Today, after seeing so much good emerging from the technologically driven new global economy, we find ourselves pausing for reflection over the relative merits of outsourcing white-collar service jobs abroad. It seems that many nations in the developing world have themselves been investing in R&D and education and are now driving their own periods of economic expansion, resulting in increasingly knowledgeable work forces that can compete for jobs that were once limited to the United States and the developed world.

Simultaneously, as America companies continue their pursuit of the enhanced efficiencies, reduced costs, and higher quality that came with outsourcing manufacturing, now white collar jobs in call centers, computer programming, or medical services are being sent abroad to deliver efficiency gains previously limited to outsourcing manufacturing.
Outsourcing abroad was good for America and the world when manufacturing went abroad. At that time, entirely vertical operations manufactured hard goods, such as automobiles, from beginning to end under one roof, under the strategy of economies of scale. But outsourcing manufacturing changed all that, and manufacturing efficiencies, quality, and productivity have all increased. Today, it takes fewer workers to output more work than before the outsourcing revolution occurred in manufacturing. As well, quality has increased through specialization.

It appears that the service sector may now be reshaped as well by developments within the global economy. Assuming it follows the same path as manufacturing, the service sector will go through similar stages of increasing efficiency, reducing costs, enhancing quality, and improving productivity, thus presumably netting increased educational levels and rising living standards abroad.

The benefits derived from outsourcing per se are unquestionably good, delivering increased profitability that can be invested in innovation and shareholder value – until we see friends and associates who are displaced by their job being sent abroad. Then we pause, hopefully, to think and reconsider the business model of modern capitalism.

Much of the present debate over outsourcing is driven by focusing only on a portion of the entire capitalist business model. The cost efficiencies and higher quality gained by sending jobs abroad lead to production efficiencies, enhanced value, and greater profitability. But that is where much of the analysis ends, only half way through the capitalistic model. The other half of the model is necessary to grasp the big picture – greater profitability leads to enhanced innovation, training, and education which drive the creation of higher paying new jobs, which drive the next wave of economic growth.

As some white collar jobs head offshore, we are at the beginning of the next cycle of capitalism which drives the future benefit of higher paying, more fulfilling work as the world simultaneously becomes increasing efficient.

Alan Greenspan, the Chairman of the Federal Reserve in Washington, D.C. recently commented that while globalization is making it hard for the least skilled American workers who are facing competition from abroad, new jobs in expanding and new industries will replace those in declining industries.

This is the so-called “free trade axiom,” which states that when a rich country sends lower-paying jobs abroad, it creates opportunities back home with the economic benefit gained for workers to move up the ladder to higher paying opportunities. Economically our faith has to be with capitalism, and politically our commitment has to be with the engines of innovation and education that allow workers to move up the ladder. This keeps all boats, both at home and abroad, rising with the tide of economic success.

As we watch friends and associates experience displacement our fears can become overblown and our concerns for others may cause us to forget that other opportunities exist, and that new ones are emerging in R&D, in higher-level IT, management, marketing, consultation, accounting, finance, law, education, medicine, services, retail, and government.
The real question is whether higher-level jobs can absorb all of the displaced workers. Some would say it always has before. New jobs are the consequence of innovation. We need to do what it takes to remain innovative and create the next waves of wealth-creating ideas, while improving educational opportunities at all levels. This is what globalization really means, and it should remind us of how important innovation and entrepreneurial activity are to the effective handling of the transitional problems created by the march of capitalism. American’s are capable of climbing the ladder toward better-paying and more fulfilling roles. It is important that both corporations and public policy drive innovation and establish the educational opportunities that make climbing the ladder possible.

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