The Global Economics of Desire

How concerned should advanced countries be about the outsourcing of manufacturing to China or software development to India? Fear of jobs lost to low-wage countries strikes a populist chord, but misses a vital point: the prosperity of developed countries depends primarily on entrepreneurship.

After all, no economy can raise living standards forever through innovations that make production of existing goods more efficient. In the short run, increased efficiency reduces the cost of a good or service, so people consume more of it. But eventually, consumers refuse to buy more even if prices continue to fall. After that, further efficiencies require shedding workers.

Creating and satisfying new consumer desires keeps the system going by absorbing the labor and purchasing power released by the increasingly efficient satisfaction of old ones. At the other end of this process, producers who satisfy old desires continue economizing, because they compete for employees and consumers with producers who satisfy new desires.

Similarly, outsourcing to low-wage countries improves living standards only if the human capital released can be used to make new goods and services. Otherwise, outsourcing merely reduces demand for domestic labor, just like other efficiency gains.