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  • Technology and Offshoring

    Posted by David Foster on December 9th, 2016 (All posts by )

    Thought question: If Henry Ford had been able to have the Model T manufactured in Mexico by people making 50 cents a day…and with no need for the assembly line and related productivity-improving technology…would that have been equivalent, in terms of its economic, social, and political consequences, to making it in Detroit on the assembly line with workers making $5.00/day and a 10:1 reduction in unit labor content?

     

    28 Responses to “Technology and Offshoring”

    1. TMLutas Says:

      Overall it would not have been equivalent because the rate of product and process improvement would have been slower in Mexico, unless the whole design and production team went south of the border. The difference in legal framework would have also negatively impacted things.

    2. dearieme Says:

      “with no need for the assembly line …”: that’s an odd proposition. If the assembly line made sense in medieval Venice and Napoleonic Britain (and presumably elsewhere and elsetimes too) why wouldn’t it make sense in 20th century Mexico?

    3. David Foster Says:

      Dearieme….the crossover point at which any technology becomes economically rational depends on the cost of the labor it displaces.

    4. dearieme Says:

      @DF, that’s my point. What did medieval Venetian labour cost, what did labour cost in the south of England in Napoleonic times?

    5. David Foster Says:

      Here’s an interesting piece about the comparative adoption of the Spinning Jenny in Britain, France, and India.

      The key metric suggested in wage level *in comparison to cost of capital*

      https://www.nuffield.ox.ac.uk/users/Allen/unpublished/jenny5-dp.pdf

    6. Grurray Says:

      “why wouldn’t it make sense in 20th century Mexico”

      Ford wasn’t operating in a vacuum. There were many other car companies around, and they were all pushing each other. That’s why Ford had to pay his workers so much. The cluster theory proposes that culture is as important as strategy or technology.

      This has unfortunately been perverted by Obama and other Leftists, who’ve tried to turn it into a “You Didn’t Build That Theory”. They wanted an oligarchy to centrally control what normally unfolds organically in order to redistribute money and capital to politically correct groups and political cronies. They should have instead focused their efforts on rebuilding the decimated social fabric from which the clusters spring up.

      Ford understood the importance of culture and tried to impose his own version of it on his workers, with some mixed results.

    7. David Foster Says:

      Grurray…”Ford wasn’t operating in a vacuum. There were many other car companies around, and they were all pushing each other. That’s why Ford had to pay his workers so much.”

      From what I have read (see for example David Hounsell, ‘From the American System to Mass Production’), the main reason for the $5/day wage was that assembly line work was so unpleasant, at least for those not used to it, compared with other available manufacturing jobs. House quotes an (anonymous) letter to Ford from a worker’s wife:

      “The chain system you have is a slave driver! My God! Mr Ford. My husband has come home & thrown himself down and won’t eat his supper–so done out! Can’t it be remedied?…That $5 a day is a blessing–a bigger one than you know, but oh they earn it.”

    8. DirtyJobsGuy Says:

      Ford didn’t have to go offshore for low costs at the time. The comparison was that he had to pay $5/day to get workers who would show up on time and sober! He new that in large volume automated assembly would overwhelm the additional labor cost. If offered a better chance of reducing costs with increasing volume than piece work. Ford had a large and intrusive “Social” department that would check on workers home life to see if they were drunks and bring the wives on board by making sure a good chunk of a weeks pay got home. So he paid for more capable workers by automating much of the process.

      Remember the public consumption of booze pre-prohibition was astounding which accounted a great deal to the successful passage of the amendment. Post Repeal drinking was estimated to be only about 60% of pre-prohibition levels. This has not changed today although the key problem is drugs as well as booze. Part of todays high cost of construction labor for big jobs is due to high failure rates on drug tests.

    9. David Foster Says:

      If the manufacturing had been done in Mexico (and I’m implicitly assuming a stable legal system, low or no import tariffs, cheap inbound and outbound transportation, etc), then surely some productivity-improving technology would have been introduced there over time. BUT it would not have happened nearly as aggressively as it did in the US, because the economic incentives to do so weren’t nearly as strong…only as Mexican wages rose substantially would the calculus have changed. And who would have gained most of the benefit of this innovation?

      The main reason for this thought-question post is that I’ve seen a number of remarks from people asserting that automation of US factories and outsourced to non-US factories are economically equivalent. My sense is that this is not correct.

      If the US, instead of developing a large and highly-productive industrial base circa 1880s to 1940s, had offshored industrial production to low-wage countries…would the American standard of living have risen in the way that it actually did?

      I guess one could make a comparative-advantage argument that it would have been better for the US, owing to its large amount of arable land and the farming skills of many of its people, to have concentrated on agriculture and left manufacturing to other countries less-blessed by nature…

    10. raven Says:

      The cars are better. When hand labor is used as a substitute for improved mass production measures, quality gets variable. Parts get mislaid, or mis-manufactured. People get tired, mistakes get made, more hand work is necessary to make things fit. Joe is not as skilled as Pat, Joe’s rear axle bolts are sometimes loose.

      The same thing is true today- that CNC machining center does not care whether it is in Thailand or Germany. if the tooling, materials, CAD programers and operators are up to snuff, it will outperform a legion of manual mills and lathes, with better quality and more repeatable parts.

      I would bet that today, a large number of bespoke goods retain “hand craftsmanship” as a sales cachet, rather than a hallmark of absolute quality.

      As far as the socioeconomic factors, it might be more useful to US interests to have the workers paying taxes and spending money here, rather than there.

    11. Xennady Says:

      If the US, instead of developing a large and highly-productive industrial base circa 1880s to 1940s, had offshored industrial production to low-wage countries…would the American standard of living have risen in the way that it actually did?

      I would say no.

      I further posit that no large-scale automobile industry would have developed in the 20th century to serve the US market without that large scale and highly productive workforce that came into existence circa the 1880s to the 1940s, thus creating that market.

      It seems to me that this hypothetical offshoring would be a situation roughly akin to that of the Antebellum South, which paid for imports via exporting agricultural products- but remained an agricultural society based upon slave labor.

      How many automobiles would the South have required had it remained so, perhaps if it had been allowed to depart the Union? How many roads would it have built, or been able to afford?

      Not so many, is my guess. I also note that the South later sent large numbers of its inhabitants to the North, as large-scale industry developed there, requiring large numbers of expensive workers, thus proving incentives for productivity enhancements.

      Should such labor-intensive industry have developed in Mexico, I bet the same incentives would have been in play, and large numbers of American farmhands would have gone south in search of a better future.

      But other factors ruled that out, and gave us the history we know.

    12. Gringo Says:

      There is one problem with the hypothetical- the Mexican Revolution. Not exactly an environment to encourage foreign investment.

      Which reminds me of one problem I had read about foreign investors in Latin America. One foreign company paid so much better than the going rate that many workers quit after a short time of employment. They had earned enough money that would last them a while, so it was time to resign and rest.

    13. Mike K Says:

      It seems to me that this hypothetical offshoring would be a situation roughly akin to that of the Antebellum South, which paid for imports via exporting agricultural products- but remained an agricultural society based upon slave labor.

      I have read some speculation about what might have followed if Lincoln had lost the 1864 election and allowed the Confederacy to leave. Or if they had never been prevented from leaving.

      The proposition that slavery would have withered away has been both supported and opposed in some of these alternate histories.

      I think the railroads had a lot to do with the beginning of manufacturing on large scale.

      I’m reading Sherman’s Memoirs at the moment and he comments on the battles before Vicksburg, especially Corinth and Island Number Ten. The captured Confederate muskets were far superior to those used by Unions soldiers, which were either old flintlocks converted to percussion or inferior Belgian muskets. The Confederates were modern nd had come from blockade runners.

      This is contrary to all I have read in the past that Confederates armed themselves from Union muskets on battlefields.

    14. Mike K Says:

      Very important post at Conservative Tree House. today.

      How ironic… The last 8 yrs ( and frankly much longer ) the non producing bureaucratic state only focused on growing it’s own organisms ( like something Ripley fought against ) rather than fostering yours, will now be run by those that for eons that had to dot their I’s and cross their T’s for all these pencil pushers. Yikes, they will be more uncomfortable than Rodney Dangerfield constantly adjusting his collar and tie during his comedy routine🙂. No I am not tired of winning, grab the popcorn this will be fun.

      The game changing nature of a Trump Administration that will be run by in essence by efficiency experts rather than coming up through the ranks politicians is so stunning I am not even sure Treeper’s and Freeper’s get it.

      Words like Demming, Kaizen, Six Sigma etc will be like names of villainous monsters once these departments have to adapt or go metaphorically extinct. No more room for Comity and advising and extending my remarks and yielding to the gentle lady from bla-bla-bla, get-er-freaking-done. Is it me or is this George Washington 2.0 and no one gets it? (link)

      No chief, it’s not just you – but, yes, few are “getting it“.

      For the past 30+ years the entire construct of Main Street business and enterprise has been dragged through a complex dynamic of ridiculous and insufferable regulatory and compliance building.

      For those who constructed this economic system Trump represents a very real and existential threat; intent on destroying decades of economic quicksand with a politically incorrect atomic sledgehammer.

      Read the whole post as Insty says.

    15. Bill Brandt Says:

      Here I am lying in bed at 2:39 in the morning talking to my iPhone. But it is an intriguing question. My answer? No. I would be curious to know how many of Ford’s factory workers were among the first in line to buy A model T because they were making the unprecedented wage of five dollars a day and could suddenly afford it. I think assembly lines had been around ford really revolutionize them and our society changed from Henry Ford’s revolution.

    16. ErisGuy Says:

      The thought experiment should have two parts: (1) What if Ford moved his production to Mexico in 190? Or 191?, and (2) What if Mexico could have had a stable, non-Socialist government without ongoing civil unrest (to put it delicately) during that period? The first lies in the debatable. The second does not.

      (OTOH, Mexico seems to be prospering despite the brutal, widespread, and bloody narco was there now.)

    17. pouncer Says:

      I don’t believe that has to be confined to a thought experiment. Ford was a globalist and the Ford Motor Company was among the first enterprises we would today call a “multi-national”. Model T and Model A cars were manufactured (or, at least, assembled) all over the world for sale far beyond the US Market.

      And if I recall my on-the-job education correctly, Ford divided his empire into regions; and imposed strict controls upon trade among and between those regions, in order to hold the price of a finished car more-or-less stable within each market region. Ford Germany could not import cars or parts from Ford Brazil, say — even though Brazil could make the same parts more cheaply. This wasn’t government policy, it was Henry Ford himself setting up borders and quotas and tariffs and penalties.

      What I think I claim may be that Ford _DID_ move some production “off shore” from Detroit, and _DID_ pay non-US-citizen workers less to get cheaper labor, cheaper parts and cheap autos to sell into less wealthy markets. He made autos affordable and demonstrated to local competitors how to do so, also. And he accomplished this by imposing tight “border” controls and tightly restricting “free” trade.

      Or so I recall.

    18. Anonymous Says:

      Mike K,
      Just as the filibuster has to go in order to get a solid constitutionally sympathetic long term majority on the supreme court, the civil service employment rules and especially the termination rules will have to be rationalized or the obstructionism of the massive bureaucracy will stifle much of the top down efficiencies and direction.

      Changing a culture in such a huge organization that has been systemically protected from personal or organizational accountability for decades is not going to happen without fundamental, seismic reforms. The wailing and gnashing of teeth, not to mention charges of civil rights violations, racism, politicization of the work force will thunder from the unions, media and academia. Not a short term effort.

      People in private enterprise understand and accept the idea of at will employment. Those in the bureaucratic state categorically reject that condition of employment and are largely legally protected from it. Think of it as similar in effect to faculty tenure for all in an organization and you can get a good idea of the implications for changing a paradigm in any sort of reasonable period of time.

      Not that it isn’t a good idea to make the effort, but eyes wide open. This is not a one term or even a one president proposition. As Jesse Stone said of De Angelo,
      “I’m not going to fire him, I’m going to wear him down.”

      Death6

    19. Mike K Says:

      What if Mexico could have had a stable, non-Socialist government without ongoing civil unrest (to put it delicately) during that period?

      Mexico, like all the Spanish colonies and the Portuguese colony Brazil, have been corrupt since the 16th century. I have long thought that the Catholic Church, with its emphasis on eternal life instead of present success or failure, was part of it. The Protestant work ethic was part of the success of the Dutch and Swiss. Calvinism emphasized (as I understand it being no theology scholar) material success as an indicator of virtue and predestination toward Heaven.

      It has been written many times that the Industrial Revolution moved to England, after the revocation of the Edict of Nantes by Louis XIV, with the Huguenots. The Dutch were probably the most prosperous people in Europe until the rise of England.

      I doubt Mexico could ever have established a stable and prosperous society. The closest to accomplishing this was Argentina, in a moderate climate and with immense natural resources. They were brought down by Peron but had had unstable governments since the 18th century. The period when they were largely governed by the English, which lasted until Peron, was probably the height of their prosperity. The present era shows no prospect of honest government. The Kirchners resemble the Clintons in many respects.

    20. Mike K Says:

      Those in the bureaucratic state categorically reject that condition of employment and are largely legally protected from it.

      The theory of Civil Service was that public “servants” exchanged job security and pensions for largely underpaid and loyal, honest service for a career.

      That has not existed for 80 years. I have read David Brinkley (The last conservative at ABC News) book, “Washington Goes to War” about World War Two in DC.

      He describes the frantic growth of Washington bureaucracy, military and civilian, as the war got going. We have never recovered from that burst of energy in the bureaucracy.

      Maybe Trump and Pence can pare it down with a combination of EOs and attrition.

      If you haven’t read Theodore Dalrymple’s, The Uses of Corruption, you should. The perils of a rogue Civil Service are discussed.

      Admittedly, corruption is a strange kind of virtue: but so is honesty in pursuit of useless or harmful ends. Corruption is generally held to be a vice, and viewed in the abstract, it is. But bad behavior can sometimes have good effects, and good behavior bad effects.

      Where administration is light and bureaucracy small, bureaucratic honesty is an incomparable virtue; but where these are heavy and large, as in all modern European states, Britain and Italy not least among them, they burden and obstruct the inventive and energetic. Where bureaucrats are honest, no one can cut through their Laocoönian coils: their procedures, no matter how onerous, antiquated, or bloody-minded, must be endured patiently. Such bureaucrats can neither be hurried in their deliberations nor made to see common sense.

    21. CapitalistRoader Says:

      The other aspect of Catholicism vs. Protestantism is centralized leadership. Catholics have their “big man” but Protestants don’t, which I think carries over to secular life. Catholics are more conditioned to put their faith in centralized authority whereas Protestants are wary of allowing power to build up in any one man or institution.

      It wasn’t just assembly line labor that Ford had to source, he also needed experienced engineers and technicians. Detroit at the time had the “secret sauce” of the automotive manufacturing world–lots of automotive talent–similar to Silicon Valley and software today. He wouldn’t have found that talent in Mexico. He shipped factories all over the world but those factories were largely designed in Michigan.

    22. David Foster Says:

      Stepping back from the hypothetical case and up to a more abstract level….One big difference between automation and offshoring is this:

      If country X adopts technology that reduces average product costs by Y percent, as a result of labor-cost savings, then–if you assume demand is not constrained–a large part of the Y percent productivity benefit will be split among workers and consumers (often but not always the same people.), with the rest of the benefit going to investors This will inevitably happen, absent collusion of producers and/or government intervention to skew things, because of natural competition between enterprises.

      If country X achieves that same average product cost reduction of Y percent but does it by offshoring to cheaper countries, then all of that Y percent improvement flows to consumers and investors rather than to workers.

      (One could argue that the savings to consumers in the latter case will result in more spendable $ and hence more employment and higher wage pressures in those industries which are *not* being offshored…but this effect will be negated if there is simultaneously massive immigration by people who tend to work in those non-offshored industries. If investors make more $ because of offshoring, quite a few of them will be buying more lawn-care services…but any tendency to drive up wages in that industry will be stifled by the large number of immigrants, both legal and illegal, who work in that industry)

    23. ErisGuy Says:

      The strangest hypotheses of alternative history and science fiction is that peoples can behave differently, because, after all, behavior is under our rational control, right? Mexicans (or anyone else) can simply wake up one morning to act as French, British, or Americans, and thereby have a prosperous, stable country, right? Well, nope. Yet things change, sometimes quickly. Why? Usually there is a lot of force involved.

    24. Mike K Says:

      “Mexicans (or anyone else) can simply wake up one morning to act as French, British, or Americans, and thereby have a prosperous, stable country, right? Well, nope. ”

      We are seeing this today with Muslim immigration. Read “The Closed Circle” about the “shame-Honor society. “

      It explains a lot about that culture which took over a thousand years to develop and may have come from an older pre-Islamic culture of the desert nomad.

      Agriculture may have taken 10,000 years to give us the innovative and peaceful European and the Chinese.

    25. Steve Korn Says:

      Labor rates are important but not the most important factor.

      Productivity, speed to market, labor flexibility, rule of law and property rights, quality, trainability, labor laws, and other factors are at least as important as labor rates.

      If labor rates were the #1 determinant, then employers would be flocking to Bangladesh.

    26. dearieme Says:

      “Catholics have their “big man”: yes, Roman Catholicism is a late-antiquity thing. The Protestants are post-Renaissance, and with more than a dash of post-Enlightenment too. Outside the US they are usually post-Darwin.

    27. Mike K Says:

      Amir Tehari has a very good book, which explained the difference between Sunni and Shia in Islam to me. The Shia are like Catholics with the clergy, the imams, to explain the liturgy and the Sunni are the Protestants with their own interpretation. At least that’s how it used to be.

      Now, it may be more expensive to be a heretic.

    28. Xennady Says:

      I have read some speculation about what might have followed if Lincoln had lost the 1864 election and allowed the Confederacy to leave. Or if they had never been prevented from leaving.

      I have as well, with most of it striking me as silly in one way or another.

      This is easy for me to say, as I am not attempting to frame a coherent story or imagine a complete future and write it down.

      I’m sure that actual events would have taken surprising twists and turns, just like the history we know. This is no great insight, of course.

      But I will suggest that a hypothetical history of the CSA would share one feature with the present day. The ruling elite would essentially share many of the assumptions about the world that the present American political class shares, and would attempt to rule in roughly the same way.

      That is, it would have no patience with objections to its free trade policies. It would seek to keep the cost of labor as low as possible, in the case of the CSA retaining slavery to the utmost. And it would be as globalist as possible, seeking foreign alliances to keep it safe from its enemies, inside and outside.

      I suspect this would have worked out for them roughly as well as I expect it to work for our political class, in the long term.

      Poorly.