Nostradoofus

I’ve suspected this for years, but after recent experiments with administrative offshoring, now have direct anecdotal evidence:  low wages are partly a lazy substitute for creative, productivity-increasing management.

This is at once obvious and subtle.  The obvious part is that I, as a manager, have little incentive to produce efficiently if I can produce inefficiently, for less, with cheap labor. The subtle part is to reconcile this with (suddenly unpopular) laissez-faire economic policy, which has a compelling argument for free global labor markets (see comparative advantage).

Here is a micro-anecdote.  Prior to 2008, I did bookkeeping for Company X.  In 2008, I outsourced it.  This was super cheap, just $300 for an entire year of data entry, and that was not even the low bid.  They did good work.

Of course, it was not frictionless.  It took several hours of my time to bid out the job, choose a winner, collect and send the year’s statements, check the results, etc.  But a big improvement over doing it all myself.

Still, for Q1 2009, I decided to see what could be better automated, rather than outsourced. After surprisingly much research (Intuit is stuck in 20th-century communications mode), turns out Company X’s bank still can export transaction data to my arcane old Mac version of Quickbooks.  Yesterday, I reconciled most of Company X’s first quarter financials by myself in an hour.  This included my time to prepare data and check results, and eliminated the friction of working with a counterparty.  Result:  automation beats outsourcing in bookkeeping for Company X.

So is comparative advantage the wrong paradigm for labor?

I assert it is not wrong, but overstated, limited in application, in areas where labor productivity can improve rapidly by just thinking or learning.

Since low wages are easily measurable and easily implemented, there is a tendency to just outsource and be done with it.  But it’s not the only solution, nor the best solution, from the business owner’s perspective.  Even in the short run.

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This entry was posted on Wednesday, April 8th, 2009 at 5:33 pm and is filed under Web Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.