Policy

Made In America

In the past several decades, American companies have famously outsourced much of their manufacturing activities to other countries. Once this process started, to make use of cheaper labor abroad, each competing company was essentially forced to follow suit to lower costs and maintain their profit margins. The process accelerated.

This has three important effects, two obvious, the third, however, may be of deeper import. First, in the United States, we lose the jobs outsourced. Second, people and economies abroad gain jobs and expertise. This raises their living standards, in the best cases.

The third consequence is twofold and may be the largest in the long run. First, we in the U.S. lose our expertise. We forget how to "do X." Think not? The Tasmanians, according to Jared Diamond, forgot how to fish.

But even if we don't forget how to "do X," we still fall behind in our skill base. The reason is something known as "learning by doing," where the mere act of using a skill also leads to advancements in that skill.

This is a well known economic phenomenon discovered in World War II. In a specific airplane factory, it was shown that each time the total number of bombers produced doubled, the price of production per bomber fell by a constant fraction, say 5 percent. If one plots the logarithm of total bombers produced on the X axis and logarithm of cost per bomber on the Y axis, one gets a straight line sloping down to the right, a power law. This is the "learning curve." It shows up in many industries, from cigar rolling and diamond cutting to automobile manufacture.

The general economic theory is that as more bombers are produced, cumulative micro-improvements are made in the production, so "learning" occurs.

As it happens, my colleagues and I used a model of rugged fitness landscapes — something I borrowed from physicists — called the NK model of "rugged fitness landscapes," and showed that the statistical behavior of "myopic" hill climbers climbing toward fitness peaks, or cost minima, exhibit precisely the same phenomenon of learning curves. In short, this economic learning seems to be a search on rugged multi-peaked "technology landscapes."

But when we ship offshore our production to other countries in the name of short-term competition and profit, we ship offshore our own "learning by doing." The cumulative innovations happen elsewhere. Even if we remembered where we "were" technologically, we fall behind the others who "run up the learning curve," and consequently we ourselves now can compete less well.

And that's if we don't forget our own technologies. More likely, the experts move on to other jobs; the assembled teams dissipate; we become disabled.

President Obama is instituting moves to try to talk companies into bringing production back to the U.S. He is right for all the reasons above, and perhaps learning by doing, and sustaining expertise in our workforce, hence not forgetting how to "do it" are the biggest reasons long term.

If we as consumers moved towards a preference to buy "Made in the USA," that would help a lot. That choice is up to us as consumers.

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