Transcript Richard Freeman: You can’t outsource responsibility

00:01 The majority of the economy, in capitalist economies certainly, runs through firms–I’d say 70 to 80% of activity. We also know that sometimes firms press the government for rules or laws that benefit them at expense of the rest of society.

00:23 I’m Richard Freeman, I’m a professor of economics at Harvard University and I work for the National Bureau of Economic Research. A firm is a legal entity in which people have put some capital and it hires people to produce goods and services and then it hopes that the consumers will buy the goods and services.

00:43 I’m going to talk a little bit about outsourcing which has to do with the boundaries of a firm. Over time the boundaries of the firm have changed. Now I will outsource some of the production to places in China and places in India. The biggest change in the last 20 years that has happened has been the movement of China, India, the collapse of the Soviet Union’s, so the movement of East Europe, they’ve all come together now into the one global economy.

01:14 Personal computers were once produced in US factories then they began to outsource parts of the computers to China. In the US we would’ve done all of our engineering and IT work in the US, now you outsource a lot of that to Indian companies. But basically what’s happened in the world has been the supply of workers and skilled workers in manufacturing, they can do engineering work, has just vastly increased because all of these other countries have joined the modern global economy. Just a better deal and ultimately a better deal for the consumer.

01:52 You are able to to get cheaper products through the outsourcing, that’s what hopefully motivates a lot of it, and often the workers in the outsourced operation are paid much less than the workers in the original company. In Boston about three years ago there was a major hotel that fired all of its workers and outsourced to a subcontractor. The new cleaning ladies are paid half what the previous cleaning ladies were paid in that job.

02:25 One of the striking examples we’ve had recently; there was this horrible fire and loss of lives in Bangladesh and the goods were all being made for people in the West. The issue for the Western companies was that they just signed the contract with the Bangladeshi firms who were running real sweatshops that were dangerous. One hopes that they will do better in the future and you keep pressing them.

02:55 There’s always some temptation for a company just to say hey it’s not my responsibility because my firm ends over here and I’m just buying this product from some other firm and that’s somebody else’s responsibility. Bottom line to this is that you can outsource activities but you don’t want to outsource the responsibility for those activities.

03:20 And you don’t want to bash outsourcing as some evil thing, like everything else in economics it can be done well and for efficient reasons and all sides can benefit or it can be done so some smartsters are ripping off other people. We just got to keep our eyes open and the people inside companies should keep their eyes open and the consumers should keep their eyes open as well.