Globalization's roots in the boom 90s

I've always wanted to read Thomas L. Friedman's "The World is Flat," a book that describes the globalization forces that have shaped the first decade of the 21st century, and in Friedman's mind, constitutes version 3.0 of a globalization wave that will be more intense - and move faster - than the two waves that preceded it. Since I tend to visit the "Borders" book store on El Camino Real in Mountain View whenever I visit the Microsoft Silicon Valley office (on account of their wonderful selection of computer books, which is a rare thing indeed these days), I decided to pick it up due to a "buy 1 get 1 half price" sale going on at the store.

I'm only on page 70, but already it has got me thinking pretty seriously about how much has changed since 2000.

The "flattening" of the world which serves as the unifying theme of Friedman's book is, in essence, a computer and network-driven reduction of the distance barriers that prevented workers in one country from competing directly with those in another. Friedman lists some surprising outsourced professions that I didn't know about, such as the ability to hire a dedicated India-based personal assistant for $1500 / month (useful for executives who want someone to read books for them and summarize the contents, or crunch the numbers and chase down references for a research paper), math tutors with high-level degrees available for $15 / hour who interact with students through their computer, or more suprising, a McDonald's franchise that has outsourced its "drive-thru" order service in a way that has halved the wait time from the McDonald's national average, thus boosting throughput and raising revenue by 20% (though in this case, the outsourcing was to Colorado Springs, and employment costs only went down by 1%).

This will obviously have ramifications for the nation state, the unit of political organization that has defined global relations for the last hundred years. As Friedman notes:

What happens if the political entity in which you are located no longer corresponds to a job that takes place in cyberspace, or no longer really encompasses workers collaborating with other workers in different corners of the globe, or no longer really captures products produced in multiple places simultaneously? Who regulates the work? Who taxes it? Who should benefit from those taxes?

What really got me thinking, however, was what Friedman identified as the cause of this revolution in human economic interaction. Joseph Stiglitz, a Nobel prize winning economist who is most recently co-author of "The Three Trillion Dollar War" (I haven't read it yet, but intend to), cited the telecommunications overinvestment that typifed the boom 90s as evidence of the misinformation and imperfection inherent in all human economic activity. Real-world economies don't fit the ideal models predicated on perfect humans in possession of perfect information, which is why he is a proponent of carefully-crafted economic regulations.

Though I agree with Stiglitz' analysis, its also interesting to see how well free markets respond to resource misallocations. Overinvestment certainly has had benefits for consumers as companies have found ways to turn wasted money into revenue gold mines. As Friedman explains:

So when the dot-com bust came along, there was just way too much fiber-optic cable out there. Long-distance phone rates went from $2 a minute to 10¢. And the transmission of data was virtually free. "The telecom industry has invested itself right out of business," Mike McCue, chief operations officer of Tellme Networks, a voice-activated Internet service, told CNET News.com in June 2001. "They've laid so much fiber in the ground that they've basically commoditized themselves. They are going to get into massive price wars with everyone and it's going to be a disaster."

It was a disaster for many of the companies and their investers (Global Crossing filed for bankruptcy in January, 2002, with $12.4 billion in debt), but it turned out to be a boon for consumers. Just as the national highway system that was built in the 1950s flattened the United States, broke down regional differences, and made it so much easier for companies to relocated in lower-wage regions, like the South, because it had become so much easier to move people and goods long distances, so the laying of global fiber highways flattened the developed world. It helped to break down global regionalism, created a more seamless global commercial network, and made it simple and almost free to move digitized labor - service jobs and knowledge work - to lower cost countries.

Those low prices, in other words, are what made it possible for companies to set up shop in Bangalore selling the services of top-notch graduates from Indian universities (among other things). Though the companies laying the fiber never intended it to be almost free (unlike Eisenhower with his national highway program), the result was the same.

I, personally, have no problem with that, as I've discussed numerous times in my blog (and before). Outsourcing is part of the development toolbox, and though it requires that workers must adjust to changed market conditions, that is a process that has gone on since America's earliest days. One of the defining characteristics of this country is our unique ability to absorb changes in technology and markets.

What was interesting, however, was that outsourcing's roots lay in an irrational misallocation of resources. Outsourcing, in other words, is the means by which that misinvestment was put to good use, and is an instance of an economy composed of imperfect humans fixing the errors that inevitably result from those imperfections.