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Published by: Glen Brink 10-Apr-18
What are the long term national security consequences of transitioning from manufacturing to software and services?

 

Over the last 40 years the US economy has been transitioning from one based on physical manufacturing industries towards software and services industries.

 

 

 

Ben's Answer 

Ben GolubBen Golub, Harvard Dept. of Economics; Ph.D. in economics, Stanford

 

 

The issue of maintaining --  or, actually, not maintaining -- technical capability in manufacturing is a classic tragedy of the commons problem.

The new Bay Bridge is being built in China and shipped here in parts. it is much cheaper that way. California is quite rational to outsource the bridge.
 

Now, it would be a bad thing if we forgot how to build bridges in the U.S. We might become totally reliant on other countries and not be able to build our own bridges in a war.

But California's decision does not make California (or any other state) substantially less safe immediately or even soon, because we can still build bridges today, and we'll still be able to do so in ten years. It's just that some large bridge-building firm in the U.S. and its suppliers lose one project and get a less practice and less revenue. The direct consequences of that, on a national scale, are minor.

And that's precisely the problem. No single decision has a big immediate national security effect, while the savings from outsourcing large manufacturing and construction projects are huge to the state or city buying the project.
 

This is very similar to other tragedy-of-the-commons problems, like overgrazing a field or overfishing a lake. Each shepherd or fisherman gets a big private benefit from having a bigger herd or trying to catch more fish. The immediate downsides to any individual are negligible, and the total immediate downsides are pretty small. But over the long run, if people behave this way, the field ends up bare and the fish go extinct. The long-run social costs are huge.
 

Similarly, even though every state is perfectly rational in going for the savings (by outsourcing any given bridge project) and ignoring the small national security decline, in the long run, if everybody does this, we end up pretty screwed.

So from this perspective, it makes perfect sense to "tax" outsourcing of this sort, to help states take into account the long-run social costs of their choices. Everyone (including those states) is better off that way.
  

 

 
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