Software Engineer Folk Economics

From the author: the value of the discussion on this page is questionable (and simply confirms my assertion). If you want, DeleteMe.

Software engineers have a tendency to engage in the worst kind of uninformed, urban-legend-driven folk theorizing when it comes to economics. Specifically: the market for overseas IT labor.

Your title is inflammatory. Why not SoftwarePersonnelEconomics? or something? No need to attach your value judgement to the title.

[If that's the worst kind then we're in good shape]

I mean to draw a distinction between economics based on scientific method and economics arrived at purely through intuition and anecdotal evidence. Just as Aristotelean physics is something like "folk physics" or "intuitive physics" compared to Newtonian physics.

For an example closer to home, software engineers often have to fight the battle against "folk engineering" ideas from management (how engineering happens, how much you can get done in X amount of time, etc).

[Then draw that distinction instead of insulting people who disagree with you. There's ample evidence that information work is migrating from high demand nations to high supply nations. Concern about the long term implications of that is not an indication of "folk economics".]

Which is only a problem if you're paying attention to one part of the job ledger. If (for the sake of argument) 3 jobs are added for every 2 that go overseas, or 2 higher-paying jobs are added for every 2 that go overseas, you don't have a problem. And one of those two things are happening, since salaries continue to grow.

[IT salaries and employment are shrinking in the US. (See http://www.ecs.csus.edu/career/salary/winter03.html.)]

Sorry, I should have inserted the term "recession-adjusted" when talking about salaries. Certainly, one can draw all sorts of false conclusions from effects of a general fall in demand and sudden cash-hoarding.

This India vs US question is a lot more fluid than people imagine. Exactly the same effect is occurring when kids graduate from college and enter the engineering profession: average salaries (for that brief moment in time) shift down, and assuming a fixed number of jobs (very false assumption in reality) someone more experienced just lost a job. Why not campaign against teaching computer science in universities?

[The economic difference is that salaries paid to citizens inside the US are largely spent in the US. Salaries paid to foreign workers in the US less so and salaries paid outside the US not at all.] Salaries paid outside California are typically not spent in California. Is that in any way negative? Not at all. Would it be bad for Californians if we erected trade barriers and protectionist measures? Yep, and bad for everyone else too.

Nationalist arrogance of course. For whatever reason, college kids are less threatening than Indian grown-ups. Stuff about college kids paying taxes is nonsense - Indians turn around and buy American products, and anyway this argument isn't usually applied to Canadians or British people who don't pay American taxes either.

[Nationalist naivete. The profits of multinational corporations are often at odds with the best interests of the nations that spawned them.] Not to mention the best interests of the nations they operate in; in fact the profits and motives of multinational corporations are rarely in anyones best interests, the system simply isn't built that way.

They act in the best interests of shareholders, who ultimately are typically middle-class participants in pension plans and 401k's.

That is largely mythology, perpetuated by the sheer usefulness of such a naive view. They act in the best interest of certain shareholders, certain board members and usually at least some of the executive officers. Joe middle-class shareholders interests may be somewhat aligned with these, but are largely irrelevant.

[Concur. See Enron, WorldCom, CitiGroup, Global Crossing, etc.]

In one sense, these and other companies all do act in the interest of shareholders. It's just that decisions are not one-man-one-vote, but instead a shareholder's influence is through the number of shares held. There might be many shares owned by many individuals, but most of the shares are owned by a few individuals or institutions. Even the Joe middle-class shares are probably owned through an institutional investor, and that institution gets Joe's proxy vote. So while mom and pop got the short end of the Enron collapse, a few shareholders made millions anyway.

[Read the Enron stories more closely. Executives cheated shareholders, large and small, for their own benefit. They lied to shareholders and regulators to keep the money coming in. The only shareholders who benefited were those who sold before the collapse, and they benefited only at the expense of the suckers they sold to.]

Partially true. The executives were significant shareholders themselves, and they benefitted by selling before everyone else knew of the problems.

To put additional perspective on it, in May of 2003 Steve Ballmer of Microsoft sold just over 8% of his holdings in his employer's company, for a cash value of nearly US $1 billion. That's not a typo. After the sale Ballmer still owned roughly US $12 billion of Microsoft, and he's only the second largest shareholder, after Bill Gates.

Sorry, as large as these companies were they don't even start to compare to the size of the US economy as a whole, which functions pretty well. Also, if ownership stakes were meaningless, why would people buy and sell billions of them every day, instead of say, apples and cows?

Which doesn't change the fact that most shareholders are simply along for the ride, like it or not. The relationship between corporations and small shareholders in this culture is very much similar to the relationship between (esp. national) politicians and voters. In the particular, the voters/shareholders don't matter at all. In the abstract, they are very important. The CEO or senator who forgets this can easily be torn down. Each of them, however, understands that it is the perception of being ruled by the will of the people/shareholders that is important, not the reality. Indeed the reality is far different; each of them is far, far more influenced by the actions and interests of a small, select few.

All that matters is that they sell when they think the price of their shares exceeds the present value of future profits of their ownership stake.

[Which is impossible to determine when the company pays its auditors to lie to the stockholders, and its investment bank owns a brokerage that lies to prospective stockholders in order to boost stock price, which the bank accepted as collateral on a massive loan to the CEO in order to keep him from selling stock which would attract attention and lower the stock price? How much time and energy can someone with a 9-6 job devote to investigating the behavior of large corporations? More importantly, who profits from telling them the truth?]

Communications technology and accounting standards in the 18th century weren't anything like they are today, yet stocks were traded then too. There's obviously enough information out there that people are willing to purchase ownership stakes, or equity markets wouldn't exist.

[People have been swindled as long as there have been people. There's a sucker born every minute.]

Again, why are people exchanging billions of these things worth trillions of dollars every business day?

[People aren't, at least not the average stockholder people. They buy and hold for their retirement because they watch one of several cable/satellite financial news channels that feature analysts employed by the investment banks mentioned above who keep telling them over the long haul, the stock market is the best investment. And WorldCom? is a strong buy because of emergent synergy.]

It is simply ridiculous to say that all trading of ownership stakes is fraud. Trillions of dollars worth of daily economic activity must have some explanation, or people would buy bonds or apples. As I said, stocks were traded long before the 80's and 90's when average people started getting involved. This is a prime example of the folk economics I'm talking about - intellectual laziness leads to absurdities like explaining an incredible amount of economic activity as fraud or sport.

It seems there are enough parallel conversations in the above that none of it makes much sense.

[It would be ridiculous to say that all trading of ownership stakes is fraud. Did someone say that? A hearty "Ridiculous!" on them if they did. But investors can be defrauded. The system is not perfect. It is vulnerable to exploitation by clever, greedy individuals. I'm not claiming every company cooks the books. But no one knows who does and who doesn't. The system is too opaque. Enron employees has US$1.2 billion of their 401ks invested in Enron. They worked there and they didn't know better. How is my mom supposed to know?]

I assert that this is the informed bottom line. Experimentation in the free market will determine whether software engineering is a commodity business or not (my guess is not, as it defies all notions of what a commodity is).

This does not require smart management. Appeals to what the current "management trends" are are irrelevant. All that needs for a market to work is dumb manager A to succeed when highly trained and productive rich-country developers ship a product more profitably than dumb manager B who farms out work to Bangalore (not to make any value judgements here, it could go the other way, though personally I doubt it will).

Finally, all you need to watch is the average recession-adjusted IT salaries. Are they going up or down in rich country X? For instance, in the US we've seen 7% average growth rates since the early-90's recession, with predictions that this will continue indefinitely. Until that average falls flat or goes negative, assertions that foreign labor is on balance hurting rich country workers are hollow, uninformed drivel.

Fear is all this boils down to. People pay attention to fear and sex, both of which focus our hunter-gatherer mental machinery like nothing else.

discussion moved from OpenProblemsInComputerScience

How to keep information work from migrating to nations that didn't invest in creating it? only a problem for people in rich nations who rely on folk- or crank-economics, and who are hopped up on fear fed by 24-hour news networks.

Besides, this one is easy - drive their economy up so that they want as much money as the other nations' developers

Heh, I may not think it's a problem either, but my limited 3rd world experience tells me it'll be a very long time before the economy of India or China is driven up to US levels.

That's actually not possible, since the US economy requires a large pool of cheap offshore labour and underpriced resources, at least at the moment. What is seems inevitable is that these economies will be pushed closer together, toward some sort of globally sustainable equilibrium, but there is a real question as to how far this will go. Certainly the rate of change is quite influenced by policy. Many 3rd world economies would be improving much more quickly if 1st world policies were helping, not hindering this, but how much faster is hard to know.

The lopsided nature may benefit some careers and hurt others. For example, if India focuses on mostly technology, then technologists in the US may have a hard time. A given population usually has people who are good at a wide variety of things. But if the demand is partitioned by country instead of by individual skill, then us techies may be in for a rough ride. My dad was a manufacturing process engineer. But as manufacturing disappeared from the US, he tried to move into other areas with dwindling success. If he lived in China, then his skills perhaps would have been in big demand and stayed that way.

"Underpriced resources". This is the sort of thing that immediately 1) sets off my folk-economics detector and 2) immediately discredits everything written afterwards. Are you saying that you think there's a problem with the price system? There is so much research showing efficient functioning of it - particularly in commodity markets - that you bear a very significant burden of proof when you assert that prices are broken. [On re-reading, I think the OP really means 'underpriced w.r.t local pricing' (there is probably a proper terminology for this). Not that pricing is broken per se., but that the market will price these external resources significantly cheaper than locally available ones. I think the idea is that a) the US economy is (currently) highly reliant on the existence of significantly weaker economies, and b) the global economy tends to want to reduce the difference. The first part is pretty easy to argue, but I am not sure that the second is a given. OP also suggests that '1st' world policies have acted to hinder the development of '3rd' world economies, which is defensible.] Yes, that is what I meant by `underpriced', which was probably sloppy. The `b' point is fairly well established, I think - I'll try and dig up some references.

If you want to treat people like commodities, then many will end up in the trash bin just like excess or mismanaged commodities do. Why don't we just shoot old people because they drain too much resources in medical expenses? Further, places like India can have lower rates because they often ignore safety, child labor, and pollution laws. They don't care if they poison a few thousand people because they have excess people. I don't want our nation to be dragged into a lazze faire race to the bottom.

I enjoy the company of fellow software engineers, except for (in many cases) when the subject shifts to economics and particularly Indian IT. In other aspects of software engineering you see an admirable and concerted effort to make decisions using scientific-like methodology - proving and disproving hypotheses. When it comes to foreign engineering labor, engineers regress into folk theories and logic that would make small-town investigative reporters proud.

Economics is an art, not a science. It depends too much on human psychology, which is about as mathematically sound as melting Jello.

Economists reliably calculate the fall in the price of gas due to changes in OPEC policy, and the change in commodity prices given a shortage of known quantity. They can accurately judge the shift in currency values due to interest-rate policy changes.

If you're talking about irrationality, yes the profession is well aware of it. And certainly economics as a tool breaks down once you get closer to predicting individual behavior. But people behave very consistently in groups, for instance I can accurately predict when and where traffic jams happen on 101.

Bull! Economists cannot predict the economic future any better than garbage workers (who can see waste patterns). Greenspan missed the dot-com bubble poppage.

Physicists can't predict the weather only a week off, therefore physics is worthless.

And by the way, he did predict it: http://www.nfsn.com/library/prime.htm

[What an astounding claim! Economists are routinely surprised or confused by fluctuations in both oil prices and exchange rates. Only in hindsight do they ever manage to explain these things, and even then the explanations are often dubious. It's no big deal to predict the 'usual' actions of these things - a child can do that - but is is a totally different thing to predict the unusual reactions, and that's when it matters. Economics is politics by another name and as such is a slave of the ideology of each individual economist; it has no relationship to science at all.]

Part of the problem is that economics involves a lot of WetWare, which is an immature science. Peoples' decisions are the main driver of economics, and that portion is full of hard-to-tame variables. History is not always an accurate guide, for the Internet Generation may respond to news differently than the non-Internet generation, for example. That doesn't mean macro-economics is a worthless field, only that it has to work with very incomplete info. It's a lot like the field of SoftwareEngineering in that regard. It would be nice if it was only about physics or math, then we could approach the accuracy that weather forecasting has (at least for the short term). But the WetWare factor pokes its big finger into the pie.

Economics gives one a framework to talk about the factors involved. Just because getting the right final answer is not easy doesn't mean the process shouldn't be analyzed. Most will agree an informed decision is better than an uninformed decision even if working with a lot of untestable or poorly-tested factors. If you can only study half the factors, wouldn't it be better to be informed about that half rather than read entrails to make decisions? Maybe there's a threshold whereby entrails are sufficiently close enough such that studying a small set of tame-able factors is not worth the effort, such as costing 2% of profits to improve profits 1%. -t

Managers and owners pay a premium for seeing physical people that they manage. But Congress is taking away that one advantage we have by allowing in way too many "guest workers" under the H-1B and L-1 visa programs. Further, why flood just IT? Why not automechanics or lawyers or plumbers?

Further, I think I would rather see full-blown immigrants instead of visa workers. That way they would keep the money in this country instead of mailing back overseas. They would raise families etc.

H1-B is open to any professional-class workers. I imagine there aren't too many Bangalore schools that train lawyers for, say, the California bar. Plumbers and automechanics don't require bachelors' degrees.

This is getting highly technical. Plumbers are needed everywhere, but it's probably just as well that they're not flooding in. What a punny comment.

H-1B's are for positions that normally require at least bachelors' degrees.

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