The .308 footgun with software contracting stems from a misunderstanding of what we pay software developers for. The model under which contracting seems like the right move is "we pay software developers because we want a unit of software", like how you pay a carpenter to build you some custom cabinets. If the union of "things you have a very particular opinion about, and can specify coherently" and "things you don't care about" completely cover a project, contracting works great for that purpose.
But most of the time you don't want "a unit of software", you want some amorphous blob of product and business wants and needs, continuously changing at the whims of business, businessmen, and customers. In this context, sure, you're paying your developers to solve problems, but moreover you're paying them to store the institutional knowledge of how your particular system is built. Code is much easier to write than to read, because writing code involves applying a mental model that fits your understanding of the world onto the application, whereas reading code requires you to try and recreate someone else's alien mental model. In the situation of in-house products and business automation, at some point your senior developers become more valuable for their understanding of your codebase than their code output productivity.
The context of "I want this particular thing fixed in a popular open source codebase that there are existing people with expertise in", contracting makes a ton of sense, because you aren't the sole buyer of that expertise.