I took intermediate macroeconomics a few semesters ago before I really got into Austrian economics. Those of you who've taken intermediate macro know that you spend quite some time on the labor market, the production function, and the productivity of labor. The neoclassical analysis concludes that immigration is a major cause of long-term economic growth.
You're taught that (the production function has constant returns to scale), in the short-run, an increased supply of labor reduces real wages as additional workers are spread over a fixed supply of capital, which, in turn, reduces the marginal productivity of labor. The total level of output, though, increases, as production is a function of both labor and capital. This, in turn, implies that as the supply of labor increases, the marginal productivity of capital must therefore increase (higher interest rates). As the marginal productivity of capital rises, the stock of capital will expand which, in turn, will increase the productivity and demand for labor in the long run (higher real wages).
Mass immigration is often considered to be a major cause of U.S. economic growth. Austrian capital theory also claims that an increased labor supply will elevate interest rates. But now the problem reveals itself.
The neoclassical conclusion (immigration causes long term growth) only holds if we assume capital to be a homogenous blob which is perfectly substitutable. In such a world, increasing the homogenous capital stock would indeed increase the marginal productivity of labor across the board. But once we drop this assumption (homogenous capital) we realize that it would increase capital accumulation only in the lower phases of production, which would make society relatively poorer. The only way it could lead to long-term growth is if the immigrants, for whatever reason, had a lower time preference, that is, if they saved more. This would extend the structure of production and increase future returns (once the roundabout methods of production are completed).
Therefore, once we look at capital as a structure, with heterogeneous and complimentary goods, we must conclude that immigration actually leads to economic contractions. This is clearly incorrect. My reasoning must be faulty; I'm missing something.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The mistake in the OP is maybe mixing up absolute growth with per capita growth. You are maybe thinking that lower phases of production pull away investment from the higher phases, making a contraction in GDP. That would be a contraction only in per capita income.
Ceteris paribus, immigration leads to an increase in GDP and a decrease in GDP per capita in both the short and long term. There is really no way that it can lead to greater long term growth in per capita with homogeneous actors, because the more you earn the larger the proportion of income can possibly be saved regardless of time preference.
I am wondering if Desoto would help here.
Also one mistake you made:
Esuric:A higher time preference = a shorter structure of production, and can also cause recessions and unemployment (if there's rigidity).
To the contrary, Higher time preference does not create a shorter structure of production, its the other way around. A high time preferences paths the way for more roundabout processee's. High time preference(Savings) will be met with the growth in the length of the structure of production. See Desoto Chapter 5.
Instead of using the Hayekian triangle, which make specific stages look all equal, though this is not the case and capital accumulation occurs in a heterogeneous fashion(Remember) different ways over various time periods for different industries, purposes and functions. Some industries need to invest their capital stock into transportation(Food), others do not for example(Software).
Here is a chart from Desoto, does this change your outlook on anything?
I think there will be a lag time and a period of increased cost of first order goods. Even with technological alleviation the lower order goods are getting produced out in accordance with the ecology of the market that existed before the mass immigration. You said yourself, not enough things are being produced to satisfy the new population, this will drive up costs of first order goods, and interest rates will also go up, as there is now a dis-proportionate ration between people and capital stock.
There is going to be lag time for factories and capital goods to be produced in order to adequately provide for the new population HOWEVER, that doesn't mean that the pre-existing populations standard of living goes down necessarily. It could mean that new innovations are made way for the sustainability of consumer satisfaction.
What happens is first off, as you said interest rates go up, time preference appears low now that the ecology has changed. The high interest rates will encourage savings. This plants the seed for the long-term growth. In the short term profit does it's job. New methods of of creating first order goods with shorter production stages are brought into the picture to alleviate the immediate demand. This will obviously mean a sacrifice in quality, but we also must remember that the previous factories and more lengthy methods of production are still operating. They will have the opportunity based on new profits to pay for conversions of their existing capital goods, allowing for a higher output. THe conversions maintain the existing capital stock, and augment it. The conversions are great because not a lengthy period of time is needed, as opposed to building an entire new factory.
We also cannot rule out that imports of first order goods will rise. Another point we are missing in our equation is other competing geographical regions, imports and exports. The market will find an equilibrium, of the cost of living rises to sharp that will deter further immigration. It also may encourage imports from neighboring geographical regions, even the regions where people were immigrating out of. So since we are focused so deeply on one specific geographical region we neglect observe that the market is attempting to find an equilibrium across all geographical locations, it is not aware of borders.
So there is short-term relief created on the market and possibly some sacrifice on quality. Neighboring geographical locations also play a roll in bringin about stability. Long-term releif will come and we all know capital accumulation takes time. And finally, with the existing capital goods ecology still in tact we always seem to forget the final but most important thing. Entrepreneurship, and innovation(Which is always left out of modern macro). To satisfy demand existing producers(Especially ones who were succesful) will innovate ways to create shortcuts further bringing satisfaction even faster. All driven under the profit motive.
I feel that modern macro tries to treat everything like a system we can come to expect, but the market cannot be expected. Suprises are brought forth via innovation every day.
In the long run a more complicated division of labor benefits everyone. What we are discussing here is a short-term discrepency.
To the contrary, Higher time preference does not create a shorter structure of production, its the other way around. A high time preferences paths the way for more roundabout processee's. High time preference(Savings) will be met with the growth in the length of the structure of production.
I'm quite sure that a high time preference is expressed by an increased preference for present goods (consumer goods) relative to producer goods (future goods), i.e., a lower rate of savings, which collapses the structure of production. Also, I don't like De Soto's work, from what I've read. He likes to talk about the Ricardo effect which literally makes no sense (to me at least).
I think there will be a lag time and a period of increased cost of first order goods. Even with technological alleviation the lower order goods are getting produced out in accordance with the ecology of the market that existed before the mass immigration. You said yourself, not enough things are being produced to satisfy the new population, this will drive up costs of first order goods, and interest rates will also go up, as there is now a dais-proportionate ration between people and capital stock.
This will drive the prices of consumer goods up, that is, it will increase the money receipts for the lower phases, while, at the same time, elevating the rate of interest. Since the higher orders receive money later, their profit margins will fall, even though their revenues may have increased (because of the elevated rate of interest). Hayek says that specific capital goods will be dragged away from the higher orders towards the lower orders along with vertical integration.
Here's Hayek:
The prevailing disproportionality theories are in agreement in one respect. They all see the cause of the slump in the fact that, during the boom, for various reasons, the productive apparatus is expanded more than is warranted by the corresponding flow of consumption; there finally appears a scarcity of finished consumption goods, thus causing a rise in the price of such goods relative to the price of production goods (which amounts to the same thing as a rise in the rate of interest) so that it becomes unprofitable to employ the enlarged productive apparatus, or, in many cases, even to complete it. (pp. 26)
This is the over-consumptionist doctrine.
What happens is first off, as you said interest rates go up, time preference appears low now that the ecology has changed. The high interest rates will encourage savings.
The high interest rate is the result of a higher aggregate time preference (a lower savings rate); the interest rate represents the aggregate time preference. The higher interest rate will induce additional savings, but only to preserve the alterations in the structure of production towards shorter methods. That is, if savings does not rise as a result of the higher time preference (interest rate) then the interest rate is not high enough, and must therefore rise and adjust to its appropriate level, which will further collapse the structure of production. According to your reasoning, economic growth is simply a matter of continuously elevating the rate of interest, which could easily be perused by a deflationary government mandate. The point is that you want the interest rate to accurately reflect the true time-preference of society.
We also cannot rule out that imports of first order goods will rise. Another point we are missing in our equation is other competing geographical regions, imports and exports. The market will find an equilibrium, of the cost of living rises to sharp that will deter further immigration. It also may encourage imports from neighboring geographical regions, even the regions where people were immigrating out of.
I'm assuming a closed economy; I don't want to complicate the already complicated issue at hand. But, if there is economic expansion, then imports may very well rise because of the increased purchasing power of money (deflation), but this would lower the cost of living, not elevate it.
Err your right, high time preference is intensified desire for immediate consumption.
Esuric:This is the over-consumptionist doctrine.
I see
Esuric:The high interest rate is the result of a higher aggregate time preference (a lower savings rate);
Yes yes I understand the PTPT, you keep repeating it to me and have been since your first response to me as if I didn't understand it. I understand it quite well, I can only guess your mis-understanding me and/or I am not adequately explaining myself.
At any rate I am simply tossing out idea's to help you bounce idea's around but rest assured I do understand the PTPT.
Esuric:The higher interest rate will induce additional savings, but only to preserve the alterations in the structure of production towards shorter methods.
What your saying is that the market in the end will reset itself to a point thats actually BEHIND where it left off, before the immigration started. And that the equilibrium is the difference between the highest stage of production, and the now new shorter stages of production, somewhere between there.
In essence your saying the economy will walk backwards due to the increased size of population. I guess I could concede that point, knowing that any massive injection of anything in a market will bring it off balance. Still is there no gain or benefit to be had from a more complex division of labor(in the long run, assumign the new population could be sustained)? And wouldn't the long-term effects, after the adjustments have been resolved eventually be greater?
Esuric:economic growth is simply a matter of continuously elevating the rate of interest, which could easily be perused by a deflationary government mandate. The point is that you want the interest rate to accurately reflect the true time-preference of society.
I havn't the slightest idea how you derived that from what I said. I wonder if I mis-worderd something but I'm not implying that altering the schedule of subjectively derived consumer preference on the deliverability of goods would be better then if left alone. I'm assuming you think I am saying that if we make an infinitely long structure of production that we would necessarily magically be wealther. In essence we would, that is what capital growth is. It's intricately intertwined with time, as you stated earlier. BUT only to the extent that present consumption was made available adequately to consumer satisfaction. It's not like we can force 100% savings and tell everyone we'll be super rich in 100 years (After we're all dead). If thats not what you mean I'd like you to clarify how it's my position where I advocate a simple alteration in interest rates will bring perpetual prosperity.
Esuric:Since the higher orders receive money later
Higher order goods operate at the same time as lower order goods. It is not the case that we must wait every 5 years to get a new batch of corn. These individual process's occur simultaneously. For a single year all stages of production are in action, and resources are being allocated to all of them. IT's not that stage 1 acts for one year, while everyone else sits on the sidelines waiting for him. Don't forget that.
Esuric:I'm assuming a closed economy;
No your not, this is about immigration, the very problem implied a non-closed system.
incidentally Esuric I agree with the premise in your original post and I am equally as curious to the resolution. Maybe your confused by my manner of responding. I have a habbit of bouncing idea's off people as a method of brainstorming. It's not always easy to pickup, I apologize.
[Edit] Holy crap, look at your post count as compared to mine.
I just try to be as clear as possible and formulate my thoughts. I really don't know how familiar you are with Austrian growth theory, but I make no assumptions.
Still is there no gain or benefit to be had from a more complex division of labor(in the long run, assumign the new population could be sustained)? And wouldn't the long-term effects, after the adjustments have been resolved eventually be greater?
No, there is! But that's the problem with my analysis. It makes perfect sense if you assume a completely collapsed capital structure with homogenous and substitutable capital goods, but I can't come to that conclusion with my (limited) knowledge of Austrian capital theory. I think I need to read Garrison or something. Essentially, I'm making some kind of mistake, somewhere.
I havn't the slightest idea how you derived that from what I said. I wonder if I mis-worderd something but I'm not implying that altering the schedule of subjectively derived consumer preference on the deliverability of goods would be better then if left alone.
Well I was just responding to the idea that increasing the interest rate leads to increased saving and that this causes economic growth. If we define wealth as the maximization of utility, as opposed to the accumulation of productive forces, then an infinitely growing capital structure would make society poorer. To better elucidate my point, consider the Soviet Union which continuously expanded the capital structure and had high annual levels of total output. They produced a lot of steel, but they were very poor.
Higher order goods operate at the same time as lower order goods. It is not the case that we must wait every 5 years to get a new batch of corn. These individual process's occur simultaneously.
Goods flow from the top down, and money flows from the bottom up. The vertical axis, in the Hayekian triangle, represents time. You use the current (more direct) production methods in order to satiate current desires, but when the time preference of society falls, that is, when they save more (lower interest rate), additional resources can be invested towards longer (roundabout) methods of production. When such (longer) methods are completed, then you can increase total output, but again, the older capital goods bridge this gap. The capital structure is inter-temporal (and inter-generational).
You're right. I meant with respect to trade. The influx of immigration can be thought of as a large jump in population growth, or a shock to the labor supply.
I took that class years ago...........
Dont forget that they have assumptions in order to say "immigration=growth"
Resources are available and abundant.
Plenty of land for new settlements.
There was possibly a labor "shortage" before mass immigration.
Corporatism is using state means to enhance market share and profitability of a few favored firms, at the expense of the citizen.
We are assuming that the massive immigration influx was not due to a local demand in labor(which is typically the case). We're assuming a prior stable economy before the immigration, that labor was generally being satisfied.
Still I am not convinced that it's not compatible with Austrian theory to state that an immediate radical influx of immigration would not tip the economy out of balance for a time.
to be sure though such situations are not usually what is actually occurring during general immigration. Immigration usually rises when there is a demand for labor in a general geographical region. Even if the conclusions we draw in Esuric's op is correct, it does not conclusively mean that immigration of all kinds causes a detrimental effect on the economy. We are talking about a very specific scenario.
This is interesting.
Richard M. Ebeling, ed:Demand for commodities is not demand for labor. In Austrian translation: Changes in the demand for consumption goods is not accompanied by proportionate changes in the demand for labor. Rather, a decrease in present consumption demand, for instance, signifies an increase in savings which, in turn, gives strength to future consumption demand. The demand for labor does not simply mirror the decrease in present consumption demand but rather reflects the change in the preferred intertemporal pattern of consumption. Both labor and non-specific capital goods are reallocated away from late stages of production that were meeting demands for present consumption, which are now weakened, and into early stages of production so as to meet demands for future consumption, which are now strengthened. The market process that results in such a restructuring is guided by changes in the prices of consumption goods, capital goods in each of the stages of production, and labor.
From: http://www.auburn.edu/~garriro/b4mismac.htm
Wonder if it's linked to what Merlin said. Merlin, do you have any reading material regarding the convertability or substitution between labor and capital?
Well, basically that’s what he is saying: stop assuming that only capital is attracted by profit (which is the root of this). The factors of production are! And, ceteris paribus one will use those factors which’s price is still lower than the marginal productivity.
1) In ‘Austrian triangle’ terms, we assume just one holistic ‘factor of production’: the initial influx of cheap labor does not change time preferences at the beginning. It only lowers the costs of production of consumption goods. The increased profits will attract the factors of production and the supply of current goods shall increase. But an increase in the supply of current goods makes time preferences fall! So a larger part of production shall now saved into the higher stages. The structure of production shall be lengthened, not shortened!
The mistake of seeing immigration as shortening such a structure rests in stopping the analyses a step to early: if one stops at the increased profits to be had in making consumption goods, that it would seem that the factor shall flow to lower stages thus shortening the structure. But why stop there?
2) Allowing for two factors of production, instead of just one as we do above: entrepreneurs tend to reach a point where:
MPl1/MPk1 (lower stage)=MPl2/MPk2 (higher stage)=Pl/Pk
Now, an influx of unskilled labor enters the market, lowering Pl1. So, it would pay to increase the use of labor in the first stage, and decrease the use of capital, up to the point where MPl1/MPk1 again equals Pl/Pk. You see, as long as some labor can be substituted for some capital the reasoning holds a-priori.
Now, I cannot find materials regarding the substitution rate right now, but frankly it doesn’t matter that much for Austrians (as long as we agree that it exists to some extent), though it’s a central concepts in microeconomics.
And indeed, fishermen catch fish in both Japan and Madagascar, but those in Madagascar use almost only labor, while those in Japan much more capital. Here we have e simple example of substitution: the same products can be made with at least two combinations of capital and labor. Taking exception of a very, very few top-notch fields, this is always the case. Whatever one does, he can do it with both more capital/less labor and more labor/less capital.
Hence immigration, is itself, cannot be detrimental as long as the population level is still under-optimal.
@OP: It is my view that national borders are purely artificial and, therefore, ancillary to the economic problem of marginal productivity. What reason is there to believe that ingress or egress of immigrants is the largest, or even a significant, impact on productivity and not, say, shifting regulations, inflation and the other arbitrary acts of governments seeking to extract the largest possible pile of booty from the citizenry without triggering open revolt?
The more fundamental question is marginal productivity versus population. As more children are born and enter the workforce, do we expect economic growth or contraction? The Malthusian view is that population growth inevitably results in individual impoverishment and eventually leads to catastrophic economic and population collapse (triggered by war, famine, disease, etc.) followed by economic recovery and population balance. Some economists (ahem Steven Landsburg) imply that population increase always leads to economic growth, by appeals to history. But it is obvious that this cannot be true because the population could grow, in a relatively short period of time, to a number so large as to exceed the total available energy in the Earth environment. The Malthusian dogma has been generously refuted both by history and analytical critique. The problem is more complex than either view and I think marginal analysis is applicable.
Clayton -
I’m afraid that Malthus law is one of the few constants around the globe, from the beginning of time. Exceptions are rare, not the other way around.
But when it comes to immigration one is in the unusually safe position of not having to worry about Malthus: no one will ever emigrate to an overpopulated country, while those who do not want a better life (just have as many kids as they can, irrespective of that keeping them at an invariable standard of living) will likewise not bother to emigrate, being content with what they already have (with the important exception of people fleeing from a newly imposed tax: that would indeed be a problem fro the recepient country).
If we assume that immigrants come in with nothing but their shirts on their back, why should they increase the aggregate demand for consumers goods? Supply creates its own demand, so there is no reason for demand to increase until productivity is increased. I don't see why immigration necessitates the increase of the natural rate of interest. Where did you [Ensuric] get this from other then your own deductive reasoning?
Merlin:I’m afraid that Malthus law is one of the few constants around the globe, from the beginning of time. Exceptions are rare, not the other way around.
The issue is people take the isolated incidents to extremes, and equivocate generic population growth in impending doom. The Malthusian growth model, as is usually used on the left in fear of any kind of population growth, does not take into consideration markets and time. The Malthusian growth model has been one of the most abused models ever conceived in economics. It's point is entirely missed and people nearly always use it to demonstrate the possibility of otherwise impossible extremes.
[EDIT] I'm not disputing the law, just how people most commonly use it and/or interpreted it.
DD5:Where did you [Ensuric] get this from other then your own deductive reasoning?
If you read the OP he explains how he's coming to this conclusion. It does make sense to an extent as well when you don't consider what Merlin said.