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.
filc: It does make sense to an extent as well when you don't consider what Merlin said.
It does make sense to an extent as well when you don't consider what Merlin said.
?? It seems that Merlin agrees with what I said so I don't know what you're talking about.
filc: High time preference(Savings)\
High time preference(Savings)\
You have it backwards. High time preference means less savings.
DD5:You have it backwards. High time preference means less savings.
Reading the whole thread 4tw
Filc:Err your right, high time preference is intensified desire for immediate consumption.
DD5:?? It seems that Merlin agrees with what I said so I don't know what you're talking about.
I think your confused.
Assume immigrants arrive with nothing but shirts on their backs, and a time-preference equal to that of the population they are joining. (and also that there are no changes in imports/exports, etc) Then we would expect the following:
There would be no change in the natural interest rate at any time in this process. The return-on-investment in consumer goods industries would increase relative to higher-order industries, but this would be only temporary, and driven by a change in entrepreneurial profits, not a change in time-preferences.
Does this help?
Government Explained 2: The Special Piece of Paper
Law without Government
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
Here's Bohm-Bawerk:
In a community interest will be high in proportion as the national subsistence fund is low, as the number of laborers employed by the same is great, and as the surplus of returns connected with any further extension of the production period is high. Conversely, interest will be low the greater the subsistence fund, the fewer the laborers, and the quicker the fall of the surplus returns. Positive Theory of Capital, pp. 401.
Hayek holds this position as well, though I can't find a specific quote at this very moment. Either way, an outward shift in the supply of labor will elevate the rate of interest. This fact isn't doubted by anyone.
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.
It would, at first, increase the use of labor and capital in the lower phase. The lower phase would be the most profitable phase (money receipts), which, in turn, allows it to draw specialized/fixed capital away from the higher orders. Again, the lower phase may employ labor at a higher rate relative to capital, but it must, as a rule, draw capital away from the higher phase(s). I'm saying the same thing as Professor Ebeling:
Richard M. Ebeling, ed: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.
Except he's talking about a lower rate of interest, and I'm talking about an elevated rate of interest.
Esuric:Mass immigration is often considered to be a major cause of U.S. economic growth.
I think this is because economic growth is measured by GDP. Immigration increases both consumption and government spending which leads to higher GDP figures.
Esuric:The neoclassical conclusion (immigration causes long term growth) only holds if we assume capital to be a homogenous blob which is perfectly substitutable.
That depends on how you measure economic growth. I think it may hold even if you don't make the neoclassical assumption. If you measure it as some sort of total physical product of consumer goods, the increase of productive immigrants will always lead to economic growth.
Esuric:My reasoning must be faulty.
I think it is pretty good as far as it goes. I just think you've just poorly defined the problem/question.
Merlin: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
People will migrate from a more overpopulated country to a less overpopulated country if that is the best opportunity available to them.
Merlin:Hence immigration, is itself, cannot be detrimental as long as the population level is still under-optimal.
Word. As long as you mean 'detrimental' to the average physical product, and we are assuming that the immigrants are productive and not parasitcal. It's nice to see that someone else gets the Malthusian point. You might also want to look up, out of interest, what Mises had to say about Malthus' population law in HA and Theory and History.
I'm saying that it would lead to a shorter capital structure, and possibly a recession.
You may be right. Here was my train of thought:
It increases total output, and in the long-run it will elevate real wages back to their previous position, and then some (possibly). The reasoning here, and again, I'm a little rusty when it comes to intermediate macro, is that it elevates the marginal productivity of capital, and therefore investment. And since real wages are a function of capital per worker (which is also a function of savings), then it will increase the productivity of labor and therefore real wages (in the longer-run).
Mathematically: Q=f(L,K) => Q=3L^.5K^.5 => L=4, K=9 => Q=3*2*3=18 => MPL=1.5*K^.5/L^.5 => MPL= 2.25 => MPK= 1.5*L^.5/K^.5 => MPK= 1. (MPL is the marginal productivity of labor; MPK is the marginal productivity of capital, and Q is total output)
L=9, K=9 (increase the labor supply) => Q=3*3*3= 27 => MPL= 1.5, MPK= 1.5 (the marginal product of labor falls but the marginal product of capital rises which increases investment). But, as you pointed out, without additional savings, the investments cannot come to fruition. I think you've answered my question.
I knew I was making some kind of ridiculous mistake, but couldn't put my finger on it. Thank you.
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@Esuric (I still can’t handle quoting in this fancy new interface)
Well, lets check those ideas step by step.
a) a low standard of living will mean high time preferences: not certain. What you could say, is that a lowering of the standard of living will raise time preferences. As the supply of current goods falls, people need a higher return to save a portion of the diminished fund. So, that would be true most of the time (but nor apodictically true) only when applied to changes, not absolute standards (the opposite is always true, an increase in time preferences always lowers the standard of living). How can we hold that lower standards bring higher time preferences when we all know how rich yanks fare in comparison to poor Chinese when it comes to time preferences.
b) the more laborers, the higher the time preferences: I’m at a total loss to account for this. It would seem to make no sense at all. What causal relationship could there be? I discuss this below. But right now I want to say that again the opposite relation is always true: an increase of time preferences mean that labor will replace capital throughout the economy. But it is unwise to work out form this true proposition, the idea that the opposite holds. It doesn’t.
c) as long as the “marginal marginal productivity” is positive, time preferences will rise: this is subtle but true. When the added product form one more unit of the factors of production is still increasing, people know that future production shall increase faster than it has up to now, and hence tend to save less, while when the marginal product begins to descent (but is still positive) they know that the future product will increase slower, hence tend to save more.
Now, I certainly cannot account for Bohm’s b point, so let’s go over the scenario again, expanding on Trulib’s post.
1) 10’000 Albanians emigrate to Switzerland. Right now, no one’s time preferences change, and the Swiss structure of production is yet unchanged.
2) These guys are ready to work for much less than Swiss workers do, yet are poorly trained. This makes them employable at a profit in the simplest, lower stages of production. As they displace Swiss workers in these fields profits in these stages soar.
4) assume a natural interest rate (prior to the infusion) of 5%. Profits throughout the triangle would tend to 5%. Now, after the drop in costs, profits in the lower phases goes up to, say, 10%.
5) Attracted by the profit differential, more entrepreneurs will move the factors of production (‘capital” but not in the economic sense of machines!) in. The movement will continue, reducing the marginal rate of profit in the lower phases and increasing that in the higher industries, until both rates equate at, let say, 8%. In order to free the factors needed, some of the higher-order goods had to be abandoned altogether. Now we have a shorter, stockier triangle. It does indeed seem that the interest rate is now 8%.
6) mistake. The time preferences of the Swiss still commands an interest rate of 5% and production didn’t change anything here. So, people are willing to accept 5% as their lowermost return. But return in our production triangle is 8%. So, by loaning out one’s fund one gets 5%, while by reinvesting profits one gets 8%! It is clear that more factors will be (re)invested, the triangle will be heightened until profit through-and-though go back to 5%, whereas the infusion of ‘capital’ ceases.
7) after all is said and done, we have a higher and wider triangle. A real improvement of the standard of living has ensued. Time preferences, as such, do not change.
Now, I said that factors move into the lower stages, and than they are reinvested into the higher stages. The question here is: which factors?
First of all, note that a triangle analysis does not include a differentiation of factors at all! It just assumes a holistic ‘factor’ because as far as time preferences go, it does not mater which factor moves. In such analyses when you see “capital moves” you should read “labor/capital/both move”.
To see which factor moves one needs further complications. It shall always be those factor which’s productivity per franc (we’re in Switzerland!)spend is higher that shall be employed. How does that fit into our Swiss scenario?
Which factor move into the lower stages? Well, we know that the price of Albanian workers is lower than that of Swiss workers, but their productivity is also lower. If the MP/P ratio is higher, Albanian workers will be used into the lower stages until their MP/P ratio equates that of both capital and Swiss workers.
As a matter of practicality, the lower the stage, and the simpler the production, the smaller the productivity differential among unskilled and skilled labor (it doesn’t take much training to tend a bar). Thus, the lower the phase the more likely are Albanian workers to displace Swiss. The same holds for capital: the simpler the production, the easier it is for man to do the job of machine (again, one could serve sushi by either serving chain or waiter). So the lower the phase the more capital shall be displaced by cheap labor.
Where do these displaced factors, Swiss workers and capital, go? Simple, these are the factors that are invested back into the triangle, stocking it up. So you see that within the holistic “the factors move into the low phases and then throughout the triangle” we have “cheap labor and some other factors move into the lower stages, while skilled labor, capital and some cheap labor move into the higher stages”.
This is important. What has happened here is that the factors have been distributed according to their productivity (not productivity per dollar spent): the more productive ones (machines and skilled labor) tend to ‘rise to the top’ of the triangle, while those less productive (the first generation of Albanian workers, as the second will certainly rule the sheep-like Swiss :) tend to ‘sink’ to the bottom. And indeed that is what one should expect: the higher the stages of production, the more complicated the job, the less useful do low productivity factors become.
So, to sum it all up: immigration does not change time preferences but yields with an increased standard of living. Immigration frees capital for use in higher stages, while itself flooding lower ones. As long as the marginal product of the extra immigrant is positive (population is sub-optimal) this shall always happen. The analysis would seem to be apodictically true.
Merlin:5) Attracted by the profit differential, more entrepreneurs will move the factors of production (‘capital” but not in the economic sense of machines!) in. The movement will continue, reducing the marginal rate of profit in the lower phases and increasing that in the higher industries, until both rates equate at, let say, 8%. In order to free the factors needed, some of the higher-order goods had to be abandoned altogether. Now we have a shorter, stockier triangle. It does indeed seem that the interest rate is now 8%.
What about the situation that may occur when capital(Funds) are redirected from higher phases into lower phases, causing the higher phases capital goods(Complex Machines(Factories)) to deteriorate due to lack of things like maintenance ect..... As such causing a higher degree of capital consumption in higher phases?
Merlin:Where do these displaced factors, Swiss workers and capital, go? Simple, these are the factors that are invested back into the triangle, stocking it up. So you see that within the holistic “the factors move into the low phases and then throughout the triangle” we have “cheap labor and some other factors move into the lower stages, while skilled labor, capital and some cheap labor move into the higher stages”.
Ahh this is interesting, and it would seem to have addressed my above question. This answer actually makes sense when you consider that desoto pic I posted above.
Merlin, great posts dude.
First, by your own standards, an increase in immigration would only lead to a decrease in GDP per capita if you assume unchanging rates of labour force participation.
Second, what about all the other effects of immigration? If immigration leads to an increase in technological development or to a favourable change in culture it may lead to increases in long term GDP.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
There's an inverse relationship between profits and wages (if we don't consider technological innovation, new capital combinations, ect). I'll give you a full explanation later, but simply put, a shock to the labor force or population requires relatively shorter, more direct methods of production, in order to feed and clothe that portion of society (unless this group has a very low time preference). Longer methods of production are only profitable if there is a low aggregate demand for final goods and services, and enough resources saved to actually complete them (I'm essentially saying the same thing twice).
2) These guys are ready to work for much less than Swiss workers do, yet are poorly trained. This makes them employable at a profit in the simplest, lower stages of production.
Why are the lower stages of production less skilled than the higher phases? The structure of production is unlike the corporate structure where the higher you go, the more advanced your degree needs to be. Is a miner (higher phase) more skilled than a salesperson (lower phase)?
Attracted by the profit differential, more entrepreneurs will move the factors of production (‘capital” but not in the economic sense of machines!)
Yes in the economic sense. Hayek knows that money =/= capital (and he talks about pure barter in much of his work).
Well, we know that the price of Albanian workers is lower than that of Swiss workers, but their productivity is also lower. If the MP/P ratio is higher, Albanian workers will be used into the lower stages until their MP/P ratio equates that of both capital and Swiss workers.
This doesn't make any sense. The productivity of labor is a function of the sophistication and degree of capital per worker.
The same holds for capital: the simpler the production, the easier it is for man to do the job of machine (again, one could serve sushi by either serving chain or waiter). So the lower the phase the more capital shall be displaced by cheap labor.
Why isn't capital needed in the lower phases of production? The wholesaler and the transportation firm need heavy and durable capital goods; retail needs capital goods as well. The various phases require different kinds of capital goods, and they compete for specialized capital.