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.
Esuric: 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).
That would apply if the population was over-optimal already. But in the case when population in sub-optimal, the marginal productivity of the extra worker is positive, i.e. he produces more than it takes to feed and clothe him. That is the very definition of the optimal level of population. So, i'm still at a loss to account for that.
Esuric:Why are the lower stages of production less skilled than the higher phases?
Normally capital goods tend to be more complex than consumption goods. And normally the more complex consumption goods grow, the more complex capital goods need become. Thus, the level of skill and capital needed to produce such complex machines tend to rise. But that is not an apodictically true statement, its would just seem to apply most of the time.
Esuric: This doesn't make any sense. The productivity of labor is a function of the sophistication and degree of capital per worker.
This doesn't make any sense. The productivity of labor is a function of the sophistication and degree of capital per worker.
That’s what I’m saying. In a laborer two number count: his price and his productivity, these are unrelated, as you point out. And every factor will be used to that proportion which equates his marginal productivity per dollar spend with that of all other factors.
Esuric: 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.
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.
I’m certainly no saying that capital is not needed. All of the contrary, my whole post rest of the assumption that labor can be substituted to capital to some extend, i.e. that the same job can be done with different combinations of labor and capital. So, of course the retailer needs durable goods, but it could replace some of that with labor, notwithstanding how costly might it seem to us. And its true that different phases require different kinds of capital goods, but given time and at a loss, capital goods can be converted into other goods better fitted for different jobs. If the difference between the MP/P ratios of labor and capital will be greater than the discounted conversion loses, people will hire more labor and sell off capital for conversion.
My point is that as lower phases goods tend to be somewhat less complex that their higher stages counterparts, one can substitute labor for capital more easily than the higher phases. That means that if labor becomes cheap, it will displace capital in these lower phases, not in the higher ones.
I don't know what you mean by "optimal population." I don't know if you're using some Malthusian model or what. The marginal productivity of the worker is positive when wages are too low. In such a condition, competition elevates real wages towards the productivity of labor (at the productivity of labor in equilibrium).
No. Complex capital goods aren't produced by engineers or people with MBA's; they are usually produced in factories with assembly lines. The more roundabout the process of production, the less labor is used at each stage of production, but this says nothing about the degree of intelligence or competence of laborers at various stages. Again, the complexity of tasks for the original means of production is not fixed at any phase of production. Mining iron or driving a freight truck is not a more difficult task then convincing someone to buy consumer good X, or managing a Wal Mart.
A massive influx of Albanians does not, a priori, mean that they will all work at Wal Mart or sell consumer goods. Many of them will work construction, in factories, mining raw materials, ect.
So, of course the retailer needs durable goods, but it could replace some of that with labor, notwithstanding how costly might it seem to us.
No. How does a transportation firm replace its freight trucks with laborers? The whole problem here, the source of your confusion, is that you're using a ridiculous production function: perfect substitute (A=aL + bK), where factor prices entirely determine the employment of inputs. So, for example, if labor is more efficient, at the margin, per dollar, then firms will replace capital with labor. But this production function is pure nonsense.
Again, it's not the substitution of labor for capital that's important, but rather the specialization of the tasks, i.e., the further division of labor and capital borught about by increased savings, and a more roundabout or longer structure of production.
I don't know, but I'm guessing that you read some De Soto and his "Ricardo Effect" has confused you.
Esuric:I don't know what you mean by "optimal population." I don't know if you're using some Malthusian model or what. The marginal productivity of the worker is positive when wages are too low. In such a condition, competition elevates real wages towards the productivity of labor (at the productivity of labor in equilibrium).
I use ‘optimal population’ in the Misesian sense: a level of population such that the firs guy to be added has a negative marginal productivity: its just a special case of the general law of diminishing returns. It is a very important concept in Human Action.
So, when the populating is still sub-optimal the immigrant shall produce more than he consumes, adding the total wealth. No reorientation of production toward lower-order goods need ensue. When population levels are over-optimal than the extra worker indeed consumes more that he produces, and the structure of production gets re-oriented towards lower order goods. Than and only than, does emigration raise time preferences. But so would every birth. Practically the scenario is not of tremendous interests as a country cannot remain overpopulated for long: some old school Malthusian check will bring it back to normal. I suspect Yugoslavia went through that due to hyperinflation eating capital, or Rwanda.
What I suspect Bohm’s idea was, was that a rise in time preferences reorients production away form capital and toward more labor.
Esuric: No. Complex capital goods aren't produced by engineers or people with MBA's; they are usually produced in factories with assembly lines. The more roundabout the process of production, the less labor is used at each stage of production, but this says nothing about the degree of intelligence or competence of laborers at various stages. Again, the complexity of tasks for the original means of production is not fixed at any phase of production. Mining iron or driving a freight truck is not a more difficult task then convincing someone to buy consumer good X, or managing a Wal Mart. A massive influx of Albanians does not, a priori, mean that they will all work at Wal Mart or sell consumer goods. Many of them will work construction, in factories, mining raw materials, ect.
You are right and I spoke too soon. There is no clear connection between the order of goods and complexity. But I indulged in that discussion to no avail, for it doesn’t change almost anything: one just needs to pinpoint the particular industries where the immigrants MP/P ratio is higher, and begin the analysis form there. It is the very same thing in the end.
Esuric: No. How does a transportation firm replace its freight trucks with laborers? The whole problem here, the source of your confusion, is that you're using a ridiculous production function: perfect substitute (A=aL + bK), where factor prices entirely determine the employment of inputs. So, for example, if labor is more efficient, at the margin, per dollar, then firms will replace capital with labor. But this production function is pure nonsense. Again, it's not the substitution of labor for capital that's important, but rather the specialization of the tasks, i.e., the further division of labor and capital borught about by increased savings, and a more roundabout or longer structure of production. I don't know, but I'm guessing that you read some De Soto and his "Ricardo Effect" has confused you.
No I’ve never read that.
Now, I mentioned that I do not really believe that capital trades marginally with labor. That is indeed absurd. On the other hand assuming that every piece of machine can only work in one given industry and cannot be scrapped into something else (not to mention being re-engineered) and that every laborer cannot but be employed in one fixed position for the rest of his life, would be just as foolish.
So, I believe we can agree that, in practical terms, some capital can be traded for some labor, some of the time. So, the analysis will only be graded, no longer marginal. In some industries substitution is easier, in other more difficult. In toto, less factors will be redeployed than those that would have should substitution be marginal, but factor will move nevertheless.
Those immigrants that just cannot be employed because the factors being employed right now in the fields where immigrants sport a high MP/P ratio, are totally unmovable for some reason, will either have to specialize into something else (increase their MP or lower their P into other fields), or remain unemployed. But again, I believe the general idea is by and large correct.
Thurs. 10/04/29 08:48 EDT.post #89 Esuric:A higher population leads to an increased demand for final goods and services, which increases prices (relative or absolute terms) in the lower phases of production. This increases the interest rate (an increased demand for final goods and services means a reduced savings rate)But only if the immigrant's savings rate is less than the average savings rate, surely?
Esuric:A higher population leads to an increased demand for final goods and services, which increases prices (relative or absolute terms) in the lower phases of production. This increases the interest rate (an increased demand for final goods and services means a reduced savings rate)
If the immigrant's savings rate is equal to or greater than the average savings rate, then the increase in demand for final goods and services the immigrant causes does not mean a reduced savings rate.Or have I missed something?
Or have I missed something?
No, but here's the problem: Both Hayek and Bohm-Bawerk say that an increased supply of labor elevates interest rates, and the Neoclassical school holds this position as well. More than that, it's empirically validated.
Thurs. 10/04/29 20:44 EDT.post #91 Esuric:More than that, it's empirically validated.Assuming that's true, and assuming my previous post is not erroneous, then I conclude that "an increased demand for final goods and services means a reduced savings rate" is not always true, and hence cannot be the explanation for the phenomenon.I'm not trying to be pompous here; if that wasn't clear, I'll reword it.Did it make sense to you? If yes, do you agree?
Esuric:More than that, it's empirically validated.
Assuming that's true, and assuming my previous post is not erroneous, then I conclude that "an increased demand for final goods and services means a reduced savings rate" is not always true, and hence cannot be the explanation for the phenomenon.
A higher consumption rate means a lower savings rate, by definition. But consumption and savings can both rise in absolute terms as the economy grows (the result of completing longer and more capital intensive production methods). So if the consumption rate rises from 50-55%, the savings rate must decline to 45%.
@ Caley
Ceteris paribus, immigration leads to an increase in GDP and a decrease in GDP per capita in both the short and long term.
This is only true if the country is optimally or over populated. If it is underpopulated the marginal immigrant will raise the average physical product.
Or have I missed something? No, but here's the problem: Both Hayek and Bohm-Bawerk say that an increased supply of labor elevates interest rates, and the Neoclassical school holds this position as well. More than that, it's empirically validated.
I think this just follows from the fact that factors of production are more productive when a greater amount of their complementary factors are employed.
Esuric:Both Hayek and Bohm-Bawerk say that an increased supply of labor elevates interest rates, and the Neoclassical school holds this position as well.
You got me quite interested in this proposition. If you can, will you please provide some link? Thanks.
Ah, and here we stumble on the typical issue we just take with empirical data: how do we know that what has been empirically validated isn’t the “increased time preferences bring more labor in” link, instead of the other way around? For the former seems perfectly legit to me.