Economics Questions

Re: Immigration and Growth (I'm confused)

Merlin — Fri, 30 Apr 2010 07:25:03 GMT

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.

Esuric:
More than that, it's empirically validated.

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.

Re: Immigration and Growth (I'm confused)

Stephen — Fri, 30 Apr 2010 06:30:47 GMT

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.

Re: Immigration and Growth (I'm confused)

Stephen — Fri, 30 Apr 2010 06:20:43 GMT

@ 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.

Re: Immigration and Growth (I'm confused)

Esuric — Fri, 30 Apr 2010 02:02:26 GMT

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%.

Re: Immigration and Growth (I'm confused)

MMMark — Fri, 30 Apr 2010 01:45:36 GMT

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?

Re: Immigration and Growth (I'm confused)

Esuric — Thu, 29 Apr 2010 21:55:26 GMT

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.

Re: Immigration and Growth (I'm confused)

MMMark — Thu, 29 Apr 2010 13:48:33 GMT

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?

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?

Re: Immigration and Growth (I'm confused)

Merlin — Thu, 29 Apr 2010 11:45:57 GMT

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.

Re: Immigration and Growth (I'm confused)

Esuric — Thu, 29 Apr 2010 08:54:15 GMT

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.

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).

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.

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.

Re: Immigration and Growth (I'm confused)

Merlin — Thu, 29 Apr 2010 08:07:06 GMT

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.

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.

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.

Re: Immigration and Growth (I'm confused)

Esuric — Thu, 29 Apr 2010 04:29:53 GMT

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.

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.

Re: Immigration and Growth (I'm confused)

hayekianxyz — Wed, 28 Apr 2010 21:22:57 GMT

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.

Re: Immigration and Growth (I'm confused)

filc — Wed, 28 Apr 2010 18:34:47 GMT

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.

Re: Immigration and Growth (I'm confused)

Merlin — Wed, 28 Apr 2010 15:13:26 GMT

@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.

Re: Immigration and Growth (I'm confused)

nirgrahamUK — Wed, 28 Apr 2010 08:54:45 GMT

Reisman

7. Free Immigration

It is necessary to address the issue of free immigration,

which is closely related to the subject of population

growth. This section will show that free immigration is

in the long-run material self-interest of the citizens of a

capitalist country.

The words capitalist country must be stressed. To the

extent that a country has a welfare system, tax-supported

hospitals and schools, public housing, and so on, and the

mmigrants come to take advantage of these offerings,

he effect is a corresponding loss to the present inhabi-

ants of the country, who have to pay the costs. The above

proposition applies to a country insofar as it is without

hese and other welfare-state-type programs—a country

n which the immigrants must be self-supporting and

hemselves pay for whatever they receive. By the same

oken, the freedom of a country implies the absence of

economic disabilities imposed on immigrants: there are

no minimum-wage laws or prounion legislation to pre-

vent them from gaining employment, and no legal obsta-

cles to their starting businesses, buying land, and so on.

Under such conditions, the freedom of immigration

must ultimately prove economically beneficial to every-

one. Because among the immigrants and their descen-

dants will be individuals of great talent, capable of achieving

great things in a free country, but who would be stifled

and be able to contribute little or nothing in the lands of

heir origin. In effect, the freedom of immigration into a

free country from countries that are less free or unfree is

a vital means of unlocking human talent and increasing

he gains from the pyramid of ability.

As a simple example, one should consider what would

have been the effect on Andrew Carnegie, and not just

on the American but on the world steel industry, if he had

been prevented from immigrating to the United States

and confined to the less free environment of Scotland and

Great Britain. One should consider what would have

been the effect on the development of the helicopter if

Sikorsky had been prevented from immigrating to the

United States from Russia. Is it likely that the Russians

would have seen the value of his ideas before they had

been proved by actual repeated demonstration in the

United States?

Indeed, we should consider the effects if the ancestors

of any American industrial innovator had had to remain

in their native lands, and thus that person have been born

and spent his life in a country like Italy, Poland, Russia,

or Germany, or even France or Great Britain, instead of

the United States. Probably most of the innovators would

have been stifled or at least significantly held back.

The historical advantage noted in the previous sec-

tion, of the people of the United States having access to

more business talent than the people of any European

country, was due to America’s policy of greater eco-

nomic freedom in general combined with her policy of

free immigration in particular. The latter gave the United

States a larger population from which to draw such talent,

while the former ensured that in the larger population a

greater frequency of such talent would be manifested,

because freedom is the essential condition for the devel-

opment and flowering of such talent. The combination

of free immigration and general economic freedom thus

results both in more people and, at the same time, as an

inextricable part of the same process, a rate of economic

progress that is not only rapid, but also further acceler-

ated by virtue of the immigration. Simply put, free im-

migration into a free country accelerates economic progress,

because talent requires freedom in order to flourish. Free

immigration into a free country brings talent to freedom,

and so enables more of it to develop and contribute to

economic progress. The acceleration of economic prog-

ress it achieves ultimately far outstrips whatever short-

run problems may accompany an increase in immigration.

Refutation of the Arguments Against

Free Immigration

It is necessary to refute the arguments advanced against

the freedom of immigration and the population growth it

causes.

It is claimed that the larger population resulting from

free immigration creates the need to resort to inferior

grades of land and mineral deposits and is accompanied

by diminishing returns. This argument has already been

answered both in our discussions of population growth

and in our discussion of private ownership of land.

115

Here it is only necessary to add a further point which

applies particularly when the population growth results

from immigration. Namely, that the immigration can be

accompanied by the importation of additional raw mate-

rials along with the additional people.

Imagine, for example, that workers of the British steel

industry immigrated to the United States and became

steel workers here. This would not mean that the iron ore

they required must be taken from the Mesabi range in

Minnesota. Very probably, it would simply mean that

iron ore that used to go from Labrador to Britain will now

go from Labrador to the United States.

This example points up the fact that those who fear

population growth are thinking in terms of a non-divi-

sion-of-labor society, in which people work the land and

in which more people in a territory means more working

of the land in that territory. Actually, immigration into

towns and cities has no necessary connection with the

extent to which the land and mineral deposits of the

surrounding territory must be worked, because the towns

and cities can draw their raw materials from anywhere in

the world. The notion that more people in a country must

mean a higher ratio of labor to land in that country, and

thus diminishing returns, simply does not apply in a

division-of-labor society.

* * *

It is also claimed that a larger population must reduce

the productivity of labor because it means a higher ratio

of labor to capital goods, or, what is the same thing, less

capital goods per worker. Those who advance this argu-

ment believe that population growth and increases in the

supply of capital goods are independent processes. Cap-

ital accumulation, they believe, is determined simply by

saving, which allegedly has no connection with the growth

of population.

The fact is that a larger number of people working and

producing is itself the cause of a larger supply of capital

goods. A larger number of people working and producing

in conjunction even with an unchanged supply of capital

goods results in an increase in total production. This no

one can deny. It is only necessary to realize that what is

produced in an economy is not only consumers’ goods,

but also capital goods. Labor and existing capital goods

are used to produce both consumers’ goods and capital

goods, and, as we shall see in later chapters, they do so

in accordance with the relative demands for the two types

of goods.

The implication of this is that if there is any single,

one-time increase in the number of people working and

producing, it automatically tends to be followed by a

growth in the supply of capital goods per worker and thus

in output per worker at least back to their original levels.

This is because the larger number of workers produces

more capital goods with which that same larger number

of workers then works in the next period, and with the

aid of which it enjoys a higher productivity. The further

effect is another increase in production in the following

period—both of consumers’ goods and of capital goods,

until the original levels of capital goods per worker and

the productivity of labor are equalled and, indeed, sur-

passed.

Thus, it should be clear that no reasonable case exists

against any single dose of immigration or population

increase based on the argument that it reduces the amount

of capital goods per worker. For the additional labor itself

results in progressively more capital goods.

In the case of a continuous increase in the supply of

labor, it could be argued that just as the first group of

additional workers brings about an increase in the supply

of capital goods, a second group arrives on the scene, so

that the ratio of capital goods to labor does not increase

and may even fall further. Yet even this, more sophisti-

cated version of the reduced-capital-per-worker argu-

ment against immigration and population growth cannot

stand. This is because if the productivity of labor were

threatened by a relative excess of labor and a relative

deficiency of capital goods, the effect would be a drop in

the demand for labor, and thus in the wage earners’

demand for consumers’ goods, and a rise in the demand

for capital goods. The effect of this, in turn, would be a

higher relative production of capital goods and a lower

relative production of consumers’ goods. The larger num-

ber of workers of each year would find sufficient addi-

tional capital goods available because they would be

produced by a larger proportion of the labor and capital

goods of each year, as well as by a growing volume of

labor and capital goods from year to year.

And, as time went on, the positive effects of the

unlocking of more human talent would occur. The effect

of this would be an increase in the output of capital goods

(and consumers’ goods) that can be obtained from any

given quantity of labor working in conjunction with any

given quantity of capital goods. Even if it occurred on a

strictly delimited, once-and-for-all basis, the effect of

this in turn would be a more rapid rate of increase in the

production both of capital goods and consumers’ goods,

with each year’s larger output of capital goods serving as

the base for the following year’s further increase in the

production both of capital goods and of consumers’ goods.

117

Thus, a capitalist economy with the freedom of im-

migration turns out in the long run to have a more rapid

rate of capital accumulation than one without it. For it

has both a larger relative production of capital goods and

uses capital goods more efficiently in the further produc-

tion of capital goods than one without the freedom of

immigration. The effect of this more rapid rate of capital

accumulation is a correspondingly faster rate of eco-

nomic progress, which soon makes up for the reduction

in the proportion of output going to the consumption of

wage earners.

If one wants to form a more precise, quantitative

estimate of the relationships involved, let us assume that

free immigration, together with any increase in popula-

tion coming from those already present, results in an

overall rate of population growth of 3 percent per year.

This is a rate last seen in the United States in colonial

times. It would be sufficient to double the population

every twenty-five years.

In order for a 3 percent larger number of workers each

year to be as well equipped as the workers would be

without population increase, something on the order

perhaps of an additional 9 to 12 percent of national

income—more accurately, current net output—would

need to be devoted to saving and capital accumulation.

This figure is generous. I arrive at it on the basis of the

fact that in the nineteenth century and the first few

decades of the twentieth century, the period in which the

American economy was relatively free, the long-term

historical ratio of reproducible capital to national income

was about three or four to one.

118

Thus, a 3 percent

increase in capital to accompany the 3 percent increase

in the number of workers and so maintain a three or four

to one ratio of capital to output per worker, would repre-

sent no more than something on the order of 9 to 12

percent of national income in conditions in which the

degree of capital intensiveness was substantially higher

than it is today.

Having to obtain this 9 to 12 percent of national

income from the share of national income previously

going to wage earners, would represent something on the

order of a one-time reduction in wages of about 13 to 17

percent, if, as is typical, wages initially constitute about

70 percent of national income. This magnitude of reduc-

tion in wages, however, greatly overstates the magnitude

that would actually follow the establishment of free

immigration. This is because it is predicated on going

from zero population increase to an annual rate of 3

percent increase. In reality, the effect would be more

likely to be to go from a 1.5 percent annual increase

without freedom of immigration to perhaps a 3 percent

annual increase with it. The additional capital required

would thus actually equal only 4.5 to 6 percent of national

income, rather than 9 to 12 percent; and the one-time

wage reduction would be on the order of 6.5 to 8.5

percent rather than 13 to 17 percent.

If the freedom of immigration were introduced fol-

lowing the establishment of greater economic freedom

in other respects, this short-run negative effect would

probably go largely unperceived, since it would be more

than offset by other, positive developments. But, in any

case, if the effect of the freedom of immigration and the

pool of talent it unlocks is to enable the productivity of

labor to increase by just an additional 1 percent a year,

then, as soon as this happens, within seven to nine years

the initial loss is made good and thereafter the process

results only in gains.

results only in gains.7. Free Immigration

It is necessary to address the issue of free immigration,

which is closely related to the subject of population

growth. This section will show that free immigration is

in the long-run material self-interest of the citizens of a

capitalist country.

The words capitalist country must be stressed. To the

extent that a country has a welfare system, tax-supported

hospitals and schools, public housing, and so on, and the

mmigrants come to take advantage of these offerings,

he effect is a corresponding loss to the present inhabi-

ants of the country, who have to pay the costs. The above

proposition applies to a country insofar as it is without

hese and other welfare-state-type programs—a country

n which the immigrants must be self-supporting and

hemselves pay for whatever they receive. By the same

oken, the freedom of a country implies the absence of

economic disabilities imposed on immigrants: there are

no minimum-wage laws or prounion legislation to pre-

vent them from gaining employment, and no legal obsta-

cles to their starting businesses, buying land, and so on.

Under such conditions, the freedom of immigration

must ultimately prove economically beneficial to every-

one. Because among the immigrants and their descen-

dants will be individuals of great talent, capable of achieving

great things in a free country, but who would be stifled

and be able to contribute little or nothing in the lands of

heir origin. In effect, the freedom of immigration into a

free country from countries that are less free or unfree is

a vital means of unlocking human talent and increasing

he gains from the pyramid of ability.

As a simple example, one should consider what would

have been the effect on Andrew Carnegie, and not just

on the American but on the world steel industry, if he had

been prevented from immigrating to the United States

and confined to the less free environment of Scotland and

Great Britain. One should consider what would have

been the effect on the development of the helicopter if

Sikorsky had been prevented from immigrating to the

United States from Russia. Is it likely that the Russians

would have seen the value of his ideas before they had

been proved by actual repeated demonstration in the

United States?

Indeed, we should consider the effects if the ancestors

of any American industrial innovator had had to remain

in their native lands, and thus that person have been born

and spent his life in a country like Italy, Poland, Russia,

or Germany, or even France or Great Britain, instead of

the United States. Probably most of the innovators would

have been stifled or at least significantly held back.

The historical advantage noted in the previous sec-

tion, of the people of the United States having access to

more business talent than the people of any European

country, was due to America’s policy of greater eco-

nomic freedom in general combined with her policy of

free immigration in particular. The latter gave the United

States a larger population from which to draw such talent,

while the former ensured that in the larger population a

greater frequency of such talent would be manifested,

because freedom is the essential condition for the devel-

opment and flowering of such talent. The combination

of free immigration and general economic freedom thus

results both in more people and, at the same time, as an

inextricable part of the same process, a rate of economic

progress that is not only rapid, but also further acceler-

ated by virtue of the immigration. Simply put, free im-

migration into a free country accelerates economic progress,

because talent requires freedom in order to flourish. Free

immigration into a free country brings talent to freedom,

and so enables more of it to develop and contribute to

economic progress. The acceleration of economic prog-

ress it achieves ultimately far outstrips whatever short-

run problems may accompany an increase in immigration.

Refutation of the Arguments Against

Free Immigration

It is necessary to refute the arguments advanced against

the freedom of immigration and the population growth it

causes.

It is claimed that the larger population resulting from

free immigration creates the need to resort to inferior

grades of land and mineral deposits and is accompanied

by diminishing returns. This argument has already been

answered both in our discussions of population growth

and in our discussion of private ownership of land.

115

Here it is only necessary to add a further point which

applies particularly when the population growth results

from immigration. Namely, that the immigration can be

accompanied by the importation of additional raw mate-

rials along with the additional people.

Imagine, for example, that workers of the British steel

industry immigrated to the United States and became

steel workers here. This would not mean that the iron ore

they required must be taken from the Mesabi range in

Minnesota. Very probably, it would simply mean that

iron ore that used to go from Labrador to Britain will now

go from Labrador to the United States.

This example points up the fact that those who fear

population growth are thinking in terms of a non-divi-

sion-of-labor society, in which people work the land and

in which more people in a territory means more working

of the land in that territory. Actually, immigration into

towns and cities has no necessary connection with the

extent to which the land and mineral deposits of the

surrounding territory must be worked, because the towns

and cities can draw their raw materials from anywhere in

the world. The notion that more people in a country must

mean a higher ratio of labor to land in that country, and

thus diminishing returns, simply does not apply in a

division-of-labor society.

* * *

It is also claimed that a larger population must reduce

the productivity of labor because it means a higher ratio

of labor to capital goods, or, what is the same thing, less

capital goods per worker. Those who advance this argu-

ment believe that population growth and increases in the

supply of capital goods are independent processes. Cap-

ital accumulation, they believe, is determined simply by

saving, which allegedly has no connection with the growth

of population.

The fact is that a larger number of people working and

producing is itself the cause of a larger supply of capital

goods. A larger number of people working and producing

in conjunction even with an unchanged supply of capital

goods results in an increase in total production. This no

one can deny. It is only necessary to realize that what is

produced in an economy is not only consumers’ goods,

but also capital goods. Labor and existing capital goods

are used to produce both consumers’ goods and capital

goods, and, as we shall see in later chapters, they do so

in accordance with the relative demands for the two types

of goods.

The implication of this is that if there is any single,

one-time increase in the number of people working and

producing, it automatically tends to be followed by a

growth in the supply of capital goods per worker and thus

in output per worker at least back to their original levels.

This is because the larger number of workers produces

more capital goods with which that same larger number

of workers then works in the next period, and with the

aid of which it enjoys a higher productivity. The further

effect is another increase in production in the following

period—both of consumers’ goods and of capital goods,

until the original levels of capital goods per worker and

the productivity of labor are equalled and, indeed, sur-

passed.

Thus, it should be clear that no reasonable case exists

against any single dose of immigration or population

increase based on the argument that it reduces the amount

of capital goods per worker. For the additional labor itself

results in progressively more capital goods.

In the case of a continuous increase in the supply of

labor, it could be argued that just as the first group of

additional workers brings about an increase in the supply

of capital goods, a second group arrives on the scene, so

that the ratio of capital goods to labor does not increase

and may even fall further. Yet even this, more sophisti-

cated version of the reduced-capital-per-worker argu-

ment against immigration and population growth cannot

stand. This is because if the productivity of labor were

threatened by a relative excess of labor and a relative

deficiency of capital goods, the effect would be a drop in

the demand for labor, and thus in the wage earners’

demand for consumers’ goods, and a rise in the demand

for capital goods. The effect of this, in turn, would be a

higher relative production of capital goods and a lower

relative production of consumers’ goods. The larger num-

ber of workers of each year would find sufficient addi-

tional capital goods available because they would be

produced by a larger proportion of the labor and capital

goods of each year, as well as by a growing volume of

labor and capital goods from year to year.

And, as time went on, the positive effects of the

unlocking of more human talent would occur. The effect

of this would be an increase in the output of capital goods

(and consumers’ goods) that can be obtained from any

given quantity of labor working in conjunction with any

given quantity of capital goods. Even if it occurred on a

strictly delimited, once-and-for-all basis, the effect of

this in turn would be a more rapid rate of increase in the

production both of capital goods and consumers’ goods,

with each year’s larger output of capital goods serving as

the base for the following year’s further increase in the

production both of capital goods and of consumers’ goods.

117

Thus, a capitalist economy with the freedom of im-

migration turns out in the long run to have a more rapid

rate of capital accumulation than one without it. For it

has both a larger relative production of capital goods and

uses capital goods more efficiently in the further produc-

tion of capital goods than one without the freedom of

immigration. The effect of this more rapid rate of capital

accumulation is a correspondingly faster rate of eco-

nomic progress, which soon makes up for the reduction

in the proportion of output going to the consumption of

wage earners.

If one wants to form a more precise, quantitative

estimate of the relationships involved, let us assume that

free immigration, together with any increase in popula-

tion coming from those already present, results in an

overall rate of population growth of 3 percent per year.

This is a rate last seen in the United States in colonial

times. It would be sufficient to double the population

every twenty-five years.

In order for a 3 percent larger number of workers each

year to be as well equipped as the workers would be

without population increase, something on the order

perhaps of an additional 9 to 12 percent of national

income—more accurately, current net output—would

need to be devoted to saving and capital accumulation.

This figure is generous. I arrive at it on the basis of the

fact that in the nineteenth century and the first few

decades of the twentieth century, the period in which the

American economy was relatively free, the long-term

historical ratio of reproducible capital to national income

was about three or four to one.

118

Thus, a 3 percent

increase in capital to accompany the 3 percent increase

in the number of workers and so maintain a three or four

to one ratio of capital to output per worker, would repre-

sent no more than something on the order of 9 to 12

percent of national income in conditions in which the

degree of capital intensiveness was substantially higher

than it is today.

Having to obtain this 9 to 12 percent of national

income from the share of national income previously

going to wage earners, would represent something on the

order of a one-time reduction in wages of about 13 to 17

percent, if, as is typical, wages initially constitute about

70 percent of national income. This magnitude of reduc-

tion in wages, however, greatly overstates the magnitude

that would actually follow the establishment of free

immigration. This is because it is predicated on going

from zero population increase to an annual rate of 3

percent increase. In reality, the effect would be more

likely to be to go from a 1.5 percent annual increase

without freedom of immigration to perhaps a 3 percent

annual increase with it. The additional capital required

would thus actually equal only 4.5 to 6 percent of national

income, rather than 9 to 12 percent; and the one-time

wage reduction would be on the order of 6.5 to 8.5

percent rather than 13 to 17 percent.

If the freedom of immigration were introduced fol-

lowing the establishment of greater economic freedom

in other respects, this short-run negative effect would

probably go largely unperceived, since it would be more

than offset by other, positive developments. But, in any

case, if the effect of the freedom of immigration and the

pool of talent it unlocks is to enable the productivity of

labor to increase by just an additional 1 percent a year,

then, as soon as this happens, within seven to nine years

the initial loss is made good and thereafter the process

results only in gains.