Immigration

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The subject of immigration is keenly debated both within libertarian circles and in the mainstream, having been an important issue in the British referendum to leave or remain in the European Union on June 23rd and also in the forthcoming US Presidential election in November. This essay will outline the core libertarian theory concerning immigration before examining the key area for contention among libertarians – whether, in a world populated by states, any particular state should restrict or otherwise control movements across the border by persons who are not considered to be citizens of that particular state and whether this is in accordance with libertarian theory. We will also explore the additional question, assuming the same, worldwide condition of individual states, of which ways immigration can be said to be a “good” thing and in which ways it can said to be a “bad” thing.

In strict libertarian theory there is no treatment of immigration separate from the general libertarian approach to private property. In a libertarian world all pieces of homesteaded land would be owned by private individuals. Although the owners of neighbouring or otherwise closely situated pieces of land may share a common language, ethnicity and culture, there would be no legally defined national borders; all we would have are the borders, or rather, the boundaries of each parcel of private property marking the point where one person’s ownership ends and another person’s begins. Who, how and when other individuals cross these borders is a private matter for the property owner. It is his property and he can welcome and exclude whomever he likes and on whichever terms he likes. If the property in question is his home then his closest, most immediate family, who may also live there, are likely to have unrestricted access; more distant family and friends may be granted access at mutually agreeable times when they wish to see each other; a lodger will have access governed by a tenancy or licence agreement; and “handymen” or contractors may be granted temporary access to carry out certain work that the owner pays them to undertake. Everybody else in the world, on the other hand, is likely to be excluded. At no point, prior to any agreement or contract with the owner, does any person have a legal right to cross the border of another person’s property. An uninvited crossing is, in libertarian theory, defined as unlawful, aggressive behaviour and may be met legitimately with physical resistance. The only places where people could wander wherever they please, except for their own property, would be onto un-homesteaded or ownerless land as only in this condition would they be undertaking an action which does not interfere with the prior rights of another individual.

In a world populated by states, however, there are not just borders or boundaries between privately owned pieces of land; rather, there are borders between whole swathes of territory which form the landmass of the states. A particular stretch of land immediately on one of these borders need not be privately owned – it may be publicly owned if it is a road or a park or even ownerless if it is, say, an unkempt meadow (although the government will, of course, claim ownership over all un-homesteaded land). In such a world the question concerning immigration would not be whether immigrants would have the right to enter your home or, say, your privately owned business premises; not even the staunchest supporter of immigration contends that this should be the case and if we assume, as minarchists do, that the state has a legitimate responsibility to protect individual parcels of privately owned property from uninvited access by either foreign or domestic individuals then this stance is perfectly in accordance with libertarian theory. Rather, the issue concerns whether the state should grant, without question, prospective immigrants a right to enter the territory of the state at certain, designated  points on the border into publicly owned or ownerless territory that the state nevertheless claims is within its jurisdiction. This, necessarily, raises the further question of whether successful immigrants would be at liberty to access all publicly owned territory, such as roads, to use publicly funded facilities and to claim publicly funded welfare.

In this imperfect world of state borders the question we as libertarians have to answer boils down to how, in libertarian theory, we should treat the ownership of publicly owned land. If the government permits any foreigner to cross the border into publicly owned land can such an arrangement be equivocated with, or approximated to, an uninvited, physical invasion of owned property, in which case it would not be permitted? Or is it an action that is more equivalent to crossing into ownerless or un-homesteaded land and thus does not violate the rights of an existing owner? If we lean towards the first possibility then the resulting situation would be one of “open borders” – the de facto right of any foreigner to cross into publicly owned or ownerless territory of another state. However, if the answer is no then it does not follow that closed borders would result – it is only a quasi-invasion if foreigners cross uninvited. To listen to the mainstream arguments one would be forgiven for thinking that the immigration question needs to be met by an all or nothing answer – it is apparently a contest between liberals, or self-styled “progressives”, clamouring for fully porous borders on the one hand versus conservative, racist bigots who supposedly want to keep everyone out. We reject this false dichotomy and recognise that it is quite possible to be in favour of permitted, regulated immigration – allowing some people to cross the border as immigrants to come and live and work in the territory of the state while denying that privilege to others.

The most convincing reconciliation of this situation with libertarian theory is arrived at by asking a simple question. If the state was to dissolve itself today who, if anyone, would have the strongest ownership claim over the publicly owned land to which immigrants would gain access if they were permitted to cross the border? It is doubtful that such land can be construed convincingly as unowned given that it contains significant infrastructure – roads, railways, utility networks and so on – that have been deliberately engineered, bringing the land into a developed condition that is far from its natural, ownerless state. This infrastructure was paid for by the domestic, tax paying citizens for the benefit of domestic, tax paying citizens, and was not paid for by foreigners who have not been tax payers. It follows, therefore, that the strongest ownership claims to publicly owned land reside with the domestic, tax paying citizens of the state. As long as, therefore, the state owns and operates this land on behalf of the tax paying citizens it should be construed as the owned property of those citizens, to which non-owners can be excluded from entry in just the same way as a house owner may exclude strangers from his house. Thus it is reasonable to suggest that foreigners do not have a legitimate right to cross a state border. Moreover, if the opposite was true and libertarian theory was construed publicly owned land as ownerless then it would seemingly allow foreigners, or indeed, anyone, to homestead this land and take it out of public ownership. The suggestion that one could homestead a major road to the exclusion of the rights of those who were forced, by the state, to pay for that road’s construction, is clearly absurd.

An objection to this suggestion is that non-taxpaying domestic citizens, such as low earners and children, will be permitted access to the publicly funded infrastructure. If we are ascribing ownership of public assets to those who fund them through tax contributions then shouldn’t these domestic, non-taxpayers be excluded too? In the first place we could suggest that the taxpaying citizens – i.e. the taxpaying parents of children and taxpaying businesses who need customers to access them via public roads – have extended a quasi-invitation to non-taxpayers to use the publicly funded infrastructure. However, before we begin to contort our analogy in a tortuous fashion we have to remember that no answer we can give in this regard is going to be perfect. A world populated by states is not a perfect situation with which libertarian theory has to deal. Libertarian theory properly excludes the state entirely; however, if we have to suffer the state in some form then there is an impetus upon us to make it function in the most liberty-oriented way, an endeavour we can only accomplish by approximating ownership as it would be in a stateless society rather than by replicating it entirely. Moreover, it is probably not possible to distinguish taxpaying citizens from non-taxpayers on a public highway, whereas it is eminently possible to exclude foreigners at a frontier.

If we maintain this theme of attempting to approximate ownership in a stateless society we can also determine the situations where foreigners would be permitted to cross a border. As we noted earlier, in libertarian theory owners may invite non-owners onto their property as and when they see fit and upon whichever terms are agreed. Such an entry would not then be an invasion. The most likely way that such invitations could be extended to cross state borders would be if a foreigner is offered employment within the territory of the state, or married into a domestic family. Alternatively, perhaps, a foreigner may purchase property that is within the territory of the state. Critically, however, these invitations should initiate from private sources and private exchanges, not from quota systems or other arbitrary rules and restrictions emanating from the state. Not only does this serve more convincingly our approximation of public ownership with private ownership, but there are also sound economic reasons for stating that this should be the case. If, for example, an invitation to cross the border is dependent upon an offer of employment from a private company or individual it demonstrates that the skills possessed by the immigrant are genuinely in short supply within the domestic population as perceived by the real wealth creators. The immigrant will arrive and will be integrated into the employer’s workforce immediately, co-operating with the existing, domestic co-workers in the production of goods and services. This is less likely to exist with either unlimited immigration, or immigration defined according to government direction, where the influx of immigrants may simply be creating a greater supply of labour which pushes down the wages of existing, domestic workers, and is likely to increase racial tension and xenophobia.

Indeed, the economic cases for and against immigration are rarely stated correctly in the mainstream debate and so it is worth our while to concentrate on these for a moment. Those who advocate open borders will be keen to point out that immigrants bring productivity and skills which serve to increase the standard of living of the indigenous population. Those who argue for restriction, on the other hand, will stress that, in fact, an influx of foreign workers simply competes with domestic workers for employment opportunities, sowing the impression that foreigners are “stealing our jobs”. Both points of view contain kernels of truth yet neither is valid in all situations. Whether or not immigration is a benefit or a burden concerns whether labour and capital goods are balanced in a particular location. The applicable economic theorem in this regard is the law of returns, which states that if the quantity of a factor of production is increased while the quantities of the complementary factors are held constant, there will come a point when the increases will produce diminishing returns and, eventually, no returns at all. For example, a farmer who wishes to grow crops may take land, seeds, water and fertiliser as his factors of production. If he holds the quantity of land, seeds and water constant while increasing the quantity of fertiliser then at first he will experience increasing crop yields per additional unit of fertiliser he deploys. Eventually, however, further increases of fertiliser will produce fewer and fewer crops per additional unit deployed without further increases in land, water and seeds, until eventually there will be no additional returns at all. Finally, of course, production will cease altogether when the land becomes buried under a mountain of fertiliser. If, on the other hand, there are increases in the quantities of complementary factors of production in addition to increases in the quantity of fertiliser, it is possible for the farmer to experience an increase in crop yields per additional unit of fertiliser deployed. Exactly the same is true when the increased factor is not fertiliser on a farm, but is, rather, human labour. If labour is increased, through population increases, but it is not possible to increase the complementary factors of production then the increase in population will simply result in diminishing returns and an overall reduction of per capita real incomes. This will be particularly acute if there is a sudden influx of a particular type of labourer that requires specific types of complementary goods in order to be productive. If there is an increase in low-skilled, manual labourers then a given territory also needs to have the additional factories, machines, tools and equipment for them to use. If it does not then the existing stock of such items simply has to be used more intensively by a greater number of labourers, which, if the increase in labour is left unchecked, is the recipe for diminishing returns. There is no point in shipping in a boatload of carpenters if there isn’t enough timber for them to work on, or if there are not enough workshops to house them; it is futile to welcome more workers onto a car assembly line if the assembly line itself has not been built, or if there is a shortage of steel or aluminium. In principle, at least, this extends to highly skilled labour as well. If a state brings in from overseas a load of doctors then the additional hospitals, surgeries and medical equipment have to be available too. Obviously the situation can become dire if the incoming population cannot work at all – for example, if there are a lot of children suddenly entering a territory, or those otherwise demanding educational services, then there needs to be the additional schools and colleges, otherwise existing class sizes simply swell and the quality of education (i.e. the “returns” on inputs into education services) diminishes. All of these additional capital goods – the machines, the factories, the equipment, the raw materials and so on – are demanded right from the moment that the immigrants arrive and seek work. However, their availability is not immediate as the production of capital goods requires both time and, more importantly, savings. Therefore, if the labour is specific, i.e. specialised to only one kind of occupation, then immigration will serve simply to increase the supply of labour applied to the relevant capital goods, thus pushing down wage rates for the domestic population. If, on the other hand, the skillset of the immigrant labour is unspecific then it may be possible to put them to work in creating these capital goods – i.e. building the very factories and tools they need to increase their productivity. However, capital goods do not yield an increase in productivity until they are completed and if the immigrant population is to go to the effort of creating them then they need consumer goods to sustain them during this phase of construction, a phase which may take a number of years before the additional capital goods are able to increase the supply of consumer goods. The only source of the latter is the prior production of the indigenous population. In other words, the domestic citizens have to reduce their level of consumption today in order to save and fund the additional production of capital goods, thus lowering their standard of living. The only way to induce this voluntarily is to raise interest rates so that more people save out of their current income. However, higher interest rates are precisely what are discouraged by spendthrift governments and economists hypnotised by Keynesianism, who do everything that they can to lower interest rates and decrease the incentive to save. The domestic population therefore continues to maintain its preference for consumption over saving and so all that they see is higher prices for the very consumer goods they wish to buy and lots more people from far flung lands wanting to buy them. It was the understanding of this whole phenomenon which formed the basis of Malthusianism – that if population increases outstrip gains in productivity then society becomes, overall, poorer. For the indigenous population of a given state, the incoming population simply becomes competing consumers of existing, or a barely increasing stock, of goods and services. Indeed, some libertarians have pointed out that this may be the aim of the state in the first place – to bring in more welfare parasites and weaken the wealth and power of the indigenous population, thus expanding the size and scope of government.

On the other hand, it is clear that if there has been an increase in the non-human factors of production but not an increase in labour then these factors too will be subject to the same law, the law of returns. In other words, an increasing number of machines, tools and factories will be used by the same number of labourers, with the result that the latter become spread out more thinly over a burgeoning supply of capital goods. In this instance, an increase in population is precisely what is needed to increase productivity and to make use of the additional capital stock. So, for example, if an empty factory with nobody to operate it, and machines and tools lying idle, is filled quickly by immigrant workers then productivity can rise on account of the fact that there has been a commensurate increase in labour and capital goods. Such a situation is not unheard of in areas where there are extremely favourable reasons for creating capital goods – low tax rates, strong private property rights, good transport links, and good supplies of natural resources – except for a sufficient supply of willing labour. For example, a mining business has to open up shop where the ore it wishes to mine is located. The labour must come to the ore in order to ensure any productivity from the mine. Going back to what we said earlier, if there is an under or oversupply of either labour or resources, only private business owners and entrepreneurs should make decisions as to what moves where – whether labour should be moved to where resources are or whether resources should be moved to where labour is – for only they are in a position to judge, through pricing, profit and loss, which is the most cost effective solution in ameliorating the imbalance between labour and capital goods. Any direct action by the state in this regard will simply create surpluses and shortages either of labour or of capital goods in different areas, as government management of anything always does. Indeed, in a previous essay on “Overpopulation”, the present author argued that increasing population is generally not a concern, from an economic point of view, under conditions of an unmolested division of labour; but it does become a very acute problem when government interferes in population levels, especially in specific areas. In particular, if we look at the two most extreme positions the state could take with regards to immigration – a policy of completely open borders (or even an active pursuit of higher immigration numbers) on the one hand, and a policy of completely closed borders on the other – the former will tend to lead to a surplus of labour while the latter will tend to lead to a shortage. In a world without the state where each parcel of land was owned privately, areas with relatively high populations and low concentrations of capital goods would have higher access costs – higher prices to access roads, higher property prices, higher school prices, and so on, deterring immigrants away from an area where there are already too many people. On the other hand, areas with relatively low populations and relatively high concentrations of capital goods would have lower access costs, encouraging immigrants to move to the place where there are not enough people. Thus, through the pricing system, the market sends signals to prospective immigrants telling them which areas need them and which areas do not. In a world managed by states, however, a policy of open borders will mean that the free cost of access to state controlled territory such as roads, schools and hospitals artificially lowers the cost of immigrating, a situation which is, of course, exacerbated when immigrants have either unrestricted or lightly restricted access to welfare benefits. There will therefore be more immigrants and a higher population than the area requires. On the other hand, a policy of totally closed borders artificially raises the cost of immigration to the level of imprisonment or being shot on the frontier. Thus, while for some this cost is justified (as trying to cross the Berlin Wall was, although this border was directed at keeping people in rather than out), the overall result will be fewer immigrants and a lower population than the area requires. States with heavily restrictive immigration policies, such as the United States, can often find that their domestic companies become exasperated by the difficulty in hiring foreign talent while there will be relatively more attempts to cross the border illegally.

This leads us onto another central theme concerning immigration and that is racism and xenophobia. Any treatment of the topic of immigration cannot avoid addressing these issues, particularly given that any opposition, principled or otherwise, to a policy of “open borders” is often shouted down as racist or at least racially motivated. In the first place, libertarian theory has nothing to do with racism. Our conclusion earlier, predicated on the approximation of ownership rights with regards to publicly owned property, that states may, legitimately, restrict foreigners from crossing the border into the territory of the state says only that the state may choose to exercise such a restriction on behalf of its tax-paying citizens. It may equally choose to relax or forego any restriction. Libertarian theory says nothing about the motivations that the state, its politicians and bureaucrats, and the citizens it supposedly represent, may have for making a choice either way. It states only that they may make such a choice. Libertarian theory is emphatically not motivated by anything that could be construed as racist. Moreover, if one does cross over to a value judgment and state that immigration should be restricted in certain circumstances, as the economic concerns that we just outlined suggest is wise, then it is preposterous to assume that the motivation is necessarily racist. These economic concerns would be true in a world populated entirely by whites, entirely by blacks, entirely by Asians or whomever, all speaking the same language and all with a relative cultural homogeneity. Yet the argument – that an increase of labour without an increase in complementary capital goods would lead to diminishing returns – would still be exactly the same.

Rather, what we will attempt to argue here is that racism and bigotry derive from, rather than precede, a state’s policy of fully open borders and that it is such a policy which aggravates racial tension. A libertarian policy of managed borders, with invitations to cross extended to immigrations extended by private individuals and companies would, in fact, result in a relatively peaceful world where different races would co-exist without difficulty.

The key to understanding why this is so is to do with how the economic aspects we outlined above intertwine with cultural homogeneity in a given society. A society is not simply a collection of atomistic persons doing whatever they like whenever they like, even though such a society may exist hypothetically in libertarian theory. Rather, people in a society embrace a certain culture and the particular morals, rules, habits and hierarchies that are created by that culture. The reason for this is not accidental or spurious. Rather, relatively predictable, reliable, homogenous practices across the populace as a whole not only aid but may even be absolutely necessary for effective social co-operation, and it is through social co-operation – the division of labour – that people are able to raise their standard of living for themselves and for their families.  A common language is, of course, an important, if not the most important homogenous, cultural phenomenon required for social co-operation. It is no accident that in very few places in the world there is a complete mixture of different languages and that, for the most part, different languages are separated geographically. Even a country such as Switzerland, which officially speaks French, German, Italian and Romansch has different areas in which each of these languages is dominant, with only a handful of fully bilingual areas. The barriers to social co-operation if the opposite was the case are obvious. Imagine coming to work one day and finding that your boss speaks only Russian, your co-worker Chinese while the team you manage speaks a mixture of Spanish, Welsh and Punjabi. Cultural practices extend also, however, to such apparently menial aspects as the 9am until 5pm working day, or when the main meal of the day is eaten. If people stroll into the office whenever they please or vanish at 10 in the morning to enjoy a three course meal clearly social co-operation is impaired. This is not to imply, of course, that everybody has to do absolutely the same thing all the time in a given society. However, the exceptions prove the rule and different practices – such as working at night and sleeping during the day – are regarded as unusual. Moreover, there is also the fact that humans are a tribal race – we prefer to associate with those who are familiar to us, those who do what we do and those who agree with us, if only for the comfort of predictability, regularity and routine in addition to the contribution of such aspects to social co-operation. Indeed, if the benefits of cultural homogeneity for social co-operation are true then it is possible that our preference for it is an outcome of evolution, which has biased us towards desiring things, through instinct, that ensure are our survival and betterment. However, it would be a mistake to assume that most specific cultural practices emerged randomly or through simple preferences. Rather, they were shaped and formed by the challenges presented by the specific climate, geography, topography and the available resources of the particular locale. For example, the Mediterranean practice of taking a siesta in the middle of the day originated because the temperature was too hot to work at that time. Indian food makes use of a lot of spices because of the difficulties in preserving food in such a hot climate, a difficulty that was not quite so prevalent in regions further from the equator. The practice of circumcision originated out of the challenges posed to male hygiene and comfort in a hot desert environment. The creation of the family unit and sexual fidelity, which we take for granted today, originated at least in part from the need for fathers to bear the costs of raising their children when population levels in hunter gatherer communities began to outstrip resources, something which could not be managed in a culture of “free love”. The family is a cultural practice we see all over the world because the problem it solved was experienced throughout the world, whereas less universal cultural practices sought to solve only specific, local problems.

When immigrants move from one state to another they are usually moving from one culture to another – from one language, one religion, one set of social norms, one type of cuisine, and so on, to something else with varying degrees of difference. If a relatively homogenous culture is both a natural human preference, is a requirement for effective social co-operation, then it follows that cultures of both the immigrants and the indigenous population of a given state are not likely to mix naturally within the same locale and that, rather, one set of cultural practices must yield to the other. This is particularly so when the cultural practices of the immigrants were developed with regards to the challenges posed by their homeland and may be superfluous or completely contradictory to what is required in the state to which they have emigrated. When, as we outlined above, individual immigrants are invited to the state by individual persons and companies to accept an offer of employment it is because there is a pressing, economic need for their presence – there is a surplus of capital goods and equipment and a shortage of labour. The immigrants, in this instance, will begin work immediately and will mould themselves into the cultural practices and habits of the indigenous population. Furthermore, their skills and abilities, being in genuine short supply, will be recognised and appreciated by their co-workers, with whom they will be co-operating to create more wealth and a greater standard of living, rather than competing to consume an existing stock of wealth. It is true, of course, that immigrants may retain cultural practices of their homeland in the domestic situation of their own home; however, the first generation of children, born in the state to where their parents have emigrated, will become heavily surrounded by its culture. To them, this new state is their homeland and not a foreign place and they will know little to nothing of their parents’ place of origin. Thus they become even more integrated into the culture of the new state and will most likely consider themselves as citizens of the new state even if they retain an obeisance to the state from which their parents emigrated. This is not to imply, of course, that the culture of the immigrants will be completely eradicated. Indeed, in some cases, foreign cultural practices find their way into the indigenous culture. The delights of foreign cuisine, for example, are often embraced by a domestic population, as Indian and Chinese food has throughout the West. All we are saying is that at if social co-operation is to be pursued to its fullest extent, one of the cultures must become recessive and to the extent that the immigrant population form a minority it is likely to be the indigenous culture that remains dominant. The outcome, of course, is a prosperous society where immigrants and natives work together peacefully without racial tension or xenophobia.

Contrast this situation, however, with the case of where it is the government of the state which welcomes immigrants to its territory, either through a policy of open borders or according to some artificial quota system which is wholly unrelated to the genuine demand for additional labour within the state. Here, the immigrants will arrive without offers of employment but they will quickly look for them. However, because there is no demand for additional labour at the existing wage rates the effect of the arrival of the immigrants is to push existing wage rates down for the indigenous population. Thus the latter draws the perception that immigrants are simply creating a crowd, a crowd which competes for existing resources but seemingly does little to add productive value. This becomes exacerbated by minimum wage laws and other costly employment regulations that the state heaps upon employers – if wage rates drop below these levels then unemployment must result. Hence the perception that foreigners are coming over to “steal” jobs from the indigenous population, although both will be afflicted. Moreover, if the immigrants cannot find jobs then it is less likely that they will be integrated into the working practices and the cultural environment of their new state. What results, therefore, is that they form their own communities and their own local economies which, with little impetus to do otherwise, retains the cultural distinction of their homeland. Hence, the perception amongst the indigenous population, that entire towns and communities are being “invaded” by an alien culture and that one’s own homeland is being turned into an outpost of some far and distant country. The stage is set, therefore, for an increase in racial tension and xenophobia, an increase which will be exacerbated if the government follows a deliberate policy of multiculturalism – i.e. the explicit intention to create numerous cultures within the same society where one was previously dominant by inviting immigrants. Multiculturalism has rarely existed under purely voluntary conditions. The only exception is where vast swathes of immigrants from different places move to a previously uninhabited or sparsely habited area. The difference here, however, is that everyone, from wherever they have come, has moved to the new land in order to make a better life for themselves and they are attempting to do so in a place where there are few, if any, indigenous persons of a given culture seeking to preserve an existing culture. Everyone, in other words, is embracing change and the challenges that come with improving their lives, rather than attempting to defend one that already exists. Such was the early history of the United States which, of course, was populated by immigrants from all over the world.

What we can see, therefore, is that policies of open borders and forced integration are the cause of racism and xenophobia through economic and cultural clashes. They are not the solutions to these problems. However, even if there were no economic barriers to welcoming immigrants to a given state and even if the only motivation for indigenous people to exclude them was racism and xenophobia that sprung from their own minds entirely as a matter of preference, our priority is to ensure that all of the six billion people of different creeds, colours, races, and religions are able to co-exist peacefully on this small rock hurtling through space. If different peoples and cultures living in separate geographical locations achieves this whereas mixing them all together in a single place causes them to fight then it is reasonable suggest that preference should be given to the former.

Progressives often label their policy of mixing cultures in the same locale as a policy of achieving “diversity”. Yet the world as a whole already is a diverse place. Some places are hot, some places are cold, some are wet, some are dry, some have fertile soil while some are barren. As we said earlier, this diversity of geography, climate and topography, together with the unique challenges posed by each difference with which humans have to deal, is what creates diverse cultures. The forced creating of “diversity” in every single locale simply amounts to a travesty. Not only does mixing every culture everywhere in every location, in fact, create bland uniformity as opposed to diversity, it is the equivalent of trying to put a mountain, a hot desert, and a jungle all in New York City. To that extent we might say that attempting to create “diversity” is a utopian revolt against nature.

Conclusion

To summarise what we have concluded here:

  • In a world where the existence of states is assumed, the ownership of state property should be approximated to the ownership of the state’s tax paying citizens, thus ruling out a right, in libertarian theory, for non-taxpaying foreigners to cross the border;
  • That invitations to cross the border should be made to prospective immigrants by private companies and individuals;
  • Such a policy would prevent the relative surplus or shortage of labour experienced when the state actively manages immigration policy; labour and capital goods would be channelled, through pricing, profit and loss to where they are most needed;
  • That it is relative surpluses of labour through policies of open borders, forced integration and the pursuit of multiculturalism, which are the causes, and not the solutions to, racism and xenophobia. The prevention of surpluses of labour through the method we described would also prevent such racial and cultural clashes and is more likely to create a world of peace and prosperity for all persons, regardless of colour or creed.

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The Myth of Overpopulation

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Overpopulation, either locally or globally, is often blamed on a number of apparent problems from the shortage of particular (usually “essential”) resources all the way up to the outright poverty of entire continents. Although few governments, most notably the Chinese, have enacted any strict policies in order to control their populations (except with regards to immigration), factoids such as the allegation that, if every single human wanted to enjoy a Western lifestyle we would need something like a dozen earths, attempt to create an unwarranted degree of hysteria.

The myth of overpopulation rests on the belief that humanity is akin to some kind of cancer which, as it grows exponentially, devours a fixed or arithmetically growing pool of resources that must be shared between everyone who has been unfortunate enough to have been born. This would have been the case in a hand-to-mouth society that preceded capitalism and the division of labour. There was effectively no production and the birth of each individual person constituted merely another mouth to feed. In other words, an increase in population led to an increase in demand for consumption without any corresponding increase in production, thus putting pressure on the existing stock of resources that had to be shared by everyone. Nevertheless, when it comes to shortages of goods in local markets today we can surmise that even if there was a fixed or otherwise relatively limited pool of resources that everyone had to share we couldn’t pin the blame for shortages on such a fact. In a free society, a particular good might be very expensive but it should never be the case that we cannot find anything. As the population increases the price of resources would rise and thus choke off demand for the least valuable uses. Shortages, rather, are always the result of government price controls that try to create the illusion of abundance without the reality, decimating the current supply and obliterating any incentive to produce more. That aside, however, the blatant reality for a capitalist society marked by the division of labour is that there is not a fixed or arithmetically growing pool of wealth and resources, and that the whole purpose of such a society is to grow, exponentially, the amount of wealth that is available. Indeed, as we shall see, humanity has succeeded in this endeavour to only a fraction of its capacity.

When the first human being trod the virgin soil of the earth, he found himself in a situation of almost unrelenting poverty. Mother Nature, as anyone trapped for an extended period of time in the wilderness has discovered, is far from a kind host, providing very little (except air to breathe and fruit on wild trees) by way of resources that can be consumed immediately for very little effort. Yet all of the matter contained in every resource that we enjoy today – buildings, cars, refrigerators, televisions, computers, clothing, medicines, and so – was, give or take a little, right there at the beginning of the world’s existence. Strictly speaking, no human being has ever created anything – rather he has merely transformed matter from one thing into another. So why, if all this matter was there from the very start, weren’t these wonderful things available to our first human? The reason is, of course, that a human must apply his labour in order to change the matter available in the world into useful resources that fulfil his ends. Yet the work of one man with his unaided body alone was not sufficient to create all of the wonderful things that we enjoy today. Indeed, it might take a single human being an entire day to hunt or catch enough fish for just one meal before the process must be repeated the following day. How can this be limitation be overcome?

The first answer is quite simply the very bugbear that is complained about – an increased population. A greater number of humans can together lift and carry a far greater amount than one man alone. Several or many men building a house would accomplish the task in a far shorter time than one man alone. More importantly, however, the widening of the division of labour as the population grows ensures that production stays ahead of population growth. Additional humans constitute an additional demand for consumption – ten humans may require ten houses whereas one human would require only one. But the fact that these men are also producers means that each can now fill his day by specialising in a particular task. One man, devoid of the ability to specialise, may take a year to build one house and he would have to undertake every single activity related to the building work on his own. With ten men, however, two may specialise in lumber felling, another two in transport, some in building, and the task of one the men may be solely to produce food and other supplies for the men doing direct work on the houses. The result of this is a greater degree and concentration of knowledge and an increased perfection of technique and expertise in each task. The resulting time saving means that, whereas one man would take one year to build one house, ten men would less than one year to build ten houses. Thus the rate of house building overtakes the rate of the increase in population. We therefore see that the quantity of labour has a marked effect on the accumulation of wealth and the transformation of matter into useful economic resources, provided that a society is distinguished by capitalism and the division of labour. To further emphasise this point, it is the twin effect of the consumption demand of the additional people coupled with the fact that these people are also producers that makes an ever increasing widening of the division of labour possible. If ten houses have to be produced then it might not be possible for one man to concentrate on any single task in order to fill his day; he might have to work in installing the wiring, the plumbing and the wallpaper. If one hundred houses have to be built then he might be able to concentrate on plumbing alone. If one thousand houses are built then he might be able to specialise on plumbing just bathrooms whereas someone else works on plumbing kitchens, for instance. The ever increasing volume of demand from an increasing population therefore begats an ever increasing division of labour when that population is put to work, and with it come all the benefits of specialisation and expertise.

Second, although it is flexible, the human body is a relatively weak and feeble creature, capable of moving and lifting only a tiny amount of matter at any one time. Regardless, therefore, of the quantity of labour available we can see that fifty men carrying sacks on their back would fail to transport as many goods in as short a space of time as, say, a railway locomotive hauling some wagons. The power of labour is therefore a further limiting factor on the number of resources that can be enjoyed. This power can only be increased by accumulating ever greater amounts of capital. All such goods – machines, tools, vehicles, and so on – are, fundamentally, merely extensions of the human body that enable its labour to accomplish more than it otherwise would. A man with an axe can fell a greater a number of trees than a man whose body is unaided by this implement. For centuries, humans could not labour to extract oil from the ground and refine it into petroleum. Yet with the capital available to construct drilling apparatus, oil rigs and refineries this is no longer the case. Indeed, most direct labour today is not concerned with the production of consumption goods at all. Rather, it is devoted to the production, augmentation and improvement of capital goods. In short, it is directed towards increasing the power of labour.

What we begin to see, therefore, is that it is not necessarily the scarcity of resources burdened by an ever increasing population that is the real obstacle to the growth of wealth and economic progress; rather, it is the scarcity of labour and the power of that labour as represented by the stock of capital goods which serve to enhance it. Goods are, to be sure, the original source of scarcity. We apply our labour only because the available quantity of a given resource exists in insufficient supply relative to the ends to which it could be devoted. Yet the power of our labour is a significant compounding factor on the degree of scarcity that we must endure. My body may only have enough capability in order to fetch a few buckets of water from a nearby stream – yet more than three quarters of the globe is covered in water. It is because the power of my labour is relatively weak that most of this water is either too far away or of insufficient quality to serve me any practical end. Only be improving the power of my labour – by being able to move greater distances, lift heavier volumes and develop processes of purification – could I hope to enjoy more water.

Such a circumstance is not limited to such a clearly abundant resource such as water. The entire world, right from the depths of the core of the Earth all the way up to the stratosphere is densely packed with matter. Our labour has only ever been able to harness a mere fraction of these resources, mostly skimmed from the Earth’s crust. As time goes on however, as population increases and with it capital accumulation and the widening of the division of labour, we harness the ability to tap into more and more of these resources. Hence, mines and oil fields that were once too costly to drill are now drilled (and, indeed, are more productive than the most productive fields of yesteryear); such mines could eventually reach depths of miles rather feet; and valuable elements can now be extracted from more complex ores. There is no reason to believe that this process cannot continue. Even today, the sea contains traces of elements such as gold which, in their totality, amount to a far greater quantity than all of that ever mined from beneath the land – 20 million tons compared to 175,000 tons respectively. Yet our labour is insufficient to take advantage of this fact. Indeed the sea remains one of the greatest untapped resources available to us. Unlike private land settlement which led to a prosperous agriculture and exploitation of the land, government has pretty much closed off areas of the sea to the possibility of settlement, preventing the development of a full-fledged aquaculture and robbing us of the ability to exploit this wonderful gift of nature.

It is for this reason – the increasing power of labour – that all predictions of resource depletion as a result of overpopulation (not to mention the ridiculousness of disingenuous “facts” such as the allegation that twelve earths are required to give everyone a Western lifestyle) – have failed. In the well known Ehrlich-Simon wager, for instance, economist Julian Simon made a bet in 1980 with biologist Paul Ehrlich that the price of five metals of Ehrlich’s choosing would have declined in price ten years later – indicating increasing availability of resources rather than increasing scarcity. Simon won the bet outright, in spite of a population increase of 800 million during that decade. Other peddlers of the overpopulation thesis, such as Albert Allen Bartlett, have labelled the views presented here as “cornucopian” or “the new flat earth” – mythical, whimsical and not based on any serious scientific understanding. What these people share in common is that they simply do not account for the future economic viability of production from what are currently viewed as uneconomic resources. For the clear result is that as population has increased we have been able to apply more labour with a greater power of that labour to a greater number of the world’s resources in ways that we were not able to do before. The ultimate goal, needless to say, would be something akin to molecular engineering – the ability to transform worthless matter such as dirt, trash or even air – into valuable resources. The futuristic “replicators” on TV shows such as Star Trek can apparently conjure goods such as a fully cooked meal out of thin air; yet the science behind would not be too difficult to imagine. We have already harnessed the ability to transform matter into energy through processes such as combustion. We can envisage that one day we could do the reverse and transform energy into matter. An inedible sack of coal could end up as a fabulous meal on your dining table.

Overpopulation does, however, give the appearance of being a problem as a result of government interference. Above we noted above, additional consumption demand represented by an increasing population serves in increase wealth provided that the additional population are also producers and therefore will act so as to widen the division of labour and the accumulation of capital. Yet the actions of government serve to swell consumption while choking off production. Pressure on resources and industries therefore arises from government control of these things. Britain’s decrepit healthcare, energy and transport systems are bursting at the seams as a result of demand and increasing costs, a direct result of inefficiency combined with prices that are too low which serve to swell consumption demand in these industries. Government pays its citizens to produce babies and thus increase the population, while an increasing immigrant population today is induced not by the freedom to pursue one’s own goals and to better one’s own life for oneself through hard work and productivity, but, rather, by generous welfare states. All of this causes a rising population that contributes to consumption but very little by way of production. In other words, if you set up the economic system to make consumption as care free as possible and production as costly as it could be then the excess of consumption and a deficit of production will give the illusion of overpopulation. Government therefore begins to look on its citizens as pests and parasites, wanton consumers of precious resources that are desperately running out. Yet the problem is not with resources; rather the problem is with the ability of the government to swell the ranks of consumers and its inability to increase the power of labour, together with its incessant stifling of anyone else who tries to do so. Every additional person who is born in the world is another mouth to feed, another person who will demand the consumption of resources. Yet that person could also be a producer who will widen the division of labour and help to grow the capital stock. Government succeeds only in breeding the consumer in a man while totally destroying in him the producer.

Turning to a related aspect, the fact that whole continents, such as Africa, are mired in poverty has nothing to do with the allegation that the richer countries refuse to “share” their wealth. If the richer countries did not have their wealth, it would not mean that poorer countries would have more – the wealth simply would not have been produced, period. Indeed, whatever wealth that does exist in poor places is often the result of Western enterprise or outright gift. These places do not lack resources; rather, they lack the institutions of private property and voluntary exchange that enable capitalism and the division of labour to flourish, and with them a greater command of labour over resources. Indeed, many of these countries are proceeding down the wrong path by setting up welfare states, trade unions and Keynesian economic (mis)management overseen by democratic institutions which are, of course, the very things that are destroying the standard of living in the West. The West achieved its greatest accomplishments in a pre-democratic, pre-welfare state and pre-union age before Marxism and socialism succeeded in leading the onslaught against capitalism and private property.

What we can see, therefore, is that overpopulation is not a fundamental economic problem. It is only an apparent problem in a society that is hampered by government intervention and the stifling of private property rights, the division of labour and capital accumulation. However, even if population started to put pressure on resources when, in a capitalist society, we reached the (unlikely) point where we were regularly turning over all of the matter in existence to meet our ends – we would still conclude that this would not be a problem worthy of any serious attention. Or at the very least, it would certainly not be a problem that merited any centralised, government control. For as population increases relative to the supply of resources, the latter become more expensive. The cost of raising a child therefore itself becomes prohibitively more expense and people would need to choose between devoting ever more valuable resources to themselves or to their children. Indeed one of the first of such resources to exert this pressure may well be land, assuming we have not, by then, invented the ability to produce more of it artificially. We could, of course, build upwards and end up living in skyscrapers but people may prefer to breed less and have more land available to themselves rather than to their children. Such choices may serve to relieve, naturally, any exponential growth in population figures. Even if, though, people desired to keep on having more children it would only indicate that they prefer the company of children to enjoying more resources for themselves. There is no objective standard by which to complain about the result of such a choice. Nevertheless, even when it comes to the question of land, humanity is currently so far from this point that we hardly need to bother mentioning it, except to try and concede to the overpopulation thesis its best possible case.

The illusion of overpopulation is exacerbated today by a fundamentally antagonistic attitude from what Murray Rothbard called the “professional foes of humanity”, the environmentalist movement1. Apart from this movement’s interference in one the most crucial markets for capital accumulation – the production of energy – the fundamentals of their philosophy view the earth as inherently beautiful and sacred, and any of humanity’s attempts to exploit it as sacrilege. Such a view is radically anti-human and can only hold that the problem with the Earth is that there are too many of these stupid, dirty, polluting, and wantonly consuming human beings. Given the influence that this movement holds it is no small wonder that such thinking permeates into more mainstream views. That aside, however, we can conclude from what we have learnt here that humans need not fear increases in population. What they should fear, however, is their government turning additional people into spoon fed eaters with shackled hands – consumers who cannot produce. It is this fact that puts a very real pressure of resources. It is therefore not overpopulation that is the real problem but, rather, “over-government”.

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1Murray N Rothbard, Government and Hurricane Hugo: A Deadly Combination, Llewellyn H Rockwell Jr, (ed.), The Economics of Liberty, pp 136-40.

Economic Myths #15 – Unemployment

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One of the key indicators of the economic “performance” of any given country is its rate of unemployment. Low rates of unemployment are understood as a sign of prosperity while high rates are taken as a sign of recession and stagnation. Indeed, during the Great Depression, unemployment reached as high as 25% in the United States. Politicians are particularly keen to monitor the rate of unemployment as low unemployment lends credence to the economic policies of those in power while high unemployment stocks the arsenal of those in the opposition. Given also that entire economic dogmas such as the so-called trade-off between full employment and inflation, not to mention the generation-long post-war Keynesian consensus are, at least, part rooted in the concept of unemployment, one would expect unemployment to be a unique and important category in economic theory.

This short essay will not explore in detail the government induced causes or aggravations of unemployment such as the minimum wage and excessive regulations heaped upon the shoulders of employers. Such topics have been examined countless times over by many economists, “Austrian” or otherwise. Rather, what we wish to concentrate on here is the validity of the very term “unemployment” itself and to determine whether it is really a useful concept in shaping so-called “economic policy” or whether it is really redundant and meaningless.

In the first place, as “Austrians” we must be highly suspicious of any concept that is an aggregation and is not explicitly linked to any notion of individual human action. All voluntary actions are, as we know, the result of the best choice of ends available with scarce means. A man who has several million pounds stashed in his bank account may be content to spend all of his time in leisure and would be “unemployed”. Yet aside from any moral wrangling over the worth of such a lifestyle we would hardly view this as a problem. But what about those lesser privileged folk – the ones who are not working but nevertheless have the outward appearance of needing an income from some kind of employment? Shouldn’t we classify these people as “unemployed” and doesn’t this state of unemployment indicate an egregious case of market failure?

The question turns on whether employment at the terms of the available opportunities is worthwhile for the individual person. If there are jobs available yet he refuses to accept them then it indicates that he is not satisfied with the terms of those opportunities. Perhaps it is the wrong industry, it is in wrong the place, or – most likely – the wage offered isn’t high enough for him. He therefore chooses to abstain and holds out for a better opportunity to appear in the future. From the point of view of individual satisfaction with the scarce means available, the outcome of seeming “unemployment” is therefore optimal. Indeed, labour, like anything else, is a resource that is available for an individual to use. Not all resources are deployed 100% of the time as it would be wasteful to do so. Everyone, for example, owns possessions that are not being used at the current moment – food in the fridge, clothes in the wardrobe, books and DVDs on the shelf, etc. Clearly it would be wasteful – nay, ridiculous – to try and use all of these “unemployed” resources at once. They are more valuable being kept in abeyance ready for utilisation when an opportune moment appears, i.e. when the person believes that use of them would yield more benefit than leaving them idle. More widely, there are always buildings to let, oil in the ground, trees that are left standing, water in lakes and reservoirs, and so on. All of these resources remain idle because an opportunity valuable enough for deploying them has not yet arisen. Indeed, consistent requirement for all resources to be utilised would mean that shops should be empty of all goods as they have already been purchased and consumed, and ultimately everything in the world should be consumed right now. To put it at its most basic, a person actively searching for the right job is not, in his mind, unemployed in the sense of carrying out a wasteful activity.

The inability to see labour as a resource that is deployed at the choosing of the individual labourer leads to many related fallacies and reveals the dangers of looking only at surface phenomena and appearance. An individual does not view employment as an end itself – work for work’s sake. Rather, all employment is action aimed at diverting scarce means available to their most highly valued ends. Employment per se is not a goal or achievement. No one would dig a hole in the ground and fill it up again unless the act of doing so led to a valuable end. Governments and people succumb to the illusion of economic activity brought about by “employment” and the apparent lack of it by “unemployment”, with any focus on providing “full employment” never stopping to ask whether the activity in which employment will be created is worthwhile or is wasteful. The most grievous example of this this is, of course, the forced lowering of interest rates to provoke an artificial investment boom. There will be lots of employment, everyone will be engaged in lots of activity and wages will be rising rapidly. But it is clear that everyone’s endeavours are ultimately wasteful and lie on a doomed path. So-called full employment policies are therefore nothing more than a surface coating to prevent social unrest, to make people feel as though they are doing something worthwhile and to put money into their hands that they can spend. To the extent that these actions create no new wealth, however, they should properly be regarded as welfare and not as employment. The wheels may be turning but the carriage goes nowhere and it is simply expending fuel on motionless activity. Far more difficult would be for governments to concentrate on policies that promote full production instead of full employment as this would, of course, require a dramatic reduction in the size and scope of government power and interference.

We submit, therefore, that unemployment is a meaningless concept at least when applied to the unfettered free market. It may have some relevance in economies where governments impede the ability of the supply of labour to meet demand through minimum wages and the like. Apart from shutting out a good number of low-productive persons from the labour market entirely, such interferences ultimately distort people’s views as to which terms of employment are achievable – they hold out for high wages because there is the illusion that that is what their labour is worth. They do not realise, however, that supply is unwilling to meet demand at that inflated level and hence their search for employment is in vain. All of this, however, is simply a particular application of price theory. If the price of any good is fixed too high it will remain unemployed. There is, therefore, no special concept of unemployment applying only to labour that attracts a different body of theory. Furthermore, the whole question of “nominal rigidity” or so-called “sticky wages” is beside the point when it comes to economic theory. If the demand for a particular good – in this case, labour – should drop it is entirely open for the particular labourers to express incredulity at this fact and to stubbornly hold out for wages that will never meet a willing demand. This is not, however, evidence of the market’s “failure to clear”. It is simply that the supply curve remains stuck to the left. There is an misconception that the market is “efficient” because it “values” everything correctly – a doctrine that underpins so-called “efficient market hypothesis”. But the “efficiency” of the market – the  nexus of voluntary exchanges between individual people – comes from its superior ability to channel goods to where they are most highly valued; it has nothing to do with whether a good should be valued or whether any particular valuation is correct. A good could be utterly useless but if a significant enough people chase a small supply it will command a relatively high price. The market will place this ware in the hands of those who value it the most, but the source of that value is the human mind and this valuation can be and often is erroneous. If people remain unemployed, holding out for unrealistically high wages, the fault lies in their incorrect assessment of the value of their labour, not in any market’s failure. Needless to say, however, the causes of these erroneous valuations are government interferences. It is because government creates such macroeconomic calamity that price bubbles and collapses occur and so-called “sticky prices” are a phenomenon associated with post-boom deflations. Having become accustomed to high wages, it is natural for workers to become frustrated and resistant when supply for these wages suddenly dries up and they not only have to face the prospect of lower wages but also a mass shift out of the capital goods industries – where they may have developed significant, specialist skills in the meantime – to consumer goods industries. In a genuine free market it is highly unlikely that workers would be faced with these problems. However, none of this really has much to do with economic theory, the purpose of which is to expound the formal characteristics of human action rather than the substance of those actions. Rather, sticky wages is more a topic for psychology, the field of human action that studies why people make the valuations that they do.

We conclude, therefore, by emphasising that there is no special category of “unemployment” as it applies solely to labour. Any “unemployment” of labour is explained either as the willing choice of the individual worker to withhold his labour from the market (and thus, to him, the best possible outcome), or as the result of government price fixing which is merely a particular instance of the economic effects of that wider category of interference.

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Economic Myths #3 – We Need More Jobs!

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During the economic malaise one of the most frequently watched figures in the economy is the number of jobs that are either created or destroyed. Government makes “job creation” a central plank of its economic policy to put people back to work and the impression that more people are being hired and fewer are being fired buoys their hubristic impression that we must be on the road to recovery.

Unfortunately this obsession with jobs is another example of the error of looking at an isolated aspect of economic achievement rather than at the entire picture – much like trying to boost consumption in order to further growth which we explored in myth #2. Jobs (or work, or labour) are simply what we have to do in order to achieve our valuable ends with the scarce resources available. It is the toil and suffering that we have to undertake in order to get to what we want because we do not live in the Garden of Eden. Our ideal situation is to have everything we want without having to have any jobs at all and economic growth fuelled by greater capital investment permits us to have more and more of what we desire for less effort. Our focus, therefore, is not on jobs per se but, rather, on what these jobs produce – the outcome of our labour and not that labour itself.

The most oft-cited example of useless job creation is government paying people to dig holes in the ground and then fill them up again. The unemployment figures would go down; the stock market would probably rally; the currency would strengthen. And yet these “jobs” have produced absolutely nothing whatsoever. All of the time and effort put into administering and fuelling them simply depleted the world of resources rather than added to it. In the real world, what this looks like is government providing artificial stimulus or subsidies to industries that are not otherwise economically viable; government “job creation” programmes; and not to mention, of course, the endless ream of bureaucrats that the government employs directly. Creating artificial jobs that do nothing funded by a government payroll simply papers over the cracks of an unsound economy. Yes, more people feel better as they have dollars in their hands and are probably not worrying about where the next meal will come from; but all that has happened is that those who were already working are now being forced to subsidise those whose employment creates no productivity.

A related fallacy is that if somebody somewhere is carrying out some kind of economic activity and the more of that activity there is then, so it is concluded, the better the economy is doing. To the central planners it doesn’t matter whether there is a housing boom, a construction boom, a tech boom or a stock market boom as long as there is lots of stuff going on, regardless of whether people actually want the products that are churned out by those enterprises. It is for this reason why we have the business cycle in the first place. Obsessed by creating some kind of “output” the artificial stimulus of credit expansion pushes the economy onto a path which, while brimming with activity, is ultimately not in harmony with the desires of consumers.

Job quality is more important than job quantity. The correct focus of any economic policy should be to ensure that we are labouring to direct the scarce resources available to the ends that we desire – and not simply on wasting those resources by doing some kind of fundamentally useless activity just to make government look good. “Full production” and not “full employment” should be our mantle.

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Means, Ends, Production and Consumption

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One of the apparent weaknesses of economics (of any school of thought) is that as soon as one gets past the “Robinson Crusoe” stage of an isolated individual and proceeds to the elaborate explanations of production, exchange, and the division of labour, it becomes extremely easy to forget that at the start of every economic system, at the bottom of every theory, is the individual acting man, the person who has ends that he achieves with means through actions. There are two, seemingly contradictory (although actually related) dangers from this oversight. First, by separating the categories of production, consumption, saving, investment, entrepreneurship and so forth into separate personae under the division of labour, we forget that these qualities are inherent in the action of all human beings and are simply abstractions from the different categories of action applied to different groups in order to demonstrate their role in the economic system as a whole. What results, therefore, is atomistic appreciation of these different categories, so that, for example, we talk of the needs of “producers” or of the welfare of “employees” or of interests of “borrowers” or of “savers” being punished, and so on. Secondly, we can go to the opposite extreme and only look at the whole economy, concluding erroneously that what is “good” for the economy (if such a thing can be said) is also good for the individual human beings who make up that economy. These two dangers we will explore in turn.

 The Atomised Categories of the Economy

When looking at an individual human being, it is not outrageously difficult to understand how the object of each human being is to achieve his most highly valued ends with the scarce means available to him. We do not need to enter a deep, praxeological analysis to understand how the individual human will, all else being equal, seek to maximise his gains and minimise his costs. He will attempt to inflate the former and deflate the latter as far as it is possible for him so to do. It is also clear that the final object of all of his action is consumption – the enjoyment of the fruits of his toil, the benefit of which he predicts will outweigh the disutility of that toil. If, therefore, in a situation of isolation, a human decides to plough a field, plant seeds and then sow the resulting crop we can readily understand that he will seek to achieve the highest yield of crop possible while ploughing the field and sowing the seeds in a manner that bears him the lightest labour and the lowest cost. If he is able to achieve the same yield with a lower cost or a higher yield with the same cost, he will, all else being equal, proceed to do so. Hence, if he is suddenly gifted a tractor that halves his ploughing time, we can understand easily why he will make use of it. If he can purchase a new type of seed that doubles the crop yield but with no extra work then, again, no one will have any difficulty in appreciating this. The idea that we will always take the shortest route to the same end or the same route to a higher end can be empathetically understood by any human – we are always trying to spend less and have more, cut down on X and increase Y, all to yield the highest benefit for the minimum cost1.

What we can also readily appreciate in this scenario is the different categories of action inherent in the single, lone human. He is a consumer, a producer, an entrepreneur, a saver, an investor, and a capitalist. He must carry out all of these activities with the means available to him on his own behalf. And hence it should be obvious that all of these activities are carried on not for their own sake but for the valuable ends and the improvements to his life that they achieve. If all of the ends could be achieved with no work, production, no saving, no investment and no capital accumulation whatsoever few would doubt that he would be in a far better position. How many of us would turn down the opportunity to purchase anything we wanted without having to go to work each day? Judging by the fact that more than half of the eligible population play the national lottery, it stands to reason that this would be few. It would, therefore, be absolutely absurd for us to say that a person’s life would be made better by loading additional burdens onto the ones that already exist. Who in their right mind would say that our lone human would be better off digging the soil with his bare hands rather than with a tractor and plough? Or that he is better off having to transport water on his shoulders than with the aid of pipes and irrigation? This would only mean that he would endure more work, more hardship but for the same end. No one in his right mind would advocate such a course of action. Additionally, no one would ever say (all else being equal) that a person has “produced too much”. We would not take the fruits of our labour and burn a half of it because the extra productivity means that we might not have to work next week. The result of this would be that a person forces himself to endure the same work for a lesser end. Again, all of this is readily understandable and no person would advocate such courses of action and expect to be taken seriously.

Unfortunately, however, this appears to be the approach that we take as soon as the division of labour comes into play and we examine the economy as a whole. For now, when considering the economy in such a manner, while all persons will still retain their multi-faceted characteristics2, the roles of consumer, producer, saver, investor, entrepreneur and so on are not concentrated in an individual but are split out so as to understand them in the new context of the division of labour and exchange. This is, of course, highly useful as it is only by utilising this approach that we can hope to gain any understanding of economic phenomena in the world in which we live, a world that is certainly not isolated but where each individual relies heavily on the productivity of everyone else. However, there is a danger in compartmentalising these activities and considering them only in isolation. With our lone human, we noted that less work means the same enjoyment for a lower burden of effort. A labour saving device, such as machine to pick fruit, for example, would obviously be of a benefit to him. But in the whole economy where the roles of consumer and producer are split, if such a device is introduced, the relative benefits and burdens appear to be split also. Hence, person X, the purchaser and consumer of fruit, is benefited by the lower cost of the product that the machine has permitted. But person Y, who might have been a fruit picker before the machine was introduced, might now find himself completely out of a job (or he may find that at least the demand for his services is drastically reduced) with apparently no corresponding benefit. The conclusion that is often drawn is that there has been a great harm and that “something must be done” to alleviate the plight of the formerly employed fruit pickers. This becomes manifest in a number of policy considerations such as “make work” rules, subsidies, campaigns against machinery and so on, many of which are instigated under union pressure.

The errors of these conclusions come from looking only at the production element of the economy and ignoring the consumer element. For no one in their right mind would say that an individual human should “make more work” for himself or destroy productive machinery to “give him a job”. It is obvious that such things would be a detriment to his ability to consume the fruits of labour. Nor would he be able to subsidise himself by taking money out of one of his pockets and putting it into the other. The very aim of every individual person is to gain as much as he can while doing less work, not more. Yet this is precisely what we do when looking at the economy as a whole. If productive machinery is allowed to displace jobs then this means that the consumers benefit with lower prices and/or increased product. To ward off the loss of jobs by artificially restricting the saving of labour is simply to “benefit” the production end of the economy but to “burden” the consumer end. But the whole point of production is consumption. These people, being kept in jobs that are unneeded, are in no way contributing towards the benefits of consumption. Their work continues as a deadweight cost and there is neither dignity nor achievement in perpetuating their pointless labour. Furthermore, while it is true that they will suffer unemployment in the meantime, the increased supply of free labour will cause wages to fall temporarily. This means that new lines of employment, those that were not previously economic when the people’s labour was desired to pick fruit, are now suddenly viable. New entrepreneurs will rush in to hire the spare labour and devote it to their new enterprises. One must not forget that there will be a degree of hardship during the transition, particularly if one was in a now redundant job for many decades or if a particular skill or talent has now become obsolete. But by deploying the labour to new lines of work, the array of consumer goods now increases. The labour saving device enables more consumption for lower prices, the final end of production, rather than stifling it in the production of the same goods for the same prices. In his role as a consumer every person will feel this benefit over time as real wages increase as a result of the increased productivity.

All of this goes to show that, far from failing to explain anything noteworthy, the economics of the isolated man – so-called “Robinson Crusoe” economics – must be thoroughly borne in mind if one wishes to avoid these misunderstandings.

The Broad View of the Economy

The second error we outlined above was of the opposite ilk – that, rather than looking at parts of the economy in compartmentalised components, one looks only at the whole economy and only thinks in terms of hermetically sealed aggregates and totals. With the individual, lone human we noted that anything that increases his consumption and reduces the burden of production is of a benefit to him. When he is, in effect, his own “mini-economy” all burdens are felt by him and all benefits are enjoyed by him; the one is weighed against the other in the same mind. If, for example, a person desires more to bake more bread and to achieve this he is going to deliberately curtail his production of meat then there is no problem in saying that the burden of the reduction of meat is offset by the increase in bread, for this individual feels both the burden of less meat and the benefit of more bread. His action demonstrates that he prefers bread to meat. This is not the case in the economy as a whole, where roles are concentrated under the division of labour and burdens and benefits are scattered across many – literally millions of – different people. It is a mistake to assume that there is any one, particular event that will be “good for the economy as a whole”. For the economy is just a number of people trading and co-operating peacefully; it is not an entity in its own right, it does not feel, it does think, it does not desire and feels neither pleasure nor pain. While we can, for example, say that a decline in meat production offset by a rise in steel production is a benefit “for the economy as whole” in the sense that the individual members of this economy have chosen to prefer steel over meat (and that jobs in the meat industry will shift to steel production), it is not the case that some broad measures of “output” and “input” leads to the conclusion that all is well. The most pervasive manifestation of this error is the almost ubiquitous obsession with GDP, a figure that is calculated from numerous aggregates that bear no relationship whatsoever with the underlying desires of the acting humans. A particularly crucial element in this aggregates is that of government spending. If GDP starts to fall, say, from the onset of a recession, then Government can simply prop it up by increasing its share of the GDP pie. But it does not follow from this that there is any benefit from this spending. It can only be concluded that an exchange is beneficial if the parties to exchange are volunteers. They only exchange because their action demonstrates that they desire the good that is gained more than the good that is given up. Government spending, however, is funded by taxation3, a compulsory exchange, not a voluntary one. Because the exchange was compulsory it demonstrates that the tax-paying party would prefer not to have his money in the hands of the government. If he did so prefer he would have paid it across voluntarily. When the government spends this money, therefore, it can only do so in ways that are less valuable to those people who provided the funding. There is no sense in which anyone is “better off”. The big aggregate numbers may look impressive following this expenditure but what has not been realised is that they are completely severed from the preferences of the individual people. The situation is no different from one man holding a gun to another’s head and forcing the latter to devote his productive resources to churn out stuff that he doesn’t want. The effort, the production and the physical results may look impressive but there is no point in producing anything if it does not satisfy someone’s most urgently desired needs. What has been gained, like Bastiat’s famous broken window, has simply been at the expense of something that was more highly desired. The same is true also of so-called “infrastructure” spending, which ignores the intricate web of the capital structure. This has been dealt with in detail here. Suffice it to say for the moment that government spending on capital goods does not help the economy; rather, the effect is to divert the economy from a path on which it was meeting the needs of individual people onto a path where it must adapt itself to the new capital resource. Lines of production that depend upon that resource will become profitable, but only at the expense of other, more highly desired lines that have to be abandoned because their funding was compulsorily diverted to government capital expenditure.

The same fallacy – of viewing the economy only as a whole – is evident in the whole saga of the business cycle and credit expansion.  For while the forced lowering of the rate of interest swells the aggregate numbers – everyone is employed, stock markets climb, skyscrapers start shooting up, etc. – what has been forgotten is the underlying preferences of the individuals in the economy. They are not willing to devote the resources necessary to sustain the new capital structure which is precisely why, when the credit expansion stops, the whole lot comes tumbling down. Indeed, the entire approach of mainstream economists seems to be that the economy is doing well as long as somebody, somewhere, is spending on something, i.e. as long as there is some kind of “activity” then there is no cause for alarm. Their failure to acknowledge the wastefulness of the boom and the necessity of the bust demonstrates their lack of comprehension of the fact that spending the scarce resources at our disposal on stuff that is simply not wanted is emphatically not economising activity – it is just waste. The lesson from the 2008 financial crisis should be that you cannot build houses if people are not prepared to pay for the bricks.

The Praxeological Method

These two errors – of looking at the economy too narrowly and then too broadly – can only be avoided by following the praxeological method. For both errors have their root in the failure to grasp the same basic point – that all economising activity is initiated by humans who desire, choose and act so as to devote the scarce resources available to best meet their most highly valued ends. By understanding this crucial fact one would never focus too narrowly and advocate a programme to help certain producers at the expense of others; but neither also would one look too broadly and conclude that what appears to be some kind of economic activity – expressed through aggregates, totals and figures – is always a good thing. Human choice, actions and ends are the foundation of economic understanding and it is vital that is restored to its rightful place in economic thought.

View the video version of this post.

1We do not, of course, have to assume that every human wants to “have more” in the sense of material fulfilment; rather that every human wishes to meet his ends for the lowest costs whatever the substance of these ends may be.

2A labourer, for example, must, to a degree, possess entrepreneurial skill in choosing the employer from which his labour will yield the highest return; he will also be a saver and investor if, for example, he saves some of his income in a pension fund. And everyone, whatever their broader role in the economy, is also a consumer.

3Even if it is funded by borrowing not only must these borrowed funds be repaid with tax loot but also government borrowing crowds out private borrowing.

Response to Petition: “Raise the Minimum Wage…”

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The author was invited to sign the following petition that recently appeared on change.org. This post is a response to this petition.

Petition:

“Every hardworking American deserves to earn a LIVING WAGE. Every small business needs CUSTOMERS. By raising the minimum wage, we create more customers for business–like Henry Ford did when he paid his workers the unheard-of wage of $5.00 a day so that they could afford to buy Ford cars. With every employed adult earning a living wage, we reduce the ranks of those on WELFARE and increase SELF-RESPECT. We protect FAMILIES by reducing divorce and dysfunction at the lower end of the socioeconomic scale. Instead of taxing people to pay for welfare, customers pay for this benefit through a slight rise in the price of goods and services they purchase from those with minimum wage jobs.”

Response:

Your aims are noble enough, to a) reduce the number of persons who receive assistance from the welfare state, b) to reduce the tax burden of the same, and c) to create more customers for business. Your proposed method of achieving these wonderful aims is, however, far from satisfactory.

Every hardworking American deserves to earn a LIVING WAGE.

Even if the concept could be defined objectively there is no such thing as a “living wage”. There is only what has been produced and this may be below, at or above the amount “necessary” on which to “live”. Nobody works for a money wage but rather for the goods and services that it can buy and a minimum quantity of these do not magically fall from the sky and present themselves for consumption.  Nor can The Congress make them appear by waving the legislative wand – they have to be worked for by someone.

Consider first of all an economy where I produce goods for only myself. If I bake three loaves of bread in a day then three loaves of bread is what I have. If, however, I bake eight loaves of bread in a day then eight loaves of bread is what I have. Assume for argument’s sake that the former situation is barely sufficient to keep me alive and the latter allows me to live comfortably. If I have produced only three loaves then three is what I have to enjoy at the end of the day. If this causes me to live at near-starvation point then nothing except more productivity on my part can change that. If, on the other hand, I have produced eight and can live handsomely from them then again it is only because I produced them.

This fact does not change when I do not produce goods for myself but instead offer them in exchange for other goods. If I swap my three loaves of bread for steak then the steak is now my “wages” for having worked to produce the bread and the bread is now the butcher’s “wages” for having produced the steak. But if the three loaves that I have paid the butcher is barely enough to keep him alive then why should I expect a quantity of steak in return that will do any more for me? Why do I “deserve” to earn a “living wage” when I can barely offer the same to the person producing it for me? Does he not “deserve” it also? Where does his “living wage” come from if I haven’t produced it?

None of this changes in a highly complex, industrial society where goods are not exchanged directly but for money. My wage is paid out of my employer’s revenue and his revenue is achieved only as a result of the productivity of the employees. Therefore if I am to earn a given wage then my productivity must enable my employer to earn at least that much in additional revenue as a result of employing me (and often much more as the total cost of employing a person is often much more than the wage paid). If the costs of my employment equal additional revenue then employing me is a break-even business and, while my employment is barely sustainable, there is no incentive for the employer to continue it. If the costs are greater than revenue then I am making a loss for the employer and I will have to be laid off.

Minimum wages therefore place a threshold of productivity which the worker must achieve before he can be legally employed; for if my ability or skill means that I cannot produce enough to enable my employer to earn enough revenue to pay me the minimum wage then I will simply not be hired. Highly skilled and experienced workers will have little problem in achieving this threshold (unless the minimum wage is set very high). But low-skilled or inexperienced workers, the very ones whom you appear to be saying are in need of help, may find it next to impossible. All you do is raise the bar over which they have to jump to get a job without improving their means to do so. Indeed, you totally impede any path to them gaining such means for the worker cannot use price as a bargaining tool. If he was unskilled or inexperienced he might happily say to a prospective employer “yes, you would pay $8/hour for someone with experience. How about I, not yet blessed with experience, do it for $5?” If the employer accepts he/she is compensated for the lack of ability or experience by the reduction in price; the worker, on the other hand, gains employment during which he may learn a valuable trade or skill that may enable him to progress to higher levels of productivity and, hence, higher wages at a later date. Even if he doesn’t quite achieve that, at least he is employed and such employment is likely to mould him into a responsible adult with self-respect. However, with an imposed minimum wage above $5 (in this example) this option is closed to both the employer and employee. The worker will simply not be hired.

The absurdity of the minimum-wage is highlighted even more when you consider what its advocates are really arguing. Presumably you think that if am not employed by an employer (i.e. I do work with a value of $0) it is fine for that employer to pay me $0? And also, if your ideal minimum wage is set at $8/hour and I do $8 worth of work for the employer, it is fine for me to earn $8/hour? But if I work to produce anything between $0 and $8 suddenly that is evil and immoral and should be outlawed. Why this lacuna? Why is producing $0 or $8+ fine but producing $4.50 is not? Is $4.50 not worth $4.50 in the same way that $0 is $0 and $8 is $8? Why is it that if I produce $0 it is moral and proper for me to be paid $0 yet if I produce just $0.01 for my employer the latter should be forced to pay me the “living wage” of $8? Further if I am not being paid for my productivity but instead am being paid a legally enforced form of charity then aren’t I in just the same position as if I was on welfare?

Finally, it is the fact that minimum wage legislation impacts upon the low-skilled or inexperienced that makes it so destructive. For these people are likely to be any combination of young, “unprivileged”, with few educational merits, or disabled – in short the most vulnerable in society who are more likely to succumb to a life of delinquency or welfare-dependency when faced with no other option. Such a person is likely to respond rather coolly to your demands for a “living wage” if he can’t get any wage at all.

By raising the minimum wage, we create more customers for business

If it is that easy then why not have an infinitely high minimum wage? Why stop at $6 or $8, why not raise it to $20, $100, or $1 000? In fact, why just not make everyone millionaires? Think of all those millions that will be spent in small businesses around the country!

Your proposal rests upon the fallacious theory that workers need enough “purchasing power” in order for businesses to expand production. The causal relationship is precisely the other way round – it is increased productivity that permits an expansion of purchasing power. Going back to the example of bread, if I bake three loaves of bread what I have is three loaves of bread with which to barter. If I bake eight loaves of bread I now have eight loaves of bread with which to barter. Eight loaves of bread will trade for more than three loaves of bread. I have more “purchasing power” because I have been more productive.

What, then, will be the effect of your proposal upon achieving your stating aims?

Regarding first of all those adults who are unemployed and are fully supported by assistance from the welfare state, why will raising the cost of employing them induce employers to do so? If they were not prepared to employ them to do a certain job at a lower rate, why on earth would they suddenly, all else being equal, be inspired to do so at a higher rate? Let’s say you go to the grocery store and see chicken on sale for $5/unit, having never bought it before. You decide that at that price it is too expensive for the benefit it will give you and you decline to purchase it. Suddenly, the Government decrees that everywhere chicken producers are not earning a “living wage” and decrees a minimum price for chicken of $8/unit. Hurrah, the plight of the exploited chicken farmers is over! But if you did not purchase the product at $5/unit why would you be any more inclined to purchase it at $8/unit? It’s the same thing, only now more expensive. Has the minimum price helped the chicken farmers vis-à-vis you in anyway whatsoever? If anything, wouldn’t lowering the price be the correct thing to do induce you to buy chicken? Exactly the same is true for businesses hiring employees. The same amount of productivity on offer for a higher price induces no new purchasing whatsoever. It seems impossible, therefore, that your petition would reduce the ranks of the unemployed who are dependent upon welfare.

For people who are both employed but remunerated at a rate below what you would call a “living wage” and who are partial recipients of welfare, raising the minimum wage will (if their current wages are below the proposed threshold) increase the costs to business of achieving the same amount of productivity. Employers have only the same stock of goods to sell to customers but now they must pay more for their employers to produce them. Revenue therefore remains equal while costs increase. How might employers respond?

First, they might gradually replace the employees with capital equipment (i.e. machines and tools). For now, with the cost of labour increased, the cost of capital relative to labour is lowered and it becomes more profitable to replace workers with labour-saving devices. However, as there has been no genuine saving (by necessity the cost of capital must be between the old wage and the new wage – if it was lower than the old wage then capital will already have replaced labour without your proposed minimum wage; if it is higher than the new wage then labour will remain employed) there are no spare funds with which to employ these workers elsewhere. So workers that were formerly partially employed would now be fully unemployed as a result of your proposal and, furthermore, will have increased the burden to the welfare state and its associated tax demands rather than have caused a decrease to either. An analogy is that if you were a purchaser of chicken at $5/unit, the new price of $8/unit you find to be too high and you switch to cheaper substitutes.

Second, the employing business may decide to absorb the extra cost from profit. But what if the increased wage completely consumes the profit margin so that the business now makes a loss? A business that loses money will have to close shop and the workers will, once again, simply have to join the ranks of the unemployed. If profit margins are so slim it means the employees were barely affordable before and their employers were no doubt straining to control costs to stay afloat which would – crucially – keep those people employed. But along you come to forcibly raise their costs thus destroying their profit margin and guaranteeing nothing to the workers but unemployment.

But assuming that a profit remains and the business can stay afloat, a lower profit margin means decreased funds for investment which the business can use to expand. It is such expansion that requires the business to increase its demand for workers, and increased demand results in increased wages. If they cannot do this then wages cannot be increased naturally. Furthermore, in the economy as a whole not all businesses will be affected in the same way. Labour-intensive industries will be the hardest hit while capital-intensive industries will suffer more lightly. Investment funds will therefore be withdrawn from the labour-intensive industries and diverted to the now more profitable capital-intensive industries; or the labour intensive stages of production will disappear overseas and the US will be left only with capital-intensive industries – plus an increased amount of unemployment from the displaced workers.

However, your proposal appears to indicate that businesses will attempt to pass these costs on to their customers. If the customers who have to bear the burden of the increased costs are the same people who have received the new, higher, wage, then you are not any step closer to weaning them off the welfare state. If their income increases but so do their costs then in real terms they are in exactly the same position as they were before. What are you going to tell them? “Congratulations, your wages have been doubled! But now you have to pay twice as much for everything as you did before!”

If, however, the burden is borne by those who do not receive an increased wage then, all else remaining equal, the customers can only do one of two things. Either they will reduce the quantity they purchase from the business, or they must divert spending from elsewhere in order to meet the added cost. If the former, then while the business’s nominal revenue may remain the same the quantity of goods needed to achieve that revenue is reduced. Reduced production therefore requires downsizing and downsizing means workers will be laid off. If customers divert spending from elsewhere then the businesses from where they withdraw funds will suffer from reduced revenue and they will lay off workers. The result in either case is increased unemployment and increased dependency upon the welfare state. Furthermore, the poor customers will have to suffer both from the increased costs of their purchases and from increased taxes to fund the now expanding welfare state.

Finally, regarding your desire to help small businesses, which type of businesses are more likely to be disadvantaged by a minimum wage? Large, multinational businesses which huge reserves of capital or the new start-up with limited investment and an unestablished market? Which of the two benefits more from being able to hire employees cheaply and which is likely to struggle from being forced to pay more for those same workers? Minimum wages, like all employment regulation, are a boon to large, established and politically connected businesses that can more easily absorb the increased costs while forcing their smaller rivals, the ones you are trying to help, out of business.

It is clear, therefore, that this proposal will not fulfil its noble intentions and, worse, will have the very opposite effect of exacerbating the very problems that it seeks to eliminate. For these reasons (aside from the fact that I am neither a US citizen nor resident) I cannot accept your invitation to support your petition and I urge you and everyone else whom you invited to abandon it.

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