incidentally Esuric I agree with the premise in your original post and I am equally as curious to the resolution. Maybe your confused by my manner of responding. I have a habbit of bouncing idea’s off people as a method of brainstorming. It’s not always easy to pickup, I apologize.
[Edit] Holy crap, look at your post count as compared to mine.
I just try to be as clear as possible and formulate my thoughts. I really don’t know how familiar you are with Austrian growth theory, but I make no assumptions.
No, there is! But that’s the problem with my analysis. It makes perfect sense if you assume a completely collapsed capital structure with homogenous and substitutable capital goods, but I can’t come to that conclusion with my (limited) knowledge of Austrian capital theory. I think I need to read Garrison or something. Essentially, I’m making some kind of mistake, somewhere.
Well I was just responding to the idea that increasing the interest rate leads to increased saving and that this causes economic growth. If we define wealth as the maximization of utility, as opposed to the accumulation of productive forces, then an infinitely growing capital structure would make society poorer. To better elucidate my point, consider the Soviet Union which continuously expanded the capital structure and had high annual levels of total output. They produced a lot of steel, but they were very poor.
Goods flow from the top down, and money flows from the bottom up. The vertical axis, in the Hayekian triangle, represents time. You use the current (more direct) production methods in order to satiate current desires, but when the time preference of society falls, that is, when they save more (lower interest rate), additional resources can be invested towards longer (roundabout) methods of production. When such (longer) methods are completed, then you can increase total output, but again, the older capital goods bridge this gap. The capital structure is inter-temporal (and inter-generational).
You’re right. I meant with respect to trade. The influx of immigration can be thought of as a large jump in population growth, or a shock to the labor supply.
I took that class years ago…
Dont forget that they have assumptions in order to say “immigration=growth”
Resources are available and abundant.
Plenty of land for new settlements.
There was possibly a labor “shortage” before mass immigration.
We are assuming that the massive immigration influx was not due to a local demand in labor(which is typically the case). We’re assuming a prior stable economy before the immigration, that labor was generally being satisfied.
Still I am not convinced that it’s not compatible with Austrian theory to state that an immediate radical influx of immigration would not tip the economy out of balance for a time.
to be sure though such situations are not usually what is actually occurring during general immigration. Immigration usually rises when there is a demand for labor in a general geographical region. Even if the conclusions we draw in Esuric’s op is correct, it does not conclusively mean that immigration of all kinds causes a detrimental effect on the economy. We are talking about a very specific scenario.
This is interesting.
From: http://www.auburn.edu/~garriro/b4mismac.htm
Wonder if it’s linked to what Merlin said. Merlin, do you have any reading material regarding the convertability or substitution between labor and capital?
Well, basically that’s what he is saying: stop assuming that only capital is attracted by profit (which is the root of this). The factors of production are! And, ceteris paribus one will use those factors which’s price is still lower than the marginal productivity.
The mistake of seeing immigration as shortening such a structure rests in stopping the analyses a step to early: if one stops at the increased profits to be had in making consumption goods, that it would seem that the factor shall flow to lower stages thus shortening the structure. But why stop there?
MPl1/MPk1 (lower stage)=MPl2/MPk2 (higher stage)=Pl/Pk
Now, an influx of unskilled labor enters the market, lowering Pl1. So, it would pay to increase the use of labor in the first stage, and decrease the use of capital, up to the point where MPl1/MPk1 again equals Pl/Pk. You see, as long as some labor can be substituted for some capital the reasoning holds a-priori.
Now, I cannot find materials regarding the substitution rate right now, but frankly it doesn’t matter that much for Austrians (as long as we agree that it exists to some extent), though it’s a central concepts in microeconomics.
And indeed, fishermen catch fish in both Japan and Madagascar, but those in Madagascar use almost only labor, while those in Japan much more capital. Here we have e simple example of substitution: the same products can be made with at least two combinations of capital and labor. Taking exception of a very, very few top-notch fields, this is always the case. Whatever one does, he can do it with both more capital/less labor and more labor/less capital.
Hence immigration, is itself, cannot be detrimental as long as the population level is still under-optimal.
@OP: It is my view that national borders are purely artificial and, therefore, ancillary to the economic problem of marginal productivity. What reason is there to believe that ingress or egress of immigrants is the largest, or even a significant, impact on productivity and not, say, shifting regulations, inflation and the other arbitrary acts of governments seeking to extract the largest possible pile of booty from the citizenry without triggering open revolt?
The more fundamental question is marginal productivity versus population. As more children are born and enter the workforce, do we expect economic growth or contraction? The Malthusian view is that population growth inevitably results in individual impoverishment and eventually leads to catastrophic economic and population collapse (triggered by war, famine, disease, etc.) followed by economic recovery and population balance. Some economists (ahem Steven Landsburg) imply that population increase always leads to economic growth, by appeals to history. But it is obvious that this cannot be true because the population could grow, in a relatively short period of time, to a number so large as to exceed the total available energy in the Earth environment. The Malthusian dogma has been generously refuted both by history and analytical critique. The problem is more complex than either view and I think marginal analysis is applicable.
Clayton -
I’m afraid that Malthus law is one of the few constants around the globe, from the beginning of time. Exceptions are rare, not the other way around.
But when it comes to immigration one is in the unusually safe position of not having to worry about Malthus: no one will ever emigrate to an overpopulated country, while those who do not want a better life (just have as many kids as they can, irrespective of that keeping them at an invariable standard of living) will likewise not bother to emigrate, being content with what they already have (with the important exception of people fleeing from a newly imposed tax: that would indeed be a problem fro the recepient country).
If we assume that immigrants come in with nothing but their shirts on their back, why should they increase the aggregate demand for consumers goods? Supply creates its own demand, so there is no reason for demand to increase until productivity is increased. I don’t see why immigration necessitates the increase of the natural rate of interest. Where did you [Ensuric] get this from other then your own deductive reasoning?
The issue is people take the isolated incidents to extremes, and equivocate generic population growth in impending doom. The Malthusian growth model, as is usually used on the left in fear of any kind of population growth, does not take into consideration markets and time. The Malthusian growth model has been one of the most abused models ever conceived in economics. It’s point is entirely missed and people nearly always use it to demonstrate the possibility of otherwise impossible extremes.
[EDIT] I’m not disputing the law, just how people most commonly use it and/or interpreted it.
If you read the OP he explains how he’s coming to this conclusion. It does make sense to an extent as well when you don’t consider what Merlin said.
?? It seems that Merlin agrees with what I said so I don’t know what you’re talking about.
You have it backwards. High time preference means less savings.
Reading the whole thread 4tw
I think your confused.
Assume immigrants arrive with nothing but shirts on their backs, and a time-preference equal to that of the population they are joining. (and also that there are no changes in imports/exports, etc) Then we would expect the following:
There would be no change in the natural interest rate at any time in this process. The return-on-investment in consumer goods industries would increase relative to higher-order industries, but this would be only temporary, and driven by a change in entrepreneurial profits, not a change in time-preferences.
Does this help?
Here’s Bohm-Bawerk:
Hayek holds this position as well, though I can’t find a specific quote at this very moment. Either way, an outward shift in the supply of labor will elevate the rate of interest. This fact isn’t doubted by anyone.
It would, at first, increase the use of labor and capital in the lower phase. The lower phase would be the most profitable phase (money receipts), which, in turn, allows it to draw specialized/fixed capital away from the higher orders. Again, the lower phase may employ labor at a higher rate relative to capital, but it must, as a rule, draw capital away from the higher phase(s). I’m saying the same thing as Professor Ebeling:
Except he’s talking about a lower rate of interest, and I’m talking about an elevated rate of interest.
I think this is because economic growth is measured by GDP. Immigration increases both consumption and government spending which leads to higher GDP figures.
That depends on how you measure economic growth. I think it may hold even if you don’t make the neoclassical assumption. If you measure it as some sort of total physical product of consumer goods, the increase of productive immigrants will always lead to economic growth.
I think it is pretty good as far as it goes. I just think you’ve just poorly defined the problem/question.
People will migrate from a more overpopulated country to a less overpopulated country if that is the best opportunity available to them.
Word. As long as you mean ‘detrimental’ to the average physical product, and we are assuming that the immigrants are productive and not parasitcal. It’s nice to see that someone else gets the Malthusian point. You might also want to look up, out of interest, what Mises had to say about Malthus’ population law in HA and Theory and History.
The mistake in the OP is maybe mixing up absolute growth with per capita growth. You are maybe thinking that lower phases of production pull away investment from the higher phases, making a contraction in GDP. That would be a contraction only in per capita income.
Ceteris paribus, immigration leads to an increase in GDP and a decrease in GDP per capita in both the short and long term. There is really no way that it can lead to greater long term growth in per capita with homogeneous actors, because the more you earn the larger the proportion of income can possibly be saved regardless of time preference.
I’m saying that it would lead to a shorter capital structure, and possibly a recession.
You may be right. Here was my train of thought:
It increases total output, and in the long-run it will elevate real wages back to their previous position, and then some (possibly). The reasoning here, and again, I’m a little rusty when it comes to intermediate macro, is that it elevates the marginal productivity of capital, and therefore investment. And since real wages are a function of capital per worker (which is also a function of savings), then it will increase the productivity of labor and therefore real wages (in the longer-run).
Mathematically: Q=f(L,K) => Q=3L^.5K^.5 => L=4, K=9 => Q=323=18 => MPL=1.5K^.5/L^.5 => MPL= 2.25 => MPK= 1.5L^.5/K^.5 => MPK= 1. (MPL is the marginal productivity of labor; MPK is the marginal productivity of capital, and Q is total output)
L=9, K=9 (increase the labor supply) => Q=333= 27 => MPL= 1.5, MPK= 1.5 (the marginal product of labor falls but the marginal product of capital rises which increases investment). But, as you pointed out, without additional savings, the investments cannot come to fruition. I think you’ve answered my question.
I knew I was making some kind of ridiculous mistake, but couldn’t put my finger on it. Thank you.