Niagara Falls Economics: The Economic Impact of Open Borders
There’s a literature in economics estimating the impact if all the world’s borders were open to free migration, as the world’s borders were largely opened to free trade in the last decades of the 20th century. “The Global Economic Impact of Open Borders,” back in 2015, was my contribution. A rough median estimate, which my model confirms as the central case among many scenarios, seems to be that open borders would double world GDP. But for most people, that’s a black-box estimate that they have to take on trust. This post tries to open the black box.
My last two posts in this “Welcome the Stranger” series, “The Dreamer Problem” and “The Limits of Immigration Enforcement,” argued that (a) it’s a moral necessity to pass the DREAM Act so that people raised in America can stay here, but that will incentivize greatly increased illegal immigration, and (b) enforcement of immigration law can’t stop this, because its efficacy is inherently limited, since illegal immigration is a victimless crime, so law lacks an ally in conscience, and it’s impossible to make compliance with the law incentive compatible while respecting human rights. The conclusion, that we’ll either mistreat immigrants or face a flood of illegal immigration– and probably both– must have struck many as rather depressing.
But now the argument will take a much more optimistic turn. A flood of illegal immigration sounds scary, but it’s actually great. The economic impact of open borders, or by extension of a major shift in the direction of open borders, is incredibly fabulous. Surrender is sweet. Economic projections of the economic impact of open borders tend to forecast massive growth: a doubling of world GDP is the median estimate. What I present here distills a variety of economic models into as conventional a graphical argument as I can contrive. If you want to know why open borders would double world GDP, I'm here to help.
I’ll make the argument in two forms: (a) an economist version, and (b) a lay version. The economist version is much shorter, encapsulated in a single complex graphical argument. My fellow economists are especially invited to read the economist version and then jump right into discussion. The lay version teaches a lot of basic economics, especially about factors of production, in order to get non-economist readers up to speed on concepts that, for economists, are already familiar and don’t need much explanation.
Economist Version
The economic impact of open borders is captured in the following chart, where WW is raw labor wages in the West (WW* current); WR is raw labor wages in the rest of the world (WR* current); WOB is the raw labor wage that would emerge worldwide (both the West and the rest of the world) under open borders; LW is the labor force in the West (measured from the left-hand axis) with LWstatus quo currently and LWOB under open borders; LR is the labor force in the rest of the world (measured from the right-hand axis) with LWstatus quo currently and LWOB under open borders; LW + LR must equal the global labor force which is assumed to be constant, with LW and LR changing only through migration while their sum remains constant; Net migrationOB is the net migration from the rest of the world to the West that occurs under open borders, and equals both the difference between LWstatus quo and LWOB and the difference between LRstatus quo and LROB; DW and DR represent labor demand in the West and the rest of the world respectively; YWORLD measures world GDP which under open border rises first from Ystatus quo to YOB (world GDP under open borders) and then to YOBLR (world GDP under open borders in the long run); KWORLD measures the world capital stock which under open borders rises from Kstatus quo to KOB; DWOB,LR represents labor demand in the West under open borders in the long run; and WOBLR represents the global raw labor wage under open borders in the long run. The circled numbers highlight features or stages in the process of transition from the status quo to open borders.
Demand for raw labor (where skilled labor earns the raw labor wage plus a human capital premium) in the West (rich countries) is high, because of abundant capital, good institutions, etc..
Demand for raw labor in the Rest of the World (poor countries) is low.
The lower axis represents the global workforce, with the share resident in the West starting from the left, the share resident in the Rest, from the right.
Under the status quo, residency is largely determined by birth, and the line shows the population shares of West and Rest
Under open borders, there's a shift to equilibrium where raw labor earns the same in West and Rest.
Raw labor wages in the West initially fall steeply under open borders.
Raw labor wages in the Rest rise sharply under open borders, both for emigrants and those who stayed behind. That’s the heart of “Niagara Falls economics,” the great enrichment of the global poor that can be achieved in no other way nearly so effectively as through open borders.
Net migration from Rest to West under open borders is billions before equilibrium is reached.
There’s a large increase in the surplus (most straightforwardly interpreted as profits) due to better allocation and combination of factors of production.
Increased surplus means higher productivity. That feeds into the Solow model.
With higher productivity, the Y(K) curve shifts upward. Note that the Y(K) curve is drawn with less of a tendency to bend and reduce its slope than is typical, because the definition of capital is very broad.
That represents an immediate increase in global GDP…
… and it also causes more savings and investment, leading to more capital accumulation. Over time, the multidimensional capital stock– physical, human, social, organizational, public– rises.
World GDP rises further due to capital accumulation as it approaches a new Solow steady state.
As capital accumulation proceeds, demand for labor increases further, until raw labor wages in the West approach their previous level. But now that’s a global increased wage.
The chart is drawn with the final raw labor wage in the West still a bit lower than before, reflecting “ancestry” concerns, culture, etc.
Visually, if anything, the chart reflects less than a doubling of world GDP in the “short run,” more than a doubling of world GDP in the “long run.” I did it that way because the models have a mix of short-run and long-run estimates. In the usual way of economics, the “short run” and “long run” are constructs used to isolate the effects of different pressures. Actually, the migration of billions and the accumulation of capital would happen simultaneously, though I think the migration would play out faster than the capital accumulation. Very roughly: maybe thirty years for billions to migrate to the West; maybe a century before the abundance of multidimensional capital in the West relative to raw labor caught up with the pre-open borders trend.
Lay Version
The phrase “trickle-down economics” is usually used pejoratively, yet the concept is actually a wise one. The phenomenon is as ubiquitous and commonsensical as people having jobs in which they earn more by working for a boss than they would shifting for themselves, or enjoying improved quality of life because of the inventive work of strangers. Some people have more ideation, initiative and/or money than they need to earn a living or can utilize by their own labor. Many of these, fortunately, become economic leaders, entrepreneurs or executives or financiers or managers or inventors or educators whose work shapes the work of others, gives it direction, and raises its productivity. Prosperity trickles down from a super-productive few to the mediocre many. In a thriving capitalist economy, the latter are not impoverished or oppressed but can lead comfortable, fulfilling lives, much helped in this by the leadership of the economic elite. Wealth trickles down from the rich, the entrepreneurial, the creative, and the knowledgeable to the broad masses, nourishing the general prosperity.
Trickle-down economics is not mainly about charity. Of course, charitable giving is one way that wealth trickles down from the prosperous to the less fortunate, and they’re grateful, but receiving charity, though sometimes necessary, and very welcome when it is, is not conducive to the greatest human flourishing. People want to be useful. So the best kind of trickle-down economics occurs when the less prosperous are enabled by economic leaders to be more productive as employees or users of inventions. Capitalism does far more than charity to lift up the poor. The wealth that trickles down from the churning capitalist machine is worth far more than handouts from governmental philanthropy. Most bosses probably get satisfaction from benefits they bestow on their employees through their workplace leadership. But they also profit by employing them, and much of the dignity of labor springs precisely from how much they're needed, how much good they did for others through their work. To be a mere charity case would confer much less dignity. The trickling down of wealth through the empowerment by economic elites of the less fortunate to be more productive and enjoy a higher quality of life is a major aspect of most of what happens in capitalist economies. How does it work? To understand that, we’ll need to learn about the factors of production, of which I'll say more in a moment. But meanwhile, what does all this have to do with immigration?
It has everything to do with it, because immigration is an enabler of trickle-down economics, and open borders would enable trickle-down economics on a massive and unprecedented scale. The scale of it breaks the metaphor slightly, since the word “trickle” denotes a small flow. And so economist and open borders advocate Bryan Caplan coined the term “Niagara Falls economics” to describe the impact of open borders, meaning that it's like trickle-down economics, only so much more so that it would be like a glorious Niagara Falls of enrichment pouring down on the heads of the world's poor. Immigrants from poor countries enjoy huge gains, seeing their incomes rise by multiples, and models of the global economic impact of open borders, though their predictions vary a lot, all predict large gains, the median estimate being that they would double world GDP. And this wouldn't happen at the expense of the natives of rich, immigrant-receiving countries. On the contrary, they would enjoy big gains, too. That sounds magical, too good to be true, but it's only the mundane magic of capitalism, which somehow sets us so far apart both from the beasts and from most of historic mankind, surrounding us with comfort and safety and freedom and means of happy adventure. Immigration restrictions are a massive and catastrophic exception to the liberating and enriching norms of capitalist society, and the rewards that await for curtailing or abolishing them are enormous.
Since the phrase “open borders,” frightening to many, has been introduced, I had better articulate a partial disclaimer. I like the phrase “open borders,” and consider myself an advocate of it, but not everyone would regard my preferred immigration policy, namely the replacement of immigration restrictions with immigration taxes, as “open borders.” That said, I think that any kind of open borders would be far less disastrous than is widely feared, and preferable to the status quo, which is sometimes characterized as “open borders” by ignorant polemicists, but is actually highly restrictionist. The concept of Niagara Falls economics is not applicable only to pure open borders, but to any policy of substantially freer migration. Indeed, one of the predictions of the theories that will be presented in this post is that immigration has diminishing returns at some point, so that most of the gains come from a minority of the potential immigration that would be unleashed by open borders. Still, Niagara Falls economics is a juggernaut of a reason to embrace and welcome immigration on a scale that would be shocking to almost any mainstream American or Westerner. It's one reason why America and the West should let hundreds of millions of people come in.
To see why, let's get back to the concept of factors of production.
Almost every production process requires both labor, the intentional direction of some human being’s effort to some productive end, and capital, some kind of tools or equipment or structures useful in production. An occasional porter or singer may work productively without any capital, but the vast majority of work requires tools. And an occasional Christmas tree farm or wine cellar may add value to products without labor inputs for a while, but the vast majority of production requires human work. The human work and the tools are very distinct. They can combine and be productive, or be separated, or the tools can be reallocated to different workers. Capital and labor must be combined in order to make almost anything.
From the concept of capital, a big reason why trickle-down economics works immediately follows. Most people don't personally own the capital goods they need to be highly productive. But employers do own them. So employers hire workers, and then give the workers access to tools and structures that make them highly productive. Some of the extra productivity covers the cost to the employer of acquiring and maintaining the capital, and some of it goes to profit. But some of it goes back to the worker in the form of a wage that is higher than he could have earned by shifting for himself.
Some, especially Karl Marx, have wished that the workers themselves could own the means of production. That doesn't change the fact that being able to use capital equipment owned by an employer, in return for getting some of the added productivity back in wages, is better than not being able to use it at all. But also, the worker is often much better off not owning his equipment. The equipment may be difficult to maintain, and perform a very specialized function, such that if the worker somehow owned it, he would be highly dependent on a large organization to repair the equipment and buy its output. He would have more net worth, but would be very underdiversified and vulnerable to fluctuations in the tool’s performance or the value of its output. A wise worker would want to sell the equipment to the company, and then use the proceeds of the sale to get a diversified portfolio of financial assets, while still using the equipment on the job in his capacity as an employee. Possibly it would be good if a few more workers owned their tools, but for the most part, it's more efficient and better for all concerned for employers to own most of the productive capital in the economy. Of course, if the employers are publicly listed companies, they are themselves owned by retail investors, many of whom are workers. So instead of owning the specific tools they work with, workers have a diversified ownership stake in a vast range of tools distributed across the economy. It's better that way.
A big part of the global economic gains from open borders would occur through this process of employers equipping workers with tools and giving them access to structures. Workers in developing countries tend to work very inefficiently because the poverty of their countries results in a very poor endowment of productive capital for them to work with. Think of hoes instead of tractors, or wheelbarrows and shovels instead of bulldozers. Some construction workers abroad don't even have wheelbarrows. But employers in advanced capitalist economies are eager to equip any worker they can get with good tools, or place them in well-designed structures, in order to render them highly productive. Neither regulation nor philanthropy would be needed to make it happen. Business would pursue its own interests by responding to an abundance of labor with an abundance of projects, as surely as the capitalist sun rises every day and keeps GDP ticking.
Economists have traditionally recognized two other factors of production as well, namely, land and entrepreneurship. Every act of production must occur in some place. The mere space required for it is sometimes a scarce resource. Most kinds of production largely exclude other kinds of production: you could not, for example, reasonably have a medical consultation and a rock concert in the same room. Also, many kinds of production depend on taking something from the land: cutting down trees, plowing fields, mining metal ore out of the earth, etc. Other production processes don't take things from the land directly, but depend on other production processes that do. An auto parts factory, for example, needs nothing from the land except the space to work, but iron and coal mined elsewhere supply the material for the parts and the energy to run the machines. In that sense, all or almost all productive activities in the economy require at least some land.
And in addition to labor, land, and capital, you need some kind of directing intelligence to plan and give orders. That's entrepreneurship. Entrepreneurship is distinctive among the factors of production because it organizes the other factors of production. Land and labor and capital are needed as inputs; entrepreneurship discerns how they can be combined for productivity. I’ll return to this concept of an entrepreneurial intelligence directing the economy in a later post on human capital.
For now, though, the focus in this post is on labor and capital. It's hard to define the difference between capital and land, and labor and entrepreneurship, in ways that settle the edge cases. Where do you draw the line between the land and improvements to land, which are a form of capital? How do you distinguish entrepreneurship from managerial labor? Land seems to have fairly small shares of the national product, anyway, indicating that scarcity of land is relatively unimportant as a constraint on the economy even if some land is indispensable. There were times and places in the past where scarcity of land was a bigger problem than today, and mass migration has sometimes been motivated primarily by a search for farmland. But in spite of higher population levels, vastly increased agricultural productivity has mitigated the problem of land scarcity to the point of unimportance. Still, the consideration of land and entrepreneurship should serve as a helpful stimulus to creativity in thinking about factors of production, which we will use later in the argument in extending and amplifying the concept of capital.
It should be mentioned that production also requires intermediate inputs. If you're cooking, you don't need just skill and effort and a kitchen (capital and labor), you also need potatoes or meat or flour or something (intermediate inputs). The difference between intermediate inputs and factors of production is that the former are used up in the production process, while the latter are, in general, not. When you finish making a meal, you (labor) are still there, with your cooking skills (human capital), and so are your pots and stove (capital), but the ingredients (intermediate inputs) are gone. When you finish chopping down a tree, you (labor) are still there, as is your chainsaw (capital), and the ground where the tree grew (land) but the tree (an intermediate input) is gone. Of course, there's always a possibility that you might break your tools, or even get yourself killed. Capital and labor can be lost in a production process. Land, too, is sometimes sadly spoiled by production processes that turn it to wasteland. But in the typical case, when a production process is complete, the land, labor, capital, and entrepreneurial ability are still there, while the intermediate inputs are gone, spent in the process of production. Economic analysis often ignores intermediate inputs, justifying the practice by treating the “value-add” of the production process, the extra value of the outputs relative to the inputs, as the real output. The practice usually works well enough, but it’s good to keep inputs in mind as another necessary precondition for production.
So far this discussion has only been about clarifying and categorizing and defining. Now we turn to the first fruits of serious, non-obvious insight from that effort: the law of diminishing returns.
There is a quite general economic law that expanding production through increasing the inputs of any one factor of production is subject to a law of diminishing returns. If you start from any reasonably efficient production process, then double your capital, while keeping your labor constant, you will increase your output by something less than double. If you double your labor, but keep your capital constant, you again won't get so lucky as to double what you produce. Clearly, there are silly counter-examples to this. If you set a cook to work with only half of a pot, then give him a full pot instead, he will more than double his output, since his soup will no longer flow out of the missing side of the pot onto the floor! There might be more serious examples, too. Maybe in some futuristic factory, ten robots under one industrial engineer can produce more than twice as much as five robots, thanks to a more sophisticated division of their artificial labor. Nonetheless, the principle of diminishing returns is fairly intuitive once you wrap your head around it, and is of great generality. It is important enough to the larger argument here that it's worth dwelling on it through a few examples in order to establish it firmly.
First, consider food preparation.
If you are out and about, and you swing by a grocery store for picnic fixings, there's a little bit of food prep that you can do merely by hand. You can put cold cuts between pieces of pre-sliced bread for a sandwich. You can shell pistachios. But your options are very limited. In this case, as in many others, labor without capital can accomplish very little.
Now suppose you have brought a knife with you. A knife is a piece of capital, a tool, a produced thing useful in production and not used up in the process of being used for production. But it's a very small piece of capital. It might be had for less than $1 in some cases, and will rarely cost more than $10 or $20. But it makes a big difference! With a knife, you can slice the bread and meat for a sandwich yourself, and spread mustard on it, too. All sorts of produce, like cucumbers, apples, broccoli, tomatoes, and so on, can be sliced into bite-sized pieces, or pieces convenient to hold in a hand for eating. Several people can eat the same cucumber at the same time after it's been cut up for sharing. Fruits like mangoes and watermelons are hardly possible to eat simply by hand, but can be prepared to perfection with the help of a knife. A knife will often make the difference between a rather awkward lunch and a very convenient and pleasant one. A mere knife can vastly increase your food prep productivity.
Now, instead of a knife, let's give you a whole kitchen. What can you do? A gas stove enables you to cook, turning all sorts of things scrumptious that hardly qualify as edible when raw. Add a whole range of knives and your cutting becomes much more efficient, while plates and forks and spoons get you past the need to rely on finger food and open up the options of rice and potatoes and pasta and steamed vegetables and all sorts of things. A refrigerator and a freezer vastly expand the range of ingredients that you're likely to have on hand, as, for that matter, does a spice cupboard.
Now, the value, in the sense of market price, of a fully equipped kitchen is a bit hard to define because it's generally incorporated into a house and can't be sold separately, but it's surely hundreds or thousands of times greater than the value of a knife. The law of diminishing returns would come into play if the productivity at food preparation of a person in a fully equipped kitchen exceeds the productivity at food preparation of the same person equipped with only a knife by less than that multiple. Is that true? Probably, but it's hard to compare. Sometimes a person preparing food in the midst of a fully equipped kitchen uses nothing but a knife, but in many other cases, dishes are prepared in kitchens which could never be made at all by picnickers equipped only with knives. No one would be satisfied to live all the time on only picnic food, so in some sense, the kitchen’s productivity is infinitely greater, since the number of people that the kitchen can adequately feed is at least one, whereas for the knife, the number is zero.
But now suppose we double the kitchen's value. In some cases, that might mean simply multiplying the amount of the same sorts of things. Twice the cupboard space. Two refrigerators instead of one. In other cases, it would only make sense to add new sorts of things. A blender. A microwave. A food processor. A deep fryer. An ice cream maker. Zesters and peelers and mandoline cutters and serrated knives and juicers and on and on. That will increase productivity. You might eat better, or eat as well with less labor, or eat as well with cheaper ingredients, or eat as well with less cooking skill, or some combination of all of the above. But it's very likely that, from most people's perspective, the superiority of the output of this double value kitchen, though surely improved compared to the regular kitchen, would fall somewhat short of double. It might still be worth building. Certainly, it does not follow, from the value-add of the premium kitchen equipment being less than the value-add of the regular kitchen equipment, that the premium kitchen equipment isn't worth buying. It all depends on your income and your preferences and other things. But it is an example of the law of diminishing returns at work.
Second, consider transportation.
Suppose you need to get somewhere, but you have no means of transportation, not even shoes. Without shoes, your feet will probably become rather tough, and you can walk for some distance. Still, it will take a lot of time to get places. It's worse if you have to carry anything. If what you need to move is heavy or bulky, it might take a lot of slow trips. If it's heavy, bulky, and indivisible, you probably can't move it at all.
Now let's give you some shoes, worth maybe $40. That will help a lot. It might increase your walking speed, and if it allows you to walk over more surfaces, including some that would have hurt your feet too much, then shorter routes mean faster journeys, too. You can probably keep walking longer, since you're not stopped by sore feet.
The next step up might be a bicycle, worth $150, and the skill to use it. That multiplies your speed tenfold on a smooth, level road, though much less, if at all, when the road is rocky or uphill. Bicycles don't help much with hauling cargo, so for that purpose, we might do better to give you a wheelbarrow, worth $80. With your shoes, bike, and wheelbarrow, you'll probably be at least 10 times as productive in getting places and moving things.
Now let's get you a car, worth $27,000, 100 times the value of your shoes, bike, and wheelbarrow. How much does that add to your productivity? A lot! But it probably doesn't increase your productivity 100-fold. On a road trip, you might be able to travel a maximum of 50 miles per day by bike, but 500 miles per day by car. A tenfold increase. If you're bringing home groceries from a store a mile away, maybe the bike wouldn't serve your purpose, but it would take you only 30 or 40 minutes by wheelbarrow, compared to three or four by car. Again, a tenfold increase. Increased comfort, especially in bad weather, is important, though hard to quantify. The car’s ability to carry multiple people is an advantage. Some tasks can't be done at all without the car, for example moving a refrigerator 20 miles, or traveling 500 miles in one day. But sometimes the car doesn't help at all, as when there are no roads wide or smooth enough for a vehicle, but only foot paths or bike paths. All in all, the car probably increases transportation productivity by less than the hundredfold increase in the value of transportation capital that it represents, but a strict like-to-like comparison isn't possible because the car can do things frequently needed that lesser modes of transportation can't do at all.
It's when you go beyond the car that diminishing returns clearly set in. What else can you add? Maybe a private single-engine plane for $70,000. Maybe a helicopter for $250,000. You can add a racecar for speed, a Jeep for rough roads, an ATV to weave through the woods where there are no roads wide enough for a full-size vehicle, and a big moving truck to haul very bulky, heavy cargo. Plus a garage to put them in. By the time you've spent $1 million, if you have the skills to use all this equipment– a big if– then you can get more places faster, carrying more stuff, But unless you're in some specialized transport job, your transportation productivity certainly won't have increased 40-fold. The plane might get you to your destination two or three times faster than by car, not more, unless you're going to an island, or some unusual remote place that has an airstrip but no road connection. You'll usually need a car for the last mile. The helicopter empowers you to go to some very remote places, but you could get to almost all of those places more slowly by a combination of walking and driving. What the moving truck could do in one trip, the car could probably do in ten. For most everyday purposes, the simple car is still the most convenient, and you'll leave all the fancy extra equipment at home. The law of diminishing returns has set in.
A third example: landscaping.
If you have a sizable property, and you want to alter or maintain it for beauty and use, you need to do some landscaping. With no tools, you can do some weeding, collect fallen debris, and break some dead branches off trees, but it's very limited. Simple tools like a shovel, a branch cutter, and a handsaw enable you to plant flowers, do simple pruning of trees, and remove unwanted bushes. To mow the grass, you can do nothing by hand, but a laborious process with a machete can get the job done. Let's say that with your shovel, branch cutter, handsaw and machete, you've invested $75 in landscaping equipment so far.
If you now spend $150 on a gasoline-powered lawn mower, tripling your capital, you can really start to make a place nice-looking and pleasant to walk about in, without getting overwhelmed by the work. The lawn looks better, and you save a lot of your time. Maybe the lawn mower increases your landscaping labor productivity tenfold.
You can go further. You can get a chainsaw for cutting down, and then cutting up, big trees. You can get a rototiller for breaking up and aerating soil, and churning up the roots of weeds. You can get a polesaw for cutting up branches that are out of your reach. You can upgrade from a walk-behind mower to a riding mower, for greater convenience and speed. You can get a weedwacker to trim the edges and squeeze into places where the lawn mower won't fit, and a sawblade to cut down woody unwanted plants. By now, we've listed maybe $3,000 worth of landscaping equipment. Compared to $300 worth of yard tools, $3,000 worth of landscaping equipment on a property of a few acres won't make it look ten times better, or enable you to maintain it with ten times less work. Once again, the law of diminishing returns has set in.
There's a law of diminishing returns with respect to labor, too. Typically, if you double both your labor and your equipment, you can do at least twice as much work, and often more, since some jobs take two people, or simply because workers can focus on a task and get good at it. But if, starting from any reasonably efficient production process, you double your labor while holding your equipment constant, the second batch of workers will generally add less value than the first. Often, this is so obvious that it seems stupid to state it. If you have a car and driver and a load to be delivered, a second driver won't help much. Likewise, if there's a lawn to be mowed and just one mower, two workers are hardly better than one. Two people can work side by side in a kitchen, and they'll all almost always be able to get dinner cooked faster, but sometimes they get in each other's way, or one stands around waiting for the other to finish a task. The law of diminishing returns applies to land and entrepreneurship, as well, and examples would be easy to provide.
It follows from the law of diminishing returns that an important part of achieving productivity at the macroeconomic level is for each enterprise to employ an appropriate mix of capital and labor, as well as other factors of production. That's not to say all firms should have the same capital-labor ratio. Far from it. Some industries are inherently much more labor-intensive than others, by the nature of production and the state of technology in that industry. But firms doing relevantly similar things usually do have similar capital-labor ratios. This does not generally require any central planning. It's all achieved by the decentralized decision-making of for-profit private firms as they try to raise output and limit costs, in the face of some sort of market prices for the factors of production. We take it so much for granted that it's hard to frame counter-examples that don't seem a little silly. But it's important, so I'll provide a couple.
First, suppose two restaurants are side by side. The first has lots of workers: a dozen cooks in the kitchen, a dozen waiters roaming the floor, janitors sweeping, decorators trying to make the place look nice, and so forth. When a rush comes, there are plenty to attend to the guests. But the kitchen has only one stove, which is old and poorly made and frequently breaks. There is no refrigerator, so the restaurant staff need to take very frequent trips to market to supply the kitchen with ingredients. And it's still common for waiters to have to warn patrons that half the dishes on the menu are not available for lack of ingredients, while on the other hand, half the produce has to be thrown out everyday because no one ordered it and it can't be stored. There are multiple knives, but fewer knives than cooks, so cooks often have to wait for the knife that will be needed for the next step in a cooking process. To make up for the lack of a CD player, the waiters sometimes sing, but the live music isn't as good as recorded music would be.
The second restaurant, meanwhile, has just two employees, a chef and a waiter. The kitchen is dazzlingly well-equipped, but the overworked chef doesn't have time to explore the functionalities of all the equipment. Likewise, the sound system is excellent, but it's often silent because the two restaurant staff don't have time to change the CD. When the chef takes a day off, the waiter has to do the cooking, which slows things down and reduces the quality of the food. Similarly, when the waiter takes a day off, the chef either brings food to tables himself, or else leaves it on a table next to the kitchen for customers to notice and pick up. The structure is huge and there are plenty of tables, but customers have learned to avoid the place when even a quarter of the tables are filled, because you'll have to wait an hour or two before the waiter gets around to you. He would never catch up, except that many customers give up, and go home without a meal, reducing the workload.
This wouldn't happen under capitalism. Market competition is too strict a taskmaster. It uses resources more efficiently than that.
In general, economic theory predicts that factors of production are spontaneously reallocated among firms by the invisible hand of the market until the marginal product of a given factor of production is equal in every application, and equal to its price. Reality is messier than that, but the principal is fairly realistic where workers or tools or bits of land are fairly interchangeable. Some people and tools are too specialized for there to be a competitive market in them. To this, we'll return when we study human capital. But in general, market forces can be relied upon to ensure a reasonably efficient mix of capital and labor in production processes, given the quantity of these factors of production available and their prices. The prices, meanwhile, move up and down to bring supply and demand for each vector of production into equilibrium.
For example, the overstaffed restaurant would soon find itself unable to pay so many salaries, and either lay people off, or go bankrupt. But even as it lays people off, it would feel the need to make better food more quickly, in order to sustain or increase revenue, so it would invest in knives and refrigerators, and maybe a sound system for ambience, too. Meanwhile, the understaffed restaurant would feel its business hurting and have trouble paying rent on its space. The easiest recourse would be to staff up, in order to ensure capacity to serve all the customers who walk in with reasonable promptness. Nothing more is needed than for both restaurateurs to recognize their own self-interest, and even if they don't, bankruptcy will come in to remove the irrational businesses from the capitalist economy.
By the same token, suppose one landscaping firm sends rent workers to every job, and has people cutting grass with machetes and trying to prune trees with simple handsaws or even by hand, while another landscaping firm sends a workman out with truckloads of the state of the art equipment of every sort, purchase at great expense, but lacks the people to respond to even half of the incoming demand. Again, this is irrational, and the market will sort it out, either through pricing pressure that forces the business owners to identify and cut unneeded costs while raising productivity and revenue, or else, if they fail to do this, by shutting them down.
Unfortunately, these very stupid business scenarios, which capitalist rationality prevents every day when it's allowed to do so, are enacted all the time in the world economy, where labor flows are tightly controlled and desperately suboptimal. Key industries like farming, construction, or transportation are far more capital-intensive in rich countries, relative to poor countries, where most workers don't get equipped with the tools they need for decent productivity. It's a monstrously inefficient situation. Some might be inclined to blame capitalism for the fact that billions are so desperately poor while middle-class workers in America are rich enough to overeat and get fat. But capitalist competition is a great leveling force, and it would produce strong wage convergence if the world's poor workers were allowed to go where the jobs are. Global inequality is appalling, but it's not the fault of capitalism. It is, to a large extent, the fault of immigration restrictions.
To put it very crudely, leaving out a whole lot of important nuances, the solution to these global inefficiencies must be either to move the capital to the labor, the labor to the capital, or some of both. For a long time now, it has superficially been the case that capital is much more movable than labor. The movement of money, which for some purposes is treated as a synonym for capital, is fairly free, while the movement of people is tightly constrained, so we might think capital would do the moving. But capital as a factor of production is far from being the same thing as mere money. And when capital is understood in a broad sense, its mobility is inherently limited.
Some kinds of capital are easily moved. A knife can be shipped without difficulty, as can hammers, saws, shoes, etc., while bicycles and lawn mowers, though more awkward, are often economic to ship over long distances. At the other extreme, structures are usually virtually infeasible to transport, with mobile homes being a kind of exception that proves the rule. That could change in future, if fleets of giant airships roam the skies, as some hope, and that's a good reminder of the technological contingency of the mobile or immobile character of capital goods. But for the foreseeable future, the vast majority of structures are effectively immoveable after they have been built. As for mobile homes, they are classified by the number of highway lanes they occupy in transit, which underscores the degree to which transportation acts as a design constraint. That in turn explains the continued dominance of site-built housing in spite of some greater efficiency in factory processes. People don't prefer to live in structures whose dimensions allow them to be shipped. Even less mobile are capital investments that consist in improvements of land: terracing, sprinkler systems, orchards, soil amendments, and so forth.
But even when the capital itself is mobile, systems to operate and maintain it may not be. Cars are a case in point here. Cars themselves are among the most mobile objects in existence, though of course only over land, and with a driver. If the object is to move cars long distances, they may be loaded onto trucks, or trains, and over water, they have to go by barge or ship. But that's still quite feasible and affordable. The problem is that cars are dependent on paved roads and gas stations to operate. Most cars driven by Americans, on America's well-paved roads, would not do very well on the muddy roads of many African countries. Also, a car repair industry is needed if cars are to keep running. Further problems might arise from differences in gasoline standards, or different customs with respect to driving on the left versus the right side of the road. Taking all this to account, cars are not so mobile a form of capital as they might seem, at least not internationally.
Infrastructure illustrates a different aspect of the immobility of capital. A wide variety of infrastructures critically underpin advanced capitalist economies: paved roads for cars, electrical wires and the utility poles that hold them up, telephone wires and coaxial cables for cable TV and fiber optic cables for broadband, cell phone towers, sewage lines, water lines, train tracks, airports, pipes delivering natural gas for heating and cooking, and so forth. Often, these infrastructures support wonderfully cheap and efficient distribution of very useful modern services. They are, however, quite costly to build, and even more difficult is their maintenance and governance.
Infrastructure is generally not amenable to be supplied under straightforward market competition. It might be, so to speak, geometrically infeasible to have multiple competitive suppliers. How would you build two different roads to the same house? Where would the second road fit? Poor competition might be ruled out by competitive dynamics under economies of scale: two fiber-optic broadband providers to the same address might be doomed to a price war until one of them goes bankrupt, restoring natural monopoly. Advanced capitalist economies have widely varying arrangements for governing these systems, from pure public provision in the case of most automobile roads, to complex universal service arrangements in telecommunications, to charters and franchises in cable TV, etc. It's far from clear whether all these arrangements are rationally chosen or historically accidental, and there's probably a lot of room for improvement, but never mind. For our purposes, the main point is that the physical infrastructure probably won't be built, and can't perform once it is built, without such systems in place for its maintenance and governance. So while fiber optic cable, or electric generators, can be shipped, there's no straightforward way to turn these physical assets into high-performing infrastructures in countries that lack the institutional sophistication to maintain and govern them.
Indeed, it's necessary here to introduce the subtle point that much capital, including some of the most important kinds of capital, is not physical. Why call it capital, then? Why stretch the concept like that? Because fundamentally, it's best to understand capital as any produced factor of production, anything that is produced and then contributes to production without being used up. That's the crucial thing that knives and hammers and cars and paved roads and fiber optic cable have in common. But many other things that are not material are also produced factors of production that contribute to production without being used up.
The concept of “human capital” has been around for a few decades in economics, and has spread outside the field to some extent, but it still has the ring of a mercenary neologism. “Education” and “skills” sound nicer. But it's important to the understanding of capitalism that education and skills are human forms of capital, produced by the labor of teachers and students or trainers and trainees, and then contributing critically to production. It's an important difference that human capital can't be sold. The skills go with the worker, and can't be sold separately and used to equip another worker. But other than that, a skill and a tool are rather similar. Both require an upfront investment in order to acquire them, and then make the possessor more productive in some task after they have been acquired. The same law of diminishing returns that applies for capital and labor applies for human capital and capital, or human capital and labor. If you add many unskilled workers to a factory, but you lack proper experts and specialists to do the critical, difficult tasks, the marginal value of more unskilled workers steadily falls. Likewise, if you keep adding fancy equipment, but you lack the skilled workers to use it properly, you get less and less benefit from your capital investment.
“Organizational capital” is occasionally mentioned by economists, and readily understood, as the peculiar productivity advantage that arises from a company's mission, culture, protocols, and key personnel, as they develop, through experience and over time, a modus operandi that makes them distinctively productive in certain jobs or functions or products. This is closely related to the factor of production traditionally called entrepreneurship, but calling it a form of capital highlights that it is built up over time through effort, and once produced, characteristically contributes to production on an ongoing basis without being used up in the process. Organizational capital has value insofar as it governs an internal division of labor to achieve higher productivity than could be achieved by the same people performing the same functions as self-employed free agents and then trading with each other. For as much as economists tend to valorize and glorify markets, they are full of inconvenient transactions costs and agency problems, and capitalism often avoids markets by favoring large corporations.
Another crucial form of capital consists of ideas or designs. Like physical, human, and organizational capital, useful ideas and designs are produced factors of production, created through inventive or artistic labor, and then contributing to production on an ongoing basis without being used up in the process. What's really distinct about ideas and designs is that, once they are made, there is zero inherent cost to them being used by others. It's taking me a lot of labor to write this book. But once it's written, it won't take any more labor from me for an additional copy to be produced. That's the beauty of ideas and designs, and also the problem with them, to which intellectual property rights are a clumsy solution. Ideas and designs are subject to free rider problems, whereby imitators “free ride” on the work of the original creator. Intellectual property rights empower the creator, or some other owner who paid the creator for the rights, to restrict the use of new ideas and designs, or license them for pay, thereby creating a kind of artificial market. These intellectual property rights enforcement arrangements are all very clumsy, inefficient and bureaucratic ex post, and perhaps ought to be more controversial than among advocates of smaller government, but the argument for intellectual property is that it incentivizes more intellectual creation, which is surely true at least sometimes. Many companies invest in new product designs in much the same way they invest in factories, financing R&D through fundraising, managing projects, and then estimating ROIs ex ante and ex post. For some purposes, though, it's more useful to leave ideas and designs out of the definition of the capital stock, because once created, ideas and designs are not inherently scarce, and not subjects to depreciation. To this we'll return.
Finally, building on our study of infrastructure as well as extending our concept of organizational capital, we can extend the idea of capital to include the laws and institutions and traditions that comprise politics and government. As with other forms of capital, this institutional capital is built up over time, produced through effort, in this case the efforts of legislators and public administrators, and behind them, the voluntary efforts of many citizens discussing and deciding and advocating and opposing and voting and protesting and so forth. Then, having been produced, it contributes to production on an ongoing basis, sometimes through direct provision of services, or even, in the case of roads, of physical infrastructure, but more often, or more comprehensively, through defining property rights and supporting investment and trade by protecting them. Countries and political subdivisions with fair and efficient economic governance will tend to see better, more productive utilization of resources than countries less institutionally well-endowed. That's not to deny that government often overregulates and does more harm than good. But institutional capital can assist with that problem, too, by taking the form of strong and reliable norms of non-interference by government in some sectors, activities, or contractual arrangements.
Bearing in mind this enriched concept of a country's capital stock, we're now ready to elucidate the impact of immigration restrictions on the world economy through the lens of factors of production in a graphical argument, such as economists habitually make to such potent effect in the classroom, even if the art has unfortunately gone out of fashion, in favor of much less valuable methods, in the rarely-read academic journals by which young professors seek tenure.
Figure 1 (which resembles the master chart near the top of this post but is less ambitious) shows, on the horizontal axis, the distribution of the global workforce. The length of the axis itself is the total global workforce, assumed (for graphical convenience at the price of slight oversimplification) to be constant. Any point along the axis represents some distribution of that workforce between “the West,” or the advanced capitalist economies, and “the Rest,” primarily developing or what used to be called “Third World” countries. There are two labor demand curves, one for “the West” and one for “the Rest,” each shaped by its endowment of capital, in the broadest sense, and of the resulting productivity with which it can use different amounts of labor. The natural equilibration process would be for labor to seek the highest wages, moving as needed from the Rest to the West, until the wage of raw labor is equal in both places. But immigration restrictions prevent that from happening. With the status quo distribution of labor between the West and the Rest, labor is artificially scarce in the West, keeping the wages of raw labor high, while in the Rest wages are much lower, not only than in the West, but than they would be under open borders. The chart is conceptual, yet I did try to draw it so that the scale of migration to the West under open borders, compared to the population of the West today, is roughly consistent with the economic models of the world economy under open borders that I like best, particularly my own. I foresee that if people were free to move, billions would come from Africa and Asia and Latin America to settle in Europe, the United States, and other advanced democracies.
Figure 1: Two regions (West & Rest), two factors (capital & labor), gains from trade
I should note in passing that when Gallup polls ask people about their desires for international migration, they find a large demand to immigrate to the United States, but not billions. 150 to 200 million is a typical figure. It's not hard to reconcile the conflicting numbers. As mentioned in my post “The Dreamer Problem,” immigration flows are affected by what is sometimes called “diaspora dynamics,” whereby pioneering immigrants from one country into another automatically make that country more appealing to their compatriots and ease the transition. Under open borders, initial demand for migration to the United States likely would be limited to the 150 million or so that Gallup polls predict. Those would be the pioneers. But they would form diasporas, clustering in certain neighborhoods, where the national languages would be spoken and the national foods sold. They would write home. They would spread word about living conditions and jobs. And others would follow. Immigration would accelerate. Many countries would become like Ireland in the 19th century, lands of emigration, where most of the natural increase of the country ended up living abroad.
But Figure 1 does more than suggest the scale of international migration under open borders. Its real work is to perform a welfare analysis of the transition to open borders. Welfare is represented by areas in the chart, of which all the relevant ones have been lettered for ease of reference. In terms of units, the horizontal axis represents labor, in whatever units, such as man-hours, while the vertical axes represent wages, in dollars per the same unit, for example, dollars per hour. Multiplying these units, man-hours times dollars per man-hour, you get simply dollars, so any area in the chart would represent some quantity of dollars, or purchasing power. Ultimately, we don't care about purchasing power, but about happiness, and the assumption that dollars of purchasing power translate into quantities of happiness is obviously oversimplified, but also, obviously plausible up to a point. Most of us can name a lot of things, including some very close to the heart, that we want but can't afford, and there does seem to be a sense in which more money would make almost anyone happier.
Purchasing power in Figure 1 is represented by areas under curves and lines. The rectangle formed by a wage rate on top and a vertical quantity of labor on the left or right boundary represents some group’s earnings. The area under a labor demand curve, and bounded by some quantity of labor, represents the product, valued in dollars, of the labor utilized, on the assumption that rational employers will hire workers for their marginal product if necessary, though they'll pay less if they can. The area between a labor demand curve and a wage rate, that is, below the labor demand curve but above the wage rate, represents the returns on capital, or profit, enjoyed by whoever the claimants on that capital income are. Thus, in Figure 1:
Under the status quo, capital income in the West is represented by area A.
Under the status quo, wages in the West are represented by areas B, C, and D, combined.
Under the status quo, capital income in the Rest of the world is represented by areas N, I, J, and M.
Under the status quo, labor income in the Rest is represented by areas G and H.
The transition to open borders would increase capital income in the West to the sum of areas A, B, and F.
By contrast, the transition to open borders would reduced capital income in the Rest to area N only.
With respect to labor, Western workers would see their earnings fall by area B.
Workers from the Rest would see their earnings increase by areas E, I, J, and M. Some would get the wage increase by moving, others while staying put, due to reduced labor supply and consequent higher wages. Migrants from the rest of the world to the West would earn an amount equal to areas F, G, and I, while workers who stayed home would earn areas H, J, and M.
There would be an increase in the total world product equal to areas F and E.
While the increase in total world product is welcome, the large redistributive effect might reasonably give people pause. Above all, the model emphatically supports one of the chief objections against mass immigration by western critics, namely, that it would drastically undermine Western wages. One counter to this is that it's unjust for Westerners to get so much more in wages for their raw labor than the rest of the human race does. But never mind that. It's hard to argue on multiple intellectual levels at the same time, and people who imagine that immigration restrictions can be defended in terms of justice are a bit beneath the level of this book. I find there's usually little or no pretense of that among active and potent advocates of immigration restrictions. Their stance is usually narrow national self-interest, combined with a dash of class warfare by a nationalistic working class against a globalist elite. From that perspective, it's anathema to expect the Western working class to accept wage reductions and leveling with the proletariats of other nations, for the sake of global benefits, which disproportionately accrue to Western owners of capital.
Even from the perspective of self-interested Western workers, however, there may be important gains to offset the loss of area B. Remember that we're defining capital very broadly, to include human capital, organizational capital, institutional capital, and ideas and designs. Virtually all Western workers have some human capital. Even the poorest Americans are overwhelmingly literate, able to drive cars, and speak English fluently. We'd hardly even call that “human capital” in the US. It's just taken for granted. But in a labor market transformed by mass immigration, these would become important, distinguishing skills warranting extra pay. Many workers, moreover, also own stocks and shares, real estate, or other assets whose value would increase under open borders. All in all, Western workers would find themselves dealing with complex offsetting effects, with new threats and new opportunities, which I plan to explain in future posts.
The loss of income and status by the capital owners in non-Western countries, the clearest losers from the change, need not be regretted overmuch. A similar loss of status occurred in 19th-century Europe among the aristocracy, and partly for the same reason: emigration provided a better option for some of those on whose poorly paid labor the affluence of the aristocracy depended. Today, especially, some of those elites are openly hostile to the West and the liberal-led world order: Russian aggressors, Chinese communists, Iranian theocrats. Meanwhile, wage gains for the workers of the less developed countries is by far the greatest benefit in the scenario shown in Figure 1. Open borders would transform the global working class with higher wages and mass migration. Nothing else we can do comes close to the beneficence of simply not interfering at the border, and allowing people to move freely.
But before we can evaluate the impact of open borders, we must consider not only its short-run but its long-run impact, and that will require a different model.
Segue into the Solow model
It starts by zooming in on the concept of capital, which we generalized to include all manner of produced factors of production. It's great news that a factor of production can be produced. It follows that, while it will take some hard work and self-denial, it's possible to grow the economy, maybe a lot. Work hard and save and you can build houses and roads and factories and companies, as well as education and skills and experience, and the economy can become more productive and everyone can become richer. Up to a point.
But there's some bad news to offset this.
First, as we have seen, there's the law of diminishing returns. Maybe you can accumulate more and more capital, and maybe it will keep making you more and more productive, but the increment of productivity gained for each increment of capital investment will get smaller and smaller.
Second, capital depreciates. Machines wear out. Buildings get weathered. Cars crash. Painstakingly educated workers grow old and die. Farmland turns to weeds. Roads get potholes. If you want to keep your capital stock intact, you have to be constantly repairing and maintaining things, and sometimes replacing them. And the larger your capital stock, the bigger and costlier the job of maintaining it gets to be.
Put these two stories together, and we run into limits to growth. At some point, the growing costs of maintenance and the diminishing returns to additional capital combined bring the economy to a point where all of society's savings are spent just maintaining the legacy capital stock and replacing it as a depreciates. There's nothing left over to add more capital. This condition is called the “steady state.” As you get closer to the steady state, growth gets harder and harder, and for any given savings rate, slower and slower. Eventually it stops all together.
Now, this conclusion may seem to discredit the theory. We don't seem to observe, in the real world, that growth has limits. A great economy like that of the United States keeps growing year after year, interrupted by occasional recessions, but with a clear upward trend. If the Solow model predicts that growth will stop, but experience showed that it doesn't, doesn't it follow that the Solow model is false?
Not so fast. First, while growth doesn't empirically show a tendency to stop alogether– so far– it does seem to exhibit a fairly strong tendency to slow down. Most wealthy OECD countries have seen growth slow down since the 1960s, even though their policies have in many ways become more conducive to growth. In light of the Solow model, that's not mysterious. Growth by capital accumulation gets harder over time.
Second, Solow believed, and built into his model, an exception to the limits to growth, namely, that technological progress, the development of new inventions and new and better ways of making and doing things, could sustain economics indefinitely without running into the limits of growth by capital accumulation. I argued above that ideas and designs could be considered a form of capital, but they do seem to be different with respect to depreciation. While they can be forgotten, both human memories and books retain them naturally and easily, and pass them down the generations, in a way that physical equipment and structures, the organizational value of good companies, and personal educational experiences, cannot match. It's typical that of ages and the remote past, very little of value remains except for ideas. This is closely related to the ease of reproduction which also makes ideas propagate very cheaply and impactfully through the economy at any given time. And so, rather than stasis, what the Solow model really predicts in the long run is that sustainable growth depends on technological progress rather than capital accumulation. Solow doesn't have a model of technological change. He just represents it as a costless upward shift in the function relating GDP to the capital stock. Graphically, it looks like the shift from the red curves to the green curves in Figure 2.
Figure 2
Figure 2 is labeled to describe a difference scenario from technologically driven growth. In this example, the productivity jump is a result of removing immigration restrictions and allowing people to go where the jobs are. But whether technology or open borders is the cause, the Solow model sheds a fascinating new light on how the impact of a productivity boost plays out in the long run.
The economy starts at K*(closed borders), Y*(closed borders), where K is the capital stock, Y is GDP, the “*” signals that the economy is in a Solow steady state, and “closed borders” is the scenario, more or less interpretable as the status quo, which prevents the vast majority of potential immigration. Immediately, or very quickly, after freeing immigration from political control, GDP jumps to YSR(open borders), but the capital stock remains the same, only it's more productive because it can be mixed with labor in more efficient ways. But that also means that for any given savings rate, there are a lot more savings available to fund investment. The result is definitely economy and breaks out of the Solow steady state, and starts accumulating capital again, and grows over time for a sustained period just by adding more capital. Eventually, the economy again runs into, or asymptotically approaches, the limits of growth, where all savings are spent just maintaining the capital stock. But by that time, the capital stock may be much larger, and GDP much higher, than it was just after the productivity jump took place.
When a productivity increase is due to technology, the irony is that much of the capital accumulation that occurs consists not in the implementation of new technology, but in the increased utilization of old technology in a bigger economy. Thus, while the main arena of innovation in the US economy in recent decades has been in the areas of computers, cell phones and smartphones, software and websites, almost important in raising the American standard of living has been an increase in the housing stock, even though housing has seen little technological innovation. Because software doesn't substitute for housing, and because it makes Americans richer, cutting edge software has fueled a lot of old-fashioned home building and home renovation.
But we're concerned with immigration, and for that, the takeaway from Figure 2 is that over time, the initial boost to GDP from mass immigration after instituting open borders would be followed by a long period of ongoing growth due to the accumulation of capital in a very broad sense. New houses would be built, and new apartment buildings, new roads, new electric lines and power plants, new fiber-optic networks and Internet exchange points, new schools, new churches, new libraries, new ports and airports, new factories, new towns, new cities, and new websites. Also, the factories would turn out new cars, computers, ovens, refrigerators, microwaves, dishwashers, and lawn mowers. Universities would expand, and educate millions, and tens of millions. In hundreds of millions of workaday jobs, a great, continual learning would occur. New companies would be founded, each with its distinctive culture, mission, products, HR policies, brand reputation, and team spirit. New and old companies alike would expand, assimilating new workers, raising their productivity, helping them learn and grow over time. They would continually adapt and change, while retaining valuable customs and traits, as capitalist companies do, but much of the context that they would need to adapt to would be shaped by open borders, by labor abundance and booming demand. Some, of course, would fail to adapt, or adapt in the wrong way, and fall by the wayside, as always happens under capitalism. Over time, they would emerge a good deal of unimaginable novelty and innovation, a good deal of fortunes made and spectacular enrichment, as well as a lot of more of the same: more suburbs, more 40-hour-a-week jobs, more mediocre college students hoping vaguely for middle-class careers, more cars in garages, more full refrigerators and closets, more business meetings, more PTO, more home mortgages and utility bills, more traffic jams. More capitalism.
The easiest way to imagine this is a scaled-up America, quantitatively increased but qualitatively similar. And that's a good thing because Americans are, by and large, happier and more thriving than most other people in the world, which is why so many foreigners would like to become Americans, and why it would be good to let them do so. But that picture is somewhat false. In some ways, it's too optimistic. While economics theory definitely predicts a lot of enrichment of foreigners through immigration, it doesn't really give a warrant to expect that their living standards would ever, on average, quite catch up. It's quite possible that there are deep cultural reasons why foreigners are, on average, less productive than Westerners, and that these cultural factors would take generations to overcome even in favorable circumstances. Even if that's the case, open borders would still result in enormous enrichment. Just because someone isn't very talented doesn't mean you shouldn't try to put them in the most productive job that they can do.
It shouldn't be hard to understand that tens or hundreds of millions of immigrants under open borders might become part of a permanent underclass resident in the West but culturally and intellectually ill-equipped to take full advantage of the opportunities in offers, and even so, they'll have benefited from open borders and be much better off than if they had stayed home. It shouldn't be hard to understand this, but somehow it is. It's a symptom of a deeper problem, namely, that Western egalitarian norms seem inexorably to compel Westerners to create a global apartheid society of international class stratification, in order to have a bubble in which they can pretend that equality of opportunity makes sense and is more or less realized. The truth is that there can never be equality of opportunity. People's talents, family backgrounds, cultures, connections, and hometowns shape their opportunities. Life presents everyone with a different menu, and that's a good thing, for a world in which people were so similar that equality of opportunity was feasible to implement would be very boring to live in. There is no equality of opportunity today, and there would be no equality of opportunity under open borders, though perhaps the single largest barrier to equality of opportunity in the world today would be eliminated by the sunsetting of immigration restrictions. But while people from poor country backgrounds would still generally have less desirable opportunities than Westerners would enjoy, they would be much better than they are today.
Such is the Niagara Falls economics of open borders, or at least its most important elements. There will be some details to add later, especially about the contribution of immigration to technology. But the heart of the matter is that the West, with its huge multidimensional capital endowment, its companies and factories and infrastructure and experts and skilled professionals and inventions and universities and protocols and traditions, has enormous latent capacity to absorb workers and employ people more productively than in their countries of origin. If they were allowed, tens or hundreds of millions would immigrate to the West, after which, far from subsiding, immigration to the West would accelerate as large diasporas came to serve as gateways. Mass migration would enrich foreign-born working classes, both those who migrate to the West and those who stay home.
Of course some skepticism is warranted about extrapolations based on economic theory about the impact of policy scenarios radically different from the status quo. There's an old joke that “an economist is someone who will be able to tell you tomorrow why what he predicted yesterday didn't happen today.” But that's inspired by economists’ guesswork about the business cycle, where economic theory doesn't predict anything very clearly, yet the economists are still continually asked for, and frequently paid for, their predictions, because so many people have large concrete financial stakes in what will happen to the macroeconomy in the near term. Even there, economists’ prediction record is good enough that people keep paying them for the predictions, and great democracies entrust them with the management of central banks to sustain the general prosperity. But economists are much more on their home turf when predicting that price caps, such as urban rent controls or on gasoline, will result in shortages, and there, it happens just as they say. They have less opportunity for such predictions than they might, because governments have become sufficiently deferential to economists that they know better than to impose price caps. Immigration restrictions are like price caps, a crude assertion of sovereign power against market forces, and economists do know what would happen, at least directionally, if it were removed. How much international migration would occur under open borders is much more speculative, and economists’ guesses are assumption driven and vary a good deal, yet most models predict billions of international migrants, and what's the alternative to tentatively accepting these forecasts as the likeliest outcome? What other basis is there for a prediction?
It's true that migration on that scale has never happened before, not even during the great migrations of the 19th-century era of open borders. But cheap and very rapid airplane travel, instantaneous global communications through the internet, English as a worldwide lingua franca, increasingly universal literacy, and cultural Americanization of people all over the world through TV and movies and websites and video games, make our times different. Why on earth should we suppose that international migration today would be no greater than it was at a time when immigrants had to spend weeks at sea, arrived not knowing the language or customs, and could only keep in touch with their homelands through letters that took weeks again to deliver? Of course now would be different, and all the signs point to more international migration than ever, if only policy allowed it.
The moral takeaway of my earlier post “The Limits of Immigration Enforcement” was that the West's insistence on immigration sovereignty is untenable, being inconsistent with democratic rule of law, like Prohibition. There is no way to enforce immigration restrictions with just proportionality and due process while making it incentive-compatible to obey them. The nihilistic “whatever it takes” attitude would never achieve total immigration sovereignty, but would smash democracy and freedom to smithereens on the path to this unachievable goal. It's time to stop already, time for democratic publics to surrender a prerogative they should never have usurped. Yet this promises to be a very pleasant kind of surrender. It's not surrendering to be impoverished, but surrendering to be enriched.
In the next posts, I’ll pursue the inquiry further by working through many of the ways in which Americans, or others in the West, can look forward to being enriched by mass migration if they stop clinging to the desperate and destructive aspirations of immigration sovereignty and decide to open the golden door to the huddled masses of humanity.