Tuesday, April 18, 2006

Markets prevail 

Reading George Borjas' piece this morning in the WSJ (subscriber's link) reminded me of the discussion we had Saturday on NARN about immigration. One of the points I didn't get to make -- it is amazing how fast two hours can go! -- is that opposing immigration of workers, even unskilled ones, is pointless. Capital will follow skilled workers wherever they go, which is one reason for Borjas and Katz's finding that when investment is considered the effect of immigration on aggregate wages is nil. Only the least skilled workers -- high school dropouts -- suffer losses. Greg Mankiw points out that just like international trade in goods, international trade of labor -- the importation of workers -- creates both winners and losers.

But the article that really caught my eye this morning was Don Boudreaux on TCS, making a case I recall from many years ago. Here's Boudreaux:

Suppose for the moment that the world does possess only a fixed amount of capital goods -- a fixed amount of factories, robots, machine tools, industrial chemicals, and R&D labs. In this case, Americans would indeed suffer from improvements in foreigners' work ethic, education, and emancipation from their governments' misguided regulations. Some capital goods that today are here, raising the productivity of workers in America, would relocate tomorrow to other countries whose citizens can now use much of this capital more effectively than they could in past. As capital flees America, the productivity of U.S. workers falls because these workers will be partnered with fewer efficiency-enhancing capital goods. ...

But one of the defining features of the modern world is capital's expansiveness, its non-fixity. Capitalists the world over know that in every place governed by a rule of law and marked by a reasonably free market, a strong work ethic, and a spirit of commerce, profits can be made by employing workers there. And this employing of workers is done by creating capital in those places.

As people in China and India become freer, and as advanced technology enables them better to serve customers in America, some jobs currently done in America will indeed be 'outsourced' to these distant lands. But America's loss of some capital to foreign countries creates opportunities for other investments in America.

The reason is that as some capital and jobs leave America, workers -- along with some supply routes and capital equipment remaining in America -- are freed up to work at other tasks that in the past were insufficiently profitable. By freeing up this labor and capital, outsourcing increases the profitability of new investment opportunities. These diligent and honest workers, along with some capital equipment, remain in place, willing to work, all in an economy and culture friendly to enterprise.

This reminded me of a very influential book to me during the early 1990s called Quicksilver Capital. Richard MacKenzie and Dwight Lee make a vigorous case for how capital breaks down barriers erected by governments. Images of China knocking down residences to pad the pockets of its political elite can cause foreign investment to dry up (if they can take housing away from their citizens, couldn't they take your factory's revenues too?) MacKenzie and Lee writing after the first election of Bill Clinton seem to foretell what has happened:

What he and others in the Clinton camp do not seem to realize yet is that the human capital at the disposal of the wealthy is more fugitive on a global scale and less subject to government expropriation than the physical capital of corporations. Physical capital can only be shipped across the globe at the slow pace of boat travel. Human capital in the form of brainpower can travel to any point on the globe at close to the speed of light through the world's interconnected network of computers and satellites.

International money markets and integrated world stock and bond markets will teach on a daily basis our country's leaders lessons that they now seem to resist. National elections conducted every four years will remain important. But votes of confidence and approval will be taken daily in the world markets, which because of the country's ties to them can be ignored only at great peril. Clinton has already sought to assure markets that he intends to make markets work better. If he doesn't hold to that promise, the next four years will prove interesting, a test of the relative power of domestic politics and global markets in shaping national policies.

Strict immigration laws are the use of government expropriation to create economic rents for native labor. The beneficiaries, including consumers who get goods at lower prices, are not able to organize as effectively as the AFL-CIO and others. But it doesn't matter, for capital will flow to those places where property rights are secure. Boudreaux again,

So when particular goods and services become more profitable to produce elsewhere -- because of the principle of comparative advantage -- these features of the American economy that prompted the initial investment don't disappear. They remain. And they prompt entrepreneurs to create new capital and jobs in place of the departed capital and jobs.

America grows richer, not poorer, as we trade openly with a freer and more prosperous world.

America is the richest place because America allows the greatest scope for specialization and exchange. As Adam Smith showed 230 years ago, those are the keys to the wealth of nations. Short of erecting huge tariff walls, of which strict immigration laws are only one part, capital will continue to expand the circle of potential traders and reside with those with the most opportunities.