7 October 2022
The following table (which I modified slightly) came from Paul Samuelson’s famous economics textbook1. Whereas Samuelson used land as his fixed input I substituted the capital stock. Production consists of a single stage at the point of consumption. In this highly simplified model capital is homogeneous2, as is labour, and consists of 1,000 units equalling 1,000 capitalists.The table makes it clear that the height of real wages rates is determined by the labour-capital ratio. The higher the ratio of capital to labour the higher the real wage rate, and vice versa. As we can see, beyond a certain point the return to labour falls but starts increasing for capital. In other words, increasing the labour supply against a given capital structure eventually lowers wage rates and by doing so increases the return to capital. Therefore, Professor Caplan, it is capital accumulation relative to the size of the population that raises real wages, not mass immigration.
What Samuelson’s table cannot do is reveal3 the fact that as a population continues to expand while the quantity of capital remains unaltered4 the production structure will eventually start changing in response to the continued fall in purchasing power, thereby changing the country from a high-wage economy to a low-wage low economy. In other words, a low-productivity division of labour has replaced the previous and more productive division of labour5. Therefore, anyone who argues that Samuelson’s model is irrelevant because it is a clear case of diminishing returns is making a grave error.
In a progressing economy a large and expanding middle class will emerge. By middle class is meant those skilled, semi-skilled and unskilled workers whose purchasing power has given them a standard of living that was once the preserve of a much smaller non-manual working section of the population. Mexico provides an illustration of how this plays out in the real world. In 2019 the ratio of new vehicles sold to the Mexican population was 1:85. For the United States it was 1:17 Americans. This huge difference in purchasing power is entirely due to the fact that Mexico has a very high ratio of labour to capital which means it has a very small prosperous middle-class atop a large populace of working poor.
We can now see that economic growth is essentially a process of accumulating capital faster than the growth in population. The classical economists were acutely aware of this fact. Their great fear was that population growth would exceed the rate of capital accumulation and thus drive down the standard of living of the masses.
It should be clear that during the period at which population is catching up with the rate of capital accumulation the growth in real wages would slowdown and finally go negative. Hence, Samuelson’s table clearly refutes Donald J. Boudreaux’s absurd argument that unrestricted immigration would pay for itself by increasing the rate of capital accumulation6. It follows that if there is rapid capital accumulation then the additional supply of labour can be absorbed so long it is not large enough to reduce per capita incomes. It also explains why under certain conditions, conditions that do not prevail in America, why real wages can still rise along with immigration. Open borders advocate can point to a situation like this and cite it as evidence that unrestricted immigration not only has no effect on real wages but that it also stimulates economic growth. For these people mass immigration is the magic pudding that keeps on giving.
In our table wages are maximised at row B, the point at which they have reached the optimum. As wage rates move up the curve numerous employers will start complaining that workers are refusing jobs at the wages offered. But this is only because increased capital accumulation is raising the productivity of labour in other lines of production. It follows that using mass immigration to satisfy C and D employers’ demand for labour would require a 44.4 per cent cut in wages. In this situation native workers would be justified in arguing that an open borders policy was really a means of forcing them to subsidise inefficient capitalists while at the same time inflating the profits of truly successful capitalists. They certainly wouldn’t see it as a means of raising future wages7.
American agricultural interests have been arguing that they need immigrant labour because Americans refuse to do the work8. What they really mean is that they cannot afford to pay free market wage rates. Their solution, therefore, is to cut real wages by expanding the supply of immigrant labour. This is exactly what the Biden regime’s destructive open borders policy intends to do, among other things9.
As for the argument that without immigrant labour they will eventually have to cease production two points need to be raised. The obvious one is that changes in economic conditions are always forcing businesses to close while new ones open. This process is most marked in technology. For example, should canal owners have been protected against railways, sailing ships against steam ships, and railways against cars, trucks and planes? As an economy progresses it uses more and more labour-economising machinery. If the productivity of the land being farmed is sufficiently high then that would justify expenditure on labour-economising machinery, assuming it exists. Unfortunately, far too many people think increases in wages can be easily offset by ‘technology’. What they failed to grasp is that technology is embodied in capital goods, the material means of production, and that these goods are in fact savings. (No savings, no capital good.)
The argument for cheap farm labour is essentially protectionist argument that ignores the fact that importing these particular agricultural products would benefit American consumers as well as foreign producers. The former because their purchasing power would increase and the latter because foreign producers would now have an expanded export market. This reveals another economic fact: as countries become more capital intensive their more labour intensive activities in the tradable area will tend to move to more labour intensive countries.
Our table cannot be dismissed as a mere theoretical construct because history is the foundry in which the theory was forged and its explanatory powers confirmed. This is where we must turn to history for guidance. Benjamin Anderson considered the situation of New York maidservants as a graphic example of an unorganised and uneducated group whose real wages rose significantly without the help of union activists or political intervention on their behalf. On the eve of WWI the average wage of these girls was about $3.50: by 1918 it had jumped to about $18. The 1920-21 depression reduced their average wage to $13 to $14 but their real wage averaged about $7.50 a week plus full board10. Any attempt to reduce the wages by importing cheap labour would amount to a direct form of income transfer from these maidservants to their employers.
So how did this happen? The war slashed the flow of cheap labour from Ireland and Scandinavia — where many of these girls originated — while the increased demand from industry absorbed female labour from the South that would have normally gone into domestic service. America experienced another rapid increase in immigration from 1905 to 1914. During six of those years annual immigration exceeded one million11. But the vital factor was — as always — capital accumulation. After 1914 had been a massive increase in industrial investment which, combined with sever immigration restrictions, raised real wages for everyone. It was this factor, combined with severe immigration restrictions12, that raised real wages for everyone. Benjamin Anderson stressed:
We could have had this rise of wages in the United States at any time before the war had we been willing to restrict immigration …. The failure of wages to decline toward pre-war levels, therefore, as commodity prices were declining toward pre-war levels, was a legitimate supply-and-demand phenomenon. Men had become scarcer, and therefore dear in relation to the capital and natural resources of the country. A radical permanent rise in wages was therefore explained on economic grounds13 .
As we can see, instead of making both maidservants and their middle-class employers richer the constant pre-WWI flow of young girls into New York only served to lower their wages while making their employers better off. Another example of wages of American workers rising because the because WWI shut down immigration was given by Paul Douglas:
The coming of the War with its increased demand for labor and its virtual shutting off of immigration, caused the wages of the unskilled to rise more than the cost of living. The real wages of this group in 1915 were 5 per cent higher than in 1914, while in 1916 and 1911 they were 6 per cent above 1914. Unskilled labor made its biggest advance, however, in 191814 .
Turning to nineteenth century England we find that Sir James Caird, a renown Scottish agriculturalist, estimated that even as late as 1851 the average weekly agricultural wage in 20 southern counties was 8s 5d compared with 11s 6d for 12 northern counties. He correctly noted
that the higher-wages of the Northern counties is altogether due to the proximity of manufacturing and mining enterprises…. The influence of manufacturing enterprise is thus seen to add 37 per cent, to the wages of the agricultural labourers of the Northern counties, as compared with those of the South15.
Sir James found that where population increased but industrial development remained absent real wages stagnated. Therefore, as the supply of rural labour increased against a fixed quantity of land wages fell and poverty rose16 , a situation that was a perfect fit for the Samuelson model. The quantity of land was also fixed in the Northern counties but the emergence of a growing industrial base ensured that the demand for labour would increase faster than the increase in the labour supply thereby guaranteeing an increase in real wage rates.
The case of New York maidservants case reminded me of an American article I read some years ago in which the author seriously argued that it would be a net benefit to the economy if qualified women with children were able to resume their careers by hiring immigrant nannies on the cheap. But this is the fallacy of composition. Just because well-off New York families would benefit from hiring poor immigrant girls does not mean poor American families will also benefit, let alone the whole country. A young unskilled Jane Doe will find herself competing against immigrant labour while being forced to endure a falling wage rate as a result. Looked at from this angle one could argue that using immigrants to provide cheap nannies for New York City’s wealthy elite is a transfer of income from a low-paid class of workers to a few privileged highly paid professionals, as was the case with the New York maidservants.
Studying this issue reveals that libertarians and business interests are trying to implement a policy of importing labour from poor countries to offset the beneficial effects of capital accumulation. In other words, they are arguing that importing cheap labour is better than paying higher wages.
1Paul Samuelson, Economics, McGraw-Hill Book Company, 10th, edition, 1976, p. 731
2Capital, the material means of production, is heterogeneous and forms a complex structure comprises enormous number of stages or production. As the economy progresses there come an increasing division of capital. It is this process that keeps diminishing returns at bay. Lachman
3Samuelson’s model represents a simple agricultural society similar to a medieval economy. This is why the model successfully explains the rise and then the fall in wages that took place after the Black Death struck Europe in 1347.
4Because capital is heterogeneous it has to be measured value terms.
5Proponents of open borders, including those paid to know better, miss the crucial fact that the division of labour requires capital.
6Donald Boudreaux, Why restrict immigration at all?
Donald Boudreaux, It Is, After All, Supply-and-DEMAND Analysis
8Stephen Colbert, who hosts a viciously partisan TV show for Democrats, spent a day on New York farm picking beans, an experience that made him an economist and an expert agriculturalist. This newly acquired expertise enabled him to emphatically support the view that a million immigrants should be allowed in as farm labourers. This is because the farmer in question could not attract American labour at the wage he was offering. Tiny Holland is the world’s second largest food exporter with only 2 per cent of the labour force in agriculture. It manages this apparent miracle because its agricultural sector has been mechanised. Now there does exist a wide range of bean harvesting machinery. That this farmer is not using any of it suggests that his farm is operating at the margin of survival. Whatever the reason for this situation, cheap imported labour is not the solution.
Incidentally, Dutch farmers are now under attack by green fanatics. Not content with slashing Europe’s energy production they now want to slash food production.
9The Democrats have illegally implemented an open borders policy in an attempt to eventually replace enough Republican voters with illegal aliens to give Democrats a permanent majority. In short, to turn America into a sham democracy.
10Benjamin M. Anderson, Economics and the Public Welfare A Financial and Economic History of the United States, 1914-1946, LibertyPress, 1979, p. 87.
11W. S. Woytinsky & Associates, Employment and Wages in the United States, Arno Press, p. 52.
12Samuelson pointed out that by keeping the labour supply down, immigration policy will keep wages higher than they would otherwise be. Economics, p. 575.
13Anderson, Economics and the Public Welfare, p.87
14Paul H. Douglas, Real Wages in the United States 1890-1926, . Augustus M. Kelley, 1966, p. 178.
15Sir James Caird, English Agriculture in 1850-51, London: Longman, Brown, Green and Longmans, 1852, pp. 511-12.
16Arthur Redford, Labour Migration in England 1800-1850, Manchester University Press, 1964, pp. 52, 53, 68, 83, 89.