A primer on the economics of immigration: a surplus approach perspective

This is definitely not my topic of research. So you may very well ask why would I venture to write about it, beyond the obvious reason that it is probably one of the most debated issues these days in the US, with the government shutdown being related to the now infamous wall. I am myself twice an immigrant, I descend from immigrants (my parents returned to their country of origin, but had emigrated, and on my mother side my grandfather was also an immigrant, and the same goes on my father's side a few generations before), I might add. But that is not the whole, or the most relevant, reason.

Most debates about immigration center on labor market issues, and discuss the issue analytically with the tools of marginalism. The conclusions, by definition, are the logical consequence of the assumptions in that model, and the reading of the evidence is biased by those theoretical concepts. Here is a place were the capital debates (go read this very old post) might be important for a policy issue that is in the news constantly and that should concern economists. Being in favor of a return to the old and forgotten method of classical political economy, or the surplus approach, and not having seen any discussion of the issue along those lines is what led me to write this brief post.

Let me start with a very simple representation of the conventional argument. In the conventional story, you have a market for factors of production (labor in this case), and equilibrium is obtained when the marginal productivity of labor equals the marginal disutility of labor, where firms maximizing profits and individual workers maximizing utility find the optimal solution, shown in point C in the figure below (with variables with their traditional meanings; note I use N for labor, since I leave L, for liquidity; yep, I still teach the ISLM with that pesky L in there).

In this case, the effects of immigration are relatively simple to understand. Mainstream economics suggests that immigrants would add to the labor force, increase the labor supply, reduce the real wage, and lead to firms hiring more workers and increasing production. Output and employment should go up, while real wages would go down. The effect on the wage bill (W/p * N) depends on certain assumptions, but certainly native workers lose to the extent that their real wages go down. Hence, a backlash against immigration by working class native groups should be expected.

This simple analysis abstracts lots of things, of course. Differences in the quality (skills) of workers, and immigrants, and what would happen in the presence of capital mobility (with profits going up, with lower real wages, and capital mobility, then new factories should move into the country to take advantage of lower wages and increase the demand for labor, eliminating any initial effects on real wages). A lot of the academic debate has been based on arguments along these lines (see, for example, the Card and Borjas debate on the effects of the Marielitos Cuban immigrants in Miami real wages in this nice Vox post). Note, also, that the evidence suggests that the effects of immigration on real wages of unskilled workers are relatively small (if you believe Card).

In this view, then, there are some acceptable reasons for workers to be concerned with immigration. Note that this says nothing about fiscal issues, which many conservatives also use against immigration, suggesting incorrectly that they do not pay taxes (they certainly pay sales taxes, and other local taxes, and given the low incomes of most unskilled workers, would not qualify for income tax anyway), and take advantage of public goods. However, there are many analytical problems with the assumptions of the model above.

Note that the basis of the marginalist (or neoclassical) model presented above is the principle of substitution. In other words, as labor becomes cheaper than capital, that is by assumption fully utilized, then firms hire more labor. So the lower wages guarantee the full utilization of labor. The intensity of labor increases as its remuneration falls, and the price of labor, as any other price in marginalist theories (Austrian too, although they sometimes confuse this) reflects the relative scarcity of the factor of production. Note that for classical political economy authors (including Adam Smith) real wages resulted from historical and institutional factors, and supply and demand were only one of the factors affecting them. Under the conditions they analyzed the economies of their time they assumed that real wages were essentially at subsistence level.

The capital debates become relevant because they essentially show that the substitution principle has logical problems, and they open the possibility to a return of the sort of historical and institutional analysis of the labor market of classical political economics. I will not discuss the whole issue here again (check that post linked above), but the essence of the argument is that sometimes when real wages go down instead of leading to firms hiring more workers, the opposite might occur. Think of a situation in which real wages fall, and as a result, there is less demand for the goods produced by the firm. Perhaps the firms goods are bought by workers themselves.  Even though labor is cheaper, there is no reason for the firm to hire more workers if they cannot sell their goods, and the income effect overwhelms the substitution effect (the capital debates suggest that the substitution effect may go in the wrong direction, on top of that). That's essentially what Keynes said on chapter 19 of the General Theory (in chapter 2 he basically accepts the marginalist demand curve above, which is problematic, and shows the limitations of the supply curve; my paper on reading Keynes after Sraffa, the key author of the capital controversy, here).

The point is that it cannot be guaranteed that immigration would lead to a reduction of real wages, at least not on the basis of the logic of the model above. The actual result is ambiguous. Classical political economy provides an alternative framework to look at the labor market effects of immigration. It is clear that an increase of the labor supply might affect negatively the bargaining power of the established workers. But note that this is not always necessarily the case. Arguably, in the case of many immigrants in the so-called first globalization (late 19th to early 20th century), in which significant amounts of Socialists and Anarchists from Eastern and Southern Europe came to the US (and other parts of the Americas), the effect was to raise the class consciousness and the combativeness of the working class, helping strengthen some unions.

And the reverse is true, a country that experiences emigration might actually lose key workers, and unionization rates might decrease. In the last 30 years or so, the US has experienced an increase in the population of immigrants, many came from Mexico of course, and yet both countries have experienced a decrease in unionization rates (see here for Mexico). This suggests that other forces are in action, and that wage stagnation might be related to those policies, and not just, or not even fundamentally, as a result of the flows of workers from one country to the other.

Note also that classical political economy authors assumed that output was given in their discussion of distribution, and that separation of the theories of output and employment (dominated by Ricardian Say's Law, that was not a necessary feature of classical thinking, and that can be superseded by the Keynesian Principle of Effective Demand) allows us to understand other aspects of immigration. In other words, the level of output and employment would depend on autonomous spending (demand), and immigrants can easily be accommodated in society without displacing the native workers. Of course that would depend to a great extent on the government macroeconomic policies (not just fiscal and monetary policy, but also the setting of minimum wages, industrial and trade policy and so on).

In this view, it is less the effects of immigration on the labor market (along neoclassical lines of reducing real wages and increasing employment) that matter. It has been the policies that actually led to lower growth, lower union participation, trade policies that favored the loss of manufacturing jobs that have created the conditions for real wage stagnation. In that sense, it is those policies that are responsible for the backlash against immigrants among large groups of resident (native) workers, that could be exploited politically by right-wing populists, often with fascistic and authoritarian tendencies (not just in the US). Immigrants are actually escaping from similar neoliberal policies in their countries of origin.

And all of these points are just about the most direct economic consequences of immigration. There are other issues that are as relevant beyond economics. And it goes without saying that both immigrants and refugees (in particular those that result from US direct or indirect intervention abroad) deserve humane treatment, even if the conventional mainstream story was correct and immigration did cause inequality.

Galbraith versus Piketty on Inequality

A new paper by James k. Galbraith has been published in Development & Change. It's along the lines of his arguments in the Godley-Tobin Lecture delivered earlier this year, and to be published in the Review of Keynesian Economics (ROKE) in January. Basically, we need a macro story for inequality (which Piketty r-g framework tries, but ultimately fail to provide) and that the payroll data that Galbraith uses provides a more accurate measure of inequality than the tax records favored by Piketty and his co-authors.

From the abstract:

This article reviews the World Inequality Report 2018, a large collaborative data project based on the work of Thomas Piketty and the late Anthony Atkinson, which critiques the entire literature of inequality measurement from survey data and purports to provide superior, unprecedented and reliable coverage of income and wealth inequalities over the entire world, based primarily on tax records. The article examines three major issues: the coverage provided by tax data in the world economy, the consistency of tax data with other sources of information on income inequality, and the peculiarities of tax‐based measurement of inequality in the United States. Then a comparison is made with measures drawn from other forms of administrative data — specifically payroll records — which are generally more consistent with records of inequality measured in household surveys than are tax records. Following this, the article discusses the analysis of wealth and wealth inequality before offering a few closing remarks about policy.

Read full paper here. 

Financialization and the low burden of public debt

Financialization is a fuzzy concept. There are many definitions, and none is clear cut, at least to characterize the changes of the last 40 years or so, which is the period most authors associate with financialization. I'm not suggesting it's not a useful concept though.* In some sense, financialization refers to the last phase in the capitalist system (even if there are ways in which one might argue that capitalism was always financialized).

At any rate, going to the point I wanted to make, the financial burden of public debt went down in the 2000s, but that is not necessarily a good sign. I was trying to check the financial burden of public debt (i.e. the total spending on interests, out of total current spending) in the United States. The figure above shows that the financialization (ha, another possible definition) of the budget started with the Volcker shock, and ended more or less with the collapse of the dot-com bubble in the early 2000s.

The hike in interest rates in the late 1970s increased the financial burden of public debt, and with the lower output growth -- associated not just to higher interest rates and its effects on consumption, but also higher unemployment and lower wages which additionally impacted private demand -- debt dynamics was on the unstable side of the Domar rule (r > g) and public debt increased significantly in a peaceful period that was for the most part prosperous.

Public debt normally increased in periods of crises or of external threats (wars). In other words, public debt was an instrument for the preservation of society for the most part. There was also an agreement that public debt was a necessary instrument for the accumulation of capital, and it provided a secure asset for the functioning of the financial system. Btw, that was a point that was contentious, and not everybody accepted the Hamiltonian notion that public debt could be, to some degree, a blessing. Think of Andrew Jackson's payment of debt, and the various modern Cassandras afraid about the debt burden on future generations.

The rise of public debt since the 1980s (with the minor decrease in the late 90s) has served a very different purpose. While part of it can be seen as the reaffirmation of American Hegemony, with the increased military spending of the Reagan years (still low if compared to the heights of war, hot or cold), much of it was the result of lower taxes for the wealthy. The accumulation of debt was, like the hike in interest, necessary to discipline the labor class and control inflation.

In part, the result of that perverse use of public debt accumulation is that private agents have ramped up private debt in order to compensate for income stagnation. Think about college kids accumulating more debt to compensate the reduced public support for public universities. That of course goes hand in hand with the fact that most booms now are associated with some bubble (stock market, dot-com, housing, etc), or in the absence of a bubble we end up with a moderate lack luster recovery (the last decade), and what is confusedly described as 'secular stagnation.' The flip side is that the low burden of debt on this side of the 2000s, is not benign like the one from the 1950s to the 1970s, which was closer to what Keynes' notion of the euthanasia of the rentier.

It reflects the needs of the economy to maintain private debt under control in a relatively unstable economy. Something that is still necessary to the extent that labor is still very much being disciplined by macro and micro policies that keep wages under control.

* For a relatively recent discussion of the meaning of financialization and its relevance see Epstein (2015) here, and for an older discussion see Palley (2007) here.

Middle Income Trap or the Return of US Hegemony

Short essay in Spanish for the special (40 year anniversary of the journal Coyuntura y Desarrollo, published by the Fundación de Investigaciones para el Desarrollo, FIDE). It is essentially a critique of the concept of middle-income trap and the idea of how the demographic transitions (discussed here before) affect the process of development. It suggests that the deindustrialization of the Latin American periphery results as much from the decisions in the hegemonic country to open up China, as from the decisions of the local elites to adopt neoliberal policies to punish its labor class. It is also noted that the deindustrialization of the central countries (particularly the US) should be taken with a certain degree of skepticism (see this old post), since manufacturing output went up (even if manufacturing employment has gone down, at least since the entry of China in the WTO), and the US maintains a significant leadership in key industrial sectors (let alone the military; see also this more recent post).

Garegnani on Sraffa and Marx, with an intro by Petri

The Review of Political Economy has done a great service to those interested in political economy, and in particular those concerned with the revival of the surplus approach. It has published the manuscript of Pierangelo Garegnani's unpublished paper.

From Fabio Petri's introduction:

In the last year of his life, Pierangelo Garegnani (1930–2011) worked on revising a paper on Marx’s labour theory of value drafted 30 years before, which had remained unpublished. This revised paper is what is reproduced below. 

The paper had been read at a 1980 Conference on Marx in Bielefeld, Germany. It was a new version, in English, of the paper ‘La teoria del valore: Marx e la tradizione marxista’, published, together with an early Italian version of Garegnani (1984) as well as some other material, in Garegnani’s Marx e gli economisti classici (1981: pp. 55–90); the project had originated in a series of articles published in the Italian weekly Rinascita in 1978 and 1979. In the opening page of an essay on ‘The Labour Theory of Value: ‘Detour’ or Technical Advance?’, Garegnani (1991: pp. 97 and 113, endnote 4) announced the present work as forthcoming, but in fact the paper did not go to print. In September 2010 Garegnani resumed working on the paper, to add to it a further Section IX concerning more recent discussions on Marx and the labour theory of value. He intended to co-author this additional Section with me, and it is from the ensuing collaboration that I have obtained the typescript of the Bielefeld paper, dated 1981, titled ‘The Labour Theory of Value in Marx and in the Marxist Tradition.’ On why this 1981 paper was still unpublished 10 years later, what went wrong with its publication in 1991, and why then the paper remained dormant for nearly 20 more years, Garegnani supplied little information. About these questions one can only wait for when an examination of his papers and correspondence – a vast task yet to be commenced – will possibly allow for a well-founded historical reconstruction of his choices. 

Unfortunately Garegnani passed away in October 2011, before a draft of the additional Section IX could be achieved (see Petri [2015] for further details). But in that last year he also worked on revising the Bielefeld paper, that is the first eight sections of the intended new paper. The result of the revision is presented here. Although not a final version ratified by the author, it is a fully autonomous paper, and quite definitive: the draft contains no incomplete sentences or notes by Garegnani indicating that certain points might need further work. Relative to the 1981 version, it contains additional observations and stylistic improvements, but no changes in the basic arguments. 

The aim and contents of the paper were summarized at some length by Garegnani himself when announcing it in the opening page of the 1991 essay. In that summary, which can now be read as an introduction to the arguments contained in the paper here submitted to the public, Garegnani (1991: p. 97) stresses that the paper is devoted to further confirming the thesis, advanced in Garegnani (1984), that the role of the labour theory of value in the classical approach and in Marx was the ‘technical’ one of providing a ‘measurement independent of distribution, of product, wages and means of production,’ thus allowing a determination of the rate of profits as the ratio of net social product to capital advances, surmounting, in the only – albeit imperfect – way concretely available at the time, the (apparent) vicious circle of a rate of profits dependent on relative prices in turn dependent on the rate of profits. With particular regard to Marx, Garegnani explains, the confirmation is achieved by showing that the traditional interpretations that attribute other roles to the labour theory of value ‘have little foundation in Marx’s own work. This applies in particular to the readings often made of some characteristic concepts of Marx, like his distinction between ‘inner’ and ‘apparent’ relations of the bourgeois system, the distinction between ‘abstract’ and ‘concrete’ labour, the representation of the wage as ‘value of labour power’, or the sense in which Marx refers to labour exploitation – a sense which, as he explicitly states, has little if anything to do with the labour theory of value.’ These interpretations ‘have indeed made it difficult to comprehend a large part of Marx’s theoretical work’. No attempt at diplomacy here! The published 1991 essay is then presented as an appendix to that still unpublished paper, defending the latter’s arguments against the views on Marx’s labour theory of value expressed by Samuelson, Baumol, Myrdal, Meek, Morishima, and Sen. 

There remains to indicate why publishing this paper today is deemed important. The main reason is that Garegnani’s understanding of the role of the labour theory of value in Marx (and of the correct reading of those ‘characteristic concepts of Marx’) appears to be scarcely known outside Italy [1], a fact that has helped the frequent placement of his overall approach in the ranks of an allegedly anti-Marx ‘Sraffian school’. This reaction is hardly surprising in the light of the substantial diversity of Garegnani’s theses from the long-dominant ones. So dominant was the tradition attributing to the labour theory of value indispensable roles other than the one indicated by Garegnani – for example, the role of proving labour exploitation – that it is not difficult to understand that the spontaneous reaction of scholars steeped in the traditional interpretation may have been one of skepticism, if not of hostility, toward a view which, by claiming that nothing is lost by replacing the labour theory of value with Sraffa’s equations, seemed to reject fundamental elements of Marx’s assessment of the nature of the capital–labour relation. The absence of a detailed exposition in English of the arguments Garegnani supplies in support of his views has made it difficult to give those arguments the attentive consideration warranted by the recognized depth of thought of the author. The publication of the present paper aims at making such adequate consideration possible [2]. 

The criticism, in the last sections of the paper, of two Italian scholars absent from recent debates does not seem to be outdated either, because views similar to those they expressed are still present today. The near identification one finds in Lucio Colletti’s (1924–2001) writings of the concepts of fetishism, alienation, and abstract labour continues the long (and still alive) tradition stressing the ‘qualitative’ roles of Marx’s labour theory of value, and has been influential outside Italy too (see, for example, Foley 1982: p. 46, fn. 5). The argument put forward by Claudio Napoleoni (1924–1988), that outside the labour theory of value one cannot view profits as the fruit of exploitation [3], is representative of a widely shared view that helps us to understand the reluctance of many Marxists to replace the labour theory of value with the correct analysis of prices as provided by Sraffa. 

Independently of how convincing it will be found, this paper questions the idea of a so-called ‘Sraffian school’ antithetical to Marx. Leaving aside the analytical and even philological legitimacy of referring to Sraffa’s work and its later developments as any new particular ‘school’ distinct from the modern reappraisal of the classical approach to value and distribution, the paper shows that no such counterposition is applicable to a scholar highly representative of that line of thought, in whose view Marx’s overall approach actually turns out to be strenghtened, rather than challenged, by the correct determination of rate of profits and prices achieved with Sraffa.

Notes

[1] The publication in 1985 of a French version of the Bielefeld paper (Garegnani 1985), also containing a short appendix criticizing Rowthorn (1974), does not seem to have been widely noticed: I have found it cited in only one (unpublished) paper concerned with Marx’s theory of value, Chattopadhyay (2000).

[2] And at supplying at last the needed background to the 1991 essay.

[3] Napoleoni’s argument is available in English in Napoleoni (1991). Garegnani does not cite this article, presumably because of the little time he had to work on the last three Sections, which have remained almost unchanged from the 1981 version.

Most of these issues were briefly tackled in this old post.  Read paper by Garegnani here.

H/T to Franklin Serrano and Sergio Cesaratto for bringing the paper to my attention.