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More fallacious economics

One of the advantages of having a comments section is providing me with new ideas to write about, even when the comment in question is so flat-out wrong that it makes me gape with amazement at the screen. In my recent post about the economic fallacies surrounding immigration, a commenter opined that Indian immigrants into the UK were leeching money out of this country by not re-investing it in new businesses but merely writing cheques to “inactive” folks back in the old homeland.

It is a lousy argument on a number of levels, and I am not even going to dwell long on the obvious dangers of inciting distrust and hostility towards economically successful immigrant groups and accusing them of not being sufficiently “patriotic” by not spending all their profits in Britain. The argument also fails because it ignores the subjectivity of economic value. If a businessman earns a million pounds in profit from a drycleaning business in Birmingham and sends the odd cheque back to his aged relatives in Bombay, then how is economic value being destroyed? In the eyes of the businessman, helping his loved ones is worth more to him than investing that money in something else, even though other people might disagree with that decision and think him to be deluded. It is none of my business to force a change in that decision.

Also, that businessman is doing something that supporters of a liberal civil society have traditionally supported: philanthropy. How can it be wrong for a man to steer a portion of his wealth to his dependants, educate them, feed and house them? Who gives any entity the right, least of all the State, the power to say yay or nay to that decision? The argument that such transfers are wrong is an echo of the old Bethamite notion that the State is entitled to seize wealth if that maximises the “greatest happiness of the greatest number”.

A final point. No doubt large sums of money are paid by immigrants and migrant workers back to the points of origin all the time. This has happened for centuries. These transfer often sustained people in great hardship.

I have come across some dubious economic arguments in my time, but the idea that immigrants paying money to their folks is some sort of parasitical waste has to be one of the weakest.

50 comments to More fallacious economics

  • Verity

    People can do what the hell they like with their own money! That’s one of the most stupid arguments I’ve ever read. Possibly one reason they came to Britain and worked hard, lond hours and sacrificed was so they could support a family back home. That’s the reason there are around 60m illegal Mexicans in the US. The men leave their families and take any work so they can send money home. Same with the Irish when they came to Britain. And the W Indians.

    Plenty of that money they earn, or of those fortunes they make, gets spent in Britain, anyway. Telling people how to spend their own money! I’ve never heard of anything so ridiculous!

  • This line is very popular among the anti-immigrant crowd in the US. If you look at the other writings of the people saying it, it’s pretty clear that they don’t really care about the health of the economy, they just don’t like people with dark skin coming into this country.

  • James of England

    You’ll find a lot of people who view the proper formulation as being the greatest good for the greatest number of people I identify with on a national, ethnic, or religious basis.

    My primary moral difficulty with socialism in the west has always been that if it is moral to redistribute income from someone earning 100,000 a year to someone earning 10,000 a year, then it must be more moral to transfer every single one of those pennies to someone earning 1,000 a year. I have never understood why an immigrant in the UK was more morally deserving of benefits than he was when he was in Jamaica. I don’t think there’s a strong moral case for distinguishing between the immigrant and the citizen either, but I recognise that the latter is based more on my faith than the former (In Christ, there is neither Jew nor Greek). I can see economic arguments for healthcare and such, even for minimum wages, but the notion that it is “compassionate” to spend money on making prisoner’s or job seeker’s or invalids or unskilled worker’s lives better instead of on making a massively greater difference to the life of a Bangladeshi worker seems to make sense only from a nationalist moral structure.

  • Dave

    yes James and whats wrong with helping your closest neighbour first, and people more distant later on when/if we have the means to do so? (if you believe people should be helped at all that is)

  • James of England

    Incidentally, if the intersection of racism and “compassion” interests you even 1/10th of as much as it does me, I cannot sufficiently recommend David Bernstein’s book, Only one place of redress.

    One of my favourite discoveries while in Law School has been the discovery that Nagin fuming about his town being swamped by “Mexicans”, most of whom weren’t from Mexico, but were neither black nor white enough for his tastes, was actually promoting the original intent of the Davis Bacon Act. When Rep. Bacon originally defended himself against charges of racism by showing how his act could be used against “Mexican workers” as well as against, ahem, African Americans. It’s not an abuse of the statute for Nagin to have wanted to use it to keep the labor in NOLA black and white, it’s exactly how it was intended to be used. Since the book was written before Katrina, this isn’t a point that Bernstein makes (indeed, he suggests that racially motivated uses of the act are a thing of the past), but for me it demonstrated how vital the principles of the book remain.

    As a final thought in what’s becoming a more rambling post than I’d meant it to be, it was disgusting that the media ignored his racism in the aftermath of Katrina but even more disgusting that he was allowed to get away with his “chocolate is a mix of milk and cocoa” defense, given the degree to which the chief object of his racial animus still seems excluded from his suggestion that he wants both black and white in his city. There they covered the statements, but did not give the context to show why they were particularly vile, leaving the impression that they were merely insincere.

  • Dave

    Johnathan, I don’t argue with your post and I can see it working fine on a smaller scale. But what would happen, if in the case of for example the USA, instead of 40million immigrants out of a total population of 290-ish million sending 50% of their wages home. What if they were all doing that, 290million people sending a huge chunk of money outside of the US economy. Would this have no impact at all?

  • James of England

    If it is more practical to help your nearest neighbour first, then I could see an argument that he should take priority. If your aid comes in the form of labor, then clearly this would be the case. If the aid travels a hundred miles away from you before being distributed, and is purely in a fungible form that is less efficiently spent on the already relatively wealthy guy living next door, then I don’t see the moral argument.

    I’m not saying that I don’t see an economic argument. You derive more pleasure from people being benefitted who you hang out with or pass on the street. If the better cell conditions result in a 1% reduction in recidivism, then you benefit more from that than you’d benefit from a dozen lives being saved in Nepal. Unless you characterize those living near you as having more inherent worth than those who live far away, there seems little moral argument that they should receive more money than they would if they were less close to you.

    As Ken notes, there are strong racial connotations to many of these arguments (perhaps not for you, but for many who make your arguments). No one argues that Scots who come down and work in London but sends funds home to families in Edinburgh are doing any harm. It’s not whether they’re close to you or not that forms the frequently suggested moral boundary, it is race and nationality. If you passionately believe in a strong federalism and campaign against money being sent from the South-East to the celtic fringes, then you’d be more likely to have a consistent approach. Is that the case?

  • What if they were all doing that, 290million people sending a huge chunk of money outside of the US economy.

    Dave, if 290 million people were sending a huge chunk of their own money outside of the US economy, are you suggesting that someone else (a) has to the right to take away their ability to do what they want with their money (i.e. impose capital controls) and (b) actually knows better that those people where that money ‘should’ be going?

    If either question produces a ‘yes’, please explain why.

  • Dave

    not at all.
    I was just asking a question about the impact of large amounts of money being moved out of the US economy.
    Johnathan seems to suggest it would make no difference, and I find it hard to see how that is true.

  • James, who needs a moral argument? People help their family and those closest to them first. It’s human nature. No justification necessary, moral or economic. And it has served our species well. 6 billion and counting.

  • Patrick

    Well, to start with it isn’t really possible – are you suggesting that they eschew houses, cars, clothes and food for themselves and their dependants in America? That’s already most of most people’s money.

    Secondly, of course, presuming that the money they give makes Indians better off, that increases the market for American goods, last time I checked. Thus making Americans better off. Same applies for pretty much any country, I’ll bet.

    Thirdly and relatedly, again presume that the money contributes to the recipients’ countries’ development. So not only do they expand the market for American goods, but for everyone else’s, and introduce their own to boot – lowering prices and increasing the standard of living all around the world. (hey, they even contribute to world peace!!)

    Fourthly, can you imagine any rule to the contrary making anyone (except profiteering government rent-seekers) better off? Wouldn’t it, horrible inefficiences and likely perversities aside, just drive people away from America, thus taking away all that expenditure referred to my first para and their labour to boot?

  • Verity

    Ivan – agreed. You help your own first. And I believe in private charity. People who have created businesses here, or are helping to create wealth by being employed (although not by the state) and want to send their money home are good, responsible people. They have accepted the burden of caring for their families. Those are the kind of people we should encourage, surely? And, obviously, they’re spending some of the money to live in Britain, rent a house or buy a house, go to the supermarkets, etc.

    Besides, my original point, it’s their money.

  • B's Freak

    The real argument on this seems to be whether it is up to the state or citizens and businesses to help other countries to develop. I prefer the latter. And I’m tired of arguing with people who think that it’s criminal for businesses to move over seas and improve the economies of poorer nations but it’s a moral imperitave to reach into each other’s pockets (as well as those of those same companies) to provide economic aid to those countries.

  • The Realist

    Deleted: Already banned and changing your name does not make you any less banned.

  • RAB

    Let me tippy toe in here as it was me that apparantly shoved the feather up Johnathans ass.
    I said on the other thread that immigrants were sending money home. I didn’t say that I disapproved or otherwise, merely thats is happening.
    I have no problem with investment merely dissipation.
    I repeat one more friggin time. If I give my money to you for no economic return, what is the benefit to me?
    How does it come home with a profit in it’s back pocket?

  • darkbhudda

    People forget one thing.
    The immigrant is sending British currency to India.
    The Indians now own currency they cannot use.

    Yes, they will just go to the money exchange and change it. Now the money exchanger has British currency and so on.

    So, how is Britain any poorer? At some stage that money is sent back.

  • Patrick

    What do you mean, exactly? Who is giving to whom? If you mean you ‘giving’ someone their wages/the prices of their goods, then the economic return to you is not all that obscure or remote (Hint: what you paid for).

    If you mean the remitter sending money back to his family/friends/dog/whatever, then a) I’ll tell you when you explain to me the economic benefit to you of Christmas presents, b) see my previous response as to some of the many ways in which there is an economic benefit to be had, c) by the way, have you been an economic benefit to your parents, or ought they have aborted you? and d) however do you think it your business?

  • simon

    Everyone loves economic freedom until it affects them. So far nobody has devised a way to offshore or downsize the jobs of politicians such as MPs. The politicians need their lackeys onshore and fullysized and loyal and safe too. Best tell your son or daughter to get a job at the town hall or in the managerial ranks of the civil service so that they can be sure of an olde worlde pension and job security. You know it makes sense.

  • simon

    Everyone loves economic freedom until it affects them. So far nobody has devised a way to offshore or downsize the jobs of politicians such as MPs. The politicians need their lackeys onshore and fullysized and loyal and safe too. Best tell your son or daughter to get a job at the town hall or in the managerial ranks of the civil service so that they can be sure of an olde worlde pension and job security. You know it makes sense.

  • jc

    What we have here is a classic confusion of open v closed economic systems. Do I really have to say more?

  • Dan

    In the US the Cuban immigrant community is much more wealthy than the Mexican immigrant community. The primary cause of this is the US boycott of Cuba. The Mexicans send money back to their families, but the Cubans were denied that option. The Cubans instead invested in their community and built wealth.

    I wouldn’t forbid sending money back home, but it’s not the best thing for their communities here.

  • Robert Alderson

    Economic freedom is paramount. There’s not much point trying to micro manage and micro analyze exactly how people choose to spend their money and put value judgements on it. Once you start tampering with the basic freedom to do whatever you want with your own money you mess up the economy as a whole

    Anyway, if immigrants weren’t sending “surplus” money home then they would just be spending it on largely imported crap at Walmart like the indigenous population.

    P.S. Verity, you mentioned 60 million illegal Mexicans in the United States. That seems impossibly high given that the population of Mexico according to the CIA World Factbook is 105 million.

  • Robert Alderson


    I can’t agree. There are two big reasons why Cubans in the US are more prosperous than Mexicans.

    1) Right after Castro took over there was an influx of the wealthiest Cuban families who felt they had most to loose and brought as much money with them to the US as they could.

    2) There are hardly any illegal Cuban immigrants in the US since US law pretty much automatically gives Cubans Green Cards if they reach US dry land (I met a Cuban waitress who had arrived two weeks previously and had already had her passport stamped for permanent residence.) People who are legally in the US can much more readily open bank accounts, take out mortgages, build legitimate businesses and get good jobs.

    Anyway, I don’t think that the US embargo has much practical effect on the ability of Cubans in Miami to get money back to Havana – it’s just not recorded in official statistics.

  • RAB

    Dan, thank you , a glimmer of sense.
    Wealth creation is local before it’s global.
    My arguments on the other thread brought in the welfare state and 3rd world aid. I see no difference between the largesse to my sub-continent cousins whom I know and support and the welfare state and Aid in the abstract.
    So one more time Johnathan, in purely economic (which sad sod that I am, have been arguing) Terms.
    How do I benefit from giving away my money rather than somebody else working for it and buying my goods and services?

  • Kim du Toit

    Just a couple of points:

    1. Not too many Americans begrudge Mexicans sending some of their money back to Mexico, provided that it’s post-tax (ie. honestly earned, as opposed to untaxed money earned by illegal immigrants).

    2. The biggest gripe is that the MexGov has become dependent on the influx of this “unofficial” foreign capital, which is one of the reasons why they encourage illegal immigration of Mexican citizens to the United States. (And yes, the MexGov does just this, building staging areas on their side of the border, handing out maps to would-be border-jumpers, and issuing “matricular” ID cards to illegal immigrants through their consulates.)

    3. A huge number of Brits retire to warmer/cheaper climes, and get their pensions in their new adopted countries, to spend there as they see fit. Would those who wish to deny British Indians the ability to send money “home” agree to deny British citizens the right to “transfer” their pensions, too? Just for consistency’s sake, of course.

    4. I’m one of those Americans who sends money “home” (in my case, to my elderly mother in South Africa, because the State old-age pension in South Africa is a joke — less than $50 per month). If I couldn’t do that, she’d go under, in no uncertain fashion — but I’d get the money to her somehow if I wasn’t allowed to do so.

    In any event, it’s my money, not the State’s. I earned it, paid taxes on it, and I’ll spend it as I see fit.

    And a pox on anyone who’d attempt to stop me.

  • Johnathan Pearce

    I repeat one more friggin time. If I give my money to you for no economic return, what is the benefit to me?

    The “benefit” in this case is the value of caring for one’s relatives, as opposed to something else. You are making the repeated error of assuming that everyone is a material maximiser. That is not the case. Lots of people spend their spare cash in ways that may not strike you as economically valuable, but which are of value to the people concerned. That was my argument about economic value being subjective, not something that you can weigh like cheese.

    I don’t question your motives, RAB, though goodness knows your argument can easily lead to paranoia about immigrants and all that entails. I question your line of reasoning.

    As an empirical fact, there is now a large middle class of immigrants descended from the Indian subcontinent, now in the professions, in business and so forth, and they are employing thousands of people and creating wealth here, so your argument is also wide of the mark.

    You certainly were the commenter who got me to write the article. I guess I should say thanks.

  • guy herbert

    I’m hard put to see the difference between importing people who work here and might send money abroad and importing goods and services (made by labour elsewhere) for payment. Unless you offer some sort of neo-mercantilist explanation that imports are per se bad.

    In which case, what about foreign travel and purchasing of foreign assets, shouldn’t we look badly on those too? (Those who see international trade as ecologically damaging are consistent on this one.)

    What I suggest is happening in such arguments is a fetishisation of cash as symbol of national potency, and indirectly of the state. The actual trade in goods and services that it facilitates is ignored. So is the fact that you get cash by exchanging something for it, so no one else is worse off if you give away your money or burn it. What matters is dirty foreigners getting their polluting hands on ‘our’ magic power. Which is why the Mexican, Indian or Turkish remittance-man is more concern than the French investment banker using Wall Street bonuses to maintain a stud-farm in Chantilly, or Paul Allen and Larry Ellison keeping a whole town of Finnish shipbuilders in vodka.

  • Simon Cranshaw

    This question seems to have a moral aspect and an economic one. The moral question is whether we should be concerned about the location of economic activity. Should we value the economic growth of our own nations citizens above those of other nations? Personally I don’t see why we should. But putting that topic aside, there also seems to be confusion over the economic issues. I believe the root of this thread was this claim.

    If that money were spent here, it would stimulate domestic economic growth, but it doesnt because it is being siphoned off, to be spent elsewhere.

    I have heard a similar complaint before in another form when a Japanese businessman friend complained that Japanese girls purchases of foreign handbags were draining wealth out of the domestic economy. The economic idea is the same since remittances are a kind of purchase of foreign goods. Both claims are however false. The mechanism which ensures this is the exchange rate and the flow of goods. Taking the UK example, when someone makes a remittance or purchases a foreign good they sell sterling and buy a foreign currency. This creates a downward pressure on the value of sterling in world markets. Because of this, goods produced within the sterling zone become cheaper and exports increase. If foreign purchases were reduced the value of sterling would receive upward pressure and exports would be reduced. Thus purchases of foreign goods encourage in kind the sale of domestic goods. Ultimately I suspect the overall impact on the domestic economy will be the same whether spent on foreign goods or domestic ones. Indeed, considering that investment in poorer countries will likely create greater relative economic development and thus greater increase in global demand for goods, in the long run it’s easy to imagine remittances having a more positive impact on the domestic economy than direct domestic purchases.

    The question was asked, “Now how does this benefit us?” The answer is that exporters benefit and their improved profits are almost instantly back at work in the cycle of money within the domestic economy.

  • darkbuddha: There is an issue. People are SELLING £ and thus devaluing it.

    I am not against the practice of immigrants sending people home, as my post in the triggering thread states. It is absurd/hypocritical to complain about this when we already buy so many foreign goods and allow foreign-owned companies to operate (thus repatriating their profits).

  • RAB: We effectively send our money overseas when we import foreign goods. Should we stop doing this? Playing your disdain for “sending money home” out to its logical conclusion eventuates in North Korea – in fact, moreso.

  • gravid

    What a great post and comments. I argued with work colleagues that immigrants had every right to send their money home, they are paying rent and spending in shops after all. I was branded an idiot for holding this view. As Verity said “It’s their money”. The influx of eastern europeans into NI is astonishing, as is the animosity towards them. Arguing about what people do with their own money makes me laugh as I find it absurd. One of the people who berated me made a comment about there being nowhere for “us” to go and earn lots of money the way “they” can come here and do it. I made the point that we were at the top of the tree already and to stop whinging. Maybe they should go and live under communism and queue up for groceries for hours every day to see if they like it any better.

  • HJHJ

    I’ve never seen any convincing evidence that immigration, of itself, makes any country either poorer or richer per head. Those that say we need it to maintain population are wrong becuase there is no evidence that countries with large populations are richer than those with small populations. On the other hand, those against need to explain why, economically, it is worthwhile regulating it (with all the attendant bureaucracy).

    I suppose it boils down to cultural issues and your preferences in this respect, not economics.

    One thing does concern me about immigration. Many areas of the economy are effectively closed to immigrants (at least in the first generation) and in any case entry is generally artificially restricted or wage rates are not determined by market forces. Law springs to mind and medicine, accountancy and much of the public sector but there are many other examples. A free market in labour helps keeps wages down in the areas where immigrants compete for work – nothing wrong with this as it controls costs. But if you are a cleaner and your wages are constrained by a ready supply of new immigrant Labour, you are disadvantaged by immigration unless it also helps to control costs in other areas. If other groups are not subject to such competition, you will suffer in comparison and this can cause resentment against immigrants whereas, in reality, the true cause of your relative impoverishment actually lies elsewhere.

    I was thinking about this when I read about how hospitals were having to cut back on services to fund the huge pay increases medics have received. My solution to this would be to let hospitals recruit far cheaper staff from abroad without any requirement that they are paid existing UK rates.

    This is an argument against closed shops, regulation andnon-market based wages I suppose, but immigration does highlight it.

  • guy herbert


    Both claims are however false. The mechanism which ensures this is the exchange rate and the flow of goods.

    Yes; in most cases. No; very often in the case of US-resident Latin Americans and quite a few others. The additional wrinkle being in the strange ecology of the US dollar. Numerous currencies are dollarised; there are significant eurodollar (are we supposed to call them xenodollars these days?) financial markets; and cash dollars circulate freely in many parts of the world. So any particular remittances need not interact with the exchange rate at all, as long as they stay in the delocalised dollar-space.

  • RAB

    I agree with most of the above posts.
    People may do what they wish with their money and if anyone can find anywhere in my posts where I advocated STOPPING immigrants sending their money wherever they wish then please point it out.
    Nor do I have any problem with charity and philanthropy.
    My point was a narrow economic one . How does gifting money economically benefit the giver? Investing money will generate more wealth but giving it away does not. It may well be the humanitarian thing to do, but like welfare and Aid it is money transference, not economic activity.

  • Tuscan Tony

    HJHJ – I’ve never seen any convincing evidence that immigration, of itself, makes any country either poorer or richer per head..

    Not sure about that, it’s hard to imagine either the United States’ or Australia’s per capita GDP being anything like they are now without the large-scale largely European immigration of the late 18th, 19th and early 20th century. Likewise 19thC Ireland’s post potato-famine mass emigrations IMHO served to shrink and damage its economy for at least the next 4 generations. I’ll go along with your paragraphs 2-5 though.

  • The problem with Mexican immigrants is not their making money and sending it home, but their demands on the social services and medical systems, funded by other Americans. In fact, you can argue that a lot of the money sent home by illegals is actually the money of legal American taxpayers, because the illegals are having many of their expenses paid by the welfare kleptocracy.
    And I’m under the impression that Cubans in the US send a LOT of money back to Cuba. It is essential to the support of the Cuban government, which rips off a large part of it.

  • HJHJ

    Tuscan Tony – I take your point and the same thoughts occurrred to me when I was writing my post.

    However, these were immigrations that completely changed the populations by orders of magnitude and we’re not quite talking about this level of immigration in the present.

  • Johnathan Pearce

    RAB, the gift does not economically benefit the giver in a material sense, no. If I buy you a new Ferrari Enzo for Christmas, I get no benefit apart from your undying friendship and the grateful thanks of the Ferrari motor company and its shareholders.

    Anyway, I see no sign that Indian businessmen are somehow starving their companies of new capital. If new economic fields are lying fallow because of such behaviour, then it would surely lure in money from other entrepreneurs in time.

  • RAB

    RAB, the gift does not economically benefit the giver in a material sense, no.
    Thank you Johnathan, that was my one and only economic textbook point. A gift is not economic activity.
    Now let’s all get out there and buy Danish!

  • Midwesterner

    There then. Now that that’s solved, can someone answer my opinion/question from ‘The lump of labour fallacy endures’ thread that was the root of this thread.

    The lump of labor concept is definately a fallacy in a truely free labor market. But to the extent that the labor market is controlled, it becomes more and more true.

    Example, if the lump of labor is a fallacy, then when more taxis are needed in New York city, just buy a car and go into business. But the number of cab IS fixed.

    But, directly correlating to these kind of controls, not to mention the more hidden controls like the difficulty of a self employed person hiring a helper and complying with all of the related laws, lump of labor is not a fallacy.

    Simon? Guy? You guys seem to understand these things.

  • “How can it be wrong for a man to steer a portion of his wealth to his dependants, educate them, feed and house them? ”

    Because these actions are the function of the state!

  • Robert Speirs: That, surely, is a fault of the ‘kleptocracy’, not the Mexicans.

  • Johnathan Pearce

    Midwesterner, well, it is indeed true that in a rigged market or a closed system, if more people enter a workforce, then it can depress wage rates for some people assuming nothing else changes. The obvious solution is to de-rig the market, not deny the advantages of having bright, motivated people entering a country.

    RAB, you claim you were making a narrow textbook point. That is not what it looked like on first glance and I have re-read your argument several times. Your use of the word “offshore” implied that somehow, money was disappearing out of sight. Anyway, it appears you are not quite defending that view now, so indeed, let’s buy Danish!

    If you have kids, buy the new Lego toys.

  • Midwesterner

    The obvious solution is to de-rig the market, not deny the advantages of having bright, motivated people entering a country.

    Yes! Very true. But having be subjected to many surgical procedures to repair injuries from an accident, I can assure you that the order of the procedures is VERY important.

    You don’t began physical therapy before you establish an airway.

    Without first fixing the problems of immigrant (and domestic) workers having the option of being paid for idleness, and the controlled economy removing elasticity from the labor market, importing more immigrants could be suicidal.

    You don’t tell a patient in cardiac arrest they should be running laps. That may be a great way to built cardiac capacity, but administered during heart failure, it’s fatal.

    If it’s your goal to bring down the government, you could make the case, but I don’t think anyone is suggesting that.

    Until the market is free market is restored, we need to behave as though ‘lump of labor’ is proportionately true.

  • Midwesterner

    Johnathan, it light of your statement to RAB that

    Your use of the word “offshore” implied that somehow, money was disappearing out of sight.

    Does that mean you’re putting ‘false’ to Guy Herbert.

    The additional wrinkle being in the strange ecology of the US dollar. Numerous currencies are dollarised; there are significant eurodollar (are we supposed to call them xenodollars these days?) financial markets; and cash dollars circulate freely in many parts of the world. So any particular remittances need not interact with the exchange rate at all, as long as they stay in the delocalised dollar-space.

    It is possible that off shore ‘gifting’ could yield entirely different results in the UK than they do in the US, I’ve haven’t heard that claim made here. (Outside of Guy’s comment.)

  • Simon Cranshaw

    Guy – thanks for your point regarding the xenodollars. Even in this case, however, I would argue that money sent out of the domestic economy will still inevitably return as new demand in the domestic economy. Let’s look at the different cases. If dollars are flowing in and out equally of the xenodollar area, then the case is as before, demand going out is being balanced by demand coming in. Now let’s suppose this isn’t so. Imagine the xenodollar economy is growing and dollars are simply flowing out into this new economy. This would lead to a reduction of money in circulation in the domestic economy and consenquently a deflation of the price of goods relative to that dwindling money supply. This will again lower the price of the domestic economy’s goods and increase their competitve edge both in world markets and versus the new xenodollar zone. Thus although xenodollars zones make a complication in the process, I still don’t see that exported demand is ever really destroyed. It keeps coming back.

    Midwesterner – The point you make appears valid and seems likely to be a real mechanism in the economy. The question is whether it is a very significant effect in the overall economy of immigrant labour. Working against the negative effect you point out are two very positive ones. The first is that many immigrants do jobs which would simply not be done by local workers, being too hard in some way for too little pay. These are “new jobs” for the economy which by facilitating business support other jobs and the local economy. Another effect, which as you point out may be dampened by regulation, is that immigrants tend for a variety of reasons to be more entrepreneurial than the local population. So which effect is stronger? It’s easy to speculate one way or the other but the proof of the pudding is in the eating and the evidence suggests that inflows of immigrant labour do not increase unemployment. I refer you to Julian Simon’s work on the issue on the Cato site.

    The effect on wages is modest by any appraisal, and the effect on unemployment apparently is zero.

    More recent work by Vedder, Galloway and Moore concurred with this view even adding

    if there is any correlation, it would appear to be negative: Higher immigration is associated with lower unemployment.

    This evidence shows that the lump of labour is indeed a fallacy.

  • Midwesterner

    Simon, thank you for the explanations. I like your step by step clarity.

    I have noted anecdotally both of the countering effects you point out, at least among the immigrants who are working.

    I googled ‘lump of labour’. Turns out that it is a straw man put up by those opposing theories advocating reduction of the number of hours people work or other economic theories. I found there has been little credible defense of the idea of ‘lump of labour’ in a free market in over a century. It’s proponents are most likely politicians, if there are any at all. What I did not find was any reference to market controls effect on the elasticity of the labor market except for the following statement that seems rather ‘trust me’ for a scientific claim.

    “It takes years to carry out a valid study, and the relevant economic conditions
    change little from decade to decade. Rest assured that there are no brand new studies that contradict the older ones.”

    Speaking anecdotally, I can tell you I receive a newsletter from the lawyers I use that is perpetually updating me on new regulations regarding employment. I chose long ago not to expand by having employees.

    The statement I am comfortable making is that

    A. Wage controls, benefits requirements, firing restrictions, work condition requirements, monopoly grants (i.e. The New York taxis) and many more market controls remove elasticity from the labor market.

    B. This loss of elasticity proportionately creates a condition that meets the description of ‘lump of labour’.

    C. State provided benefits, when extended to immigrants, remove the most visible consequences of labor market inflexibility.

    D.The concerns expressed by the author who was the subject of the original blog post are a very real concern when the conditions described in A & B, & C are met to any significant degree.

    So, to your closing statement, “This evidence shows that the lump of labour is indeed a fallacy.”

    I guess we disagree this time, But I do enjoy your posts very much and usually learn something or put what I already think on a firming footing.

  • Midwesterner

    Hi Simon,

    ‘Nother question for you. (On any other thread, we would be thrown off for this other discussion. But I think it’s what this thread is here for.)

    Your xenodollar explanation was very useful. Going through the complete picture made it clearer. There was one area you didn’t go into that I don’t understand. I’ll phrase it as a series of statements that may or may not be correct.

    The US cannot deliberately manipulate the zenodollars by printing or destroying dollars because domestic money supply it is too delicately balanced controlling inflation/recession.

    Therefore, the US is in many/most ways just one more nation swimming in a pool of dollars that has become an independent supernational marketplace.

    But the US must have some benefit (I’m not sure what it is, though) because our domestic economy is more controllable because we are able to use money supply to counter domestic inflationary/deflationary trends. As far as I can tell, this is our only advantage over the other holders of dollars. And in light of the other nations being able to readjust their own currencies against the dollar (something we can’t do), it may not be that big of a deal.

    This whole area confuses me. How does our ability to control the money supply effect the money flow? What are the consequences of the US being tied to the total money supply while every one else can adjust their own currency to the dollar individually?

    And one more question, if you’re up for it. What is the difference in the effect of xenodollars that return as income to domestic owners verses xenodollars that return and buy domestic assets for control by outside owners? Aren’t we, in effect, shrinking that part of our economy while other nations annex that part of it to their’s? Under most reporting/accounting systems it doesn’t show up this way, but doesn’t this need a corresponding acquisition of that country’s property by owners in our country to make a net neutral? Granted, the foreign owned US property is subject to US law, and is in our geographical area, but it is still owned by other nations (and their citizens if they happen to be property rights nations.)

    Thank you for your answers. Hope you have the time for these new ones. I apologize for my delay in replying. It takes more than a quick glance and I needed to wait for some free time to consider you reply.

  • Simon Cranshaw

    Midwesterner, thank you for your feedback. I also enjoy our discussions!
    Just to recap where we are, the original point for me was regarding a more open immigration policy. I am strongly in favour of a more open policy. However, there are those who say against this, that increased immigration would lower the number of jobs available for the local population. I would counter that the evidence does not suggest this to be true.

    I can imagine the effects you describe in A and C. I don’t understand though how you get to B, where you seem to say that a condition of “lump of labour” is to some extent achieved. As I understand it, we agree on the existence of both positive and negative effects but I’d like to ask why you feel that “lump of labour” is achieved. Do you feel the studies are not reliable or not relevant? Are you referring to some other evidence?

    The second question is a big one and still contentious but I’ll go through what I understand. A simple model holds that increasing the money supply has two main effects. One it acts as a kind of tax increasing government holdings. Second, when spent it also acts as a short term stimulus to the economy. Initially, demand appears to rise and production increases. However, ultimately the increase in money lowers the value of that money, and there is inflation. The increased production is realised to be not necessary for the real level of demand and production is cut back. Milton Friedman was very critical of such policies, because of the “noise” which they introduce in the demand supply loop. In general, thus this type of money supply increase has been cut back and is in general not thought of as a good idea and central banks instead aim for price stability. There are however good arguments for use of increase in money supply in special cases. Good cases have been made that it should be used to escape a liquidity trap in Japan. Is this the kind of thing you were asking about?

  • Midwesterner

    Hi Simon,

    Your second answer, I’m going to have to think about for a while. It has the kind of information I’m looking for but will take more than a quick read to understand. Where I’m having particular trouble is understanding the relation between changes in the US money supply re it’s effect on,
    A. US (you covered this one but I need to study it better)
    B. Holders of xenodollars re US (I can kind of guess this, not sure. They might be p.o.’d?)
    C.Holders of xenodollars trading among each other. Seems to me zenodollar trade would only be effected re the US, but some countries may choose to revalue in order to maintain parity with previous US values and then they would be effecting trade among each other.

    Am I correct in believing that the US money supply is critical to too many domestic things to be used as an international trade tool?

    RE the first ‘lump of labour’ discussion, my understanding is that this, in it’s pure, non-pejorative sense, simple means a fixing of the amount of available labor (work). My contention is that market controls of the type I mentioned (plus many more, the gov never seems to run out of ideas to meddle with the marketplace) have the unintended, and amazingly sometimes intended effect (New York taxis, again) of fixing the amount of labor (work) available in the marketplace.

    My underlying point through out the L of L discussion is that when labor market controls and state welfare benefits are in place together, there is a pronounced effect on the labor marketplace. The cascading effects of a fixation of the amount of available labor (work) must be accounted for. Whether they would have occurred in a free economy or not is not relevant in the short. The order in which we achieve a freer marketplace matters.

    I almost didn’t, but I’m glad I split out ‘B’. I didn’t even realize it was a point of discussion.

    My understanding is that Perry leaves these threads open indefinitely. If you have the patience to explain these things, you might want to bookmark this thread. I have a real busy day today. Not enough thinking time to do more than ‘hit and run’ on Samizdata. I’m trying to build a money supply model in my head, and that takes time.

    Thank you for your answers. They make sense to me, which is not usual in discussions of economics.