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Importing people is not like importing apples

Author(s): Nick Rowe

From Worthwhile Canadian Initiative:

Remember all the old Canadian nationalists? The ones who said that the (Canada-US) Free Trade Agreement would destroy Canadian culture? The ones we economists defeated back in the 1988 election? I'm beginning to wish we hadn't defeated them quite so thoroughly.

They were wrong. But they sorta, kinda, did have a point. Social/economic institutions are endogenous. They are not part of the unchanging geological landscape. Social/economic institutions are part of what people do; they are part of how people interact with each other, and expect others to interact with them. And, at least in principle, there is no reason why those social/economic institutions should be exogenous with respect to our imports and exports. And there is, or there used to be, a whole school of Canadian economics that pushed exactly that idea. So if you could make a reasonable case that the FTA and importing or exporting more apples would cause Canadian social/economic institutions to become, well, like North Korea, then OK. All that guff about comparative advantage and economies of scale and the gains from trade wouldn't be very convincing.

Here's Jonathan Portes:

"The essence of the economic case for migration is very simple: it is the same as the case for markets in general. If people take decisions on the basis of their own economic self-interest, this will maximise overall welfare. This applies to where people live and work just as much, if not more, than it applies to buying and selling goods and services. Of course markets fail here, as elsewhere, and "more market" is not always better. But the view that, as a general proposition, markets are good at allocating resources - including human resources - is widely shared among economists.

And this analogy holds in a narrower, more technical sense as well. The classic argument for free trade, as advanced by Adam Smith, is not just analogous to, but formally identical to, the argument for free movement. It is easy to see this. In economic terms, allowing somebody to come to your country and trade with you (or work for you, or employ you) is identical to removing trade barriers with their country." [bold added]

Sometimes I am proud of what some people unkindly call economists' "autism". At other times I despair. This is one of those other times.

Importing people is not like importing apples.

It's not just "labour services" and "consumer demand" that crosses the border; it's people. And there's a lot more to people than just bundles of labour services and consumer demands, where tariffs and transport costs make the only difference to whether they are inside or outside the borders.

"Total Factor Productivity" is not some geological feature like the Canadian shield. There has to be a reason why some countries are rich and other countries are basket cases, and unless you are lucky enough to find yourselves sitting on great reservoirs of oil that someone else will pay you to pump out of the ground, that reason seems to have something to do with social/economic institutions, and social/economic institutions seem to have something to do with people.

If you have a model which treats Total Factor Productivity as exogenous, then yes, if "resources" flow from places with low TFP to places with high TFP, as they will if the invisible hand is allowed to operate, that would be a Good Thing. But you need to stop and ask: "Hang on. I wonder why TFP is higher in some places than in others?" Which should lead you to the next question: "I wonder if TFP really would be exogenous to the sort of policy experiment I'm using my model for?". Which should lead you to the next question: "I wonder if social/economic institutions really would be exogenous to the sort of policy experiment I'm using my model for?"

How exactly will social/economic institutions change when we import people? God only knows. They might change for the better; they might change for the worse. It depends on them; it depends on us. But they almost certainly will change. And if you can't even see that question, and wonder about it, then you really are missing something that even the great unwashed uneducated rabble can see. And the great unwashed uneducated rabble are going to put even less credence on what you intellectual elites are telling them they ought to think.

Mrs Thatcher was not wrong, but misunderstood. There is such a thing as society, but society is not something that exists apart from the rules of action and belief of the people who create that society on an ongoing basis. We don't just do it once and leave it cast in concrete; we re-create it every day. And as Hobbes said, Total Factor Productivity wasn't so great in the State of Nature.

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