Smith's Law, Free Trade, and Free Immigration

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

Adam Smith, The Wealth of Nations, 1776

If books can be had much cheaper from Ireland (which I believe, for I bought Blackstone there for 24s. when it was sold in England at 4 guineas) is not this an advantage, not to English booksellers indeed, but to English readers, and to learning?

In transactions of trade, it is not to be suppos'd that like gaming, what one party gains the other must necessarily lose. The gain to each may be equal. If A had more corn than he can consume, but wants cattle, and B has more cattle but wants corn, an exchange is a gain to each; hereby the common stock of comforts in life is increas'd.

Benjamin Franklin, 1783 (reference is to William Blackstone's Commentaries on the Laws of England, 1765-1769, now from the University of Chicago Press, 4 volumes, 1979; Franklin has here described the form of a positive sum game)

Trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to the people of this country by the "trusts" which have destroyed legitimate competition and driven honest men from legitimate business enterprises.

Representative William Mason (R. Illinois), June 20, 1890, quoted by Donald J. Boudreaux, Wall Street Journal, Monday July 14, 2008

By analogy with Say's Law, one of the most important ideas in Adam Smith's Wealth of Nations might be proposed as "Smith's Law":   That the purpose of production is consumption [note]. While this might be so obvious as to seem self-evident, as Smith says himself above, there is nevertheless often a very different principle that occurs in political and economic discourse:   That the purpose of production is to provide a livelihood for the producers. While this is certainly a positive externality of production, it becomes a disastrous principle when the value of production as a source of livelihood begins to be given precedence over the value of production for consumption. Such a dangerous and damaging principle to the progress of human wealth and happiness might be called the "principle of feudal tenure," even though it was an affliction of feudalism, as it is of capitalism, rather than anything original and essential to it.

The experience of feudalism is instructive. The feudal relationship was a contract, by which compensation was exchanged for services rendered. Since a cash economy in early Mediaeval Western Europe had mostly disappeared, compensation could not be by monetary payment. When the only source of wealth was the produce of the land, and that produce could not really be stored or transported for a lord to pay off his retainers, the land itself (peasants included) could be conditionally ceded to the retainer. Given the rule of a certain domain, the feudal vassal then was obligated to supply a certain amount of military service for a certain amount of time to the lord.

This kind of contractual arrangement placed a tremendous premium on personal loyalty and faithfulness, upon which its enforcement primarily depended. Should a vassal be called up for service, it would presumably be in some case of need. Should the vassal then not show up, the lord might have to pursue his original purposes, rather than turning aside to punish the vassal, using the forces that were available. Should the lord then be defeated, thanks to the absence of the faithless vassal, the vassal might find himself, not only scott free, but perhaps in a position, with undamaged forces, to replace the lord. Thus the system provided powerful incentives for faithlessness, especially when all the vassals of the lord would be thinking the same thing. And, rather than outright faithlessness, an occasion of great need for the lord could simply be used to renegotiate the feudal contract for more favorable terms. This dynamic was still evident in 1701, when the Margrave of Brandenburg requested royal status from the Holy Roman Emperor in return for support in the War of the Spanish Succession. Thus the Kingdom of Prussia was born.

What the feudal contract gravitated toward in short order was two things:   (1) hereditary tenure, and (2) independence. Hereditary tenure, of course, could still be conditional upon the performance of required service. Independence meant that required services gradually diminished to zero. Since the process would repeat itself in each domain, there was a third consequence of the system:   Fragmentation. Early on, the weakest and most fragmented European kingdom was France, the western side of Charlemagne's Frankish Empire. The Capetian French Kings then had to struggle back from little better than a status of "first among equals." In the long run, however, the most fragmented kingdom became Germany, which by the 19th century consisted of dozens of really independent states. Nowhere, however, could this dynamic be entirely avoided until the return of a cash economy and trade could make a centralized administration and a professional, paid army possible.

What the experience of feudalism demonstrates, then, is really no less than rent seeking:   feudal vassals sought personal possession and property rights to their domains, ultimately free of feudal dues and services. Nor were these simply property rights:   the property in question was the source of wealth and livelihood. Thus, feudal tenure was not simply a possession, it was a living. This is ultimately characteristic of all rent seeking -- the ownership of a livelihood. Mediaeval guilds also exhibited this tendency:   A craft or profession collects monopoly rents by limiting membership, prohibiting competition, and making the business of manufacturing their products or providing their services, not just the actual products, the property of the members of the guild.

The same tendencies towards rent seeking become evident in other economic regimes. Looking at the Mercantilism of his day, Adam Smith was still seeing the dynamic of mediaeval guilds:   businesses with monopoly powers and protections granted by government, all in the interest of monopoly rents and taxes collected by chartered businesses and the sovereign or government, although rationalized as the wealth and power of the nation as a whole. Even after the end of Mercantilism, however, with the provisions of private property, free trade, and free entry into markets, the tendency to seek feudal tenure would always be active. What ends up changing are the means towards feudal tenure, which begin to be enacted through the politics of democracies, and the rhetoric, which, in such a political context, replaces evident self-interest with claims about the public good.

One of the most conspicuous examples today of "livelihood" rent-seeking comes with moralistic complaints and political pressure about the "down-sizing" of businesses, by which workers are let go so that a business can increase its efficiency and its profit margin. This is politically portrayed as heartless indifference to the loyal workers at the business. Businesses are thus portrayed as feudal (or Confucian) arrangements by which retainers are bound by mutual ties of loyalty and care. Workers are "stake-holders" who have quasi-property rights to their livelihood. What this does, however, is undermine the purpose of production:   increasing efficiency in a competitive market will reduce prices, thus benefiting all consumers. When increasing efficiency can go into increased profits, this attracts competition, rendering the market more competitive, which ends up having the same price reducing effects. When workers can lock up a business, perhaps with labor union contracts that mandate inefficient seniority arrangements and make it difficult to fire employees who can file "grievances," or with "employment law" principles that people are to be hired, fired, and treated in certain ways that may or may not be economically relevant, or even physically or psychologically possible (cf. Walter K. Olson, The Excuse Factory, How Employment Law is Paralyzing the American Workplace, Martin Kessler Books, the Free Press, 1997), this puts the business at a competitive disadvantage. When industry-wide labor unions or a corrosive, politicized legal regime can lock up an entire industry, as previously with the American car and steel industries, or with British coal mining or newspaper publishing, the whole industry may be all but put out of business -- which then results in demands for protection against foreign competition.

The true property owners of a business are those who own its capital, the actual owner of a private business or the stockholders of a publicly traded business. Since they don't necessarily work at the business or even actively direct its operations, the leftist view is that they are parasites whose only interest is profit, not any kind of morally worthy purpose. Thus, stockholders do not have as much of a "stake" in the business as the workers. Profit, however, is the most important thing in an economy. Since profit represents real growth in wealth, its existence is the only hope of an improving life. Without profit, an economy devours its own capital, like a starving person metabolizing their own tissues. The productive use of capital serves the purpose of production. Complaints about this almost always want capital to serve some other purpose, like providing "secure" livelihoods. This pressure gets brought to bear on managers of businesses. Their responsibility, holding the capital of the firm in trust, is to the stockholders. By maintaining the profitability of the business against competition, the managers serve consumers, the purpose of production, and also deliver a return on their capital to the stockholders. When managers, however, are forced to sacrifice profits or competitiveness in order to placate "stake-holders," this damages the engine of growth and at the expense of consumers and of stockholders who will then have less incentive to invest in the future.

A similar dynamic may be seen both with and without union influence in the idea that workers should get raises simply for years of service, without regard to whether their performance really warrants increased pay. Like the "Peter Principle," that people are promoted to their level of incompetence, this easily produces a situation in which people are not worth what they are paid. Rather than humiliate the overpaid or the incompetent by pay cuts or demotion, it is "easier" in some sense to fire them and hire younger, albeit untried, workers. This is not necessarily better for anyone than the pay cut or demotion, but it happens against a background of false expectations, that seniority or age should mean higher pay and status.

What is best for a business is that people are paid what they are worth. Long term, known employees actually are more valuable than the unknown factor of a newly hired employee. But if there is no alternative to firing an employee who has ended up overpaid and has become, to an extent, deadwood, because it is inconceivable that there might come a time when an older worker's pay should naturally decline, then firing it must be, unless the bad impression it would make is seen as a greater cost than the business would suffer by retaining them. The political and public reaction to this situation, unfortunately, is usually just a feudal one that an aged retainer deserves the status of deadwood, regardless of cost. That the public ends up paying the cost in higher prices may be acceptable in the abstract, but is usually resented if comes down to paying actual higher prices -- when the prices may be blamed on profiteering, which everyone has heard of, rather than on rent-seeking, which few may have heard of.

Understanding that the purpose of production is consumption cuts a broad swathe through public issues of often intense and acrimonious debate. Historically the most important issue, and perhaps still politically the most important, is free trade. The answer to the question of free trade is easy once it is seen that the only reason that has ever been offered for protective tariffs or a closed market is, indeed, protection. Since "protection" is always of producers, industries, and "jobs," this is clearly looking on the wrong side of the equation. Free trade means that consumers are able to buy goods at the costs arranged by the best efforts of producers, wherever the producers happen to be producing.

A "protective" tariff then artificially drives up the prices of competitive foreign goods to make them less competitive. Consumers thus pay higher prices, will have no reason to prefer foreign goods, and so will end up subsidizing the possible inefficiency of domestic industry. Since a tariff is a political imposition, the domestic industry thus obtains political rents from consumers. This can be justified (1) on the basis of a political desire to foster certain industries for the ultimate good of consumers, which presupposes that politicians can know what is for the ultimate good of consumers, which they never have known and cannot know; and (2) on the basis of a need to equip the nation with certain industries in case of war, when the goods or materials needed may not be obtainable from foreign sources, either because the sources are hostile or because wartime trade may be excessively hazardous. The second is a reasonable consideration, but also relatively rare in comparison to the foolishness of the first.

A "protective" tariff as a device of economic planning simply becomes a means of showing political favoritism to certain influential industries. It never helps consumers. If such things really helped consumers, then the abolition of internal tariffs within the United States was a mistake -- consumers would be helped by levies on goods crossing State or even County borders, as well as international borders. No one has ever argued such a thing. Indeed, the State of Rhode Island was coerced into ratifying the Constitution with the threat of tariffs against it. Instead, in American history, the political motivation of tariffs has usually been obvious:   when tariffs were instituted to protect Northern industry in the 1830's, which hurt the foreign market for the export of Southern cotton, the Southern States were so outraged by such manipulation that South Carolina contemplated "nullification" of the tariff law. Only Andrew Jackson's threat to use force deterred South Carolina. Later, even though the Southern States left the Union mainly to protect slavery, their continuing resentment over protective tariffs for Northern industry, which were sure to be promoted by Lincoln's new Republican administration, was still a strong factor.

Another factor in abridging free trade, however, is the "retaliatory" tariff, which raises barriers against the trade of foreign nations just because they use protective tariffs themselves. From this point of view, free trade is seen as good, but practicing it against a non-free trading partner puts one at a disadvantage. This is so appealing an argument that it seems to have been accepted by Thomas Jefferson and even by Adam Smith himself. However, it makes the same mistake as all other "feudal tenure" arguments. If "protective" tariffs actually damage one's own consumers, then such a tariff is a self-inflicted wound. And then -- as has been pointed out by the economist Walter Williams -- a "retaliatory" tariff means that one's own nation "retaliates" against another one damaging its consumers by damaging one's own consumers in turn. Thus, we say, "You've hurt yourself, so in retaliation I'm going to hurt myself also." In ordinary life this would be deeply idiotic behavior.

"Retaliatory" tariffs can also be levied against foreign nations that do not practice "fair trade," e.g. the prices of their own exports may be artificially lowered through subsidies, giving their goods a competitive advantage that does not arise from any true efficiencies on the part of their industry ("dumping" and similar phenomena). But, as both Walter Williams and Milton Friedman note, if foreign nations wish to tax their own people to subsidize our own consumers, why not? That's great! What foreign consumers lose, domestic consumers gain. The only objection can be that a domestic industry may lose its market, but this is, again, a "protective" argument for producers, not for consumers.

Similar to the "protective" and "retaliatory" arguments is the idea that free trade in general is bad because foreign industry may be able to use "cheap labor" that is not available to domestic industry. What is behind this argument, however, is simply an anti-capitalist misconception about labor. What goes with the idea of "cheap" foreign labor is the assumption that the labor is cheap because it is "exploited," while domestic labor is protected against "exploitation." Since "exploitation" is a moral evil, it must be morally prohibited, even if its use would benefit domestic consumers. The moral dimension of this argument puts it in a different category from the others, but it is a category that shares the moral confusion of other kinds of anti-capitalist arguments. If an industry can hire foreign labor at much below domestic labor market prices, this is because wages really are lower in the foreign labor market, and that is because of the nature of the foreign economy, not because of the intentions, good or bad, of the employers. The foreign economy will simply be "underdeveloped." The wages offered to foreign workers will either be above or below the market wages of that economy. If below, then workers will not work for them anyway, but if too much above the market wage, the extra money will simply contribute to inflation in the foreign economy, not to greater wealth or to an improved a standard of living. If unemployment is high in the foreign economy, this will usually mean that wages are too high, not that they are too low, or that capital formation and entrepreneurship are artificially suppressed, all of which, like high wages, can be the result of anti-capitalist political action.

Instead of "exploitation," what we tend to see is the natural development of an "underdeveloped" economy. New industry attracts workers by paying market wages or somewhat better. In some places, e.g. India, Pakistan, Thailand, Central America, etc., this may include children, which provokes another confused moral response, since most people now think that child labor is simply a moral evil which can be stopped at any time with the right intentions, rather than an unavoidable stage in the process of economic development. If it is assumed that all the production of a foreign industry is exported, so that domestic consumers enjoy all the advantage of the cheaper labor, the foreign consumer does not benefit at all. This would indeed be "exploitation" if otherwise foreign domestic production is politically suppressed, for the unspent wages of the foreign workers would naturally go into savings, which then makes for expanded production. If there is no foreign savings or capital formation, and no corresponding importation of products to balance the exports, then the greater wages of the foreign workers, whether they are high or low, would simply, again, fuel a price inflation, benefiting no one.

The case of Japan is illustrative, since Japanese workers religiously saved their wages, and the savings did go into capital formation and the expansion of production. On the other hand, much of the expansion of production went into exports, which benefited foreign consumers considerably, even while the Japanese persisted in their savings-motivated self-denial. Thus Japan grew into the largest per capita economy in the world, even while the Japanese standard of living was still significantly below that of the United States. This "exploitation" of Japanese workers in part followed from government and industry policy, but also was an effect of the traditional Japanese ethic of hard work and self-denial, which could only with difficulty countenance a way of life geared to enjoying greater wealth and consumption. The Japanese were thus, after a fashion, willing to "exploit" themselves for the sake of American consumers, even while Americans viewed this as a hostile attack on American industry! An "attack," of course, that would have been impossible if Americans had not voluntarily bought Japanese goods, which were cheaper and better, instead of American ones.

An often cited counterexample against free trade is the experience of Great Britain, which became the first country to formally adopt free trade policies. It is often said that free trade "ruined" Britain. This requires some specification of when Britain got "ruined," since the British experience up to World War I was of great prosperity and growth, albeit falling behind the United States and Germany in the size of its economy in the latter part of the period. Considering the differences in size and population, one should be forgiven for wondering if it was possible for Britain, as the first great industrial power, to maintain that status against larger countries with potentially much larger economies, any more than the Netherlands was able to maintain its position against Britain in the 17th century.

Actually, what one sees in the 20th Century is a Britain where class conflict steadily shoved it toward the diseconomies of socialism, while the tradition of British entrepreneurism, which had been found disproportionately in Non-Conformists and foreign immigrants, lost ground both to radicalized workers and to the equal parasitism of the English upper classes and intellectuals, who had never cared much for "trade" in the first place, and who tended to see their noblesse oblige as also, ironically, implying socialism. By the Twenties, it was a good question who in Britain would support, not just free trade, but capitalism itself. That was more like what "ruined" Britain. Representative of such a problem was the mentality of the famous British motorworks Rolls-Royce, which never built for a mass market but maintained an almost Mediaeval devotion to craftsmanship. This gave Rolls-Royce cars a great reputation and status, but it made no significant contribution either to the wealth of the nation or the wealth of its founders -- indeed, the Rolls-Royce auto line was never even profitable, and the company would have gone bankrupt (far sooner than it did) if not for its production of aircraft engines. The place where industrial production had begun was not the place where mass production, on the scale of Henry Ford, would begin. If Britain had then been "protected" from Fords, this obviously would not have put a Rolls-Royce in every garage. It would have put nothing in every garage.

Another issue that gets mixed up with arguments over free trade is the "balance of trade" (or the "balance of payments"). If exports exceed imports, this results in a net flow of money into a country, while if imports exceed exports, this results in a new flow of money out of a country. The former is thought to be desirable, since the latter "drains wealth" out of the country. "Protective" tariffs may be proposed to cut down on imports and correct the "balance." Since such a tariff may be seen as a hostile act against another country's exports, they may "retaliate" with corresponding tariffs, so that everyone ends up punishing each other's exports. Of course, no one really wants a "balance"; they want to manipulate trade and deceive their partners so that their own trade will show a surplus.

These views, however, which dominated Mercantilism, go back to a Mediaeval desire to hoard money, especially when money meant gold and silver coinage. Such an attitude, however, is based on a false understanding of the nature of money. Money does not have an intrinsic or constant value. If money drains out of a country, deflation occurs, which means that prices fall and the remaining nominal amount of money becomes more valuable. Foreigners, meanwhile, find an inflation occurring in their prices, which means that the deflated prices become more attractive. Money flows back in. This effect was well understood and expressed by David Hume in 1752, twenty years before The Wealth of Nations (1776), in his essay "Of the Balance of Trade."

Today, with everyone long off the Gold Standard, when money is just created by Central Bankers who write numbers in a book (or a computer), a negative "balance of trade" does not even need to produce deflation. As money flows out of a country, it can simply be replaced, maintaining prices or even producing inflation. This has obviously been going on with the Federal Reserve System in the United States for many years. One result is that a majority of United States currency is actually held outside the country. This results in a negative balance of trade being itself the favorable relationship. As pointed out, again, by Walter Williams, if Americans can exchange foreign goods for paper, and also keep all their own production for themselves, this adds immensely to the volume of goods in the American economy. It is the opposite of the Japanese practice, where domestic production was exported and not much was imported, leaving the Japanese people with little to show for their work, except pieces of paper with nice pictures of dead American Presidents on them. If that was then used, after all, to buy American goods or invest in the United States, it would be at less favorable prices than would have been produced by the currency flows under the Gold Standard. Thus, it turned out that the panic of the early 1980's, when Americans feared that Japan was going to buy everything in the United States, should have been felt by the Japanese themselves, who bought at inflated prices with money that was often secured by loans on inflated property values back in Japan. The early 90's then produced a very nasty contraction when these bubbles burst and Japanese investors couldn't afford their investments or their loans. This contraction, even depression, in the Japanese economy has continued all the way into 1998, leading to talk about the "lost decade" of Japanese economic growth.

The "balance of trade" issue as a factor in the debate over free trade thus turns on many of the same misunderstandings of consumer interest as in the other parts of the debate. Hoarded money is useless and even valueless, like all the gold in Fort Knox that the United States stupidly hoarded at the beginning of the Great Depression. Wealth means goods, and money is just the medium of exchange for goods. What consumers need, therefore, is the maximization of production, which means that more imports than exports is preferable. The Gold Standard actually inhibited that by producing a domestic deflation in such a situation, which could slow the economy and tempt foreigners to buy things that the domestic market would otherwise consume. Not surprisingly, as with so many other economic issues, this is the opposite of the conventional wisdom.

Another hot public and political issue, not just in the United States but elsewhere, as in France, is immigration. Apart from a simple xenophobic dislike of foreigners, hostility of immigrants is often based on economic ideas that immigrants, like "cheap" foreign labor, drive down wages and take jobs away from natives. Again, however, workers qua workers are producers and labor costs are production costs. Driving down labor costs drives down production costs, which will benefit consumers, either by the reduction of prices in a competitive market or by an increase in profits which will attract competition that will also drive down prices.

One can object, of course, that lower wages mean that the quality of life will decline for workers, so that the supposed benefits for "consumers," who are also workers, will be erased. However, if prices decline along with wages, it is very possible that the net result would be no change. But the more important point is not to forget Say's Law:   the value of wages depends on the value of money, which depends on the size of the economy, not on the intrinsic value of labor or on the good will of employers. The introduction of immigrants, all other things being equal, would reduce the quality of life, not because they drive down wages, but because they share the same total of previous production. "All other things being equal," however, is not what happens. With new immigrant labor, as long as productivity remains constant and wages fall to a market clearing level, production will increase in proportion to the new consumers. If productivity increases through capital formation, as it should, then production will simply increase per capita and immigration will have, if anything, only a positive effect on the growth of wealth.

All of this is so familiar from American history that there is almost no excuse for anyone not being aware of it. The peaks of American prosperity tend to correspond to peaks in immigration, while the troughs in prosperity also correspond to troughs in immigration. Thus, the greatest surge in immigration ever, between the turn of the Century and World War I, which must have burdened job formation to an unparalleled extent, was also an era of unparalleled prosperity and low unemployment. On the other hand, the Great Depression occurred in an era of low immigration, and a program of suppressing immigration further and expelling aliens (especially Mexicans) nevertheless had little effect on domestic unemployment. Exceptions to this pattern are the low immigration but prosperous decades of the Twenties and the Fifties, and the high immigration but economically sluggish Seventies. Higher immigration had started during the prosperous Sixties, and so someone might argue that the stagnation of the Seventies could have been due at least in part to immigration; but then prosperity returned in the Eighties without any significant or effective steps being taken against immigration.

The greatest benefit of immigration is to increase the size of the domestic free trade zone without all the uncertainties, disputes, recrimination, and misunderstandings that attend the issue of foreign free trade. This made a world superpower of a immigrant nation like the United States, as different policies on immigration and development keep immigrant nations of similar size, Canada and Australia, well back in the pack, great-power-wise. Australia almost "protected" itself into conquest by Japan.

The debate over immigration in the Nineties, however, still continues in a kind of vacuum of history and economics, although one may suspect that a kind of Know Nothing-ism in these areas has the same roots as the original Know Nothing Party--in xenophobia. Representative of this tangle, as it also involves issues of free trade and "cheap" foreign labor, it the relationship of the United States to Mexico.

For most of American history, there was simply nothing to stop Mexicans from coming into the United States to work. Much of this was agricultural and seasonal labor, under conditions marginally better, but not much, from conditions in Mexico, but some of it was also for industrial labor, as far away as Henry Ford's auto factory in Michigan. The proximity of Mexico made for a variety of purposes and experiences for Mexican immigrants. In Michigan, Mexicans clearly had to become "Americanized" to the same extent as Lithuanians, Jews, Italians, or anyone else coming into the country. They might persist for a time in their own community, speaking their own language, and observing their own traditions, but they also had to learn to deal with the other communities around them on the basis of a common language and certain common principles of behavior. Along the border with Mexico, however, or off sojourning in agricultural labor, accommodation to "Americanization" would be less necessary, both because one foot might still be retained in Mexico and because an exclusive sub-culture might exist without much interaction with others.

With the great immigration into the United States from Mexico and Central America from the Sixties on, there was an ambivalence both among natives and immigrants about the purpose and meaning of the whole thing. Many immigrants, or at least many politically active ones, wanted to retain their exclusive sub-culture, and they resented the United States for their previous treatment in the country and the racism they believed motivated it. Such resentment also fit into the political program that evolved for the Democratic Party in the Sixties, which fostered feelings of resentment and victimization against American history and sought to build a political coalition upon it.

At the same time, this ambivalence wasn't entirely coherent:   Immigrants were in the United States because of greater opportunity and the chance of greater wealth. If there really wasn't greater opportunity, because of racism, people would not be coming in the first place; and if there was greater opportunity, then it must be because of some better political arrangements or social traditions than existed back in Mexico, or wherever. But a program to overturn American traditions, perpetuate ghettos of Mexican culture, or to actually return the Southwest to Mexico, reversing the decision (through reconquista) of the Mexican War, would contradict the point of moving to the United States in the first place. The only possible way to make sense of that would be some kind of Cargo Cult economics that could view the Southwest as somehow naturally rich, with wealth just there for the taking, whether by evil Yanquis or by the more deserving Chicanos. Otherwise, why flee from Mexico just to reestablish Mexico, culturally or politically, when you arrive?

Most Latin American immigrants, indeed, quickly become Americanized in the peculiar manner that all other immigrants become Americanized. The dynamic of American society has always been profoundly different from whatever "Old Country" anyone has come from, whether they retain an affection for that country, its language, or anything else. Thus, one discovers that the politically explosive program of "bilingual education," which was sold as a more effective means of teaching English to immigrant children but was actually administered as part of a political program to preserve a linguistic ghetto and foster the above-mentioned program of resentment and victimization, has actually not been all that popular among immigrants themselves. Immigrant parents have often requested that their children be transferred to English language classes, only to be told that this could not be done, and that it would be better for their children not to do it. The reality of the situation was also revealed when children with Spanish surnames, even if they were native speakers of English and knew not a word of Spanish, were nevertheless put in bilingual classes for Limited English Proficiency students.

Much American political xenophobia, then, is really not directed at the attitudes or desires of actual immigrants, but at the attitudes and agenda of a politicized class that wishes to speak for and make use of immigrants for their own domestic purposes. Unfortunately, one thing that this political class can sometimes count on is the radicalized leftist politics often to be found in Mexico and Central American countries. Since it was easy there to blame America for the poverty and misery of those countries, and since immigrants may find the same attitudes among many Democratic politicians, not to mention "tenured radical" Marxist professors at the American colleges their children may end up attending, it becomes easier to manipulate the more politically active among them into the variety of anti-Americanism and anti-capitalism that the Democratic Party has fostered.

The United States, therefore, does not have an "immigration problem." It has a domestic political problem with advocates of a kind of radicalized Sixties politics that has really become anti-capitalist and anti-American. Since this anti-Americanism has become a consistent, if not always dominant, theme in the Democratic Party since 1972 and has infected American politics, law, and policy to the large extent that the American people have bought into and tolerated it, the debate over immigration is not really over its real history or its economic meaning, or even its cultural meaning (when American culture simply folds in any new input into an always growing and amazing kaleidoscope), but over the identity of America itself as a place of political and economic freedom, rather than a place of paternalism and socialism, through which the political class gets to control everyone else's lives and property.

The simple economic principle of "Smith's Law," that the purpose of production is consumption, thus can easily get lost among other issues, whether moral objections to the "exploitation" of labor, xenophobia, or the radical politics that has never accepted American capitalism in the first place. We thus find layers of economic misunderstanding, starting with the more or less overt Marxism of many clueless and/or vicious politicians and academics, down to subtle questions of market economics, where honest mistakes are possible about the relationship of production and consumption. Sorting these out in a public forum is, sadly, almost impossible, since politicians and journalists are usually intellectually incapable of distinguishing between ideas about "exploitation" derived from Marxism and the related, confused, emotional, moralistic language common in recent politics.

Like the principle of Say's Law itself, not much is to be hoped for until the influence of informed economists, and the lessons of history from the fall of Communism and the stagnation of Western European socialism, diffuse more widely through academic and intellectual culture, or until a political alliance can be effected that will bypass that leftist academic and intellectual culture. Such a political alliance is possible, since Presidents Reagan and Bush were elected, and a Republican Congress returned in 1994, 1996, and 1998, in defiance of that culture; but it must be an alliance that is better informed and both more purposeful and less narrowly ideological than what they represented (although it is not clear that President Bush represented much of anything). President Reagan, for instance, like 90's conservatives, was too focused on the "cultural" issues of his religious supporters, while failing to balance a budget or restrain the real growth of government and government power (which were actually vastly expanded by a "cultural" or moral issue like the "War on Drugs"). But the real problem, as always, is not what the power of government is used for, but that the government has too much power in the first place.

Political Economy

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Copyright (c) 1997, 1998, 2004, 2007, 2008, 2012 Kelley L. Ross, Ph.D. All Rights Reserved

Smith's Law, Free Trade, and Free Immigration, Note

This sounds more than a little bit like an old slogan, that we should have "production for use" rather than "production for profit." While the idea may be a Marxist notion, the earliest I've seen it expressed is by the shamefully foolish John Dewey, that "production for profit be subordinated to production for use" [Characters and Events: Popular Essays in Social and Political Philosophy, Volume II, edited by Joseph Ratner, Henry Holt & Company, 1929, p.555]. The Marxist thinking in this respect would be that profits are unnecessary and exploitative and that the desire of businessmen to make a profit off their businesses just means that they are parasites. Thus, without profit and businessmen, goods would be produced, altruistically, just so they could be used by others. What Dewey was thinking may not have been orthodox Marxism. Whether he thought that profit was necessary or not, he certainly believed that the motives of businessmen could not be trusted and that the government should supervise their avarice and regulate business so that proper socially conscious "production for use" be achieved.

What is wrong with the Marxist reasoning is easy enough to express:  Businesses that do not turn a profit go bankrupt, or must be subsidized. Even without regard to money, what this means is that unprofitable businesses do not increase wealth or value, but consume it. If all businesses are unprofitable, and so must be subsidized, as was pretty much the case in the Soviet Union, then the total wealth of society will decrease and the capital stock of an economy, like the seed grain, will be devoured. This process continues in post-Soviet Russia and is now characteristic of several Euro-socialist countries, like France, which experienced poor or even negative economic growth in the '90's and continue to be relatively stagnant.

What is interesting about the "production for use" slogan is that it would seem, in one respect, to duplicate Smith's Law, i.e. the purpose of production is not to produce jobs or a living for the producers. However, in a Marxist economy, the producers would just be the workers, and this produces a conflict when all political action is supposed to be directed to the benefit of the workers. Thus, the tendency of communist and socialist political economy has been almost entirely protectionistic:  entrenching workers in their benefits and privileges regardless of the effect that this has on consumers. The effective principle is thus not "production for use" but "production to maintain workers in the style to which they have become accustomed, or just think that they deserve." The result will then be high prices, poor quality, and shortages for consumers, since the business will only be run to produce employee, not customer, satisfaction. This ends up rebounding, of course, against the workers. In the Soviet Union, employees ended up spending a great deal of their time away from their jobs, hunting up scarce consumer goods, which meant that they did their jobs even worse, resulting in even more decline in quality and production.

The most powerful incentive for "production" to become entirely to the benefit of the "workers" is in government. As Marx himself recognized, bureaucrats become a self-interested class whose goal is self-perpetuation rather than service to their customers. A business with such an attitude, and with real competition, would quickly lose sales and even go bankrupt. But a government, even when bankrupt, still avoids actual liquidation and can demand ever more from the taxpayer to supports all its inefficiencies, diseconomies, and monopoly rents. And, as in California ("Clueless-ornia"), the voters may keep falling for it.

The Marxist "production for use" slogan thus not only turns out to be false as to the principle of its rejection of profit, but it actually turns out not even to be applied when it comes to political practice, where production is not for "use" at all. The ultimate reductio ad absurdum in that respect may be the example of some of the remaining Communist Chinese state industries, whose production is so worthless that it is simply warehoused instead of distributed. For an economic system that was supposed to be "scientific" and rational, that is the ultimate humiliation of complete irrationality -- "production for storage." India in that respect has been a little more rational. Some State factories built in India, like the Haldia fertilizer factory, were maintained with full staff, township, hospital, school, and employee's store without producing a kilo of fertilizer. It was understood that the project was a total loss, so the loss was not made greater by any production. This may even be better than the Chinese examples. If the purpose of business is employment, then production isn't even necessary for that. So we don't have "production for use" or even for storage. Just no production.

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