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Economic growth, immigration and Say's Law
Gerard Jackson
A great many misconceptions about population size, immigration and the nature of economic growth.. Many members of our business community believe that more people will somehow translate into more customers. If this were so, then those countries that had the highest population growth rates would have enjoyed the highest economic growth rates. What these captains of industry fail to grasp is that the correlation runs with savings and not the birth rate.
Those who oppose further immigration argue that immigrants compete for jobs. Business advocates readily admit that this true but counter with the argument that at same time as immigrants are competing for jobs they are also creating them. These advocates are evidently unaware that they are relying on Say’s law, which in itself is a truism. However, Say’s law does not say that the creation of more jobs will mean higher wages. Say fully recognised, as did the other classical economists, that it was investment, fuelled by savings, that raised the real demand for labour and hence wage rates.
It’s true that a large community is necessary for investment in economies of scale. What is usually overlooked is the insurmountable fact that without the necessary purchasing power such investments are not viable. This means that if a population grows faster than the level of investment, purchasing power will fall and poverty will rise, irrespective of whether fertility or increased immigration caused the population increase. Now Mr Moore is of the opinion “that high productivity … and high living standards [might be] readily achievable with ‘small’ and even slow growing populations”. (Institute for Private Enterprise)
In support this view he cited Angus Maddison, The World Economy: A Millennial Perspective, OECD 2001 (appendix E). I believe that Maddison’s figures are misleading. For example, for GDP per person employed they put Belgium at US$44,939 for 1990 and US$52.642 for 1998 compared with US$47,976 and US$55,618 for the US.
These figures simply do not square with the differences in actual living standards. It should be self-evident that even small differences in living standards will show up in differences in consumption levels. Maddison’s figures showed Belgium’s income to be the highest of those European countries he included in his table and only 5 per cent below that of the US. This suggests that there is little difference between the two countries’ living standards.
But a very different picture emerges when we use the consumption approach. In 1997 90 per cent of US households had a clothes washer as against 88 per cent for Belgium; for dishwashers it was 53 per cent to 26 per cent; microwaves: 86 per cent to 21 per cent; clothes dryers: 82 per cent to 39 per cent; VCRs: 83 per cent to 42 per cent; personal computers: 40 per cent to 22 per cent; phones per 100 people: 63 to 46; cell phones per 1000 people: 128.4 to 23.2; TVs per thousand people: 776 to 464; cars per 100 people: 57 to 41.
Even these consumption figures probably overestimate European living standards. American houses are much bigger and better insulated; appliances are more plentiful and larger. (Fridges and microwaves, for instance, are far bigger on average). Europeans pay more for food, clothing, travel, and so on. When it came to competitive ranking ‘high-productivity’ Belgium stood at 23 compared with 1 for the US. Their relative unemployment rates were 5.4 per cent as against 9.8 per cent. The situation was even worse for job growth. From 1970-1996 America experienced a 61 per cent increase in jobs: Belgium’s growth was a dismal -0.1 per cent, for 1980-96 it was -2.7 against America’s 27.6 per cent.
Irrespective of Maddison’s table, the fact is that the US leads Europe by a huge margin. This brings us Mr Moore’s contention that “high living standards might be “achievable with ‘small’ and even slow growing populations”. Europe’s living standards are entirely due to past capital accumulation. In a sense, therefore, Europeans are living off their savings.
It is true that countries with small populations have done well, but that is because their economies became ‘integrated’ with the economies of countries that had much larger populations. This is why Volvo was such a success. If it had to rely on its own small domestic market it would have either failed or have been nothing but a very small manufacturer of extremely expensive cars. (Does Sweden have that many rich people?)The optimum population concept, which Mr Moore considers to be a myth, can be quite helpful. Given the state of technology, production processes and the capital structure there always exists a point at which there will be an optimum population that will maximise the economy’s output of consumer goods.
The fact that we cannot know what the optimum will be, at least with any degree of respectable certainty, we do know that it exists and that it is an empirical problem and not an economic question. Post-1348 England is an unusually graphic example of this question. A swift and massive reduction in the population brought about by the Black Death and followed by a protracted decline caused an equally swift rise in real wage rates. Unfortunately the reason behind the jump in incomes completely eluded the crown.
So what the optimum concept tells us that a lower level of population will not be able to fully exploit the division of labour that would otherwise exist, meaning that labour’s marginal product would be lower than at the optimum. This is why in these circumstances real incomes would rise with a rise in population. Obviously a population in excess of the optimum will lower real wage rates.
The logic of the optimum population concept leads to the conclusion that the capital structure would have to radically adjust itself to accommodate a significantly smaller population if a rising standard of living is to be sustained. It would appear that many of those who argue that we can do at least just as well economically with a smaller population have given very little thought to what that would involve. Perhaps that is why it is treated by some commentators in such a blasé fashion.
The recently deceased Paddy McGuinness had argued that “a population of 30 million could have, with good policy, a GDP as high as one of 40 million with the same policies we have today”. (Sydney Morning Herald, Get smart and put the brakes on growth, 4 November 2003). By the same token a population of 40 million would be even better. He finished with the very, very non-conservative entreaty of: “Why should we not set out to become a social laboratory once more, and pioneer the policies of adjustment to population stabilisation?”
The last century saw more than 100,000,000 souls, and it still hasn’t stopped, lose their lives because of ruthless smart-alecks who felt they had the right to turn each of their countries into a “social laboratory”. I cannot say that I’m really surprised by McGuinness’s attitude. After all, he approved of the political lynching of judge Bork because the judge was an originalist who questioned the constitutional propriety of Roe v Wade.
When I. F. Stone died McGuinness wrote a glowing article about the man, while neglecting to mention that he was a traitor, a Stalinist mouthpiece and a KGB agent. Just to make sure his media colleagues know he’s on the right side, he also attacked Joe McCarthy — despite the fact that the Venona Papers had fully vindicated McCarthy.
Is it any wonder I despair of our so-called rightwing?
Rush Limbaugh: immigration, jobs and real wages
Immigration, wages and other myths, part I
More on immigration, wages and other myths, part II
Immigration, economic growth and jobs
The Wall Street Journal gets it wrong on the immigration question
Importing Chinese labor won't cut real wages
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 4 February 2008