Reforming Global Finance

Adam Smiths of Capital, Friedrich Lists of Labor

Why do people who consider themselves pro-free market take radically different positions on the mobility of capital and labor?

Adam Smith and Friedrich List

Takeaways


  • When it comes to international economics, conservative Mitt Romney and left-wing Christina Kirchner share the same ideology.
  • Mitt Romney wants to limit the international flow of labor by introducing tougher immigration policies in the United States.
  • Kirchner wants to limit international flow of capital — and did so by nationalizing YPF, the Argentine unit of Spanish energy firm Repsol.

Although the cross-border movement of labor has increased over the last 20 years, it is still significantly below its level a century ago. Compared to total world population, present migration flows are between one-half and one-fifth the levels achieved during the last era of globalization (1870-1914), according to calculations by Lant Pritchett, a development expert at Harvard.

It is also estimated that only about 3% of world’s population now lives in countries where they were not born. Compare that with the fact that 30% of global output is sold in countries where it was not produced.

Even in the United States — which has experienced an upsurge of immigrants since the 1990s — the share of foreign-born population, at around 12-13%, is about the same as a hundred years ago. However, the shares of exports or imports are much higher than back then.

This divergence is the elephant in the room for the politicians and economists who claim to be pro-market — and who advocate unfettered economic freedom when it comes to cross-border flows of goods and capital. And who hardly ever mention free movement of labor.

Yet no sensible economist would disagree that the free movement of a factor of production is efficiency-enhancing. For the same reason that the movement of labor from Virginia to California is good for the global economy, the movement of labor from Mexico to the United States must also be good.

Put differently, for the same reason that the movement of capital between the United States and China must be globally good, movement of people from India to the United States must also be good.

There is no fundamental difference between the two factors of production, capital and labor. The rules of economics do not apply to one and not to the other.

This markedly different approach to labor and capital among people who consider themselves pro-free market afflicts economists and politicians alike. Mitt Romney, the presumptive Republican candidate for the U.S. presidency, is generally thought be in favor of fully free domestic and international markets.

Romney would be very surprised, and likely outraged, to be ideologically placed in the company of left-wing Argentine president Cristina Kirchner. But when it comes to international economics, the two share the same ideology.

Mitt Romney wants to limit the international flow of labor by introducing tougher immigration policies in the United States and using “self-deportation” to get rid of foreign labor that has already settled in the country. Kirchner wants to limit international flow of capital — and did so by nationalizing YPF, the Argentine oil unit of the Spanish energy firm Repsol.

Globalization or nationalization?

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The principles behind each decision are the same: not allowing free international movement of a factor of production. The difference is simply that, in one case, the factor of production is labor, while in the other, it is capital.

From a strictly economic point of view, the difference is much less important than the similarity implied in the principle that a factor of production should be nationally-bound.

This analysis leads to an intriguing question: How many free-market economists would be willing to support a colleague who claims to be in favor of free markets, and yet also advises Cristina Kirchner on how to nationalize foreign-owned companies?

Probably very few. And the claim that one is in favor of both globalization and nationalization would be met with derisive laughter. But that is not necessarily the case when instead of capital, we deal with labor.

Thus, Harvard economics professor Gregory Mankiw — an advisor to the Romney campaign and the former chairman of President George W. Bush’s Council of Economic Advisors, does not seem to find the candidate’s tough stance against free movement of labor in any way objectionable.

Nor is seemingly his status of a pro-market economist put in jeopardy by the position his candidate — and presumably himself — supports. But it would be impossible to find in the economics profession those who would take such a benevolent view if Mankiw, instead of Romney, were to advise Kirchner.

In effect, while Kirchner is protectionist when it comes to capital, Romney is protectionist when it comes to labor. Both are understandable political or ideological positions, so long as one does not simultaneously claim to be in favor of fully free markets.

In that sense, Kirchner is more honest, Romney (perhaps even without realizing it) more hypocritical. Likewise, free-market economists such as Mankiw often assume, perhaps also without realizing it, the mantle of national protectionists. They are Adam Smiths of capital and Friedrich Lists of labor.

The differential treatment of cross-border movement of labor and capital among free-market economists exposes the flaw of an incomplete, or not fully consistent, argument. If free movement of one factor of production (labor) can be limited when it is in the interests of a certain political community, there is no reason why a different political community may not limit the free movement of another factor (capital) if it judges that to be in its interest.

All of economics is then seen as a subject of negotiation and bargaining between different groups of people: Imposing price controls is not fundamentally different from limiting the free flow of capital or labor. But if we care about global welfare and take economic theory seriously, they should all be free.

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About Branko Milanovic

Branko Milanovic is the lead economist in the World Bank's Development Research Group and a visiting professor at the University of Maryland.

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