Monday, July 21, 2014

Walls With Open Doors

This simple post is not much more than bullet points about some of the complex issues at play in the immigration debate. Each point deserves much more explanation and nuance than I can write about here. I focus on the US-Mexico border because it is the most mired in problems at the moment, but the basic principles hold for all immigration.
The United States is a country of immigrants; while it is often a political slogan, this fact must be firmly grasped in all discussions of immigration policy. An integral part of our national identity is that we all came from somewhere else. Favoring immigration is both the most American and economically sound position, however, the question is complicated by the facts of the current American case.

One thing I cannot understand is the fervent belief by many people that illegal immigrants deserve exemption from the law. This strong opinion is manifested in the demands that those people who have entered the United States in a manner which constitutes a violation of its laws should not be called illegal immigrants but rather “undocumented” or “irregular.” Of course each case is unique, and there are many, many people currently in this country illegally who were brought here as young children and who cannot be held responsible for the actions of their parents. The situation is further complicated by the obvious compassion of the parents’ decision; they want their children to have a better life than they themselves have, and they see America as the key to achieving that goal. I cannot help but admire that commitment, and nothing should make us more proud of our country than the fact that so many people risk everything to come here even though it is against the law.

It is with this type of immigrant in mind that we ought to make the immigration process as easy as possible. We should be the country that wants the tired and the poor without quotas or discrimination based on intelligence. Everyone who wants to come to America should be able to. Objections about immigrants “taking” domestic jobs or depressing wages are simply not borne out in economic theory or practice and ought to be abandoned. (For more see Ben Powell’s informative video)

The fact that we ought to welcome all immigrants, however, runs into another snag in the form of our current welfare state. Our government cannot afford to pay welfare benefits (under the current system) to a massively increased population of tired and poor. This also, however, is not a good reason to restrict immigration; it only goes to show that a welfare state is incompatible with economic realities. Milton Friedman was right when he said, “you can't have free immigration and a welfare state.” Since our choice is between preserving the welfare state and opening the borders, we should always choose the latter.

Completely open borders is not a reasonable policy, however, since it presents major security problems. In order to ensure its own security, a state must be able to know and control who and what crosses its borders. Securing the border is a buzz phrase in politics, but it is really an essential component of an immigration solution. Our current borders are so porous that enemies of the United States could cross them with weapons and plans to harm the country. Too often “securing the border” is seen as a way to keep out immigrants when it should be simply the ability to control who enters the country with what, a standard practice at every international airport.

President Reagan eloquently defined the balance of free immigration with border security in his farewell address as he pictured the United States as a shining city: “And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.” That should be our goal. We do not need a literal wall along the Mexican border, but we should seek to preserve our security while making wide and open doorways for many future Americans.

Another version of this article is published here.

Monday, July 14, 2014

Resolving the Paradox: Mill As a Liberal And Utilitarian.

This is part one of a two part series on the paradox of liberalism and utilitarianism in J.S. Mill's, On Liberty. Previously: Part 1

One proposed solution to Mill’s ostensibly opposed arguments for liberalism and utilitarianism is simply that there are no purely self-regarding acts. The problem is solved if we accept Mill’s theory but say one class of actions within it is impossible.[1] This interpretation, however, is inconsistent with Mill’s writing since he clearly states the kinds of actions which would constitute self-regarding acts.

The best way to reconcile the two apparently divided Mills is to examine Mill’s idea of the good life. He understands the good life to be composed of the pursuit of beauty and knowledge.[2] This view is illustrated by his arguments for free inquiry and freedom to challenge established ideas in chapter II of On Liberty. Given this understanding of the good life, one may observe that Mill does not promote utilitarianism or liberty as ends in themselves but as means to achieving a higher end. He would prefer that men and society be both free and happy and he thinks that some restriction of freedom may be necessary to reach that ideal. In a strange way, Mill sees utilitarianism as a means to achieve utilitarianism; that is, happiness will be maximized when everyone agrees that they ought to maximize happiness. Understanding the Mill’s motives as searching for a higher goal than either liberty or happiness in themselves, one may begin to see that he need not be an inconsistent utilitarian when he recommends postponing or forgoing certain good things, and that he need not be a an inconsistent when he advocates curtailing certain rights.

But, the question arises, if Mill holds to the above utilitarian framework what role is left for liberties? In one way they can exist wholly independently of utilitarianism. Rights can always be considered good unless they conflict with other rights or the rights of others. It is at this point that the distinction between other- and self-regarding acts enters the discussion. Mill may be utilitarian with regard to other-regarding acts but liberal in all other cases. In other words, individual rights always take precedence unless they conflict with another’s right, in which case the right which maximizes utility must prevail. In neither case is liberty being thrown away in favor of some abstract concept of collective good. One of the rights must win, so, as far as Mill is concerned, it might as well be the one that makes more people happier.

Careful examination of Mill’s ultimate goals reveals a complex interaction between liberty and utility. Although his ideas may, at first, seem contradictory, the paradox resolves itself into an applicable political philosophy which balances individual freedom with societal good.

[1] Strasser, Mark. "MILL AND THE UTILITY OF LIBERTY." Philosophical Quarterly 34, no. 134 (1984): 63-68. 63.
[2] Kurer, Oskar. “John Stuart Mill: liberal or utilitarian?” European Journal of the History of Economic Thought 6, no. 2 (1999): 200-216. 202-203.

Sunday, July 13, 2014

John Stuart Mill: Liberal, Utilitarian, or Both?

This is part one of a two part series on the paradox of liberalism and utilitarianism in J.S. Mill's, On Liberty.

John Stuart Mill promulgated a political theory of nearly limitless liberty in his 1869 work On Liberty. Mill also held to a broader social theory of utilitarianism which leads him to be apparently at odds with his own arguments

Mill begins On Liberty with an uncompromising defense of seemingly total freedom. People should be free not only from coercion by the government or physical coercion by other men, but they should also be free from the power of customs to enforce the will of a majority.[1] While he acknowledges that society has the capability to control an individual, Mill is intensely concerned with abuses of power by the majority. He holds to a rule that it is sometimes necessary for a nation, or a majority party in a nation, to have its own will restricted in order to protect the liberty of the minority.

In order to distinguish the kinds of acts over which the will of society, justly exercised by civil authorities, may have coercive power and those which are off limits to government and any will of any majority Mill creates two categories: self-regarding acts, or those actions which do not impact persons other than the doer of the action, and other-regarding acts, those which directly influence or affect others people. He writes of the division in the following way:
The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.[2]
This statement by Mill is an extraordinarily strict defense of individual liberty over the will or good of society. Other-regarding acts, for Mill, do not include emotional stress caused indirectly by an otherwise self-regarding act; in order to be considered other-regarding an act must violate a “distinct and assignable obligation.”[3] This requirement means that a person’s action must be direct and tangible in order for any outside authority to make any curtailment of his rights. All acts that do not violate a distinct and assignable obligation are not under the jurisdiction of any civil or external power.

This strong affirmation of unfettered liberty gives way to a different influence later in the work, namely utilitarianism. Mill is the foremost thinker on the philosophy of utilitarianism his study of which was influenced greatly by Jeremy Bentham.[4] The main tenet of utilitarianism is that the just or right thing to do is that which accomplishes the greatest good for the greatest number; in other words, the goal is to maximize total societal happiness.[5] Mill seems to support utilitarian principles over those of freedom later in On Liberty in which he sanctions civil penalties against actions which would seem to be “self-regarding” by his own definition. He writes,
If gambling, or drunkenness, or incontinence, or idleness, or uncleanliness, are as injurious to happiness, and as great a hindrance to improvement, as many or most of the acts prohibited by law, why (it may be asked) should not law, so far as is consistent with practicability and social convenience, endeavour to repress these also?[6]
Notice the reference to the list of vices as sources of unhappiness. This is textbook utilitarianism; regardless of whom one’s actions affect, they are not permissible if they decrease overall happiness. Mill justifies legal prohibitions, such as those in the above excerpt, by appealing to universal agreement of the badness of such things.[7] He also compares irresponsible adults to children whom the government has not only a right but a duty to regulate and control.[8] 
It seems as though the earlier Mill, who advocated total independence and liberty in matters not having tangible external effects on other persons, has been lost and replaced with a micromanaging all-concerned authority. On the face of it, there is no way to reconcile this contradiction; how can liberty be a bright line that no authority may cross when compromising liberty may sometimes increase happiness or utility?
The next part will evaluate proposed solutions to the apparent contradiction between Mill's advocacy of liberalism and utilitarianism and will provide a resolution to the paradox.

[1] Mill, John Stuart. “On Liberty.” 2-3.
[2] Op Cit. 6.
[3] Op Cit. 49.
[4] Schwartzberg, Melissa. "Jeremy Bentham On Fallibility And Infallibility." Journal of the History of Ideas 68, no. 4 (2007): 562-586. 563.
[5] Brink, David O.. "MILL’S AMBIVALENCE ABOUT RIGHTS." Boston University Law Review 90, no. 4 (2011): 1669-1704.
[6] Mill. 49
[7] Ibid.
[8] Ibid.

Saturday, July 12, 2014

Part 4 - Chinese Economic Development: Comparing Policies

This is part four of a series comparing the effects of different economic policies on economic development in China. Previously: part one - part two - part three. 

Private ownership of capital in the SEZs permits the engine of capital accumulation to propel expansion and development as well. Since entrepreneurs were now free to possess and use their own capital and, thus, maintain it and invest in more, capital can accumulate. The permission of investment from non-Chinese sources also allowed for an inflow of capital from citizens of countries richer in capital than China meaning that the Chinese capital stock would grow.

The most important provision governing the special economic zones is that their economic activities are driven primarily by market forces. This rule is essential to the function of the previously mentioned engines of development, but it is most important to the final one, entrepreneurship. Entrepreneurs need market forces to operate in order to make economic calculations about production. Freely fluctuating interest rates and other prices signal to entrepreneurs what and how much they should produce. The SEZs not only protected the institution of money prices from manipulation by the government, they also established the institution of private ownership, as previously mentioned. This fact, however, is as important to entrepreneurship as it is to capital accumulation. Private ownership means that entrepreneurs can save their profits and invest them in capital. The ability to own capital is necessary but not sufficient to sustain economic expansion. It requires entrepreneurship to actually invest in the maintenance and growth of the capital stock, and this can only happen through saving which is possible only if the entrepreneur owns the fruits of his productive activities.

The effects of the liberalization of parts of the Chinese economy were dramatic. According to World Bank data, when the SEZs were first set up in 1980 Chinese GDP per capita was (in current USD) $193. Just five years later it was $292. Throughout the rest of the 1980s and into the 1990s, China added new SEZs and expanded existing ones. The economy continued to improve with the increased liberalization. In 1995 GDP per capita was $604. As the engines of development were freed to drive the economy, China saw economic growth at an increasing rate. At the turn of the century China’s GDP per capita was $949, and the most recent data, from 2012, showed it at $6,091. This data represents a clear relationship between the continued freeing of the Chinese economy and unprecedented economic expansion and development.

From the creation of the People’s Republic of China to the death of Mao, the Chinese economy remained undeveloped and its people impoverished. This state was never so clear as during the Great Leap Forward when the drivers of development were suppressed as the expense of productivity and millions of lives. When Deng Xiaoping began instituting free market reforms, however, the economy sprang back to life. To this day, China remains one of the world fastest developing economies. The prolific economic expansion experienced by China is attributable to freeing to the division of labor, capital accumulation, and entrepreneurship in special economic zones as well as increased protection for the institutions of private property and money prices. If China wants to continue expanding and developing, it should increase the number and scope of SEZ’s and liberalize the entire economy.

Friday, July 11, 2014

Part 3 - Chinese Economic Development: Comparing Policies

This is part three of a series comparing the effects of different economic policies on economic development in China. Previously: part one - part two.

 Mao pitched the Great Leap Forward as a way to modernize and industrialize China. The slogan of the program was to “Surpass Great Britain and catch up with the United States." Instead of expanding and developing the economy, however, the Great Leap Forward choked the drives of development leading to a lack of industrialization due to destruction of capital and a lack of modernization as the economy stalled and people starved. Eventually, however, Mao died. His successor was Deng Xiaoping, a strong Communist Party member who never officially held the position of head of state or head of the party but who, nevertheless, called the shots for the People’s Republic of China. His rise was undoubtedly connected with his military prestige and not with Mao’s intentions as the two were opposed within the party since before the Cultural Revolution . Deng’s attitude toward leadership is best described as pragmatic; He knew of the failure of Mao’s policies, including the calamity that was the Great Leap Forward, and did not want to return to the same failed policies. Instead, Deng announced a new policy, “Socialism with Chinese characteristics” which amounted to free market reforms while remaining nominally communist. The pragmatism of Deng is summed up in his famous statement that “It doesn’t matter if a cat is white or black. If it catches mice, it is a good cat”. This is to say that Deng was willing to break with hardline communism in order to expand the economy since Maoist economics had not been working. Deng’s policy of opening China manifested itself in the form of special economic zones and free trade zones throughout the country.

The early days of the experiment saw four coastal cities become special economic zones. These zones permitted and protected private ownership of land and capital goods, had lower tax rates (especially tariffs and taxes on foreign investments), and operated under the government issued four principles, the most important of which being “products are primarily export-oriented” and “economic activities are driven primarily by market forces”. This policy is an about face from the Maoist policies of the 1950s and 1960s. Rather than directing production from the top down in order to benefit the communist revolution in China, the special economic zones were to be directed by market forces and be direct toward producing for a global economy. Such zones are examples of restarting the engines of development. By reducing barriers to trade, China could take advantage of a larger market which contributes to the effectiveness of the division of labor. The division of labor is limited by the extent of the market; that is, a market that is too small will not experience significant benefits from the division of labor because there are not enough people to provide essential goods so that others may be freed up to produce non-essential goods which make up economic development. An economy with only two producers will be unable to take advantage of the division of labor because they must produce sustenance for themselves instead of producing an excess of another good to trade for sustenance; there simply are not enough people to produce sustenance if they do not. Clearly, however, if more producers enter this economy, the potential for specialization increases. This phenomenon continues when scaled up to real economies; the larger are marketplace, the greater the advantage made possible by the division of labor. From this fact it follows that a global market can better utilize specialization than a merely national one, and, therefore, elimination of trade barriers so as to promote participation in the international economy will aid in economic expansion and development by increasing the effectiveness of the division of labor.

The next part will continue assessing Deng's economic policies and then will draw conclusions concerning China's economic past and future.

Thursday, July 10, 2014

Part 2 - Chinese Economic Development: Comparing Policies

This is part two of a series comparing the effects of different economic policies on economic development in China. Previously: part one. 

The failure of Mao Zedong’s economic policies and plans, especially during the Great Leap Forward, are explainable by examining the ways in which they ignored and destroyed the three drivers of development described above and failed to implement the institutions of private property and money prices. Mao organized rural workers into communes where they were to produce steel in backyard furnaces which lacked adequate temperatures to make useful steel. Peasants also melted down steel or iron tools and cooking materials they already had to be used in the production process, which, since the process was generally unsuccessful at making useable steel, resulted in these capital goods being actively destroyed. The economic problems with this approach are many. First, use of inadequate steelmaking furnaces represents a failure to allow the functioning of entrepreneurship. No individual trying to make a product that will earn him a profit would invest in capital that was unable to produce that product. The failure to accumulate useful capital is the result of unwise investment which characterizes an economy which is driven by the desire to meet quotas rather than by a desire to make a profit. This point highlights the problems caused by the lack of functional institutions of private property and money prices. Since the production of steel was intended for use or distribution by the Chinese Communist Party, there was no real reason for the workers, or even lower level party officials, to care about the production process beyond merely following orders, so they did not intervene to remedy problems with the production process. Indeed, most lacked the expertise to know how to make good steel much less repair a process that made bad steel; this expertise in the use of capital and knowledge of the production process is the heart of what would be provided by competent entrepreneurship, a phenomenon that was repressed as production decisions were made further up the bureaucracy. The destruction of existing tools and cooking utensils further illustrates the foolish decisions made in the absence of entrepreneurial freedom. It is also blatant destruction of useful capital goods which could have been used for productive enterprises but which instead were consumed and made useless. Without the engine of capital accumulation, especially with rampant consumption of capital in its stead, it is little wonder that the party’s dreams of industrialization were not realized by Great Leap Forward planning.

The Chinese did not fail to stifle the final engine of development, division of labor in their production plans. By merely assigning certain laborers to make steel, Mao’s policies decreased the diversity of production that is necessary for an economy to develop. Without the freedom to specialize, potential economic expansion was forgone since people may be very bad at producing steel may be very good at producing numerous other goods. Since people did not produce, in excess of their needs, that for which they possessed a comparative advantage, their productivity was wasted and economic expansion diminished. Similar problems existed with the Great Leap Forward’s agricultural program.

On the agricultural front, Mao’s planning was characterized by unrealistic production quotas which were enforced against farmers which resulted in the taking of more food than they could afford to lose. The misallocation of resources which resulted in this tragedy is, once again, the result of restriction of entrepreneurship. In a free market, the entrepreneur bears the risk when deciding to produce or not produce. If production is unprofitable, he loses. In China, however, the risk was born by poor farmers and production decisions were issued by party officials. Without the institution of money prices, there was no way to calculate the amount of wheat and other foodstuffs that could and should be produced. The result of this ignorance was the demanding of more food than was able to be produced and taking the total crop leaving around 40 million to starve to death. The Chinese communists did not fail to stifle another engine of development with the farm program as well. As with the steelmaking program, division of labor was set aside in favor of government assigned farming projects meaning that productivity was lower than it could have been. A country cannot hope to experience economic expansion and development if it actively reduces its potential productivity.

The next part will begin an examination of the contrasting economic policy of Deng Xiaoping and how it restarted the engines of development.

Wednesday, July 9, 2014

Part 1 - Chinese Economic Development: Comparing Policies

This is part one of a series comparing the effect of different economic policies on economic development in China.

After the Communist takeover of China in 1949, the Party instituted a variety of programs to fully “revolutionize” the country. One such program, the so-called Great Leap Forward began in 1958 and was intended to accelerate economic expansion and development in China in order to catch up with western powers. Despite its intentions, the program resulted in the starvation of tens of millions, and was a setback to economic development. More recently, however, China has seen unprecedented expansion and development in its economy. An analysis of the economic factors at play in China reveals that the institution of free market reforms in special economic zones in China, as opposed to the communist policies of the late 1950s, is responsible for the expansion for the expansion development of China from the late 1970s to the present.

The first thing that must be understood to explain the disparities between Chinese economic development during the Great Leap Forward and after the institution of special economic zones is what actually drives development. There are three major forces that largely determine the degree to which economies expand and develop: the division of labor, capital accumulation, and entrepreneurship.

Division of labor describes the specialization of people to produce more than they need in order to survive and then trading that excess for the excess of others to fulfill as many of their needs and wants as possible. This phenomenon is fundamental to economic development because it provides an incentive for people to engage in commerce. If each person produced only what he needed to survive, then he would be unable to trade in order to satisfy his other preferences because he would need to consume all that he produces in order to survive leaving no excess to trade. Only if he specializes can he produce enough of one good to trade for the others that he needs. Of course, however, this scenario requires that there be other persons in the vicinity who also produce in excess of their needs so that they are able to offer their goods to trade to the first man in exchange for the goods in which he has specialized. For this reason, the division of labor contributes to the formation of societies in which different people specialize in producing different goods and services. It is further clear that the more diverse and complex the division of labor, the more goods and services will be available. If there are enough people specializing in producing food and building shelters, then others are freed to produce non-essential or even luxury goods. This last point is the very definition of economic development.

The second driver of economic development is the accumulation of capital and capital goods. In general, capital can be defined as the produced factors of production. Capital goods are essential to economic expansion because they increase the productivity of labor, and they aid development by permitting the production of goods which would otherwise be impossible to produce (for example, microprocessors for computers could not be produced without machinery). For expansion and development to occur, however, it is not enough to merely have the capital for a day; it must be maintained and, ideally, accumulated. Since capital goods will deteriorate over time, entrepreneurs must engage in saving in order to replace or repair them and thus replace the productivity that would have been lost by their deterioration. If the entrepreneur saves more than is required to merely maintain his capital stock, then he can invest in more or better capital to further increase and diversify productivity and thus drive expansion and development.

The third engine of economic growth is entrepreneurship. Entrepreneurship is the act of undertaking risk and coordinating the factors of production to produce wealth. The process of capital accumulation as described above is essential, but capital goods simply sitting around will not make a profit. Entrepreneurship is required to determine how much to save, how much to invest, and in what to invest that amount. The coordination and wise use of capital along with the application of ideas to productivity activity makes entrepreneurship necessary to the other engines of development as well as a powerful driver in itself. Entrepreneurship is unable to function, however, if it is hampered by improper institutions. Entrepreneurs need there to be money prices in order to conduct calculation to predict the best future use of resources and the degree to which they should save and invest. Money prices provide a mechanism for making objective decisions about production and investment in the face of diverse and subjective valuation. They indicate the relative scarcity of different goods and, thus, signal producers as to what they should and should not produce. They also provide a common unit in which exchanges can take place and in which profits and losses can be evaluated. Private property is a second indispensable institution for the engine of entrepreneurship. If entrepreneurs do not own the fruits or failures of their labor, then there is no reason for them to do anything. Furthermore, the fact that profits belong to the producer is the only thing that makes him able to invest in building the capital stock since he cannot invest what is not his. The importance of private property is empirically verified by the strong correlation between institutional property rights and the extent of economic development.

The next part will examine how Mao Zedong's policy decisions stifled the engines described above and the effect those decisions had on Chinese economic development.