Legal Immigration Into the United States (Part 13): The California Hourglass Class Figure

Discussions of the impact of immigration on native labor often have a 19th century, quasi-Marxist flavor. Implicitly, they seem to posit a large undifferentiated working class, on top of which sits a small middle, or professional class, itself crowned by a tiny capitalist class. (Today, it would be the absurd “1%.”) With this scheme, the capitalists, employers all, only want cheap labor, of course, and they keep importing immigrants to compete with native workers and thus keep wages down. In the meantime, the latter vacillates between resentment of foreign born wage competition and class solidarity cutting across nationalities and immigration statuses. The middle class, of course, opportunistically sells its political influence to one or the other main classes. Such a class structure is compatible with a good deal of hostility toward immigrants. The larger and/or the more organized, that native working class, the better expressed its hostility toward immigrants, the more likely that hostility will become institutionalized. At the extreme, it turns into the “Herrenvolk democracy” pioneered by the labor union-supported South African apartheid regime. (We are and were nowhere near that point in California. I evoke apartheid to indicate an extreme theoretical destination for such a movement, not by way of prediction.)

But when the class arrangements are not in such a conventional pyramid shape, attitudes toward immigration can be counter-intuitive. Imagine a society where the middle class is both very large and subjectively indistinguishable from a putative capitalist class because every member of the former sees himself as a good candidate for the latter (and correctly so, to a considerable extent). A society where the formal ownership of the means of production is widely dispersed through the mechanism of stock options gifted to employees. Imagine further that what remains of the old middle class has become numerically and socially insignificant. In particular, small merchants have nearly disappeared, replaced by salaried employees of large chains. The old professionals, doctors and lawyers, and the like, have lost their special standing in the close proximity of educated, prosperous mind workers.

At the same time, a combination of vertical mobility in the growth economy for some of the native working class, of physical movement out of the high rent areas associated with prosperity for others, and of increasing immigration, has created a largely foreign-born working class. The combativeness of this foreign working class is impeded  by its low cultural competence and by the fragile legal status of many of its members.

The remarkable thing about this scenario is that few of the remaining native-born appear to feel threatened by immigrant competition. Those who are actually in competition with low qualification immigrants are too immersed in the prominent issue of immigrant numbers to gain a coherent voice. The middle/upper class itself has an immigrant component but that component constructs itself slowly and at a predictable rate because the federal government easily limits via the granting of visas the admission of those not carried by family relationships. Note that this has been largely the case for immigrants from India, China, and Europe.

I am describing here a vertically asymmetrical hourglass class structure with a large upper component, a possibly larger lower component, and not many in-between. To the upper component, the lower immigration-based masses comprise so many hewers of wood and drawers of water. What’s more, they do not compete in the same rental markets or in the same leisure areas (In my local terms, the middle/uppers do mountain biking in the redwood forests while the working stiffs go to the Boardwalk.)

Some immigrants from poor areas bring with themselves a superior capacity for high density occupancy of humble housing premises, even for downright crowding. They don’t’ stop property values from rising. The more of them there are, the lower the prices of services that the uppers must consume in large quantity because they spend a great deal of time at work. The same work situation that motivates Google to offer its employees decent free food at all hours insures that there will be a high demand for providers of common services. Even low-level tech Google employees don’t do their own laundry! (Personal observation.)

In that labor situation, you would expect little prejudice against immigrants and a high willingness to open the gates to more of them. Note, that illegal immigrants, specifically, make the best helots because they are often in no situation to complain or to demand anything. Or, they are simply not clear as to what their rights are, or what’s prudent in this connection. A “sanctuary” state, promoting a defense of all immigrants couched in the language of generosity, is what you would expect to arise here, and even flirtations with the notion of open borders. I have just described northern-central California today, of course. Other high-tech nodules across the country conform.

[Editor’s note: In case you missed it, here is Part 12]

The Dangerous Inequality Meme

The inequality of wealth and income has become a meme loaded with danger. A “meme” is an idea that gets propagated like genes in biology. Economic inequality has long been a topic of interest, but during the past few years, and especially during the 2015-2016 American elections, the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.

The facts about inequality in the USA are clear. Since 1970, income inequality has increased. As national income has grown, most of the gains have gone to the rich. Average incomes have even dropped since the recession of 2007-2009.

During the 1800s, the first economist to analyze equality and inequality was Henry George. Karl Marx had touched on economic inequality by saying that the surplus from production was due to labor but was captured by the capitalist, the owner of the firm and its tools. Thus, the proletariat, the workers, stay poor and the capitalists get rich, creating inequality. But Marx and his followers focused on the conflict between labor and capital rather than the inequality.

Henry George pointed out that the surplus from production is not in wages, nor in business profits, but in land rent, which is a pure surplus, since land has no cost of production. George showed how land rent captures the gains from economic progress, creating the inequality in wealth and income between workers and the landowners. Competitive firms make normal profits, which has no surplus. Of course monopolies can capture surplus also, but the profits from entrepreneurship are a bonus to society, rather than a social problem, as entrepreneurs drive innovation and economic progress.

Unfortunately, when the classical economics of the 1800s turned into the neoclassical doctrines of the 1900s, both by design (in opposition to the Georgist remedy of taxing land value) and for mathematical convenience, land was dropped as an input factor, and mainstream economics became the two-factor production function Q=f(K,L). It is illogical that land rent gets included in the distribution of income in the return on K, but excluded on the production side, as the models are based only on the two inputs, labor L and capital goods K. This contradiction is not questioned by graduate students in economics, who are too busy learning the calculus of “math econ” to bother asking if the whole system makes sense.

Therefore the inequality meme is now blended with the labor-capital meme, ignoring the real source of economic inequality, unequal land tenure. Politicians exploit the all-too-real economic inequality with a superficial, simplistic, and dangerous remedy: tax the rich and transfer the funds to the poor. Of course governments are doing that already, and that has not reduced inequality, but the welfare-statists insist that government should do more of it.

Conservative opponents of greater redistribution point out, correctly, that higher taxes and takings from the rich will stifle entrepreneurship and savings, reducing the economic growth. But other than eliminating some of the tax deductions and generating more growth by reducing the top tax rates, the conservatives have no effective remedy. Their call to flatten the tax rates play into the political agenda of the redistributionists who call for higher, not lower, tax rates on the rich.

The danger in the inequality meme is the confiscation of the wealth not just of the rich but also of the middle class. A family that spent all its income and now has no wealth would be given welfare aid, while the family with the same income but frugally saved its income for retirement or to provide for their children would have their wealth taken away, not just by ordinary and predictable taxation, but by a sudden taking, as happened in Cyprus in 2013. Government chiefs facing a debt crisis can kill two birds with one stone: confiscate savings and use some of it to pay off debt and the rest to transfer to the poor. Such confiscation has been suggested by the International Monetary Fund, which lends funds to countries bogged down in debt. In its publication Fiscal Monitor Report, the IMF stated (pdf):

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).” There we have the proposition that such confiscation of wealth can be “fair” (49).

This IMF capital-levy proposition was presented in Forbes with the title, “The International Monetary Fund Lays The Groundwork For Global Wealth Confiscation.” The Wikipedia article on “capital levy” shows that this meme is getting some traction, such as by Germany’s Bundesbank. The concept of a capital levy, confiscation of savings and investment, comes from the meme of economic inequality that looks only at the superficial existence of unequal wealth and not to the source.

It has been well pointed out by British journalist and economist Fred Harrison in his Youtube video “Ricardo’s Law: the Great Tax Clawback Scam” that while the rich pay much in taxes, many of them get the tax back, as a clawback, from government’s public goods, which generate higher rent and land value.

The effective and equitable remedy for economic inequality is not redistribution but the proper initial distribution of income. Wages and capital yields should be kept by the workers and investors, while land rent should be equally distributed either as cash or in public services. Public revenue from land rent would equalize income while promoting growth and raising wages. We need to bring land back into economic discourse, but that requires penetrating the appeal of superficial thinking. That’s what Henry George tried to do, and the Georgist meme had reached up to the heads of state in China, Great Britain, and Russia (after the first revolution with Kerensky), but World War I blasted the impending tax reforms to bits.

The candidates who now rant against inequality, the corporations, and the billionaires, even if they don’t win the election, will influence policy and generate calls for more redistribution and, perhaps in the next financial crisis, a capital levy. While alarmists often exploit impending doom for their own gains, sometimes they are right.

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This article is also in progress.org under the title “Tyrants Exploit Income Inequality”

[Ed. note: I added tags, categories, and links, and patched up some grammar – BC]

Information doesn’t matter

The classical economists gave us three basic factors of production: Land (i.e. nature-given resources), Labor (i.e. human effort), and Capital (i.e. tools). Naturally this involves lumping together a lot of heterogeneous things. Capital includes a rock you might use to smash an assailant over the head as well as a particle accelerator. But prices do a brilliant thing: they provide information about the relative scarcity of goods and compress that information into a single dimension

This allows us to aggregate! It means that we can talk about how much capital per capita is available in a region (or better yet, provide a distribution of workers’ access to capital… a project I’m not sure if anyone’s done) and the like.

This whole intellectual project is necessary if we want to talk about the nature and causes of a particular economy’s well being. But the original factors have become less useful as the nature of economic activity has changed over time.

It gradually became clear that the concept of labor was too fuzzy: how do we compare the labor of a doctor with that of a stevedore with that of a professional wrestler? We could try to use prices, but for a variety of reasons that just won’t work very well. Household production and leisure don’t have market prices, market frictions are particularly pronounced, information asymmetries abound and are entangled with principal-agent problems (you don’t have to watch a wrench to ensure that it doesn’t slack off, but your administrator may very well cease to administrate while browsing Facebook).

Economists have dealt with the issue with the idea of human capital. In addition to physical tools, people also have mental tools (skills). This idea leads into the notion of social capital (people invest in relationships), and can be extended in any number of directions. It’s a wonderful lens through which to view the world because it lets us see the nature of what we do.

But it’s not the right way to think about the factors of production. Not because it’s difficult to measure human capital (I’m not convinced it’s really possible to measure much of anything of importance in economics… even though I keep trying to). The problem is that it doesn’t get us down to the core, atomic thing that we’re really interested in.

Boulding tells us [emphasis mine]:

It is much more accurate to identify the factors of production as know-how (that is genetic information structure), energy, and materials, for, as we have seen, all processes of production involve the direction of energy by some know-how structure toward the selection, transportation, and transformation of materials into the product.

And I think he’s on to something here. The basic stuff of our economy is information applied to objects (even information has to be physically embodied in writing, magnetic manipulation of hard drives, or the shape of our neural connections), which requires energy.

But we’ve got the information necessary to do far more than we actually do. What is it that stands between the vast amounts of knowledge at our command being applied to our enormous stocks of physical resources using our still plentiful and cheap energy? Why is there so much slack in our economic systems?

It could simply be transaction costs, but I think we can go deeper. Boulding’s factors give a more refined view of both labor and capital, but he’s still missing the fundamental kernel of labor. It’s not our know-how that matters–we all know we’re supposed to save for retirement and yet we don’t. It’s not that we don’t have enough energy. What’s missing is an appreciation of attention.

Attention is at the root of alertness which Kirzner tells us is the prime mover that sets in motion economizing behavior. Attention is what is necessary to learn. Most importantly, it is what is necessary to remember and apply what we learn. And it’s universal. Laborers have it and so will our future robot overlords. It’s easily as basic as energy and materials. The question then is how to tie it into the notion of know-how (the psychology of learning) and social sciences more generally.

“Just Leave Me Alone Goddammit!”*

The basic argument I want to make is that we’ve been thinking about labor and human capital imprecisely,** and we would do better to think of labor as the selective application of attention, and habit (which economizes on attention) as the basic essence of human capital.

Attention

The kernel of this idea was planted when I read Pragmatic Thinking and Learning a few years ago. An important point it makes is that whenever our work is interrupted it takes something like 15 minutes to get back to work. Mental work is like barbecuing (or what the uninitiated erroneously call “smoking”). After 8 hours of cooking your guests are impatient (and drunk) and want you to check the meat. So you open up the barbecue and a plume of smoke billows out. You put in a meat thermometer and sure enough, the meat isn’t done. But now it’s going to take another 15 minutes for enough to smoke to build up to get the process moving again. 20 minutes later people want you to check again. (And that’s why our parties back in San Jose so often dragged on so long.) Showing up to work for 8 hours a day isn’t sufficient for getting your work done; sometimes you just need your boss to leave you alone long enough for you to focus deeply enough to solve the problem you’re facing.

Or we could think of work like juggling. Working on some difficult problem, you’ve got a few pieces of mental material in the air. When someone knocks on your door (or you take notice of an email notification on your phone) you drop the balls. Getting them going again takes some effort, so even a one second interruption sets you back a few minutes. Those of us who work at desks are familiar with how difficult thinking can be. Managing our attention takes effort. But with practice we can get better at coping with distractions and skipping the easy, but unproductive paths offered to us.

And what about grunt work? There’s less attention necessary (perhaps rhythm serves a role in maintaining that minimal bit of attention), but nobody gets paid for not doing what they’re told. Your job is to keep applying effort in the appropriate way. The only human capital you really need is what is necessary to get out of bed and get to work every day.

Habit Capital

People who smoke cigarettes, they say “You don’t know how hard it is to quit smoking.” Yes I do. It’s as hard as it is to start flossing.

Mitch Hedberg

Habit offers a means of economizing on attention. Instead of using up our mental capacity to decide to brush my teeth every day, I just do it automatically. Flossing is not so easy… except that I was able to make it a habit by piggybacking it on an existing habit.

Many of the skills we have are built on a collection of complex little habits, whether it’s muscle memory (you must watch the video above), understanding how to read graphs, or bearing in mind that everything has an opportunity cost.

(Obviously) getting a college degree is not the same as accumulating human capital. What college does (we hope) is inculcate students with critical thinking habits and some basic knowledge deemed necessary or particularly helpful for navigating the world. Learning on the job is similarly about providing workers with habits, and both positive and normative knowledge (i.e. factual knowledge and norms/beliefs/corporate culture). Growing up is about building up human capital largely in the form of internalized norms (moral habits). Habits are everywhere and they’re at the core of what we mean when we use the term human capital.

Habit capital allow us to direct our attention to critical areas in the same way physical capital allows us to leverage (and ultimately replace) our physical effort. By establishing habits we can get certain things done (teeth brushed, books read, etc.) while conserving attention. This takes more attention upfront just as physical capital requires upfront investment.

Anticapital

Economists generally don’t think much about bombs as an investment. Bombs require foregoing current consumption, but once they’re made, they’re intended to get a negative return by destroying something of value. Physical anticapital, as a social scientific idea, falls primarily in the domain of International Relations. Which isn’t to say economists haven’t thought about investments that destroy value. The idea of rent seeking is an important one, but it’s one that has been rationalized.

There’s probably not much to gain by thinking about rent seeking as investment in anticapital.*** But we can bring bad habits out of the purview of irrationality and bring it into the warm, rational glow of economics with the concept of human anticapital.

Just like in biological evolution, we’re satisficing, not optimizing. Habits may initially be adaptive and turn bad as circumstances change. We should expect a tendency towards “good” habits–and how those habits propagate is certainly an interesting question–but we should also expect the odd bizarre byproduct, misfire, and obsolete habits to emerge.

“We are still very close to our ancestors who roamed the savannah. The formation of our beliefs is fraught with superstitions–even today (I might say, especially today). Just as one day some primitive tribeman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm.”

Nassim Taleb

tl;dr:

Attention matters more than time. Habit economizes on attention. Mental work involves applying mental tools to particular problems and habit allows us to do so more or less automatically. In other words, habit is human capital.****

*That’s one possible title for the next paper I want to write. A more boring but descriptive possibility is “Habit Capital.” Another with more regional flavor is “Hey! I’m Working Here!” Maybe I’m not very good at titles…

**This follows in a similar vein as my entrepreneurship research which basically boils down to: entrepreneurship theory is good, but our empirical measures suck.

***Although I should mention that thinking about rates of depreciation will surely shed light on rent seeking questions.

****I’ll leave it for the comments to sort out whether it’s the only sort of human capital. Maybe you can also help me sort out how to wrap belief, understanding, and learning into this view.

Strange Historical Facts

Not long thereafter, they erected the first sawmill in what was to become the state of Washington on a site by the lower falls of the Deschutes River. Much of the capital for erecting the mill apparently came from George W. Bush, Washington’s first black resident. The cut of this mill, it has been claimed, was marketed through the Hudson’s Bay Company at Fort Nisqually and found its way to Victoria and the Hawaiian Islands. The first shipment was supposedly made on the Hudson’s Bay Company steamer Beaver in 1848.

Um, wow. I don’t know where to begin. This excerpt comes from page 25 of a 1977 book by historian Thomas R Cox titled Mills and Markets: A History of the Pacific Coast Lumber Industry to 1900. Aside from the interesting anecdote quoted above, it’s not very good. I picked it up because of the possibilities associated with such a subject, but instead of a theoretical narrative on globalization, identity, state-building, and property rights, it is a book that reads a lot like the excerpt I quoted above (the local history aspect I have enjoyed, though; local history is one of my secret pleasures, the kind of stuff that never makes it into grand theoretical treatises but always lights up my brain because of the fact that places I know and places I have lived are the focus of the narrative).

I blame it on the year it was published, of course. 1977 was at the height of the Cold War, which means that scholarly inquiry was inevitably going to be policed by ideologues, and also that works appraising global or regional scales and scopes just weren’t doable. For instance, there was virtually no mention of Natives in the book. (See archaeologist Kent Lightfoot’s excellent, highly-recommended work – start here and here – for more on how this is changing.)

The burden of imperialism, the virtues of immigration, and the importance of data

One thing I have noticed about the terrorist attacks in Paris is the relatively little that imperialism is brought up. The Muslims of France hail from parts of the world that were once a part of the official French empire. This empire is still a force in much of its old official boundaries. The British and the Dutch also have problems with Muslims that were once a part of an official empire. The Germans and the Turks are a different case, as the Ottoman and German empires had more of a deal between themselves in regards to cheap labor than the cases of Western Europe, but the relationship is still not one of immigration – not in the sense that is perceived by Americans, Canadians, and Australians.

I wonder how much of the tension between natives and immigrants is due to the imperial relationship of the sides involved. I would wager quite a bit. I also have to wonder about the role of land in all of this. Land, of course, is the ugly cousin of labor and capital, two of the three factors of production utilized by economics (there is a fourth sometimes cited, entrepreneurship, but I am not yet convinced that this belongs and neither are many economists).

Immigration is different than what the former imperial states of Western Europe are dealing with. I know the similarities are seemingly the same, but they are not. I would be happy to flesh this out more in the ‘comments’ threads if anyone takes issue with it.

Here is the abstract from an excellent article in Social Forces on the futility of deriving any conclusions about a society based on simple perceptions:

We investigate the thesis widely credited to Max Weber that Protestantism contributed to the rise of industrial capitalism by estimating the associations between the percentage of Protestants and the development of industrial capitalism in European countries in the mid- to late nineteenth century. Development is measured using five sets of variables, including measures of wealth and savings, the founding date of the principal stock exchange, extension of the railroads network, distribution of the male labor force in agriculture and in industry, and infant mortality. On the basis of this evidence, there is little empirical support for what we call the “Common Interpretation” of Weber’s The Protestant Ethic, namely the idea that the strength of Protestantism in a country was associated with the early development of industrial capitalism. The origin of the Common Interpretation and its popular success are probably derived largely from selected anecdotal evidence fortified, through retrospective imputation, by the perceived well-being of contemporary Protestant countries.

The article is titled “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe” and it can be read here (pdf). As you read through analyses of the terrorist attacks in Paris, be sure to keep this in the back of your mind.

By the way, the piece is co-authored by Jacques, who has failed to adhere to his own standards when it comes to discussing Islam.

Free Banking Explained

Free Banking is free-market banking. In pure free banking, the money supply and interest rates are handled by private enterprise, there is no restriction on peaceful and honest banking services, and there is no tax on interest, dividends, wages, goods, and entrepreneurial profits. Free banking provides a stable and flexible supply of money, and allows the natural rate of interest to do its job of allocating funds among consumption and investment, thereby preventing inflation, recessions, and financial panics.

To understand free banking, we first need to understand the relationship between capital goods and interest rates. Capital goods, having been produced but not yet consumed, have a time structure. Think of it as a stack of pancakes. The bottom pancake is circulating capital goods, which turnover in a few days, such as perishable inventory in a store. The higher levels take ever longer to turn over. The highest pancake level consists of capital goods with a period of production of many years, the most important type being real estate construction.

Lower interest rates make the pancake stack taller, while higher interest rates make it flatter. Think of trees that take 20 years to mature. Suppose the trees are growing in value at a rate of three percent per year. If bonds pay a real interest rate of four percent, and the interest rate is not expected to change, then the trees will not be planted, since savers will put their funds into bonds instead. But if bonds pay a rate of two percent, then the trees get planted. So the lower interest rate induces an investment in long-lived trees and steepen the capital-goods pancake stack. Continue reading