TGIF: The H-1B Controversy

Does anyone still believe that the market process should set prices, including wages? Apparently not. Take the controversy surrounding the H-1B visa, the program that "permits" employers to hire highly educated and skilled foreign workers, such as hi-tech personnel.

Judging by the narrow range, everyone involved in the debate is a social engineer. Only three options are on the menu: continue the program, reform it to prevent its misuse, and end it. What's missing? The "let the market set wages" option Sorry, that's not on offer.

Let's start with how the U.S. Department of Labor describes the program:

The H-1B program applies to employers seeking to hire nonimmigrant aliens as workers in specialty occupations or as fashion models of distinguished merit and ability. A specialty occupation is one that requires the application of a body of highly specialized knowledge and the attainment of at least a bachelor’s degree or its equivalent. The intent of the H-1B provisions is to help employers who cannot otherwise obtain needed business skills and abilities from the U.S. workforce by authorizing the temporary employment of qualified individuals who are not otherwise authorized to work in the United States.

The law establishes certain standards in order to protect similarly employed U.S. workers from being adversely affected by the employment of the nonimmigrant workers, as well as to protect the H-1B nonimmigrant workers.

Of course, the government has something to say about wages:

Employers must attest to the Department of Labor that they will pay wages to the H-1B nonimmigrant workers that are at least equal to the actual wage paid by the employer to other workers with similar experience and qualifications for the job in question, or the prevailing wage for the occupation in the area of intended employment – whichever is greater.

Is anyone offended that in a country that thinks itself free, the government decrees that employers need permission to hire "nonimmigrant aliens" and can get it only if certain conditions apply? "Nonimmigrant aliens" are people, in case anyone needs reminding. How's that good for a country supposedly devoted to freedom and free enterprise?

The standard answer is that those jobs are American jobs. However, if capitalist entrepreneurs want the freedom to hire consenting workers living abroad, the jobs obviously are not American jobs. Who has the right to declare them otherwise? A job is a continuing transaction between an employer and an employee. It has no national label. To insist that it does have such a label because the employer operates on U.S. soil is to accept a premise that requires proof, namely, that the government or a majority of voters owns the country. That premise glaringly clashes with the principle of liberty. It makes freedom a delusion.

When left free, the market sets prices, including wages, through the process that emerges from countless choices by individuals collaborating to achieve their personal goals. These choices include selling, renting, and buying material resources and products. Supply and demand generate a vast money-price system that enables everyone to make plans using economic calculation, as Ludwig von Mises long ago spelled out. Without calculation we could not make more than the simplest plans or judge a project's success or failure—through profit or loss—afterward. Waste would abound In a world of scarcity, which would be a disaster. Poverty would rule.

Among other things, prices and wages signal to producers what consumers want most keenly. Again, in a world of scarcity, that's important. Since we can't have everything right now, we must make choices. Resources producing automobiles cannot be producing washing machines or computers. What to do? Let the price system work its magic—except that it is not magic. It is human action and its welfare-enhancing consequences. When the government prohibits the price system from doing its job, scarce resources are wasted as far as consumers are concerned. In a free and competitive economy, their choices shift resources to the purposes consumers most want to be fulfilled. The whole point of an economy is to serve consumers, remember?

This is no less true for labor. If high-tech companies can find satisfactory foreign software engineers who are willing to work for less than their American counterparts, that's a signal to be heeded. The Americans have asked too much. They have no right to those jobs or a higher wage. There's other work to be done—or would be if the government did not interfere. Consumers are never fully satisfied.

Those are the basics. What about H-1B? That is not a market institution. It's an intervention to somewhat ameliorate the predicament of employers who are denied the full freedom to hire whomever they want. It's no more than second-best, and it has downsides. For example, its restrictions enable employers to pay foreign workers less than those workers would have earned if they could work freely in America. To get a visa, foreign workers must have employer sponsors. If they wish to quit their jobs, they must find other qualifying jobs or be deported. That undoubtedly keeps visa holders in jobs they would prefer to quit. That's not right.

But beware those shedding tears over H-B1 "indentured servants." Those are crocodile tears because those opponents would not replace the visa program with open visas, that is, free immigration. They would shut down the program altogether. My hunch is that visa candidates would prefer the current program to closed borders. They wouldn't come here if the conditions were not superior to those at home. So let's hear no more sobbing from "left" and "right" statist populists like Steve Bannon and Batya Ungar-Sargon. These opponents of freedom should not be making economic policy.

Has the program been misused, that is, used contrary to its stated purpose? Undoubtedly. That's standard operating procedure. When the government hands out favors, political entrepreneurship will emerge on the part of those who don't want to be left out. This is purely the result of government violations of freedom. Get rid of the program and you get rid of the misuse.

It is certainly to be expected that if foreign workers can freely come to America, some wages will go down. That's supply and demand. On the other hand, other wages will go up. Immigrants buy consumer goods and start businesses, in some cases, highly successful businesses. Lower market-set wages, by the way, bring lower consumer prices, raising the standard of living. As noted, wage differences signal consumers' most highly valued wants.

Finally, some might say that we Americans could have the benefits of high-skilled foreign workers without importing them. How? Through trade with their countries. But hold on. The same people who want to shut down H-1B also want tariffs against foreign goods to "protect American jobs." Even if we have free trade, however, that is not a good answer. Foreigners are much more productive here than they are over there. Why? Because America has more capital and better management techniques than India and elsewhere. Because capital investment per worker is so high in America, any human being will be many times more productive here than anywhere else. That's good for the workers—and for consumers. Remember: everyone is a consumer.

This matter is not "just economics." Freedom itself is at stake.

Production Is Spiritual, Not Material

"Production is not an act of creation; it does not bring about something that did not exist before. It is a transformation of given elements through arrangement and combination. The producer is not a creator. Man is creative only in thinking and in the realm of imagination. In the world of external phenomena he is only a transformer. All that he can accomplish is to combine the means available in such a way that according to the laws of nature the result aimed at is bound to emerge....

"Only the human mind that directs action and production is creative. The mind too appertains to the universe and to nature; it is a part of the given and existing world. To call the mind creative is not to indulge in any metaphysical speculations. We call it creative because we are at a loss to trace the changes brought about by human action farther back than to the point at which we are faced with the intervention of reason directing human activities. Production is not something physical, material, and external; it is a spiritual and intellectual phenomenon. Its essential requisites are not human labor and external natural forces and things, but the decision of the mind to use these factors as means for the attainment of ends. What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason. The human mind alone has the power to remove uneasiness.

"The materialist metaphysics of the Marxians misconstrues these things entirely. The 'productive forces' are not material. Production is a spiritual, intellectual, and ideological phenomenon. It is the method that man, directed by reason, employs for the best possible removal of uneasiness. What distinguishes our conditions from those of our ancestors who lived one thousand or twenty thousand years ago is not something material, but something spiritual. The material changes are the outcome of the spiritual changes."

—Ludwig von Mises, Human Action

TGIF: Efficient Bureaucracy?

With all the talk about government efficiency, it would be useful to remind ourselves why bureaucracies differ radically from for-profit businesses. Ludwig von Mises devoted a short but enlightening volume to this subject in 1944, Bureaucracy. Elon Musk and Vivek Ramaswamy, who will co-chair the nongovernmental Department of Government Efficiency, should do some homework by reading that book.

Mises, as an advocate of limited government, did not argue that bureaucracy has no place in a free society. In contrast to anarcho-capitalists, he thought government and therefore some bureaucracy was necessary to protect what he valued most: peaceful social cooperation through the division of labor—that is, the market economy. Violence against persons and property was clearly antithetical to the continuing welfare-enhancing collaboration we call the market process. But Mises did not want bureaucracies trying to do what free, private, and competitive enterprises could do better. Moreover, if the government went beyond its mere peacekeeping duties, it would undermine the market process and make us all less well off despite any good intentions.

Mises began by reminding readers (or perhaps teaching them from scratch) what the free market is and what it accomplishes. It's a great primer for those who lack the time to read his longer works. He wrote:

Capitalism or market economy is that system of social cooperation and division of labor that is based on private ownership of the means of production. The material factors of production are owned by individual citizens, the capitalists and the landowners. The plants and the farms are operated by the entrepreneurs and the farmers, that is, by individuals or associations of individuals who either themselves own the capital and the soil or have borrowed or rented them from the owners. Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser—whether businessman or farmer—is to make profit.

The uninitiated might ask who runs things. He replied: "The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship."

However, let's not jump to conclusions about who really runs things, Mises advsed:

But [the capitalists, etc.] are not free to shape [the ship's] course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.

Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The producers do not produce for their own consumption but for the market. They are intent on selling their products. If the consumers do not buy the goods offered to them, the businessman cannot recover the outlays made. He loses his money. If he fails to adjust his procedure to the wishes of the consumers, he will very soon be removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.

All the conventional controversy about bosses and workers overlooks the critical point:

The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.

Capitalism is not a profit system, Mises taught. It is a profit-and-loss system. If the consumers give thumbs down to a product, the entrepreneur could lose everything. He may have to seek a job from a superior entrepreneur.

The performance of businesses, Mises wrote, can be appraised only because private property in the means of production, free exchange, and the resulting money prices permit economic calculation and thus planning by economizing individuals. This was Mises's pathbreaking demolition of the economic case for central planning—socialism in its national and international forms—over a century ago.

Economic calculation matters when comparing a business to a bureaucracy. As Mises wrote:

The manager of the whole [business] concern hands over an aggregate to the newly appointed branch manager and gives him one directive only: Make profits. This order, the observance of which is continuously checked by the accounts, is sufficient to make the branch a subservient part of the whole concern and to give to its manager’s action the direction aimed at by the central manager....

As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.

What about a bureaucracy? The answer is implicit in what has already been stated. By nature a bureaucracy faces no profit-and-loss test. It has money expenses in a market-oriented society: it hires willing workers and buys equipment and supplies from willing vendors. However, it does not offer its output to potential consumers, that is, people who are free to say no and take their money elsewhere. Instead of consumers, a bureaucracy has taxpayers, who must pay whether they want the output or not. This disconnect must have far-ranging consequences. (Government services for which user fees are charged differ in this respect, but the government typically forbids competition.)

Instead of the business directive "Make profits," Mises wrote:

Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them....

The absence of the seller-buyer relationship makes a big difference:

The objectives of public administration cannot be measured in monetary terms and cannot be checked by accountancy methods.... In public administration there is no connection between revenue and expenditure....

In public administration there is no market price for achievements....

Now we are in a position to provide a definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: We do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money....

Bureaucratic management is management of affairs which cannot be checked by economic calculation.

This would be a valuable lesson for Musk and Ramaswamy to take to heart. Their task should not be primarily to search for ways to make the bureaucracies more efficient. Rather their task ought to be to identify those current functions the government should not be performing, those that should be turned over to free, private, profit-motivated, and competitive enterprise. We ought to replace coercion with consent.

We must, in other words, revisit the question: what is the proper role of government, if any, in a society that aspires to be free?

Competition Is Cooperation

"The pricing process is a social process. It is consummated by an interaction of all members of the society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want-satisfaction, and the determination of the share of each individual. These three events are not three different matters. They are only different aspects of one indivisible phenomenon which our analytical scrutiny separates into three parts. In the market process they are accomplished uno actu. Only people prepossessed by socialist leanings who cannot free themselves from longing glances at socialist methods speak of three different processes in dealing with the market phenomena: the determination of prices, the direction of productive efforts, and distribution."

—Ludwig von Mises, Human Action

TGIF: Capitalist Exploitation or Interest?

The completely just proposition that the worker is to receive the entire value of his product can be reasonably interpreted to mean either that he is to receive the full present value of his product now or that he is to get the entire future value in the future. But ... the socialists interpret it to mean that the worker is to receive the entire future value of his product now.

—Eugen von Böhm-Bawerk

The free-market economy—laissez-faire capitalism—may be unpopular because people think it authorizes the exploitation of workers. They are not paid the full value of their product—or so it seems. This indictment has been wielded to justify not only full socialism but also substantial government interference with the market economy, including strong pro-union measures.

Few people realize, however, that the market economy was decisively acquitted of the exploitation charge back in 1884 by the second-generation Austrian economist Eugen von Böhm-Bawerk in his History and Critique of Interest Theories. The key to understanding the acquittal is time.

Ludwig von Mises, a student of Böhm-Bawerk, and Murray Rothbard, a student of Mises, refined Böhm-Bawerk's pioneering work when they examined the overriding importance of time in the market process. This sadly neglected matter is obviously relevant to the exploitation charge. Here's Mises in Human Action:

The prices of consumers’ goods are by the interplay of the forces operating on the market apportioned to the various complementary factors cooperating in their production. As the consumers’ goods are present goods, while the factors of production are means for the production of future goods, and as present goods are valued higher than future goods of the same kind and quantity, the sum thus apportioned ... falls behind the present price of the consumers’ goods concerned. This difference is the originary interest.... [Emphasis added.]

The difference between the sum of the prices of the complementary factors of production and the products which emerges ... is an outcome of the higher valuation of present goods as compared with future goods. As production goes on, the factors of production are transformed or ripen into present goods of a higher value. This increment is the source of specific proceeds flowing into the hands of the owners of the factors of production, of originary interest.

He went on:

Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. [Emphasis added.]

In other words, all action takes place in time, including the production of consumer goods, which in an advanced economy takes place through many stages over long periods, each progressively closer to the final consumer-goods stage. It is helpful to think of all the factors of production as unfinished consumer goods to some degree. The capitalist pays factor owners in the present to combine their labor, land, and capital goods to advance the "ripening" of the factors into future finished consumer goods. Consumption is what the market process is all about. He can do this through free market exchanges because some people more eagerly prefer money sooner, before the goods are finished and sold, rather than later, after the finished goods are sold. Because we prefer money sooner rather than later, present money is discounted against future money. Waiting for a future payment requires a premium, that is, interest; advance payment requires a discount of the future amount.

What looks to the unschooled like exploitation, is not exploitation at all. The workers and landowner must have found the exchange worthwhile or they would not have agreed to it. If the capitalist's vision of the future is wrong and consumers don't like the final product or the asking price, the capitalist is out of luck. He suffers losses. He can't get a refund from the workers and landowners.

In Man, Economy, and State, Rothbard explained the structure of production and the remuneration of the factor owners in much greater detail, drawing on the pioneering work in capital, rent, and interest theory by the American "Austrian" economist, Frank A. Fetter (1863-1949). Joseph Salerno has noted that Rothbard's 1962 treatise was a major original contribution to our economic understanding. Rothbard wrote (all emphasis in the original):

An individual or a group of individuals acting jointly can..., at present, offer to pay money to the owners of land and labor, thus buying the services of their factors. The factors then work and produce the product, which, under the terms of their agreement, belongs to the new class of product-owners. These product-owners have purchased the services of the land and labor factors as the latter have been contributing to production; they [product-owners] then sell the final product to the consumers.

What has been the contribution of these product-owners, or “capitalists,” to the production process? It is this: the saving and restriction of consumption, instead of being done by the owners of land and labor, has been done by the capitalists. The capitalists originally saved, say, 95 ounces of gold which they could have then spent on consumers’ goods. They refrained from doing so, however, and, instead, advanced the money to the original owners of the factors. They paid the latter for their services while they were working, thus advancing them money before the product was actually produced and sold to the consumers.

That is known as a harmony of interests, not exploitation. Diverging time preferences create opportunities for mutual gains from trade.

The capitalists, therefore, made an essential contribution to production. They relieved the owners of the original factors from the necessity of sacrificing present goods and waiting for future goods. Instead, the capitalists have supplied present goods from their own savings (i.e., money with which to buy present goods) to the owners of the original factors. In return for this supply of present goods, the latter contribute their productive services to the capitalists, who become the owners of the product.

Or as he put it elsewhere, "[W]hen a capitalist hires a worker or rents land, he will pay now, not the factor’s full marginal product, but the expected future marginal product discounted by the social rate of time-preference."

Rothbard emphasized that what prompts the capitalist's offer to workers and landowners is the anticipated spread between what he pays now and what he expects to reap when he sells his goods later. That spread is the interest rate. The return is not to capital; it's to waiting. Time and time preference permeate the market process.

Rothbard made a crucial point about the ownership of capital goods that further debunks the exploitation theory:

[T]hese capital goods, it must be stressed, do [the owner] no good whatever. Thus, suppose that a capitalist has already advanced 80 ounces over a period of many months to owners of labor and land in a line of production. He has in his ownership, as a result, a mass of fifth-, fourth-, and third-order capital goods. None of these capital goods is of any use to him, however, until the goods can be further worked on and the final product obtained and sold to the consumer. [My boldface emphasis.]

The capitalist's vulnerability is not to be envied. What does he own? Goods-in-process-of-completion (capital goods), which may require many more stages over a long period before they are ready for the retail shelves—assuming shoppers will want them at the price asked. Consumers have no use for unfinished goods. Rothbard wrote:

Popular literature attributes enormous “power” to the capitalist and considers his owning a mass of capital goods as of enormous significance, giving him a great advantage over other people in the economy. We see, however, that this is far from the case; indeed, the opposite may well be true. For the capitalist has already saved from possible consumption and hired the services of factors to produce his capital goods. The owners of these factors have the money already for which they otherwise would have had to save and wait (and bear uncertainty), while the capitalist has only a mass of capital goods, a mass that will prove worthless to him unless it can be further worked on and the product sold to the consumers.

Another reason the capitalist's revenues might exceed his payments to factor owners is pure entrepreneurial profit. Profit, as opposed to interest, is a confirmation of the entrepreneur's hunch that the market had undervalued the factors of production with respect to consumers' wants. Israel Kirzner, a student of Mises, would say that the entrepreneur has improved market coordination. The entrepreneur might have been wrong and suffered a loss. The future is uncertain. Profits do not last, however, because they attract competitors, who bid up the factor prices and lower the price of the consumer good.

The socialists have it wrong. What they see is not exploitation. Rather, it is all-pervasive time, time preference, interest, and risk tolerance.

Crucial Economic Calculation

"The advocates of totalitarianism consider 'capitalism' a ghastly evil, an awful illness that came upon mankind. In the eyes of Marx it was an inevitable stage of mankind’s evolution, but for all that the worst of evils; fortunately salvation is imminent and will free man forever from this disaster. In the opinion of other people it would have been possible to avoid capitalism if only men had been more moral or more skillful in the choice of economic policies. All such lucubrations have one feature in common. They look upon capitalism as if it were an accidental phenomenon which could be eliminated without altering conditions that are essential in civilized man’s acting and thinking. As they neglect to bother about the problem of economic calculation, they are not aware of the consequences which the abolition of the monetary calculus is bound to bring about. They do not realize that socialist men for whom arithmetic will be of no use in planning action, will differ entirely in their mentality and in their mode of thinking from our contemporaries. In dealing with socialism, we must not overlook this mental transformation, even if we were ready to pass over in silence the disastrous consequences which would result for man’s material well-being."

—Ludwig von Mises, Human Action

Which Came First: The Individual or the Group?

"It is illusory to believe that it is possible to visualize collective wholes. They are never visible; their cognition is always the outcome of the understanding of the meaning which acting men attribute to their acts. We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering or a mass (in the sense in which this term is used in contemporary psychology) or an organized body or any other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence. And this meaning is always the meaning of individuals. Not our senses, but understanding, a mental process, makes us recognize social entities.

"Those who want to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong and—with the exception of the most primitive tribesmen—really belongs to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonisms can be solved only by methodological individualism."

—Ludwig von Mises, Human Action

The Socialist Spirit

"Of course, not Marxists alone, but most of those who emphatically declare themselves anti-Marxists, think entirely on Marxist lines and have adopted Marx’s arbitrary, unconfirmed and easily refutable dogmas. If and when they come into power, they govern and work entirely in the socialist spirit."

—Ludwig von Mises, Socialism, Preface to 2nd German edition