The Free Market – If Capital Can Cross Borders Freely then Should Labour Too?

A not-so-mainstream problematic – a novel use of some very mainstream tools that (unfortunately) thwarts resolution of this problem.

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I have long been of the opinion that there was a grave injustice in the nature of open markets at the international scale. This rises from the simple point that capital can move and people can’t. First, I’m going to explain why this is grossly unjust in principle. Then, I’m going to explain how and why I came to the realization the other day that completely free movement of labour across borders is a really, really baaaad idea in the long term.

I’m not talking about the fact that I can send money around the world with minimal effort, for a few dollars, to find the best returns on money. I’m not talking about the significant psychological barriers and costs involved with relocating labour to locations with better wages either.

I’m talking about regulations. Financial capital is typically allowed to move across borders with few restrictions, while labour faces numerous restrictions on its ability to move.

One of the general reasons that we should celebrate the market is that the profit incentive is supposed lead to allocations of resources to their most efficient use. In this case, financial capital moves where it can produce the most of its products for the least amount of money. One would think, then that if the role of markets is to allow factors of production (capital and labour in the most simplified way of looking at things) to move to where they are most profitable, then this would be most easily served by a system which allowed people to move where they could find the highest wages as well as capital moving to where it could make the most profits.

Companies can move to where wages (productivity / nominal wage) are highest, in relation to what they actually pay for labour, but you can’t necessarily move to where wages are highest. This clearly benefits companies more than labour.


This is totally OK with most people in the West, since we have been the main beneficiaries of this setup for a very long time, getting access to cheap production inputs from the rest of the world without having to worry about them coming here and driving down the prices of our labour. Some would state that this isn’t possible since markets take prices as given and wages are set by productivity. It’s hard to get a grip of the effects of the truth of the matter, given that we do not presently have free movement of labour.

In any case, the economic answer to that problem isn’t terribly significant, since we live in democracies, and the public has no interest in opening the doors to just anyone who wants to come. We only let the cream of the crop in, with a nominal allocation for sympathy cases.

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I had a sudden realization the other day, and now I’ve forgotten what brought it on, that if we allowed labour to move wherever it wanted, then no country would have much incentive to educate its population. Rather, it would try to poach expertise from other countries. This already happens, but nowhere near on the degree that would happen if there was complete freedom of labour mobility.

There are positive externalities to education. This means that, although the individual benefits, they are not the only ones to benefit from that education. Society benefits to. This means that markets would lead to a sub-optimal allocation of education. The state can internalize the wider benefits of education within its borders, since taxes are paid by more or less all people. The result is that the state has an incentive to invest in public education in order to have a more productive society, while our inability to internalize ALL the benefits of our own education lead us to under-invest in education when it is at market prices. That's without even counting the inherent good of improving people's abilities through education.

So why not increase international labour mobility?

Simple. A state that can no longer internalize the benefits of a broadly educated public, who are likely to move anywhere where wages are higher, is not as likely to invest as much in educating its people. This is OK at a limited level, and may be important to allow for experts, in order to facilitate research and innovation.

However, the expected effect of complete freedom of movement of labour would therefore be a significant reduction in education across the world. The present setup where capital can move and people can’t (or can only do so in a limited sense) is not fair, but a world with free movement of labour would leave everyone much worse off. Almost…


A quick internet search before I went to post this showed that I am certainly not the first one to realize this, but I already figured that was probably the case.


Being in a position to take advantage of all sides of this problem (as an educated individual from a country with capital whose citizens have comparatively little difficulty working overseas), I have to ask myself - Have I been, as Francis Hutchinson would say, bribed by self-interest to make a biased argument? Or possibly I’m just damn lucky to be Canadian.

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Iiiiiii remember, this is exactly the same reason that cooperation on global warming is so difficult. It’s a free rider problem. Every country has an incentive to let others bear the brunt of the costs and do nothing themselves. In one case, it’s a global market for educated individuals, in the other it’s a global environment.

That calls for a heavy duty discussion of the issue of negative externalities, how they work, and why they necessitate things like prices on pollution, regulations, and so on (depending on what works best for the particular problem). The most relevant policy question driving the response being – how can Canada stimulate productivity growth (a central problem in our short-term and long-term economic prospects) and address global environmental issues (a central issue in our short-term and long term economic prospects) with a minor modification of the tax code that still leaves markets free to find efficient allocations of economic resources?

Hey! But increasing international labour mobility should smooth economic fluctuations. That's one of the main practical applications of the study of macroeconomics. Hmmm …