# We still have much to do

In a speech late yesterday President Obama spoke about the need to fix the United States’ immigration system and announced a series of executive actions his administration was taking. The full text of his speech can be found here, and the Department of Homeland Security’s fuller description of Obama’s executive actions can be found here. If you are wondering about the constitutionality of Obama’s actions I refer you to Law Prof. Ilya Somin’s post on the issue and his updated version.

I agreed with much of what President Obama said last night. Immigrants have shaped the United States. We are a nation of immigrants. Our national epic begins with a group of migrant Pilgrims fleeing religious prosecution in Europe and settling in the new world; we celebrate this event every year on Thanksgiving. I cannot think of a better time for immigration reform.

President Obama conceded in his speech that the bill passed last year by the Senate was imperfect, it was a compromise on both sides, but nonetheless it was an improvement over our current system. Here too I agreed with the President.

I diverge with the President however in thinking that one of the main issues of immigration reform is what to do with our nation’s illegal alien population. By all means I have a vested interest in seeing some sort of legal status conferred to this population. The life of an illegal alien in the United States is difficult, but it is infinitely better than the life of those who weren’t able to make the trip at all. What we should concentrate on is reforming the system so that everyone who wishes to come to the United States has the opportunity to do so.

President Obama spoke about the need to make it “… easier and faster for high-skilled immigrants, graduates, and entrepreneurs to stay and contribute to our economy…” but this is still missing the point. President Obama seems to believe that the United States need a specific type of migrant and that the government is capable of screening for them whilst simultaneously denying entrance to ‘undesirables’. One of the reasons I support Open Borders is precisely because we can’t know what type of migrant we need.

If I may lift a page from F.A. Hayek, the question is not whether immigration should be planned but who should plan it. Many people believe by default that it is the state that should plan for society. In this respect most mainstream pro-migrant and anti-migrant advocates are only marginally different. They may differ in how they believe the state should plan, but they nonetheless believe it should plan. The radicalness of Open Borders is the belief that the role of planner should go not to the state, but to the spontaneous order that is created through the actions of individuals.

Whether a migrant is employed by a firm should be a decision made by his potential employer. Whether a migrant finds housing should be a decision made by his potential landlord. Whether a migrant is accepted into a given church, club, association, or Jazz band should be up to these respective groups. Whether a potential migrant is able to succeed in his mission should depend on his ability to find employment, housing, and social ties through voluntary transactions with other individuals. There is neither need nor place for the state to become involved in these transactions.

The executive actions undertaken by the Obama administration yesterday have improved on the status quo, and to that extent I welcome them. These reforms are not enough though, we still have a long way to go before we reach Open Borders. The United States immigration system must be replaced with one led by the market process. Immigration systems elsewhere must also be reformed. The posts on Open Borders: The Case are US-centric because most of our writers are Americans, but this should not be confused to mean that only the United States needs to adopts Open Border policies. Israel, the United Kingdom, Australia, Mexico, South Africa, and every other polity should adopt Open Borders. By all means let us celebrate the marginal improvements the Obama reform has brought, but let us not forget that our end goal is something far more radical.

# What should the Obama administration do?

The Obama administration is expected to announce a series of executive orders later today (8pm EST) regarding immigration policy. Many suspect that the President may provide relief from deportation and work permits to millions of US illegal aliens, among other changes. The best sketch of what we can expect has been provided by Fox News, which has allegedly received a ten point draft of what Obama will announce.

I have reservations about the Obama administration attempting to pass immigration reform via executive order. My chief concerns are that it sets precedent for greater executive discretion in migration policy, and that congressional Republicans will simply spend the remainder of Obama’s term trying to reverse ‘Obamigration’.

Co-blogger Nathan Smith and Bryan Caplan penned a more optimistic perspective on Obama’s use of executive powers back when the administration first announced the Deferred Action for Childhood Arrivals (DACA) program in 2012.  Caplan seems less optimistic about this latest round of executive action.

My reservation should not be taken to mean that the Obama administration should stay quiet on immigration. Far from it, there are two major steps the administration could pursue if it were serious about being more pro-immigration.

1. Negotiating NAFTA 2.0

The North American Free Trade Agreement (NAFTA) is celebrating its twentieth birthday this year. The trade agreement improved trade relations between the United States, Canada and Mexico in several sectors, but it fell short on several others including labor mobility.

Obama could call up his counterparts in Mexico City and Ottawa and begin negotiations on expanding NAFTA to remove any remaining trade restrictions between the three countries. The issue of labor mobility was ignored in the initial phase of NAFTA to minimize political tensions, but surely after two decades we can begin dialogue on allowing the free movement of people across North America?

The Schengen Area in the European Union provides us with a prime example of how to, and how not to, implement a free movement zone among the North American nations. Ideally a free movement zone between the North American nations should allow the unrestricted movement of individuals, while not creating tax burden on the host nations to provide state welfare.

I have written on this possibility previously. Of related interest Freakonomics recently had a podcast on a US-Mexico ‘merger’.

2. Allowing the Federalization of Immigration Policy.

It is unlikely that we will see sweeping reforms of the immigration system at the federal level in the near future. Even if last year’s Senate immigration bill were passed the system would only be marginally improved. Things are more optimistic at the state level though, and several state legislatures have signaled willingness to pursue their own regional policies.

Unfortunately most state legislators have curbed their proposals in fear that the federal government won’t stand for their actions. If the Obama administration made it clear that it were willing to see states take a more proactive role in shaping immigration policy things might turn out for the better in the long run.

For comparison let us consider marijuana legalization efforts. At the federal level marijuana is still illegal, but the Obama administration has thus far tolerated its legalization by the states of Colorado and Washington. In the most recent midterm elections Alaska, Oregon, and Washington DC all passed legislation to legalize marijuana. At this rate it won’t be long before marijuana is legal nationwide.

Why not allow states the same leeway in immigration policy? If Utah wishes to grant legal status to its illegal alien population and create a guest worker program for its state, why not allow it to do so? If New York wants to grant citizenship to its resident migrants, why stop it? Allowing states to set their own migration policies might lead to a few of them adopting anti-migration policies, such as Arizona, but this is a small cost to be paid.

The Obama administration should set parameters under which the states can work and thereafter sit back and watch them experiment with migration policy.

I have previously written on the subject in We Need More San Franciscos and Thoughts on State-Based Immigration Reform . My co-blogger John Lee has also explored the concept as it relates to Canada’s immigration system . Alex Nowrasteh and his colleagues at the Cato Institute have teased the idea out in previous events , and policy analysis papers . The Reason Foundation has also begun toying with the idea recently.

# Why I’m sticking with open borders, or, plucking the not-so-low-hanging fruit

I started Open Borders: The Case about 2.5 years ago, in March 2012 (you can read the site story, my personal statement for the site, and some general background for my involvement with open borders). My active involvement with the site has reduced a lot since summer 2013, but it’s still the biggest single topic on which I semi-regularly write stuff for the general public. I have considered switching my attention to other topics such as drug policy (both recreational and medical), organ trading, economic freedom broadly construed, existential risks, cause prioritization in effective altruism, and animal welfare. However, I’ve decided to stick with open borders. This includes participation at the Open Borders Action Group, more blogging here, and other miscellaneous work. In this post, I’ll describe my reasons.

#### TL; DR

My reasons in summary form:

1. My estimates for the value of open borders, or the extent to which we can realistically move to open borders, haven’t changed much.
2. There are two countervailing, roughly canceling effects in terms of the extent of marginal impact of open borders advocacy, so on net that hasn’t changed much either.
3. I am still well-positioned to help take Open Borders: The Case to the next level.
4. Other causes, including the most promising ones, seem less promising than open borders.
5. There is value to personal specialization. I’ve already acquired experience with thinking and writing about open borders, so I can do more by sticking to it.

Cartoon showing the importance of not giving up. Source Moving Forwards Seminars

#### A quick review of the Drake equation

Before delving into the reasons, I’ll recall a framework I developed a while back in my Drake equation post. I wrote there:

$latex \text{Utility of a particular form of open borders advocacy} = Wxyz$

Here:

• $latex W$ is the naive estimate of the gains from complete open borders (using, for instance, the double world GDP ballpark).
• $latex x$ is a fudge factor to represent the idea that “things rarely turn out as well as we expect them to.” If we set $latex x = 0.1$, for instance, that’s tantamount to saying that, due to all the numerous problems that our naive models fail to account for, the actual gains from open borders would be only 10% of the advertised gains. The product so far, namely $latex Wx$, describes what we really expect the gains from open borders to be.
• $latex y$ is the fraction to which the world can realistically move in the direction of open borders. The product $latex Wxy$ is total expected gain from however far one can realistically move in the open borders direction.
• $latex z$ is the extent to which a particular effort at advocacy or discussions moves the world toward open borders, as a fraction of what is realistically possible. For instance, setting $latex z = 10^{-4}$ for Open Borders the website would mean that the creation of the website, and work on the website, has moved the world 1/10,000 of the way it feasibly could in the direction of open borders.

#### #1: My estimates for $latex W, x, y$ haven’t changed much

After a few years of reading, thinking about, and discussing open borders, my broad estimates of the gains from complete open borders, the fudge factor, and the extent to which we can realistically move in the direction haven’t changed. To some extent, my estimate for $latex W$ has fallen somewhat, but this is compensated for by an increase in $latex x$. I’ve moved in the direction of embracing lower estimates of the GDP gains from open borders, but also reduced my probability estimate of open borders being a total dud or having net negative consequences, so the fudge factor $latex x$ improves correspondingly. Open borders feels like a somewhat more known quantity. Moreover, the degree of uncertainty regarding consequences reduces further considering that we aren’t going to have complete open borders. Overall, I continue to believe that the product $latex Wxy$ falls somewhere between 500 million and 500 billion dollars, as I’d stated in my Drake equation post.

#### #5: The value of personal specialization

When I first started Open Borders: The Case, my knowledge of migration-related matters was fairly shallow. Over the last few years, I’ve learned many things. Nonetheless, there still remains a lot to learn. If I start a website on a new topic, I’ll have to learn a lot about that topic. If, on the other hand, I continue working on Open Borders: The Case, I can build on the knowledge I’ve already acquired and be even more effective.

# Philosophers, wonks and entrepreneurs

I’ve talked about open borders and migration-related issues with people coming from a range of different perspectives (including a wide range of open borders supporters at different levels), and I’ve often found that people are talking past each other. This is partly because of fundamental differences in the mindset that people bring to thinking about the current state of the world and how to change it. In this post, I describe three main (plus some additional) perspectives on the world, and their meaning in the context of open borders.

#### Philosophers, specifically moral philosophers and ethicists

The moral philosopher or ethicist is interested in figuring out the right course of action, but in a very abstract sense. The moral philosopher may consider questions such as whether we have a duty to vote, whether we are obliged to obey and respect governments’ authority, whether we should eat meat, or whether we have an obligation to make large donations to end poverty. Some of the questions considered refer to the moral choices that individuals face, while others refer to moral choices faced by collectives, represented through intermediaries such as governments, businesses, or other organizations.

Some moral philosophies are deontological, so practical considerations, including the costs and consequences of the relevant alternatives, are not that important. Other moral philosophies are consequentialist, so practical considerations matter in answering moral questions (the most salient example is utilitarianism, where different choices are compared in terms of utility). However, although a consequentialist perspective might seem to be more practical, it is still a philosophical perspective: practical considerations matter only insofar as they shed light on what is right.

Examples of open borders philosophers include Michael Huemer, Jason Brennan, Joseph Carens, and Bryan Caplan. One interesting example to illustrate how the philosopher perspective uses practical considerations merely as a tool of philosophical argumentation is offered by the way people such as Huemer (e.g., here) and Caplan (e.g., here) typically deploy keyhole solutions. When Caplan brings up keyhole solutions, he’s not actually advocating them, let alone offering a specific keyhole solution that he is fully getting behind. In fact, as he’s clarified, he thinks pure open borders is preferable to keyhole solutions, or what I call the (1) > (2) > (3) preference ordering in this post. Rather, he’s using keyhole solutions to win the debate on whether it’s feasible to move in the direction of open borders.

As I noted in my post on Bryan Caplan’s open borders advocacy:

Although Caplan has proposed keyhole solutions, he doesn’t spend enough effort developing these or explaining why and how they may actually be made practical and palatable. Commenters on his posts may get the impression that he is using “keyhole solutions” as a way to deflect restrictionist arguments rather than looking at the reality on the ground regarding what’s actually politically feasible.

Commenter BK agreed and went further:

So generalized pro-immigration ideological pushes strengthen the opponents of keyhole solutions more than they support keyhole solutions. And in practice Bryan and folk at this site do seem to use keyhole solutions primarily as a rhetorical fig-leaf to deflect opposition and shut down conversations.

But from the philosopher perspective, establishing the existence of keyhole solutions can be sufficient to make a case even if one doesn’t feel the onus of developing or recommending them (in Bryan’s case, the logic is analogous to the logic of his views on desert: if one could come up with some way that a person could avoid a bad situation, then they do not deserve sympathy for that bad situation; similarly, if one could come up with keyhole solutions that could in principle allow for open borders, then one has no excuse to maintain the closed border status quo).

When Open Borders: The Case began, it had a fairly heavy philosophical bent. This made sense, because philosophy seems to offer a good place to start an investigation into a change as big and complex as open borders. I feel that this site (and the “open borders movement” at large) has exhausted the philosophical perspective more than the other perspectives. There’s still work to be done with respect to outreach and refinement, but the most important new ground to break on the question won’t come from a purely philosophical angle.

To the extent that work remains on the philosophical side, I believe it will be something of the sort where we apply philosophical reasoning to concrete, specific problems that exist in the world today. Thus, rather than writing another generic post about the right to migrate, we could argue that open borders is the only ethically consistent way of dealing with refugees and DREAMers.

UPDATE: In the comments of an Open Borders Action Group post by Joel Newman linking to an interview in the New York Times of philosopher Joseph Carens, John Lee excerpts a part of the interview that describes the philosopher perspective:

G.G.: So, why argue for open borders if it is not a feasible policy?

J.C.: Because philosophers should tell the truth as they see it (even when that makes some people mad). And it can be important to gain a critical perspective on existing arrangements, even if we cannot do much to change them at the moment. The feudal system was once deeply entrenched. So was the institution of slavery. For a long time, there was no real hope of changing those social systems. Yet criticism was still appropriate. If we don’t ask fundamental questions about the justice or injustice of our social arrangements, we wind up legitimating what should only be endured.

#### Wonks and policy catalysts

The wonkish perspective to open borders focuses on finding practical solutions or paths in a public policy context. Wonks are interested in the philosophy and ethics insofar as it tells them what subjects to focus on, and insofar as it provides some moral boundaries within which they can explore alternatives, but they’re more interested in working out the details of proposals that are, or might soon become, practical proposals for serious considerations.

Historically, there have been a lot of migration wonks (see for instance our list of migration information web resources and pro-immigration web resources), but few of them, even those whose recommendations push in the direction of freer migration, have identified with the cause of radically freer migration, let alone with “open borders” as a term. Partly, this could be because they are genuine moderates. Partly, this is because wonks, focused as they are on what’s immediately feasible, may lose sight of the ultimately desirable North Star. There are examples of wonks who, even as they propose moderate keyhole solutions, appreciate open borders as a potential end goal. Michael Clemens and Lant Pritchett come with a more distinctively academic pedigree, but are still focused on finding ways to get from here to there, and advocating for their particular keyhole solutions with governments, the public, and the intelligentsia. A particularly salient example is Clemens’ work on expanding the H-2 program in the United States to Haiti and trying to make it more easily accessibl to Haitians.

There are also a few wonks at libertarian think tanks who address migration-related issues, and at least in principle support radical open borders, even if the proposals they table for immediate consideration are more gradual. Examples include Alex Nowrasteh of the Cato Institute and Shikha Dalmia of the Reason Foundation. And then there are people like Matthew Yglesias who view open borders as a worthy end goal but offer far more moderate proposals for immediate consideration. Moreover, even those who are naturally philosophers can don a wonk’s hat and come up with practical proposals. Open Borders: The Case blogger Nathan Smith’s DRITI proposal (that he designed before this site came into existence) and co-blogger Michelangelo Landgrave’s suggestion of making use of NAFTA’s labor provision are examples.

Open Borders: The Case has represented the wonkish perspective to a fair degree, though somewhat less so than the philosopher perspective. My co-blogger Michelangelo Landgrave’s recent post suggesting next steps for the open borders movement basically argues that it’s time for the open borders movement to shift focus from the philosopher perspective to the wonk perspective.

But there’s a very important third perspective that is often ignored in this context, and may well be more promising than it looks.

#### Entrepreneurs

Entrepreneurs, like wonks, are focused on practical, immediate changes. However, unlike wonks, the practicality of entrepreneurs is not directed primarily at influencing policy. Entrepreneurs do not assume they have the ear of political decision-makers, or a special seat at the table in political negotiations. Rather, they’re attempting to find ways of attacking problems, starting off as ordinary people (albeit with some financial resources and personal connections).

Philosophers tend to be morally judgmental, telling people and institutions what they should believe and do. Wonks tend to be largely accepting of public opinion and belief systems, and tend to either move it at the margin or attempt to influence government policy holding public opinion fixed. Entrepreneurs try to directly sell stuff to the people, attempting to either change public opinion or ignore it and still provide value to the minority that defies the public. The entrepreneurial perspective hasn’t really been given much importance on Open Borders: The Case, or in policy discussions of migration in general. This makes prima facie sense: the main obstacles to open borders seem like policy obstacles, and policy change seems essential. Apolitical entrepreneurship doesn’t seem like a good fit.

But I’d like to argue that entrepreneurs are more important than that. Consider business like Uber and Airbnb. Both companies (and many others in recent years) began by operating in a legal gray area, but soldiered ahead, despite injunctions and threats from city governments. And at some point, their services had a sufficiently large loyal following from users that city governments couldn’t really shut them down (but at the same time, they got big enough that they couldn’t ignore government threats, so they reached compromise “keyhole solutions”). For concrete examples with Airbnb, see this and this. And Uber co-founder Travis Kalanick’s disregard for legal barriers is part of the reason for the company’s success.

What would the analogous situation be for migration? Illegal immigration similarly represents a challenge to the status quo. Just like Uber has done more to challenge the status quo of highly restrictive taxi medallions than numerous academic papers and think tank reports on the subject, continued illegal immigration has done a lot more to keep the issue of migration restrictions and their effect live than the economic or philosophical literature on the subject could alone. One of the main reasons politicians in the United States even consider passing immigration reform is the large number of illegal immigrants who make the issue salient and hard to sweep under the rug. As my co-blogger Nathan Smith says, “heightening the contradictions” through continued amnesty for illegal immigrants might ultimately be the most feasible path to increasing freedom of migration. There are close parallels between such amnesty and post-facto legalization of the gray area services provided by companies like Uber and Airbnb.

Thus, one could argue that those who facilitate illegal migration directly (as human smugglers or document forgers) or indirectly (by providing legal assistance or employment opportunities to illegal immigrants) are making entrepreneurial moves in the direction of open borders. Such entrepreneurs invoke mixed feelings even among open borders advocates, given that operating a successful business of smuggling people in and forging documents can require engaging in many unethical and even violent activities (partly to avoid border controls, partly because the underground nature of the activity makes legal or open means of recourse difficult). A recent post of mine on snakeheads (human smugglers from China), with a special focus on the recently deceased Sister Ping, went into some detail on this matter. The tactics used by some of these people are several shades worse than Uber’s shady tactics to gain market share.

One doesn’t necessary have to directly help people migrate illegally in order to facilitate illegal migration or use illegal migration to help challenge the status quo. One can also assist illegal immigrants once they have migrated, with jobs, educational opportunities, places to stay, and evading immigration enforcement. These fall within the broad category of civil disobedience, on which we’ve done a few posts before.

That said, it’s not necessary to concentrate solely on breaking the law to make an entrepreneurial impact. Some other, more legally above-board routes of an entrepreneurial nature are described at our migration arbitrage business opportunities page and my philanthropic possibilities blog post. A particularly noteworthy example that I’d love to investigate further is CITA, a nonprofit that helps farmers in the United Stateas connect with people interested in doing farm work in nearby countries such as Mexico, so that they can legally apply for H-2 temporary work visas. There may be similar opportunities in other locations, such as Svalbard, Argentina, the UAE, Singapore, Sweden, and Thailand, where at least nominally there is considerable freedom of migration for people who have a job offer in the receiving country.

#### The social/moral psychologist

A fourth perspective, that is not seen so much from people when they are trying to push the world towards open borders, but that is a very important complement to such pushes, is that of the social or moral psychologist. Such a person strives to understand the world, and the way that humans are behaving in it. Social scientists are part of this spectrum, while moral psychologists such as Jonathan Haidt are in a different part.

#### Wonks versus philosophers: two apparent conclusions and why they’re premature

Some might interpret wonks’ apparent practicality as evidence that wonks are more keen to actually see open borders through than philosophers. This is not necessarily true. Many wonks may be motivated at least partly by their paycheck (not that this means they’re saying things they know to be false, but at minimum their proposing practical solutions doesn’t necessarily mean that they are more serious about migration liberalization).

One can also err by interpreting the divide in the opposite way. A person used to wonk-speak may consider a philosopher a starry-eyed extremist who lacks practical sense. But this isn’t necessarily because the philosopher’s actual practical recommendations (if he/she were required to come up with those) would be more extreme, it’s simply that the philosopher is trying to address a different question. Similarly, for those used to moral philosophy, the wonk’s moderation may seem like wussiness, but that may not reflect objective truth. The wonk/philosopher divide is thus closely related to the moderate/radical divide and the moral/practical divide, but it provides a slightly different focal perspective on these divides.

#### Some hybrids

I think of FWD.us (that we’ve blogged about in the past) as an ill-conceived attempt at an entrepreneur-wonk-philosopher hybrid. Coming from (and attempting to embody) a Silicon Valley culture, FWD.us adopted the machismo of entrepreneurs. It borrowed a little bit from philosophical language, but offered no clear idea of what the underlying moral beliefs were and why. But its proposed path to success was purely wonkish. In light of this confused hybrid, it’s unsurprising that the group hasn’t really been able to achieve much, and that Joe Green, the President and CEO, was ultimately pushed out.

The DREAMer movement offers another interesting kind of hybrid. At one level, DREAMers are entrepreneurs: they’re engaged in openly defying and disobeying an existing system of laws, thereby making the contradictions between those laws and commonsense morality more apparent. At another level, to the extent that they propose, or at least stand behind, policy changes, they are playing the wonk. And to the extent that they directly appeal to people’s conscience about the correct way to treat DREAMers, they are engaging in moral philosophy.

The DREAMer hybrid has ben most successful in the entrepreneurial sense: they were able to acquire sufficient political salience that a DREAM Act has sort-of-been in the works for a while, and in June 2012, Obama passed his de facto DREAM Act called Deferred Action for Childhood Arrivals. The credit goes to DREAMer thought leaders such as Jose Antonio Vargas and his organization Define American, as well as numerous other grassroots organizations that have pushed for the issue. As wonks, the DREAMers have been relatively weak, offering no compelling long-term or robust solution. As philosophers, I think they’ve been even weaker. My co-blogger Michelangelo, himself a DREAMer, takes issue with what he considers flawed DREAMer logic and proposes instead that the DREAMer movement should use the case for open borders as a foundation. Occasional blogger David Bennion has argued that the DREAMer movement, and undocumented organizers at large, could pave the way towards open borders, and cited his own work for the DREAM 30 as an example.

Pro-immigration organizations such as the Immigration Policy Center, not explicitly pro-open borders, offer an interesting hybrid. They’re largely wonkish, but they also engage in and indirectly promote various forms of activism that could be construed as entrepreneurial. Personally, I’ve found their philosophical foundations to be poor. This isn’t necessarily an overwhelming criticism, because they specialize in something else. There is also a somewhat related issue of how their pro-immigration stance could conflict with certain kinds of keyhole solutions, and how they may be reluctant to consider trade-offs that improve greater freedom of migration in exchange for fewer immigrant rights (I discussed this a while back in this post, but there’s a lot more I hope to say on the rights-volume trade-off in future posts, probably referring to the work of Martin Ruhs).

#### Addendum: philosophers, wonks, and entrepreneurs against migration

The philosopher/wonk/entrepreneur distinction also applies to those who oppose some or all migration. This reference page on our site discusses the various philosophical bases for anti-immigration arguments, and includes commonly used argument types such as citizenism, territorialism, and local inequality aversion. Unsurprisingly, I think that the philosophical bases for arguments against freedom of migration seem weak, but that’s what you’d expect from a blogger on Open Borders: The Case.

The anti-open borders wonkish perspective is represented by organizations such as those listed on the anti-immigration web resources page. In the United States, the most respectable (in the view of legislators) of the anti-immigration think tanks is the Center for Immigration Studies.

What about anti-immigration entrepreneurship? The Minutemen and various other vigilante justice and citizen initiatives to identify and report illegal immigrants come to mind. One could also argue that websites like VDARE offer interesting (if confused) philosopher-wonk-entrepreneur hybrids.

# Introduction to Institutional Economics

Whether open borders would really “double world GDP” depends greatly on how it will affect institutions. So let me offer a brief introduction to institutional economics.

There is one problem, however, that must be dealt with first. Institutional economics has become identified with economists like Dani Rodrik and Daron Acemoglu, with papers like “The Colonial Origins of Comparative Development” and “Institutions Rule”  and with books like One Economics, Many Recipes: Globalization, Institutions, and Economic Growth and Why Nations Fail: The Origins of Power, Prosperity, and Poverty. All this is, as I see it, is fairly marginal relative to the real insights that institutional economics has to contribute, and the real task it has to do.

In the past couple of decades, there has been a boom in loose, hasty “institutional” narratives about comparative development, because “institutional” stories provide an interpretation of “total factor productivity”– the residual differences in international income that can’t be explained by factor endowments– that is (a) difficult to refute, because theoretically weak, and (b) somewhat politically correct. Cultural explanations of the wealth and poverty of nations are politically incorrect, though Deirdre McCloskey has ventured one. Racial/biological explanations are even more politically incorrect, though Greg Clark hints at one in A Farewell to Alms. But a book like Why Nations Fail stepped into a kind of vacuum, telling development economics what it wanted to hear. Its ascendancy is a disaster for the field. For lack of space, I’ll outsource my criticisms to Duncan Green and Jeff Sachs, satisfying myself with a few cryptic dicta. Property rights are not “inclusive economic institutions;” on the contrary, they exclude. They also permit “extraction,” e.g., coal mining, harvesting crops. “Inclusive economic institutions” ought to mean communism; to link democracy and capitalism by calling them both “inclusive” makes no sense. Non-democracies are no more “extractive” than democracies, in general. If anything, democracies take more resources from productive people by force, via tax and transfer systems. It’s not in the interest of democratic majorities to establish pro-growth institutions because, as Arrow’s impossibility theorem long since proved, it’s meaningless to speak of the interests of democratic majorities. It often is in the interest of autocrats to establish pro-growth institutions, so as to have more to extract: this is Mancur Olson’s “stationary bandit” argument. No matter how much we wish it were true, and no matter how much jargon we dress it up in, development is not a function of democracy. The thesis that growth depends on “inclusive economic institutions” which “inclusive political institutions” help to establish, while “nations fail” because “extractive political institutions” establish “extractive economic institutions,” has no merit.

(By the way, I’ve lamented the ascendancy of Acemoglu and Robinson before. See also Bryan Caplan’s link, and the comments below it, where I voiced more of my complaints. To my surprise, the Wikipedia page on Why Nations Fail actually links to both my post and Caplan’s! And here’s a post, “Comment on Smith’s Critique of Why Nations Fail,” with an extensive discussion following, in which I participated.)

I want to get back to basics. Here’s the core of institutional economics, which, by the way, has nothing to do with democracy. It starts, like most things in economics, with supply and demand:

Think of that chart as the central corridor of economics, of which every feature is a door into a room containing some subfield. Open the “D” door, and we enter consumer theory, with utility functions, budget constraints, own price and cross price and income elasticities of demand, etc. Open the “S” door, and we enter the theory of the firm, with long-run and short-run total and marginal and average cost, shutdown points and breakeven points, and behind that, isoquants and isocost lines; or, as an adjoining room behind the same door, we can enter industrial organization, with perfect competition and monopolistic competition and monopoly and oligopoly. Open the “P” door, and since prices are measured in money, we step into monetary economics, with price stickiness, and the equation of exchange, and various theories of the short-run trade-off between inflation and unemployment. Let “P” be wages and “Q” be employment and you’ve walked into labor economics. Let “P” be interest rate (or rate of return) and “Q” be quantity of loanable funds (or shares) and you’ve taken your first step in financial economics. Draw a new line below the equilibrium price and call it “world price” and you’ve got yourself an international trade model. Focus on “consumer surplus” and “producer surplus” and you’ve entered welfare economics. Push D down and to the right, or to the left, and call the gap between old D and new D a “tax,” or a “subsidy,” respectively, and you’ve entered public economics.

What about institutional economics? Where’s the door into that?

To enter institutional economics, stop to notice a few of the assumptions that must lurk in the background for the chart to make any sense. In particular:

• Specialization. The model requires that some people have a surplus of the good to sell, while others have a need for the good to be met. Surpluses and unmet needs arise from, or at least are greatly multiplied by, specialization. Because I make X all the time, I’m very good at it; but for the same reason, I don’t have time to make any Y. So I supply X and demand Y. Thus supply and demand are born.
• But not too much specialization, because you need competition too. The basic supply-and-demand model assumes price-taking behavior on the part of both buyers and sellers. Only competition can ensure that. But now suppose that a society of 1,000 people divides its work into 1,000 tasks so that each person is a monopoly provider of the one thing they do. There’s no competition, and no reason for suppliers to be price takers. So markets of the kind shown in the chart, with their nice efficiency properties, occur only somewhere in the middle of a spectrum running from no specialization to perfect specialization.
• Property rights– including complicated contracts. Demanders must have some kind of property rights to the money they bring to market. They must have power to transfer these rights. Likewise, suppliers must have property rights in the goods they bring to market, and power to transfer them. “Property rights” can mean legal property rights, credibly backed up by a government, or customary rights, or private promises, or perhaps, occasionally, even the mere informal trading of favors. Often legal property rights and social trust are both necessary, as when contracts are signed, but cannot be made sufficiently detailed to cover all contingencies.
• Some method of executing transactions, and it shouldn’t be too costly. Institutional economists talk a lot about “transactions costs,” and that sounds really, really BORING. Sure, it does take a bit of time and effort to move money from hand to hand, ring up cash registers, sign checks, mail stuff, etc., but is that really important enough to merit our attention? To this objection, the first answer is that “transactions costs” include things like contracts and search and establishing trust and getting incentives right. Transactions costs in this sense can plausibly be estimated to comprise more than half of US GDP. Second, and even more importantly, transactions costs determine the size of the network of specialization and trade. The transactions that don’t happen are as important as the transactions that do. Everyday example: the typical reader of this post probably does his or her own dishes, even though the value of his or her time is a good deal higher than many people who live nearby. Why? Because it’s too complicated to find them, hire them, communicate the nature and scope of the job to them, move them physically to where the job needs to be done, coordinate their entry and exit, and structure their incentives properly. Heighten entrepreneurial cunning and social trust enough, and you’d press a button, and some underemployed person in your neighborhood would come and do your dishes for you at an easily affordable cost, while you devote yourself to business or pleasure.

So how does institutional economics relate to the supply-and-demand chart that is the heart of economics? Institutions determine what markets exist at all, and who participates in them. Institutions enable– or fail to enable– enough people to do business with each other that all sorts of specialized markets can come into existence, creating wonderful productivity increases and wonderful consumer and producer surplus. And institutions take up the slack when markets can’t operate because specialization has been pursued too far to be compatible with competition.

Even though Adam Smith’s trumpet triumphantly declares, in the title of Chapter 3 of The Wealth of Nations, that “the division of labor is limited by the extent of the market,” economists have a bias against believing it, because it creates fundamental problems for the theory of competitive markets, a bias well-expressed by Becker and Murphy’s paper “The Division of Labor, Coordination Costs, and Knowledge.” When I read this paper for the first time in grad school as part of my dissertation research, I was very annoyed with it, because it missed the point in such a lucid and convincing way. Today, I love the paper for the same reason: it expresses a fallacy that pervades the economics profession, in a form that’s clear enough to be straightforwardly defeasible.

Becker and Murphy start by assuming that society’s tasks are infinitely divisible, that productivity in any given task depends on specific human capital, and that specialization raises productivity by allowing workers to focus their specific human capital acquisition efforts on one narrow task and therefore to acquire more of it. So far, the model points to perfect specialization, i.e., a society in which everyone is the unique specialist in one very narrow task. But then they argue:

Conflict among members grows with the size of a team because members have greater incentives to shirk when they get a smaller share of the output (see, e.g., Holmstrom (1982)). Moreover, efforts to extract rents by “holding-up” other members also grows as the number of members performing complementary tasks increases (see Chari and Jones (1991)). Further, the chances of a breakdown in production due to poor coordination of the tasks and functions performed by different members, or to communication of misleading information among members, also tends to expand as the number of separate specialists grows… Principal-agent conflicts, hold-up problems, and breakdowns in supply and communication all tend to grow as the degree of specialization increases.

They go on to assume that average coordination costs have the functional form C=C(n), dC/dn>0, that is, average coordination costs increase with the size of the “team.” That’s why they think that “sometimes the division of labor is limited by the extent of the market, but more frequently in the modern world it is limited by other forces.” To support this claim empirically, they go on to give many examples of markets where there seem to be quite a few fairly substitutable specialists. The facts they cite would constitute evidence against the theory that “the division of labor is limited by the extent of the market,” if that theory implied that there should be only one monopolistic specialist in most tasks. But it does not, and the literature they cite in support of the concept of “coordination costs” implicitly contains the reasons why the extent of the market can limit the division of labor well before the technical limits of useful specialization have been reached. Most “coordination costs” are related to missing markets, and would be mitigated if the market were large enough.

Start with the “team production” problem of Holmstrom (1982). The output of a team is usually such that the sum of the marginal products of its members is greater than the value of what the team produces. But that’s a complex and jargon-ridden way of saying it. Let me try again. There is a popular saying that “the whole is greater than the sum of the parts.” Now, if that’s true, what happens if you take one part away? The whole is no longer a whole, and its value is greatly reduced. That reduction in value is the “marginal product” of the part, in the sense that it is what that part adds to the value of the whole, provided all the other parts are in place. But, precisely because “the whole is greater than the sum of the parts,” every part has a large “marginal product.” The traditional theory of the firm assumes that each factor is paid its marginal product. If “the whole is greater than the sum of the parts,” then the sum of the marginal products of the parts is greater than the whole, so each factor can’t be paid its marginal product within the team’s budget constraint. And that creates “hold-up problems,” with each team member being in a position to blackmail the rest for a large share of the team product. Such hold-up problems can cause the team’s cooperation to break down, even though its potential product is more than enough to pay team members their opportunity costs.

But now suppose that the market is large enough that every team member is readily replaceable. If you want to interrupt me here, and object that even if outsiders were ex ante replaceable, once the team has begun work, its members gain lots of project-specific knowledge that makes them irreplaceable, then you haven’t meditated deeply enough on the condition that “the market is large enough.” In a large enough market, there will be many other teams working on very similar projects, at a similar stage, so team members remain replaceable throughout the project. In that case, the hold-up problem is easily solved. If any team member demands an undue share, just fire him and poach a similar person from some other team. If the market isn’t quite that large, maybe there’s a moderately similar team member who can be recruited if someone demands too large a share, and that at least mitigates the problem. The larger the market, the less the “coordination costs” associated with moral hazard in teams, relationship-specific or asset-specific or project-specific knowledge and investments, opportunism, hold-up problems, etc. A similar logic applies to production breakdowns due to logistical problems or miscommunication: the larger the market, the easier it will be to buy key spare parts when there’s a bottleneck.

And so, in my dissertation, I proposed the following modification of Becker and Murphy. Rather than C(n), average coordination costs are C(n,N), where n is the size of the team, and N is the size of the market. C(n,N) is an increasing function of n, but a decreasing function of N. Division of labor is limited by the extent of the market, but there isn’t perfect specialization, precisely because as the economy approaches that limit, coordination costs become too high. People under-specialize to avoid getting trapped in monopoly-monopsony relationships where they’re vulnerable to opportunism, hold-ups, coordination failures, etc. To the extent that monopoly-monopsony relationships are inevitable, that’s what firms, those “islands of planning in a market sea,” are for. Where market relationships would be dysfunctional, power relationships arise instead. In a world of perfect information and costless and complete contracts, there would be no need for “firms” or “jobs”: we’d all be free agents, trading goods and services. But because a boss and employee need to do a lot of relationship-specific investment, and the boss has better information about the value of various things the employee could do, the economy is mostly organized as firms and jobs, instead.

The role of “good institutions,” then– at least, as I read it: but the issue is very complex– is not so much to give people political representation and redistribute income, or even to provide public goods, tax or prohibit activities with negative externalities, subsidize activities with positive externalities, and ensure that industries remain competitive. I don’t think it’s even primarily to enforce property rights in an everyday sense– plenty of regimes can do a decent job of preventing shoplifting and trespassing– but rather, to do arcane things like protect minority shareholders, and put Martha Stewart sent to jail on obscure charges that most people can’t understand. Why does it matter to protect minority shareholders? Because then people will hand over their hard-earned money to companies they’ve barely heard of, which is pretty amazing if you think about it. And that allows firms to raise cash for new projects, and for people like Mark Zuckerberg who have done something really useful to become billionaires through an IPO, mitigating the burden of nondiversifiable entrepreneurial risk.

How important are institutions for comparative development? That’s too difficult a question for me to answer with much confidence, but tentatively: I think culture does a lot of the work that is sometimes attributed to “institutions,” but culture and institutions together probably are the main explanations of differences in “total factor productivity.” To see what I mean by “culture,” consider the question: why do US universities really create and disseminate knowledge, when it’s ridiculously difficult to monitor what a professor actually does in the classroom? Because professors are inducted into a culture of learning, to the point where we really care about knowledge and truth and rigor, etc., not (only) for the sake of payday or tenure or even prestige, but for its own sake. We give Ds to terrible students, even if it gets us bad teacher evals, because it’s wrong to tell the world that someone understands economics, who doesn’t. And I’m sure similar forms of professionalism apply in many fields. I’m skeptical, on empirical grounds, of Weber’s “Protestant work ethic” as a theory of comparative development, but I think that kind of explanation, concerning how culture, history, and religion shape individual behavior and values in a way that isn’t reducible to homo economicus, is probably important to the wealth and poverty of nations. In cutting-edge, innovative industries, culture usually has to do the initial work in solving team production problems. Rewards are wildly incommensurate with effort and risk, and perverse incentives are all over the place, but people do the right thing because they love cars, or computers, or whatever. Later, institutions codify and enforce the modes of cooperation that culture discovered, though even in mature industries, norms and values and intrinsic rewards are crucial to sustaining high performance.

Given my perspective on institutional economics (including culture), how would open borders affect the institutions of rich countries? Would they “kill the goose that lays the golden eggs?” Or would poor people enjoy the productivity-enhancing power of sophisticated, wealth-fostering institutions (and cultures), without damaging them?

There’s a farm I know in Maine which sells veggies by an honor system. The veggies are laid out on tables in a shed, with prices, and it’s up to you to put money in their cash box. No one is watching. It’s a very convenient and affordable way to buy fresh vegetables. This business model might collapse under open borders, as a critical mass of immigrants prove less honest than Americans, and shoplifters make honor-system sales unsustainable. Or, it might not. It wouldn’t surprise me much if even more honor-system commerce took place under open borders. But I’d expect less of it. I’d also expect to see more littering and open defecation under open borders. I think the kinds of transactions that are as vulnerable as this to a deterioration in mass behavior are of minor importance to the economy, but I’m not sure.

In big business and high finance, by contrast, I doubt open borders would do any serious damage to culture and institutions, as long as open borders doesn’t mean open voting. These are elite institutions with plenty of gatekeepers, and no one rises high enough to make the rules without being thoroughly shaped by the rules first. Even the average native-born citizen knows little about them and has no power to influence them, except very indirectly at the ballot box. Big business and high finance have a much larger effect on GDP than rural veggie stands, though their relative importance for quality of life is perhaps a good deal less than for GDP.

In general, I think most civil society organizations and trust-based commercial relationships wouldn’t be harmed by open borders because one isn’t dealing with random strangers, but with people self-selected and/or screened in various ways. Universities, for example, only accept students, and hire faculty, who meet their standards. The fact that someone is physically on US soil doesn’t compel a university to do business with them in any way. The exception here is that anti-discrimination law sometimes does compel private and public organizations to deal with people they would prefer to screen out (especially under the deplorable “disparate impact” doctrine which forbids people and companies to statistically discriminate on grounds that are correlated with race, and that courts or bureaucrats should arbitrarily decide are inadmissible).

My main fear for institutions under open borders is that law and public opinion would fail to recognize that private discrimination against immigrants is morally fine and should be legal. If firms, public bureaucracies, and civil society organizations, whose members and leaders obviously have the best knowledge about those organizations’ goals, needs, and workings, were arbitrarily forced to include people they didn’t want by bureaucrats and judges, then they could sustain serious damage, and the killing the goose argument might come into its own.

Open borders might also have a beneficial impact on institutions through international Tiebout competition.