Immigration, Migration, and Imbalances

The current fracas with regard to immigration through the southern border of the United States will die down in time, and another issue will replace it in the headlines, in breaking news announcements, in round-table discussions. There will not be a resolution any time soon. But what is important is to understand the underlying issues involved. The context is what we need to get a better idea of how to judge necessarily ephemeral events.

The first thing to understand is that at bottom, the motivation for these people movements is economic. For this reason, we can start our analysis by eliminating the category of refugees seeking asylum. The latter is not a function of economics but of justice and compassion. While this is important, it is dwarfed by the scale of economics-inspired movement.

We also need to distinguish immigration and migration. In the sense I intend, immigration concerns people going to the country of destination with the mindset of assimilating into that country. For example, hitherto when immigrants moved to the United States, they moved with the intention of becoming Americans, of leaving their home countries behind and entering into the civic compact that has defined the United States from its inception. Migration, on the other hand, is no so much concerned with assimilation, but rather with the maintenance of the original culture and religion in the midst of the new environment – the establishment of enclaves within a foreign culture, that while engaged, is not entirely received, and indeed is held at arm’s length. In this sense, migration is a form of colonialism. And indeed, contemporary migrations are looked upon, approvingly or otherwise, as a form of retribution for the centuries of colonial relations the West imposed upon the rest of the world: these foreign peoples are now returning the favor, colonizing, and extracting wealth from, the host nations.

In the current climate, and in this analysis, it is migration with which we are concerned.

Some economic principles to guide the discussion

Migration, then, is an aspect of a global confluence of factors mainly economic in character.

Certain basic economic concepts have to be grasped in order to get a proper view of this phenomenon.

First: the economy, whether viewed locally, nationally, or globally, is a circular flow of the production and consumption of goods and services. This is a reflection of Say’s Law: supply creates its own demand. Say’s Law, which was most effectively employed in the work of Joseph Schumpeter, from whom the phrase “circular flow” comes, helps us understand how economies function.

The circular flow of goods and services concerns is the so-called real economy.

Second: not only is there a circular flow of goods and services, there is also a circular flow of payment, credit and debt, which is generated together with the other circular flow. It is both the result of that flow, and affects that flow. This is the so-called financial economy.

The two impinge on each other and determine each other. They cannot be viewed in isolation but as two parts of the same coin. The trouble with much of modern economics is that it does not do that, but treats them in abstract separation.

These circular flows are firstly local, comprising a local economy. A larger economy is a composite of smaller economies, and so comprises a confluence of circular flows. For this reason the economy, especially in other languages like French, is also called the conjuncture. The broader economy is a conjuncture of smaller economies operating more or less in sync with each other.

The component sub-economies do not move in lockstep. Rather, they develop at varying paces, some experiencing boom periods, others bust periods, others more or less stagnating.

What happens, then, is that factors of production flow towards areas of greater productivity: that is where the jobs are, that is, where capital receives a better return.

Borders and exchange rates

Within a political unit, these flows can occur unhindered. Between political units, they are obstructed by borders. These borders are the product of law. Laws set up obstructions to the crossing of boundaries. Furthermore, currencies, which are the product of law, form hidden barriers. Because they fluctuate, they make it more difficult to judge relative values, such as wages, keeping investors and workers from making the move, especially if the move looks to be from a more valuable to a less valuable currency. But beyond all of this, language and culture form boundaries, so that even in the absence of legal or monetary hindrances, people are hindered from moving because of the difficulty in adapting to foreign conditions.

So how do adjustments occur between economies separated by boundaries? By adjustments in the exchange rate of the countries’ currencies, so that areas with expanding economic activity see their currencies appreciate, while those with relatively contracting activity see their currencies depreciate. This is reflected in the current account, which is the sum of a country’s economic activity as far as production of goods and services is concerned, as it relates to other countries. The current account is in surplus when exports exceed imports, and vice versa. And a current account surplus should result in an appreciating currency.

In a perfect world, this mechanism would proceed unhindered, and the balance between nations would be maintained, with current account surpluses and deficits continually issuing forth into currency shifts that automatically lead to their reversals. Outperforming countries would have more money to buy foreign goods and services, and underperforming countries would have relatively cheaper goods and services to offer. This would result in a reversal of flows, with the more expensive countries importing more (and producing less) and the less expensive countries exporting more (and consuming less). Wages would increase in step with the currency, allowing them to import more. This is not a static condition. Currency exchange rates would continue to shift, balancing flows through the fluctuations and reversals of economic conditions over time.

Short-circuiting the feedback mechanism

But here is where problems arise. Particular interests are favored at any particular time, on both sides of the equation. On the side of the exporting country, there is the interest of the export industry, while on the side of the importing country there is the interest of consumers. Or at least, consumers can be led to believe that it is in their interest to have cheap goods available, although there is a hidden cost to this, which we will discuss shortly.

This is the situation in our current regime of globalism. Cheap-production countries are looking to lock themselves into exchange-rate and regulatory conditions favorable to their continued exports, even though such a regime is unfavorable to their own domestic economies. In those countries, domestic consumers face high prices on imports and production geared to foreign markets; workers see their wages artificially suppressed, rather than automatically rising vis-à-vis foreign competitors, as they would if currency exchange rates moved in step.

The gainers in such a situation are mainly multinational corporations which have relocated to low-wage countries and use their former home markets as dumping grounds for cheaper production. Other gainers are governments in the exporting countries, which book revenues from those corporations and their exports. Controlling elites on both sides of the equation benefit financially and politically.

The result in the importing countries is cheaper imports, but likewise a drain of production capacity, leading to an economy heavy on service-sector jobs.

Is such an economy – one lacking in production capacity – sustainable? It would seem that, given the demands and requirements of modern welfare states and the generation of revenues they require, that such an economy is not sustainable – for ultimately it is production capacity that generates wealth, while services only redistribute pre-existing wealth. Not to mention the utterly redistributionist nature of entitlement and benefit payments, which generate no wealth whatsoever, and in fact entail a form of friction which erodes wealth.

The stubborn expansion of imbalances

In the event, such a regime generates what have come to be known as imbalances. And a lot of effort is expended to counter those imbalances without resolving them. For to resolve them would lead to favored parties – e.g., multinational corporations, exporting countries – losing their lucrative advantages.

One of the important consequences is reflected in money and banking. The regime of fixed or pegged exchange rates is realized by keeping currency exchange from taking place. Normally, cross-border trade is paralleled by currency exchange, which leads to shifts in exchange rates. But to keep those exchange rates stable, currency exchange has to be headed off at the pass, as it were. This is accomplished through what is known as “sterilization.” Central banks act to keep foreign currency earnings from being released into the domestic economy. This holds down purchasing power and so eases pressure on the domestic currency to appreciate against the foreign currency. But this also leads to bloat in the currency of the importing country. Under our current regime, in which the US dollar serves as the reserve currency for international trade – and in which the US, not coincidentally, serves as the “consumer of last resort”—this has led to the buildup of massive amounts of liquidity which circulate aimlessly on financial markets without touching ground in real markets. This leads to bubbles in markets that traditionally serve as havens for excess liquidity, such as real estate markets and stock markets. Such asset “bubbles,” when they burst, lead to massive failures in the banking system, as occurred in 2008–2009.

Migration as a rectification of imbalances

This is one way in which imbalances are generated, and how they, by hook or by crook, get resolved. But capital flows comprise only one of the factors that resolve cross-border imbalances. The other mobile factor of production – labor – will likewise be drawn by the magnetic attraction of richer countries, especially where 1) those economies are lopsided toward service jobs, which cannot be exported and therefore draw low-wage labor to them rather than going to where low-wage labor is, like manufacturing capacity can; and 2) those economies maintain more or less lavish welfare and benefit regimes which ipso facto exert an attraction on citizens of less prosperous countries.

Therefore, in a world of fixed or pegged exchange rates – or especially, in the case of the European Union, a single currency – imbalances are rectified globally in the same way they are internally within a domestic economy. For the effect of the current globalist regime is to turn the entire world economy into a single domestic economy.

It would seem that this is a driving force behind current policy decisions being taken by Western nations, both in North America and in Europe. In the United States, border control lapsed and the government introduced a range of measures to accommodate inward migration, rather than making an attempt to stifle it. This is a tacit acknowledgement that a regime of floating exchange rates, the counterpart of nations able exert to effective sovereignty, has been set aside for all practical purposes, and that the great dream of cosmopolitan liberals everywhere is at hand: a global regime of universal jurisdiction, of a police rather than a military force, of a global welfare state in which ostensibly universal human rights move from the category of “ostensible” to “actual,” and the entire globe is harnessed to a redistributionist regime in which equal rights for all becomes a reality, regardless of cost.

In the meantime, what this regime of more-or-less fixed exchange rates and open borders spells is mass migration. For able-bodied labor will move if it can move, and given the technical transportational possibilities that increasingly have become available to low-wage populations everywhere, this movement will only accelerate. This is even more the case where populations are stuck not only in low-wage situations but in crime-ridden or even war-ridden, dysfunctional countries. Muslim populations in particular seem to be caught inordinately in such situations. Not surprisingly, Muslim populations are on the move.

The problem with this solution

But this points up the profound danger involved in these movements, and the misgivings they give rise to among “receiving” populations. For we are not dealing here with interchangeable parts; we are dealing with human beings, with cultures, mores, religions, in addition to whatever wealth or lack of it, health or lack of it, they may already have. Add to this the migration-orientation as opposed to immigration-orientation of these peoples, and the problem becomes all too apparent.

With migration, nationhood itself becomes problematic; instead of these groups being encouraged to assimilate, they become treated as victims of nationalistic jingoism, and encouraged to become integral parts of the grievance coalition. Patriotism really does come to be seen as the last refuge of the scoundrel, at least for the idealist. Cosmopolitanism becomes de rigueur.

But that cosmopolitanism is only a façade covering over deep divisions. For example, to what degree is Islam compatible with liberal democracy? If Muslims ever were to become a majority, would they maintain Western liberal institutions, or would they impose the institutions peculiar to Islamic countries, such as Sharia law? These are questions that not only are interesting academic exercises, but which practice will answer unequivocally, sooner or later, and of which real people will feel the effects.

Another such question: to what degree can countries like the United States sustain influxes of low-wage labor for service jobs that already are under pressure from unemployed or underemployed citizens? How can revenues be generated to counter the massive amount of pressure being put on the health, education, and welfare systems these countries have built up over the years, especially given their aging populations? Is it not a form of collective suicide to allow these migrations to take place in the hope that the gravy train will continue to flow? For looked at purely in terms of economics, these flows look to be unsustainable.

The end game?

Perhaps that is what our contemporary global elites are after. The very destabilization of nations, the undermining of national sovereignty, only plays into the hands of those desiring to establish a global regime to replace, or at least gain dominance over, sovereign nations. Nationhood itself is at stake. Politicians seem to have placed the dream of universal jurisdiction and the realization of every human being’s inalienable rights to food, accommodation, livelihood, education, health care, and the rest of it, above the exigencies of national survival. Apparently, they will pick up the pieces left in the aftermath of conclusive national failure.

Indeed, this would seem to be end game of national leaders favoring and preferring foreign interests to those of their own nations (e.g., Barack Obama, Angela Merkel). They seem to be auditioning for leadership in the regime which is yet to come, a regime to supplement or even replace our current framework of internationalist institutions such as the United Nations. Will it ever come to that? Yet another of those questions that practice will answer. But it is looking increasingly likely.

But there is an alternative. The venerable tradition of national sovereignty, of laws and currencies which are the expression of that sovereignty, of national populations that determine their own destinies rather than having them determined by unaccountable elites at transnational levels – the infrastructure for this is still there. And the top priority to this end, quite simply, is floating exchange rates and maintenance of the institutions protective of national sovereignty. This is not rocket science. It is a simple choice. Nationhood, or globalism?

The Mystery of Capital in Context

Given the rancorous debate unleashed by the UK electorate’s decision to depart the European Union – in particular, regarding the damage to the UK economy that independence might bring – it seems wise to re-examine the foundations of economic prosperity and its relationship to political and legal factors. I do so by examining Hernando de Soto’s seminal book, The Mystery of Capital, which goes to the heart of the relationship between political framework, legal framework, and economic development.


The “mystery of capital” is the intriguing title of one of the most important books of the new millennium. Written by the Peruvian economist Hernando de Soto, it breaks with the tradition of dealing with capitalism as a system established of, by, and for the rich, by looking at it from the bottom up: from the lowest levels of society. De Soto finds capitalism even at that level, albeit in a stage of dormancy, as it were. His treatise is intended to help us understand that capitalism is nothing esoteric – despite its being a “mystery” – but rather something down to earth, active in the lowest levels of society, and only waiting for a proper legal and political framework to become an equitable system, in the service of all, not just the well-to-do.

De Soto first made a name for himself with his path-breaking work in Peru, which culminated in the best-selling book The Other Path. In order to show an alternative route to a better society, De Soto developed a unique investigative method. At the time – the 1980s – the better society was being promised by radical revolutionary groups. In Peru, such a group was El Sendero Luminoso, the “Shining Path” – the path to the enlightened society, the workers’ paradise. Officially, this was the Communist Party of Peru, and throughout the 1980s it engaged in violent revolution. De Soto proposed El Otro Sendero, the “other path,” which would render the revolution irrelevant by integrating the real-world economies of the poor within an all-embracing economic framework that left no one out.

What De Soto and his colleagues at the Institute for Liberty and Democracy had discovered was that, at the poorest and most basic levels of society, a vibrant economy was already in existence. It functioned in spite of, rather than because of, the formal institutional and legal structures provided by the state. For in Third-World countries such as Peru, there was not one economy but two: the formal economy, the economy of the wealthy and middle class, connected with the rest of the world; and the informal economy, the economy of the poor, the “off the books” economy, comprising the residual and peripheral denizens who happened to make up the vast majority of the nation. Essentially, the legal and political institutions functioned within and for the benefit of the formal economy, while the informal economy ran on its own, ignored and neglected by the powers that be, kept by the phalanx of rules and regulations from ever graduating from the shadows into the sunlight of the economy proper.

De Soto’s book highlighted this situation and the potential that it held, if it could be harnessed, both for the benefit of the poor and for the nation as a whole. Mainly, the regime of bloated regulation and official corruption needed to be exchanged for the rule of law, specifically the institutions of property and contract. If this would occur, the chains would come off of the poor and they could become full-fledged participants in a functional rather than dysfunctional social order.

De Soto’s second book, The Mystery of Capital, is the culmination of the work done in the wake of, and building on the foundations laid in, The Other Path. It is the product of the transfer of the method pioneered in Peru into many other Third World countries facing similar problems. De Soto took his show on the road, making the Institute for Liberty and Democracy into a globally active entity.

Unlike The Other Path, however, The Mystery of Capital is more than an exposition of the findings of investigative field work. In fact, it transcends the empirical method altogether: it sets forth a philosophical outworking that is both result and foundation of those empirical findings.

In making this leap from practice to theory, De Soto had penned a most important book on the subject. He was enabled to do this precisely because of the empirical basis: the book went beyond economic theory to the real world in which economic practice is embedded, a world that economic theory studiously ignores; it takes into account the real-world framework within which economies function.

The recognition of the two-tiered economy led De Soto to perceive the crucial importance of the legal system. For in his findings, it was the legal system that made the difference between the two economies. This led him to explore virtually virgin territory: the relationship between the legal system and the economy has been largely ignored, except for certain specialty (and rather idiosyncratic) disciplines such as institutional economics, “new” institutional economics, and law and economics. While these latter disciplines have not been entirely fruitless, they have not helped to rework economic theory the way that De Soto had done in his book.

De Soto’s reworking of economic theory starts from a rather crucial distinction that is well known to legal philosophers, the distinction between possession and property. This is a staple of the Western legal tradition (both civil and common). Essentially, the difference between possession and property is physical versus mental – possession is physical holding, while property is an entitlement that stays in force regardless of whether the owner is in physical possession or not. And this distinction depends on a functioning legal order that enforces its arrangements. With possession, enforcement is essentially left to the possessor; with property, it is maintained by a separate entity charged with law enforcement, and hence is not dependent upon the physical strength of the owner in order to enforce possession.

With property arrangements, then, the relations of people and things are elevated to a higher plane than arrangements of pure possession. And they provide for higher-order exploitation of resources than simple possession does. For one thing, property rights can be split up and farmed out any number of ways. For another, property allows for encumbrance in credit contracts, whereby the property item serves as collateral. Without changing its physical status, the encumbered asset engenders a new set of economic advantages. The owner can borrow money against it; and, as Steuart showed back in the 18th century and Schumpeter in the 20th, this is essentially the way in which, in the modern world, money comes into being. At least, in a banking- as opposed to a coinage- or scrip-based system. Credit and debt are the source of money issue. As any bank balance sheet will show you, all money issued has as its counterpart an encumbered economic asset.

In his book, De Soto never explicitly refers to the legal doctrine of possession vis-à-vis property, but despite that, it underlies his entire exposition. He argues that it is the legal system that enables possessions to become property, thus assets, and assets to become capital – resources capable of generating new productivity and income. “Like electrical energy, capital will not be generated if the single key facility that produces and fixes it is not in place. Just as a lake needs a hydroelectric plant to produce usable energy, assets need a formal property system to produce significant surplus value. Without formal property to extract their economic potential and convert it into a form that can be easily transported and controlled, the assets of developing and former communist countries are like water in a lake high in the Andes – an untapped stock of potential energy.”[1]

De Soto’s argument is crucially important – as far as it goes. But it runs into problems when he goes further and highlights a single aspect of the legal system, to which he attributes excessive importance. This in turn causes him to lose sight of other aspects, and indeed, the bigger picture.

De Soto emphasizes the role of record-keeping as the determining factor in creating a cognitive layer overlaying the physical layer of tangible things. Records, titles, data storage and retrieval, allow the things that otherwise exist in isolation to be integrated together into a collective mind map, by which they become a synergistic whole that is greater than the sum of the parts. For De Soto, this is the crucial element of a system of property rights, which enables it to generate productive economic assets – capital.

But this is to overplay his hand. It is not so much record-keeping within a framework of law, but the framework of law itself that is the important thing. The key is the establishment of common law: a law that is valid across the board across the entire territory, which holds for everyone and which establishes at its core, property rights and freedom of contract, uniformly and equally enforced. Historically, this kind of common law was established early on in England, where the king’s writ came to run everywhere. Which is why England became the common-law country par excellence.[2]

Such an establishment of common law, in turn, depends upon the consolidation of sovereignty.

Sovereignty is the power by which the rule of law is established. It is the prerequisite of a functioning legal order. Sovereignty is the power to establish and confirm shared, social value. It does this through legislation and adjudication, establishing laws as standards by which the social order is ruled – the rule of law. These, then, are values, which are universally valid and binding.[3]

But there is more to the establishment of value than this. Valuation has, of course, an economic dimension as well as a juridical one. But does the legal system generate economic value? Yes it does, through the utilization of property and contract. And here we have the intangible, mental, symbolic dimension of the economy that De Soto intuits, but does not quite elucidate, given his focus on record-keeping. Property and contract generate value by the process of credit and debt. When property is harnessed as collateral in a credit contract, it is valued; and this valuation is expressed in the issuance of a monetary equivalent. A deposit is established at the bank, in the equivalent of the loan. Borrowing a metaphor from the days of minting coinage, Steuart called this the “melting down” of property into “symbolical” money. Hence, the regime of property and contract participate in the process of valuation in a very critical way. And out of this valuation comes capitalization – capital.

Now then, the context of this valuation and process issuing forth ultimately in that mysterious entity, capital, is a common legal order, the product of a consolidated and viable locus of sovereignty. Sovereignty, then, enables this whole process of capitalization to take place. What is the locus of sovereignty? Following the German Calvinist statesman and political philosopher, Johannes Althusius, we can answer unambiguously, the nation.[4]

The Industrial Revolution, the “take-off,” as W.W. Rostow put it, did not come about in a vacuum. It came about in nations in which sovereignty had been consolidated; and those nations in which sovereignty had not been consolidated, did not experience it. Nationhood and sovereignty go together. Like a lens out of focus, sovereignty is weak where it does not shine through the prism of nationhood. And, where sovereignty is weak, there also a domestic economy does not materialize; as a result, conditions are rife for an exploitative, colonial or neo-colonial framework. Wallerstein’s center-periphery framework then looms large. None of that is necessary for economic growth: in fact, it only benefits particular interests, at the expense of broad-based, populace-elevating economic growth.

So then, it is sovereignty refracted through nation-states that has enabled the genesis of the capital which De Soto seeks to demystify. Summarizing this state of affairs, I wrote: “Through the institutions of property and contract, credit and debt, the asset base in man (human capital) and through man (tangible and intangible property) becomes capitalized, generating a money supply which, when properly maintained, is the faithful representation of that asset base, no more and no less. The nations of the world have no need of a Wizard of Oz to grant them prosperity. It is in their hands to do so, if they would only recognize it.”[5] That is the mystery of capital explained. In its fullness, only nations can bring it off. Neither inchoate peoples, nor empires, ever have, or ever will.


[1] Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000), p. 48.

[2] For more on this point see my book Common Law & Natural Rights (Aalten: WordBridge, 2009), pp. 68ff.

[3] For more on this point see my book Common-Law Conservatism: An Exercise in Paradigm-Shifting (Aalten: WordBridge, 2007), ch. 1.

[4] For more on this point see this previous post.

[5] Follow the Money, p. 190.