Austrian Economics Applied To Mass Immigration

Mass immigration is a topic of intense controversy in the US today.  Donald Trump used it as an important pillar in all 3 of his election campaigns.  It is also one of the reasons that the Democratic Party has opposed him so vigorously.  The subject has also split the liberty movement in two.  Some libertarians have been at the forefront of conducting economic analyses to study possible economic benefits.  In many ways they follow the teachings of Ludwig Von Mises on the topic.  Afterall, he did write about the benefits of the free flow of labor, and how it improves economic efficiency.  On the opposite end of the spectrum there are libertarians like Hans Herman Hoppe and Lew Rockwell, who have written about the problems that mass immigration presents.

To better understand the "proper libertarian view", it is important assess the topic using Austrian economic principles.  Specifically, Say's Law, the Cantillon Effect, and Ralph Raico's commentary on the welfare-warfare state sheds light that libertarians of all types should consider.

First, it is helpful to analyze the subject through the lens of Say's Law, which in short says that supply precedes demand.  Its conventional expression states that the first step for a market exchange is the production of goods.  The next step is that a person takes the value of the goods he produced to the market (supply) and seeks to exchange those goods for other goods that someone else produced (demand). 

When applying the concept to immigration, today's supply in a nation is based on the goods produced by yesterday's population.  With no immigration, today's demand is also based on yesterday's production.  However, when adding immigration into the equation, today's demand increases proportionately to the amount of new immigrants added while increasing supply to a lesser degree.  The basic result is an increase in prices.  Some of the goods, whose demand is affected the most by increasing population, are things like housing, medicine, education, food, social services, roads, and transportation.  For each of these things, it takes significant time and investment to increase supply, so it is inevitable that continuing mass immigration will lead to continuing noticeable price increases.  The effect is similar to continual money supply inflation, a thing that virtually all libertarians oppose.

The labor market suffers from the same deleterious effect, but in the inverse direction.  Increasing labor supply increases competition for jobs, thereby decreasing the price of labor, all other things being equal.  Wages don't decrease equally for all jobs, of course.  Most immigrants have a relatively low level of skills and education compared to the average American, so they mostly compete with lower-income classes.  Meaning, it harms those most who are already struggling to make ends meet.

That brings the discussion to the Cantillon Effect.  The classical framework says that money supply growth first affects the prices of goods that are purchased first with newly created money.  Along with that, prices increase more for goods for which a greater amount of the new money buys that good.  As an example, if all the new money goes into student loans, then the price of tuition and fees which universities charge will increase before anything else.  In addition, the price increase will be larger compared to other goods and services unrelated to a college education.  New money enters the economy in specific places causing the biggest price effect and then "trickles down" over time affecting other prices in the economy in diminishing amounts.

When applying the same concept to mass immigration, a similar affect emerges.  Immigrants start looking for jobs in specific areas of the economy.  Due to the increase in labor supply there, wages for those specific jobs face downward pressure.  As I said before, most of these jobs are in lower skilled categories decreasing wages for already lower-income workers.  The new immigrants increase demand for consumer goods as well, driving up prices for the types of goods that same demographic tends to purchase.

So far, applying Say's Law and the Cantillon Effect has shown that mass immigration harms those in need of an economic boost the most.  The implications of these economic principles show us that three groups do benefit from mass immigration.  First, employers looking for low skill workers in areas like construction, child care, elder care, maid services, janitorial services, yard care, etc; who want to keep operating costs low. Second, political parties who promote immigration and provide financial assistance to new residents create a new voting bloc for themselves, not to mention the NGOs who are paid to make it all happen.  Last, owners of discount retailers and general merchandising stores receive more demand for their products, facilitating higher prices or maintaining the profitability of low margin items. 

The counter to this analysis is that immigration increases economic activity and efficiency. It even increases GDP! Who can argue with that, right?  Well, shouldn't libertarians be skeptical of using metrics like GDP and other statistics to determine economic reality?  Even if GDP increases, per capita GDP could decrease drastically. Even if an individual immigrant boosts his own salary by moving to a more prosperous country, the Austrian principles discussed so far explain why there should be an overall negative effect.  Some say that mass immigration is good because it increases government tax receipts.  However libertarians don't usually support tax revenue growth because that inevitably leads to a larger and more powerful government.

Thinking further about GDP.  It is no surprise that some studies show that immigration can increase overall production.   Human beings are the ultimate resource as economist Julian Simon stated in his 1981 book "The Ultimate Resource."  More people in a geographic area equals more economic activity in that area every time.  But does that mean that the area is better off overall?  Or does it matter how it affects those who had lived in that area before mass immigration started?  For example, these positive reports don't pass the reductio ad absudum test.  If the goal is to maximize economic activity does it follow that moving 1 million, 5 million, or 10 million people into a city will improve life in that city?  It may increase the production of goods there, but are the original residents better off?  Are overall living conditions in that city better?  Applying Say's Law and the Cantillon Effect to that scenario doesn't paint a pretty picture.

Next, libertarians need to consider how state welfare programs fit into the equation.  As Milton Friedman said, "it's just obvious you can't have free immigration and a welfare state."  Dr. Friedman recognized the problem that if immigrants can enter your country and immediately receive government assistance, then there will be a mass influx that will push government programs to the breaking point.  As usual, even though he was correct, he only saw half the picture. 

Fortunately, Ralph Raico saw the whole thing, writing about the intimate relationship between immigration and welfare in his book the "Struggle For Liberty."  Raico1 states that mass immigration isn't just bad if welfare exists, but explains that it is used to fund the welfare-warfare state that we all loathe so much.  The issue isn't their coexistence, but that the one feeds the other.  Within current US demographic trends, if you get rid of mass immigration, then welfare programs will have to go away too.  One of his main examples is Social Security, which needs a growing populace to support payments to the older generation.  As the state launches more wars and offers more welfare programs, their appetite for new residents grows.  If we libertarians want to see an end to entitlement spending, we will have to starve it of resources, and to do that we need to understand Raico's observations and respond accordingly.   Some practical ways to do this are to stop funding NGOs that facilitate immigration, close the borders, remove those here illegally, and reduce the number of Visas available.

Once again, Austrian economics is a reliable tool for libertarians to use to better understand the critical issues of our day.  Applying Say's Law and the Cantillon Effect reveals that mass immigration causes negative economic outcomes for Americans that are already in tough material circumstances.  Additionally, Ralph Raico's history of political thought, The Struggle For Liberty, exposes just how necessary it is for building the U.S. state apparatus, while helping those in the ruling class solidify their positions of power and extract more value out of our society.

1. Ralph Raico, "Chapter 10: Classical Liberalism and the Welfare-Warfare State" in The Struggle for Liberty, ed. Ryan McMaken (Auburn, Alambama: Mises Institute, 2025), 237-258.