Why is capital so much freer than labour?

This article was written for Rethinking Economics

It is often said that “history is written by the victors”, yet those who are winning also get to write the rules of the present. In the rules of international trade drawn up by rich countries and, through a combination of carrots and sticks, forced onto poor and middle-income countries, it is very hard to restrict the movement of capital. In short, international institutions like the IMF, World Bank and WTO make it very difficult for a country like Nigeria to prevent, say, a British company from investing in it.

The neoliberal consensus decreed that only by allowing countries and companies freedom to invest as they please would economically efficient outcomes be achieved. To prevent them doing so would be to prevent the market from operating freely, which would be both morally and pragmatically wrong. However, as Chang says in 23 Things They Don’t Tell You About Capitalism, “there is no such thing as a free market”. Whenever we say “free market” there are always constraints. Even in Hong Kong, ranked 1st in the world for economic freedom, someone wishing to sell marijuana or counterfeit iPhones would quite quickly begin to feel things are less “free” than they first seemed.

Another area of economic activity which is tightly controlled is labour. While rich countries are extremely keen to increase the freedom of labour in some senses – like reducing the power of trade unions in factories producing cheap garments – they are much less willing to open up their labour markets to migrant workers. In contrast to Nigeria’s inability to restrict British capital, the UK is able to place huge restrictions on Nigerian labour and chooses to do so.

Now, there are good reasons to restrict the movement of labour, to a degree. Social welfare programs – seen by many as vital for a functioning society – would quickly become unfeasible if the entire world were allowed to use them. Local cultures would likely suffer if overwhelming numbers of newcomers arrived, creating potential hostilities between the newcomers and original populations. These, among others, are compelling reasons not to allow free migration.

There are also strong reasons – beyond naked patriotism and self-interest of local elites – to restrict free movement of capital. Just as an influx of foreign labour can be problematic, an influx of foreign capital can be too. It can often be much easier for governments to work with domestic companies than foreign ones. People are not the cold-hearted rational actors that some economists assume them to be – many CEOs, despite their interest in profit, will still feel a certain loyalty to the society they are from. Even if they do not, they are likely to have more of an interest in the general health of their society for purely selfish reasons than foreign managers. This means that a certain amount of arm-twisting and cajoling in the national interest is likely to be possible – much more so than with a foreign firm.

This sets up a strange dichotomy where “free markets” trumps all as an argument when forcing through rules which benefit the citizens of rich nations, yet not for citizens of poor nations who would benefit greatly from free migration. In fact, there is scant empirical evidence that free movement of capital is, as the Western institutions continue to insist, good for poor nations. Two of the 20th century’s outstanding economic growth stories – Japan and South Korea – were achieved while directly contradicting this doctrine.

I am arguing neither for free migration nor complete restrictions on FDI. However, it is grossly hypocritical of the West to force rules onto poorer nations using argumentation that they themselves do not accept all of the time. We must rethink economics to question why it is that arguments we accept in one domain, we outright reject in another.

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