Most bad economics comes down to one mistake, repeated in different disguises. People assume the economic pie is fixed. If someone gains, someone else must lose. This is the zero-sum fallacy, and it is older than economics itself.

 It is not hard to see where the instinct comes from. For most of human history, wealth really was fixed, at least in the short run. A tribe hunting and gathering on a fixed territory faced a limited supply of game and berries. If one family took more, another family took less. Zero-sum thinking was not a mistake in that world. It was an accurate description of it. 

The trouble is that the same instinct survived the arrival of trade, production, and specialization, none of which existed on the savannah. Modern economies are not fixed pies. They are pies that grow when people trade, invest, and innovate. But the old intuition still runs deep, and it surfaces again and again in economic thinking, almost always wrong. 

Take exchange itself. Many people believe that in any deal there must be a winner and a loser. If you buy a coat for £50, the assumption runs, either you overpaid or the seller undersold. In fact both sides gain, or the trade would not happen. You value the coat more than your £50, and the seller values the £50 more than the coat. Nobody loses. Two people become better off, and no third party is worse off either.

This is not a subtle point, but it contradicts something people feel to be true, so it is forgotten the moment the subject turns to trade between nations, or between rich and poor, or between borrower and lender.

Trade between countries is the clearest case. The old mercantilist idea, that a country grows rich by selling more than it buys, has been dead in economic theory for two centuries and alive in political rhetoric the whole time. It rests on the same fallacy as the coat example, scaled up. 

If a British exporter sells machinery to a German buyer, both are richer for it. The transaction does not make Britain rich and Germany poor, any more than a bakery selling bread makes its customers poor. Yet the language of trade deficits and surpluses still treats exports as wins and imports as losses, as though a country's shop till were the measure of its wealth rather than what its people actually get to consume.

The same fallacy explains why speculators and middlemen are so often despised. The claim is that they add nothing, that they merely take a cut ofvalue created by others. But speculators who buy low and sell high are performing a service. They are moving goods from where they are less wanted to where they are more wanted, or from a time of surplus to a time of shortage.

A middleman who connects a producer in one country with a customer in another is solving a real problem, namely that the producer and the customer would otherwise never have found each other. Strip out the middleman and the trade very often does not happen at all. Nobody gains, least of all the producer.

Interest works the same way, and provokes the same reaction.

A lender who charges interest is often accused of getting money for nothing. But the lender is not getting nothing. He is giving up the use of his money for a period, at real cost to himself, and interest is his compensation for that cost and for the risk that he will not be repaid. The borrower, meanwhile, gets to use money now that he would otherwise have had to wait years to save. Both sides gain from the arrangement, which is why they enter into it voluntarily. 

Taxation debates carry a milder version of the same error. It is often assumed that when a government raises the tax rate, it simply collects a larger share of a fixed amount of economic activity. In reality, higher rates change behaviour. Investment is deferred, activity moves elsewhere, and reported income falls. The size of the pie is not fixed while government decides how to slice it. The slicing itself changes the size. 

None of this is difficult economics. It is mostly a matter of remembering that trade is voluntary, and that people do not enter into deals which make them worse off. But this simple fact keeps losing out to an older and more compelling one, the sense, wired into us over tens of thousands of years of a genuinely fixed world, that somebody's gain must be somebody else's loss.

Modern economies does not work that way, and has not for a very long time. Prosperity comes from exchange, not despite it. The countries and individuals who understand this outperform those who do not, and they have been doing so since long before economics had a name.

Madsen Pirie

Each Labor Day since  2021, I have written posts explaining how breaking down barriers to labor mobility can help many millions of workers around the world. The main points everything  last year's post are just as relevant today. So I am reprinting it with some updates and modifications, many of them related to the awful deterioration in immigration policy over the last year:

Today is Labor Day. As usual, there is much discussion of what can be done to help workers. But few focus on the one type of reform that is likely to help more poor and disadvantaged workers than virtually anything else: increasing labor mobility. In the United States and around the world, far too many workers are trapped in places where it is difficult or impossible for them to ever escape poverty. They could vastly improve their lot if allowed to "vote with their feet" by moving to locations where there are better job opportunities. That would also be an enormous boon to the rest of society.

Internationally, the biggest barriers condemning millions to lives of poverty and oppression are immigration restrictions. Economists estimate that eliminating legal barriers to migration throughout the world would roughly double world GDP - in other words, making the world twice as productive as it is now. A person who has the misfortune of being born in Cuba or Venezuela, Zimbabwe or Afghanistan, is likely condemned to lifelong poverty, no matter how talented or hardworking he or she may be. If they are allowed to move to a freer society with better economic institutions, they can almost immediately double or triple their income and productivity. And that doesn't consider the possibility of improving job skills, which is also likely to be more feasible in their new home than in their country of origin.

The vast new wealth created by breaking down migration barriers would obviously benefit migrants themselves. But it also creates enormous advantages for receiving-country natives, as well. They benefit from cheaper and better products, increased innovation, and the establishment of new businesses (which immigrants create at higher rates than natives). Immigrants also contribute disproportionately to scientific and medical innovation, including vaccines and other medical treatments that have already saved millions of lives around the world.

The Trump Administration's massive assault on immigration of virtually every kind is predictably harming both migrants and native-born Americans, condemning hundreds of thousands of the former to a lifetime of poverty and oppression, and denying the latter the growth and innovation immigration facilitates. Most recently, thanks in part to a badly flawed Supreme Court decision, it has depriving hundreds of thousands of Haitians and others of legal status, thereby gravely harming both these migrants and the many US industries that depend on them.

Similar, though somewhat less extreme, barriers to labor mobility also harm workers within the United States. Exclusionary zoning prevents many millions of Americans - particularly the poor and working class - from moving to areas where they could find better job opportunities and thereby increase their wages and standard of living. Occupational licensing further exacerbates the problem, by making it difficult for workers in many industries to move from one state to another.

Breaking down barriers to labor mobility is an oft-ignored common interest of poor minorities (most of whom are Democrats), and the increasingly Republican white working class. Both groups could benefit from increased opportunity to move to places where there are more and better jobs and educational opportunities available. Much can be done to curb these problems through a combination of political action, and litigation under both  federal and state constitutional law.

As with lowering immigration restrictions, breaking down domestic barriers to labor mobility would create enormous benefits for society as a whole, as well as the migrants themselves. Economists estimate that cutting back on exclusionary zoning would greatly increase economic growth. Like international migrants, domestic ones can be more productive and innovative if given the opportunity to move to places where they can make better use of their talents.

Many proposals to help workers have a zero-sum quality. They involve attempts to forcibly redistribute wealth from employers, investors, consumers, or some combination of all three. Given that virtually all workers are also consumers, and many also have investments (e.g. - through their retirement accounts), zero-sum policies that help them in one capacity often harm them in another. Breaking down barriers to labor mobility, by contrast, is a positive-sum game that creates massive benefits for both workers and society as a whole; it similarly benefits both migrants and natives.

The same is true of breaking down barriers to the mobility of goods. Tariffs and other trade restrictions harm many more workers than they benefit, by increasing prices (which disproportionately hurt lower-income workers), and increasing the cost of inputs used by domestic industries (leading to lower employment levels and wages). In February, the Supreme Court struck down Trump's massive and unconstitutional IEEPA tariffs in a case I helped litigate. But the administration has sought to replace them with equally illegal and harmful tariffs enacted under various pretext, such as combating "forced labor" or addressing "balance of payment deficits." Litigation on these policies is ongoing.

Some on the left point out that, if investors are allowed to move capital freely, workers should be equally free to move, as well. It is indeed true that, thanks to government policies restricting labor mobility,  investment capital is generally more mobile than labor. It is also true that the restrictions on labor mobility are deeply unjust. In many cases, they trap people in poverty simply because of arbitrary circumstances of birth, much as racial segregation and feudalism once did. The inequality between labor and capital, and the parallels with segregation and feudalism should lead progressives to put a higher priority on increasing labor mobility.

At the same time, it is worth recognizing that investors and employers, as a class, are likely to benefit from increased labor mobility, too. Increased productivity and innovation create new investment opportunities. The biggest enemies of both workers and capitalists are not each other, but the combination of nativists and NIMBYs who erect barriers to freedom of movement, thereby needlessly impoverishing labor and capital alike. Despite conventional wisdom to the contrary, even current homeowners often have much to gain from curbing exclusionary zoning policies that block the construction of housing needed by workers seeking to move to the region.

On the right, conservatives who value meritocracy and reject racial and ethnic preferences, would do well to recognize that few policies are so anti-meritocratic as barriers to mobility. The case for ending them also has much in common with the case for color-blind government policies, more generally. A number of other conservative values also reinforce the case for curbing both domestic NIMBYism and immigration restrictions. Right-wingers would also do well to recognize that most workers benefit from free trade, and are harmed by protectionism.

There are those who argue against increasing labor mobility, either on the grounds that existing communities have an inherent right to exclude newcomers, or because allowing them to come would have various negative side-effects. I address these types of arguments here, and in much greater detail in Chapters 5 and 6 of my book Free to Move: Foot Voting, Migration, and Political Freedom. As I explain in those earlier publications, nearly all such objections are wrong, overblown, or can be ameliorated by "keyhole solutions" that are less draconian than exclusion. In addition, the vast new wealth created by breaking down barriers to mobility can itself be used to help address any potential negative effects. In the book, I also push back against claims that mobility should be restricted for the benefit of those "left behind" in migrants' communities of origin.

In recent years, there has been important progress on reducing exclusionary zoning. Several states have also enacted occupational licensing reform, which facilitates freedom of movement between states. But there is much room for further improvement on these fronts. And when it comes to international migration, we are in a period of horrific regression.

Workers of the world, unite to demand more freedom of movement!

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