Let’s say you have a 10 person workers’ co-op which shares income equally. Each person now gets paid 1/10th the firm’s profit. Thanks to diminishing marginal returns, if you add an 11th worker who is otherwise identical, they will contribute gross revenue/have a marginal product of labor that is less than the previous added worker’s. When you divide the income by 11, everyone will make less.
This is a well-known problem in the econ lit. Of course, in real life, workers are not homogenous, but the point remains that in general you get diminishing returns by adding workers.
As a toy illustration, suppose that there two countries, Richland and Poorland. Everyone in Richland makes $100,000/year. Everyone in Poorland makes $2,000/year. Suppose, however, that if half of the Poorlanders move to Richland, their income will up by a factor of 15, while domestic Richlanders’ income will increase by 10%. Thus, imagine that after mass immigration, Richland has 50,000 Poorland immigrants now making $30,000/year, plus it’s 100,000 native workers now each make $110,000 a year. From a humanitarian and egalitarian standpoint, this is wonderful. Further, this isn’t merely a toy example; these are the kind of income effects we actually see with immigration in capitalist economies.
But this same miraculous growth looks far less sexy when it occurs in a democratic socialist society with equalized incomes. Imagine that democratic socialist Richland is considering whether to allowing 100,000 Poorlanders to immigrate. Imagine they recognize that Poorlander immigrants will each directly contribute about $30,000 a year to Richland economy, and further, thanks to complementarity effects, will induce the domestic Richlanders to contribute $110,000 rather than $100,000. But here the Richlanders might yet want to keep the Poorlanders out. After all, when the equalize income ((100,000 X $30,000 + 100,000 X $110,000)/200,000), average incomes fall to $70,000. Once we require equality, the Richlanders see the immigrants as causing each of them to suffer a 30% loss of income. While for capitalist Richland, the immigrants were a boon, for socialist Richland, they are a bust. Unless we imagine our socialist Richlanders are extremely and unrealistically altruistic, they will want to keep the Poorlanders out.
Things get worse once we consider how real-world ethnic and nationalist prejudices will affect things. In fact, people are biased against foreigners, especially foreigners of a different race or religion. However, the beauty of capitalism is that it makes employers’ pay to indulge their prejudices; it literally comes out of their pockets. Thus, it’s not surprising, despite what some journalists and academics claim, that when economists try to measure to what degree wage differentials are the result of employer discrimination, they find that at most it’s quite tiny.[1]
[1] Goldin and Rouse 2000; Betrand, Goldin, and Katz 2010; Bolotnyy and Emanuel 2018.
Let’s say you have a 10 person workers’ co-op which shares income equally. Each person now gets paid 1/10th the firm’s profit. Thanks to diminishing marginal returns, if you add an 11th worker who is otherwise identical, they will contribute gross revenue/have a marginal product of labor that is less than the previous added worker’s. When you divide the income by 11, everyone will make less.
This is a well-known problem in the econ lit. Of course, in real life, workers are not homogenous, but the point remains that in general you get diminishing returns by adding workers.
This might be a dumb question, but wouldn’t this theory imply that smaller companies are on average more efficient than larger companies (holding worker quality constant)? And isn’t the very existence of pretty large companies some degree of evidence against this?
The point he is making is about worker cooperatives, rather than firms in general. A widely recognised problem with worker cooperatives is that there are disincentives to scale because adding more workers is a cost to the existing coop owners. So, the point doesn’t apply to privately owned companies because adding workers do not get a share of the business
As presented, the efficiency claims seem to be agnostic about firm structure, while the worker coop-specific parts are about credit/profit allocation. (As usual, I could of course be misreading)
Yeah, I think this is an important point to make: There are lots of instances where adding more workers allows specialization. When it comes to literally an entire economy, though, things can get weird/complicated—which is why I think there are much better ways to explain why welfare-heavy states and open borders don’t mix well than by appealing to diminishing marginal returns to labor.
Your Richland-Poorland example is indeed illustrative, thanks. However, it seems the problem caused by immigration does not only occur when incomes in Richland were equalized before the immigration, but rather they also occur when people care about the degree of income inequality in their own country. So if Richlanders are free-market fans, but they do not like domestic inequality, they will want to keep the Poorlanders out.
Let’s say you have a 10 person workers’ co-op which shares income equally. Each person now gets paid 1/10th the firm’s profit. Thanks to diminishing marginal returns, if you add an 11th worker who is otherwise identical, they will contribute gross revenue/have a marginal product of labor that is less than the previous added worker’s. When you divide the income by 11, everyone will make less.
This is a well-known problem in the econ lit. Of course, in real life, workers are not homogenous, but the point remains that in general you get diminishing returns by adding workers.
As a toy illustration, suppose that there two countries, Richland and Poorland. Everyone in Richland makes $100,000/year. Everyone in Poorland makes $2,000/year. Suppose, however, that if half of the Poorlanders move to Richland, their income will up by a factor of 15, while domestic Richlanders’ income will increase by 10%. Thus, imagine that after mass immigration, Richland has 50,000 Poorland immigrants now making $30,000/year, plus it’s 100,000 native workers now each make $110,000 a year. From a humanitarian and egalitarian standpoint, this is wonderful. Further, this isn’t merely a toy example; these are the kind of income effects we actually see with immigration in capitalist economies.
But this same miraculous growth looks far less sexy when it occurs in a democratic socialist society with equalized incomes. Imagine that democratic socialist Richland is considering whether to allowing 100,000 Poorlanders to immigrate. Imagine they recognize that Poorlander immigrants will each directly contribute about $30,000 a year to Richland economy, and further, thanks to complementarity effects, will induce the domestic Richlanders to contribute $110,000 rather than $100,000. But here the Richlanders might yet want to keep the Poorlanders out. After all, when the equalize income ((100,000 X $30,000 + 100,000 X $110,000)/200,000), average incomes fall to $70,000. Once we require equality, the Richlanders see the immigrants as causing each of them to suffer a 30% loss of income. While for capitalist Richland, the immigrants were a boon, for socialist Richland, they are a bust. Unless we imagine our socialist Richlanders are extremely and unrealistically altruistic, they will want to keep the Poorlanders out.
Things get worse once we consider how real-world ethnic and nationalist prejudices will affect things. In fact, people are biased against foreigners, especially foreigners of a different race or religion. However, the beauty of capitalism is that it makes employers’ pay to indulge their prejudices; it literally comes out of their pockets. Thus, it’s not surprising, despite what some journalists and academics claim, that when economists try to measure to what degree wage differentials are the result of employer discrimination, they find that at most it’s quite tiny.[1]
[1] Goldin and Rouse 2000; Betrand, Goldin, and Katz 2010; Bolotnyy and Emanuel 2018.
This might be a dumb question, but wouldn’t this theory imply that smaller companies are on average more efficient than larger companies (holding worker quality constant)? And isn’t the very existence of pretty large companies some degree of evidence against this?
The point he is making is about worker cooperatives, rather than firms in general. A widely recognised problem with worker cooperatives is that there are disincentives to scale because adding more workers is a cost to the existing coop owners. So, the point doesn’t apply to privately owned companies because adding workers do not get a share of the business
As presented, the efficiency claims seem to be agnostic about firm structure, while the worker coop-specific parts are about credit/profit allocation. (As usual, I could of course be misreading)
Yeah, I think this is an important point to make: There are lots of instances where adding more workers allows specialization. When it comes to literally an entire economy, though, things can get weird/complicated—which is why I think there are much better ways to explain why welfare-heavy states and open borders don’t mix well than by appealing to diminishing marginal returns to labor.
Your Richland-Poorland example is indeed illustrative, thanks. However, it seems the problem caused by immigration does not only occur when incomes in Richland were equalized before the immigration, but rather they also occur when people care about the degree of income inequality in their own country. So if Richlanders are free-market fans, but they do not like domestic inequality, they will want to keep the Poorlanders out.