Monday, 17 August 2015

The free movement of goods, capital and labour

Capitalism confirmed and extended the benefits from free movement of goods and services, capital and labor. Initially mostly at the national level, but progressively also at the international level.

Throughout the middle ages internal trade was not only risky due to the shortage of transport infrastructure and lack of protection against robbers, but also because of the many tolls required to enter cities, navigate the rivers, use bridges or the right of way over the nobles land. For instance, in 1250 there was 12 tolling stations on the Rhine river between Mainz and Cologne, which are only 170 km apart.

By then slavery had been generally replaced by serfdom. But, about half of the population still continued tied to the lord’s land through bondage and had to provide a certain number of labor services. Serfs were forbidden to live outside the seigniorial territory, had to pay fines to marry serfs of another lord and were subject to a number of fees.

Craftsman and artists enjoyed more freedom but were progressively organized in Guilds which restricted severely their training, trade and mobility. So, the concept of free labor mobility was basically unknown.

Likewise, there was very little capital mobility because the sale of land (the main asset at the time) was severely restricted through seigniorial and inheritance laws. Financial investments were equally very limited and lending was typically provided only to royalty by Jewish merchant- bankers. So, apart from travel and trade-related payments, the transfer of financial capital was too little and mostly to pay for ransoms and tributes.

However, the advent of the commercial revolution in the XIII century and the Renaissance changed dramatically the situation in Europe. By the late XVII century international banking and trade had achieved a significant development in Northern Italy, London and Amsterdam. Yet, its driving forces were still the spices and other exotic merchandise made available through the Spanish and Portuguese sea voyages, which were necessarily limited.

It was up to capitalism, with its focus on manufacturing, to change dramatically the growth of international trade through the export of manufactured goods to the colonies and the import of the raw materials used to produce them. This process contributed to the rise of London as a major international clearing and financial center, where it became possible to borrow and invest internationally.

In turn, the financing of major railways and other ventures in the Colonies in North and South America required massive labor migration.

Of course major human migration had been around since the early days of the homo sapiens. He moved out of Africa some 80 millennia ago, and spread across Eurasia 40 millennia ago. Migration to the Americas took place about 20 to 15 millennia ago and, about one millennium ago, all the Pacific Islands were colonized. Later, significant population movements included the Neolithic revolution and the Indo-European expansion.

Throughout history, most major migrations were caused by the collapse of empires, slavery or religious persecution. For instance, it is estimated that before 1830 2.75 million Europeans left to settle overseas, mostly convicted and fugitives from religious persecution.

The difference under capitalism was that migration accelerated not only substantially, but its motivation also became essentially economic. For instance, between 1835 and 1935, the number of European emigrants rose to 75 million who left voluntarily to America and other continents in search of a better life. With a bit of exaggeration, one may say that with capitalism the labor market transformed from a local market into a global market.

Nevertheless, the dismantling of the barriers preventing the free movement of goods, capital and labor was a slow process. Governments had become addicted to customs tariffs as a source of revenue, wanted to force national savers to lend their money only to them or did not wish to extend their social services to immigrants.

In general, capitalists have a duplicitous approach to the freedom of movement. They support free trade as long as it opens up new markets for their products and supplies, but are against when it means direct competition with their products. Likewise, they welcome financing from foreign investors but do not appreciate it when national banks lend to foreign companies. Similarly, they welcome foreign workers as a way of keeping wages lower but do not like it when foreign companies poach their own employees.

Ultimately, the question remains one of knowing whether restrictions to the free movement should be acceptable as temporary or permanent to avoid major disruptions in the three markets. History has shown that the abolition of barriers has been faster in relation to goods and services, somewhat rapid in relation to long term capital but very slow in relation to labor movement.

In general, and especially in large countries, capitalism can live with movement restrictions, as long as they are not excessive. However, to reach its full potential restrictions must be progressively abolished. Indeed, as our analysis of business cycles has shown, programs of accelerated liberalization usually have been associated with an acceleration of economic growth.

To conclude, capitalism not only accelerates the freedom of movement but it is equally needed to keep the momentum for international free movement of goods, capital and labor.

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