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Foreign investment was an achievement of laissez-faire capitalism. It developed step by step only in the nineteenth century. Writing in 1817, Ricardo could still assert that most men of property are “satisfied with a low rate of profits in their own country, rather that seek a more advantageous employment for their wealth in foreign nations.”1
What impelled entrepreneurs and capitalists toward foreign investment was, of course not “altruism,” but the eagerness to earn profits by supplying the domestic consumers in the best possible and cheapest way with those commodities they demanded most urgently. They went into foreign countries in order to supply the home market directly or indirectly (i.e., by triangular trade) with raw materials and foodstuffs which could otherwise not have been obtained at all or only at higher costs. If the consumers had been more eager for the acquisition of a greater quantity of goods that could be produced at home without the aid of foreign resources than for imported food and raw materials, it would have been more profitable to expand domestic production further than to invest abroad.
But foreign investment benefited the receiving nations no less than the investing nations. These receiving nations were backward and underdeveloped insofar as they had been slow in developing those ideological and institutional conditions which are the indispensable prerequisite of large scale capital accumulation. While amply endowed by nature, they lacked the capital needed for the exploitation of their dormant resources. On account of the paucity of capital available, the marginal productivity of labor and thereby wage rates were low when compared with the state of affairs in the capitalistic countries. The inflow of foreign capital raised wage rates and improved the masses’ average standard of living.
The socialists provide a different interpretation of the problems involved. As they see it, a business enterprise is a contrivance to exploit unfairly the workers employed. Its very existence and operation are contrary to the external laws of morality. There is but one means to put an end to this exploitation, namely socialization, i.e., the expropriation of the private capitalists and entrepreneurs and the transfer of their plants, mines, and farms to the hands of the state. This is what the labor government is anxious to achieve in the United Kingdom and what the Iranian government, imbued with a truly Fabian spirit, is just doing in its own country. If it is right for the British to nationalize the the British coal mines, it cannot be wrong for the Iranians to nationalize the Iranian oil industry. If Mr. Attlee2 were consistent, he would have congratulated the Iranians on their great socialist achievement. But no socialist can be or ever was consistent.
It is hopeless for the British to dissuade the Iranians from nationalizing the British-owned wells, refineries, and pipe lines by pointing out the disadvantages that will certainly result for the people of Iran. They themselves did not pay heed to such “reactionary” talk when the problem of nationalizing various British industries was at issue.
Under the present state of international law every sovereign nation is free to deal as it pleases with all property situated within its boundaries. A foreign government may diplomatically protest and support claims of its citizens for an indemnification. But if the government of the nationalizing nation is not prepared to yield to such diplomatic overtures, that settles the matter. It is enough to refer to such precedents as the case of Russia in 1917 or the case of the Mexican expropriation of the oil industry.
The foreign government may submit the case to the International Court of Justice. But the decisions of this Court are practically unenforceable.
If the foreign government resorts to the ultima ratio regum, to military intervention, this would under the charter of the United Nations represent a clear case of aggression.
The pundits of international law and the lawyers of the United Nations will certainly write very profound reports and treatises about the legal aspect of the Anglo-Iranian conflict. Such utterances are not worth the paper on which they are printed. The simple truth is that if the government of Iran does not of its own accord change its mind because it may expect some immediate political and material gain from such a change, nothing can prevent it from expropriating the oil industry. For it is obvious that Great Britain cannot win anything by military measures. Even in the unlikely event of a British success, the British would discover that bayonets are very uncomfortable to sit upon in a business office. Besides there is the spectre of a Russian occupation of the greater part of Iran and the still more threatening danger of a new world war.
The immediate consequences of the Iranian oil expropriation are very sad indeed. It seriously affects the military plans of the Western powers and revolutionizes conditions on the world oil market.
Still more important are the remoter consequences of the affair. Foreign investment of private enterprises and citizens already came to an almost complete standstill years ago. The private investor has learned from experience that investing abroad is virtually tantamount to throwing away one’s own wealth. It is true, not all receiving countries resorted to undisguised expropriation of property and repudiation of loans. But many of the “good” countries too have effectively robbed the foreign investors and creditors by foreign exchange control and discriminatory taxation. It is of little use for an American or a Swiss to own a blocked balance with a Ruritanian bank, especially if he notices that the purchasing power and the equivalent in hard currency of the Ruritanian monetary unit is dropping more and more.
The American Administration recommends as an adequate substitute for private investment abroad public investment and loans either granted directly by the governmental (national or international) banks or guaranteed by such banks. The idea is that the governments, first of all the American government, should fill the gap that the anti-capitalistic policies of the underdeveloped countries have willfully created. But the example of Iran shows that such governmental investments and loans are also not safe against predatory ventures. Why should the American government pump American funds into Ruritania if the Ruritanian parliament is free to deal with them as it pleases? Are there no investment opportunities left within the United States? It is rather unrealistic to assume that Congress will continue to tolerate a policy that subsidizes foreign countries at the expense of the American taxpayer. There is no use in fooling ourselves. The hopes that the much talked about Point Four3 may work as a satisfactory substitute for the disintegrated international capital market have proved fallacious.
It is this disintegration of the international capital market that creates the plight of the underdeveloped countries.
These countries were in the last decades benefited by the modern methods of fighting epidemics and other diseases which the capitalistic West has developed. Mortality rates dropped and the average length of life was prolonged. Population increased considerably. But the economic policies of these nations are preventing an expansion of the insufficient amount of domestic saving and capital accumulation; sometimes they even directly induce capital de-accumulation. As there is no longer any importation of foreign capital worth mentioning, the per head quota of capital invested decreases. The outcome is a drop in the marginal productivity of labor. But at the same time the governments and the labor unions try to enforce wage rates which exceed the marginal productivity of labor. The result is spreading unemployment.
Unaware of the causes of unemployment the governments try to remove it by various measures which, although entirely futile, are so costly that they by far exceed the public revenue and are financed by the issuance of additional fiat money. Inflation still more discourages domestic saving and capital formation.
The governments of all these underdeveloped countries indefatigably talk of the necessity to “industrialize” and to modernize the outdated methods of agricultural production. But their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?
About two hundred years ago conditions in England were hardly better, perhaps even worse than they are today in India and China. The then prevailing system of production was lamentably inadequate. In its frame there was no room left for an ever increasing part of the population. Masses of destitute paupers were barely living on the verge of starvation. The ruling landed aristocracy did not know of any means to cope with these wretched people other than the poorhouse, the workhouse, and the prison. But then came the “Industrial Revolution.” Laissez-faire capitalism converted the starving beggars into self-supporting breadwinners. It improved conditions step by step until, at the end of the Victorian age, the average standard of living of the common man was the highest in Europe, much higher than that of people whom earlier ages had considered as sufficiently well-to-do.
What the underdeveloped nations must do if they sincerely want to eradicate penury and to improve the economic conditions of their destitute masses is to adopt those policies of “rugged individualism” which have created the welfare of Western Europe and the United States. They must resort to laissez faire; they must remove all obstacles fettering the spirit of enterprise and stunting domestic capital accumulation and the inflow of capital from abroad.
But what the governments of these countries are really doing today is just the contrary. Instead of emulating the polices that created the comparative wealth and welfare of the capitalistic nations, they are choosing those contemporary policies of the West which slow down the further accumulation of capital and lay stress on what they consider to be a fairer distribution of wealth and income. Leaving aside the problem whether or not these policies are beneficial to the economically advanced nations, it must be emphasized that they are patently nonsensical when resorted to in the economically backward countries. Where there is very little to be distributed, a policy of an allegedly “fairer” redistribution is of no use at all. IV. In the second part of the nineteenth century the shrewdest among the patriots of the underdeveloped nations began to contrast the unsatisfactory conditions of their own countries with the prosperity of the West. They could not help realizing that the Europeans and Americans have better succeeded in fighting penury and starvation than their own peoples. To make their own peoples as prosperous as those of the West became their foremost aim. So they sent the elite of their youth to the universities of Europe and America to study economics and thus to learn the secret of raising the standard of living. Hindus, Chinese, Africans, and members of other backward nations thronged the lecture halls, eagerly listening to the words of the famous British, American, and German professors.
This is what these professors—Marxians, Fabians, Veblenians, socialists of the chair, champions of government omnipotence and all-round planning, peacemakers of inflation, deficit spending and confiscatory taxation—taught their students: rugged individualism, the policy of laissez faire and private enterprise are the worst evils that ever befell mankind. They enriched a few robber barons and condemned the masses of decent people to ever-increasing poverty and degradation. But fortunately the black age of capitalism is approaching its end. People will no longer let themselves be fooled by the spurious doctrines of the sycophants of the bourgeoisie, the depraved apologists of a manifestly unfair social order. We, the adamant advocates of justice and riches for all, have for ever exploded the fallacies and paralogisms of the orthodox authors. The Welfare State will bring prosperity and security to everybody. The economics of abundance and plenty will be substituted for the economics of scarcity. Production for use will be substituted for production for profit. There will be freedom from want; i.e., everybody will get all he wants.
Never did these professors mention the—in their opinion manifestly absurd—truism that there is no means to improve the conditions of any nation or the whole of mankind other than to increase the per head quota of capital invested. On the contrary. They indulged in expounding the Keynesian dogma of the dangers of saving and accumulating capital. Never did they refer to the fact that nature—not the capitalists—has made the means of human sustenance scarce. As they saw it, the State had inexhaustible funds at its disposal that enabled the government to spend without any limits. They have even today not yet realized that progressive taxation has already exhausted this alleged surplus in all other countries and will have exhausted it even in the United States very soon.
Indoctrinated with these principles the graduates of the Western universities returned to their countries and tried to put into effect what they had learned. They were sincerely convinced that to create prosperity for all nothing else was needed than to apply the formulas of Occidental pseudo-progressivism. They thought that industrialization means labor unions, minimum wage rates and unemployment doles and that trade and commerce means controls of every kind. They wanted to nationalize before they had permitted business to build plants and enterprises which could be expropriated. They wanted to establish a new fair deal in countries whose distress consisted precisely in the fact that they had not known what is today disparaged as the old and unfair deal.
All these radical intellectuals of the underdeveloped countries blame Europe and America for the backwardness and poverty of their own peoples. They are right, but for reasons which are very different from those they themselves have in mind. Europe and America did not cause the plight of the underdeveloped nations, but they have prolonged its duration by implanting in their intellectuals the ideologies which are the most serious obstacle to any improvement of conditions. The socialists and interventionists of the West have poisoned the mind of the East. They are responsible for the anti-capitalistic bias of the East and for the sympathies with which those Eastern intellectuals look upon the Soviet system as the most intransigent realization of Marxian ideas.
All underdeveloped countries are flooded with translations of the writings of Marx, Lenin, and Stalin and of the books of all shades of non-Marxian socialism and anti-capitalism. But only very rarely have books expounding the operation of the market economy and critically analyzing the dogmas of the socialist creed been published in one of the languages of these nations. Little wonder that their reading public believes that the description of capitalism as provided by the Communist Manifesto exactly fits present day American conditions, that, for instance, the laborer “sinks deeper and deeper” with the progress of industry and that “the bourgeoisie is incompetent to assure an existence to its slave within his slavery.” Little wonder that they look upon the Soviet system as the model of a better future.
We must comprehend that it is impossible to improve the economic conditions of the underdeveloped nations by grants in aid. If we send them foodstuffs to fight famines, we merely relieve their governments from the necessity of abandoning their disastrous agricultural policies. In the past, for instance, Yugoslavia’s main problem was how to find foreign markets for its considerable surplus of cereals, pigs, fruits, and lumber. Today the country that includes the most fertile land of Europe outside Russia and Romania is famine stricken. If we send to the poor countries manufactures or “lend” them dollars, we virtually pay for the deficits of their nationalized transportation and communication systems and their socialized mines and processing industries. The truth is that the United States is subsidizing all over the world the worst failure of history: socialism. But for these lavish subsidies the continuation of the socialist schemes would have become long since unfeasible.
The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue. What the underdeveloped countries need first is the ideology of economic freedom and private enterprise and initiative that makes for the accumulation and maintenance of capital as well as for the employment of the available capital for the best possible and cheapest satisfaction of the most urgent wants of the consumers.
In no other way can the United States contribute to the improvement of the economic conditions of the underdeveloped countries than by transmitting to them the ideas of economic freedom.
- *.[This article is from 1952 and is previously unpublished—Ed.]
- 1.[David Ricardo, On the Principles of Political Economy and Taxation, vol. 1 of The Works and Correspondence of David Ricardo, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951-1973), p. 137—Ed.]
- 2.[Lord Clement Attlee was leader of the British Labor Party from 1935–1955 and a committed socialist. He was prime minister of England from 1945–1951—Ed.]
- 3.[Point Four of the Atlantic Charter was concerned with equality of access to trade and raw materials of the world and to securing for all nations an improved labor standard, economic adjustment, and social security—Ed.]