What is lacking in order to make the developing countries as prosperous as the United States
is only one thing.
Capital.
And, of course, the freedom to employ it under the discipline of the market and not the discipline
of the government.
Greetings and salutations, my fellow plebs.
My name is Walker and this is the Bitcoin Podcast.
The Bitcoin time chain is 862716 and the value of one Bitcoin is still one Bitcoin.
Today's episode is Austrian Audible.
I'll be reading the fifth of Mises six lectures and the topic for today is foreign investment.
I know, I know, it's been a while since I did one of these but I'm back at it now and
I hope you've been enjoying all the recent interviews I've done.
If this is your first time listening to Austrian Audible on the Bitcoin Podcast, consider going
back to the previous episodes, starting with capitalism, then socialism, interventionism
and inflation and listening to those first.
If you go to the show notes, you can find links to check out the Austrian Audible playlists.
I believe these lessons from Mises are best experienced in the original order in which
they were delivered but of course it's up to you.
You can download the PDF of economic policy, thoughts for today and tomorrow in the show
notes.
These lectures were originally delivered in Argentina in 1959 and I think it is fascinating
to see how much has changed in the world since Mises gave these lectures but also how much
is still very much the same.
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Without further ado, let's get into lesson five from Mises six lessons.
Foreign investment.
Economic policy.
Thoughts for today and tomorrow.
By Ludwig von Mises.
Some people call the programs of economic freedom a negative program.
They say, what do you liberals really want?
You are against socialism, government intervention, inflation, labor union violence, protective
tariffs.
You say no to everything.
I would call this statement a one sided and shallow formulation of the problem for it
is possible to formulate a liberal program in a positive way.
If a man says, I am against censorship, he is not negative.
He is in favor of authors having the right to determine what they want to publish without
the interference of government.
This is not negativism.
This is precisely freedom.
Of course, when I use the term liberal with respect to the conditions of the economic
system, I mean liberal in the old classical sense of the word today.
Most people regard the considerable differences in the standard of living between many countries
as unsatisfactory 200 years ago.
Conditions in Great Britain were much worse than they are today in India, but the British
in 1750 did not call themselves underdeveloped or backward because they were not in a position
to compare the conditions of their country with those of countries in which economic
conditions were more satisfactory.
Today, all people who have not attained the average standard of living of the United States
believe that there is something wrong with their own economic situation.
Many of these countries call themselves developing countries and as such are asking for the
question for aid from the so-called developed or even overdeveloped countries.
Let me explain the reality of this situation.
The standard of living is lower in the so-called developing countries because the average earnings
for the same type of labor is lower in those countries than it is in some countries of
Western Europe, Canada, Japan, and especially in the United States.
If we try to find the reasons for this difference, we must realize that it is not due to an inferiority
of the workers or other employees.
There prevails among some groups of North American workers a tendency to believe that
they themselves are better than other people, that it is through their own merit that they
are getting higher wages than other people.
It would not only be necessary for an American worker to visit another country, let us say
Italy where many American workers came from, in order to discover that it is not his personal
qualities but the conditions in the country that make it possible for him to earn higher
wages.
If a man from Sicily immigrates to the United States, he can very soon earn the wage rates
that are customary in the United States and if the same man returns to Sicily.
He will discover that his visit to the United States did not give him qualities which would
permit him to earn higher wages in Sicily than his fellow countrymen.
Nor can one explain this economic situation by assuming any inferiority on the part of
the entrepreneurs outside the United States.
It is a fact that outside of the United States, Canada, Western Europe, and certain parts of
Asia, the equipment of the factories and the technological methods employed are, by and
large, inferior to those within the United States but this is not due to the ignorance
of the entrepreneurs in those underdeveloped countries.
They know very well that the factories in the United States and Canada are much better
equipped.
They themselves know everything they must know about technology and if they do not, they
have the opportunity to learn what they must know from textbooks and technical magazines
which disseminate this knowledge.
Once again, the difference is not personal inferiority or ignorance, the difference is
the supply of capital.
The quantity of capital goods available, in other words, the amount of capital invested
per unit of the population is greater in the so-called advanced nations than in the developing
nations.
A businessman cannot pay a worker more than the amount added by the work of this employee
to the value of the product.
He cannot pay him more than the customers are prepared to pay for the additional work
of this individual worker.
If he pays him more, he will not recover his expenditures from the customers.
He incurs losses and, as I have pointed out again and again and as everybody knows, a
businessman who suffers losses must change his methods of business or go bankrupt.
The economists describe this state of affairs by saying, wages are determined by the marginal
productivity of labor.
This is only another expression for what I have just said before.
It is a fact that the scale of wages is determined by the amount a man's work increases the
value of the product.
If a man works with better and more efficient tools, then he can perform in one hour much
more than a man who works one hour with less efficient instruments.
It is obvious that 100 men working in an American shoe factory, equipped with the most modern
tools and machines, produce much more in the same length of time than 100 shoemakers in
India who have to work with old-fashioned tools in a less sophisticated way.
The employers in all of these developing nations know very well that better tools would make
their own enterprises more profitable.
They would like to build more and better factories.
The only thing that prevents them from doing it is the shortage of capital.
The difference between the less developed and the more developed nations is a function
of time.
The British started to save sooner than all other nations.
They also started sooner to accumulate capital and to invest it in business because they
started sooner. There was a higher standard of living in Great Britain when, in all other
European countries, there was still a lower standard of living, gradually.
All the other nations began to study British conditions and it was not difficult for them
to discover the reason for Great Britain's wealth.
So they began to imitate the methods of British business.
Since other nations started later and since the British did not stop investing capital,
there remained a large difference between the conditions in England and conditions
in those other countries.
But something happened which caused the head start of Great Britain to disappear.
What happened was the greatest event in the history of the 19th century.
And this means not only in the history of an individual country, this great event was
the development in the 19th century of foreign investment.
In 1817, the Great British economist Ricardo still took it for granted that capital could
be invested only within the borders of a country.
He took it for granted that capitalists would not try to invest abroad.
But a few decades later, capital investment abroad began to play a most important role
in world affairs. Without capital investment, it would have been necessary for nations less
developed than Great Britain to start with the methods and the technology with which
the British had started in the beginning and middle of the 18th century.
And slowly, step by step, always far below the technological level of the British economy,
try to imitate what the British had done.
It would have taken many, many decades for these countries to attain the standard of
technological development, which Great Britain had reached a hundred years or more before
them. But the great event that helped all these countries was foreign investment.
Foreign investment meant that British capitalists invested British capital in other parts of
the world. They first invested it in those European countries which, from the point of
view of Great Britain, were short of capital and backward in their development.
It is a well-known fact that the railroads of most European countries, and also of the
United States, were built with the aid of British capital.
You know that the same happened in this country. In Argentina, the gas companies in all the
cities of Europe were also British. In the mid-1870s, a British author and poet criticized
his countrymen. He said,
The British have lost their old vigor, and they have no longer any new ideas. They are
no longer an important or leading nation in this world.
To which Herbert Spencer, the great sociologist, answered,
Look at the European continent. All European capitals have light because a British gas company
provides them with gas. This was, of course, in what seems to us the remote age of gas
lighting. Further answering this, British critic, Herbert Spencer, added,
You say that the Germans are far ahead of Great Britain, but look at Germany. Even Berlin,
the capital of the German Reich, the capital of Geist, would be in the dark if a British
gas company had not invaded the country and lighted the streets.
In the same way, British capital developed the railroads and many branches of industry
in the United States. And of course, as long as a country imports capital, its balance of
trade is what the non-economists call unfavorable. That means that it has an excess of imports
over exports. The reason for the favorable balance of trade of Great Britain was that
the British factories sent many types of equipment to the United States, and this equipment was
not paid for by anything other than shares of American corporations. This period in the
history of the United States lasted by and large until the 1890s.
But when the United States, with the aid of British capital, and later with the aid of
its own pro-capitalistic policies, developed its own economic system in an unprecedented
way, the Americans began to buy back the capital stocks they had once sold to foreigners.
Then the United States had a surplus of exports over imports. The difference was paid by the
importation, by the repatriation, as one called it, of American common stock.
This period lasted until the First World War. What happened later is another story. It is
the story of the American subsidies for the belligerent countries in between and after
two world wars. The loans, the investments the United States made in Europe, in addition
to lend lease, foreign aid, the Marshall Plan, food that was sent overseas, and other subsidies.
I emphasize this because people sometimes believe that it is shameful or degrading to
have foreign capital working in their country. You have to realize that in all countries
except England, foreign capital investment played a considerable part in the development
of modern industries. If I say that foreign investment was the greatest historical event
of the 19th century, you must think of all those things that would not have come into
being if there had not been any foreign investment. All the railroads, the harbors, the factories
and mines in Asia, and the Suez Canal and many other things in the Western Hemisphere
would not have been constructed had there been no foreign investment. Foreign investment
is made in the expectation that it will not be expropriated. Nobody would invest anything
if he knew in advance that somebody would expropriate his investments. At the time,
when these foreign investments were made in the 19th century and at the beginning of the
20th century, there was no question of expropriation. From the beginning, some countries showed
a certain hostility toward foreign capital. But for the most part, they realized very
well that they derived an enormous advantage from these foreign investments. In some cases,
these foreign investments were not made directly to foreign capitalists, but indirectly, by
loans to the foreign government. Then it was the government that used the money for investments.
Such was, for instance, the case in Russia. For purely political reasons, the French invested
in Russia. In the two decades preceding the First World War, about 20 billion gold francs
lending them chiefly to the Russian government. All the great enterprises of the Russian
government, for instance, the railroad that connects Russia from the Yural Mountains through
the ice and snow of Siberia to the Pacific, were built mostly with foreign capital lent
to the Russian government. You will realize that the French did not assume that one day
there would be a communist Russian government that would simply declare it would not pay
the debts incurred by its predecessor, the Tsarist government.
Starting with the First World War, there began a period of worldwide open warfare against
foreign investments. Since there is no remedy to prevent a government from expropriating
invested capital, there is practically no legal protection for foreign investments in
the world today. The capitalists did not foresee this. If the capitalists of the capital exporting
countries had realized it, all foreign investments would have come to an end 40 or 50 years ago.
But the capitalists did not believe that any country would be so unethical as to renege
on a debt. To expropriate and confiscate foreign capital with these acts, a new chapter began
in the economic history of the world. With the end of the great period in the 19th century,
when foreign capital helped to develop in all parts of the world, modern methods of transportation,
manufacturing, mining, and agriculture, there came a new era in which the governments and
the political parties considered the foreign investor as an exploiter who should be expelled
from the country in this anti-capitalist attitude. The Russians were not the only sinners.
Remember, for example, the expropriation of the American oil fields in Mexico and all
the things that have happened in this country, Argentina, which I have no need to discuss.
The situation in the world today created by the system of expropriation of foreign capital
consists either of direct expropriation or of indirect expropriation through foreign
exchange control or tax discrimination. This is mainly a problem of developing nations.
Take for instance the biggest of these nations, India. Under the British system, British
capital, predominantly British capital, but also capital of other European countries,
was invested in India and the British exported to India something else which also has to be
mentioned in this connection. They exported into India. Modern methods of fighting contagious
diseases, the result was a tremendous increase in the Indian population and a corresponding
increase in the country's troubles. Facing such a worsening situation, India turned to
expropriation as a means of dealing with its problems, but it was not always direct expropriation.
The government harassed foreign capitalists, hampering them in their investments in such
a way that these foreign investors were forced to sell out. India could, of course, accumulate
capital by another method. The domestic accumulation of capital. However, India is as hostile to
the domestic accumulation of capital as it is to foreign capitalists. The Indian government
says it wants to industrialize India, but what it really has in mind is to have socialist
enterprises. A few years ago, the famous statesman, Jahawaral Nehru, published a collection of
his speeches. The book was published with the intention of making foreign investment
in India more attractive. The Indian government is not opposed to foreign investment before
it is invested. The hostility begins only when it is already invested. In this book,
I am quoting literally from the book, Mr. Nehru said, Of course we want to socialize,
but we are not opposed to private enterprise. We want to encourage in every way private
enterprise. We want to promise the entrepreneurs who invested in our country that we will not
expropriate them nor socialize them for ten years, perhaps even for a longer time. And
he thought this was an invitation to come to India. The problem, as you know, is domestic
capital accumulation. In all countries today, there are very heavy taxes on corporations.
In fact, there is double taxation on corporations. First, the profits of corporations are taxed
very heavily. And the dividends which corporations pay their shareholders are taxed again. And
this is done in a progressive way. Progressive taxation of income and profits means that
precisely those parts of the income which people would have saved and invested are taxed
away. Take the example of the United States. A few years ago, there was an excess profit
tax, which meant that out of one dollar earned, a corporation retained only 18 cents when
these 18 cents were paid out to the shareholders. Those who had a great number of shares had
to pay another 60 or 80 or even greater percent of it in taxes. Out of the dollar of profit,
they retained about 7 cents. And 93 cents went to the government. Of this 93%, the greater
part would have been saved and invested. Instead, the government used it for its current expenditure.
This is the policy of the United States. I think I have made it clear that the policy
of the United States is not an example to be imitated by other countries. This policy
of the United States is worse than bad. It is insane. The only thing I would add is that
a rich country can afford more bad policies than a poor country in the United States.
In spite of all these methods of taxation, there is still some additional accumulation
of capital and investment every year, and therefore there is still a trend toward improvement
of the standard of living. But in many other countries, the problem is very critical. There
is no or not sufficient domestic saving and capital investment from abroad is seriously
reduced by the fact that these countries are openly hostile to foreign investment. How
can they talk about industrialization? About the necessity to develop new plants? To improve
conditions? To raise the standard of living? To have higher wage rates? Better means of
transportation? If they are doing things that will have precisely the opposite effect? What
their policies actually accomplish is to prevent or slow down the accumulation of domestic
capital and to put obstacles in the way of foreign capital? The end result is certainly
very bad. Such a situation must bring about a loss of confidence, and there is now more
and more distrust of foreign investment in the world, even if the countries concerned
were to change their policies immediately and were to make all possible promises. It
is very doubtful that they could once more inspire foreign capitalists to invest. There
are, of course, some methods to avoid this consequence. One could establish some international
statutes, not only agreements, that would withdraw the foreign investment from the
national jurisdiction. This is something the United Nations could do. But the United Nations
is simply a meeting place for useless discussions, realizing the enormous importance of foreign
investment. Realizing that foreign investment alone can bring about an improvement in political
and economical world conditions. One could try to do something from the point of view
of international legislation. This is a technical legal problem, which I only mention because
the situation is not hopeless. If the world really wanted to make it possible for the
developing countries to raise their standard of living to the level of the Americans way
of life, then it could be done. It is only necessary to realize how it could be done.
What is lacking in order to make the developing countries as prosperous as the United States
is only one thing, capital. And, of course, the freedom to employ it under the discipline
of the market and not the discipline of the government. These nations must accumulate
domestic capital, and they must make it possible for foreign capital to come into their countries.
For the development of domestic saving, it is necessary to mention again that domestic
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A great part of the capital at work in American enterprises is owned by the workers themselves
and by other people with modest means. Billions and billions of saving deposits of bonds and
of insurance policies are operating in these enterprises. On the American money market
today, it is no longer the banks, it is the insurance companies that are the greatest
money lenders and the money of the insurance company is not legally but economically. The
property of the insured and practically everybody in the United States is insured in one way
or another. The prerequisite for more economic equality in the world is industrialization
and this is possible only through increased capital investment. Increased capital accumulation.
You may be astonished that I have not mentioned a measure which is considered a prime method
to industrialize a country. I mean protectionism, but tariffs and foreign exchange controls
are exactly the means to prevent the importation of capital and industrialization into the
country. The only way to increase industrialization is to have more capital. Protectionism can
only divert investments from one branch of business to another branch. Protectionism
in itself does not add anything to the capital of a country to start a new factory. One needs
capital to improve an already existing factory. One needs capital and not a tariff. I do not
want to discuss the whole problem of free trade or protectionism. I hope that most of
your textbooks on economics represented in a proper way. Protection does not change the
economic situation in a country for the better and what certainly does not change it for
the better is labor unionism. If conditions are unsatisfactory, if wages are low, if the
wage earner in a country looks to the United States and reads about what is going on there,
if he sees in the movies how the home of the average American is equipped with all modern
comforts, he may be envious. He is perfectly right in saying we ought to have the same
thing, but the only way to obtain it is through an increase in capital. Labor unions use violence
against entrepreneurs and against people they call strike breakers. Despite their power and
their violence, however, unions cannot rage wages continually for all wage earners, equally
ineffective are government decrees fixing minimum wage rates. What the unions do bring
about if they succeed in raising wage rates is permanent, lasting unemployment, but unions
cannot industrialize the country. They cannot raise the standard of living of the workers.
And this is the decisive point. One must realize that all the policies of a country that wants
to improve its standard of living must be directed toward an increase in the capital invested
per capita. This per capita investment of capital is still increasing in the United
States in spite of all the bad policies there. And the same is true in Canada and in some
West European countries, but it is unfortunately decreasing in countries like India. We read
every day in the newspapers that the population of the world is becoming greater by perhaps
45 million people or even more per year. And how will this end? What will the results and
the consequences be? Remember what I said about Great Britain. In 1750, the British
people believed that 6 million constituted a tremendous overpopulation of the British
Isles and that they were headed for famines and plagues. But on the eve of the last world
war in 1939, 50 million people were living in the British Isles and the standard of living
was incomparably higher than it had been in 1750. This was the effect of what is called
industrialization. A rather inadequate term, Britain's progress was brought about by increasing
the per capita investment of capital. As I said before, there is only one way a nation
can achieve prosperity. If you increase capital, you increase the marginal productivity of labor,
and the effect will be that real wages will rise in a world without migration barriers.
There would be a tendency all over the world toward an equalization of wage rates. If there
were no migration barriers today, probably 20 million people would try to reach the United
States every year. In order to get higher wages, the inflow would reduce wages in the
United States and raise them in other countries. I do not have time to deal with this problem
of migration barriers. But I do want to say that there is another method toward the equalization
of wage rates all over the world. This other method, which operates in the absence of the
freedom to migrate, is the migration of capital. Capitalists have the tendency to move towards
those countries in which there is plenty of labor available, and in which labor is reasonable,
and by the fact that they bring capital into those countries, they bring about a trend
toward higher wage rates. This has worked in the past, and it will work in the future,
in the same way, when British capital was first invested in, let us say, Austria or Bolivia.
Wage rates there were much, much lower than they were in Great Britain, but this additional
investment brought about a trend toward higher wage rates in those countries, and such a
tendency prevailed all over the world. It is a very well-known fact that as soon as,
for instance, the United Fruit Company moved into Guatemala, the result was a general tendency
toward higher wage rates, beginning with the wages which United Fruit Company paid, which
then made it necessary for other employers to pay higher wages also. Therefore, there
is no reason at all to be pessimistic in regard to the future of undeveloped countries. I
fully agree with the communists and the labor unions when they say, what is needed is to
raise the standard of living. A short time ago, in a book published in the
United States, a professor said, we now have enough of everything. Why should people in
the world still work so hard? We have everything already. I do not doubt that this professor
has everything, but there are other people in other countries, also many people in the
United States who want and should have a better standard of living outside of the United States,
in Latin America, and still more in Asia and Africa. Everyone wishes to see conditions
improved in his own country. A higher standard of living also brings about a higher standard
of culture and civilization. So I fully agree with the ultimate goal of raising the standard
of living everywhere. But I disagree about the measures to be adopted in attaining this
goal. What measures will attain this end? Not protection, not government interference,
not socialism, and certainly not the violence of the labor unions. Euphemistically called
collective bargaining, which in fact is bargaining at the point of a gun. To attain the end,
as I see it, there is only one way. It is a slow method. Some people may say it is too
slow, but there are no shortcuts to an earthly paradise. It takes time, and one has to work,
but it does not take as much time as people believe. And finally, an equalization will
come around 1840 in the western part of Germany, in Swabia and Wurttemberg, which was one of
the most industrialized areas in the world. It was said, we can never attain the level of the
British. The English have a head start, and they will be forever ahead of us. 30 years later,
the British said, this German competition, we cannot stand it. We have to do something against it.
At that time, of course, the German standard was rapidly rising and was, even then, approaching
the British standard. And today, the German income per capita is not behind that of Great Britain
at all. In the center of Europe, there is a small country, Switzerland, which nature has endowed very
poorly. It has no coal mines, no minerals, and no natural resources. But its people over the centuries
have continually pursued a capitalistic policy. They have developed the highest standard of living
in continental Europe. And their country ranks as one of the world's great centers of civilization.
I do not see why a country such as Argentina, which is much larger than Switzerland, both in
population and in size, should not attain the same high standard of living after some years of good
policies. But as I pointed out, the policies must be good.
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