"In every experimental science there is a tendency
toward perfection. In every human being there is a wish to ameliorate
his own condition. These two principles-have often sufficed, even when
counteracted by great public calamities and by bad institutions, to
carry civilization rapidly forward. No ordinary misfortune, no ordinary
misgovernment, will do so much to make a nation wretched as the constant
effort of every man to better himself will do to make to e' a nation
prosperous. It has often been found that profuse expenditures, heavy
taxation, absurd commercial restrictions, corrupt tribunals, disastrous
wars, seditions, persecutions, conflagrations, inundations, have not
been able to destroy capital so fast as the exertions of private
citizens have been able to create it. It can easily be proved that, in
our own land, the national wealth has, during at least six centuries,
been almost uninterruptedly increasing. . . . This progress, having
continued during many ages, became at length, about the middle of the
eighteenth century, portentously rapid, and has proceeded, during the
nineteenth, with accelerated velocity."
We too often forget this basic truth. Would-be
humanitarians speak constantly today of "the vicious circle of poverty."
Poverty, they tell us, produces malnutrition and disease, which produce
apathy and idleness, which perpetuate poverty; and no progess is
possible without help from outside. This theory is today propounded
unceasingly, as if it were axiomatic. Yet the history of nations and
individuals shows it to be false.
It is not only "the natural effort which every man is
continually making to better his own condition" (as Adam Smith put it
even before Macaulay) that we need to consider, but the constant effort
of most families to give their children a "better start" than they
enjoyed themselves. The poorest people under the most primitive
conditions work first of all for food, then for clothing and shelter.
Once they have provided a rudimentary shelter, more of their energies
are released for increasing the quantity or improving the quality of
their food and clothing and shelter. And for providing tools. Once they
have acquired a few tools, part of their time and energies can be
released for making more and better tools. And so, as Macaulay
emphasized, economic progress can become accelerative.
One reason it took so many centuries before this
acceleration actually began, is that as men increased their production
of the means of subsistence, more of their children survived. This meant
that their increased production was in fact mainly used to support an
increasing population. Aggregate production, population, and consumption
all increased; but per capita production and consumption barely
increased at all. Not until the Industrial Revolution began in the late
eighteenth century did the rate of production begin to increase by so
much that, in spite of leading to an unprecedented increase in
population, it led also to an increase in per capita production. In the
Western world this increase has continued ever since.
So a country can, in fact, starting from the most
primitive conditions, lift itself from poverty to abundance. If this
were not so, the world could never have arrived at its present state of
wealth. Every country started poor. As a matter of historic fact, most
nations raised themselves from "hopeless" poverty to at least a less
wretched poverty purely by their own efforts.
Specialization and Trade
One of the ways by which each nation or
region did this was by division of labor within its own territory and by
the mutual exchange of services and products. Each man enormously
increased his output by eventually specializing in a single activity -by
becoming a farmer, butcher, baker, mason, bricklayer, or tailor -and
exchanging his product with his neighbors. In time this process extended
beyond national boundaries, enabling each nation to specialize more than
before in the products or services that it was able to supply more
plentifully or cheaply than others, and by exchange and trade to supply
itself with goods and services from others more plentifully or cheaply
than it could supply them for itself.
But this was only one way in which foreign trade
accelerated the mutual enrichment of nations. In addition to being able
to supply itself with more goods and cheaper goods as a result of
foreign trade, each nation supplied itself with goods and services that
it could otherwise not produce at all, and of which it would perhaps not
even have known the existence.
Thus foreign trade educates each nation that
participates in it, and not only through such obvious means as the
exchange of books and periodicals. This educational effect is
particularly important when hitherto backward countries open their doors
to industrially advanced countries. One of the most dramatic examples of
this occurred in 1854, when Commodore Perry at the head of a U. S. naval
force "persuaded" the Japanese, after 250 years of isolation, to open
their doors to trade and communication with the U.S. and the rest of the
world. Part of Perry's success, significantly, was the result of
bringing and showing the Japanese such things as a modern telescope, a
model telegraph, and a model railway, which delighted and amazed them.
Some Steps May Be Skipped
Western reformers today, praising some
hitherto backward country, in Africa or Asia, will explain how much
smarter its natives are than we of the West because they have "leaped in
a single decade from the seventeenth into the twentieth century." But
the leap, while praiseworthy, is not so surprising when one recalls that
what the natives mainly did was to import the machines, instruments,
technology, and know-how that had been developed during those three
centuries by the scientists and technicians of the West. The backward
countries were able to bypass home coal furnaces, gaslight, the street
car, and even, in most cases, the railroad, and to import Western
automobiles, Western knowledge of road-building, Western airplanes and
airliners, telephones, central oil heaters, electric light, radio and
television, refrigerators and airconditioning, electric heaters, stoves,
dishwashers and clothes washers, machine tools, factories, plants, and
Western technicians, and then to send some of their youth to Western
colleges and universities to become technicians, engineers, and
scientists. The backward countries imported, in brief, their "great leap
forward."
In fact, not merely the recently backward countries of
Asia and Africa, but every great industrialized Western nation, not
excluding the United States, owes a very great part - indeed, the major
part - of its present technological knowledge and productivity to
discoveries, inventions, and improvements imported from other nations.
Notwithstanding the elegant elucidations by the classical economists,
very few of us today appreciate all that the world and each nation owes
to foreign trade, not only in services and products, but even more in
knowledge, ideas, and ideals.
International Investment
Historically, international trade
gradually led to international investment. Among independent nations,
international investment developed inevitably when the exporters of one
nation, in order to increase their sales, sold on short-term credit, and
later on longer-term credit, to the importers of another. It developed
also because capital was scarcer in the less developed nation, and
interest rates were higher. It developed on a larger scale when men
emigrated from one country to another, starting businesses in the new
country, taking their capital as well as their skills with them.
In fact, what is now known as Is portfolio" investment
- the purchase by the nationals of one country of the stocks or bonds of
the companies of another - has usually been less important
quantitatively than this "direct" investment. In 1967 U. S. private
investments abroad were estimated to total $93 billion, of which $12
billion were short-term assets and claims, and $81 billion long-term. Of
American long-term private investments abroad, $22 billion were
portfolio investments and $59 billion direct investments.
The export of private capital for private investment
has on the whole been extremely profitable for the capital-exporting
countries. In every one of the twenty years from 1945 to 1964 inclusive,
for example, the income from old direct foreign investments by U. S.
companies exceeded the outflow of new direct investments. In that
twenty-year period new outflows of direct investments totaled $22.8
billion, but income from old direct investments came to $37.1 billion,
plus $4.6 billion from royalties and fees, leaving an excess inflow of
$18.9 billion. In fact, with the exception of 1928, 1929, and 1931, U.
S. income from direct foreign investments exceeded new capital outlays
in every year since 1919.1
Our direct foreign investments also greatly stimulated
our merchandise exports. The U. S. Department of Commerce found that in
1964, for example, $6.3 billion, or 25 per cent of our total exports in
that year, went to affiliates of American companies overseas.
It is one of the ironies of our time, however, that the
U. S. government decided to put the entire blame for the recent
"balance-of-payments deficit" on American investments abroad; and
beginning in mid-1963, started to penalize and restrict such investment.
The advantages of international investment to the
capital importing country should be even more obvious. In any backward
country there are almost unlimited potential ventures, or "investment
opportunities," that are not undertaken chiefly because the capital to
start them does not exist. It is the domestic lack of capital that makes
it so difficult for the "underdeveloped" country to climb out of its
wretched condition. Outside capital can enormously accelerate its rate
of improvement.
Investment from abroad, like domestic investment, can
be of two kinds: the first is in the form of fixed interest-bearing
loans, the second in the form of direct equity investment in which the
foreign investor takes both the risks and the profits. The politicians
of the capital-importing country usually prefer the first. They see
their nationals, say, making 15 or 30 per cent annual gross profit on a
venture, paying off the foreign lender at a rate of only 6 per cent, and
keeping the difference as net profit. If the foreign investor makes a
similar assessment of the situation, however, he naturally prefers to
make the direct equity investment himself.
But the foreigner's preference in this regard does not
necessarily mean that the capital-importing country is injured. It is to
its own advantage if its government puts no vexatious restrictions on
the form or conditions of the private foreign investment. For if the
foreign investor imports, in addition to his capital, his own (usually)
superior management, experience, and technical know-how, his enterprise
may be more likely to succeed. He cannot help but give employment to
labor in the capital-importing country, even if he is allowed to bring
in labor freely from his own. Self-interest and wage-rate differentials
will probably soon lead him to displace most of whatever common or even
skilled labor he originally brings in from his own country with the
labor of the host country. He will usually supply the capital-importing
country itself with some article or amenity it did not have before. He
will raise the average marginal productivity of labor in the country in
which he has built his plant or made his investment, and his enterprise
will tend to raise wages there. And if his investment proves
particularly profitable, he will probably keep reinvesting most of his
profits in it as long as the market seems to justify the reinvestment.
There is still another benefit to the capital-importing
country from private foreign investment. The foreign investors will
naturally seek out first the most profitable investment opportunities.
If they choose wisely, these will also be the investments that produce
the greatest surplus of market value over costs and are therefore
economically most productive. When the originally most productive
investment opportunities have been exploited to a point where the
comparative rate of return begins to diminish, the foreign investors
will look for the next most productive investment opportunities,
originally passed over. And so on. Private foreign investment will
therefore tend to promote the most rapid rate of economic improvements.
Foreigners Are Suspect
It is unfortunate, however, that just as
the government of the private-capital-exporting country today tends to
regard its capital exports with alarm as a threat to its "balance of
payments," the government of the private-capital importing country today
tends to regard its capital imports at least with suspicion if not with
even greater alarm. Doesn't the private capital-exporting country make a
profit on this capital? And if so, mustn't this profit necessarily be at
the expense of the capital-importing country? Mustn't the latter country
somehow be giving away its patrimony? It seems impossible for the
anticapitalist mentality (which prevails among the politicians of the
world, particularly in the underdeveloped countries) to recognize that
both sides normally benefit from any voluntary economic transaction,
whether a purchase-sale or a loan-investment, domestic or international.
Chief among the many fears of the politicians of the
capital-importing country is that foreign investors "take the money out
of the country." To the extent that this is true, it is true also of
domestic investment. If a home owner in Philadelphia gets a mortgage
from an investor in New York, he may point out that his interest and
amortization payments are going out of Philadelphia and even out of
Pennsylvania. But he can do this with a straight face only by forgetting
that he originally borrowed the money from the New York lender either
because he could not raise it at all in his home city or because he got
better terms than he could get in his home city. If the New Yorker makes
an equity investment in Pennsylvania, he may take out all the net
profits; but he probably employs Pennsylvania labor to build his factory
and operate it. And he probably pays out $85 to $90 annually for labor,
supplies, rent, etc., mainly in Pennsylvania, for every $10 he takes
back to New York. (In 1969, American manufacturing corporations showed a
net profit after taxes of only 5.4 per cent on total value of sales.)
"They take the money out of the country" is an objection against foreign
investors resulting even more from xenophobia than from anticapitalism.
Fear of Foreign Control
Another objection to foreign investment
by politicians of the capital-importing country is that the foreign
investors may "dominate" the borrowing country's economy. The
implication (made in 1965 by the de Gaulle government of France, for
example) is that American-owned companies might Come to have too much to
say about the economic decisions of the government of the countries in
which they are located. The real danger, however, is the other way
round. The foreign-owned company puts itself at the mercy of the
government of the host country. Its capital in the form of buildings,
equipment, drilled wells and refineries, developed mines, and even bank
deposits, may be trapped. In the last twenty-five years, particularly in
Latin America and the Middle East, as American oil companies and others
have found to their sorrow, the dangers of discriminatory labor
legislation, onerous taxation, harassment, or even expropriation, are
very real.
Yet the anticapitalistic, xenophobic, and other
prejudices against private foreign investment have been so widespread,
in both the countries that would gain from importing capital and the
countries that would profit from exporting it, that the governments in
both sets of countries have imposed taxes, laws and regulations, red
tape, and other obstacles to discourage it.
At the same time, paradoxically, there has grown up in
the last quarter-century powerful political pressures in both sets of
countries in favor of the richer countries giving capital away to the
poorer in the form of government-to-government "aid."
The Marshall Plan
This present curious giveaway mania (it can
only be called that on the part of the countries making the grants) got
started as the result of an historical accident. During World War II,
the United States had been pouring supplies - munitions, industrial
equipment, foodstuffs - into the countries of its allies and
cobelligerents. These were all nominally "loans." American Lend-Lease to
Great Britain, for example, came to some $30 billion and to Soviet
Russia to $11 billion.
But when the war ended, Americans were informed not
only that the Lend-Lease recipients could not repay and had no intention
of repaying, but that the countries receiving these loans in wartime had
become dependent upon them and were still in desperate straits, and that
further credits were necessary to stave off disaster.
This was the origin of the Marshall Plan.
On June 5, 1947, General George C. Marshall, then
American Secretary of State, made at Harvard the world's most expensive
commencement address, in which he said:
"The truth of 'the matter is that Europe's
requirements, for the next three or four years, of foreign food and
other essential products - principally from America - are so much
greater than her present ability to pay that she must have substantial
additional help, or face economic, social, and political deterioration
of a very grave character."
Whereupon Congress authorized the spending in the
following three-and-a-half years of some $12 billion in aid.
This aid was widely credited with restoring economic
health to "free" Europe and halting the march of communism in the
recipient countries. It is true that Europe did finally recover from the
ravages of World War 11 - as it had recovered from the ravages of World
War I. And it is true that, apart from Yugoslavia, the countries not
occupied by Soviet Russia did not go communist. But whether the Marshall
Plan accelerated or retarded this recovery, or substantially affected
the extent of communist penetration in Europe, can never be proved. What
can be said is that the plight of Europe in 1947 was at least as much
the result of misguided European governmental economic policies as of
physical devastation caused by the war. Europe's recovery was far slower
than it could have been, with or without the Marshall Plan.
This was dramatically demonstrated in West Germany in
1948, when the actions between June 20 and July 8 of Economic Minister
Ludwig Erhard in simultaneously halting inflation, introducing a
thoroughgoing currency reform, and removing the strangling network of
price controls, brought the German "miracle" of recovery.
As Dr. Erhard himself described his action: "We decided
upon and re-introduced the old rules of a free economy, the rules of
laissez-faire. We abolished practically all controls over allocation,
prices, and wages, and replaced them with a price mechanism controlled
predominantly by money."
The result was that German industrial production in the
second half of 1948 rose from 45 per cent to nearly 75 per cent of the
1936 level, while steel production doubled that year.
It is sometimes claimed that it was Germany's share of
Marshall aid that brought on the recovery. But nothing similar occurred
in Great Britain, for example, which received more than twice as much
Marshall aid. The German per capita gross national product, measured in
constant prices, increased 64 per cent between 1950 and 1958, whereas
the per capita increase in Great Britain, similarly measured, rose only
15 per cent.
Once American politicians got the idea that the
American taxpayer owed other countries a living, it followed logically
that his duty could not be limited to just a few. Surely that duty was
to see that poverty was abolished everywhere in the world. And so in his
inaugural address of January 20, 1949, President Truman called for "a
bold new program" to make "the benefits of our scientific advances and
industrial progress available for the improvement and growth of
underdeveloped areas.... This program can greatly increase the
industrial activity in other nations and can raise substantially their
standards of living."
Because it was so labeled in the Truman address, this
program became known as "Point Four." Under it the "emergency" foreign
aid of the Marshall Plan, which was originally to run for three of four
years at most, was universalized, and has now been running for more than
twenty years. So far as its advocates and built-in bureaucracy are
concerned, it is to last until foreign poverty has been abolished from
the face of the earth, or until the per capita "gap" between incomes in
the backward countries and the advanced countries has been closed -even
if that takes forever.
The cost of the program already is appalling. Total
disbursements to foreign nations, in the fiscal years 1946 through 1970,
came to $131 billion. The total net interest paid on what the U. S.
borrowed to give away these funds amounted in the same period to $68
billion, bringing the grand total through the 25-year period to $199
billion.2
This money went altogether to some 130 nations. Even in
the fiscal year 1970, the aid program was still operating in 99 nations
and five territories of the world, with 51,000 persons on the payroll,
including U. S. and foreign personnel. Congressman Otto E. Passman,
chairman of the Foreign Operations Subcommittee on Appropriations,
declared on July 1, 1969: "Of the three-and-a-half billion people of the
world, all but 36 million have received aid from the U. S."
Domestic Repercussions
Even the colossal totals just cited do
not measure the total loss that the foreign giveaway program has imposed
on the American economy. Foreign aid has had the most serious economic
side effects. It has led to grave distortions in our economy. It has
undermined our currency, and contributed toward driving us off the gold
standard. It has accelerated our inflation. It was sufficient in itself
to account for the total of our Federal deficits in the 1946-70 period.
The $199 billion foreign aid total exceeds by $116 billion even the $83
billion increase in our gross national debt during the same years.
Foreign aid has also been sufficient in itself to account for all our
balance-of-payments deficits (which our government's policies blame on
private foreign investment).
The advocates of foreign aid may choose to argue that
though our chronic Federal budget deficits in the last 25 years could be
imputed to foreign aid, we could alternatively impute those deficits to
other expenditures, and assume that the foreign aid was paid for
entirely by raising additional taxes. But such an assumption would
hardly improve the case for foreign aid. It would mean that taxes during
this quarter-century averaged at least $5 billion higher each year than
they would have otherwise. It would be difficult to exaggerate the
setbacks to personal working incentives, to new ventures, to profits, to
capital investment, to employment, to wages, to living standards, that
an annual burden of $5 billion in additional taxation can cause.
If, finally, we make the "neutral" assumption that our
$131 or $199 billion in foreign aid (whichever way we choose to
calculate the sum) was financed in exact proportion to our actual
deficit and tax totals in the 25-year period, we merely make it
responsible for part of both sets of evils.
In sum, the foreign aid program has immensely set back
our own potential capital development. It ought to be obvious that a
foreign giveaway program can raise the standards of living of the
socalled "underdeveloped areas" of the world only by lowering our own
living standards compared with what they could otherwise be. If our
taxpayers are forced to contribute millions of dollars for hydroelectric
plants in Africa or Asia' they obviously have that much less for
productive investment in the U. S. If they contribute $10 million
dollars for a housing project in Uruguay, they have just that much less
for their own housing, or any other cost equivalent, at home. Even our
own socialist and statist do-gooders would be shaken if it occurred to
them to consider how much might have been done with that $131 or $199
billion of foreign aid to mitigate pollution at home, build subsidized
housing, and relieve "the plight of our cities." Free enterprisers, of
course, will lament the foreign giveaway on the far more realistic
calculation of how enormously the production, and the wealth and welfare
of every class of our population, could have been increased by $131 to
$199 billion in more private investment in new and better tools and
cost-reducing equipment, and in higher living standards, and in more and
better homes, hospitals, schools, and universities.
The Political Arguments
What have been the economic or political
compensations to the United States for the staggering cost of its
foreign aid program? Most of them have been illusory.
When our successive Presidents and foreign aid
officials make inspirational speeches in favor of foreign aid, they
dwell chiefly on its alleged humanitarian virtues, on the need for
American generosity and compassion, on our duty to relieve the suffering
and share the burdens of all mankind. But when they are trying to get
the necessary appropriations out of Congress, they recognize the
advisability of additional arguments. So they appeal to the American
taxpayer's material self-interest. It will redound to his benefit, they
argue, in three ways: 1. It will increase our foreign trade, and
consequently the profits from it. 2. It will keep the underdeveloped
countries from going communist. 3. It will turn the recipients of our
grants into our eternally grateful friends.
The answers to these arguments are clear:
1. Particular exporters may profit on net balance from
the foreign aid program, but they necessarily do so at the expense of
the American taxpayer. It makes little difference in the end whether we
give other countries the dollars to pay for our goods, or whether we
directly give them the goods. We cannot grow rich by giving our goods or
our dollars away. We can only grow poorer. (I would be ashamed of
stating this truism if our foreign aid advocates did not so
systematically ignore it.)
2. There is no convincing evidence that our foreign aid
played any role whatever in reversing, halting, or even slowing down any
drift toward communism. Our aid to Cuba in the early years of the
program, and even our special favoritism toward it in assigning sugar
quotas and the like, did not prevent it from going communist in 195S.
Our $769 million of aid to the United Arab Republic did not prevent it
from coming under Russian domination. Our $460 million aid to Peru did
not prevent it from seizing American private properties there. Neither
our $7,715 million aid to India, nor our $3,637 million aid to Pakistan,
prevented either country from moving deeper and deeper into socialism
and despotic economic controls.
Our aid, in fact, subsidized these very programs, or
made them possible. And so its goes, country after country.
3. Instead of turning the recipients into grateful
friends, there is ever-fresh evidence that our foreign aid program has
had precisely the opposite effect. It is pre-eminently the American
embassies and the official American libraries that are mobbed and
stoned, the American flag that is burned, the Yanks that are told to go
home. And the head of almost every government that accepts American aid
finds it necessary to denounce and insult the United States at regular
intervals in order to prove to his own people that he is not subservient
and no puppet.
So foreign aid hurts both the economic and political
interest of the country that extends it.
The Unseen Costs of Utopian Programs
But all this might be
overlooked, in a broad humanitarian view, if foreign aid accomplished
its main ostensible purpose of raising the living levels of the
countries that received it. Yet both reason and experience make it clear
that in the long run it has precisely the opposite effect.
Of course, a country cannot give away $131 billion
without its doing something abroad (though we must always keep in mind
the reservation - instead of something else at home). If the money is
spent on a public housing project, on a hydroelectric dam, on a steel
mill (no matter how uneconomic or ill-advised), the housing or the dam
or the mill is brought into existence. It is visible and undeniable. But
to point to that is to point only to the visible gross gain while
ignoring the costs and the offsets. In all sorts of ways - economic,
political, spiritual - the aid in the long run hurts the recipient
country. It becomes dependent on the aid. It loses self-respect and
self-reliance. The poor country becomes a pauperized country, a beggar
country.
There is a profound contrast between the effects of
foreign aid and of voluntary private investment. Foreign aid goes from
government to government. It is therefore almost inevitably statist and
socialistic. A good part of it goes into providing more goods for
immediate consumption, which may do nothing to increase the country's
productive capacity. The rest goes into government projects, government
five-year plans, government airlines, government hydroelectric plants
and dams, or government steel mills, erected principally for prestige
reasons, and for looking impressive in colored photographs, and
regardless of whether the projects are economically justified or
self-supporting. As a result, real economic improvement is retarded.
The insoluble Dilemma
From the very beginning, foreign aid has
faced an insoluble dilemma. I called attention to this in a book
published in 1947, Will Dollars Save the World?, when the Marshall Plan
was proposed but not yet enacted:
"Intergovernmental loans [they have since become mainly
gifts, which only intensifies the problem] are on the horns of this
dilemma. If on the one hand they are made without conditions, the funds
are squandered and dissipated and fail to accomplish their purpose. They
may even be used for the precise opposite Of the purpose that the lender
had in mind. But if the lending government attempts to impose
conditions, its attempt causes immediate resentment. It is called
'dollar diplomacy'; or 'American imperialism'; or 'interfering in -the
internal affairs' of the borrowing nation. The resentment is quickly
exploited by the Communists in that nation."
In the 23 years since the foreign-aid program was
launched, the administrators have not only failed to find their way out
of this dilemma; they have refused even to acknowledge its existence.
They have zigzagged from one course to the other, and ended by following
the worst course of all: they have insisted that the recipient
governments adopt "growth policies" which mean, in practice, government
"planning," controls, inflation, ambitious nationalized projects - in
brief, socialism.
If the foreign aid were not offered in the first place,
the recipient government would find it advisable to try to attract
foreign private investment. To do this it would have to abandon its
socialistic and inflationary policies, its exchange controls, its laws
against taking money out of the country. it would have to abandon
harassment of private business, restrictive labor laws, and
discriminatory taxation. It would have to give assurances against
nationalization, expropriation, and seizure.
Specifically, if the nationals of a poor country wanted
to borrow foreign capital for a private project, and had to pay a going
rate of, say, 7 per cent interest for the loan, their project would have
to be one that promised to yield at least 7 per cent before the foreign
investors would be interested. If the government of the poor country, on
the other hand, can get the money from a foreign government without
having to pay interest at all, it need not trouble to ask itself whether
the proposed project is likely to prove economic and self liquidating or
not. The essential market guide to comparative need and utility is then
completely removed. What decides priorities is the grandiose dreams of
the government planners, unembarrassed by bothersome calculations of
comparative costs and usefulness.
The Conditions for Progress
Where foreign government aid is not
freely offered, however, a poor country, to attract private foreign
investment, must establish an actual record of respecting private
property and maintaining free markets. Such a free-enterprise policy by
itself, even if it did not at first attract a single dollar of foreign
investment, would give enormous stimulus to the economy of the country
that adopted it. It would first of all stop the flight of capital on the
part of its own nationals and stimulate domestic investment. It is
constantly forgotten that both domestic and foreign capital investment
are encouraged (or discouraged) by the same means.
It is not true, to repeat, that the poor countries are
necessarily caught in a "vicious circle of poverty," from which they
cannot escape without massive handouts from abroad. It is not true that
"the rich countries are getting richer while the poor countries are
getting poorer," It is not true that the "gap" between the living
standards of the poor countries and the rich countries is growing ever
wider. Certainly that is not true in any proportionate sense. From 1945
to 1955, for example, the average rate of growth of Latin American
countries in national income was 4.5 per cent per annum, and in output
per head 2.4 per cent-both rates appreciably higher than the
corresponding figure for the United States.3
Intervention Breeds Waste
The foreign aid ideology is merely the
relief ideology, the guaranteed-income ideology, applied on an
international scale. Its remedy, like the domestic relief remedy, is to
"abolish poverty" by seizing from the rich to give to the poor. Both
proposals systematically ignore the reasons for the poverty they seek to
cure. Neither draws any distinction between the poverty caused by
misfortune and the poverty brought on by shiftlessness and folly. The
advocates of both proposals forget that their chief attention should be
directed to restoring the incentives, self-reliance, and production of
the poor family or the poor country, and that the principal means of
doing this is through the free market.
In sum, government-to-government foreign aid promotes
statism, centralized planning, socialism, dependence, pauperization,
inefficiency, and waste. It prolongs the poverty it is designed to cure.
Voluntary private investment in private enterprise, on the other hand,
promotes capitalism, production, independence, and self-reliance. It is
by attracting foreign private investment that the great industrial
nations of the world were once helped. It is so that America itself was
helped by British capital, in the nineteenth century, in building its
railroads and exploiting its great national resources. It is so that the
still "underdeveloped areas" of the world can most effectively be helped
today to develop their own great potentialities and to raise the living
standards of their masses.
At the time of the original publication, Henry Hazlitt
was well-known to FREEMAN readers as author, columnist, editor,
lecturer, and practitioner of freedom. This article will appear as a
chapter in a forthcoming book, The Conquest of Poverty, to be
published by Arlington House.
1 See The United States Balance of Payments
(Washington: International Economic Policy Association, 1966), pp. 21
and 22
2 Source: Foreign Operations Subcommittee on
Appropriations, House of Representatives, July 1, 1970.
3 Cf." Some Observations on 'Gapology,"' by P. T. Bauer
and John B. Wood in Economic Age (London), November-December 1969.
Professor Bauer is one of the few academic economists who have seriously
analyzed the fallacies of foreign aid. See also his Yale lecture on
foreign aid published by The Institute of Economic Affairs (London),
1966, and his article on "Development Economics" in Roads to Freedom:
Essays in Honour of Friedrich A. von Hayek (London: Routledge &
Kegan Paul, 1969). I may also refer the reader to my own book, Will
Dollars Save the World? (Appleton, 1947), to my pamphlet, Illusions of
Point Four (Irvington-on-Hudson, New York: Foundation for Economic
Education, 1950), and to my chapter on "The Fallacy of Foreign Aid" in
my Man Vs. the Welfare State (Arlington House, 1969).
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
October, 1970, Vol. 20, No. 10.
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