Two Ways to Develop a Country; D. Russell

The absence of a free market for labor· and services in the South was keeping its people poor, discouraging the accumulation of capital, driving away the capital that already existed, and delaying the development of the abundant natural resources to be found there. This Southern author was telling his slave-owning fell Helper, Hinton Rowan. The Impending Crisis in the South: How To Meet It. New York: A. B. Burdick~ 1860. Mr. Russell, fonnerly a member of the Foundation staff, was study ing at the Graduate Institute of International Studies in Geneva during 1957. This article is from a paper delivered in a seminar there. [72 ] low countrymen that they would make more money-not less-by freeing their slaves and paying the high wages established by a competitive market economy. He warned his neighbors that the South would remain underdevel oped and backward as long as· it continued to reject the market economy.

In effect, he explained that progress, prosperity, and profits are based on a governmental and social system that permits each person to use his individual skills and resources as seems to him most profitable and pleasing. He claimed that when peaceful persons are forced to do what they would not do voluntarily-or are prevented from doing what they want to do-the results are always second best, if not disastrous. Mr. Helper's research showed that there was far more production per acre of land in the market economy of the North than on comparable land in the unfree market of the South. The production per man-hour in Northern industries was far higher than in Southern industries. Because of the general absence of competition in a slave economy, even the free workers of the South were far less efficient than the industrial workers of the North. In fact, the North was ahead of the South in every mean ingful economic area that the author of this study could measure. And in all of these areas, the North was stead ily forging further ahead.

My thesis today is the same as that advanced 100 years ago by Mr. Helper: Any restriction of the free market-legal or illegal-will ultimately result in less production of wanted goods and services than there [73 ] would be in an unrestricted market economy. It makes no difference whether the restrictions concern minimum or maximum wages, minimum or maximum profits, im port or export embargoes, subsidies, allocations of raw materials or markets, monopolies, controlled currencies, tariffs, domestic or foreign trade, or development of resources within or without a country. In any country in the world, the people over a reasonable period of time will have more of the goods and services they want if the government limits itself to protecting the free market where independent and peaceful persons may trade their skills and services as seems best to them. Ways and Means Undoubtedly, all of us want the people of underdevel oped countries to have more of the material comforts of life. All of us are persons of good will, and our goal is the same. But I suspect that the means advanced by us to reach this desirable goal would vary from complete government control to an absolutely free market. So let us examine a few ideas and examples behind these two general ways-government versus the free market-to develop an underdeveloped country.

The free market way means that persons voluntarily use their own money and skills to back their own eco nomic decisions. They reap the rewards of good judgment and suffer the consequences of poor judgment. In this way, no person buys or sells or participates unless his best judgment says to do so. [74 ] The Compulsory Way The government or socialistic way to develop a coun try means that government officials compel you against your will and better judgment to contribute a portion of your money or time to implement their ideas and schemes. There is no sure way to determine if the decisions of these officials are economically sound be cause the only economic measurement available-the test of the marketis forbidden. It is true that as long as a free market in similar goods and services exists either within or without a socialistic country, the government officials can still make rough comparisons to determine the economic status of their projects. But since they know in advance that their projects would not meet the test of the free market (otherwise there would have been no reason to resort to compulsion), these government planners seldom make effective use of this comparative measurement.

The Middle Way Now someone is sure to claim that there is a third way to develop an underdeveloped country or region-the "middle-of-the-road" way that avoids the free market on the one side and government ownership or control on the other. I am convinced that this alleged third way is mostly a delusion. Mr. Nehru of India aptly described the nature of this third way in one of his speeches when he promised that [75 ] his government would give "encouragement in every way" to privately owned industries in his country. He promised that the government "would not touch them for at least ten years, maybe more." He added: "We do not know when we shall nationalize them."2 This third way is also inherent in the promises of officials of various underdeveloped countries to permit new private companies to operate tax free for a period of years-usually ten. This third way inspired Nikolai Lenin to establish his New Economic Policy in Russia in an effort to persuade the farmers to increase their agricultural production.

The government agency popularly known as the World Bank is following this third way when it speaks favor ably of private development and offers its bonds for sale to private investors. The hard reality behind this third way to development is written large in both history and current events. Mr. Nehru will continue to nationalize whatever he pleases and whenever he pleases. When a businessman is granted a tax concession in any country, he would be well ad vised to prepare himself for the confiscatory taxation or nationalization that will soon follow. Lenin's return to limited free enterprise was designed only to fool the people who enjoy being fooled. The World Bank was deliberately and purposefully designed to promote gov ernment ownership and control, not a market economy. A 1942 opinion by the Supreme Court of the United 2 Nehru, Jawaharlal. Independence and After. New York: John Day Company, 1950. p. 192.

[76 ] States succinctly summed up the fundamental reality behind this alleged third way when it ruled that "it is hardly lack of due process for the government to regulate that which it subsidizes." "This Time Is DifJerent~~ I suspect that most union leaders, fanners, business men, and other recipients of these subsidies that accrue to them for endorsing this third way, are well aware of the reality behind the favoritism and special privileges they now enjoy. But they fondly imagine that this time it is different; that all history and logic to the contrary, this time it will work. Well, it won't. And here's why. By definition, the third way is not the voluntary free market way; it is the way of government and compulsions. The fact that a govern ment may permit a great deal of private ownership and initiative in these partnerships doesn't deny that the gov ernment is in charge of the situation. When you think about it, why should the government bother to compel persons to conform or to refrain or to cooperate when it can persuade them to conform or refrain or cooperate voluntarily? Joseph Stalin would never have murdered anyone if he had been sure that everyone would have done exactly as he wanted them to do. The only realistic test of whether a project or method is, or is not, govern ment is this: Would the people do this voluntarily if the government stayed out of it completely? In every third[77 ] way project I know, the answer would be a resounding " "no.

True enough, the advocate of the third way may sin cerely and indignantly deny that he favors government ownership-or, at any rate, claim that he is in favor of only 10 per cent control by government. But he thereby opens the way for complete government control because he no longer has any principle or logical reason to protest 11 per cent control by government, or 49 per cent, or 51 per cent, or 100 per cent. Thus the defenders of the so called third way are in reality endorsing the government way and repudiating the market way-even though they themselves may not be aware of the ultimate implications of their acts. I agree that if we are forbidden a free market, then a half-free market is far superior to no market economy at all. This is merely another way of saying that the degree of freeness and competition in the market is directly re lated to the degree of production of the goods and serv ices that the people want.

Market V8. Compulsion In reality then, there are two ways-and only two ways -to develop an underdeveloped country. First, there is the way of the market, with each person voluntarily back ing his economic ideas with his own money and skills. Second, there is the way of government, wherein the capital is collected by the tax officials; wherein the par ticipants are compelled to participate by the police force; [78 ] wherein the market is by-passed. And under this second way-government-there is a subheading that might be titled "governmental direction of resources that remain in private hands." Now let's see how these two ways operate in practice. I contend that there is no real economic difference be tween domestic and foreign trade-although there are certainly political differences. And so it is in developing an underdeveloped country; although there are political differences, the same economic factors apply to internal and external development of underdeveloped areas. Thus the following examples of government development versus private development will cover both situations.

The TVA Idea Everyone knows of the Tennessee Valley Authority and the attempt of the United States government to de velop the admittedly underdeveloped resources of the State of Tennessee. People from all over the world have come to America to admire this project, to study it, and to reproduce something like it in their own countries. Among other things, the Tennessee Valley Authority is designed to control Hoods, improve navigation, and produce electricity. Without going into detail, here are some conclusions based upon my own studies of the situation.S 3 Russell, Dean. The TVA Idea. Irvington, N. Y.: Foundation for Economic Education, 1949. [79 ] 1. More land has been permanently Hooded, and thus permanently taken out of production, by the TVA project than the records show was ever temporarily Hooded by nature. 2. There was more traffic on the Tennessee River in 1930 before TVA than there was in 1939 after TVA had poured several hundreds of millions of taxpayersl' dollars into the improvement of navigation on the river. Subse quent increases in traffic on the Tennessee have been comparable to increases on other American waterways, improved or not. The four cents per ton-mile cost to tax payers for traffic on the Tennessee waterway in 1939 com pares with the price of one per cent per ton-mile charged by privately owned railroads in the same area.

S. When all expenses are considered and properly al located, the cost of TVA-produced electricity is almost one-third higher than the cost of electricity produced by neighboring power companies that are privately owned and operated. Russia Builds a Dam Now le~s go to Russia and brieHy examine a similar project there-the great Dneprostroi hydroelectric dam. Not surprisingly, it has many resemblances to the Ten nessee Valley Authority. In 1935, an exiled Russian econ omist who had worked on this and similar projects in Russia wrote a book on the subject. When you hear what he had to say, you will readily understand why he was exiled. Here is a part of it: [ 80] The rapid construction of the great power station on the Dnieper rapids (Dneprogez) is accounted one of the most brilliant feats of the Soviet government, and it has already won for the government the support of many foreign travelers.

But from an economic point of view the rapid construction of Dneprogez cannot be justified at all, because many years must elapse before the factories which it is supposed to serve will be completed; there seems, indeed, to be no urgent need for them. Meanwhile no funds are available for house-building in Magnitogorsk, and it is very probable that the unsatisfactory results yielded by this smelting works are the direct outcome of the disgusting conditions in which the workers are com pelled to live.4 Nasser Follow,s Suit Moving down to Egypt, let's speculate for a moment about another similar government plan to develop an underdeveloped nation or region-Colonel Nasser's As wan high dam. Is it economically feasible? Well, by the only realistic test of economic feasibility that exists-what people are willing to do with their own money-it is not. Even the greatest planners of all, the Russian experts, say that this particular project is impractical. I cannot im agine that any independent economist would pronounce it an economically sound project for Egypt. The truth of the matter seems to be this: In Egypt today, we find all the trimmings of capitalism-engineers, machinery, finan cial experts, and so on-but there is a serious curtailment of the philosophy of capitalism, such as government pro4: Brutzkus, Boris. Economic Planning in Soviet Russia. London: George Routledge & Sons, 1935. pp. 228-9.

[81 ] tection of private property, sanctity of contract, personal savings for domestic investment, profits, and so on. Venezuela Tries Freedom Compare this Egyptian dilemma with the development now under way in Venezuela. Venezuela wants the world's capitalists to invest their money and skills in ex ploiting the natural resources of that country. The gov ernment has guaranteed noninterference in the strictly business and economic affairs of the foreign companies established in Venezuela. In traditional free market fashion, the government sells mineral and other conces sions to the highest bidder and on the best possible eco nomic terms for Venezuela. But once the contract is signed, the government keeps its promise. The foreign capitalists are free to make as much profit as they pos sibly can. In fact, the more they make, the more the Venezuelans make. As a result of this practical and effective method of exploiting natural resources, the level of living in Vene zuela is rising steadily. So is the educational level. The economy is booming and, I predict, will continue to do so-unless some softheaded Venezuelan patriot persuades the people that they should nationalize the foreign com panies and keep all those exorbitant profits for them selves. If that happens, Venezuela will begin to sink back into one of the world's most backward nations.

Many persons in underdeveloped lands complain that foreign capitalists are primarily concerned with profits [82 ] and would take out of the country more than they bring in. Certainly they would! The investors in General Motors and the United States Steel Corporation also take from those companies in profits a great deal more than they put in them in the form of capital. I know it is dangerous to make blanket statements, but here is one that I will stand on: This chance to make high profits in a com petitive economy is the only reason that the United States has become the greatest industrial producer the world has ever known, with a level of living for even the poorer citizens that is higher than that enjoyed by the richer citizens of socialist countries. My choice of the phrase above, (Cthe only reason," is not an accident because if competition and this chance for profits were abolished, the other corollary reasons for progress would be of little or no value. And, conversely, the only reason that any country now remains underdeveloped is because its laws and customs are hostile to competition and the profit motive.

Cultural Underdevelopment For example, take India. Both law and custom in that underdeveloped country are antagonistic to efficient eco nomic development. The iron grip of the inflexible caste system of the Hindu civilization has stunted individual initiative, and repressed every attempt to deviate from traditional standards, for hundreds of years. As long as it continues, capitalism can't possibly make much head way there. Admittedly, Mr. Nehru is doing his best to [83 ] abolish the caste system, and is apparently having con siderable success. But he is doing it not for economic but for social reasons. In fact, while he is attempting to free the Indian people from this repressive caste tradition, he is at the same time using the law to bind them down with an equally repressive economic system. And the United States government, with the help of the World Bank, is doing all it possibly can do to aid Mr. Nehru in his at tempt to make sure that the market economy shall never be permitted to flourish in India. It seems that Mr.

Khrushchev of Russia is also anxious to help forestall this dreaded possibility of a market economy for India. I .could now move on to Great Britain and point out the inevitable results of a few of their government plans like the nationalization of the coal mines, or the East African Groundnuts scheme (sometimes known as the Great Peanut Fiasco), and other similar grandiose proj ects that required the use of the police force to recruit investors and capital. But instead, I'll dwell for a moment on a remarkable speech once made by the late Foreign Minister, Ernest Bevin. He pointed out that it used to be possible for an Englishman to go to Victoria Station, buy a ticket to any place in the world, and go there-without the permission of his own or any other government. Mr. Bevin complained that this was now no longer possible and that something ought to be done about it. The whole world applauded his sentiment. But ap parently neither Mr. Bevin nor his applauders stopped to think that Mr. Bevin's own philosophy of government and economics was· solely responsible for the condition [84 ] he claimed to deplore. It was the economic policies of Mr. Bevin and his fellow government planners all over the world that required passports and visas, trade bar riers, pegged currencies, a limit on the amount of money a citizen could take from his own country or into another country, and various other curtailments of the traditional right of a person to travel and to trade as seemed to him best.

In contrast to the above examples of government mis management, consider West Germany since the Gennan people finally abolished the worst features of the planned economy that the United States government saddled them with from 1945 to 1950. The West German people are now well on their way to the highest level of living in Europe. They are doing so well that American manu facturers are beginning to demand that our government protect them against German competition not only in the world markets but even within the United States itself. That protection-if they get it-will deprive the American people of various products they want, and it will increase the cost of similar goods produced at home. The Buying of Friendship Now I could recite a great many other examples of the disastrous results that occur when a nation invites the investment of foreign capital and guarantees that the in vestments and any resulting profits will be protected.

And conversely, I could go on with many other examples of the disastrous results of government planning in vari[85 ] ous underdeveloped countries. Instead, however, I want to mention another aspect of foreign investment that is frequently discussed. It is claimed that government loans or gifts by the United States to foreign governments will gain allies against Russia and will prevent the spread of communism. If I were an Italian citizen, for example, I would resent this idea that I could be bribed not to become a com munist. And the evidence seems to indicate that the Italians have resented it. At any rate, the membership in the Communist party in Italy seemed to increase with each additional million dollars that the United States poured into that country. Then suddenly the Communist party in Italy suffered a blow from which it probably will never recover. This disaster is due not to American money in any way but exclusively to the fact that the Russians began shooting Hungarians. Did the promise of American money have anything to do with this revolt in Hungary?

No. How about Poland? Again the answer is no. Thus we now have good reasons to suspect that our best allies against Russia may well be the people to whom we haven't given a penny! It seems to me that this idea of buying allies-either with outright gifts or with funds disguised as capital to develop the underdeveloped areas-is highly question able. Whatever else Mr. Nehru may be, certainly he is an honorable man, and he can't be bought. The Indian peo ple under his leadership are following many of the blue prints and objectives of the old Russian CCfive-yearplans" because they want to. The money being supplied to India [86 ] by the World Bank will, of course, help them do it. It will do exactly that, and little else. Let Freedom Reign If the government of any underdeveloped country truly wants its resources and people developed to the fullest possible extent in the shortest possible time, here is all it needs to do: First, abolish all trade and currency re strictions-all of them, internal and external. Second, en act laws guaranteeing the protection of the private prop erty of its own citizens. Third, enact laws that guarantee the same treatment to foreigners and foreign capital as is then guaranteed to its own citizens and their capital.

Fourth, convince both its own citizens and the world in general that this is a permanent policy. Fifth, be prepared for an immediate and dramatic start toward the develop ment of both the resources of the country and the skills of the people to their maximum capacity in the shortest possible time. [87 ] FREEDOM OF OPPORTUNITY ONE of the characteristics of our educational system in the past decade or so has been its preoccupation with the welfare of the "slow learner," or poorer student. This has resulted in "passing" many who should· have failed. We are now beginning to realize that the granting of such unearned benefits to the intellectually poor or the plain lazy has only compounded and perpetuated the difficulty. Concentration on the poor student has been accom plished only by a corresponding neglect of the better student, and this neglect has been costly. The lesson to be learned is that excessive concentration on the welfare of the intellectually. poor has not only failed to help him but that such policies have had an effect of causing the intellectually rich to lose initiative in providing brain power for progress.