Foreign Investment Vs. Foreign Aid; H. Hazlitt

HENRY HAZLITT FOREIGN INVESTMENT FOREIGN AID AT the beginning of Chapter III of his History of England, Thomas Babington Macaulay wrote: "In every experimental science there is a tendency toward perfec tion. 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 ca lamities and by bad institutions, to carry civilization· rapidly for ward. 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 a nation prosperous.·. It has often been found that profuse expendi tures, heavy taxation, absurd commercial restrictions, corrupt tribunals, disastrous wars, sediHenry Hazlitt is 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 Arling ton House.

tions, persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the ex ertions of private citizens have been able to create it. It can easily be proved that, in our own land, the national wealth has, dur ing at least six centuries, been almost uninterruptedly increasing. ... This progress, having con tinued 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." Pov erty, they tell us, produces malnu trition and disease, which produce apathy and idleness, which per petuate poverty;¥ and no progess is possible without help from out side. This theory is· today pro pounded unceasingly, as if it were 580 THE FREEMAN October axiomatic. Yet the history of na tions and 'individuals shows it to be false.

It is not only "the natural effort which every man is continually making to better his own condi tion" (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 in creasing the quantity or improv ing the quality of their food and clothing and shelter. And for pro viding tools. Once they have ac quired 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 ac celerative. One reason it took so many cen turies before this acceleration ac tually began, is that as men in creased their production of the means of subsistence, more of their children survived. This meant that their increased produc tion 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 Revo lution began in the late eighteenth century did the rate of production begin to increase by so much that, in spite of leading to an unprece dented increase in population, it led also to an increase in per capita production. In the West ern world this increase has con tinued ever since. So a country can, in fact, start ing from the most primitive con ditions, 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 na tions 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 ex change of services and products.

Each man enormously increased his output by eventually special izing in a single activity - by be coming a farmer, butcher, baker, mason, bricklayer, or tailor - and exchanging his product with his neighbors. In time this process ex tended beyond national bound1970 FOREIGN INVESTMENT VS. FOREIGN AID 581 aries, enabling each nation to spe cialize more than before in the products or services that it was able to supply more plentifully or cheaply than others, and by ex change and trade to supply itself with goods and services from others more plentifully or cheaply than it could supply them for it self. 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 Commo dore Perry at the head of aU. S. naval force "persuaded" the Japa.nese, 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 mod ern telescope, a model telegraph, and a model railway, which de lighted and amazed them. Some Steps May Be Skipped Western reformers today, prais ing some hitherto backward coun try, in Africa or Asia, will ex plain 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, instru ments, technology, and know-how that had been developed during those three centuries by the sci entists 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 rail road, and to import Western auto mobiles, Western knowledge of road-building, Western airplanes and airliners, telephones, central oil heaters, electric light, radio and television, refrigerators and air conditioning, 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 uni582 THE FREEMAN October versities 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 industri alized Western nation, not exclud ing the United States, owes a very great part - indeed, the major part - of its present technological knowledge and productivity to dis coveries, inventions, and improve ments imported from other na tions. Notwithstanding the elegant elucidations by the classical econ omists, very few of us today ap preciate 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 in vestment. Among independent na tions, international investment de veloped 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 import ers 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 "portfolio" investment - the pur chase by the nationals of one coun try of the stocks or bonds of the companies of another - has usu ally been less important quanti tatively than this "direct" invest ment. In 1967 U. S. private invest ments 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 in vestments abroad, $22 billion were portfolio investments and $59 bil lion direct investments. The export of private capital for private investment has on the whole been extremely profitable for the capital-exporting countries. In everyone of the twenty years from 1945 to 1964 inclusive, for example, the income from old di rect 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 1970 FOREIGN INVESTMENT VS. FOREIGN AID 583 outlays in every year since 1919.1 Our direct foreign investments also greatly stimulated our mer chandise exports. The U. S. De partment 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.