The Outlook for Saving and Investment
[February 12, 1966]
Writing in 1817, David Ricardo in his Principles of Political Economy and Taxation pointed to the experience that "the fancied or real insecurity of capital, when not under the immediate control of its owner" checks the emigration of capital. Thus most men of property prefer a low rate of profit in their own country to a more advantageous employment for their wealth in foreign nations. This was said precisely on the eve of the age that will be remembered in history as the period in which the insulation of the various local and national markets gave way to the evolution of an effective world trade not only in consumers' goods but also in capital goods.
British capitalists inaugurated the new methods of foreign investment; they were very soon followed by the businessmen of western and central Europe and of the United States. An unprecedented improvement in the average standard of living resulted. Observing the benefits that this system brought both to the investors and to the people of the countries in which the investments were made, optimists hopefully looked forward to the coming of an era of perpetual peace and goodwill among all nations. They were poor prophets.
They overrated the mental power and they underrated the malicious envy not only of the uncultured masses but no less of the crowd of self-styled intellectuals. They did not foresee that in the light of doctrines, elaborated in England and France and perfected in Germany and Russia, foreign investors would appear as the worst enemies of all decent people, as exploiters and usurers. They could not divine the impetuous vehemence of the passions stirred up by unscrupulous demagogues. The Americans and the British are hated in the economically underdeveloped countries because they have provided the capital for investments the inhabitants were not able to provide.
Every account of the history of modern culture must first of all distinguish between two groups of nations, viz., those that have developed a system which made domestic saving and the large-scale accumulation of capital possible and those that did not. The lamentable failure of all "leftist" economic doctrines from Saint-Simonism and Marxism down to the "imperialism" theory of Luxembourg, Lenin and Hilferding and to Keynesianism is precisely to be seen in their misconstruction of the meaning of saving, capital accumulation, and investment. In the great ideological conflict of the 19th century the Liberals and their spokesmen, the much abused "vulgar economists," were right in proclaiming as their main thesis: there is but one means to improve the material conditions of all of the people, viz., to accelerate the accumulation of capital as against the increase in population.
The great age of foreign investment came to an inglorious end when the 20th century's doctrinaires were no longer prepared to see any difference between the devastation of a country by military action and the investment of foreign capital for the construction of factories and transportation facilities. Each of these two entirely different procedures is called conquest and imperialism. The expropriation of foreign investments is styled "liberation." It is, if at all, only mildly censured by the jurists and economists of the "capitalistic sector" of the world. No wonder, that the eagerness to invest in foreign countries disappeared. Foreign aid tries now to fill the gap. As Miss Ayn Rand defined it, this new doctrine requests that our wealth should be given away to the peoples of Asia and Africa, "with apologies for the fact that we have produced it while they haven't."
The joint operation of the ideas of socialism and nationalism has not only almost entirely suppressed saving and the accumulation of capital (for nonmilitary purposes) in the communist countries and in the orbit of the nations commonly called today underdeveloped. It made the industrial countries of western and central Europe and North America adopt conceptions the application of which must sooner or later result in the complete cessation of any voluntary saving and capital formation on the part of individual citizens.
The "Productivity of Labor"
Thus the official doctrine of the United States operates with a concept of productivity of labor that defines it as the market value (in terms of money) added to the products by the processing (of the firm in question or by all the firms of the branch of industry), divided by the number of workers employed. Or, in other words, output per man-hour of work. It pretends that every improvement in this figure means an "increase in the productivity of labor" that is caused by the workers' effort and which by rights belongs entirely to them. In wage negotiations the unions claim this "productivity gain" as their members' due. The employers as a rule neither question this concept of productivity of labor nor do they contest the resulting claims of the unions. They accept it implicitly in occasionally pointing out that wage rates have already risen to the extent of the increase in productivity, computed according to this method. The government in formulating its "guidelines" for the determination of wage rates and product prices adopts the unions' point of view.
It is obvious that the theory underlying this doctrine radically misconstrues the essential facts about industrial production. The difference between the "productivity" of a worker handling the tools of a bygone state of technology and another working in a plant equipped with the most modern machines is not due to the personal qualities and the effort of the worker but to the quality of the shop's equipment. If the worker is to get all the "increase in productivity" brought about by the investment of additional capital, nothing is left for the people whose saving created this capital and made its investment possible. (For the sake of simplicity we may omit referring to the role of the entrepreneurs and to that of the managers and the technologists.) Saving, capital accumulation and investment will no longer pay and will come to an end. There will no longer be any economic progress.
It cannot be denied that also in the noncommunist countries an outspoken anticapitalistic tendency prevails in fiscal policies. The taxation of personal incomes, corporations and inheritance tends more or less openly toward a complete confiscation of such allegedly "unearned" intake. The joint effects of these anticapitalistic measures are to some extent still veiled by inflationary monetary and banking policies. But sooner or later the main problem will become visible: how to provide for new additional investments when the individuals and corporations are prevented — either by the methods of taxation or by the methods applied to the determination of wage rates — from deriving any benefit from saving and capital investment.