Interregional Trade

Frederic Bastiat

Editor’s note: The author did most of his writing during the years before—and immediately following—the Revolution of February 1848. This was a period when France was adopting many socialistic policies. As a Deputy to the Legislative Assembly, Mr. Bastiat studied each interventionist measure and explained how it must inevitably hurt the people. Protective tariffs were his special target. He pointed out that “protection” gives a special privilege to certain producers. He showed how tariffs add to the cost of imports, and reduce competition from abroad, benefiting certain producers at the expense of other producers and of consumers who must pay the higher prices or go without.

We candlemakers are suffering from the unfair competition of a foreign rival. This foreign manufacturer of light has such an advantage over us that he floods our domestic markets with his product. And he offers it at a fantastically low price. The moment this foreigner appears in our country, all our customers desert us and turn to him. As a result, an entire domestic industry is rendered completely stagnant. And even more, since the lighting industry has countless ramifications with other native industries, they, too, are injured. This foreign manufacturer who competes against us without mercy is none other than the sun itself!

Here is our petition: Please pass a law ordering the closing of all windows, skylights, shutters, curtains, and blinds—that is, all openings, holes, and cracks through which the light of the sun is able to enter houses. This free sunlight is hurting the business of us deserving manufacturers of candles. Since we have always served our country well, gratitude demands that our country ought not to abandon us now to this unequal competition.

We hope that you gentlemen will not regard our petition as mere satire, or refuse it without at least hearing our reasons in support of it.

First, if you make it as difficult as possible for the people to have access to natural light, and thus create an increased demand for artificial light, will not all domestic manufacturers be stimulated thereby?

For example, if more tallow is consumed, naturally there must be more cattle and sheep. As a result, there will also be more meat, wool, and hides. There will even be more manure, which is the basis of agriculture.

Next, if more oil is consumed for lighting, we shall have extensive olive groves and rape [variety of mustard] fields.

Also, our wastelands will be covered with pines and other resinous trees and plants. As a result of this, there will be numerous swarms of bees to increase the production of honey. In fact, all branches of agriculture will show an increased development.

The same applies to the shipping industry. The increased demand for whale oil will then require thousands of ships for whale fishing. In a short time, this will result in a navy capable of upholding the honor of our country and gratifying the patriotic sentiments of the candlemakers and other persons in related industries.

The manufacturers of lighting fixtures—candlesticks, lamps, candelabra, chandeliers, crystals, bronzes, and so on—will be especially stimulated. The resulting warehouses and display rooms will make our present-day shops look poor indeed.

The resin collectors on the heights along the sea-coast, as well as the coal miners in the depths of the earth, will rejoice at their higher wages and increased prosperity. In fact, gentlemen, the condition of every citizen of our country—from the wealthiest owner of coal mines to the poorest seller of matches—will be improved by the success of our petition.

To this Petition of the Candlemakers, Bastiat in effect replied:

You neglect the consumer in your plea. Whenever the consumers interest is opposed to that of the producer you sacrifice the consumers—for the sake of increased work and employment. The consumer wants goods as cheaply as possible, even imports, if they are inexpensive. “But,” you reply, “producers are interested in excluding cheap imports. Similarly, consumers may welcome free natural light, but producers of artificial light are interested in excluding it.”

Nature and human labor cooperate in the production of commodities in various proportions, depending on the country and the climate. Nature’s part is always “free.” If a Lisbon orange sells in Paris for half the price of a Paris orange, it is because nature and, thus, free heat does for it what artificial and, therefore, expensive heat must do for the other. A part of the Portuguese orange is furnished free.

When we can acquire goods from abroad for less labor than if we make them ourselves, the difference is a gift. When the donor, like the sun in furnishing light, asks for nothing, the gift is complete. The question we would ask—and we pose it formally—is this: “Do you prefer that our people have the benefit of consuming free and inexpensive commodities? Or would you impose on them the supposed advantages of hard work and expensive production?”

(Paraphrased from the original)

Dean Russell

The most persuasive argument I ever heard for protective tariffs was offered by an Egyptian student. He pointed out correctly that the low production of the Egyptian workers is due primarily to their primitive tools. He informed me that (contrary to general belief) the low production standards in Egypt actually result in high labor costs when measured on a realistic per unit produced basis. He then argued that the workers in the underdeveloped nations just couldn’t possibly compete against industrial workers with their efficient machines and the resulting high production and low labor cost per unit. And he concluded that if the government didn’t protect the low-paid Egyptian workers against competition from the more advanced industrial nations, most of them would soon lose their jobs to the high-paid men with the machines.

Actually, my Egyptian friend’s argument for protection against so-called expensive foreign labor is not any more valid than are the arguments by my own countrymen for protection against so-called cheap foreign labor. In reality, the trade itself necessarily causes real wages to rise in all nations that participate. In order to understand this better, let us start with a statement that is not subject to argument: No person in Egypt or Guatemala or the United States will voluntarily trade with a person in another country (or even next door) unless he puts a higher value on what he gets than on what he gives up. And thus both parties to any trade (domestic or foreign) necessarily benefit (or at least expect to benefit) from the trade.

Actually, there is no exclusively economic or theoretical justification for discussing domestic and foreign trade separately; they are identical in all respects—except for the purely arbitrary and artificial interventions of government. For example, in the United States, a manufacturer in southern California has no particular difficulties in trading with a company in northern Maine, some 4,000 miles away. But when the same manufacturer tries to trade with a company in Tijuana, Mexico—perhaps’ 4 miles away—he encounters all sorts of frustrating and noneconomic prohibitions and compulsions that have been devised by the two governments.

The problems of transportation and distance (as such) are not something peculiar to international trade. Nor do differences of language and religion constitute special problems in trading across national boundaries.

For example, a Catholic manufacturer who speaks only Italian in Lugano, Switzerland, has no problem at all in trading with a Protestant retailer who speaks only German in Zurich. But when he attempts to trade with his Italian cousin just across the border (both speaking the same language and belonging to the same church), he encounters problems that are often insurmountable. All of these problems are, without exception, created by government and are thus completely artificial and unnecessary.

Canada offers an example of how vast distances, different wage scales, different languages, different religions, and different racial and cultural backgrounds present no real trade problems at all. But let a Canadian try to buy an automobile from Detroit, just across the border!

Even different moneys (lira, peso, dollar, or whatever) present no real problem to any trader—if the various moneys can be freely bought and sold. But when this is forbidden, problems do appear; again, however, they are artificial problems and are due entirely to governmental rules and regulations.

At Home and Abroad

Any argument for free trade and the division of labor within a nation is automatically and necessarily an argument for free trade and the division of labor internationally. If a person advocates free trade domestically, he cannot logically advocate protective tariffs and other similar measures that prevent goods and services from moving freely across national boundaries. It is simply not true that a nation and a people are made more prosperous by compelling themselves to pay two and three times as much as they need to pay for the goods and services they want. It just does not make sense to improve the means of moving goods from one nation to another, and then to cancel out the savings in transportation costs by passing laws to hamper the resulting trade. I am convinced that such contradictions arise more from lack of understanding than from evil intentions.

For example, the idea of creating and protecting domestic industries and jobs by restricting foreign imports is still generally found at the bottom of most arguments for protective tariffs. This objective is at least understandable. And it is unquestionably true that if it were not for government protection against foreign competition, many persons in Guatemala and the United States would lose their jobs. Further, a considerable number of companies in both nations would be forced out of business and would suffer heavy losses of capital. But the persons who are quick to point out these economic realities seem unaware of the multitude of jobs and industries in Guatemala and the United States that actually depend on foreign trade.

For example, the advocates of protective tariffs in my own country dramatize the story of the jobs and industries that are destroyed or threatened by the $16 billion of yearly imports into the United States. But they just ignore the far larger number of jobs and industries that are involved in our $20 billion of exports—automotive and electrical equipment, steel mill products, machine tools, coal and cotton, petroleum products, and many others. In a manner of speaking, prohibitive tariffs could destroy 20 United States jobs and companies for every 16 saved or created. And worse still, the companies most likely to be injured by restrictive trade policies are our most efficient ones that tend to pay the highest wages. The advocates of protective tariffs completely ignore the obvious fact that foreigners cannot continue to buy from us unless they are permitted to sell to us.

A Huge Market

In reality, the absence of tariffs and similar trade restrictions among the 50 states in my country goes a long way to explain why our level of living is so high. This absence of internal trade restrictions permits and encourages competition, natural specialization and division of labor, survival of the most efficient managers and companies, and especially the free movement of labor and capital from one industry and one section of the nation to other industries and sections. The final result of all this is better jobs at higher pay for all employees, lower prices for all consumers, and perhaps even higher profits for those owners and managers of capital who are capable of operating in a free and competitive economy.

Just as free trade among the states of the United States has brought this result, just so would free trade among the nations of the world bring similar results to all of them. To help us understand why this is so and how it would work, let us refer briefly to the concept of trade according to the principle of “comparative advantage” as developed by David Ricardo.

This comparative advantage idea is often confused with an absolute advantage, such as coffee produced in Guatemala but not in the United States. But according to the Ricardian example, two nations must produce the same two (or more) products before this principle applies. And still following Ricardo, the comparison is always first made within one of the nations alone. The comparison concerns the “substitution ratio” or “alternate opportunity cost” of producing domestically one of the two products instead of the other. Then exactly the same comparison is made domestically within the other nation. Whenever the physical cost or substitution ratio for the two products in one country differs from the same cost or substitution ratio for the same two products in the other country, a “comparative advantage situation” exists. Each nation can then profit by concentrating on producing one of the products at home and trading a part of it abroad for the other.

Delivering the Paper

Now I am well aware that the above explanation of Ricardo’s comparative advantage principle of trade is too condensed and complicated for general lecture purposes. So I will merely refer you to any textbook on international trade for the full development of it. I will here confine myself to applying the same idea in more familiar situations and in less technical terms. But even so, the reality behind my examples and conclusions are still Ricardian.

Here is my first example of Ricardo and his comparative advantage idea in modem dress: As I write these words, I can see my “newspaper delivery boy” plodding slowly toward my door. He is late as usual. And perhaps the reason I am watching him is to see if he will again step on another one of my prized flowers planted along the sidewalk. Now if you will look upon him and me as representing two nations—and let lecturing and delivering newspapers represent the two products produced in both countries—I can illustrate quite simply the essential idea behind Ricardo’s law of comparative advantage.

Positively and beyond any shadow of a doubt, I can deliver newspapers more efficiently than my paper boy can. Since I can deliver more of them in a given period of time, I can earn more money than he can. And since I would be much neater and much more pleasant while doing the job, doubtless the traditional “tips” would be larger for me than they are for him. In short, the market would pay me more to do that delivery job than it now pays him.

I’ll also hazard the guess that I can make better speeches than my paper boy can. I know, however, that he can make speeches; in fact, he made a couple of them to me when I recently suggested that he should not leave my paper on the open porch during a rain storm. Thus, I will here maintain that I can do both of these jobs better than he can; I have an absolute advantage over him in delivering lectures and in delivering newspapers. Even so (and to get at Ricardo’s point), he has a comparative advantage over me in delivering newspapers. And based on what the market will pay me to deliver newspapers and to make lectures, I have a comparative advantage over him in the speech-making business. Here is how it works.

The Scope of the Handicap

Let’s say the market pays my paper boy 50 cents an hour to deliver papers. My guess is that he would earn almost nothing as a speech-maker, but let’s be generous and allow 5 cents an hour. To follow Ricardo, his substitution ration is 50 to 5 or 10 to 1. That is, in the same amount of time, he can earn 10 times as much delivering newspapers as he can earn by making speeches.

I am confident that the market will pay me better for both jobs. Let’s say I could earn $1 per hour delivering newspapers, and $20 an hour as a lecturer. Thus, for every hour that I spend delivering newspapers for $1, the alternate opportunity cost to me is the $20 I could earn as a lecturer and teacher. Thus, it clearly pays me to devote my full working time to lecturing, teaching, and writing instead of delivering papers. Even though I can do a better job than my “competitor” in delivering newspapers, he still has a comparative advantage over me; or, technically, his comparative disadvantage is less in delivering papers than in delivering lectures. The fact that I have an absolute advantage in both categories is of no consequence. As the Ricardian principle illustrates, I will continue to pay my so-so paper boy to deliver my newspaper because (comparatively) my advantage over him is far greater in lecturing than in delivering papers.

It Still Pays To Trade

And so it is with trade between nations. As Ricardo pointed out, one nation can be more efficient in every category than another nation—and yet because of a comparative advantage, it is still profitable for the more efficient nation to trade with the less efficient nation. But how does one discover these comparative advantages among the various nations in today’s world?

Well, first, it is necessary that you and I and everyone else can freely buy and sell and exchange the moneys of the two nations being compared. For when free exchange is permitted, then prices and wage rates in the two nations will tend to be based on reality instead of wishful thinking. And when trade is based on reality, comparative advantages are not hard to find. Select two jobs or two products that exist in both nations. Now examine the wage rates and prices paid in one of the nations for the jobs or products. Now compare the wages and prices for the same jobs and products in the other nation.

Unless the comparative substitution ratios are identical (highly unlikely), trade will occur between the two nations. Each nation will concentrate on the production of the item in which it has the greatest comparative advantage (or the least comparative disadvantage). Both nations will profit from this trade, even when one of them has an absolute advantage in producing both products.

Comparative advantages can be found in general categories as well as in specific products and services. For example, I am confident that, compared to the United States, the cost of capital is higher than the cost of labor here in Guatemala. If so, the United States enjoys a comparative advantage over Guatemala in capital costs, and Guatemala enjoys a comparative advantage over the United States in labor costs.

Given this situation, one would logically expect “labor intensive” products to go from Guatemala to the United States, and “capital intensive” products to flow from the United States to Guatemala. And I am confident that such would be the case, if our two governments would abolish the trade restrictions that each has placed against the other. If this were done, both nations would necessarily profit thereby.

Again, this comparative advantage principle works the same between persons within a nation as it does between nations. For example, the famous showman, Billy Rose, was also a champion typist. But he operated on the principle of comparative advantage when he hired a typist and devoted his own time to producing shows and writing newspaper columns. The fact that he could type faster and better than his secretary is beside the point. Both he and she enjoyed a higher level of living because of that division of labor, just as the level of living in any and all nations rises when trade is permitted to operate according to this principle.

Likewise, a surgeon may know how to wash his surgical instruments better than does the person he actually hires to wash them. But obviously, everyone profits by his decision to devote his full time to the job (surgery) at which he enjoys the greatest comparative advantage, as measured by the price the market will pay him for performing the two tasks.

As another familiar example of how Ricardo’s comparative advantage idea works in everyday life, take the insurance salesman who pays a man $1.50 an hour to work for him in his yard during the day. Let’s assume that the caliber of the work done by the yardman is not as good as the owner himself could do—or, at any rate, thinks he could do. So why doesn’t he do the work himself and save $1.50 an hour? The answer is that he would not necessarily save $1.50 an hour but might actually lose $3.50 an hour by working in his own yard. That development is due to the fact that his average hourly earnings as an insurance salesman are $5. He has a comparative advantage selling insurance instead of raking leaves. The pricing mechanism of the free market shows this beyond any shadow of a doubt.

And so it is with trade among nations. Every nation enjoys a comparative advantage in some product or service, even though it may be due only to some institutional or historical reason. That nation (and the people in general in that nation) would enjoy a higher level of living if it specialized in those goods and services in which it enjoys such an advantage.

Let the Market Decide

How can we citizens of Guatemala and the United States discover which are the products and services in which each enjoys a comparative advantage? Easy! Just remove all artificial restrictions against trade, including monetary exchange. Then observe what the importers and exporters in Guatemala do. I doubt that many of them can explain to you Ricardo’s comparative advantage principle, but every one of them will search the world’s markets to see what and where he can buy most advantageously. Nor do any of them need to hear this lecture in order to know where in the world the most profitable demand exists for Guatemalan products and services. While the producers and buyers in Guatemala and the United States may not be able to explain the Ricardian theory on which they operate, they will still quickly indicate to us which products and services enjoy a comparative advantage in which nation. You and I need only follow the free market price signals in our buying and selling.

We are foolish indeed to continue to impose tariffs and other restrictions against trade between our nations; the only result of such misguided and uneconomic governmental interventions is that we pay more and get less.

David Ricardo

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilised world. It is this principle which determines that wine shall be made in France and Portugal, that com shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.

In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.

If Portugal had no commercial connection with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.

The quantity of wine which she shall give in exchange for the cloth of England is not determined by the respective quantities of labour devoted to the production of each, as it would be if both commodities were manufactured in England, or both in Portugal.

England may be so circumstanced that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.

To produce the wine in Portugal might require only the labour of 80 men for one year, and to produce the cloth in the same country might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.

It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth should be removed to Portugal for that purpose. In that case, the relative value of these commodities would be regulated by the same principle as if one were the produce of Yorkshire and the other of London: and in every other case, if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities than the additional quantity of labour required to convey them to the various markets where they were to be sold.

Experience, however, shows that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and intrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital. . . .

Henry Hazlitt

At the beginning of Chapter III of his History of England, Thomas Babington Macaulay wrote:

“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 mis-government, 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 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 progress 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 modem 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 “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.

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 foreigners 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 II—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 or 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.

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-pay-ments 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 so-called “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 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 selfinterest. 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 1958. 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 it 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.

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.

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.

W. Marshall Curtiss

A businessman is always under the necessity of adjusting the conduct of his business to the institutional conditions of his country. In the long run he is, in his capacity as entrepreneur and capitalist, neither favored nor injured by tariffs or the absence of tariffs.

Ludwig von Mises, Human Action

If there is one point of fairly general agreement among economists throughout the world and throughout time, it is that trade should remain free from all sorts of governmental restrictions and interventions. It would seem unnecessary to repeat over and over why the material welfare of individuals is enhanced through the division of labor and freedom to trade.

But restrictions still exist! Tariffs and other barriers to trade seem to move through cycles, relaxed at times, and then reapplied. Why, in the face of reasoned arguments by leading intellectuals, do restrictions to trade have such an appeal to lawmakers? In other words, who is it and what is it that moves the lawmakers to take such action?

The cry for protection comes in many voices. A glove manufacturer resents finding imported gloves in the market. It is natural for any firm to take any legal steps available to sustain profits and remain in business. If a way can be found to eliminate this foreign competition, perhaps convince the government to raise some sort of barrier to the foreign gloves—a tariff, or a quota, or an embargo—then the glovemaker might be able to continue in business, competing with domestic firms as always, but avoiding the foreign competitor.

The glove industry may maintain a lobby in Washington to try to convince the lawmakers that unless protection is provided, thousands of jobs will be lost, unemployment will rise, and companies will go bankrupt. And it may all be true! At least it often is convincing enough to the lawmakers.

What happened to the logical argument of the economists who said protection hurts the consumer? Well, the argument stands, but the consumers voice is faint. What if it does cost a few pennies more to buy a pair of gloves? Compared with the loss of a job or a failing company, this is nothing! Or so it seems to those seeking protection.

We Accept Domestic Competition

Now, suppose a domestic firm is in financial trouble, in no way caused by imports. Does it send a lobby to Washington and ask for help? Not ordinarily. In domestic trade, we accept the idea that a firm must compete without special favors. True enough, companies do fail; men do lose their jobs; but the consumer is not penalized by interventions that reduce production and make things cost more.

If the failure of the Edsel automobile had been because of foreign competition, it might have been argued that a tariff on imports would have saved the car and preserved thousands of jobs. Had the maker been a one-product firm, it might have been saved from bankruptcy. But, no; it was a domestic firm that misjudged consumer acceptance of a product; and that was that! The Edsel is reported to have cost the Ford Motor Company $250 million.

A more recent example is that of Corfam which the du Pont Company developed to compete with natural leather for footwear. After seven years and a reported $100 million, du Pont discontinued production of Corfam.

Only the size of these write-offs makes these two items newsworthy. Thousands of new products are tried each year, and there are many failures. Unless a company has other profitable items which will carry such losses, the company may fail, as many do.

The testing of consumer preferences goes on constantly. Ordinarily, we wouldn’t think of asking the government to prevent the failure of a given product. We accept such failure as one of the regulatory aspects of competition and the market. But let the competition be from a foreign country, even though it benefit consumers the same as domestic competition, and there arises a clamor to erect some sort of barrier to save jobs, or to save firms, or to build a fence around our high standard of living, or whatever.

Politics of International Trade

The justifications for tariffs and other forms of protection include the arguments that they keep our wages high, prevent unemployment, protect infant industries, help with national defense, prohibit trade with the enemy, discourage dumping, and so on.

Trade barriers or threats of trade barriers are often used in the formulation of foreign policy. “We will reduce our restrictions if you will do likewise.” Or: “Let us reduce our restrictions against underdeveloped countries so that they can benefit from sales to us.” Or: “Let us stop buying chrome from an African nation whose internal policies we do not approve.” Among the reasons for trade restrictions must be included foreign policy. Or, as one author recently stated, “trade policy in the United States is a political matter.”

But of all the pressures upon the members of Congress and the Executive to enact trade restrictions, few are greater than those exerted by business firms or associations representing business firms. Individual consumers who have the most to gain through the reduction or elimination of trade barriers, and who have voting power enough to elect or defeat any candidate for office, are practically powerless in comparison with business lobbies.

As an illustration, note the results of recent attempts to cut back certain phases of defense spending. Now, the production of something to be destroyed in combat obviously is worthless so far as contributing to the level of living of a people is concerned. If those workers and resources were used to produce housing, build highways, provide medical care, teaching, plumbing, auto repairs, and the like, then consumers would be that much better off.

But let it be suggested that we shut down our war machine and the protests are deafening. Workers will lose their jobs; companies will fail; the entire economy will suffer.

Granted, there are difficult adjustments to be made. But the fact that a worker is not needed in an airplane factory shouldn’t preclude his finding a productive job elsewhere. One sympathizes with a worker in an industry that is being “wound down,” especially in a one-industry community. In the recent discussion of continuing research and development of the SST, many in Congress, and many members of the press based their argument chiefly on the fact that thousands of workers would be disemployed and business firms would fail. The same arguments have been used in trying to maintain our outer space program. Such arguments have a strong emotional appeal and carry considerable persuasive force.

Many of the same arguments are used to establish trade restrictions, and with equally disastrous economic consequences.

Five Basic Principles

In discussing foreign trade, it is well to keep in mind certain basic principles:

(1) Trade between two individuals, entered into freely, always results in benefits to both parties. Otherwise, why should they trade? What anyone else may think of their judgment is beside the point.

(2) There always is a comparative advantage in producing some products and importing others. Production costs in one nation may be lower than in another nation for every item produced in either nation. But the people of these respective nations may still find it profitable to trade with one another.

It is often thought that only nations like Great Britain or other maritime nations benefit by trade, simply because there are so many things they do not produce domestically. True, the United States could close its borders to all imports and exports and still there might be a relatively high level of living for its citizens; but not as high as would be possible through trade with foreigners.

(3) Consumption is the sole purpose of production. Adam Smith explained this nearly 200 years ago. Production is to supply consumers’ wants. It is not to make jobs, or to keep a business solvent, or to make one nation dependent on another. Naturally, some of these things happen as a by-product of production and trade, but that should not be the objective.

(4) Trade ordinarily will be most satisfactory to all concerned when individuals or their agents who have something to trade deal with other individuals or their agents who want the other side of that trade. Governments should be involved as little as possible; first, because they are not concerned, and secondly, because there is always the temptation to use the trade for purposes other than satisfying consumers.

If an individual in this country wanted to trade some of his own property for something offered by a Russian citizen, we would think little about it, knowing that each party to the trade considered he was better off than before. But if government enters one or both sides of such a trade, there is often the suspicion, sometimes justified, that one party is seeking a military or political advantage.

(5) Imports require exports. Foreign trade appears complicated because it often takes an indirect or roundabout route through several nations. In addition, monies of several nations with complex exchange rates are usually involved. But it finally boils down to the fact that a nation which imports must export something in exchange.

Many people appear to believe that we might eventually be inundated with imports to the extent that practically all production in this country, all jobs, all business firms, might be wiped out. They fail to see that foreign goods cannot continue to come into this country unless something goes out to pay for them.

The Reciprocity Argument

A popular argument in support of tariffs is that we will reduce our obstacles to trade if other nations will reduce theirs. In other words, we must do it together.

The lack of understanding of international trade and the effect of restrictions is reflected in this press release in The New York Times for March 31, 1971. “The European Economic Community decided today to give generalized trade preferences to developing countries beginning July 1.” The implication is: “If you are poor, we will let you sell to us.” The truth, of course, is that voluntary exchange, whether the participants be rich or poor, benefits the buyer as well as the seller. Had the “developing country” previously been subject to trade restrictions, then, of course, it would gain from the relaxation of those restrictions. But the increased trade also would be of benefit to the “affluent” buying nation.

When diplomats from different countries discuss the reduction of trade barriers, it almost always has the appearance of a high-level bargaining session. How little can we give up in reducing our restrictions on imports in order to gain some reduction in their restrictions against our exports? It never seems to occur to them that we stand to gain by opening our gates entirely, whatever the other nation does. Certainly our consumers would stand to benefit. But, always of diplomatic concern is the effect on firms and on jobs.

A great deal of consideration is given to “most favored nation” reductions. If we give one nation the “benefit” of our reduction, then all nations are entitled to this great benefaction. Actually, unilateral action in reducing our restrictions against imports would benefit our consumers, and might end most of the seemingly endless bargaining over reduction by other countries in return.

Who knows? It might soon be discovered that trade policy should not be a political issue but that free trade between citizens of all nations, rich and poor alike, benefits all consumers.

How Can Free Trade Be Achieved?

Politicians, in the legislative as well as the executive branches of government, respond to pressures of various kinds from their constituents. So long as the pressure for trade restrictions exceeds that for free trade, we can expect restrictions to continue.

Considerable attention just now is directed at textiles, especially the textile trade with Japan. Had such trade been strictly between individuals without the intrusion of governments, many of our present problems would have been avoided. Following World War II, our government made concessions to help rebuild the Japanese economy. It delivered cotton for less than our own textile manufacturers had to pay for it; it practically gave new textile mills to the Japanese. Little wonder that American textile manufacturers resented this unfair competition and sought to restrict imports from Japan. Now, a quarter of a century after the war, while the effects of that kind of “foreign policy” may have worn off, the arguments against Japanese textiles persist and carry weight with legislators.

Over the years, many economic injustices, ineluding misuse of capital and labor, have resulted from trade restrictions. To remove them all at once and go back to free trade is bound to require difficult adjustments on the part of business firms. No wonder they try, in any legal way they can, to protect any remaining shelters or even increase their protection.

Who Speaks for the Consumer?

From the standpoint of a manufacturer, the so-called benefits of protection and disadvantages of free trade are short-run and disappear once adjustments to the changed situation are made. The firm still must compete with other domestic firms as well as with imports, even if over a tariff wall. But it is these short-run adjustments that the legislators hear about—the layoff of workers, the reduced profits, and even business failures. The longer-run genuine benefits of free trade to consumers arouse little excitement. This is especially true in a country like the United States where imports are a relatively small part of all trade. Who is there to speak for the consumers? The professional protectors seem so interested in auto seat belts, unit pricing, packaging, advertising, truth-in-lending, and ecology that they aren’t likely to get to the matter of free trade for some time.

Most families present a combination of consumer and producer interests, interests which may seem to be in conflict with regard to trade restrictions. For example, suppose two members of the family work in the local textile mill. The most important day-to-day problem to the family is making certain that these two mill workers are employed and bring home their weekly pay checks. So, if they are convinced that imported textiles may eliminate their jobs, then they are apt to be protectionists. Attesting to this is a story in a recent Sunday supplement headlined “Twilight of a Textile Town.” In this article, it was reported that a mill which had been the town’s leading industry for 70 years went bankrupt and put 844 textile workers out of work. Furthermore, “50 textile plants in the South have shut down since 1969. The Department of Labor has estimated that 27,200 Southern textile workers lost their jobs in 1970 alone.”

This is a serious situation, apparently calling for a political solution. What is not so obvious is that even if all imports of textiles were stopped, after a short period of adjustment, domestic firms would find strong competition with each other and marginal firms would continue to face failure.

An illustration of how adjustments can be made to a declining industry is related in the New England Letter for April, 1971, published by The First National Bank of Boston. The study shows how, in the early 1950’s, many textile mills were liquidated and a basic weakness was shown in the leather and shoe industries. Some of the textile mills are now among those in trouble in the South. Had the problem been handled with political solutions, no doubt New England textiles could have been “protected” in a way that would have kept the mills going with employment and jobs as usual.

But, instead, New England industry changed, in part, to the maufacture of transportation equipment, electrical equipment, and instruments, to name only three. This new type of manufacturing is more export-oriented and enjoys a better international competitive position. It has the greater “comparative advantage” that economists have been talking about. It uses higher skills from its workers, and the “value added in manufacturing” is relatively high. Thus, in the long run, the return to labor stands to exceed what it was and what it might have been in the production of textiles, shoes, and leather goods. True, some of the newer types of industry have been closely tied to government defense contracts, and with a recent cutback, unemployment increased. However, a basis for export and for increased production for consumers is there.

Adjustments to changes like these are often difficult and must not be passed off lightly. But such changes in an expanding and progressive economy are always going on. Attempts to stop them with artificial restraints are certain to be more painful than is the process of adjusting.

Man Must Choose Between Freedom and Protectionism

As observed earlier, most economists agree that protectionism is unsound. The consumer is served best by allowing people to trade freely with each other, not only domestically but world wide. But restrictions continue to persist, placed there for political reasons. The incentive to erect barriers to trade is a political response to pressure from individuals, groups of workers, industrial groups, and others who think they will gain from protective measures such as tariffs, quotas, and the like.

Because the consumer is the disadvantaged party, it may be argued that the solution lies in his education. But as previously shown, the consumer’s stake as consumer of a protected product often is much less important to him than his job as a producer of a potentially protected product. Therefore, it seems doubtful that consumers, as a group, can be effective in bringing political pressure on lawmakers to offset the pressure for protection exerted by other groups.

After two centuries and more of expounding the advantages of free trade, it must seem trite to say that education must be relied upon to bring about a correction of the wrongs caused by protectionism. Nevertheless, there seems to be no short cut. While the consumer, qua consumer, must be included among those educated, it would seem that emphasis should be placed on convincing lawmakers of the advantages of free trade so that they can better withstand the pressures put upon them by their constituents who think they need and deserve protection from competitors.

Karl Brandt

It is, if I am not mistaken, the goal of all free countries with government by law to diminish poverty, squalor, and drudgery for the greatest number of their citizens, and to expand opportunities to all self-respecting, responsible citizens to develop their personal potential. This goal includes the obligation of the nation to respect the dignity and integrity of all men of good will.

If this national goal is accepted, the economy must have the institutional framework to promote the gradual improvement of the real income of the people by improving the productivity of human, natural, and man-made resources. This requires, in the production of goods and services, more division of labor, specialization, and increased efficiency from research, innovation, and better management. But in order to have some orientation for such endeavor it is essential to give the consumer the sovereign power to allocate resources to the satisfaction of his needs and of his more and more refined wants. This provides the powerful incentive to all people to make the effort to earn the money to get the goods and services they want. Such an arrangement is ideally guaranteed in the market with freely moving prices by the daily plebiscite in which housewives and the consumer in general express their preference in francs and centimes, or dollars and cents.

In the modem economy, in which this allocation of resources applies to all goods, durable and nondurable, to houses and motor vehicles, and to all services—educational, medical, culinary, artistic, and to entertainment, travel, insurance, recreation, and multitudes of others—economic growth is bound to accelerate and to become all-pervasive. Such dynamic growth, to be stable and continuous, requires a high degree of mobility of human resources, such as shifts from the production of goods to the performance of services.

Such economic growth or development, which requires above all stability of the national currency and the discipline of monetary and fiscal policies to keep inflation in check, calls also for an optimum of foreign trade. It is generally agreed that the promotion of peaceful relations in this turbulent and dynamic world requires economic development in all countries, particularly those with still predominantly rural living conditions. This development in formerly colonial and other industrially retarded countries is definitely needed for the healthy development of the advanced nations, because industrial economies maintain growth and stability by a reliable flow of essential raw materials.

The Need for Leadership

Of all the conditions for increasing the income of the people in the world’s rural countries, by far the most strategic are continued healthy and stable growth of the leading industrial countries and their avoidance of prolonged economic stagnation or contraction. Any idea of accelerating growth in underdeveloped countries by sapping the strength of industrial nations belongs in the moth-eaten fabric of ideas of Marxian determinism and the fata morgana of the dictatorially-ruled “paradise for all proletarians.” Since these grand ideas have been tried for close to 40 years in a laboratory experiment with several hundred million people, they have lost their luster and gaudy colors.

Today, the economies of industrial and developing countries are mutually interdependent, as is the guardianship of peaceful cohabitation of nations. Hence, while the industrial countries need an adequate and growing flow of primary material from developing countries, they will pay for these, as well as for manufactured goods from light industries, by exporting to those countries an increasing volume of manufactured producer and consumer goods, and will also help them to industrialize gradually.

If this mutually beneficial exchange is to flourish, all nations must act in accordance with their optimal comparative advantage, i.e., the opportunity to produce and sell at lower unit costs. To let this principle work requires optimal diminution or removal of hindrances to trade expansion, not only import quotas and customs duties but the whole arsenal of nontariff trade impediments in lieu of duties.

All the proposed solutions have one common denominator. They suggest that, by setting up international and regional world-wide administrative machinery to control and regulate prices for optimal financial liquidity of developing countries, the pace of raising the income of the poorest people in the most agrarian countries can be accelerated at will, and that more perfect equity and justice in distribution among independent nations can be attained.

Perhaps the most persuasive and yet the most dubious proposal to remedy the instability of foreign exchange earnings of developing countries is the device of international commodity agreements, abbreviated in the literature as ICA. This form of intervention in the international market for primary commodities is an excellent example that makes clear where the generating power originates that drives a national economy, and how complex and delicate a self-adjusting system the market economy actually is. When I speak of the market economy, I do not mean a laissez-faire system with no rules, but a competitive private enterprise economy with effective enforcement by the government of regulations, quality standards, and rules for competition.

International commodity agreements are arrangements between contracting governments, aimed at preventing precipitous price declines of a primary commodity on the world market, in order to avoid serious balance of payment and illiquidity problems for the governments of the exporting countries. But the attempt to forestall disastrous price declines also demands that brakes be put on too steeply rising prices, because such increases may unduly stimulate expansion of production, with resulting sharp price declines later.

This remedy for price instability consists basically of a type of market intervention that was adopted in the late twenties and early thirties on the European continent, in the United States, and in other parts of the world: farm income support through guaranteed minimum prices for specified agricultural commodities. These price support policies amount to a compulsory government-controlled cartel, with innumerable variations in detail. Since more than 30 years of experience with this policy have accrued in the industrially advanced countries and in the world market, it is relevant for our discussion to summarize the modus operandi and the economic results of this remedial counteraction to price instability.

Once the government supports the price of a commodity, the price can theoretically still move, but only above the so-called “floor” or guaranteed minimum. By political compromise this level is deliberately set above equilibrium, which by definition is the price that would clear the market. The politically set level is meant to be remunerative to the high cost or marginal producers, the low income farmers on whose behalf price stabilization is mainly established. It is therefore unavoidable that the price, and the elimination of any risk of its change by government guarantee, will act as a forceful incentive, especially to efficient producers, to expand the area for the specific crop. To counteract this the government imposes an area limit, the so-called “acreage allotment.” Some sort of base is needed for its determination; usually a historical base is chosen, such as each farmer’s actual average acreage of the crop cultivated in several base years. However, the common experience in all countries is that the combination of a profitable guaranteed price with the acreage allotment acts as a still more effective incentive for increasing output per unit of land on limited acreage by more intensive farming. More fertilizer, better seed, more irrigation, better pest and weed control, more cultivation, and various other methods are used. Hence, the government has to buy and store more grain to keep the price at the support level.

The Sorry Results

Up to this point the results of this intervention are already remarkable:

1. There is no longer any mobility of the geographical location of production. It is frozen from the moment the allotments are established.

2. The unintentionally subsidized intensification of production has created surpluses that exceed effective demand.

3. Therefore, the government has to finance and operate storage of commodity stockpiles.

4. Hence, the government at taxpayers’ expense has entered the commodity business.

5. The price can no longer move upward but is tightly pinned to the “floor.” Instead of a price support or the guarantee of a minimum price, one has a fixed, totally inflexible price.

6. This fixed price still governs producers, processors, everybody in the trade chain, and consumers. The price signals are set in false position for all of them. Although an excess supply exists, everybody can act only according to the price which indicates shortage, namely by consuming less, by substituting other commodities. The processors and the speculative trade reduce stock carrying because the government keeps the excess stocks at public expense.

7. In other words: without any intent to do so, the government has socialized stock carrying.

8. As a further result, the most effective commodity price and supply stabilizing institution, the commodity exchange with its trading in future delivery contracts, is made idle.

However, even those are by no means all the side effects. The Treasury has to pay for moving the commodity into and out of storage and for storing it, as well as for losses when the surplus is disposed of. Thus, there are innumerable secondary beneficiaries of stockpiling excess output, such as railroads, truckers, labor union members, and many others. All these receivers of windfalls acquire a vested interest in maintaining farm price supports. Much worse is the fact that the market in farm real estate discounts the subsidy-earning value of the acreage allotment. Hence, price stabilization of farm products boosts the value of farm land; in due time higher land prices and rents on leased land increase the costs of farming and force more intensive use. This is another unintentional side effect.

Marketing Quotas Assigned

When the excess production begins to bleed the Treasury too badly, the next step is to tighten the cartel by efforts to control the supply in the market. In addition to the acreage allotment the government imposes on all farms a marketing quota, which is established by subdividing a national quota prorated in accordance with individual acreage allotments. This national quota is fixed by a precarious government estimate of how large the domestic consumption and the net export may be one year later. Since the marketing quota tends to be smaller than the output, it immediately poses the problem of a black market and the necessity of suppressing it by heavy penalties. Output that exceeds the marketing quota can be stored, converted, or consumed by the farmer, but it cannot be marketed legally. Even in countries with a customarily law-abiding farm population, the temptation to profit by disposing of such illegal supply by barter or other black deals is strong, and actual enforcement is difficult.

The cartel price-fixing for agricultural commodities also unintentionally subsidizes increased production of the same commodity in other countries. Price-fixing thus creates effective competition abroad. Since it is politically unpopular and difficult to lower the guaranteed price level even when costs of production are declining, stabilization by political decision is practically identical with “stabilizing upward.”

Finally, the greatest ordeal for the government agency responsible for operating the cartel is the obligation to dispose of the accumulated excess stocks so as not to undermine the fixed price. Such disposal would be simple if it were done by destroying the supply. Grain could be burned or dumped in the ocean, although even this costs money. But powerful social, moral, and political taboos prevent this solution for any major nonperishable food commodity. Only in the case of coffee in Brazil was destruction used as a market-corrective action. Therefore, the government must seek to release the excess of staple food commodities in foreign countries as gifts, on credit, or with lowered prices. Except for the gifts, this amounts to dumping, and has a deleterious impact upon producers in the recipient country, and secondarily on the exporting country’s foreign markets and on its foreign economic relations.

A Commodity in Quarantine Still Affects the Market

It is a psychological fact that a commodity kept off the market by a government, in quarantine, so to say, is still a powerful factor influencing both the price and the actions of all parties in the market. Grain “in jail” is still grain, because if it is not destroyed it will in due time appear as market sup-ply.

National commodity markets are a remarkably effective system of communicating vessels in which millions of interested consumers, retailers, wholesalers, speculators, and farmers keep the flow going. The idea of inserting into the market, via detours, major quantities of supply, under perfect quarantine or segregated from the ordinary supply, belongs in the realm of fiction. Only private charity distribution can minimize the impact on the market. Even the ably administrated food stamp plan of the late thirties in the United States proved that free food did not cause additional consumption of food, but actually subsidized consumption of other goods and services. To change the determined consumer’s preference in his family budget decisions takes far more than free distribution of goods, the more so the poorer and prouder he is.

The cartel operation produces still other undesirable side effects. In many instances, particularly for industrial raw material products in agriculture such as cotton, jute, hemp, and sisal, the raised fixed price gives the greatest incentive to producers of substitutes. This exerts pressure on consumption of the original product, say cotton, at the expense of the farmer, whose marketing quota will be cut if national consumption shrinks.

The industrial temperate zone countries, which make a virtue out of the backwash of domestic political necessity and subsidize exports of agricultural raw materials such as cotton, thereby slide to the next necessity of granting more subsidies. Manufacturers of cotton textiles, who have to compete in the foreign market as well as in the domestic one, now need a subsidy to restore equal raw material costs. And so there are three recipients of subsidies: the farmer; the exporter of the farm product; and the manufacturer who uses the raw material.

However, I have not nearly exhausted the appalling record of unforeseen and unwanted distortions of economic processes caused by government intervention that attempts to remedy instability of ‘ commodity prices. Subsidized surplus disposal by gifts diverted to other countries can assist private charity that reaches the destitute, the sick, and helpless widows and orphans. But it cannot cure the causes of poverty. Only increased productivity on farms, in craftshops, in factories, and in the wholesale and retail trade can do that. It is here that the disposal of surpluses from abroad does its greatest harm. The majority of people in underdeveloped countries are small farmers who earn their cash income by selling farm commodities. Dumping such commodities in their market may be a boon to some of their customers in the cities, but the farmers resent it, and it diminishes the incentive for them to produce more.

One Control Leads to Others

I have yet to give the reasons why I believe that, whatever action may be taken to mitigate the impact of unstable commodity prices on the balance of payments of developing countries, the International Commodity Agreement method is not only inadequate and dubious but outright harmful to the best interests of the developing countries and to world trade in general. Basically, the sobering experience of sovereign governments of advanced nations with this enigmatic cartel policy in their national markets applies also to the immeasurably more difficult situation in the international commodity market.

The worst feature of all market intervention with price fixing is that, while dealing with one commodity or a few closely related commodities, this inevitably changes the relations between the price of the regulated commodity and the prices of all other commodities and services. The insertion of one rigid price into a range of flexible prices for some 160 or 170 agricultural products is like a boy who knows nothing about the meaning or the effects of the different positions turning switches at the control board of an automated factory. The far-reaching adjustments that farmers and all other affected parties must make to the accidental price relationships caused by fixing the price of one commodity are unpredictable. Therefore, such isolated treatment of the price mechanism for one country contributes more uncertainty tomorrow than there was instability prior to price fixing. The case for all such trouble-multiplying cures rests on the assertion that the adjustment of supply and demand under the rule of flexible prices does not function—an assertion that contradicts all evidence and economic experience.

The intent of stabilization is realized so long as the stabilization is upward. When, however, larger stocks have been accumulated and their disposal is unavoidable, the same consequences arise as in the case of price supports in domestic markets. Necessity commands that besides regular commercial sales, concessional sales be undertaken, or part of the supply be given away. This procedure leads to serious disorganization and corrosion of markets. The United States, with $6 billion worth of agricultural exports, disposes of over 30 per cent in the form of concessional deals. This is not done on principle. Far from it. It is simply the accumulated backwash of an ill-chosen method of social income support.

Enforcement of ICA regulations is even more difficult than is enforcement in single countries. When one begins to speak of “policing the markets of coffee beans,” I wonder how one dares suggest the feasibility of such control in vast areas where the United Nations is faced with the problem of preventing the murder of rural people by armed bands.

Problems of the Board

Aside from the dubious state of effective government administration, a serious question is whether competing countries can possibly agree on export or production quotas and thus freeze the geographical location of production, or administer shifts in location. The board of an ICA must try to achieve principles of equity and justice for all signatory parties to the multigovernment cartel. Originally, commodity agreements included exporting countries only and thus represented producer interests exclusively. They led to defensive policies by importing countries and their effect was nullified. Naturally, the enthusiasm of producers diminished as consumers won equal representation on ICA boards. Yet, without importing governments, such cartels are doomed.

Today, all such agreements include major importing as well as exporting countries. This demands far more wisdom than the fairest and ablest board possesses. Suppose one exporter earns 80 per cent of foreign exchange from the commodity, another 20 per cent. When quota restrictions are necessary to raise the price, will the exports from both countries be cut by the same percentage? If not, what principle shall determine the degree of discrimination and the number of years it shall last? If drastic changes in costs of production or handling or transportation of the regulated commodity occur, which apply to one or more countries but not to all, shall all nevertheless receive the same price? If the commodity comprises a range of qualities, with lower grades produced at disproportionately lower costs, shall quotas treat all the same? Such questions indicate that ICA s are bound to end up with all kinds of soft political compromises on the main points of control over supply and even of price arrangements.

As soon as there is a serious contingency of substitution for the commodity by other natural, processed, or synthetic products, ICA price stabilization begins to sound the death knell for the original commodity. I indicated earlier that in many cases price supports operate, via detours of economic processes, to the long-run detriment of the cartelized producers. To prove my point that ICA’s may become deadly poison I have only to mention the cases of rubber, wool, linseed oil, or tungnut oil.

Natural rubber was one of the commodities on which price stabilization ideas were tested in a world-wide experiment under Dutch and British management. The attempted producer-exporter cartel was mainly instrumental in pushing rubber plantations into other tropical areas, in stimulating experiments with other latex-yielding crops, and in boosting synthetic production of plastomers with large government subsidies in industrial countries. To kill the remaining industrial use of linseed oil, tungnut oil, or soybean oil, one need only fix the prices internationally.

Five ICA’s are at present in existence: on wheat, sugar, coffee, olive oil, and tin. Only four, excluding olive oil, are important. The one for wheat is proclaimed by its supporters the outstanding success. It can be proved beyond discussion that the ICA’s for wheat, sugar, and coffee amount to no more than sanctimonious declarations of good intentions. They have neither stabilized the incomes of the exporting countries nor avoided the whole range of unintentional distortions of world trade that do far more harm than good. Insofar as the wheat agreement has given some semblance of stabilizing price—though not income—it was due to the fact that the governments of the United States and Canada shouldered the burden of carrying the gigantic excess stocks. But both governments have had to enter into a multitude of noncommercial disposal arrangements that violate the principles of truly competitive international trade.

There is one little defect in all plans for administering economic progress at specified growth rates, which the econometricians usually fail to mention: no genius, no power in this world, has the ability to forecast the future supply, the demand, or the price for any commodity, or to predict the performance of one or of many national economies one, three, or five years from now. The most fabulous computers have not changed this situation one bit. We now know much faster and more accurately what has happened up to today. But as to the future, we get the wrong guesstimates also much faster, and with more scientistic trimming.

Restrictive compulsory cartel policies that raise prices to benefit high cost producers and artificially throttle output and supply to maintain such arbitrarily fixed prices, belong in the tool chest of the static society and its dirigism. Such policies are technically possible, but they are the antithesis of what the dynamic economy of an open and free humane society requires.

I expect much sound development in those primary material exporting countries that succeed in taming the monster inflation and, relying on their producers’ ability to compete, pave the way for sound private investment of foreign capital, as the transfer of funds from government to government diminishes.

Footnotes

1 Translated and slightly condensed by Dean Russell from Selected Works of Frederic Bastiat, Volume 1, Paris: Guillaumin, 1863, pp. 58-59

2 This article is one of a series of lectures delivered at the Centro de Estudios Económico Sociales, Guatemala City, April 6-10, 1964. Reprinted from The Freeman, July 1964

3 Excerpted from Chapter VII of Principles of Political Economy and Taxation (1817). Ricardo, an economist of the “Classical School,” deserves credit for having been among the first to point out the advantages of specialization and trade, even if one party to the transaction could produce everything better and cheaper than the other.

4 It will appear, then, that a country possessing very considerable advantages in machinery and skill, and which may therefore be enabled to manufacture commodities with much less labour than her neighbours, may, in return for such commodities, import a portion of the com required for its consumption, even if its land were more fertile and corn could be grown with less labour than in the country from which it was imported. Two men can both make shoes and hats, and one is superior to the other in both employments; but in making hats he can only exceed his competitor by one-fifth or 20 per cent, and in making shoes he can excel him by one-third or 33 per cent—will it not be for the interest of both that the superior man should employ himself exclusively in making shoes, and the inferior man in making hats?

5 From The Freeman, October 1970

6 See The United States Balance of Payments (Washington: International Economic Policy Association, 1966), pp. 21 and 22.

7 Source: Foreign Operations Subcommittee on Appropriations, House of Representatives, July 1, 1970.

8 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: Rout-ledge & 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).

10 Slightly condensed from the English version of his first address as a foreign member of the Académie d’Agriculture of France, delivered in Paris in French, May 27, 1964. Reprinted from The Freeman, March 1965

1THE CANDLEMAKERS’ PETITION55.*
2FREE TRADE: DOMESTIC/FOREIGN56.*
3ON FOREIGN TRADE57.*
4Thus England would give the produce of the labour of 100 men for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.57.1
5FOREIGN INVESTMENT VS. FOREIGN AID58.*
6The 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 1919.58.1
7The 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.58.2
8It 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.58.3
9RESTRICTIONS ON INTERNATIONAL TRADE59.*
10THE FAILURE OF INTERNATIONAL COMMODITY AGREEMENTS60.*

Free Market Economics: A Basic Reader