Introduction*

The international division of labor was an achievement of the spirit of Liberalism. International trade has to some extent existed from the oldest times. There was a regular commerce in some commodities the production of which was limited to special geographical conditions. There was occasional trade when some extraordinary event offered unusual opportunities. But however important the civilizatory consequences of this international traffic were and however important its amount was when compared with the technical difficulties that transport had to overcome, the role played by it in supplying the wants of the markets was negligible. A very small part only of the common man’s daily consumption was dependent on foreign produce. The commodities imported might for the most part be regarded as luxury goods, as people could do without them without suffering too great privation. At the beginning of the nineteenth century Napoleon’s continental blockade even if it had been strictly enforced would not have had any noteworthy consequences on the daily consumption of the masses in Central Europe. In those days for the ordinary man’s supply of even sugar (of course, in those days cane sugar only) and cotton were luxuries.

The growth of international trade was due to the abolition of the greater part of the trade barriers which misguided fiscalism and the errors of mercantilist policy had erected. Liberalism broke them down and thus paved the way to unparalleled intensification of international trade relations. When Cobden and Bastiat were at the zenith of their prestige it was the universally accepted belief that trade barriers were doomed to disappear forever like the other remnants of a dark past, such as absolutism, superstition, intolerance, ignorance, and wars.

The theory of foreign trade as stated by Ricardo has proved in an irrefutable way that free trade only ensures the highest productivity of the economic efforts and that every kind of protectionism must necessarily result in a reduction of the output of capital and labor. For a hundred and twenty years a flood of books and pamphlets has endeavored to invalidate the teachings of this theory and to show that some good might be reaped from protection. They have all failed. They could not disprove that as far as the supply of the consumer with commodities and services is concerned free trade is more efficient than any other system. Never has any proposition been brought forward that could shake the foundations of the free trade doctrine.

The most famous objection once was the infant industry argument. But everything that could be said about the inability of newly established industries successfully competing with old and well-established producers holds good in both cases whether the competitors are of the same or of different nations. That nobody likewise ventured to demand protection for new firms starting a new business against the overwhelming competition of older firms working in the same town, district, or country can already be considered as a proof that the argument is not economic but political. Of course, every new plant has to meet difficulties of different kinds until it runs smoothly. There are drawbacks which make the business bad for a longer or shorter period of initiation. If there is no prospect that these losses will be over-compensated by later success then the foundation of the new plant is not a paying concern. Then it is a waste to add new firms or plants to those already existing. In this respect it makes no difference whether the new center of production is working in the same or in another country. Many historical examples prove that industries have been shifted in the same country from a center of less favorable to a center of more favorable conditions, although no protective measures sheltered the infancy of the new establishment. In these cases in the calculus of the entrepreneur the losses of the beginning were outweighed by the later prospective gains. Protection was not necessary for the impulse. Nor is it more wanted if the shifting has to take place between different countries. Examined more closely, the infant industry argument reveals its purely political character. It cannot be considered as a sound economic argument in favor of protection.

The infant industry argument played an important role both in economic writings and in policies. But economic history does not give us a single example of protection in infant industries that did not turn into lasting and enduring protection. The industries of America, and Australia and of the Eastern countries of Europe in their infancy amply enjoyed the blessings resulting from the infant industry protection argument. Now grown-up, they are still protected and even much more efficiently and there is no question of declaring them of age by abolishing their protection.

The infant industry argument is today a thing of the past. In the present world other arguments have to be credited with the responsibility of protectionism and its logical outcome: the aim of self-sufficiency. These arguments are: the argument of national prestige, the war argument, the wages argument, the over-population argument, and the monetary or foreign exchange argument.

I. The Argument of National Prestige

According to List,1 every nation has to go through different stages of economic evolution. At the highest stage the nation has not only developed agriculture but trade and industry too. Until a nation has reached this last and highest stage it cannot harmoniously evolve all its productive forces. From this philosophy all the nations of the world which were backward in industrial production inferred that not to have a modern industry and modern big scale production was a sign of inferiority. Whereas the Romantics in the industrial countries wish to bring back the bygone days of a more agricultural age, the Romantics of the agricultural countries yearn for the industrialization of their own country. They think that a nation whose wealth is based on agriculture and the production of raw materials only can never attain the level of moral and intellectual civilization peculiar to the leading nations of the Western world. They long for industry because they desire the perfections of modern culture.

This Romanticism is accountable for the fact that in the more agricultural countries the programmes of the nationalistic parties always include protection for industry and put much less stress on the wants of agriculture.

In pre-war days, when immigration into the industrial countries of Europe and overseas was still free, the foremost reason for this policy in many European countries was the aim to make emigration superfluous. Conditions for industrial production were in every respect more favorable in Central and Western Europe than for instance in the Balkans. With a policy of laissez faire the excess population of these nations which could not find employment in agricultural production had to emigrate to Central and Western Europe and to the New World. When the governments of these Eastern nations encouraged industrial production by strict protectionism they wished to reduce emigration figures. They considered emigration as prejudicial to the greatness and to the political and military power of their State. They were afraid of the fact that the emigrants would in their new settlements in the course of the years lose their attachment to their old mother-country, its habits and language and its civilization. The policy of protection for industrial production was a policy of national and racial self-preservation. Its aim was to keep the citizens away from the melting pot of the European West, the United States, and other American countries. Today this argument has lost its meaning. Immigration is no longer free; the excess population cannot emigrate because there are hardly any countries where immigration is possible.

In pre-war days the migration argument was valid not only in the agricultural countries of Europe, but even in one of the most industrialized countries, in Germany. When the German agriculture, especially of the Eastern provinces of Prussia, could no longer compete on an unsheltered market with the agricultural production of more fertile countries like Russia, Rumania, the United States, Canada, and Argentina, Germany step by step progressed on the way to protectionism, because it wished as far as possible to reduce emigration losses. But we have not to dwell on this point any longer as today international migrations on a big scale are impossible.

In the opposite way in which the regard for population figures influenced the commercial policy of the countries which were relatively over-populated and therefore countries of emigration, the population argument influenced the relatively under-populated countries. These nations—in the first line the countries of Latin America—wished to increase their population figures by more immigration; protection was, in their eyes, one of the means of attracting more hands. But this too now belongs to the past.

Under present conditions, where migrations are reduced to a minimum and where no important country is ready to open its doors to newcomers, such considerations no longer play any role at all. We shall speak of the part played by the immigration barriers later in the essay.

II. The War Argument

The foremost reason for protection and the drive towards self-sufficiency in the world today is the war motive. For the militarist countries the readiness to make war is the primary goal of their policy and war itself the regular means of attaining their objects. They therefore consider peace nothing but the time to prepare the coming war. The economic activities of the country have already in peace time been organized in such a way that they may later serve the interests of war. This scheme includes self-sufficiency for all kinds of produce necessary to a war-making nation.

When the Liberals recommended free trade and international division of labor they did so because peace among all civilized nations was the cornerstone of their political creed. We have to realize that the conditio sine qua non of international free trade is goodwill and peace among nations. Division of labor and war are incompatible. The division of labor within a country presupposes peace between its different parts and districts. In the Middle Ages and even later, when the division of labor was hardly developed, it was possible for single towns and countries to go to war with each other. As every part of the country produced everything which was needed in war time, war-making did not present problems of supply of food, equipment, and arms. The belligerent parties wanted money with which to conduct the war; but if they had it, they could buy what they required.

Things are entirely different in the modern world of international division of labor. The European countries rely more or less on foodstuffs and raw materials imported from abroad. The manufacture of modern arms and war material is only possible in highly specialized big scale enterprises which must have been working already in peace time in order to run smoothly in wartime. A nation which does not produce all the raw materials and foodstuffs and all kinds of arms and military equipment within its borders would in time of war lack them.

When since the nineties of the last century Germany started its preparations for a decisive war, its economic provisions were limited to the supply of food. Protection for agriculture was among other reasons actuated by the necessity of making the country independent of foreign supply in war time. But nobody realized that a belligerent country could suffer from the lack of materials other than foodstuffs. It was the experience of the World War2 that taught this lesson.

Today these Powers who regard war as the means of satisfying their “dynamic” aspirations aim at self-sufficiency in order to be independent of foreign supply in a coming conflagration. It is these Powers which have in a systematic way evolved the theory and practice of self-sufficiency for the purposes of war making. Their endeavors have been intensified by the consideration of Article 16 of the Covenant3 providing economic sanctions against a nation going to war.

To attain self-sufficiency in war time these nations wish to become as far as possible independent of raw materials which have to be imported. They desire to replace the imported raw materials and foodstuffs by home production. They further the expansion of the production of food and raw materials which can be produced within their own borders by the most strict means of protectionism. They try to replace those raw materials which they cannot produce at home by substitutes manufactured in the country. In these efforts there is no regard for the cost of production. In the eyes of the supporters of this policy it is immaterial whether the cost of production of these succedanea is many times higher than the price which has to be paid for the imported commodity. What matters only is that it can be produced at home. It was in this spirit that they proceeded to produce synthetic rubber, synthetic petrol, synthetic wool, etc.

In the reasoning of this militarist argument in favor of self-sufficiency there is nevertheless a striking error. Whenever modern technique succeeds in replacing a raw material hitherto used by a synthetic article which is at least not less efficient, and regard being had to its efficiency not more expensive than the natural product, it is obvious that the new article more or less drives the old article off the market. In this way madder was replaced by aniline. In this way silk and cotton have lost ground to artificial silk. Under such conditions the new article can no longer be called a substitute in the same way as a motor-car is not a substitute for a carriage or a gun not a substitute for a bow and arrow. But this is not the problem we have to deal with. The substitutes under consideration are poor substitutes and do not render better and cheaper services than the commodity they have to replace but are less efficient and more expensive. In the endeavors to find such substitutes one may one day invent something new which will give more satisfaction than the materials now in use. But for the moment we have not to reckon with vague expectations but with the present situation. We have to face the fact that nations wish to attain self-sufficiency by replacing some imported raw materials and foodstuffs by a home production which brings them a more expensive and less efficient substitute than the material they wish to avoid importing. But they believe that these disadvantages are compensated by the fact that the country becomes independent of foreign supply and will therefore not suffer from its lack in war time. They think that if problems of national defense occur, cost of production is negligible. What counts is only independence.

But this reasoning is fallacious. It is not true that it does not play any role whether the production of a material wanted for war-making is more or less expensive. Higher costs of production mean that the same amount of capital and labor produces less. If a belligerent country has to employ more capital and labor to obtain a given quantity of material they will not be so well supplied as their adversaries. Especially the fact that they will have to employ more hands for the production of the same amount of goods is a calamity. Those surplus hands will be lacking in the trenches, as men cannot fight and work at the same time. Already in the World War it was felt as a hindrance by the Central Powers that the production of war equipment absorbed too many younger men.

Then there is a second great inconvenience. The substitutes are less suitable than the materials they have to replace. If they were not less suitable they would not be succedanea but the right material and the adversary too would use them. The fact that one party is forced to use less appropriate material is a heavy handicap. The better equipped party will reap from its better equipment both a moral and a material advantage. It demoralizes even the best army to realize that their adversaries are better fed, better armed, and better protected against every evil than they themselves. Nothing in the World War discouraged the soldiers of the Central Powers so much as when, capturing trenches of the Allies, they discovered that their adversaries were better armed, equipped, and fed than they were. Nobody can deny that the victory of the Allies was to a great extent due to the superiority of their material.

Then there is to consider that for the production of the substitutes some raw materials too are required. In very rare cases only these raw materials are available in the home market in sufficient quantities. Mostly they too have to be imported, because they are not produced at all in the country, or not in sufficient quantity. For the production of the textile by which Germany wishes to replace cloth, wool is wanted also and it is doubtful whether it may be possible to expand the German wool production to such a degree that it could produce the whole quantity needed. In any case, the expansion of the wool production can only be effected by restricting other agricultural production, as it requires soil which is scarce in Germany. If Germany or Italy try to produce substitutes out of wood they have to face the fact that their wood production does not suffice. When Italy under the sanctions planned to produce cloth from dairy produce it had to face the fact that its milk production too was limited and could not be expanded except by the use of imported fodder. The production of substitutes does not do away with the problem of raw materials, it merely shifts it to other branches of production.

It is the economic characteristic of the modern industrial communities that they cannot do without the import of raw materials which they buy by exporting manufactured goods. These modern industrial countries are thus in relation to the rest of the world in the same position as the centers of industry are in relation to the agricultural and raw material producing districts of their own country. Just as it is impossible for a town to wage a war against the country district which supplies it with food and raw materials, so it is impossible for an industrial country to wage a war against the rest of the world. This is the situation in which the industrial countries of Europe are today.

The Liberal economist deduces from this fact the necessity of international peace. He is of the opinion that war is incompatible with the present state of international division of labor. But the militarist who considers war making as the highest and noblest activity of a nation, believes that this international division of labor imposes slavery on his nation by preventing it from making war. His idea of independence is to attain a state of things for his country in which it could wage war against all other nations or against a group of nations without being dependent on foreign countries for supplies. Both Germany and Italy wish to be able to withstand a war against France and nations allied to France without suffering from the lack of a supply of food and raw material. This does not mean that they really wish to attack France or that they think that France will attack them. We have not to discuss this problem. But they consider a state of things in which they are unable to have recourse to war as ultima ratio as an unbearable handicap. Freedom as they understand it is the readiness to go to war when the national leader thinks it necessary.

It is obvious that this conception of freedom is limited to big nations only. A small nation could never dare to formulate its claim for independence in this way. Hitler and Mussolini emphasize that their revendication is justified, because a big nation cannot live in conditions which may content a smaller one. They demand territories where they may produce raw materials on their own soil and when they declare that their nations are not satisfied they bear out this statement by demonstrating the unfair distribution of colonies and raw materials. It is especially in respect of coming negotiations concerning a redistribution of raw materials and colonies that they wish to be provided with self-sufficiency because they wish to throw the sharpened sword into the scale.

Now we may better understand the role played by self-sufficiency in the plans of these two Powers. They do not consider self-sufficiency of their nation within the actual boundaries of the national territory as a lasting but only as a temporary provision for the preparation of the coming war for supremacy. This is the war frequently alluded to by Hitler in his book Mein Kampf.4

Of course, the policy of self-sufficiency does not seem any more reasonable if considered as a preparation for the next war only than if considered as a lasting military institution.

Some military experts consider the coming war as absolutely different from the past World War. They assume that the aggressor will succeed very quickly if he attacks unexpectedly a country which is not aware of this danger and is therefore not prepared to resist. With one stroke such an “Überfallskrieg” could bring the deciding victory. But whether such a surprise attack would be more successful in a coming war than it was in past wars is very doubtful. The sudden attack overthrew Saxony in 1756, and Belgium in 1914, but in both cases it neither decided nor ended the struggle, but on the contrary it kindled it only. There is no reason to think that it would be different in a hypothetical new world war. On the other hand, in a war in which the aggressor puts all his trust in a rapid success of his attack, the superiority of his equipment and armament plays a still greater role than in any other war-making. For the success of such a plan inferior quality of the arms due to the use of substitutes for the proper materials may prove fatal.

From the military point of view the substitution of succedanea for the proper raw materials seems therefore in every respect unfavorable. When the Central Powers went to war in 1914 without having made any provisions for the supply of foreign raw materials they could rely on the great stores of those goods which represented the normal stocks of business. These stocks were sufficient for the needs of the first two years of the War. The result of the policy of self-sufficiency and economic preparation for war will be that in a new campaign such stores will hardly exist.

It is the paradox of self-sufficiency as economic preparation for war that it weakens the military potential of the nation by rendering its arms less efficient. The present state of international division of labor puts to every nation which ventures to wage war a dilemma to which there is no solution. They have to face on the one hand the fact that they cannot fight without a continuous import of raw materials and food, and on the other hand the fact that the replacement of these imported goods by home production of substitutes diminishes their military force.

In time of peace every nation can buy all the raw materials and foodstuffs it requires and is ready to pay for. Of course, this makes the nation depend on foreign supplies and involves it in the international division of labor. But to consider this as a drawback because it renders war-making impossible is an atavistic view.

III. The War Argument in Neutral Countries

There are fortunate countries which have decided to remain neutral in all wars. For such a country the war argument for self-sufficiency as advanced by the militarists is nil. They do not intend to make conquests and they wish nothing but to live in peace and to have business always undisturbed. But even if they succeed in this policy and if they continue to be a peaceful island in an ocean of blood they may suffer from the consequences of war. Typical in this respect was Switzerland’s situation during the World War. Its supply of imported foodstuffs and raw materials was at the mercy of the belligerents. But for the agreements with the belligerents the Swiss would have had neither fuel nor food and would have starved.

In such a country a policy in favor of self-sufficiency to provide for the dangers of a new world war seems more reasonable than for countries which wish to attack. The Swiss Confederation cannot hinder its neighbors from going to war. It has simply to protect its own interests. This includes not only armaments, but also provisions for the feeding in war time. Many measures of the Swiss economic policy which should be regarded as completely unsound in a peaceful and reasonable world are justified by the international situation which the nation has to face. The conditions for some other nations are not very different, although none of the others is in such an unhappy geographical position as Switzerland.

The trend for self-sufficiency is in these cases too the consequence of the warlike spirit which is now infecting the world. The menace of coming wars endangers the maintenance of the international division of labor and every government, even the most peaceful and internationally minded, has to provide for the event.

IV. The Wages Argument

It is one of the effects of the international division of labor that it creates an interdependency of wages all over the world.

With perfect mobility of labor, capital, and commodities all over the earth’s surface there would be a tendency for an equalization both in the rate of profit and in wages for labor of the same kind. Capital and labor would be shifted from the areas where the natural conditions of production are less favorable to areas where they are more favorable until this equalization has been reached. Under the actual state of things where there are very effective institutional barriers against the transfer both of capital and labor from country to country there exist conspicuous differences in the rate of profit and in the level of wages. But the interdependency of both is nevertheless a fact.

One of the factors determining wages in Japan is the circumstance that the Japanese are not free to emigrate because no country tolerates such an immigration. One of the factors determining wages in the United States is the fact that immigration to that country is restricted. Labor is not free to move from Japan to the United States. But there is nevertheless a connection between the height of wages in both countries. This connection is effected by the movability of the produce of labor. The commodities produced by either nation enter into competition. In a world of free trade for commodities they would have to be sold at the same price notwithstanding the allowance made for transport. The faculty of a country’s trade unions to raise the level of wages seems therefore limited by the competition of goods produced abroad by cheaper labor. The trade unions of the countries with more favorable conditions for production and higher wages would like to see the wages in the less favored countries rise. But that could not be attained otherwise than by shifting hands from the less favored to the more favored countries. It is precisely this that the trade unions of the better endowed countries wish to avoid. But without a change in the distribution of workers over the earth’s surface equality of wages is impossible.

Under the existing system of immigration restrictions equilibrium wages are different from the level they would attain in a world where labor is free to migrate; they are higher in some countries and lower in others. But there is for every area, within which there are no barriers for the transfer of labor from one place to another, a uniform equilibrium rate of wages for every kind of labor. As long as effective wages do not exceed this equilibrium level employment and unemployment are normal. It is in the nature of the equilibrium rate to make supply and demand on the labor market coincide.

If the trade unions of the countries endowed with more favorable conditions for production were to limit their activities to checking immigration, and if they were satisfied with the rise of equilibrium wages due to these restrictions, they would not increase unemployment figures. But if the trade unions try, as they really do, to raise the wages above this equilibrium rate they bring about lasting unemployment of a great part of the working class. Of course this is in a market economy the unavoidable consequence of a wage rate exceeding the equilibrium rate.

Entrepreneurs ascribe their inability to employ more hands at the rates fixed by collective bargaining to the pressure of foreign competition. Public opinion therefore considers barriers erected against imports from abroad as an effective measure of fighting unemployment without lowering the level of wages. One of the most popular arguments in favor of protection is to defend the national standard of living against the dumping of goods produced by cheap labor.

Now people call dumping the import of goods produced by cheap labor and regard the exclusion of such goods as quite justified. That means for the countries which on the one hand are endowed by nature and by the plenitude of their capital with the most favorable conditions for production, and on the other hand keep out foreign immigrants, that they consider high import duties, quotas and even complete self-sufficiency as justified.

If a country neither tolerates the immigration of labor, nor the imports of goods produced abroad by cheap labor, nor the export of capital, it is on the way to complete economic isolation.

The Anglo-Saxon and some other Western countries are doubly responsible for the low rate of wages and for the low standard of living in the over-populated areas: first, by making immigration practically impossible, and secondly, by fighting the import of manufactured goods. In their endeavor to maintain their own higher standard of living they exert a pressure on the standard of living in other countries, especially in Central, Eastern and Southern Europe, and in Japan. They reduce their imports of manufactured goods but at the same time increase their exports of food, raw materials, and manufactured goods; the consequence is a fall in the total volume of international trade.

The trend to make trade barriers more effective and to isolate the countries economically more and more is therefore an outcome of a policy which wishes to fight unemployment by protection for home production. The idea underlying this policy is misleading. The low wages abroad become still lower and the country’s own selling abroad decreases in the same proportion as imports are reduced.

It is hopeless to try to do away with unemployment by a policy of trade barriers. That wages higher than the equilibrium rate can only be maintained when a considerable part of the labor supply is unemployed is for an isolated country no less the case than for a country buying and selling abroad. It is a fallacy to think that in the long run unemployment can be caused by foreign competition. Foreign competition, or more correctly the fact that the home market forms a part only of the international market, is one of the factors determining the height of the equilibrium wage rate. At the equilibrium wage rate unemployment is only a transitory phenomenon. Foreign competition may make equilibrium wages lower but cannot directly cause lasting large scale unemployment.

If a country tries to keep out the influence of the foreign labor markets from its home market it has to withdraw from the international division of labor. But then it deprives its people of all the advantages of international economic cooperation. That means that in the long run commodity wages have to go down. The policy of economic isolation is in no way the right means of improving a nation’s standard of living.

V. The Over-Population Argument

The over-population argument for protection is nothing but the wages argument as seen from the point of view of the over-populated countries. In these countries wages are low and there is under the present conditions of migration barriers no hope of making the wages higher by emigration.

Equilibrium wages are low in these countries. But as long as actual wages do not exceed the equilibrium rate there is no lasting large scale unemployment. Equilibrium wages of course may fall extremely low as compared with foreign wages.

Low wages are very unsatisfactory and both governments and trade unions are in search of a remedy. Unfortunately, the only effective remedy—emigration—cannot be taken into consideration. Minimum wages, whether imposed by government interference or by collective bargaining, only increase unemployment. To fight unemployment an effort is then made to protect home production. But this raises commodity prices and lowers the standard of living still more.

The recriminations of the over-populated countries against the more fortunate countries are justified. The countries where equilibrium wages are higher harm them in a twofold way: by making immigration impossible and by closing their markets to the import of their produce. Nevertheless, these over-populated countries themselves make their own conditions only worse by closing themselves to their own markets. In doing so they effect nothing else than a further lowering of their standard of living.5

In this case, too, protection and self-sufficiency are remedies that only increase the evil.

VI. The Monetary or Foreign Exchange Argument

The monetary or foreign exchange argument in favor of protection differs from most other arguments in that it is purely economic. Unfortunately, it is like the other arguments a fallacious one.

The maintenance of a sound currency has nothing to do with foreign trade. It is the old and fundamental error of all types of Mercantilism, that an unfavorable balance of trade drives money out of the country. But the balance of trade is one item only in the balance of payments. An excess of imports over exports is compensated or over-compensated by assets from other items. The balance of payments always balances. If both sides of the balance of payments equalize only by an export of gold, prices have to fall. The low prices increase exports and check imports. In countries where the currency is not purely metallic, the outflow of gold forces the Bank to restrict credit. Then the adjustment is effected by the inflow of foreign short-term loans attracted by the higher rate of interest. Thus, under both conditions, the equilibrium is re-established automatically. In the long run a country which has not embarked on inflation and credit expansion can never be in danger of seeing its monetary stocks go out of the country. On the contrary, if there is inflation and if as a consequence of the excess of currency prices rise and the national monetary unit depreciates, nothing can prevent the working of the mechanism described by Gresham’s law. If the government attributes the same legal tender quality to the depreciated paper money as to the gold coins the latter disappear from circulation. As under the conditions of inflation and credit expansion the automatic readjustment cannot take place, the gold standard is replaced by a paper currency, which depreciates more and more with the advance of inflation.

It is in vain that governments try to stop the course of depreciation by restricting imports. If the government prevents the citizens from buying foreign goods they will buy more home products. The price of these home products will then go up and their export will decrease. Thus the interference of the government, which is directed to an improvement of the balance of trade by restricting imports, results in bringing down both sides of the balance. It cuts simultaneously both imports and exports. The effect is a reduction in the total volume of foreign trade.

If the government wishes to succeed in its policy it would have to take away from the hands of the citizens the excess of their cash holdings. The government would have to tax the citizens or to issue a loan on the home market and then to withdraw from circulation the money received. This means a policy of deflation. Of course deflation is the only efficacious means of bringing down the rate of foreign exchange and of re-establishing the former purchasing power of the monetary unit. But if the government does not wish to deflate it has no means of reducing the prices paid for foreign exchange.

The foreign exchange regulations as they exist in many countries are of two different types. There are countries which wish to maintain simply the market rates of the foreign exchanges. They believe that something should be done to prevent a further depreciation and that foreign exchange regulation is the right way. But they do not intend to force the citizens to buy and sell foreign exchange at a lower price than the market price. Under such conditions the effects of foreign exchange regulations are not very harmful. As there are no endeavors to impose on the market a lower price for foreign exchange, as foreign exchange is bought and sold at the market price, it does not matter whether the dealings are free, or the privilege of an institution like the Central Bank, or a Foreign Exchange Equalization Account. Of course, if the government or this institution for the management of foreign exchange dealings hinder some imports for the sake of economizing foreign exchange, they restrict imports too and thereby the volume of foreign trade. But there is under these conditions no urgent cause to take very drastic measures in this respect, as the foreign exchange regulations do not directly restrict the available amount of foreign exchange.

It is different, where the aim of the foreign exchange regulations is to impose on the market a lower price for foreign exchange than that which would be formed on a free market. If every citizen is bound to sell all foreign exchange to the Exchange Equalization Account at this legal or official price, which is lower than the market price, things are exactly the same as if there were a duty on exports. The amount of exports falls, and therefore the amount of foreign exchange offered to and bought by the Exchange Equalization Account. A scarcity of foreign exchange is the unavoidable consequence of a policy which imposes on the market too low a price for gold and foreign currency. The more these regulations are enforced, the greater the scarcity becomes. Exports would cease completely but for export premiums paid by the government to compensate losses which the exporter suffers by the compulsion to sell the foreign exchange at a price below the market value.

If a country which has adopted this regime complains of a shortage of foreign exchange it has to realize that the evil is due to its own policy only. But for the consequences of foreign exchange regulations, there is no difference for the citizens whether they buy home or foreign produce. There is no such thing as a problem of transfer. Whether a German wishes to buy cotton or some home produce, let us say coal, does not make any difference either for him or for the country’s monetary system. In both cases he has to abstain from buying something else. He has to spend less Marks for other purposes than he would have done if he had not bought the cotton or the coal. The problem is whether he is rich enough to buy cotton or coal, whether he disposes of the amount of Marks necessary. If he buys more imported goods he has to abstain from buying home-made goods. These goods therefore then become cheaper and can more easily be exported, thus compensating the outflow of money by an inflow. If for some reason exports cannot be expanded, the greater demand for foreign exchange makes the prices of foreign exchange and therefore those of the imported goods rise and this upward movement of prices forces the citizens to restrict their buying of imported goods. Here too the automatism of the market works smoothly.

Let us assume that by a redistribution of the areas producing raw materials some part of Australia and of the South of the United States became German possessions. Nothing in the economic and monetary sphere would be changed by such an arrangement. The German consumer would have to pay just the same for cotton and wool as he has to pay now. It would not be easier for him or more difficult for the British or the Americans to buy in these newly ceded territories. Of course, under present conditions too trade between Great Britain and Australia is not conducted in any other way than the trade between Great Britain and Germany, or between Germany and Australia. It is not any advantage for the British buyer of wool that his King is at the same time the ruler of Australia, or that the citizens of Australia speak English and are the offspring of British ancestors. The German buyer on the wool market competes under equal conditions with the British or Danish or Polish buyer.

Let us, on the other hand, assume that Bavaria were separated from the Reich. But for government interference in the currency system and for foreign exchange regulations, the trade between Bavaria and the rest of the Reich could not be affected by such a change. What Saxonians buy in Bavaria has to be paid either by direct exports or by triangular trade, whether Bavaria is a part of the Reich or not.

It is misleading to think that the buying of imported goods absorbs a quantity out of the Devisen-stock [foreign exchange] of the nation. It is an error to say to a man: you must not buy this foreign commodity because for this purchase a part of the nation’s hoard of foreign exchange is wanted. There is no such thing as a fund of foreign exchange. Foreign exchange holdings are in a continuous flux and reflux, they are daily filled up and daily depleted. In buying foreign goods the consumer creates at the same time, by reducing his buying at home, the amount of foreign exchange necessary for his buying.

The fact that there are trade barriers does not alter the working of this mechanism. Trade barriers of course make it more difficult to export and to get foreign exchange. But the fall in exports and in the inflow of foreign exchange automatically leads to a restriction of buying abroad. When prices, wages, and profits in the export industries fall, the groups affected have to reduce either their buying of foreign goods or their buying of home produced goods. In the first case the demand for foreign exchange falls, in the second case the prices of these goods sold on the home market in lesser quantities fall, and it is easier to export them.

If a country wishes to enjoy the advantages of a sound currency and stability of foreign exchanges, it has but to avoid inflation and credit expansion. If it prefers the pretended advantages of depreciation, then it has to let the market fix the value of its currency unit. In both cases it would not find any monetary difficulty in dealing with foreign countries. It is but the aim to fix foreign exchanges below the market price by means of foreign exchange regulations which creates the shortage of foreign exchange.

Germany’s position in the world’s economic system, like the position of many other European nations, was and is based on industry. They import mostly raw materials and food and export mostly manufactured products. By restricting the purchases of raw materials the German government restricts the exports of manufactured goods too. By using the imported raw materials for rearmament purposes instead of the production in the exporting plants it reduces the amount of foreign exchange available. But Germany is only the most outstanding case of a policy followed today by many other countries too.

In an economic system based on barter and direct exchange between two parties only, nobody would doubt that satisfaction is given to both parties. The function of money is to provide the same facilities in triangular trade. This clearing function of money is not limited to local trade only; it works in the same way in inter-local, inter-regional and international trade. The most efficient clearing system and the most simple too is the monetary system. If a nation replaces the use of money in international trade by bilateral clearings it deprives itself of the advantages of triangular trade. It loses thereby the faculty of buying on the cheapest market and of selling where it may obtain the highest prices. It has to buy notwithstanding the height of the prices where it has something to sell, and it has to sell notwithstanding the low level of prices where it wishes to buy something.

The gold standard was and is still the best and even the only practical solution to an international organization of triangular trade. That it no longer works is not due to inherent defects or to a change in the conditions it presupposes. It is simply the consequence of the fact that governments no longer wish to let its mechanism work. They combat the international division of labor and they therefore intend to destroy the most important tool of international trade. It is not the breakdown of the gold standard, and it is not the unsatisfactory state of the world’s monetary system which necessitate a policy of trade restrictions for monetary reasons. On the contrary. The gold standard and the world’s monetary system collapsed because the governments destroyed them purposely for the sake of doing away with international trade.

VII. Protection from the Point of View of Home Policy

The nations went in for protection because they believed that in trade the national interests were in conflict with the interests of other nations and that it was therefore necessary to protect the home market against foreign commodities. But even if these erroneous considerations of national interests as contrasted with the international point of view had not worked, considerations of home policy only would have brought about the same effect.

In many countries of the world today it is commonly assumed that it is the duty of the State to protect the less efficient producer against the competition of the more efficient. In this way the government prevents the more efficient producer from using his full superiority. It restricts the sphere of action of big stores for the benefit of the shopkeepers. It forces upon a whole industry a proportional reduction of output instead of letting the market eliminate the marginal producers. It makes it more difficult for the motor-car to compete with the railway. It tries to create by interference a better marketing for commodities which are produced in greater quantities than public demand.

The strong governments of the authoritarian States, who emphasize their mission to lead and not to be led and to force their subjects to obey their orders act under the rule of the theories of government interference and interventionism not differently than the democratic governments whom they reproach with their weakness. Every government, whether parliamentary or dictatorial, is today ready to interfere for the particular interests of groups on whom they wish to rely. Even small groups are sometimes considered as very important for the political concept of the ruler, whether he is democratic or dictatorial. The case of silver in the United States is an excellent example of how a special strategic position may even to a small group give the possibility of influencing a big country’s policy. In a similar way, in every country small groups of entrepreneurs and trade union members back particular measures of protection and restriction.

It seems to our contemporaries justified that our fellow citizens who find it difficult to stand foreign competition should be protected. It is the belief that a government which did not try to help a less efficient producer would neglect its first duty.

But it would be too simple an explanation to say that at the bottom of protection is the selfishness of particular interests as contrasted with the general interest. These particular interests are always the interests of minority groups. The producers—both entrepreneurs and workers—of every single commodity are always a minority if compared with the bulk of the consumers. They succeed in getting their particular interests protected against the greater interest of the majority only because they are supported by public opinion, which considers such protection as beneficial for the nation. A hundred years ago the coachmen and the postilions did not find protection against the overwhelming competition of the steam-engine and the railway, because in those days the Liberal spirit was opposed to privilege which benefited a small group to the disadvantage of the public. Today, the claim of the railways for safeguard against the motor-car seems justified to the legislator. Today every particular interest is sure to find support in public opinion. It is this attitude of public opinion which is responsible for the privileges and not the desire of those who wish to enjoy a privilege. Seen from the point of view of home policy, protection is but a category of measures in the system of government interference.

VIII. The International Conflict of Economic Interests

In our world of migration barriers there are very grave conflicts of economic interests between nations. In restricting immigration figures some nations succeed in making wages for their citizens higher, but only at the expense of the citizens of other nations. The international clash of economic interests is due to this fact. There are no serious conflicts about raw materials or colonies in a world of peace and peaceful trade, where everybody has the right to buy on the same terms as everybody else. But there is a conflict when the citizens of some countries of Europe and Asia are prevented from moving to the countries where they may earn more than in their own country. The high standard of living in the United States and in the British Dominions has its corollary in the low standard of living in Eastern, Central and Southern Europe, in India, China, and Japan.

The people of the United States and the British Dominions defend their higher standard by closing their doors to newcomers. The result is that within their boundaries many millions of acres lie barren, whereas much poorer soil in other countries has to be cultivated. Any account of the world’s present economic and political situation which does not stress this fact is inadequate.

There are three reasons why this vital problem is generally overlooked in present public discussion. First of all, our economic and political considerations are prejudiced by the Marxian doctrine. According to Marxism, the interests of the proletarians all over the world are identical. The conflicts between nations and States are only the outcome of the prevailing particular class interests of the bourgeoisie. Nationalism, hatred between nations and imperialistic and militaristic tendencies in international relations are peculiar to the rule of capitalists. A world of popular regime would be peaceful and adverse to international conflict. The proletarians are all brothers and friends. Biased by this dogma, the Marxians ignore that the poverty of the great mass of the proletarians in Europe and Asia, which they deplore, is due to the fact that they have to dwell, live, and work in areas where the natural conditions of production are less favorable because the proletarians of better blessed areas refuse them the right to enter their countries. A consistent application of the Marxian “superstructure” theory would have to say: the proletarians of Europe and Asia are exploited by the proletarians of the New World; modern imperialism and militarism are the “superstructure” of the conflict of economic interests between the proletarians of the more favored with those of the less favored nations. But the Marxians intentionally keep silent over these conflicts. It is very characteristic how scarce the writings about the migration restrictions are when compared with the abundance of publications on all other measures of present economic policy. It is even more characteristic how eager the Marxians are to develop highly artificial and futile hypotheses to explain imperialism out of alleged difficulties of the capitalist order.

Nor are the opponents of Marxism on our political stage, the fascists and nationalists, more ready to discuss the migration barriers. Their philosophy is against emigration. They want all their men for the coming war. They wish to conquer the richer countries and to annex them; they do not wish to send their sons as emigrants to foreign lands. Their remedy for the Volke ohne Raum (people without room) is conquest. The population pressure in Italy, highly aggravated by the post-war migration checks, does not make Mussolini criticize the policy of the countries not allowing Italian immigration. On the list of his grievances no mention is made of immigration barriers. On the contrary, desirous of increasing his military strength, he himself is against emigration and wishes to raise the birthrate.

There is still a third reason for the underrating of the importance of the migration barriers. The most eminent upholders of international mind today are the intellectuals of the English-speaking nations. Without their noble attitude the case for peace and international collaboration would be hopeless. But these intellectuals sympathize with trade unions, which in the English-speaking countries are the champions of immigration barriers.

The drawbacks of the immigration barriers are further increased by the obstacles raised against the transfer of capital. It is difficult to decide whether it was more the policy of the debtor countries or the policy of the creditor countries which was responsible for the abolition of the movability of capital. The countries which had imported capital destroyed the internationality of capital transactions by open repudiations and by foreign exchange regulations. But the capital exporting countries too had their share in limiting the outflow of capital. The result is that the populations, which by the immigration restrictions are forced to work in areas where the natural conditions for production are less favorable and where in consequence wages have to be low, find their existence made even worse by a shortage of capital, which lowers the marginal productivity of labor and thereby wages still more.

It may seem striking that public opinion is more concerned today with the apparent problem of raw materials and does not deal with the most serious problem of contemporary international relations: with the problem of the movability of labor.

But whether we consider the raw material question or the migration question as the crucial point of internationalism, in any case we have to realize that neither the suppression of international trade nor war can be considered as appropriate remedies. Even a nation handicapped by the poverty of its territory, which cannot yield enough raw materials, and whose citizens are prevented from emigrating cannot draw any advantage from protection. It is noteworthy to realize that Ricardo’s irrefutable proof of the superiority of free trade policy is precisely based on an argumentation which assumes that capital and labor do not move freely from country to country as they do within a country. This assumption of the immovability of capital and labor was true for the days of Ricardo. It was not true for the late nineteenth century and for the beginning of the twentieth century; it is true again for our days. It is therefore a mistake to say that Ricardo’s arguments are no longer valid for our days as conditions have changed. On the contrary, conditions are again the same.

But neither is war a solution for the present conflicts. Given the geographical and political conditions of our world, it seems hopeless for the over-populated European countries to force by war upon the countries closed to immigration a change in their policy. That is why Hitler in Mein Kampf does not propose as the goal of German policy the conquest of overseas territories, but only of European territories. But these European neighboring countries of Germany, apart from the fact that they are already now over-crowded, could not give the German emigrant what he wants.

It would be ostrich policy to deny the existence of very grave conflicts between the nations of our world. But we have to realize that neither war nor protectionism and self-sufficiency can provide a solution for the problems involved.

Conclusion

Liberalism is a philosophy of peace and international cooperation. It is the basic point of its social and economic theory that, rightly conceived, the interests of all individuals and of all nations are harmonious in a society of private ownership and free trade. For the Liberal democracy and peace are the outcome of his ideas on life, work, and human cooperation.

But Liberalism is for the time being the privilege of a small and uninfluential minority. The world is ruled by other ideas. These ideas lead to armaments and to protectionism, to barriers against the movability of commodities, labor and capital, to militarism and to dictatorship.

It is a mistake to assume that as long as such conceptions prevail any endeavors to lower the obstacles to international trade could be successful. If the theories in favor of protection and self-sufficiency are considered as right, then there is no reason to bring down trade barriers; only the conviction that these theories are wrong and that free trade is the best policy can shake them. It is inconsistent to support a policy of low trade barriers. Either trade barriers are useful, then they cannot be high enough; or they are harmful, then they have to disappear completely. The pre-war policy of moderate protectionism was the result of a labile equilibrium between two conflicting theories; now when the theory of protectionism has driven the theory of free trade off the field of public opinion there is no more limit to trade barriers.

It is hopeless to expect a change by an international agreement. If a country thinks that more free trade is to its own advantage, then it may always open its frontiers. But if it views free trade as a disadvantage to its own interests it will not be more willing to grant it in an international treaty. Every nation is today anxious to expand the volume of exports, but no nation is prepared to sacrifice the particular interests of an existing industry or even of an industry which has still to be created. It is this tendency that is continually reducing the volume of international trade.

The poor results obtained by the League of Nations and the failure of the World Economic Conferences and of the more special conferences and negotiations between smaller groups of nations are due to the fact that the world lacks today the mentality of peaceful cooperation. Under the rule of militarist ideas the efforts at international collaboration are doomed.

What the world needs is not more conferences and conventions but a radical change of mentality.

• *[Extract from The World Crisis, Symposium of Studies published on the occasion of the Tenth Anniversary of the Graduate Institute of International Studies (London, New York, Toronto: Longmans Green, 1938)—Ed.]
• 1[Friedrich List, a German economist in the 1820s and 1830s, favored free trade accompanied by tariff protection to stimulate the growth of infant industries as a country progresses through the various stages of economic evolution—Ed.]
• 2[Bear in mind that this extract was written in 1938 and that the World War that Mises refers to here and throughout this piece is World War I—Ed.]
• 3[The Covenant was a short concise document of 26 articles stating the purpose and intentions of the League of Nations. Article 16 said that all members promised to join in common action against any other which made war in violation of the Covenant; i.e., the breaking off of all economic transactions and other benefits with the Covenant-breaking state, and, if this were not successful, then of military action. This article also empowered the League’s council to expel any member violating the Covenant—Ed.]
• 4Cf. Adolf Hitler, Mein Kampf, 42nd ed. (Munich: F. Eher Nachtfolger, 1933), pp.726–43, 757, and 766.
• 5[Cf. Ludwig von Mises, “The Freedom to Move as an International Problem” [1935], in The Clash of Group Interests and Other Essays, Richard M. Ebeling, ed. (New York: Center for Libertarian Studies, 1978), pp. 11–20—Ed.]

I. Terminological Remarks*

There is considerable ambiguity concerning the terminology to be used in dealing with the problems of international economic relations. It seems therefore expedient to start with a clear definition of some terms.

Chauvinism is the overvaluation of one’s own nation’s achievements and qualities and the disparagement of the other nations. As such it does not result in any political action.

Patriotism is the zeal for one’s own nation’s welfare, flowering, and freedom. But the patriots disagree with regard to the means to be applied for the attainment of this end.

The free traders (liberals in the old sense attached to the term liberalism, today mostly disparaged by the self-styled “progressives” as orthodox, reactionaries or economic royalists, as Manchestermen1 or as supporters of laissez faire) want to make their own nation prosperous by free trade and by its peaceful incorporation into the world-embracing commonwealth of the international division of labor. They recommend free trade not for the sake of other nations, but from the viewpoint of the rightly understood or long-term interests of their own nation. They are convinced that even if all other nations cling to protection, a nation best serves its own welfare by free trade.

The nationalists, on the contrary, believe that a nation cannot further its own well-being but by inflicting harm upon other nations. Aggressive or militaristic nationalism aims at conquest and at the subjugation of other nations by arms. Economic nationalism aims at furthering the well-being of one’s own nation or of some of its groups through inflicting harm upon foreigners by economic measures, for instance: trade and migration barriers, expropriation of foreign investments, repudiation of foreign debts, currency devaluation, and foreign exchange control.

Economic nationalism results in war if some nations believe that they are powerful enough to brush away, by military action, the measures of foreign countries which they consider as detrimental to their own interests.

The free traders want to make peace durable by the elimination of the root causes of conflict. If everybody is free to live and to work where he wants; if there are no barriers for the mobility of labor, capital, and commodities; and if the administration, the laws, and the courts do not discriminate between citizens and foreigners, the individual citizens are not interested in the question where the political frontiers are drawn and whether their own country is bigger or smaller. They cannot derive any profit from the conquest of a province. In such an ideal—Jeffersonian—world of democracy and free trade war does not pay.

The nationalists, on the contrary, assert that peace itself is an evil and that war is, as the English writer John Ruskin said, “the foundation of the arts and of all the high virtues and faculties of man.” Consequently the Nazis considered it as the most desirable state for a nation “to be always at war,” and Mussolini exalted “the dangerous life.” The Japanese clung to the same tenets.

Pacifism is the belief that all that is required for the abolition of war is the building up of an international organization and the establishment of an international world court whose rulings should be enforced by a world police force.

The noble-minded founders of the League of Nations were guided by this type of pacifism. They were right in their idea that autocratic governments are warlike, while democratic nations cannot derive any profit from conquest and therefore cling to peace. But what President Wilson and his collaborators did not see was that this is valid only within a system of private ownership of the means of production, free enterprise, and unhampered market economy. Where there is no economic freedom things are entirely different. In our age of statism and socialism, in which every nation is eager to insulate itself and to strive toward autarky it is quite wrong to assert that no man can derive any gain from conquest. Every citizen has a material interest in the nullification of measures by which foreign governments injure his economic interests.

Autarky or economic self-sufficiency is a state of affairs where there is no foreign trade at all; every nation consumes only goods produced within its own borders. No contemporary nation is ready to admit openly that it strives toward autarky. But as every nation is anxious to restrict imports and as exports must needs fall concomitantly, we can characterize the economic policies of the last decade preceding the present war as autarkic.

II. The Rise of Modern Protectionism

In the ’sixties of the nineteenth century, public opinion was almost unanimous in the assumption that the world was on the eve of an age of everlasting free trade and peace. True, there was only one big nation which had unconditionally espoused the principle of free trade: Great Britain. But there seemed to prevail a general tendency all over Europe toward a step-by-step abolition of trade barriers. Every new commercial treaty between civilized and politically advanced nations brought a reduction in tariffs and included the most favored nation clause. The teachings of Ricardo and John Stuart Mill, of Cobden and Bastiat, met with general approval. People were optimistic enough to expect that trade barriers and war were doomed to disappear with other remnants of the dark ages like despotism, intolerance, slavery and serfdom, superstition, and torture.

However, the greater part of the world still had tariffs. There were two groups of protectionist countries.

There were, on the one hand, the countries of the European continent which had long since embarked upon a Mercantilist2 policy of protection. People were convinced that these nations would soon learn that protectionism does not further but seriously checks their own material well-being and would turn to free trade.

There were, on the other hand, the former colonies, the countries peopled by the descendants of European settlers. These countries had in earlier days considered import duties as the most expedient means for taxing their citizens. Their tariffs had originally only fiscal purposes. With the progressive evolution of economic civilization and the increase of population figures these tariffs changed their character and provided ample protection to the growing domestic industries. In the middle of the nineteenth century they were, especially in the United States, already more effective in this regard than those of the then most protectionist European powers, Austria and Russia. However, the optimists hoped that at least the United States would outgrow what they qualified as the remnants of its colonial past.

The optimists were entirely wrong. The protectionist nations did not abandon protection, but raised their tariffs; furthermore, the free trade countries themselves turned toward protection. Great Britain and Switzerland, once the champions of free trade, are today fanatically devoted to the most radical methods of economic nationalism.

III. Remarks on the Theory of Foreign Trade

The return to protectionism, the progressive aggravation of trade restrictions through the multiplication of import duties and through the application of new methods for prevention of imports, and the evolution of the tariff system into a system under which all kinds of commercial transactions with foreigners (even tourism, the consultation of foreign doctors and education at foreign schools) require a special license on the part of the authorities—all these are not the outcome of a change in the theory of foreign trade. The desperate attempts of the advocates of protection to refute the statements of the classical economists concerning the consequences of free trade and protection failed lamentably. All they could demonstrate was that under special conditions the interests of some groups of the population can derive temporary benefits from protection. But the economists have never denied this. What they asserted was:

1. If protection is granted to one branch of production or to a few branches only, those privileged are benefited at the expense of the rest of the nation.

2. If protection is granted to the same extent to all branches of domestic production (“lückenloser Schutz der nationalen Arbeit,” as the Germans call it), nobody can possibly derive any net profit. What a man profits on the one hand qua producer, he loses on the other hand qua consumer. Moreover, everybody is hurt by the fact that production is diverted from those lines in which its physical productivity is highest; all nations and every individual are injured by the fact that less favorable conditions of production are exploited, while some more favorable remain unused.

3. It is vain to try to “improve” the balance of trade by import restrictions. But for capital transactions (foreign investments and foreign loans and the payments resulting therefrom), gifts and tributes, the total value of the commodities sold and the services rendered to foreigners exactly equals the value of the goods and services received.

4. The advantage derived from foreign trade lies entirely in importing. The exports are only the payment for the imports. If it were possible to import without exporting at all, the importing country would not suffer, but enjoy prosperity.

It has been asserted again and again that conditions have changed since the days of Ricardo and that his conclusions are no longer valid under present conditions. This, however, is a fallacy too.

Ricardo assumes that there is no mobility of capital and labor, but that on the other hand there is some mobility for commodities. (If there is no mobility at all for commodities either, then every nation lives in perfect autarky and there is no question of any foreign trade.) The conditions assumed by Ricardo changed in the course of the nineteenth century. Millions of workers emigrated from the comparatively overpopulated countries and immigrated into the comparatively underpopulated countries offering more favorable conditions for labor and consequently higher wage rates. Today things have changed and the state of affairs is by and large the same as in the time of Ricardo. Migration is almost impossible. The international capital market is disintegrated. The capitalists shun foreign investment because discriminatory taxation, expropriation and confiscation, foreign exchange control and repudiation of debts make them too risky. The governments of those countries whose capitalists could consider foreign investment are ready to put an embargo upon capital export because they view it as contrary to the interests of the most influential domestic pressure groups, labor, and farming.

In a world of perfect mobility of capital, labor, and products there prevails a tendency toward an equalization of the material conditions of all countries. Those parts of the earth’s surface which offer more favorable natural conditions of production attract more capital and men than those offering less propitious ones. There are areas more densely populated and areas less densely populated. Freedom of migration and capital transfer tend to make the difference of comparative overpopulation and comparative underpopulation disappear. They tend toward an equalization of wage rates and rates of interest and concomitantly of standards of living.

In a world of immobility of men some countries are comparatively overpopulated, others comparatively underpopulated. There are conspicuous differences in wage rates and in standards of living. The restrictions imposed upon the mobility of capital intensify this outcome.

Ricardo has demonstrated what the consequences of free trade in such a world are. His law of comparative cost has never been disproved. Even if all other countries cling to protection, every nation best serves its own interests by free trade.

IV. Big Business and Protection

For the self-styled “progressives” big business is the scape-goat for all evils. The selfish class interests of the capitalists and entrepreneurs, they say, have pushed the nations toward hyper-protectionism. Modern nationalism is but the ideological disguise of the class interests of the exploiters.

However, big business is not afraid of foreign competition. The American motor car producers and the German electric companies do not fear that any foreign competitor could supersede them on their domestic market.3 Neither do they ask for protective duties in those foreign countries into which they want to export, indeed their interests are considerably hurt by the import duties of these countries. If they are not ready to lose these markets, they are forced to build subsidiary plants in protected countries and to produce at a higher cost. Instead of supplying the consumers with merchandise manufactured in big scale plants located at the sites offering the most advantageous opportunities, they are compelled to produce a good deal of their output in smaller plants located in less appropriate places. But for protectionism it would never have occurred to Mr. Ford to fabricate cars in Canada, in France, in Germany, and in some other countries. The characteristic feature of present-day big business is that the enterprises own subsidiaries in many countries. They are not interested in the continuation of production of the subsidiaries. They would, in the absence of protection, concentrate their whole production in those plants in which costs are lowest.

If it were true that big business is favored by protection, there would be no protection in this age of violent anti-capitalism. It can hardly be denied that the general trend of the economic policies of all countries in the last decades was to inflict as much harm as possible on big business.

The present structure of business and the location and the size of the single plants are adjusted to the conditions brought about by protectionism. A transition to free trade would cause a general reshuffling, as many plants are now located in places where production costs are so high that they cannot, when unprotected, compete with industries operating in places offering more propitious opportunities. The vested interests of many enterprises are therefore opposed to free trade. But this is not the cause of protection, it is rather its outcome. If there had not been any protection at all, the capitalists would not have invested their funds in places in which profit can only be expected under protection.

While some enterprises are menaced by free trade, the interests of the bulk of industry and of the whole nation are not. On the contrary! Everybody would be benefited, if production were discontinued where the physical input needed for the attainment of one unit of output is higher, and were to expand where the input required is lower.

Under free trade for products and capital and under immigration barriers for labor, there would prevail in America a tendency to prefer those branches of manufacturing in which wages form a smaller part of the total costs of production. The country would favor more the expansion of the heavy industries and less those branches which require comparatively more labor. The resulting imports would bring about neither bad business nor unemployment. They would be compensated by an increase in the export of goods which can be produced to the highest advantage in this country. They would raise the standard of living both in America and abroad.

American processing industries do not need any protection. They are, but for some special branches, like Paris dressmaking and English cloth, paramount in the world. Natural conditions of production are extremely favorable in this country, the supply of capital is more abundant than anywhere else, the ingenuity of the entrepreneurs, the efficiency of the inventors and the designers, and the skill of the workers are unsurpassed. The technical equipment of the plants and the methods of business management are unparalleled.

The main argument advanced in favor of American protectionism is the wage rate argument. The American standard of living, people say, has to be protected against the “dumping” of industries producing at lower labor costs.

Real wages are higher in this country than in almost all other countries because America is comparatively underpopulated, while most of the other countries are comparatively overpopulated. As immigration is restricted, there does not prevail a tendency toward an equalization of wage rates. In those countries in which physical conditions of production are less favorable than in America, wage rates must needs be lower. There would be but one means to raise the extremely low standard of living in China: to let the Chinese freely emigrate to countries in which natural conditions of production are more favorable, capital is more abundant, and population is comparatively less dense.

The comparatively high state of market real wage rates, i.e., wage rates as they would be in the absence of any trade union pressure and compulsion, in this country is not an outcome of protectionism and does not need to be safeguarded by tariffs. The abolition of protection would not lower the American standard of living, but raise it. American processing industries would concentrate their efforts upon those branches in which their superiority is highest. Their products would buy on the world market a greater amount of those products whose production would be discontinued in this country because American superiority is lower in those fields. The total amount of American consumption would increase, not decrease.

Money wage rates may drop. But they would drop less than the prices of consumers’ goods, now artificially raised by protection.

V. Protection and Defense

It has been asserted that the nations strive after autarky because they are warlike and want to be independent of foreign supply.

The truth is that Germany strove after autarky and therefore wanted to conquer more Lebensraum, i.e., a territory so large and so rich in natural resources that the Germans would live in economic self-sufficiency at a standard not lower than that of any other nation.

Moreover, economic nationalism is not a phenomenon peculiar to aggressive nations. Peace-loving nations are no less imbued by the spirit of economic nationalism than militaristic peoples.

It may be reasonable to explain the protection (operated by a government wheat monopoly) which Switzerland grants to its domestic wheat production as a defense measure. But it is impossible to apply the same explanation to the Swiss import restrictions upon china, glassware, and silver plates. The country applies the quota system to passenger cars although there is no domestic production and no hope that such a production could be bolstered up!

VI. Protection and Government Control of Business

A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together, they are but one system. Economic nationalism is the corollary of the present-day domestic policies of government interference with business and of national planning as free trade was the complement of domestic economic freedom. There can be protectionism in a country with domestic free trade, but where there is no domestic free trade, protectionism is indispensable. A national government’s might is limited to the territory subject to its sovereignty. It does not have the power to interfere directly with conditions abroad. Where there is free trade, foreign competition would in the short run already frustrate the aims sought by the various measures of government intervention with domestic business. When the domestic market is not to some extent insulated from the foreign markets, there can be no question of government control. The farther a nation goes on the way toward public regulation and regimentation, the more it is pushed toward economic isolation.

We do not have to deal with the problem whether economic interventionism, i.e., government interference with business, can attain the ends aimed at by the government and by the “progressives” who endorse this system. Its champions—the German “Sozialpolitiker,” the right wing of the British Fabians, the American Institutionalists, the moderates among the New Dealers and many other groups—have contended that interventionism is feasible and workable as a permanent form of social economic organization. They have claimed that it is as far from socialism as it is from capitalism, that it stands as a third solution of the problem of society’s economic organization midway between communism and laissez faire, and that while retaining the advantages of both it avoids the disadvantages inherent in both of them. However, modern economic theory has demonstrated in an irrefutable way that this alleged third method is contrary to purpose, and that the various measures of government interference with business not only do not attain the ends sought but, on the contrary, must needs result in a state of affairs which—from the viewpoint of the government and the supporters of its policy—is even much more unsatisfactory than the conditions which they wanted to alter.

Neither do we have to deal with the lessons to be learned from historical experience. For more than sixty years all governments of civilized nations have experimented with various modes of economic interventionism. The outcome was always the same: manifest failure. The Sozialpolitik of the German Reich, inaugurated at the end of the ’seventies of the nineteenth century and solemnly publicized by the old Kaiser’s imperial message of November 17, 1881,4 and the American New Deal are the outstanding examples.

From the viewpoint of the subject with which this paper deals we have to stress another point. Every act of government interference with business raises the domestic costs of production and thus disarranges the conditions for competition. Under free trade it would immediately result in a drop of sales on the part of domestic producers, in restriction of output and in discharging of workers. People would quickly realize that the system of interventionism does not work and that it causes unemployment and bad business. They would ask for a return to the conditions prevailing before the government interfered, i.e., for repeal of the detrimental measure.

But things are different if there is protection preventing foreign business from competing on the domestic market or at least rendering such competition more expensive. Then the domestic entrepreneur can react to the increase of costs through raising prices. The government and the supporters of its policy triumph; they are convinced that their methods of improving the material well-being of the workers have succeeded. What they do not see is that the public has to pay the bill and that the workers are burdened with higher prices. The same is valid with regard to wage raises brought about by the trade union compulsion and pressure. Wage rates on the unhampered labor market are higher in the United States than—with the exception of New Zealand—in any other country. Natural conditions of labor are more favorable, and capital is more abundant in this country; on the other hand immigration is restricted. If the American trade unions try to raise wage rates above this market level—a high level indeed, when compared with that of the rest of the world—the same problems present themselves. The immediate manifest failure of the trade union methods can only be avoided by a rise of prices which requires protection.

If there were free trade in United States, prices—due allowance being made for transportation costs—could not rise above world market levels. An employer whom the unions have forced to pay wages higher than his business can afford would have to restrict output and to discharge workers.

If the industry concerned exports a part of its products, it is in a special position. It is not free to raise the prices of the exported commodities. But protectionism provides another way out. The domestic producers form a cartel, charge monopoly prices on the domestic market and compensate for the losses incurred in selling abroad at low prices by a part of the monopoly profit. This was especially the case with Germany. Germany, which is forced to export a great part of its manufactures, was, from the end of the seventies of the nineteenth century to the outbreak of the First World War, far ahead of all other nations in matters of Sozialpolitik and trade unionism. Its much admired and glorified system of Arbeiterschutz, social insurance and collective bargaining, could work only because German industries, sheltered by all-round protection, built up cartels and sold on the world market much more cheaply than at home. The alleged success of the “soziales Königtum der Hohenzollern” and of the German Social Democrat party was apparent. In their capacity as consumers, the workers themselves had to bear the burden. Cartel and monopoly were necessary complements of German interventionism.

Popular legends have misrepresented the fact. They teach that the trend toward monopoly is inherent in capitalism. The German champions of government control of business have repeated again and again that private enterprise, if left free and not restrained by government control, must result in monopolization and that this inextricable tendency makes nationalization of business necessary. They passed over in silence the fact that cartelization was only possible because government and parliament had decreed import duties; that the law itself ordered the entrepreneurs to form a cartel if they refused to so do of their own accord, as was, for instance, the case with potash; that the Prussian government itself in its capacity as owner and operator of coal mines joined the coal cartel.

It is a characteristic feature of present-day governments and political parties that they promise in the same breath low prices to the consumers and high prices to the producers. But as it is beyond the power of any government to make prices lower than they would be on the competitive market unhampered by government interference, what results is always only a policy of raising prices. The governments pretend to fight monopoly, but they never take recourse to the measure which would render vain in most of the branches of industry all attempts to bolster up a monopoly, namely the abolition of import duties.

That the governments and the parliaments favor monopoly prices is clearly evidenced by their actions with regard to international monopolistic schemes. If the protective tariffs result in the formation of national cartels in various countries, international cartelization can in many cases be attained by mutual agreements between the national cartels. Such agreements are often very well served by another pro-monopoly activity of governments, the patents and other privileges granted to new inventions. However, where technical obstacles prevent the construction of a national cartel—as is almost always the case with agricultural production—no such international agreements can be built up. Then the governments interfere again. The history between the two world wars is an open record of state intervention to foster restriction and monopoly by international conventions. There were schemes for wheat pools, rubber, tin and sugar restrictions and so on. Of course most of them collapsed soon. But this failure was rather an outcome of government inefficiency than of government preference for competitive business.

We have to realize that even protectionism cannot make government interference with business work and achieve the ends sought. All that it can bring about is to delay for a shorter or longer time the appearance of the undesired consequences of interventionism. Its failure must finally become manifest. The schemes to raise by decree or by trade union pressure the income of the wage earners above the height fixed by the unhampered market must necessarily sooner or later result in mass unemployment prolonged year after year; protection can only postpone this effect, but does not brush it away. But it is exactly this temporary adjournment which the supporters of interventionism aim at. It disguises the futility and ineptitude of their cherished policies. If the detrimental effects of their measures were to appear immediately, the public would more quickly understand their vanity. But as they are delayed, the champions of government control and trade unionism have in the meantime the opportunity to boast that the employers were wrong in predicting that the artificially raised wage rates and the burdens imposed upon business by discriminatory taxation and by labor legislation would make their plants unprofitable and hamper production.

Economic nationalism is the necessary complement of the endeavors to interfere with domestic business conditions.

VII. Protectionism on the Part of Creditor Nations

The tariff barriers against imports are especially nonsensical when erected by creditor nations. If the debtor nations in accordance with the terms stipulated pay interest and repay the principal of the debts and if they do not hinder the foreign investors taking out the business profits earned, their balance of trade must show an excess over imports, i.e., become favorable. Concomitantly the balance of trade of the creditor nations becomes unfavorable. The terms “favorable” and “unfavorable” are, of course, misleading. It is not unfavorable to be a rich nation and to receive large payments of interest, dividends, and profits from abroad. Great Britain was in the past century the world’s richest nation, not although, but because it had a very “unfavorable” balance of trade.

The United States, in the years of its glorious geographic and economic expansion, had offered very propitious investment opportunities for foreign capital. The capitalists of Western Europe provided a part of the capital needed for the construction of American railroads and for the building up of American mining and American processing industries. Then later the Americans began to repatriate the stocks and bonds owned by foreigners; these operations made the nation’s balance of trade active. With the First World War things changed. America became a creditor nation, the greatest capital exporting nation. Its favorable balance of trade—in the years 1916 to 1940 the excess of exports over imports was about 30 billion dollars—had now another significance; it was the outcome of the loans granted abroad and of investments in foreign countries.

But at the same time American tariff policy made the payment of interest and the transfer of dividends more burdensome to the debtor nations. The same policy was applied by the other creditor nations, for instance Great Britain, France, the Netherlands, Belgium, and Switzerland. The debtor nations were, it is true, not very enthusiastic about the payments they had to make; debtors mostly are not very anxious to keep to the terms of the contract. But the conduct of the creditor nations, which sensibly prejudiced their interests, provided them with an opportune pretext for refusal to pay. They took recourse to currency devaluation, foreign exchange control, moratoriums and some of them even to open repudiation and bankruptcy.

The policy of the creditor nations was especially paradoxical in the case of the German reparations and the inter-allied debts. If Germany had really paid reparations out of her own funds—and not out of foreign, mostly American credits granted to her—these payments would have rendered necessarily the receiving countries’ balance of trade “unfavorable”; their imports would have exceeded their exports because they collected reparations. But this effect appeared, from the viewpoint of mercantilist fallacies, as a tremendous mischief. The Allies were at the same time anxious to make Germany pay and not to get the payments. They simply did not know what they wanted. But the Germans knew very well what they themselves aimed at. They did not wish to pay. They succeeded.

The same holds true with regard to the inter-Allied debts.

VIII. Totalitarianism and Autarky

Ferdinand Lassalle, the founder of the German Social Democrat Party and the eloquent champion of government control of business, is credited with the dictum: “The State is God.” Eminent scholars, for instance Ambassador Carlton Hayes, call nationalism a new religion, the creed of our day.

People distinguish between the parties of the Left and the parties of the Right. The former, they say, are the “progressives,” the supporters of government control of business, the socialists and the communists; the latter the “reactionaires,” the nationalists. This classification is spurious. The socio-economic tenets of both groups differ only in minor points. They both aim at full government control of business. It is difficult to decide to which of these two totalitarian groups the most eminent intellectual harbingers of present-day “unorthodoxy” are to be assigned. There is no doubt that Lassalle was also the forerunner of German National Socialism and the first German who aimed at the Führer position. The Frenchman Georges Sorel, the advocate of the “action directe,” i.e., violent trade union activities and general strike, was the preceptor both of Lenin and Mussolini. The socio-economic program of Italian Fascism, the stato corporativo, is an exact replica of the schemes of British Guild Socialism; its most lucid exposition is the book of the English Fabians and enthusiastic pro-Soviet writers, Sidney and Beatrice Webb: A Constitution for a Socialist Commonwealth of Great Britain (1920). Not only Mussolini, but many outstanding French collaborationists and German Nazis (for instance, Werner Sombart) were Marxian readers before they turned to the “Right.”

The truth is that modern nationalism is a corollary of the domestic policy of government control of business. It has been demonstrated that government control of business would manifestly fail already in the short run if the country is not isolated from the rest of the world. A government aiming at full regimentation of business must aim at autarky too. Every kind of international economic relations impairs its power to interfere with domestic business and limits the exercise of its sovereignty. The state cannot pretend to be an omnipotent god if it has to bother about its citizens’ ability to compete with foreign business. The outcome of government interference with business is totalitarianism, and totalitarianism requires economic self-sufficiency.

The same is valid with regard to self-proclaimed socialist states, that is states which have openly nationalized all economic enterprises and boast of this achievement. Socialism, when not operated on a world scale, is imperfect, if the socialist country depends on imports from abroad and therefore still has to produce commodities for sale on a market. It does not matter whether these foreign countries to which it has to sell and from which it has to buy are socialist or not. Socialism must always aim at autarky.

Protectionism and autarky mean discrimination against foreign labor and capital. They not only lower the productivity of human effort and thereby the standard of living for all nations; they create moreover international conflict.

There are nations which for lack of adequate resources cannot feed and clothe their population out of domestic resources. These nations cannot aim at autarky, but by embarking upon a policy of conquest. With them bellicosity and lust of aggression are the outcome of their adherence to the principles of government control of business. This was the case with Germany, Italy, and Japan. They said that they wanted to get a fair share of the earth’s resources, thus they aimed at a new distribution of the areas producing raw materials. But these other countries were not empty; their inhabitants were not prepared to consider themselves as an appurtenance of their mines and plantations. They did not long for German or Italian rule. Thus there originated conflicts.

IX. Sovereignty in the Present World

The principle of national sovereignty does not stand in the way of international division of labor and of peaceful collaboration of all nations within the framework of the world-embracing Great Society, provided that every nation unswervingly clings to the policies of democracy and capitalism. In the socio-economic setting of market society (laissez faire, laissez passer) the state is not an omnipotent God, but—as Lassalle used to say disparagingly—just a “night-watchman.” The state is not an end, much less the only and supreme end, but simply a means for the promotion of the citizens’ welfare. The acknowledgment of the indispensableness of private ownership of the means of production and of unhampered market exchange restricts the exercise of sovereignty. Although formally free in the exercise of their powers, the individual governments are subject to the supremacy of a principle which prevents the rise of international conflicts.

If the state administered in accordance with the ideas of economic interventionism, statism, and socialism, sovereignty becomes unlimited and absolute. The totalitarian state pretends to be omnipotent, supreme and above any principle, law, rule or consideration for anybody and for anything. Nothing counts but its “sacred egoism.” Right is what the state declares to be such.

This excessive notion of national sovereignty is incompatible with the present state of economic evolution. It cannot coexist with international division of labor. It wrongs all other nations and must result in strife.

Mankind is not free to return from a higher state of division of labor to a lower state. Autarky of every nation would impair very sensibly the standard of living of all peoples. There are today no such things as domestic affairs of an individual nation which do not affect the well-being of the rest of the world. Every nation has a material interest in the other nations’ economic well-being because maladministration of one country hurts all other nations too.

If a national government hinders the most productive use of its country’s resources, it hurts the interests of all other nations. Economic backwardness of a country with rich natural resources challenges all those whose conditions could be improved by a more efficient exploitation of this natural wealth.

Protectionism and autarky result in a state of affairs in which a country’s resources are not used to the extent that they would be under free trade. For instance, the fact that the tariffs of those nations whose soil offers the most favorable physical opportunities for the production of wheat—the United States, Canada, and Argentina—hinder the import of manufactures would, even in the absence of European tariffs on wheat, compel Europeans to grow wheat on a soil which is less fertile than millions of acres of untilled soil in those countries better endowed by nature.

A country’s economic insulation impairs not only the material well-being of its own citizens. It is no less detrimental to the economic interests of foreigners. This is why, in the middle of the past century, Great Britain and France induced China to open its harbors and why the United States applied a similar policy with regard to Japan.

X. The United States and World Affairs

Not only economic isolation, political isolation too is unfeasible in the present world.

The Western Hemisphere was once safe against aggression. Thousands of miles of ocean separated it from possible invaders. The airplane has radically changed this state of things. The American isolationists have not yet realized this fact.

They argue this way: “It is a very deplorable fact that the peoples of Europe are fighting one another, that they have wrecked their glorious civilization and that they are consequently doomed to starvation and misery. It is no less deplorable that similar things happen in Asia. Unfortunately we cannot save them from disaster. They themselves have to learn that peaceful cooperation would be more beneficial to them than war and mutual extermination. We cannot police the whole world. All we can do is to look out for ourselves and to preserve the Western Hemisphere’s independence. We will keep neutral, will not interfere with other continents’ affairs and thus preserve our American way of life.”

But it is not without concern for America what happens in the rest of the world. The establishment of two big totalitarian empires, one on the other side of the Atlantic, one on the other side of the Pacific, would have been a tremendous menace to America’s political independence. The German nationalists had always emphasized that the last goal of their ambitions was the conquest of a large colonial domain on the American continent. The present writer is not familiar with the Japanese language and does not know whether Japanese economists and publicists were equally frank in their printed utterances. But he knows from conversations with many Japanese professors and students that they considered the Americans and not the Chinese, their main enemies.

For the sake of its own vital interests America cannot remain neutral in world affairs and cannot live in political isolation. It has to realize that every international conflict will sooner or later involve America too and that it must be its main concern to establish a post-war order which will make the peace last.

There have been suggested various plans for such a scheme for a durable peace. Nobody can foretell today which of them will be put into execution.5 However, all these proposals must needs imply a close and permanent cooperation either among all nations or at least among one group of nations, those united today in the war. If conflicts are not eliminated, there can be no question of a durable political alliance. But protectionism and still more autarky provoke conflicts.

The Second World War was not caused by Nazism alone. The failure of all other nations to erect in time a barrier against a possible aggression was no less instrumental in bringing about the disaster than the plans of the Nazis and the other Axis powers. If the Nazis had expected to encounter on the first day of hostilities a united and adequately armed front of all those nations which later came united in fighting them, they would never have ventured an assault. But collective security is unrealizable among nations bitterly fighting one another in the economic sphere. Economic nationalism has divided the peace-loving nations. If the United Nations do not succeed in brushing away economic nationalism, postwar conditions will not differ from those prevailing in the years between the two World Wars. Then a third and much more dreadful war is unavoidable.

Every nation has to choose. The United States too. The alternative is: unity among the peace-loving nations or return to the chaos out of which new conflict will originate. But unity is incompatible with protection. Every day experiences anew that the good neighbor policy among the American republics comes into collision with economic nationalism. How should Latin America and the European democracies enter into a close political collaboration with the United States if their citizens suffer from American foreign trade policies?

If economic nationalism is not abandoned the most radical disarmament will not prevent the defeated aggressors from entering anew the scene of diplomatic intrigues, from building up new blocks and spheres of interest, from playing off one nation against the others, from rearming and finally from plotting new attacks. Economic nationalism is the main obstacle to lasting peace.

• *[Previously unpublished manuscript, dated May 5, 1943—Ed.]
• 1[The Manchestermen, along with the British liberals of the nineteenth century, thought that the best way to insure peace was by an unlimited laissez-faire economy. Free trade was both domestically and internationally a necessary prerequisite to preserve a lasting peace—Ed.]
• 2[Carleton J. H. Hayes, The Historical Evolution of Modern Nationalism (New York: Richard R. Smith, 1931); Walter Sulzbach, National Consciousness (Washington, D.C.: American Council on Public Affairs, 1943)—Ed.]
• 3[The reader should keep in mind that these passages were written in 1943—Ed.]
• 4[This scheme was the blueprint of modern state welfare. Its aims were to increase the income of the average worker to gain a better standard of living. This was obtained through political intervention and legislation favoring the working man. Labor unions thrived during this time, and social security was instituted for the first time—Ed.]
• 5[This was written before the United Nations Charter was drafted on January 1, 1942—Ed.]

The task of one privileged to address an audience of serious and conscientious citizens on problems of international relations is thankless indeed. If he is anxious to do his duty and to show things as they really are, he cannot help dispelling illusions, unmasking fallacies and exhibiting the intricacy of the problems involved.

The instigators of the ordeal through which mankind is going today are gangs of rascals. There have always been bad people and there always will be. But it is the main goal of social organization to prevent them from doing harm. The fact that our age has failed in this respect is the proof that something is fundamentally wrong with our institutions and policies. If Messrs. Hitler and Mussolini had been born fifty years earlier, they would probably never have acquired fame. They did not bring about the chaos. It was the chaotic conditions which placed them at the head of two great nations and gave them power to inflict harm upon millions of peace-loving people.

Looking backwards on the history of the last hundred years we have to realize the sad fact that eminent writers have preached the gospel of war, violence, and usurpation, and have disparaged the endeavors to promote peace and good will among the nations. This phenomenon was not limited to Germany only. There was, for instance, the Scotchman Thomas Carlyle who glorified the Prussian King Frederick II, the ruthless tyrant and aggressor. There was the Englishman John Ruskin, the fanatical lover of art, who declared that “war is the foundation of the arts and of all the high virtues and faculties of man.” There was the Frenchman Georges Sorel, the father of French syndicalism and master both of Lenin and of Mussolini, who advocated violence, brutality, and cruelty. There were finally German professors who asserted that the most desirable thing for a nation is to be always at war.

These are hard facts. However, world wars are not fought in order to abide by the teachings of distinguished authors. La trahison des clercs, the treason of the intellectuals, as the Frenchman Julien Benda stigmatized these attitudes of many literati, is a deplorable historical phenomenon.1 But it is not responsible for the terrible events of our day. It has not produced the conflicts which have caused these wars.

Many people confuse chauvinism with nationalism and consider chauvinism as the main cause of the clash of nations. Chauvinism consists in a conceited overestimation of one’s own nation’s qualities and achievements and in a prejudicial disparagement of all other peoples. It is a disposition of mind not more conspicuous among narrow-minded philistines than personal conceit and arrogance. It is surely not a virtue. But it does not result in action and political ventures. The Germans do not embark upon conquest because, as the Frenchman Count Arthur Gobineau and the Englishman Houston Stewart Chamberlain told them, they are the only really human race, while all other peoples are simply trash and underdogs. They are aggressive because they believe that aggressive nationalism is the best, is the only way to promote their own material well-being.

Mr. Carlton Hayes, formerly of Columbia University and today American Ambassador in Spain, and Professor Walter Sulzbach, formerly of the University of Frankfurt, today at Pomona College, California, have provided us with brilliant analyses of chauvinism.2 But they both are mistaken in confusing chauvinism with nationalism. Nor has chauvinism begotten nationalism. Its only function in the scheme of nationalist policies is that it adorns nationalism’s shows and festivals. People overflow with joy and pride when the official speakers hail them as the elite of mankind, praise the immortal deeds of their ancestors, and the invincibility of their armed forces. But when the words fade away and the celebration reaches its end, the participants return home and go to bed. They do not mount the battle horse.

Nationalism cannot be explained or excused by chauvinist intoxication. It is a policy of cool-minded Machiavellian politicians, it is the outcome of reasoning, of course of misguided reasoning. Scholarly books, full of thoughts, of course of erroneous thoughts, have carefully elaborated the doctrines, whose application has lead to the clash of nations, to bloody wars and destruction.

About eighty years ago public opinion all over the world was almost unanimous in the belief that mankind is on the threshold of an age of undisturbed peaceful cooperation of all nations. There was no organized pacifist movement in those days. People did not base their conviction that wars will disappear on the working of pacifist societies but on the fact that liberalism was on the point of abolishing the root causes of war. Within a world of popular government and perfect free trade there are, they said, no conflicts among the various nations. War will become obsolete because it will be useless to fight and to conquer.

Princes and kings, they argued, are eager for conquest because they can increase their power and their personal income by the annexation of a province. But a democratic nation cannot derive any profit from the enlargement of its territory. All that is needed to make for eternal peace is to remove the tyrants who oppose democratic government. Some wars and revolutions are still unavoidable in order to accomplish this task. But once the world is safe for democracy, it will be safe for peace too.

Such were the tenets of President Wilson. To make the world safe for democracy and to make it safe for peace was in the eyes of this great humanitarian one thing. Eliminate the Kaiser and his Junkers3 and you have established everlasting peace. The war against the Hohenzollern, not against the German people, is the war for the abolition of all wars, is the last war.

But unfortunately President Wilson and his noble-minded collaborators did not realize that their main thesis is only correct if there prevails perfect free trade. If the laws, the administration and the courts do not discriminate between citizens and foreigners, if everybody is free to live and to work unmolested where he wants, if the transfer of labor, capital and commodities from country to country is not subject to any regimentation or taxation, then of course it is without any concern for the individual citizen whether his country is bigger or smaller and where the political frontiers are drawn. No citizen can expect any profit from the incorporation into his own country of a piece of land previously owned by another nation. Wars no longer pay, they are useless.

The reality in which we have to live and to settle our political issues is very different from this liberal utopia as depicted and aimed at by Frédérick Bastiat and Richard Cobden. Ours is not an age of laissez fare, laissez passer, but an age of economic nationalism. All governments are eager to promote the well-being of their citizens or of some groups of their citizens by inflicting harm upon foreigners. Foreign goods are excluded from the domestic market or only permitted after the payment of an import duty. Foreign labor is barred from competition on the domestic labor market. Foreign capital is liable to confiscation. This economic nationalism must needs result in war, whenever those injured believe that they are strong enough to brush away, by armed violent action, the measures detrimental to their own welfare.

A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together, they condition each other. Economic nationalism is the corollary of the present-day domestic policies of government interference with business and of national planning as free trade was the complement of domestic economic freedom. There can be protectionism in a country with domestic free trade, but where there is no domestic free trade, protectionism is indispensable. A national government’s might is limited to the territory subject to its sovereignty. It does not have the power to interfere directly with conditions abroad. Where there is external free trade, foreign competition would even in the short run frustrate the aims sought by the various measures of government intervention with domestic business. When the domestic market is not to some extent insulated from the foreign markets, there can be no question of government control. The further a nation goes on the way toward public regulation and regimentation, the more it is pushed toward economic isolation. International division of labor becomes suspect because it hinders the full use of national sovereignty. The trend toward autarky is essentially a trend of domestic economic policies; it is the outcome of the endeavors to make the state paramount in economic matters.

In such a world of economic nationalism every citizen has a material interest in the nullification of measures by which foreign governments injure his interests. Every citizen is therefore eager to see his own country mighty and powerful, because he expects personal advantage of its military might. Small nations cannot help being victimized by other nations’ economic nationalism. But big nations place confidence in the valor or their armed forces. Present-day bellicosity is not the outcome of the greediness of princes and of Junker oligarchies; it is a pressure group policy whose distinctive mark lies in the methods applied but not in the incentives and motives.

It is therefore of no use to tell the aggressors, as the pacifists do: Do not fight; even a victorious war does not pay; you cannot derive any profit from conquest. These aggressors are convinced that victory pays. The Japanese argue: If we conquer Australia and make it consequently possible for 20 million Japanese to settle down in Australia, we will raise wage rates and standards of living for all Japanese, both for the emigrants and for those staying at home. There is only one counter-argument which they accept as valid: the victory of those assaulted. In our age of economic nationalism the only method to prevent war is armaments. Watch your borders day and night!

The Geneva experiment did not fail because America did not join the League or because the Covenant4 was unsatisfactory. It failed because it is vain to aim at peaceful cooperation among nations fighting one another unswervingly in the economic sphere.

This war was not caused by Nazism and the Japanese alone. The failure of all other nations to stop in time the rise of Nazism and to erect a barrier against a new German aggression was not less instrumental in bringing about the disaster than were events of Germany’s domestic evolution. There was no secrecy about the ambitions of the Nazis and their Italian and Japanese friends. The Nazis themselves advertised them in innumerable books and pamphlets and in their newspapers and periodicals. Nobody can reproach the aggressors with having concocted their plots clandestinely. It was easy indeed to know all about their plans. This Second World War would never have broken out if the Nazis expected that they would have to encounter on the first day of hostilities a united and adequately armed front of all the nations which are today united in fighting them. But such a union could not be organized in time among nations waging a permanent economic war against one another.

It is not my task to dwell upon the events of the past. I have mentioned all these facts only in order to demonstrate what has to be achieved for the future.

It is not difficult to draft seemingly excellent proposals for a post-war reconstruction and for a durable peace if one is prepared to abstract from stark reality and to indulge in day dreams. If there were no economic nationalism, if there were perfect free trade it would not even be necessary to plan special institutions and provisions for the safeguarding of peace. In the absence of conflicting interests there is no war. But we cannot hope that economic nationalism will disappear in a not too distant future as all nations are firmly resolved not to return to what they call domestic laissez faire.

This is my main objection against the pacifist platform as represented by the distinguished English scholar Sir Norman Angell. Sir Norman’s reasoning would be quite correct if there were no clash of economic interests. But this assumption is unfortunately illusory.

The pacifists suggest a world authority, a world court for the settlement of disputes and an international police force for the enforcement of the rulings of the world authority and the finds of the world court. But how should this world government be organized?

The League of Nations was not a world government, but rather a social club of nations. You are free to join a club and you are not less free to walk out. The majority has not the right to impose its own will upon a dissenting minority. Such articles of association are, of course, incompatible with government. The essence of government is compulsion and coercion applied against people not ready to obey spontaneously. Under a democratic constitution the majority has the power to enforce its will upon dissenting minorities. The first step required for the transformation of the impotent League of Nations into a more efficient institution is to establish a procedure for voting and for the determination of the will of the majority.

But how should voting be done? If to every nation one vote is assigned, Luxemburg and Estonia together would have two votes, Great Britain one vote only. The twenty republics of Central and Southern American would get 20 votes against one vote of the United States.

Another solution would be to assign to every nation as many votes as correspond to its population figures. This would be really democratic. But then the peoples of Asia and of Africa will by far outnumber the most advanced peoples, those which have created Western civilization. What will happen if the majority declares that migration barriers are contrary to the fundamental principles of international cooperation and have to be abolished? Will the citizens of Australia and New Zealand surrender to such a ruling?

Let us not indulge in illusions. There exist differences in civilization and in standards of living which render futile all plans for the immediate establishment of a democratic world government. There are not more than 600 million Christians in the world and more than 1,500 million members of other religious groups. Almost two thirds of the world’s population are virtually illiterate. There are conflicts of economic interests. The citizens of the comparatively underpopulated countries are not willing to admit immigration from the comparatively overpopulated countries. No country is ready to open its borders to foreign products.

The fathers of the League of Nations and the champions of all plans for a world embracing commonwealth of nations did not take into account that our contemporaries lack entirely the mentality which alone can make for peaceful international cooperation. They were eager to build up institutions, offices, and courts, and to draft articles of covenants and pacts. But what is needed is to change public opinion and to substitute for the spirit of mutual hatred and rivalry a spirit of mutual cooperation. The pacifists are quite right in asserting that our civilization is based on international division of labor and that it is doomed if we do not succeed in eliminating war. But our contemporaries are possessed by the idea that to bar access to foreign products and to immigrants serves best their own nation’s interest. A return to free trade, to laissez faire, laissez passer is for them out of the question.

Thus we must first try to change this mentality. A small group of economists are intent on demonstrating that economic nationalism is detrimental to the rightly understood selfish interests of all men and all nations and that everybody should aim at free trade, not for the sake of foreigners, but for the sake of his own people. Even if all other nations cling to protectionism, every nation serves best its own well-being by free trade. I do hope that these endeavors will succeed. But a radical change of ideologies takes a long time. Years must elapse, generations must pass away, new ages must rise, before such a change can be expected even in the most favorable case. We must not abandon the idea of a commonwealth of nations, but we have to provide for the transitional period. We must not neglect the task of our time, merely because a more distant future will bring a perfect solution. We have today to face an urgent problem. We have to prevent a third world-war. On the eve of victory we have to plan for a system which will make it hopeless for militarist nations to embark upon a new aggression.

Such are the aims of various proposals suggested by distinguished authors. These men do not reject the idea of a universal League of Nations or of such statutes as the Kellogg-Briand pact.5 Only they are realistic enough to comprehend that, in the absence of an adequate ideology, a universal scheme can work only after a long period of transition. They take account of the fact that the aggressive mentality of the two hundred and fifty million Germans, Italians, Japanese, Hungarians, Rumanians, and Slovaks cannot be changed over night. They are looking for an expedient, and emergency measure, as it were, for the impending day.

It is not my intention to make propaganda for any patent-medicine. On the contrary, I am rather skeptical with regard to these proposals. But I believe that it is the duty of every serious and conscientious man to examine them carefully. Mr. Clarence Streit has rendered a great service to mankind, even if the examination of his project proves that it is under present ideological conditions unfeasible. He has tried to find a way out of the dilemma: return to perfect free trade or endless wars.

The basic idea of Mr. Streit is this: in order to avoid a new aggression it is necessary to make the cooperation of the Western democracies, today united in the struggle against Germany and Japan, lasting and permanent. The present-day military and political alliance has to be transformed into a permanent union, into a solid block, which no foreign intrigues could disintegrate. Such a powerful union could prevent the rearmament of the defeated aggressors and thus preserve peace. On the other hand it is quite obvious that a return to the state of affairs which prevailed in the period between the two wars would finally result in a new war.

The nations which have to form this union have to abandon essential features of their national sovereignty for the benefit of the super-national authority. They have to pool their foreign policies and their armed forces and they have to stop fighting one another in the economic field. They have to enter into a permanent customs union and monetary union. In short: they have to form a new federation.

It is not necessary to dwell upon more details either of Mr. Streit’s project nor of similar projects brought forward for other parts of the world, for instance, for the whole of Europe—Paneurope of Count Coudenhove-Kaleigi—or for Eastern Europe or the Danubian area. The distinctive mark of all these plans is that they suggest the formation of a new super-national federation.

Now we are back where we started from. Not only is a world embracing commonwealth of nations incompatible with the preservation of economic nationalism but even a federal union among a smaller group of nations. What renders all schemes for a better post-war order futile is the present-day doctrine of government interference with business. In every country there are powerful pressure groups opposed to every infringement of their vested privileges.

I have not at all exaggerated the detrimental consequences of economic nationalism. On the contrary. I was anxious not to allude to the delicate problem of migration barriers. I am optimistic enough to believe that migration barriers alone would not necessarily frustrate endeavors for international cooperation. But protectionism does. And protectionism is indispensable if there is government interference with business.

I do not refer to the problem of the warlike nations like Germany, Japan, and Italy. Whatever their aspirations may be, they could never embark upon a new war if all American republics, Great Britain, and the British Dominions and the smaller democracies of Europe are welded together into a solid bloc of peace-loving peoples. But such a bloc cannot last if there is protectionism. If the Argentinean cattle-breeders feel injured by the policy of the United States regarding the imports of beef and if the Paris dressmakers suffer from the British measures concerning imports of garments, they will not cling to the union. But on the other hand, they are not ready to see almost all the powers which are now vested in their own national governments shifted to a super-national authority. They already resent the concentration of more and more powers in their own national capitals, they would be much more shocked by the establishment of the hundred times larger bureaucratic body of the new super-national authority.

Peaceful coexistence of sovereign nations is possible if every individual nation is convinced that it would be contrary to its own selfish interests to hinder the mobility of capital, labor, and products. Such a policy of free trade presupposes domestic free trade, today generally disparaged as laissez faire. Government control of business results in conflicts of national interests for which up to now no peaceful solution has been discovered.

It is an illusion to believe that such conflicts could be settled by arbitration on the part of impartial courts. A court can administer justice only according to the articles of a code. But it is exactly these prescriptions and rules which are contested. Let us abstract from the problem of migration barriers and restrict our discussion to the problem of trade barriers only. The peoples of the comparatively overpopulated areas of Europe and Asia, the immense majority of the earth’s popular, consider trade barriers of the comparatively underpopulated areas as the main obstacle for their material improvement. They say that they have not free access to the raw materials and the trade of the world. I do not want to quote the formulation of this grievance by the representatives of the aggressor nations. There is in the present world an authority which is above the parties. The Pope is not a party in a conflict. There are Catholics on both sides and the Pope does not side only with one party. It is therefore of great importance what the ideas of the highest dignitary of the Roman Church are with regard to the future world order. Says the Pope in his Christmas Eve broadcast of December 24, 1941, only a few days after the entry of the paramount Catholic country into the War:

Within the limits of a new order founded on moral principles, there is no place for that cold and calculating egoism which tends to hoard the economic resources and materials destined for the use of all to such an extent that the nations less favored by nature are not permitted access to them.

In this regard, it is for us a source of great consolation to see admitted the necessity of a participation of all in the natural riches of the earth, even on the part of those nations which in the fulfillment of this principle belong to the category of “givers” and not to that of “receivers.”

The Pope was not mistaken in asserting that these principles are acknowledged by all nations, by those which he calls the “givers” not less than by those which he calls the “receivers.” The proof is provided by Point Four of the Atlantic Charter6 : It reads: They, i.e., the governments of the United States and of the United Kingdom, will endeavor with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.

The Pope, of course, is not an economist. If he were an economist he would not consider free trade as a concession granted on the part of one group of nations to the exclusive benefit of other nations. He would emphasize that free trade serves best both parties and that it is inappropriate to speak with regard to free trade of givers and of receivers.

But be this as it may, the main issue is that the governments of the world’s two paramount powers and the head of the world’s most numerous religious community agree with regard to the importance of the trade problem. It is still a far cry from this academic recognition of the problem to a satisfactory solution. The obstacles to be overcome are enormous and nothing less than a radical change in the generally accepted economic doctrines is required. But if there is anything which justifies optimism, then it is the fact that people are beginning to realize that free trade is the indispensable condition of lasting peace.

• 1[Julien Benda, The Treason of the Intellectuals [1928] (New York: W. W. Norton, 1969)—Ed.]
• 2[Carleton J. H. Hayes, The Historical Evolution of Modern Nationalism (New York: Richard R. Smith, 1931); Walter Sulzbach, National Consciousness (Washington, D.C.: American Council on Public Affairs, 1943)—Ed.]
• 3[The Junkers were members of the Prussian aristocracy owing allegiance to the Kaiser—Ed.]
• 4[The League of Nation’s Covenant was signed on April 28, 1919 and was composed of 26 articles that proposed an agreement to collectively maintain peaceful settlements of disputes in an effort to obtain economic and social cooperation worldwide. Keep in mind that World War I had just ceased in Europe prior to this attempt. As long as there are restrictions on import and export markets and government intervention to protect industries there will inevitably be clashes leading to disputes—Ed.]
• 5[A treaty renouncing war as an instrument of national policy and an agreement by signatory members not to seek settlement of any conflict except by peaceful means. There existed loopholes for the use of military action in cases of self-defense and fulfillment of treaty obligations. The treaty did not contain sanctions for breaches of the agreement thus the 63 nations that signed it on July 24, 1929 did so as a formality—Ed.]
• 6[The Atlantic Charter was the result of several meetings—held on board warships in the North Atlantic—between President Franklin D. Roosevelt and British Prime Minister Winston Churchill in August 1941. The thrust of the Charter was an 8-point program seeking to secure a “better future for mankind” by not seeking new territories; the right of self-determination and self-government for all peoples; access to trade and raw materials; and once peace is established all nations must abandon the use of force. The Charter was later incorporated into the Declaration of the United Nations, January 1, 1942—Ed.]

I.*

Foreign investment was an achievement of laissez-faire capitalism. It developed step by step only in the nineteenth century. Writing in 1817, Ricardo could still assert that most men of property are “satisfied with a low rate of profits in their own country, rather that seek a more advantageous employment for their wealth in foreign nations.”1

What impelled entrepreneurs and capitalists toward foreign investment was, of course not “altruism,” but the eagerness to earn profits by supplying the domestic consumers in the best possible and cheapest way with those commodities they demanded most urgently. They went into foreign countries in order to supply the home market directly or indirectly (i.e., by triangular trade) with raw materials and foodstuffs which could otherwise not have been obtained at all or only at higher costs. If the consumers had been more eager for the acquisition of a greater quantity of goods that could be produced at home without the aid of foreign resources than for imported food and raw materials, it would have been more profitable to expand domestic production further than to invest abroad.

But foreign investment benefited the receiving nations no less than the investing nations. These receiving nations were backward and underdeveloped insofar as they had been slow in developing those ideological and institutional conditions which are the indispensable prerequisite of large scale capital accumulation. While amply endowed by nature, they lacked the capital needed for the exploitation of their dormant resources. On account of the paucity of capital available, the marginal productivity of labor and thereby wage rates were low when compared with the state of affairs in the capitalistic countries. The inflow of foreign capital raised wage rates and improved the masses’ average standard of living.

The socialists provide a different interpretation of the problems involved. As they see it, a business enterprise is a contrivance to exploit unfairly the workers employed. Its very existence and operation are contrary to the external laws of morality. There is but one means to put an end to this exploitation, namely socialization, i.e., the expropriation of the private capitalists and entrepreneurs and the transfer of their plants, mines, and farms to the hands of the state. This is what the labor government is anxious to achieve in the United Kingdom and what the Iranian government, imbued with a truly Fabian spirit, is just doing in its own country. If it is right for the British to nationalize the the British coal mines, it cannot be wrong for the Iranians to nationalize the Iranian oil industry. If Mr. Attlee2 were consistent, he would have congratulated the Iranians on their great socialist achievement. But no socialist can be or ever was consistent.

It is hopeless for the British to dissuade the Iranians from nationalizing the British-owned wells, refineries, and pipe lines by pointing out the disadvantages that will certainly result for the people of Iran. They themselves did not pay heed to such “reactionary” talk when the problem of nationalizing various British industries was at issue.

Under the present state of international law every sovereign nation is free to deal as it pleases with all property situated within its boundaries. A foreign government may diplomatically protest and support claims of its citizens for an indemnification. But if the government of the nationalizing nation is not prepared to yield to such diplomatic overtures, that settles the matter. It is enough to refer to such precedents as the case of Russia in 1917 or the case of the Mexican expropriation of the oil industry.

The foreign government may submit the case to the International Court of Justice. But the decisions of this Court are practically unenforceable.

If the foreign government resorts to the ultima ratio regum, to military intervention, this would under the charter of the United Nations represent a clear case of aggression.

The pundits of international law and the lawyers of the United Nations will certainly write very profound reports and treatises about the legal aspect of the Anglo-Iranian conflict. Such utterances are not worth the paper on which they are printed. The simple truth is that if the government of Iran does not of its own accord change its mind because it may expect some immediate political and material gain from such a change, nothing can prevent it from expropriating the oil industry. For it is obvious that Great Britain cannot win anything by military measures. Even in the unlikely event of a British success, the British would discover that bayonets are very uncomfortable to sit upon in a business office. Besides there is the spectre of a Russian occupation of the greater part of Iran and the still more threatening danger of a new world war.

II.

The immediate consequences of the Iranian oil expropriation are very sad indeed. It seriously affects the military plans of the Western powers and revolutionizes conditions on the world oil market.

Still more important are the remoter consequences of the affair. Foreign investment of private enterprises and citizens already came to an almost complete standstill years ago. The private investor has learned from experience that investing abroad is virtually tantamount to throwing away one’s own wealth. It is true, not all receiving countries resorted to undisguised expropriation of property and repudiation of loans. But many of the “good” countries too have effectively robbed the foreign investors and creditors by foreign exchange control and discriminatory taxation. It is of little use for an American or a Swiss to own a blocked balance with a Ruritanian bank, especially if he notices that the purchasing power and the equivalent in hard currency of the Ruritanian monetary unit is dropping more and more.

The American Administration recommends as an adequate substitute for private investment abroad public investment and loans either granted directly by the governmental (national or international) banks or guaranteed by such banks. The idea is that the governments, first of all the American government, should fill the gap that the anti-capitalistic policies of the underdeveloped countries have willfully created. But the example of Iran shows that such governmental investments and loans are also not safe against predatory ventures. Why should the American government pump American funds into Ruritania if the Ruritanian parliament is free to deal with them as it pleases? Are there no investment opportunities left within the United States? It is rather unrealistic to assume that Congress will continue to tolerate a policy that subsidizes foreign countries at the expense of the American taxpayer. There is no use in fooling ourselves. The hopes that the much talked about Point Four3 may work as a satisfactory substitute for the disintegrated international capital market have proved fallacious.

III.

It is this disintegration of the international capital market that creates the plight of the underdeveloped countries.

These countries were in the last decades benefited by the modern methods of fighting epidemics and other diseases which the capitalistic West has developed. Mortality rates dropped and the average length of life was prolonged. Population increased considerably. But the economic policies of these nations are preventing an expansion of the insufficient amount of domestic saving and capital accumulation; sometimes they even directly induce capital de-accumulation. As there is no longer any importation of foreign capital worth mentioning, the per head quota of capital invested decreases. The outcome is a drop in the marginal productivity of labor. But at the same time the governments and the labor unions try to enforce wage rates which exceed the marginal productivity of labor. The result is spreading unemployment.

Unaware of the causes of unemployment the governments try to remove it by various measures which, although entirely futile, are so costly that they by far exceed the public revenue and are financed by the issuance of additional fiat money. Inflation still more discourages domestic saving and capital formation.

The governments of all these underdeveloped countries indefatigably talk of the necessity to “industrialize” and to modernize the outdated methods of agricultural production. But their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?

About two hundred years ago conditions in England were hardly better, perhaps even worse than they are today in India and China. The then prevailing system of production was lamentably inadequate. In its frame there was no room left for an ever increasing part of the population. Masses of destitute paupers were barely living on the verge of starvation. The ruling landed aristocracy did not know of any means to cope with these wretched people other than the poorhouse, the workhouse, and the prison. But then came the “Industrial Revolution.” Laissez-faire capitalism converted the starving beggars into self-supporting breadwinners. It improved conditions step by step until, at the end of the Victorian age, the average standard of living of the common man was the highest in Europe, much higher than that of people whom earlier ages had considered as sufficiently well-to-do.

What the underdeveloped nations must do if they sincerely want to eradicate penury and to improve the economic conditions of their destitute masses is to adopt those policies of “rugged individualism” which have created the welfare of Western Europe and the United States. They must resort to laissez faire; they must remove all obstacles fettering the spirit of enterprise and stunting domestic capital accumulation and the inflow of capital from abroad.

But what the governments of these countries are really doing today is just the contrary. Instead of emulating the polices that created the comparative wealth and welfare of the capitalistic nations, they are choosing those contemporary policies of the West which slow down the further accumulation of capital and lay stress on what they consider to be a fairer distribution of wealth and income. Leaving aside the problem whether or not these policies are beneficial to the economically advanced nations, it must be emphasized that they are patently nonsensical when resorted to in the economically backward countries. Where there is very little to be distributed, a policy of an allegedly “fairer” redistribution is of no use at all. IV. In the second part of the nineteenth century the shrewdest among the patriots of the underdeveloped nations began to contrast the unsatisfactory conditions of their own countries with the prosperity of the West. They could not help realizing that the Europeans and Americans have better succeeded in fighting penury and starvation than their own peoples. To make their own peoples as prosperous as those of the West became their foremost aim. So they sent the elite of their youth to the universities of Europe and America to study economics and thus to learn the secret of raising the standard of living. Hindus, Chinese, Africans, and members of other backward nations thronged the lecture halls, eagerly listening to the words of the famous British, American, and German professors.

This is what these professors—Marxians, Fabians, Veblenians, socialists of the chair, champions of government omnipotence and all-round planning, peacemakers of inflation, deficit spending and confiscatory taxation—taught their students: rugged individualism, the policy of laissez faire and private enterprise are the worst evils that ever befell mankind. They enriched a few robber barons and condemned the masses of decent people to ever-increasing poverty and degradation. But fortunately the black age of capitalism is approaching its end. People will no longer let themselves be fooled by the spurious doctrines of the sycophants of the bourgeoisie, the depraved apologists of a manifestly unfair social order. We, the adamant advocates of justice and riches for all, have for ever exploded the fallacies and paralogisms of the orthodox authors. The Welfare State will bring prosperity and security to everybody. The economics of abundance and plenty will be substituted for the economics of scarcity. Production for use will be substituted for production for profit. There will be freedom from want; i.e., everybody will get all he wants.

Never did these professors mention the—in their opinion manifestly absurd—truism that there is no means to improve the conditions of any nation or the whole of mankind other than to increase the per head quota of capital invested. On the contrary. They indulged in expounding the Keynesian dogma of the dangers of saving and accumulating capital. Never did they refer to the fact that nature—not the capitalists—has made the means of human sustenance scarce. As they saw it, the State had inexhaustible funds at its disposal that enabled the government to spend without any limits. They have even today not yet realized that progressive taxation has already exhausted this alleged surplus in all other countries and will have exhausted it even in the United States very soon.

Indoctrinated with these principles the graduates of the Western universities returned to their countries and tried to put into effect what they had learned. They were sincerely convinced that to create prosperity for all nothing else was needed than to apply the formulas of Occidental pseudo-progressivism. They thought that industrialization means labor unions, minimum wage rates and unemployment doles and that trade and commerce means controls of every kind. They wanted to nationalize before they had permitted business to build plants and enterprises which could be expropriated. They wanted to establish a new fair deal in countries whose distress consisted precisely in the fact that they had not known what is today disparaged as the old and unfair deal.

All these radical intellectuals of the underdeveloped countries blame Europe and America for the backwardness and poverty of their own peoples. They are right, but for reasons which are very different from those they themselves have in mind. Europe and America did not cause the plight of the underdeveloped nations, but they have prolonged its duration by implanting in their intellectuals the ideologies which are the most serious obstacle to any improvement of conditions. The socialists and interventionists of the West have poisoned the mind of the East. They are responsible for the anti-capitalistic bias of the East and for the sympathies with which those Eastern intellectuals look upon the Soviet system as the most intransigent realization of Marxian ideas.

All underdeveloped countries are flooded with translations of the writings of Marx, Lenin, and Stalin and of the books of all shades of non-Marxian socialism and anti-capitalism. But only very rarely have books expounding the operation of the market economy and critically analyzing the dogmas of the socialist creed been published in one of the languages of these nations. Little wonder that their reading public believes that the description of capitalism as provided by the Communist Manifesto exactly fits present day American conditions, that, for instance, the laborer “sinks deeper and deeper” with the progress of industry and that “the bourgeoisie is incompetent to assure an existence to its slave within his slavery.” Little wonder that they look upon the Soviet system as the model of a better future.

We must comprehend that it is impossible to improve the economic conditions of the underdeveloped nations by grants in aid. If we send them foodstuffs to fight famines, we merely relieve their governments from the necessity of abandoning their disastrous agricultural policies. In the past, for instance, Yugoslavia’s main problem was how to find foreign markets for its considerable surplus of cereals, pigs, fruits, and lumber. Today the country that includes the most fertile land of Europe outside Russia and Romania is famine stricken. If we send to the poor countries manufactures or “lend” them dollars, we virtually pay for the deficits of their nationalized transportation and communication systems and their socialized mines and processing industries. The truth is that the United States is subsidizing all over the world the worst failure of history: socialism. But for these lavish subsidies the continuation of the socialist schemes would have become long since unfeasible.

The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue. What the underdeveloped countries need first is the ideology of economic freedom and private enterprise and initiative that makes for the accumulation and maintenance of capital as well as for the employment of the available capital for the best possible and cheapest satisfaction of the most urgent wants of the consumers.

In no other way can the United States contribute to the improvement of the economic conditions of the underdeveloped countries than by transmitting to them the ideas of economic freedom.

• *[This article is from 1952 and is previously unpublished—Ed.]
• 1[David Ricardo, On the Principles of Political Economy and Taxation, vol. 1 of The Works and Correspondence of David Ricardo, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951-1973), p. 137—Ed.]
• 2[Lord Clement Attlee was leader of the British Labor Party from 1935–1955 and a committed socialist. He was prime minister of England from 1945–1951—Ed.]
• 3[Point Four of the Atlantic Charter was concerned with equality of access to trade and raw materials of the world and to securing for all nations an improved labor standard, economic adjustment, and social security—Ed.]