Why Capitalism, Lecture 5

David Gordon
Mises Institute
May 21, 2013
 The Cycle of Poverty
• Why are some nations poor? Some people
appeal to the “cycle of poverty.”
• People start off very poor. Almost no on has
money to buy things. Thus, markets to sell
people goods can’t get started.
• This is the “cycle of poverty.” Once people are
in it, they can’t get out. Thus, they need
foreign aid to develop.
Problems with the Cycle Argument
• What’s wrong with the cycle of poverty
argument?
• If it were true, all nations would be poor. Every
country started out poor, but some nations
got out of poverty.
• How do they do this? Some people are able to
save and invest, even if only a small amount.
 How Nations Got Out of Poverty
• Savings and investment are the key to getting
out of poverty. Once people start saving, they
can invest in capital goods and produce more.
• There is no cycle of poverty that dooms a
nation to poverty.
• What is important is the ratio of capital to
population. Mises thinks that population
increases can absorb increases in investment,
leaving people no better off.
 Britain
• England was the first nation to escape from
poverty for most people, through the
Industrial Revolution.
• If one country can do this, why not others?
They have the advantage of being able to use
British inventions and technology, if they can
save.
 Why Didn’t British Stay on Top?
• Mises raises an important problem. Britain got
a head start on all the other nations in
industrial development.
• The other nations, e.g., France and Germany,
industrialized only later. Even if they did the
best, they could, why wouldn’t Britain always
remain on top?
 The Problem Continued
• Once you have started investing, your further
investments can just keep increasing. The
other nations would be starting from a smaller
base.
• That is, suppose we take a nation that starts to
industrialize in 1850. Britain had already
grown a lot by 1850. How would the other
nation catch up?
How the Other Nations Caught Up
• The answer is that the other nations of Europe
and elsewhere benefited from foreign
investment from Britain. There was extensive
British investment in India, for example.
• British capital also played a prominent role in
American industrial development. E.g., the
British helped finance American railroad
development.
• Foreign investment closes the gap.
 Attitudes to Foreign Investment
• Although foreign investment greatly helps in
building up prosperity, many governments
oppose it.
• By confiscating and taxing foreign investment,
they interfere with prosperity.
• Nehru, trying to encourage investment in
India, said that businesses wouldn’t be
nationalized for 10 years.
 Attitudes Continued
• Some people in advanced countries oppose
foreign investment because it sends money
out of the country.
• This money could have been used to employ
citizens of the advanced country.
• Hazlitt points out that returns on investment
come back to the home country.
 More Attitudes
• Growth in the economy permits greater
employment in the investing country.
• Although the money invested is used to hire
foreign workers, domestic workers will also be
in demand.
• There is always a scarcity of labor relative to
demand.
 Foreign Attitudes
• Although foreign investment benefits the
country in which the investment occurs, many
people there complain about it.
• They say it leads to foreign control of the
economy. Money is sent out of the country.
• R. Palme Dutt, India Today, (1940) argued that
Britain suppressed native industries to the
benefit of the British.
 Hazlitt’s Answer
• Hazlitt points out that without the foreign
capital, the investments wouldn’t have taken
place at all.
• Hazlitt uses the example of money borrowed
from NY for investment in Pennsylvania.
• Of course, money to repay the loans will be
going to NY. But there wouldn’t have been
investment at all without the borrowed
money.
 Tariffs
• Some people think that protective tariffs are
needed to build up the industries of
developing countries.
• Everybody probably knows the argument that
trade takes place only if benefits all parties to
the exchange. Interference with trade is
harmful.
 Tariffs Continued
• Mises makes an additional point. Suppose that
by means of tariffs investment in a domestic
industry goes up.
• This will not result in an increase in
investment, unless total capital increases.
• Without the growth of capital, tariffs will just
cause a switch to the industries that benefit
from the subsidies.
 Foreign Aid
• It’s very frequently argued that the developed
countries should give foreign aid to the
underdeveloped countries.
• Foreign aid takes away money from domestic
consumers and thus hurts the economy.
 An Objection
• Against this, people sometimes point out that
foreign aid money is used to purchase
domestic products.
• This is just a diversion of demand. Of course,
some people will benefit, if money is spent on
their products. But the money would have
been spent elsewhere.
 The Marshall Plan
• After WWII, America gave a great deal of
foreign aid to help the European countries in
economic recovery.
• George Marshall, the American Secretary of
State, proposed this in 1947 and the Plan was
put into effect in 1948.
 Marshall Plan Continued
• Hazlitt argues that the Marshall Plan wasn’t
needed for European recovery.
• The British economy didn’t do well, even
though Britain received more Marshall Plan
aid than Germany.
• The key to recovery in Germany was the
ending of price controls by Ludwig Erhard in
1948. (Erhard got his PhD from Franz
Oppenheimer.)