Mises’ article on “The Plight of Underdeveloped Nations” makes an insightful observation regarding the sad impact of western socialist propaganda on underdeveloped nations— especially during the mid-twentieth century increases of worldwide awareness and globalization.
As he points out, the very possibility of “foreign investment” originated when the capitalists of wealthier nations saw profit opportunities in previously untapped places of the world. Seeing a chance to make a profit, these western capitalists supplied the domestic consumers with goods and services that they did not previously have access to. The increase of capital investment into these places was not caused by altruism, points out Mises, but self-interest; the profit motive.
But what the demonstration of capitalism showed in these places was not just that the capitalists made their profits, but also that the receiving nations benefitted tremendously. Mises:
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.
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.
The key element for the improvement of underdeveloped nations, indeed the component that can take every society from a status of poverty to wealth, is capital investment. Unfortunately, the underdeveloped nations never understood the importance of capital. While for a time they benefitted from the western capital investments into their regions, they soon adopted the desire to prevent western investment, preferring instead to “do it themselves.”
But these underdeveloped nations remained underdeveloped precisely because their governments refused to allow capital investment to continue. In an attempt to bring forth the same level of prosperity as the west, these governments intervened, created unemployment, and even issued fiat money, thus destroying their currencies. Faced with devastating failure, they looked to the west for an answer as to how their economies might to experience unprecedented growth.
What was the secret? How did the west distance themselves from the east, so obviously and quickly? Mises observes:
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 “Indus- trial 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.
The answer was obvious. The underdeveloped nations needed to adopt the model of freedom and free enterprise. The Misesian advice is so clear:
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.
Unfortunately, they refused:
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.
Now, while the west has benefitted at historically unprecedented levels from capital accumulation that stems from freedom, the west’s own intellectual class was in the late nineteenth century taken by the ideas of socialism, especially of the Fabian flavor. The intellectuals turned their backs on the very thing that made them rich in the first place: capitalism.
Herein lies the “sad impact of western socialist propaganda on underdeveloped nations” mentioned above. As Mises writes,
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.
In an effort to undercover the secrets of prosperity, the youth were sent to learn from the western intellectuals. But what they found in the Ivory Tower was a fierce criticism of individualism, laissez faire, and private enterprise. To the socialistic intellectuals who ignored the achievements of capitalism, these things “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.” The narrative in higher education was as follows:
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.
And thus the lessons that the youth took back home to their people were precisely the opposite of the truth.
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.
Now then, what the world needs today, both in the west as well as the east, is not merely more government aid, more welfare, more bailouts. What is needed, as Mises points out in this essay as well as in numerous other places, is a better paradigm. People need to understand that government cannot create prosperity because governments are a drain on capital.
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.
I would only add here that the United States needs this transmission of ideas just as much as any other place. The halls of governments, of schools, of churches, of the media, and so on are filled with socialist tendencies and assumptions.