I spent a happy morning reading a monograph on Mexico's economic development penned by Ludwig von Mises in the early 1940s, shortly after he had moved to America, but before the end of WW2. The monograph has much of interest to other Third World nations, in Latin America, Asia and Africa, including especially India, which took all the wrong advice from all the wrong economists. Let us begin with "industrialisation."
Over 70 per cent of Mexico's population was engaged in agriculture in the 1940s - and Mises rightly asserted that the country needed to industrialise. Mises begins with a critique of the "closed door method of industrialisation": that is, which aims not at securing the nation in the "international division of labour," but which aims at the "commercial insulation" of one's own country.
This foolish path is what we followed in India, thanks to Raul Prebisch and Hans Wolfgang Singer, who had the full support of every United Nations development organisation. Prebisch and Singer had argued for "import-substitution industrialisation" - and Mises writes about how foolish the idea is, "to cheer when the statistics show a decline in imports." He rightly says:
The advantage derived from foreign trade lies entirely in importing, not in exporting. An increase in exports is only the means to increase imports. A reduction in imports is not a blessing, but a calamity.
The lesson: You must integrate your nation into the international division of labour by specialising in the export of those goods you can produce efficiently and in which you can compete - and use the proceeds to import all your needs, including especially capital goods for your factories.
Import-substitution, on the other hand, penalises domestic consumers - while also hurting foreign nations. When these foreign nations cannot sell to you, they cannot buy your exportables either. Double whammy!
Autarky, or economic self-sufficiency, is "economic suicide."
Another point that Mises makes - extremely relevant to all under-developed nations - is that they need to import Capital. Thus, policies of expropriation, taxation, currency control, and nationalisation which hurt foreign foreign investors must be done away with. If foreign investors are not secure in their investments, the nation will lose.
Today, India is holding up foreigners who wish to invest in supermarkets - and this hold-up is nonsensical, according to Mises. Indeed, there is an entire section in the monograph on "Small Business and Distribution" in which Mises champions the small shopkeeper - and says how his "eminence lies in his adaptability," while the chain store is standardised. The small shopkeepers of North America have survived chain stores and supermarkets, Mises notes, because they adapt themselves faster and better to local and personal conditions. In any case, in poor nations, people buy in small quantities - from small shops.
Mises pays great attention to transportation - favouring the privatisation of Mexico's horrible railways. He says they should be expanded with an eye on freignt and not passengers, which also means lower investments. For passenger traffic, Mises favours building roads and airports - so that civil aviation, personal automobiles, and motor buses can flourish. Indeed, this sentence, written in the early 1940s, before India gained independence, is worth quoting in the India of 2011:
Under present conditions, the construction of modern motor roads is more important than the improvement of the railways.
Mises, thus, would not have advised us to build the Konkan Railway. Rather, he would have insisted on an ultra modern coastal highway. And we would have been immensely better off. Mises waxes eloquent on Mexico's tourism potential, and also on the possibility of her "coastal regions" taking a lead in "processing industries" catering to the export market.
On currency policy, Mises praises The Banco de Mexico for allowing the free purchase of gold and advises this poor nation to refrain from inflationism - a foolish policy to which the US and Britain have "sold themselves." He points out that if the Mexican peso is pegged to gold, it will appreciate against the currencies of these great economic "powers." Then, of course, Bretton Woods was yet to happen, and a world fiat currency system was unthinkable.
On government spending, Mises was no Keynesian, writing that:
When the government spends more, the individual citizens spend less.
He advised low taxation, too.
But it is the section on education that deserves our greatest attention today, not just in India, but in the West as well. I will quote it in full:
Mexico is a country rooted in an old civilisation. Its universities are notable seats of teaching and research. It has succeeded in the last decades in the establishment of an efficient system of primary education for the masses. It is anxious to further vocational and technical schools. All foreign experts are unanimous in the praise of Mexican achievements in this field.
However, the economist must warn of the dangers of some trends in contemporary education. Germany and France were paramount in the development of teaching and instruction. But the results did not come up to expectations. Germany is today [1943] a nation of barbarians; Germany, once styled as a nation of poets and thinkers, is now a nation of gangsters. The high state of French education did not prevent a moral and political collapse.
The truth is that the French and German schools instilled in their pupils a pernicious mentality. The students were imbued with the religion of étatism [French term for "statism"]. They were taught that the State is God, that nothing counts but its power, greatness, and glory. And they were also taught to despise and to hate all other peoples. Graduates looked down upon the business of private citizens. Their only aim was to obtain jobs in the service of the government. The ideal of the Frenchman was to be a fonctionnaire, that of the German to be a Beamter. [Both words mean "civil servant" or "State functionary."] They were not eager to work; they wanted to give orders and to be paid out of funds collected by taxation. They preferred the parasitic life of a bureaucrat to the industrious life of a plain citizen. They did not care for anything other than a career in the daily increasing body of State employees.
Corrupt politicians and unprincipled civil servants have ruined the glorious civilisation of Western Europe. The institutions of learning and of education were instrumental in creating the vicious mentality that led to this disaster. It is a characteristic fact that many of the most eminent harbingers of the new barbarism were professors of the German universities or members of the Académie Française. Intellectuals have built the houses in which Hitler, Mussolini, and Laval lived at their ease. It was a real trahison des clercs ["treason of the intellectuals"] as Julian Benda stigmatised it in his well-known book.
A nation that would guard itself against such a catastrophe has to watch its educational institutions. The youth have to be protected against the arrogant self-conceit that makes them disparage ordinary business activities. It is true that one goal of learning is to train people for the correct fulfilment of duties in the civil service. But the first requirement of a government employee is due regard for the individual citizen, for the man whose work produces the means of supporting the nation and the State.
The worst outcome of the étatist superstition is the habit of considering the "State" as a mythical being, commanding inexhaustable treasures that it can lavishly spend. The State should do this, and this, they say; it should pay more and more for various purposes. It never occurs to the étatist mind that the State cannot spend except by collecting taxes or by incurring debts or by embarking upon inflation. They do not realize that "The State" that pays is the citizenry itself and not some mythical Midas.
The problem of a balanced budget and of an equilibriated economc system are not political and technical; they are moral and intellectual. If public opinion is convinced that The State has never-failing sources of income, and that the only decent way to make a living is to get salaries or subsidies from the Treasury, then even a well-intentioned government and parliament cannot succeed in making both ends meet.
One of the main purposes of education must be to dispel the superstitions of étatism.
It is a common mistake of our contemporaries to view a country's economic problems primarily as a matter of "material" factors and of technical changes. The main issue is intellectual and moral; the spirit is supreme in this field, too.
Thereafter, Mises makes some concluding remarks:
1. Civilisation depends on material well-being. The richer a nation, the better.
2. There is only one way to get richer - Production.
3. To produce more requires Capital - and the private accumulation of Capital is a blessing, not a curse.
4. Private Property and Free Enterprise are the foundations of civilisation.
The final paragraph is worth quoting in full:
The German socialist and harbinger of National Socialism, Ferdinand Lasalle, sneered disparagingly at liberal civil government as a "nightwatchman" and proclaimed, "The State is God." It is this superstitious belief in the omnipotence of government that has brought about the present crisis of civilisation.
Unfortunately, this paper is not available in PDF on the internet. You can buy the book containing this essay - and many more - in India here. And from the Mises Institute here. Well worth buying, and studying - and telling others, too.
The fact that State-employed professors in Indian universities were teaching State-worship to their students is well brought out in my old post titled "The Evil Professors of Delhi U."
