Dean Russell: The Problem

Play it again Sam!



The most difficult part of solving a problem is usually the identifying of the problem itself.

I observed this difficulty in an extreme form as a recent “wit­ness” on the TV program, “The Advocates.” The issue was non­military foreign aid, and I was testifying against these govern­ment-to-government grants by our State Department.

The witnesses in favor of con­tinuing and increasing our gov­ernment’s grants and gifts to other governments were three em­ployees of the State Department, a famous foreign sociologist who is currently Visiting Professor at Columbia, and their lawyer. All five of them identify the problem behind our foreign aid programs as “hungry people in underdeveloped nations all around the world.” Since they believe that’s the prob­lem, it follows automatically that their solution is to feed the hun­gry people. And that’s about as far as they go.

I am convinced, however, that the fundamental problem is more political and economic than it is biological. And in my attempt to identify the problem, I ask myself why these people are hungry. Is their inability to produce enough food (or to produce goods and services to exchange for food) due to stupidity or laziness? I think not. Then just what causes their continuing hunger, generation after generation?

I try to identify the probable cause in this fashion: I have a small amount of liquid capital, that is, dollars which can be con­verted by labor into the real capital of machines, raw materials, and finished products. For various reasons, I would like to use this modest supply of capital in India, to improve my own material well­being and the material well-being of several Indian families who are now hungry.

An Offer to Help and Why It Won’t Be Done

Over the years, I have made the following proposal to several ac­quaintances in India, including a government official: If you will permit me to come in, I will im­mediately hire at least four peo­ple at better wages than they are now earning. Their working con­ditions will be more pleasant —and their employment will be steadier — than is now the case for any of them. It is self-evident that I would have to fulfill these promises before I could possibly persuade anyone to use my ma­chines; obviously, no one would work for lower wages than he is already earning. Even so, I always include in my offer the posting of a performance bond. What I pro­pose to do is to try to solve the cause of the hunger — the real problem — by showing a few hun­gry people how to produce enough goods and services to feed them­selves and their families on a con­tinuing basis. And please note that I propose to back my judgment with my own capital, not the tax­payers’ money.

So why don’t I do it? The an­swer is shocking. The Indian gov­ernment refuses to let me in. “No foreign imperialist is ever going to exploit us again,” they proclaim in various words and tones. Then they immediately apply to the United States Department of State for more government-to-govern­ment grants-in-aid. And they al­most always get them, thus con­tinuing to treat the consequences of the problem instead of the prob­lem itself.

True enough, two of those In­dian acquaintances informed me that I can enter India with my machines, under certain condi­tions. First, I must produce what the government wants produced; I am not permitted to make the de­cision alone. And I must locate where the government specifies; I cannot make that decision for my­self. While I will be permitted to try to earn a profit, it must be “reasonable”; the figure of 4 to 8 per cent was mentioned. And fin­ally, the Indian government guar­antees that it will not nationalize my company for at least ten years.

And then the leaders of the In­dian government wonder why for­eign capital doesn’t come in! They seem honestly distressed and puzzled as they pass increasingly stringent laws forbidding their own citizens to send their capital abroad. This “frightened domestic capital” goes to various places, in­cluding Switzerland. That small nation, with almost no natural re­sources, enjoys a high level of liv­ing because its leaders decided long ago that individual capitalists with machines should be welcomed as benefactors instead of repudi­ated as exploiters.

Thus, the empty bellies continue to multiply in India and elsewhere, far faster than the “green revo­lution” can increase the rice and wheat yields. And our State De­partment off¹cials continue to treat the symptoms rather than the dis­ease itself. Instead of trying to discourage this process of destruc­tive prohibitions and interferences by the various foreign govern­ments in their own economies, our State Department seems deter­mined to worsen the situation by imposing their own group of gov­ernment officials on top of the ex­isting group. And worse still, American political leaders largely direct the clamor to install a third group of officials (the United Na­tions) on top of the other two. This failure to identify the prob­lem — this inability to understand what is preventing hungry people from productive efforts to help themselves — can result only in more hunger, despair, and vio­lence.

Confusing Money with Raw Materials and Labor

A charitable explanation of this blindness of the supporters of gov­ernment-to-government aid is per­haps to be found in their failure to understand the difference be­tween the measuring device (mon­ey) and the thing being measured (raw materials and labor).

In truth, of course, no one wants mere pieces of green paper with numbers printed on them. Those hungry people abroad and their officials want American raw ma­terials, food, labor, and various final products and services. The dollar figures — the “credits” re­corded in various ledgers under various headings — are merely for counting purposes. Were this not so, we could quickly print up sev­eral trillion dollars marked, “Not to be used to purchase goods and services in the United States,” and give them to hungry people. Of course, no one abroad, or at home, would even bother to pick up such worthless paper. Foreign­ers don’t eat dollars; they eat food, including all the labor and scarce raw materials involved in producing the fertilizers and ma­chinery used to grow, harvest, and transport the food.

A favorite argument of those who advocate foreign aid is that many of these grants are now made in the form of interest-bearing loans.

“Why, we will even get back more than we send out,” they suggest.

In turn, I suggest that, for the moment, they forget the political rhetoric and examine with me the reality of these transactions. America’s scarce resources — fab­ricated into various shapes and forms by American labor — are collected by our government from us in the form of taxes. These re­sources are then sent abroad. Not one bit of these resources will ever be returned to our shores in any form. That is the reality of government-to-government loans, as contrasted with person-to-per­son loans which are indeed even­tually repaid in kind.

No Way to Repay

Just how would a foreign gov­ernment repay to our government the grants of raw materials and labor? Even if they wished to do so, there is simply no mechanism to handle it. We can’t eat rupees, any more than Indians can eat dollars. Thus, if we are to get anything back, it must obviously be Indian raw materials and fin­ished products. Just where would our State Department store them — in the basement? Of course, our off¹cials might demand repayment in textiles, bring the cloth here to the United States, and dump it on our domestic market at low prices. But the State Departmentoff¹cials know, as does everyone else, that this is politically impos­sible, regardless of the economics of it.

There is no possible way that foreign governments can ever re­pay to this nation the raw ma­terials and finished products which were granted to them in various forms by our government. That’s why government-to-govern­ment loans are always ultimately canceled, usually after being re­negotiated a couple of times in various ways. Generally, they are canceled by the foreign nations which owe the debts — for exam­ple, France’s repudiation of its debts to the United States. Some­times the debts are canceled by the nation that made the loans, as when the United States wrote off the debts owed to it by Finland and Great Britain. In any case, they are ultimately canceled.

This lack of understanding of the economic and political reality of government-to-government transactions explains the failure of the attempt to collect “repara­tions” from Germany after World War I. That ill-advised scheme was certainly a chief cause of the collapse of the Weimar Republic and the emergence of Hitler and World War II. It is comparatively simple for our government to col­lect raw materials and labor from the American people and to send them abroad; it is politically and economically impossible for the American government to receive back a like amount of resources from abroad to be used within our own borders.

What Is Not Seen

The advocates of foreign aid often have no comprehension of the first principle of economics, namely, that resources are scarce and have alternate uses. They do not seem to understand that the cement, pipes, pumps, machines, and engineering skills given away abroad by our government could just as easily have been used here at home, perhaps to clean up our polluted water and air, or used in other ways that producers and consumers might deem more im­portant.

I become a bit unhappy when seemingly intelligent people deny that these governmental foreign aid programs cost you and me any­thing. I try to explain to them in personal terms of a canceled edu­cational trip to Europe because I had to pay my taxes, steaks not eaten because my government put a 10 per cent surcharge on top of my regular tax, and so on. I am quite willing to pay to preserve our nation at home and to protect our legitimate interests abroad, but I do not gladly tolerate un­thinking people who demand that my resources be devoted only to their purpose and who claim that the only cost of governmental give-away programs is the modest price of printing more money.

It’s quite true, as has been said, that the rich United States has enough money to do all these things that need doing. Actually, we have more than enough money, and our government apparently can print more whenever it desires to do so. The difficulty is that we don’t have enough raw materials, engineers, doctors, teachers, and the other factors required to do all of these things in reality.

This “confusing of the measur­ing device with the thing being measured” is all summed up in the argument that almost all of these foreign aid dollars — 98 per cent of them — are actually spent here in the United States, thus creating prosperity at home.

What possibly could have hap­pened to that other 2 per cent? Perhaps India traded a portion of its “dollar credits” to Brazil for coffee. If so, our State Department should have noted the fact that Brazil, in turn, used its “dollar credits from India” to buy Ameri­can machines and ship them to Brazil.

Of course, the entire grant was spent here, in one way or another; the only reason why foreign na­tions want dollars is to purchase American materials and labor in various forms. It’s easy enough to explain that rather obvious fact. But how can anyone believe that we can become rich and prosper­ous by working and producing goods and services to be given away without any return of other goods and services in trade?

Why Not Export Everything?

If prosperity could really be ad­vanced in that fashion, we could easily treble our material well-be­ing in the United States within one year. Our government could just put everyone to work digging up scarce raw materials, turning them into finished products, and shipping them abroad. If we would do this on an emergency double-shift basis, our annual Gross Na­tional Product would surely soar above the three-trillion-dollar mark. On the records used to re­cord our GNP, we would appear prosperous indeed. But only on those measuring devices; for the things being measured — goods and services — would all have been shipped out of the country, never to return. Our real level of living would plummet to zero. We would still have the paper dollars, though there would be nothing left to buy with them. Could that possibly ex­plain why prices have skyrocketed in the United States over the past several years?

Well, there is nothing I can do for persons who are unable to dis­tinguish between measuring de­vices and the things being meas­ured. Nor can I influence persons who are unwilling to separate ef­fect from cause, or communicate with those who will not under­stand that scarce resources sent permanently abroad are thus ren­dered unavailable for use at home.

There is one thing I can do, however. There are about 150 freshmen every year in my classes in Introductory Economics. I can at least continue to insist that they identify a problem before they offer a solution, and that the solution must be designed to make the problem go away instead of to make it worse.

Dean Russell was a long-time FEE staff member and the author of several books, including Frederic Bastiat: Ideas and Influence. This article is from volume 20, issue 5 of the May 1970 issue of The Freeman.

Copyright © 2012 Foundation for Economic Education. All rights reserved. Used with the permission