WHAT are the underlying causes of international investment friction? The answer to that question could carry us far back toward the philosophical problem of first causes, or into a discussion of the biological heritage of man, or even into the forces which hold the earth in its path around the sun. In a sense, every past development in the history of civilization has helped to "cause" modern international investment frictions. There is no intention, of course, to push our inquiry to such ultimate lengths, though it is useful to point out that the total setting of modern human society is a conditioning factor in the origin of investment friction. For example, the existence of different geographical regions with different resources and potentialities, the existence of various peoples under various forms of economic and social organization, the fact that certain inventions of great significance in transport, communication and industry have been made and have been adopted unequally over the earth's surface, the existence of language groups and racial groups with certain social attitudes among themselves and towards each other, the political and cultural developments associated with the rise of the national state---all these things and many others are among the underlying causes of international investment friction. Some of these factors, however, must be regarded as constant elements in the situation which we wish to analyze, especially if our ultimate purpose is control, for they are either unchanging and unchangeable by human action, or are subject to such slow changes as to be constant for all practical purposes. By the "underlying causes" of investment friction which interest us here, therefore, we shall understand those factors which are fundamental enough so that alteration in them might be expected to have a significant effect on the problem, and yet not so deeply fundamental that they are entirely fixed or uncontrollable.
By bringing together the threads of the argument developed in the last few chapters we can now state the most important of these underlying causes in relatively simple fashion. To review briefly: The investment of capital is a form of international contact which contains the potentialities of a great variety of conflicts. Many of these conflicts arise directly out of the economic relationship itself: the debtor-creditor conflict, the labor-capital conflict, the tenant-landlord conflict, the conflict between investors seeking the most attractive investment opportunities, the conflict between joint creditors of the same doubtfully solvent debtor. Others are one step or more removed from the immediate economic interests involved, but are political or cultural concomitants closely associated with international capital investments: the conflict between dwellers in a land and its economic exploiters, the conflict arising from a clash of divergent cultures, the conflict between social reform and vested property interests, the conflict between desires for economic and political independence and the real or imputed "foreign domination" which the interdependence resulting from capital relationships may be felt to entail, the conflict between rival national expansionisms to which investments are related in complex but important ways. These potential conflicts occasioned by international private investment are numerous, real, and difficult. But why do they tend to take the acute political form of diplomatic clashes, wars, or threats of war between governmental units---that is, between national states---when conflicts just as direct within the bounds of a single nation do not ordinarily take such forms? The answer lies in the ineffectiveness of the social institutions thus far developed for the adjustment of investment conflicts involving persons or interests of diverse national loyalties. In the last chapter we have just seen that the system of national diplomatic protection, which is the corner stone of present-day procedure for dealing with the problems raised by international investment conflicts, depends upon a process of judgment and execution by interested parties, enlarges rather than restricts conflicts, entangles justice with haute politique and political expediency, stimulates antagonistic propaganda, provides easy pretexts for aggression, leads states to adopt anti-alien policies which themselves provoke trouble, and encourages reliance on a legalistic process which cannot solve the problems raised by international investment conflicts. Truly, if judgment is to be rendered according to such criteria as, (1) a tendency to adjust investment conflicts with a fair measure of reasonable and disinterested justice, and (2) a tendency to do so in a manner that lessens the likelihood of investment conflicts becoming causes of war between nations, then the institution on which chief reliance is now placed for the settlement of international investment difficulties must be regarded as seriously defective.
The underlying causes of international investment friction, then, may be expressed in the following summary statement: We have a form of world-wide contact (capital investment) which inevitably raises conflicts, but the social machinery for adjustment of these conflicts is so ill-adapted to that function that it often succeeds instead in transforming them into acute political antagonisms. When that happens, and especially if the upshot is international war, the net social result is that the conflicts may still exist, perhaps in an aggravated form, after the war, plus new ones caused by the war, while the incidental economic and social destruction costs each side much more than it had at stake in the pre-war conflict. The problem of statesmanship is to break into this vicious circle by altering some of the causal factors.(1)
Let us inquire more narrowly, Why are existing institutions of adjustment so ill-adapted to the problems of international investment conflict? Historically, it is easy to see how the situation came about. The amazing technological changes of the last century or two, especially in the fields of transportation, communication, and industrial production, created a veritable revolution in the economic relationships of the various parts of the world. This raised new conflicts, new problems, which the old institutional arrangements were not equipped to handle. Yet it was not possible immediately to abandon the old institutions and construct new ones out of whole cloth. "Der Mensch knüpft immer an Vorhandenes an,"(2) the new could only develop gradually out of the old. Thus, as technology and the economic relationships closely associated with technology proved to be less subject to the restraining influence of traditional forms and beliefs than were men's political loyalties---including their patriotisms and their ideas on government, politics, and the control of economic activity-economic change tended to run ahead of political readjustment. Particularly was this true in the international field, and the result today is a set of world-wide economic interrelationships, characterized by close contact, by interdependence, and by conflict, while the institutions of adjustment are still rooted in the inadequate national base. We find ourselves in a period where the area covered by the closely knit economic organization of trading and investment has far outstripped in extent the area of closely knit political organization. This fatal non-congruence between economic areas and the political areas on which institutions for the regulation of economic activities are based is the factor of most fundamental importance in understanding or dealing with the so-called "economic causes" of war in general, or international investment friction in particular.
For example, investments of Englishmen in the Near East, of Germans in the Near East, of Frenchmen in the Near East, have set up potential conflicts between Near Easterners and Englishmen, Near Easterners and Germans, Near Easterners and Frenchmen, also between Englishmen and Germans, Englishmen and Frenchmen, Frenchman and Germans. Add Americans, Dutchmen, Swedes, Italians, and South Africans to the list of investors, add Central America, China, Canada, and the investing countries themselves to the places where investments are made, and the situation only begins to approach the complexity of reality. These potential conflicts, which are continually turning up as more or less serious actual conflicts, cover almost the whole world with their network of relationships. Yet the national state is the typical social area on which existing institutions for the adjustment of investment conflicts---international as well as domestic---are based. For domestic investment conflicts, the institutions of adjustment based on the national state include within their jurisdiction all parties and interests involved in the conflicts. The area of possible conflict is not greater than the base area of the institutions of adjustment. But for international investment conflicts there is no all-inclusive, political unity or political jurisdiction which enfolds at once all parties and interests; they fall within the partial and overlapping jurisdictions of many national states, on which existing institutions of adjustment are based. The result is that international investment conflicts are not only ineffectively dealt with---from the standpoint of justice to the parties, for example---but that they tend to involve the national states in friction with each other.
Let us return for a moment to an illustration used previously in order to make this vital point still more clear. Suppose that a New York corporation undertakes to acquire and operate mining lands in Nevada, to set up a smelter and perhaps a factory, and to build a short railway connecting its different enterprises. There are two functions of government in connection with such capital investment which have been recognized nearly everywhere in the capitalistic world. The first may be described as smoothing the way for investments. It consists in providing, or encouraging the provision by others, of certain fundamental services such as transportation facilities, maintenance of means of communication, collection of important economic information, and the guarantee of a certain elemental minimum of law and order, sanitation, and the like. As the New York investors prepare to start work in Nevada they make use of maps supplied by the United States Geological Survey and of technical information gathered by the United States Bureau of Mines. They will, of course, find access to Nevada easy on account of a railway system encouraged in the first place by the federal government, which undertook many years ago to "open up" the unexploited West. Notice that it is not by any means the State of New York which has smoothed the way for the investment of New York capital in Nevada, except as New York participates in the federal government of the United States, whose sphere of activity and jurisdiction includes both the investor and the region of his proposed investment. The second usual function of government consists in the supervision of investment contacts once made, including the enforcement of whatever property rights are commonly accepted, provision for security against depredation, and provision for recourse in case an aggrieved party claims injustice has been done him. Suppose that the New York corporation finds itself in dispute with citizens of Nevada over the terms of a contract for the delivery of supplies. It need have no fear that the matter will be settled arbitrarily by prejudiced local courts, for on account of the diversity of citizenship of the two parties the case can be tried in the United States federal courts.(3) Suppose that after the New York corporation has been operating in Nevada for some time the Nevada legislature passes a new land law, or a mining code, or a new piece of labor legislation, which in the opinion of the investor has the effect of confiscating his previously acquired rights. Again, appeal lies to the federal courts and ultimately to the Supreme Court of the United States. Both the investor and the citizens of Nevada may be assured that the conflict will be settled, if not to the complete satisfaction of both parties, at least in accordance with a well-established body of law applied by courts which are neutral as between the local interests of Nevada and the propertied interests of outside owners. Similarly, if Nevada passes a tax law which, in the opinion of the New York investor, discriminates unjustly against his property, that question also can be threshed out and settled in the courts of the federal government. Once more let it be remarked that in all these proceedings the State of New York takes no hand. It has no official interest in the profits and losses of its citizens in Nevada, nor in their just or unjust treatment by the governing authorities of that sister state. Rather, the functions of promotion and protection of capital migration between New York and Nevada are entrusted to the federal government, which proceeds upon the basis of laws accepted by the citizens of both regions. There may be sectional differences, even antagonisms, between capital-importing states like Nevada and capital-exporting states like New York, but they are fought out in federal legislative assemblies, where relatively neutral opinion is also present, not in diplomatic interchanges between the governors of New York and Nevada. The same holds for rival capital-exporting states like New York and Illinois.
Now let our New York corporation become a corporation of Country X, and let it establish a similar enterprise---a mine, smelting plant, factory, and railway---somewhere abroad, in Country Y. All the economic factors are exactly the same as in the first instance, and exactly the same conflicts of interest arise. But now a national boundary runs between the domicile of the corporation and the scene of its operations; so the legal, political, and social situation is vastly different. Country Y may be jealous of its sovereignty and independence, fearful of economic or political domination by a great power like Country X, and therefore suspicious of capital from X. Country X, in turn, may be proud of its world importance, concerned about the maintenance of its prestige, anxious to protect its investors. It maintains government departments with trained agents abroad whose duty it is to seek out opportunities for the enterprise of its nationals. Doubtless one of these agents, perhaps the regular diplomatic representative of X in Country Y, assists our corporation in setting up its foreign establishment. At least, the important activities of the corporation will be reported and tabulated in both the commercial and political departments of the government back home in X. Very likely the steamship line which transports mining machinery from X to Y was established originally under subsidy from the government of X, in order to open up a new region for its trade, or to meet the competition of subsidized lines from some other country. It is not unlikely that the cable, the airplane line, the radio station, even the interior railway and telegraph lines serving Country Y, have been installed under the direct subsidy, or the encouragement and watchful guidance, of some outside national government---not by a world government.
A dispute arises between our corporation and citizens of Country Y. If the courts of Country Y take an attitude which impresses the directors of the corporation as a flagrant denial of justice they have no recourse except to the diplomatic protection of their own government. There are no international courts (corresponding to the federal courts in the New York-Nevada instance) to which a private corporation can appeal. There is no "federal" law, including both the domicile of the investor and the scene of his operations, to which a corporation has access in its own right. Only states, not private persons, have rights under the classical international law. The question then becomes one between the governments of two national states, and as it thereby ascends into the realm of high politics it is very likely to receive either more or less vigorous attention than the issues would demand in themselves, depending upon the international political situation at the time, and on the influence which our corporation or its antagonists can bring to bear upon the governments involved.
To return to the specific problem of the failure of national diplomatic protection as an institution for the adjustment of international investment conflict, it seems clear that the failure has resulted not so much from incompetence or bad faith on the part of those who administer the system, but rather from the unworkableness of the system itself. The principle of national diplomatic protection is fundamentally ill-adapted to the adjustment of international investment conflicts. These conflicts are world-wide, super-national, in scope. Diplomatic protection proposes to settle them by nationalizing the interests involved--that is, making each interest into the interest of some national state---and then instituting negotiations between national states. This procedure has two principal defects. First, it resorts to a system of quasi-anarchistic bargaining between states which, because of their "sovereignty," claim to acknowledge no ultimate authority higher than their own interpretation of their rights and duties. Second, it makes little, if any, provision for continuous, day-to-day administration and supervision of the conflict-producing contacts---which is of the essence of successful institutions of adjustment---but goes into operation mainly after a dispute has developed.
As to the first defect, negotiations between independent, proud, and armed men or groups of men, each recognizing no authority higher than that imposed by self-interest or self-interpreted codes of honor, may be a sufficiently satisfactory form of social adjustment under certain conditions. These conditions must include relatively infrequent contact, so that the occasions for conflict are not many, and relatively little interdependence of the sort inseparable from coöperation, specialization, and exchange, so that the interruption of such processes does not do serious damage. These conditions may have been fulfilled at certain times and places: for example, in isolated regions inhabited by nomadic tribes, or in pre-industrial societies like those of medieval Europe, where the contacts between manorial villages were irregular and superficial. But a system of anarchy---for it is literally a system of anarchy, "no-government," that we are discussing ---has never been found workable for the adjustment of the conflicting relationships that develop in a community of men whose members are in fairly close and constant contact. Certainly the conflicts which arise in connection with the close contacts and the interdependent relationships of capital investment can never be handled in a just and peaceful fashion through the quasi-anarchistic system of inter governmental bargaining by proud, sovereign, and armed states.
Nor would the development of a universal custom of arbitration among these states, or a court of international law with compulsory jurisdiction over all states, remove the fundamental faults of diplomatic protection.(4) The essence of successful institutions for the adjustment of economic conflicts can never be the mere settlement of disputes. Rather, there must be continuous, day-by-day supervision of the conflict-producing activities---therefore, administration and enforcement of accepted rules. The rules themselves must be alterable to fit new situations, and they must respond to shifts in social power---that is, there must be legislation, and provision for a continuous process of legislation. Finally, there must of course be provision for the settlement of disputes that cannot be forestalled by measures of general policy---which means fact-finding, conciliation, judicial settlement. All this, and more, is included in the term "institutions of adjustment" wherever it has been used in this discussion. It is evident that the successful operation of such institutions depends upon the development of a continuous, permanent supervision over the conflict-producing activities by an authority having a jurisdiction and commanding loyalties as wide as the area of the activities and conflicts themselves. In the case of international investment conflicts, this means a world-wide government, not over the political relations between the states of the world, but directly over investment activities themselves when these cut across the jurisdictions of several national states. It means a continuous process of world-wide legislation and administration to regulate those international boundary-crossing relationships which produce conflicts. It means provision for the settlement of disputes, not between states sponsoring the interests and engaging in the conflicts of their citizens, but directly between citizens of different national states without involving the national governments at all.
The point that the most effective institutions for the adjustment of economic (and other) conflicts which arise in society do not consist merely, or even mainly, of machinery for the settlement of disputes can hardly be too strongly emphasized. When one asks, "What institutions preserve the peace between the inhabitants of a city, some of whose interests must be coming into conflict daily?" the most obvious answer may be "the police" and "the courts." But a little reflection is enough to show that these institutions deal with conflicts which have come to the dispute stage or the stage of overt acts of violence, and were it not for many other institutions, governmental and non-governmental, which operate to forestall such acute developments the police and the courts would be swamped in the resulting chaos. For example, courts might be charged with the settlement of claims for damages which arise out of the sale of impure foods or drugs by a merchant to a consumer. But it is far more effective in a society like ours to install a meat inspection service and to examine and license dispensers of drugs. Shall we say that these administrative agencies, which tend to prevent the conflicts between the interests of merchants and the interests of consumers from taking acute forms, are any less institutions of adjustment than the courts? Similarly, statutory provisions about the manner in which contracts shall be drawn, the setting of minimum standards of health, safety, and comfort for workers in factories, copyright laws, and traffic regulations, all illustrate the operation of institutions of adjustment. All those agencies which contribute to the smooth functioning of the social and economic organization, which make it responsive and adjustable to changing situations, which tend to reduce the friction resulting from multitudinous contacts charged with potential conflicts-in a word, all the agencies of social cohesion and coördination are institutions of adjustment, insofar as they function effectively, and within the social areas to which they extend. If investment contacts, with their inevitably associated conflicts, are to continue on a world-wide scale; and if an intelligent effort to minimize the international friction from these contacts leads us to seek to develop institutions of adjustment on a similar world-wide scale-then it is plain from the foregoing that our problem is immensely more than one of setting up international tribunals or preaching goodwill and coöperation among separate national units. The problem is one in the control of world-wide economic contacts through corresponding political and social organization on a worldwide base. The successful development of such organization is limited by the extent to which a sense of world-wide social cohesion, a sense of world citizenship and world loyalties, can be made effective.
