Yesterday the Cato Institute, the Washington-based libertarian think tank, celebrated its 25th anniversary. One very special guest at the dinner gala was to have been Peter Bauer, a Hungarian-born British economist who was a pioneer in development economics. Several weeks ago he learned that he was to receive the inaugural Milton Friedman Prize for Advancing Liberty, a prestigious $500,000 prize awarded every two years by the Cato Institute. On May 2, he died quietly in his London home at the age of 86, no doubt pleased with the recognition his ideas have now achieved throughout the world.
Peter Thomas Bauer was born in Hungary in 1915. He studied law in Budapest before embarking for England in 1934 to study economics at Gonville and Caius College, Cambridge, from which he graduated in 1937. After a brief period in the private sector working for Guthrie & Co., a London-based merchant house that conducted business in the Far East, Bauer spent most of his long career at the London School of Economics and retired in 1983, as emeritus professor of economics. In 1982, he was made a life peer. Lord Bauer was also a fellow of the British Academy and a member of the Mont Pelerin Society, founded by his friend Friedrich A. Hayek.
During the 1950s and 1960s, Bauer fought almost alone against the rising tide of state-led development policy. It was not unusual at the time to hear well-known economists advocate socialism as the answer to poverty. In 1957, Stanford University economist Paul A. Baran wrote, “The establishment of a socialist planned economy is an essential, indeed indispensable, condition for the attainment of economic and social progress in underdeveloped countries.”
Bauer sought to convince the so-called development experts that their theories and policies were inconsistent with sound economic reasoning and with reality. His message was loud and clear: Comprehensive central planning, foreign aid, price controls, and protectionism perpetuate poverty rather than eliminate it; the growth of government intervention politicizes economic life and reduces individual freedom.
The failure of development planning — as revealed most notably in the collapse of the Soviet regime, the ongoing transition from plan to market in China, and the dismal record of foreign aid in Africa and India - has led to a revolution in thinking about the determinants of economic advance. Even the World Bank, in its 1997 World Development Report, admitted that the notion that “good advisers and technical experts would formulate good policies, which good governments would then implement for the good of society” was naive. “Governments embarked on fanciful schemes. Private investors, lacking confidence in public policies or in the steadfastness of leaders, held back. Powerful rulers acted arbitrarily. Corruption became endemic. Development faltered, and poverty endured.” Exactly as Bauer had predicted.
For Bauer, the essence of development is the expansion of individual choices, and the role of the state is to protect life, liberty, and property so that individuals can pursue their own goals and desires. Limited government, not central planning, was his mantra.
Accordingly, in 1957, Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries:
I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development; and I judge a measure principally by its probable effects on the range of alternatives open to individuals… The acceptance of this objective means that I attach significance, meaning, and value to individual acts of choice and valuation, including the individual time preference between the present and the future.
He went on to say that “my position is much influenced by my dislike of policies or measures which are likely to increase man’s power over man; that is, to increase the control of groups or individuals over their fellow men.”
Bauer placed himself firmly in the tradition of the great classical liberals. His adherence to the principles of free trade and free people reflected his deep respect for the dignity, rationality, and capabilities of poor people around the world versus the patronizing undertones of the development experts who made up “the spurious consensus.”
In his many articles and books, including Dissent on Development (1972), Bauer overturned many of the commonly held beliefs of development economics. He refuted the idea that poverty is self-perpetuating and showed that central planning and large-scale public investment are not preconditions for growth. In his clever fashion he noted, “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.”
He criticized the idea that poor people could not and would not save for the future, or that they had no motivation to improve their condition. He opposed “compulsory saving,” which he preferred to call “special taxation,” and, like modern supply-side economists, recognized the detrimental effects of high taxes on economic activity. Bauer also saw that government-directed investment funded by “special taxation” would increase “inequality in the distribution of power.”
Unlike many development experts, Bauer did not see the poor as “lifeless bricks, to be moved about by some master builder.” Rather, his experience in Malaya (now Malaysia), in the late 1940s, and in West Africa led him to recognize the importance of individual effort by small landowners and traders in moving from subsistence to a higher standard of living. As he wrote in The Development Frontier (1991):
A developed infrastructure was not a precondition for the emergence of the major cash crops of Southeast Asia and West Africa. As has often been the case elsewhere, the facilities known as infrastructure were developed as the economy expanded… What happened was in very large measure the result of the individual voluntary responses of millions of people to emerging or expanding opportunities created largely by external contacts and brought to their notice in a variety of ways, primarily through the operation of the market. These developments were made possible by firm but limited government, without large expenditures of public funds and without the receipt of large external subventions.
Bauer was perhaps the first economist to recognize the importance of the informal sector and advocated the “dynamic gains” from international trade - that is, the net gains that result from exposure to new ideas, new methods of production, new products, and new people, or what we would call “globalization.” He demonstrated that trade barriers and restrictive immigration and population policies deprive countries of those gains.
For Bauer government-to-government aid was neither necessary nor sufficient for development, and may actually hinder it. “To have money is the result of economic achievement, not its precondition,” he argued. Trade, not aid, promotes long-run prosperity. The danger of aid, according to Bauer, is that it increases the power of government, leads to corruption, misallocates resources, and erodes civil society.
Bauer’s legacy is a better understanding of the forces that shape economic development, especially the institutions of private property, stable money, free trade, and limited government under a rule of law that underpin the spontaneous market order. Along with Hayek and Milton Friedman, Lord Bauer will be remembered as a great friend of free enterprise and individual liberty. That is a legacy he can be proud of.