All Commentary
Sunday, October 1, 2000

P. T. Bauer’s Market-Liberal Vision

The Underdeveloped World's Best Hope

Today it is not unusual to hear it suggested that the undeveloped world’s best hope lies in private property, the market economy, and the rule of law. But a short time ago, that suggestion would have scandalized many audiences. Peter Bauer is a major reason for that shift.

Lord Bauer, the son of a Budapest bookmaker, came to Britain in 1934 to study economics at Gonville and Caius College, Cambridge, where he later became a fellow. His pioneering work in development economics, which began with his study of the Southeast Asian rubber industry in the 1940s and his classic 1954 book, West African Trade, led him to question, and later overturn, many of the beliefs held by mainstream development experts. This work was carried out primarily from the London School of Economics and Political Science, where he taught from 1960 to 1983 and where he is currently emeritus professor of economics. In 1982, he was made a life peer and is a fellow of the British Academy.

Bauer’s work is characterized by careful observation of how countries move from subsistence to exchange economies, an application of simple economic principles, and a sound understanding of the role of non-economic variables in promoting material advance. As he noted in his book Dissenton Development, “Economic achievement depends primarily on people’s abilities and attitudes and also on their social and political institutions. Differences in these determinants or factors largely explain differences in levels of economic achievement and rates of material progress.”

What Bauer observed was that people in poor countries respond to price incentives just like people in rich countries. He also observed that when people have the freedom to own property and to trade, and when government is limited to the protection of those rights, they have a better chance of achieving prosperity.

The intellectual climate in the late 1950s was not hospitable to Bauer’s critique of state-led development policy. In 1956, Swedish economist Gunnar Myrdal, later a Nobel laureate, wrote, “The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem . . . all recommend central planning as the first condition of progress.”

That view persisted well into the 1960s and has only recently been supplanted by a more market-friendly view. It was not until after the collapse of communism in Eastern Europe and the Soviet Union that the World Bank admitted, in its 1997 development report, “State-led intervention emphasized market failures and accorded the state a central role in correcting them. But the institutional assumptions implicit in this world view were, as we all realize today, too simplistic.”

Bauer recognized, as noted in his book Reality and Rhetoric, that “the critics who propose replacing the market system by political decisions rarely address themselves to such crucial matters as the concentration of economic power in political hands, the implications of restriction of choice, the objectives of politicians and administrators, and the quality and extent of knowledge in a society and its methods of transmission.”

In observing economic reality and adhering to the logic of the price system, Bauer refuted key propositions of orthodox development economics, the most basic one being the idea of a “vicious circle of poverty.” Poor countries were said to be poor because people had low incomes and could not generate sufficient savings to allow for capital accumulation, one of the prerequisites for economic growth, as spelled out in mainstream growth models. Bauer observed that many people and many countries had moved from poverty to prosperity and that large-scale capital investment is neither necessary nor sufficient for material advance. His study of small holdings in the Malaya (now Malaysia) rubber industry and his observation of the importance of small-scale traders in West Africa convinced him that the reality of development was different from the rhetoric of development experts.

A corollary of the vicious circle is that poor countries cannot become rich without external aid from developed countries. However, the nations that have become rich had no access to foreign aid, while those that have received substantial external aid are for the most part still poor, as in Africa. So Bauer argued that foreign aid is more likely to perpetuate poverty than to alleviate it. And history has borne him out.

Bauer also strongly disagreed with the widely held view that population growth is a drag on development. In his essay “Population Growth: Disaster or Blessing?” he wrote, “Economic achievement and progress depend on people’s conduct not on their numbers.” Unlike many of the development experts who wanted to use government to “help the poor,” Bauer thought that poor people could lift themselves out of poverty through their ownefforts, if only governments would safeguard both economic and personal freedom. When people are free to choose and bear the responsibility for their choices, as they do under a system of private property and free markets, they will be more able to improve themselves and provide for their families—as well as have stronger incentives to do so—than when they are dependent primarily on the state.

Politicizing Life

Bauer was one of the first economists to clearly see that state-led development policies and the quest for “social justice” would politicize economic life, impair individual freedom, and fail to achieve long-run prosperity for the majority of people. He also noted that those countries that had the fewest commercial contacts with the West were the least developed. Thus, he recognized the dynamic gains from free trade. In his most recent book, From Subsistence to Exchange and Other Essays, he wrote, “Contacts through traders and trade are prime agents in the spread of new ideas, modes of behavior, and methods of production. External commercial contacts often first suggest the very possibility of change, including economic improvement.” Certainly the experience of people in Japan, South Korea, Taiwan, China, and Hong Kong support that observation.

Bauer’s emphasis on individual merit, character, culture, property rights, and markets, and his distrust of big government, foreign aid, and the welfare state place him squarely in the classical-liberal tradition. His life’s work has been in the broad context of political economy, not in the narrow technical confines of modern development economics or the even narrower space of formal economic modeling.

Bauer’s keen understanding of how individuals and nations grow rich comes from practical experience combined with plain economic theory and a deep knowledge of history. His work has stood the test of time. That is why he is now widely recognized as a hero of the revolution in development economics.

  • James A. Dorn is vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference.