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Tuesday, October 5, 2010

Institutions Matter: The Mont Pelerin Society on Development

Today’s document is the first issue of the Mont Pelerin Quarterly (Vol. 1 No. 1 to be exact) published in April 1959 by The Mont Pelerin Society. The society was founded in 1947 (just a year after FEE was founded) by F.A. Hayek with the goal of advocating free market economic policies and a free and open society. Classical liberals and libertarians throughout the world joined the society, such as Karl Popper, Ludwig von Mises, George Stigler, and Milton Friedman. Many of the officers listed on the first page were famous economists, some of whom were supporters of FEE in some form or another, such as Trygve E. Hoff, Wilhelm Ropke, and Fritz Machlup.

The main portion of the journal is a discussion of two papers submitted by development economist P.T. Bauer titled, “Regulated Wages in Under-developed Countries” and “The New Orthodoxy of Economic Development.” The discussion took place at the 9th meeting of the Mont Pelerin Soceity on September 13th, 1958 in Princeton, New Jersey. Economist John Davenport was given the task of summarizing Bauer’s papers, because Bauer was unable to be there, as he was in Pakistan at the time. Then short responses from David McCord Wright, Gustavo Velasco Nobutane Kiuchi, S.H. Frankel, Ludwig von Mises, Eugenio Gudin, and Romulo Ferrero were given.

The exchanges on Bauer’s papers are a fascinating read and seem to be very similar to current debates in developmental economics. Bauer essentially questions the “new orthodoxy” of development economics, which claims the way out of the vicious circle of poverty is by 1) adopting planning measures for their domestic economies and 2) by receiving large amounts of foreign aid. Today one can still find many economists making such arguments. Of course, just as Bauer and these Mont Pelerin members objected to those ideas, there are exceptions, such as William Easterly but the ideas are far from dead.

While all discussants essentially come down on the side of Bauer, some do advocate some levels of government intervention and aid. As David McCord Wright notes, “I do not believe, under present conditions, that we should confront the aspirations of the underdeveloped countries, simply with a bare negative, in other words, I do think we will have to give some direct aid in addition to the military aid, as a diplomatic move more.” He also saw education as a big problem where state intervention could be necessary.

Wright is missing the point, which Ludwig von Mises does not. In his closing paragraph he says, “Let the harbingers of government omnipotence call us negative. We are negative in the same sense in which all the founders of modern civilization were negative. We reject the fashionable semantics that changes the meaning of all terms into their opposite. It was not government planning, but the actions of individual citizens that created all that well-being of the West that the underdeveloped nations want to duplicate for their own citizens. What these poor nations lack, is not mere government interference with business and not government planning, but spontaneous action and initiative on the part of individual citizens.”

In other words, institutions matter! If the institutions are not right, growth will not occur. Direct aid will fail to cause growth in the long run. Military aid may simply prop up bad regimes that hold their citizens down. And education? Education is not a cause of growth, but a product of it. Get the institutions right and the incentives will follow. FEE founder Leonard Read was a member of Mont Pelerin, but once in a letter to J. Howard Pew said that if pushed to consistently apply libertarian thought, many Mont Pelerin members would not pass muster in FEE’s eyes. This is not to say Wright was one of them, he did many great things for FEE and fought against Keynesian thought, but in this instance he does not go far enough.

Download The Mont Pelerin Quarterly Vol. 1 No. 1 April 1959 here.

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.