Peter Bauer

Peter Bauer was a central figure in the 20th-​century debates over economic development, foreign aid, and the role of institutions. He made significant contributions to political economy and the relationship between economic freedom and prosperity. The son of a Budapest bookmaker, he went 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. His path-​breaking work was primarily carried out while at the London School of Economics and Political Science, where he taught from 1960 to 1983. In 1982, he became a life peer and a Fellow of the British Academy. Just days before his death on May 2, 2002, Lord Bauer was named the first recipient of the prestigious Milton Friedman Prize for Advancing Liberty, awarded biennially by the Cato Institute.

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 noneconomic variables in promoting material advance. As he noted in his book Dissent on 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.”

Bauer observed that people in poor countries respond to price incentives just as in rich countries. He also took note of the fact that when people have the freedom to own property and to trade, and when government is limited to the protection of those rights, they will 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.”

In his book Reality and Rhetoric, Bauer recognized that

By observing economic reality and adhering to the logic of the price system, Bauer refuted key propositions of orthodox development economics, the most basic of which was 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, which was widely viewed as a key determinant of economic growth. 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 Malayan rubber industry and his observation of the importance of small-​scale traders in West Africa convinced him that the reality of the development process was considerably different from the rhetoric of development experts.

Bauer also questioned the widely held belief that poor countries cannot become rich without external aid. He found that underdeveloped countries have become rich without access to foreign aid, whereas those that have received substantial external aid have failed to escape poverty. He therefore argued that foreign aid is more likely to perpetuate poverty than to alleviate it, a claim that now has substantial empirical support.

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 own efforts if only governments would safeguard both economic and personal freedoms.

Bauer was one of the first economists to argue 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. He focused attention on the dynamic gains from free trade. In his last 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.”

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 rests squarely in the broader context of political economy, not in the narrow technical confines of modern development economics or the even narrower space of formal economic modeling. As Nobel laureate economist Amartya Sen stated in his introduction to Bauer’s last book, “The indispensability of Bauer’s analysis is a reflection of the reach and profundity of his political economy.”

Further Readings

Bauer, Peter T. Dissent on Development. Cambridge, MA: Harvard University Press, 1972 [rev. ed., 1976].

———. Equality, the Third World, and Economic Delusion. Cambridge, MA: Harvard University Press, 1981.

———. From Subsistence to Exchange and Other Essays. Princeton, NJ: Princeton University Press, 2000.

———. “Population Growth: Disaster or Blessing?” Cato Institute Distinguished Lecturer Series, Cosponsored with the Institute for Political Economy. Washington, DC: Cato Institute, 1995.

———. Reality and Rhetoric: Studies in the Economics of Development. Cambridge, MA: Harvard University Press, 1984.

———. West African Trade: A Study of Competition, Oligopoly and Monopoly in a Changing Economy. Cambridge: Cambridge University Press, 1954.

Dorn, James A., Steve H. Hanke, and Alan A. Walters, eds. The Revolution in Development Economics. Washington, DC: Cato Institute, 1998.

Yamey, Basil S. “Peter Bauer: Economist and Scholar.” Cato Journal 7 no. 1 (Spring/​Summer 1987): 21–27.