Peter Bauer's Market-Liberal Vision

Journal of Private Enterprise, Fall 2004 by Dorn, James A

Bauer has been a consistent and cogent defender of the role of the market economy in bringing about economic development. No one has done more in clarifying the reach of Adam Smith's thesis regarding the creative contributions of exchange.

-Amartya Sen1

A pioneer in development economics

At a time when mainstream development economists were promoting state-led development planning in the aftermath of World War II, Peter (Lord) Bauer stood firm in his conviction that comprehensive central planning, protectionism, and foreign aid were detrimental to economic development. Indeed, he relied on firsthand experience in Malaya, West Africa, and India, and on classical liberal principles, to reach his conclusion that limited government and economic freedom are the prerequisites for increasing individual welfare.

Pieter Tamas Bauer was born in Budapest on November 6, 1915. He earned a law degree at Budapest University and attended Gonville and Caius College at Cambridge University, where he studied economics and later taught. Most of his distinguished academic career was spent as a professor at the London School of Economics. In 1982, he was made a life peer with the appropriate tide Lord Bauer of Market Ward. He was a fellow of the British Academy, a member of the Mont Pelerin Society, and the first recipient of the Milton Friedman Prize for Advancing Liberty, a $500,000 prize awarded every two years by the Cato Institute. The award cited Bauer's "tireless and pioneering scholarly contributions to understanding the role of property and free markets in wealth creation, his demonstration of the negative effects on poor nations of government-to-government transfers, and his inspiring vision of a world of free and prosperous people" (Blundell 2002: 55). He died on May 2,2002, at the age of 86.2

Central to Bauer's work is the idea that 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. Bauer's view of economic development as a process consistent with, and dependent on, private property and freedom of contract placed him 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.

Conflicting views of development

For many years following World War II, it was generally accepted that comprehensive central planning was necessary to increase economic growth in less-developed countries. It was assumed that poor people could not and would not save for the future, and that government had to organize economic life for the good of the people. Bauer questioned that dogmatic and condescending approach. His observation of the informal sector in Malaya and West Africa convinced him that poor people could prosper through hard work, thrift, and foresight-when government leaves them alone and protects property rights.

State-led development

In 1957, Paul A. Baran, a respected economist at Stanford University, 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" (Baran 1957: 261). That view was widely held among Western development experts who peddled their theories to the World Bank and other multilateral development agencies. As Gunnar Myrdal (1956: 201) noted, "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."

Bauer questioned that conventional wisdom and warned that central planning is a threat to individual freedom. Comprehensive planning extends the power of the state and limits individual choice. Consequently, all economic decisions become political decisions, and corruption becomes endemic. As Bauer (1976: 84) noted, "By continuing and extending state control over the lives of the population, central planning reinforces the subjection of the individual to authority. Such a development discourages self-reliance, personal provision for the future, sustained curiosity, and an experimental turn of mind."

The goal of development planners was not merely to control the economy but to control people and remake society. Indeed, Bauer (1976:188) tells us that Myrdal's main thesis was that "personal conduct and social attitudes are to be restructured in the interest, or at least the declared interest, of higher per capita incomes." The poor were not to be trusted with freedom: they were assumed to be indifferent toward the future and unresponsive to market prices. Thus, for their own good, they would have to be treated as pawns in the hands of the enlightened planners. Bauer found that anti-market mentality disturbing. He did not see the poor as "lifeless bricks, to be moved about by some master builder" (Bauer 1984: 5).