BAUER ON CULTURE AND THE GREAT ENRICHMENT.

AuthorMcCloskey, Deirdre N.

I first commented on P. T. Bauer 30 years ago, at a point I optimistically thought was his "resurrection" as a voice in the fraught field of development economics. I wrote in 1987 that his "story follows William James's three stages in the rhetoric of academic disputes: at first what Bauer says is plainly false; then it is trivially obvious; and finally it is so true that we, not he, invented it" (McCloskey 1987: 253). By now the joke has come true. Some of us have forgotten, but many now know, that Bauer invented in the 1950s and 1960s, reiterating later, what has become trivially obvious from the experience of China and India, Ireland and Botswana--namely, that leaving people alone, while assigning the government to the few if important tasks that do not obstruct opportunity, is the path to wealth. What does not work is "socialism with Chinese characteristics," that is, political tyranny and unprofitable governmental enterprises. The economic liberalism of the competition for business among Chinese xians is what worked, leaving people alone to innovate, just as Bauer would have said (Coase and Wang 2013, and the later works of S. N. S. Cheung).

Bauer: A Classical Liberal

As Bauer remarked about his book of 1954 at its reissue in 1963, "the discussion of price stabilization and of the operation of the marketing boards [anticipating the political scientist Robert Bates (1989)] aroused much controversy at the time, but the analysis and the conclusions are no longer disputed" (Bauer [1954] 1963: xviii-xix). Likewise his views about the corrupting effects of foreign aid, anticipating those of the political scientist Edward Banfield (1963), and more recently the economist William Easterly (2001), as Easterly has admitted, is now no longer much disputed.

Yet it seemed to us lefties of the early 1960s to be plainly false. Surely the way to wealth in Ghana, we thought in our admiration for Kwame Nkrumah, is giving massive aid to the Ghanaian government, out of, say, Norwegian taxes. Anything less would be cruelly selfish. Shame on you conservatives and classical liberals who doubt. But in 1954 when he was criticizing what Easterly nearly 50 years later called, appropriately, the "capital fundamentalism" of the World Bank and other foreign aiders (Easterly 2001), Bauer wrote: "the comparative lack of local technical and administrative skills aggravates the effects of the scarcity of equipment.... For this reason indiscriminate import of capital, or even substantial capital accumulation in the hands of public organizations, alone would not necessarily improve the situation" ([1954] 1963: 13).

Bauer's great advantage was that unlike many economists he understood "price theory," as we called it in the good old days at the University of Chicago (e.g., McCloskey 1985). That is, he understood the way an economy works through scarcity, entry, and supply and demand curves. Back in 1848 the field of economics, or rather "political economy" as it called itself then, had a reasonable grip on such matters, which guided liberals such as Mill and Bastiat and Cobden. The grip was strengthened by the marginal revolution in the economics of the 1870s.

But the 1870s was also the era in which theories of American protectionism and British New Liberalism and the German Historical School among other anti-economic movements started to take hold outside the price-theoretic and British/Austro-Hungarian core of the field. By 1975, Bauer noted with irritation.

Some economists holding senior academic positions confuse free goods and scarce resources [e.g., in thinking that development spending is a net addition to national income, regardless of its opportunity cost], ignore the dependence of supply and demand on price [e.g., speaking of the numerical "structure" of jobs or exports or the balance of payments without regard to their sensitivities to price elasticities of supply and demand], or neglect patent empirical evidence pertinent to their arguments [e.g., evidence of entry at the pull of profit] [Bauer 1975: 287].

Bauer was therefore not misled, as so many economists are, by the litany of "imperfections" in the market, of which I have recently counted fully 110 imagined since 1848--monopoly, externalities, inadequate aggregate demand, irrational consumers, informational asymmetries, and on and on, recently bearing fruit in many a Nobel Memorial Prize (McCloskey 2018a). Not one of them--startlingly in what purports to be a serious empirical science--has been shown to be a substantial obstacle to economic progress, except on the blackboard. All are used to recommend corrective governmental action by saintly geniuses able to predict and therefore to engineer the future witiiout flaw for the good of us all. As Comte, the master of such thinking, put it in 1830, Savoir pour prevoir, afin de pouvoir, "Know in order to predict, to be able to act with power" in the state. Meanwhile the highly "imperfect" economy, chiefly by ignoring the statist advice of the increasing number of illiberal economists, yielded a Great Enrichment from 1800 and especially from 1848 to the present of 3,000 percent more goods and services for the poorest among us, uniquely in economic history.

The behavioral economist Richard Thaler is the best example of an un-Bauerish and illiberal approach to price theory and practice that human frailty is likely to yield (McCloskey 2018b). He combines the 110 imperfections of the market with the 257 cognitive biases that the psychologists have discerned. (1) He concludes that without governmental help we cannot be trusted to walk across the street, and certainly not to make any serious economic decisions, considering that the imperfection-crippled market will not offer us useful protections from our idiocy. Therefore we need to be nudged to safety, like a two year old grabbed by his mother before he carries out his intention to run in front of a tram. The conclusion by most economists of the past century has been that we are little children, or idiotic adults, and need to be economically engineered, by those very economists. We naive statists in the 1960s called it "fine tuning." Now "nudging." In other cases, socialism and fascism.

Like the agricultural economist and Nobelist at the University of Chicago, Theodore Schultz, and a few other brave souls writing in the 1950s and 1960s, Bauer didn't think that people in poor countries were little children or in other ways idiotic (Schultz 1964). For example, Bauer did not believe the racist assumption, widely if sometimes unselfconsciously held in the 1950s and 1960s, that Africans or Indians or whoever could not possibly achieve the Great Enrichment of 3,000 percent, available only to Europeans spoiling melanin-challenged skin. We young students of economic development in the 1960s, at any rate if we were not studying at the London...

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