Economic development and freedom: the legacy of Peter Bauer.

AuthorDorn, James A.

A Hero of the Market Revolution

The death of Peter Bauer on May 2, 2002, at 86 years old, marked the passing of a great economist and a hero of the market revolution that has been sweeping the globe. In recognition of his pioneering work in development economics and his lifelong commitment to the principles of a free society, Bauer was named the first recipient of the Milton Friedman Prize for Advancing Liberty, a $500,000 prize awarded every two years by the Cato Institute. Bauer was awarded the prize posthumously on May 9, at the Cato Institute's 25th anniversary celebration. At that ceremony, Milton Friedman expressed his admiration for Bauer with these words: "There are few things that are more important than to honor those people who have promoted liberty around the world, and Peter deserved that prize. A friend of mine for 50 years, he was always consistent and persistent in presenting ideas that were unpopular but correct."

For years Bauer fought against so-called development experts who saw comprehensive central planning, protectionism, and foreign aid as prerequisites for economic advance. The collapse of communism in Soviet Bloc countries in 1989 and in the USSR in 1991, and the end of central planning in China and other developing countries, were the defining moments of the 20th century from a market-liberal perspective. Those events, in particular, have vindicated Bauer's lifework.

Pieter Tamas Bauer was born in Budapest on November 6, 1915. He attended the famous Scholae Piae and then went on to study law at Budapest University. In 1934, he embarked for England and was admitted to Gonville and Caius College, Cambridge, where he studied economics and graduated in 1937. Bauer then returned to Hungary to complete his law degree and serve in the military. In 1939, he left to take a job in London with Guthrie & Company, a merchant house that conducted business in the Far East. Bauer began his academic career in 1943 at London University, where he was first a research fellow and then, in 1947, a reader in agricultural economics. He moved on to teach at Cambridge University in 1948 and remained there until 1960. The remainder 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 title Lord Bauer of Market Ward. He was a fellow of the British Academy and a member of the Mont Pelerin Society. (1)

The End and Criterion of Development: Extending Individual Choice

For Bauer, 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. Limited government, not central planning, was his mantra. Accordingly, in 1957, Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries:

I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development; and I judge a measure principally by its probable effects on the range of alternatives open to individuals.... The acceptance of this objective means that I attach significance, meaning, and value to individual acts of choice and valuation, including the individual time preference between the present and the future [Bauer 1957: 113]. He went on to say, "My position is much influenced by my dislike of policies or measures which are likely to increase man's power over man, that is, to increase the control of groups or individuals over their fellow men."

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.

If economic development is to be maximized, then freedom must be maximized, which means coercion must be minimized. To do so the powers of government must be limited to the protection of persons and property. People will then be free to choose and expand their options provided they respect the equal fights of others. The rules of the game were important to Bauer because they helped define the choice set open to individuals. Long before it became fashionable Bauer applied property fights theory and public choice to the field of development economics.

The spontaneous market order is consistent with freedom. Any increase in the scope of market exchange naturally increases the effective range of individual choices. Likewise, any restriction of economic freedom reduces the effective range of alternatives open to individuals and hinders development, as envisioned by Bauer. Both the rich and the poor benefit from economic freedom. When law safeguards private property rights, people will specialize in ownership and risk bearing, markets will flourish, and voluntary trades will be mutually beneficial.

In his essay "Market Order and State Planning," Bauer (1984: 25) wrote,

The market order minimizes the power of individuals and groups forcibly to restrict the choices of other people. Forcible restriction of the choice of others is what coercion means. Possession of wealth does not by itself confer such power on the rich. Indeed, in modern market economies the rich, especially the very rich, usually owe their prosperity to activities which have widened the choices of their fellow men, including those of the poor. For Bauer, the poor benefit from the freedom to choose whom to work for and where, as opposed to a centrally planned economy in which workers have no such freedom. Power in the hands of government officials is more dangerous than money in the hands of rich people. Restricting capital flows and travel also harms the poor. That is why Bauer (1984: 26-27) emphasizes that "in the Third World, as in the West, the extension of opportunities presented by the market has been and is of critical significance for the poor"; "poverty is not the same as unfreedom in the sense of being subject to coercion by others"; and "a market order is a necessary condition of personal freedom."

Bauer's focus is on the process of development, as measured by the extent of economic freedom, not on the growth of national income. The two, of course, are related, but there are important differences. A centrally planned economy may have a high rate of economic growth (ignoring measurement problems), but people are not free to choose; oppressive government narrowly limits their range of effective alternatives. That aspect of development must not be ignored, according to Bauer (1957: 125-26).

In sum, what really matters to Bauer is freedom of choice, including the choice about how much to save and to invest: "The right of some people to force others to develop is not self-evident, particularly when a widening of the range of choice, of access to alternatives, is regarded as the principal benefit of economic development" (Bauer 1957: 122).

If people are to be free to choose, their property rights must be protected by law. Bauer placed a great deal of emphasis on the primacy of property in a market-liberal order and in the development process. The movement from subsistence to exchange requires a legal system that provides secure property titles, enforces contracts, and adjudicates disputes fairly and efficiently. It was clear to Bauer that restrictions on private ownership erode not only economic freedom but also personal freedom.

In his study of the Malayan rubber industry in 1948, Bauer criticized the restrictive practices of the colonial government that prevented smallholders (small-scale growers) from acquiring land. He saw the refusal to alienate land for rubber planting as particularly harmful to the smallholder and socially disruptive:

Rubber production is an industry where apart from statutory restriction, the small man was until recently in a position to start on his own and to secure a decent and independent income, with the possibility of rising to higher levels; until the ban on new planting and on the alienation of land for rubber planting, estate labourers often rose to the position of medium or smallholders through the development of a rubber holding. But for the almost uninterrupted statutory restriction of the last quarter of a century, there would today be fewer landless labourers in Malaya and many more owners of small plantations. This would conduce to social stability of the country. The present policy of supporting production based on large alien labour forces and of preventing the extension of individual...

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