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Peter (Lord) Bauer, one of the pioneers of early post-Second World War development economics, stood almost alone in the 1940s and 1950s in questioning the prevailing orthodoxy.

Born in Budapest on 6 November 1915, he was the son of a bookmaker. Bauer left Hungary in 1934 to study at Cambridge University, where he earned a first-class degree in economics from Gonville and Caius College in 1937. He returned home to complete his law degree at Budapest University, and then took a job in London with the trading firm of Guthrie & Company. In 1947 he was appointed a lecturer in agricultural economics at London University. From 1948 to 1956 he was a lecturer in economics at Cambridge University, and then became Smuts Reader in Commonwealth Studies. In 1960 Bauer accepted a professorship at the London School of Economics, and took emeritus status in 1983. Prime Minister Margaret Thatcher elevated Bauer to the House of Lords, as a life peer, in 1982. Lord Bauer was a fellow of the British Academy and of Gonville and Caius College. He was 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’. Peter Bauer died on 2 May 2002 at the age of 86.

In the early post-war era, orthodox development economists held that there was a ‘vicious circle of poverty’. They assumed that low incomes in less developed countries would prevent sufficient domestic saving and capital accumulation, which were seen as essential for growth. Moreover, poor people were assumed to be incapable of readily responding to market incentives or to have the foresight to save and invest, investment opportunities were seen as narrowly limited, and external trade was viewed as ineffective or even harmful. Poverty was therefore regarded as self-perpetuating. The only escape was to generate a ‘big push’ by comprehensive central planning and by relying on external assistance.

Bauer’s first-hand observations during his extensive work in south-east Asia and in British West Africa in the 1940s and 1950s led him to question the conventional wisdom. In his classic studies of the rubber industry in Malaya (Bauer 1948) and small traders in West Africa (Bauer 1954), he found strong evidence that poor people can lift themselves out of poverty by hard work, entrepreneurial activities, and internal and external trade – provided they have the freedom to do so. He was fond of saying, ‘If the notion of the vicious circle of poverty were valid, mankind would still be living in the Old Stone Age’.

Rather than advocate a state-led development model, which was in high fashion at the time, Bauer argued that investment planning, compulsory saving, protectionist trade policies, marketing boards, and government-to-government transfers (foreign aid) would politicize economic life, empower the ruling class, and perpetuate poverty. His views have been vindicated by the failure of comprehensive economic planning and by the ineffectiveness of official aid to spur development.

For Bauer, the essence of economic development is to increase ‘the range of effective alternatives open to people’ – that is, to increase economic freedom. Until recently, this classical-liberal view was largely invisible. Bauer was among the first to downplay the importance of physical capital accumulation as a precondition for growth. His focus was on institutions and incentives, and especially on the dynamic gains from trade. Total factor productivity is a black box that must be opened to understand the underlying forces of the development process. Bauer was sceptical that those forces could be precisely modelled or that there could be a general theory of development. The process was much too complex.

The primary role of government, in Bauer’s view, is to protect private property rights and freedom of contract so that individuals are free to choose and to trade. Conditions will then be conducive to develop and to prosper. Limited government is more important than democracy, in this respect. Hong Kong has few natural resources but has limited government and free trade, and was able to escape the ‘poverty trap’ – without comprehensive planning or foreign aid.

Bauer, like Ronald Coase, relied on direct observation, an understanding of institutions and history, and sound economic logic to overturn conventional wisdom. When nearly everyone was focusing on capital accumulation as the primary determinant of growth, Bauer (1957a, p. 119) argued, ‘It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital’.

In his final book, From Subsistence to Exchange and Other Essays (2000), Bauer summarized his market-liberal vision of the development process:

  • ‘Economic performance depends on personal, cultural, and political factors, on people’s attitudes, motivations, and social and political institutions.’

  • ‘Contacts through traders and trade are prime agents in the spread of new ideas, modes of behavior, and methods of production.’

  • ‘Development aid is thus clearly not necessary to rescue poor societies from a vicious circle of poverty. Indeed, it is far more likely to keep them in that state.’

Those ideas were controversial for many years, but are now more readily accepted in the field of development economics. Bauer deserves much credit for that reversal.

See Also

Selected Works

  • 1948. The rubber industry. London: Longmans, Green and Co.

  • 1954. West African trade. Cambridge: Cambridge University Press.

  • 1957a. Economic analysis and policy in underdeveloped countries. Durham: Duke University Press.

  • 1957b. (With B.S. Yamey.) The economics of underdeveloped countries. Chicago: University of Chicago Press.

  • 1976. Dissent on development, revised ed. Cambridge, MA: Harvard University Press.

  • 1991. The development frontier. Cambridge, MA: Harvard University Press.

  • 2000. From subsistence to exchange and other essays. Princeton: Princeton University Press.