The world lost a great man last week with the death of economist Peter Bauer on May 2. Sadly, he was just on his way to Washington to accept the first $500,000 Milton Friedman Prize for Advancing Liberty. Bauer was to receive the award, announced on April 18, at a gala dinner sponsored by the Cato Institute on May 9.
It is impossible to explain Bauer's importance without recalling the intellectual climate of the immediate postwar era in which he did his most important work. During World War II, government economic planning appeared to work well. And in the wake of the Great Depression, all Western governments were obsessed with preventing its recurrence, which was widely expected once the war ended. Especially in Europe, this led virtually all countries to adopt highly centralized economic policies, including widespread nationalization of industry.
Many of the countries adopting these socialist policies, such as France and Great Britain, exported them to their colonies, where they took root and continued even after independence. The idea that socialism was the quickest path to growth and prosperity was reinforced by the Cold War and fashionable economic theories. Development economics became a popular field of study, while concerns about communism led Western nations to initiate huge foreign-aid programs. Suddenly, billions of dollars were available to impoverished nations for development, which was viewed as the best way to keep them out of the Soviet camp.
Development economists saw less developed countries (LDCs) as lacking all of the necessary conditions for growth -- they had no capital, no entrepreneurs, no education, no infrastructure and no access to foreign markets. It was thought that foreign aid would fill these gaps and create the conditions for "take-off," after which growth would be self-sustaining. Without aid, it was thought that poverty would perpetuate itself virtually forever.
Western governments hired development economists to advise LDCs on how to industrialize and modernize their economies. Aid was available for projects favored by them and denied to countries that insisted on going their own way. In this way, government planning was cemented in place as the dominant approach to development.
In the midst of this consensus, Bauer was hired to study the rubber industry in Malaya and trade in West Africa. Although he did not consider himself to be a "development" economist, he quickly found himself at odds with those who did. What he saw in his very detailed field research ran sharply counter to the teachings of development economics.
Bauer saw with his own eyes how poor, uneducated peasants built a vast rubber industry in Malaya and cultivated millions of acres for growing cocoa and other export crops in West Africa. He saw the LDCs not as special cases where different economic principles applied, but simply as countries at an early stage of development, little different from Europe 150 years before.
Bauer was appalled by the disastrous advice he saw given to impoverished LDCs. They were being told to tightly control trade, when free trade had been a cornerstone of European development. He saw countries discouraging the inflow of private capital in favor of foreign aid. He saw price controls, high taxes and government regulations kill vibrant native industries, while aid financed industrial "white elephants" that became bottomless pits for the precious little capital available.
Bauer argued that all the LDCs had to do was follow the time-tested path to prosperity laid out by Adam Smith and blazed by England, the United States and other nations that rose from poverty to wealth in just a couple of generations by letting the market, rather than government, guide development.
Somewhat reluctantly, Bauer was drawn into development economics, where for 40 years he was a lone voice for free market policies where socialism was overwhelmingly dominant. Only with the election of Ronald Reagan and Margaret Thatcher did the economics profession and international development agencies like the World Bank begin to take seriously Bauer's views.
Much more still needs to be done to reform foreign aid and thinking about economic development. But at least the crude notion that government planning is the quickest path to prosperity has been deeply discredited. The fact that most LDCs are poorer today than they were at independence is sufficient proof that the postwar consensus was terribly wrong.
It's a cliche, but true nevertheless, to say that ideas have consequences. They make some people poor and some people rich. Had the world listened to Peter Bauer 50 years ago, there would be billions fewer of the former and billions more of the latter. Although he is no longer with us, his work and ideas still are. They will forever remain a true guide to wealth and prosperity for any country willing to follow them.