Resurrecting Peter Bauer in Budapest – Notes for a Conference

I do not pretend to be an expert on Peter Bauer or a specialist in the field of development economics. I met Peter Bauer two or three times at international conferences and we exchanged a few friendly words. One sixteen-year-old story, however, deserves to be mentioned. The Cato Institute created the Milton Friedman Prize for Advancing Liberty, and together with Margaret Thatcher, Edward Crane, John Blundell, Rose Friedman and a few others, I was appointed to be a member of the International Selection Committee. I did not hesitate one second. From the suggested list of candidates I immediately picked up Peter Bauer and Margaret Thatcher told me later that she did the same.

That is not the end of the story. I arrived in Washington DC the night before the planned celebration and was told that Peter Bauer had died a few days before. It was a very sad and strange moment for me and for all those who came there from all over the world. The prize was awarded, but instead of listening to Peter Bauer’s speech we participated in an unplanned conversation with Milton Friedman.

I have never worked in the field of development economics (as long as we do not consider the relatively developed and highly industrialised centrally planned Communist economies as the Czech Republic developing countries). Economists in those countries were – together with Peter Bauer – convinced of the necessity of a fundamental systemic change, of the liberalisation and deregulation of our economies, of the introduction of free markets, of unregulated prices and of proper incentives. We considered Peter Bauer our colleague in promoting such ideas.

When we heard – decades ago – Peter Bauer’s powerful attack on foreign aid, we also fully agreed. We had had very frustrating experiences with helping some politically selected developing countries. We knew quite well that their problem, like our own, was not the lack of money or of capital but their economic system, again like our own. We understood how irrational the whole idea of foreign aid was. Our aprioristic criticism of foreign aid – organised as it was by governments and by foreign aid lobbyists in international financial institutions – was absolute. We felt very strongly the hypocrisy of this endeavour. And we knew that no one in the world had criticised this hypocrisy so eloquently and efficiently as Peter Bauer.

The fall of Communism brought us additional convincing arguments. Our country was very lucky not to get any foreign aid in that crucial moment. We did not need it. We got a chance to follow an almost controlled laboratory experiment done with our neighbour country, the GDR. The huge amounts of money which have been flowing for more than a quarter of the century into this country simply could not compensate for the absence of any transformation process there.¹

We have had another convincing experience in recent years in the form of EU inter- country financial transfers. It has been convincingly proved how unproductive, useless and even dangerous the current EU foreign aid in reality is. It is almost irrelevant economically and it clearly contributes to the atmosphere of corruption in today’s Europe. Foreign grants lead to the politicisation of economic life which was one of Peter Bauer’s better-known arguments. Our post-Communist transformation was based on the radical de-subsidisation of our economies, yet on entering the EU we found we were in a heavily subsidised economy again.

I think I can fairly claim that I understood and accepted Peter Bauer’s ideas from the very beginning. I have always stressed that we need trade, not aid. He was convinced (and tried to prove it in his early academic works) that people in Malaysia and West Africa reacted to prices and incentives – however poor they were. He argued that they intuitively knew how to react to market incentives and needed no education in this respect. They especially had no need for advisors, consultants and bureaucrats from international financial institutions with their built-in foreign aid mentality as their teachers. They grasped the principles of trade like the surest Homo Economicus.

We went through the same debate after the fall of Communism. The anti- Bauers of all colours were coming into our countries and telling us that people in Communist countries do not understand markets and that they would need decades to learn it. I disagreed. I was convinced that what the people in former Communist countries needed was a systemic change, not any schooling done by the World Bank or any other experts. But that was exactly what the people in these institutions wanted to do. Let me admit that this was quite understandable. They also reacted to incentives. They wanted to maximise their own income, not the “Wealth of Nations” such as Hungary or Czechoslovakia. We were, of course, very happy to live with open borders after decades of the existence of the Iron Curtain. But I remember that at one moment I threatened to start issuing entry visas for one special group of visitors: namely for foreign advisors and investment bankers. It was impossible to entertain all of them.

At the beginning we – wrongly – believed that there was a positive and productive aspect to some of these institutions. My first letter abroad, which I sent as a Minister of Finance in January 1990, asked the IMF and the World Bank to allow us to re-enter these two institutions.² We succeeded in this effort very rapidly but these institutions proved to be not very helpful. With the exception of a small stand-by loan at the very beginning, we did not ask for IMF loans and we were not able to find projects that could be financed by the World Bank. I remember making a small scandal in Washington when I refused to take the technical assistance loan from the World Bank. My comment that “I am not ready to pay hard money for soft advice” was dubbed “Klaus’s Law” by Milton Friedman. So we can conclude that developments after the fall of Communism in our part of the world also confirmed Peter Bauer’s views.

He was a very sophisticated person but his economic theory was relatively very simple. He regarded himself primarily as an applied economist which is something I share: I accept that my position in the science of economics is on the demand side, not on the supply side. His economics was based on relatively few basic and powerful principles. They were sufficient. He did not need sophisticated mathematical and econometric models for describing economic reality or for giving useful economic recommendations. He believed in the market economy. It is those who want to play the markets or to replace the markets who need sophisticated models (mostly to hide their ignorance). He wanted only to apply elementary economic principles to problems in the real world. He could not get the Nobel Prize with this approach but he could get the Milton Friedman award. I recommend to everyone to reread his 1987 Cato Journal article “The Disregard of Reality”.³ James Buchanan correctly called Peter Bauer “a laissez-faire optimist”⁴ – which is an almost endangered species these days.

His views are as relevant now as they were 70 years ago. His criticism of central planning (nicknamed regulation today), of protectionism and of foreign aid is much needed again. His belief in liberty and markets is needed too. Such tried-and-tested principles, and the common sense built upon them, face far more stubborn obstacles today in the Brave New World of political correctness, human-rightism, faith in information technology, the EU, etc. than in the recent past.

In his Economic Analysis and Policy in Underdeveloped Countries (published in 1957) he explained that: “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.”⁵ This is – for me – a formulation in the tradition of great classical liberals. We see few of them among us these days.

I was also immensely impressed by the arguments he used when rejecting the fashionable concept of “a vicious circle of poverty”. His well-known words “to have money is the result of economic achievement, not its precondition {...} If the notion of the vicious circle of poverty were valid, mankind would still be living in the Old Stone Age”⁶ should be repeated again and again. Seventy years ago he famously coined the phrase that “capital is created in the process of development rather than that development is the function of capital”.⁷

Finally, I should mention some of the many sharp perceptions and distinctions that Bauer throw off, apparently in moments of intellectual relaxation! In the dangerous era of Thomas Piketty, we should particularly emphasise Bauer’s important linguistic distinction between “inequality” and “differences”. (For Peter Bauer the latter term is better because “it is more analytical and less emotive”.) We should also cite his pointing out the importance of trade for economic development itself which experience has amply confirmed since he first stressed it. Indeed, I like in general his highlighting “the need to restate the obvious”, in particular his criticism of the exhibitionist guilt felt in the Western world. I could go on and on with such examples.

Peter Bauer was a great economist. Deepak Lal correctly speaks about his “intellectual robustness”.⁸ We were very much enriched by his ideas.

(Title of the conference: Peter Bauer: A Hungarian in Cambridge. Danube Institute, Hungarian National Bank, Budapest, 27 March 2018.)

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