In Memoriam: Peter, Lord Bauer

Peter, Lord Bauer died unexpectedly at his home in
London on Thursday night, just days before the

ceremonies
in Washington D.C. at which he was to be
awarded the first Milton Friedman Award at the Cato
Institute`s 25th Anniversary dinner. He was
85.

This is a double sadness for those of us who admired
this fierce, impish economist, with his sweep of white
hair and his striking accent, half-Hungarian, half
Cambridge (U.K.) don. We had hoped the Friedman prize
would correct the fact that Bauer`s work has never
really received the recognition in this hemisphere that
it deserved. Some years ago, I was surprised to find
that Hernando de Soto, the celebrated Peruvian

economist
, was unaware of Bauer, although his
emphasis on the critical role of markets and property
rights in Third World development had exactly
anticipated de Soto, four decades earlier.  

Lord Bauer – he was raised to the peerage by Margaret
Thatcher – did gain wide recognition for his sustained
critique of “foreign aid” or, as he called it,
“government-to-government subsidy.” You couldn`t force a
country to grow economically, he argued, by just
injecting money. There had to be the right incentives
and institutions. Forty years ago, this was extreme
heresy, although subsequent post-colonial stagnation of
much of the Third World has silenced many of Bauer`s
critics. But Bauer himself became irritated at being
identified with the foreign aid debate. He rightly
thought his work was much richer – for example, on the
roles of middlemen and exchange rates. After a
profile of him that I wrote for Forbes
magazine was edited (now it can be told!) to focus on
foreign aid, he sulked at me for several years. 

In fact, Bauer had two problems as an economist.
Firstly, in the mysterious way that these things happen,
he chose to get interested in free market economics at a
time when it was utterly and completely out of fashion –
in a way that is now hard to imagine. Harry G. Johnson
in his book

The Shadow Of Keynes
has a searing portrait of
Cambridge (U.K.) in the early 1950s, with economics
discourse controlled by the self-styled “secret seminar”
orchestrated by left-wing Keynesians led by Richard Kahn
and Joan Robinson. In a passage that now reads
ironically, Johnson noted that  

“non-invitation to attend
was deliberately used as a snub to those who lacked the
correct Keynesian qualifications and/or political
orientation, even though their theoretical abilities
were indisputably at least equal to the group`s average.
“Included out” in this way were both the Cambridge
economist P.T. Bauer and the American visitor Milton
Friedman
.”

Bauer`s second problem–in some ways even more
serious, it may have cost him the Nobel Prize–was that
he preferred words to numbers and arguments to
equations. His chosen vehicle was the essay. (His last
collection,

From Subsistence To Exchange
, was published only
in 2000.) This literary methodology has a history in
economics that goes all the way back to Adam Smith. But
it has been totally displaced by math, even in the free
market catacomb. The fact that Bauer and the highly
quantitative Milton Friedman were such personal friends
always struck me as a tribute to both men.

Peter Bauer was one of the inspirations of my
immigration reform book

Alien Nation.

It came about in a paradoxical way: among many popular
causes that Bauer dissented from was population control.
He regarded it as a gross form of government
intervention, like price control, that could easily do
more harm than good. One day, I decided to ask a
hypothetical question: if a country did, through
restricting births, forcibly reduce its dependency ratio
– the proportion of non-working children and aged in the
population–wouldn`t that give it a brief breather in
which resources could be diverted from consumption to
investment? (It would be a brief breather, of course,
because in a few years the supply of new workers would
be correspondingly reduced, and the dependency ratio
would rise until the aged died off. But by then maybe
that investment would have kicked in.)

A grand old chase ensued. Bauer by this stage had
obviously decided that no opponent ever had anything
worth saying and felt little need to come up with new
arguments. He had also mastered a range of perfidious
British debating techniques to avoid doing so. But
eventually I cornered him. And his answer was brilliant.
This was the composite Bauer quote we constructed
together for Alien Nation

“However surprising it
may be to laymen, capital and labor are relatively minor
factors of production. For example, the work of Simon
Kuznets [such as his

Modern Economic Growth: Rate, Structure and Spread]

showed that increases in capital and labor together
accounted for no more than 10 percent of the West`s
increase in output over the last two hundred years, and
probably less. The balance was caused by technical
innovation – new ideas.”

In the context of the population control debate, this
meant that any freeing of resources by reducing the
number of children–putting aside any disincentive
effect–was insignificant compared to the potential of
innovation.

But I saw immediately that this insight transformed
the immigration debate. It meant you couldn`t reason
from

Wattenberg
-style

government-imposed
immigration-driven population
growth to economic growth. Conversely, the American
economy does not actually need immigration – least of
all unskilled immigration. It can grow indefinitely
through innovation. This is the reality that underlies

George Borjas
` sensational econometric finding that
the economic benefit to native-born Americans from the
post 1965 immigration influx is nugatory.

America is being transformed for nothing
.

The average conservative intellectual is aware of
this argument in another form: population growth is not
a threat because technological innovation Will Provide.
What has not yet penetrated their Wall Street Journalized
wits is the corollary: population growth is Not
Necessary–because of technological innovation.

Bauer, by contrast, was fully aware of this. He was
not a Julian Simon-type cornucopian, although I think
Julian dedicated a book to him. Some time later, I asked
him another question, on behalf of my new friends in the
immigration reform movement who worry about population
growth: just because technological innovation could
Provide for any rapid population growth—does that mean
it will? (After all, human die-offs have
happened—from

Easter Island
to

Famine Ireland.

This time, there was no grand chase. He looked at me
intently for a couple of seconds. Then he said: “No.”

My summary of Bauer: Immigration is definitely not
necessary. Population growth can be handled -
regardless of whether it`s undesirable for other
reasons – but it can also be mishandled.

Naturally, I don`t want to put words into anyone`s
mouth—and above all I don`t want to cast a pall over the
Cato ceremony—but I think Peter Bauer agreed with my
argument in Alien Nation. Apart from the growth
issue, it is hard to see how anyone so aware of
economics` cultural framework could not. It was a heavy
blow to immigration reform that the issue surfaced when
he was so old, and Murray Rothbard so dead.

Peter Bauer died too suddenly for the Last Rites he
had always made very clear he wanted. My Catholic
advisors tell me, and I believe, that they were not
necessary.

May 03, 2002