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