A Tale of Two Refugees:
Heinz Arndt and Peter Bauer
by Helen Hughes
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Two refugees from fascism made an outstanding contribution to the development of economics

Two refugees from fascism, each of whom made an outstanding contribution to the development of economics and hence to the rapid rise of living standards in the West after World War II, died in May. Both were born in 1915, Heinz Arndt in Breslau (then in Germany) and Peter Bauer in Budapest. They were fortunate that both families were wealthy and alert enough to send them abroad to study, respectively to Oxford and Cambridge, in the early 1930s. They were part of the refugee influx into the United Kingdom, Canada, the United States and Australia that was HitlerÕs gift to social and natural sciences and the arts in the democratic West.

Heinz ArndtÕs first book, The Economic Lessons of the Nineteen-Thirties, published in 1944, placed him (to his later embarrassment) among socialist thinkers, so much so that the conservative English economics establishment opposed his appointment to a post in the peak economics departments in England. So Arndt exiled himself once more, to the Economics Department of Sydney University. He shortly moved to the Australian National UniversityÕs School of General Studies as Foundation Professor of Economics. His insights on international capital movements and external economies of scale began his move from planning to market economics and established his international reputation. He moved further along the market path in working on applied and policy aspects of the Australian economy, publishing The Australian Trading Banks in 1957. He took a vigorous part in Australian economic debates, but also continued to work on the European economy. He had a spell in India, then following Russian style planning and state ownership and consequently mired in balance of payments difficulties and poverty. This turned him even further towards liberal economic views and led to an invitation by Sir John Crawford to head up a new Department of Economics in the Research School of Pacific Studies.

Heinz Arndt turned to the Asian economies and the economics of development, culminating in The Rise and Fall of Economic Growth: A Study of Contemporary Thought (1978). He was not only a dedicated teacher and economic thinker, but also a humanist with widespread interests in politics, literature and the arts. These qualities enabled him to make Canberra into the leading world centre of teaching and research on East Asian economies in his own Department of Economics and its offshoots, the Australia-Japan Research Centre and the National Centre of Development Studies. A high proportion of those now working on Asian economies in Australia studied with Heinz Arndt and more than 2,500 Asian and Pacific Masters and PhD graduates have gone home from Canberra to contribute to their countriesÕ economic development. In addition, hundreds of visiting fellowships for Asians and Pacific Islanders, seminars, conferences, monographs, books and journals have analysed Asian development and Australian-Asian relations, also creating strong linkages for Australia. The issue of Asia Pacific Economic Literature that Heinz Arndt was editing the week before he died, now going to press, is the latest of his many contributions.

Peter Bauer went to Gonville and Caius in 1934, worked at the London School of Economics in the late 1940s and again from 1960, continuing as Professor of Economics to specialise in development until his retirement in 1983. In 1982, after a long career of rowing against the mainstream, his contribution was acknowledged (somewhat to his amusement) when he was made a life peer by Margaret Thatcher.

Peter Bauer was posthumously presented on 7 May 2002 with the first Milton Friedman Prize of $US500,000 for Advancing Liberty by the Cato Institute at a gathering of thinkers whose promotion and defence of liberal ideas against dirigiste policies has delivered comfortable living standards and political freedom for the majority of people in industrial countries. It is tragic that only a handful of developing countries (Chile, Hong Kong, Singapore and Taiwan) have followed the liberal economic policies that Peter Bauer so long espoused. After 50 years of vast volumes of aid for so-called development, most people in developing countries are still living in poverty because their governments have steadfastly refused to follow development strategies that Peter Bauer advocated.

The Cato award recognises the work of an economist who maintained his integrity against a flood of Ōdevelopment economicsÕ and public relations efforts that favoured high levels of government intervention in development. The Rubber Industry was published in 1948, West African Trade in 1954, Dissent on Development in 1972 and his most recent book, From Subsistence to Exchange in 2000 when he was 85 years old. His combination of theory with meticulous empirical work resulted in insights that would have improved living standards for millions of poor people if they had not been crowded out by dirigiste thinking.

Peter Bauer showed that illiterate small rubber producers in Malaya and West African market women were better at taking advantage of economic opportunities and contributed more to development than dirigiste planners. He argued that marketing boards used their purchasing monopolies to exploit small producers, wrecking industries such as cocoa in Ghana. The great wool debacle could have been avoided if BauerÕs work had been appreciated in Australia.

Understanding that central planning was disastrous when the Soviet Union was widely regarded as a model of industrial development made Peter Bauer an outsider in economic debates in the 1950s. The rest of the profession only gradually caught up with him as deregulation proved to be essential for growth and rising living standards in the West. For some dirigiste economists even the collapse of communism was not enough evidence. And for some, the Japanese model, with dirigisme modified by trade, is alive and well after 10 years of stagnation in its homeland.

The most important contribution that Peter Bauer made to economics was his analysis of the role of aid in undermining development. He noted that the industrial economies had emerged without the benefit of aid because even in poor societies, provided there is security and absence of planning and regulation that creates market failure, people save and invest. Open economies that take advantage of international trade can pull themselves up by their own bootstraps. Bauer also predicted, and later showed, that aid flows are, on balance, counterproductive. Aid strengthens the dirigiste roles of governments so that much aid is wasted through economic misdirection and corruption. Because of their fungibility, aid flows can be used to pay for police and armies (as well as for high living for elites) to keep in power governments that would otherwise become bankrupt. The egregious waste, corruption and ultimately devastating conflict resulting from aid support for Mobutu in Zaire proved BauerÕs hypotheses. So did the other 40 plus Ōhighly indebted poor countriesÕ, mainly in sub-Saharan Africa, that have been bankrupted by misspent aid flows. Aid has not only been devastating in Africa. About two million Argentineans and other Latin Americans are annually fleeing a continent bankrupted by years of counter-productive economic policies sustained by IMF credits.

Peter Bauer also saw that population growth per se was not inimical to growth. Dirigiste policies and the kleptocracies that they engendered kept growing populations from education and jobs and hence in poverty.

Peter BauerÕs insights were clearly inimical to the growth of the aid industry. His was a (hard won) lone voice in the World BankÕs lecture series on Pioneers of Development (1984), drowned out by nine supporters (three of them Nobel Prize winners) of planning, state intervention and the imperatives of aid. If the Cato award, to be given every second year, continues to go to thinkers as outstanding as Peter Bauer, it will rank well above the Bank of SwedenÕs tarnished Nobel prizes in economics.

Peter BauerÕs views on aid and development featured in The Centre of Independent StudiesÕ 1991 Aid and Development in the South Pacific. Heinz Arndt had become a member of the CentreÕs Advisory Council. After 50 years of debate, the views of the two economists, by then in their 70s, had come together. If the Pacific Islands had taken note, a decade of stagnation and corruption in the Pacific could have been avoided.

Helen Hughes is Emeritus Professor, The Australian National University, and Senior Fellow, The Centre for Independent Studies, Sydney. This piece was previously published in The Australian Financial Review (10 May 2002).

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