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Book Review: The Development Frontier

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The Development Frontier: Essays in Applied Economics
by Peter Bauer (Cambridge: Harvard University Press, 1991); 241 pages; $24.95.

Socialism has had two playgrounds on which to exercise its destructive force. One has been in the former Soviet-bloc countries, which now stand in disarray and which now are attempting to recover from the economic and political consequences of central planning and one-party rule.

The other has been in what is called the Third World. Socialism’s effect in this part of the globe has been no less catastrophic. As the European colonial powers withdrew their military forces and civilian administrations from various parts of Asia and Africa in the decades following the Second World War, new independent nation-states rose up to take their place.

Those individuals who assumed the reins of power were convinced that colonialism and imperialism were the products of capitalism. Colonies in Asia and Africa were exploited for the benefit of capitalist industry in the home country of the colonial power. And they believed that the only way for their new nation-states to be fully independent was to follow paths of economic self-sufficiency. But to be economically independent required the state to centrally plan agriculture and industrialization so that domestic substitutes would exist to replace the commodities and capital investments previously provided by the capitalists of the colonial power.

The idea that economic development for the Third World required state planning and control was supported by many economists in the West. They presented theories supposedly demonstrating why a market economy was incapable of producing rapid economic growth and rising standards of living. They created economic models claiming to show how wise and intelligent state planning could direct resources and labor, organize investment, and distribute all that would be produced in a manner that, in the shortest period, would assure “first-world” status to Third World countries.

During these years following World War II, there were few critics of the central-planning mode for economic development. One of these few, and indeed the most important of them, was Peter Bauer. Professor Bauer has refuted every one of the assumptions underlying the arguments of the Third World planners. And he has shown how their polices have not only retarded real economic development but also fostered economic stagnation and political corruption and tyranny.

Professor Bauer continues his battle against Third World socialism in his most recent book, The Development Frontier: Essays in Applied Economics. A central theme in these essays is the existence of natural incentives for economic development when markets are allowed to emerge and evolve without governmental intervention or regulation. Economic development, Bauer “plains, revolves around the creation of market incentives — incentives that result in individuals specializing in various productive activities and directing their productions toward the consumer demands of others in the society. The increased wealth opportunities that can be obtained from exchanging with others creates additional incentives for savings, investment, and expansion of specialized production.

A key figure in this wealth-creating process is “the trader” — the commercial entrepreneur who sees opportunities to sell manufactured goods to self-sufficient villagers in the countryside and to purchase, in exchange, various agricultural commodities and resources. Trading networks connecting country and town soon arise. Both town manufacturers and village farmers intensify their productive activities; and the development process is set into motion.

Professor Bauer explains that this natural market process has been hindered and, in some instances, reversed by state planning and intervention. In a series of chapters, he analyzes the effects of “development socialism.” Declaring that middlemen are costly participants in the market, Third World governments have attempted to do away with them and to substitute state-trading bodies. The result has been state exploitation of farmers through bureaucratic monopolization of trade under which agricultural prices have been set artificially low.

In the name of helping the poor, wage regulation has destroyed private-sector jobs that the unskilled in Third World countries desperately need. In the name of rationalizing production, Third World commodity-stabilization programs have established commodity cartels that raise world prices and force private Third World producers to restrict their production and to sell their output to the state. In the name of helping the development process, Western governments have supplied foreign aid for decades that transfers Western taxpayers’ income to Third World governments, which use this money to subsidize their socialist failures of the past and support new interventionist fiascoes today and tomorrow.

In the last few years, a number of development economists have begun to rethink their allegiance to the planning and interventionist ideal. And a number of Third World countries are beginning to give up the socialist ghost and move towards market reforms. Professor Peter Bauer deserves a good deal of the credit for this. Having swum against the stream, his books finally helped to change the stream’s course.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).