Equality, the Third World, and Economic Delusion
Peter Bauer is one of the most distinguished development economists in the world, and undoubtedly the foremost conservative one. His pioneering study of the rubber industry—published in 1948—established him as an applied economist of exceptional skill. He has written on a vast range of topics, including the market mechanism, the nature of West African trade, abuses of planning, and occupational statistics. There are few branches of development economics in which Bauer has not had something interesting and important to say. And he has gone beyond development economics into the study of comparative economic systems, international economic relations, and general political economy.
This book, consisting of a collection of Bauer’s essays (most of which were published elsewhere earlier), gives an excellent account of his main theses on development policy and international relations. It also presents his approach to economic equality and inequality in general, and places his discussions of development against the background of some of the broadest issues of political economy. It is an exciting book. It is also extremely provocative—Bauer is no compromiser—and I have to confess to being suitably provoked. I shall argue that Bauer’s approach—in spite of its power and appeal—is fundamentally flawed, and that his analysis cannot bear the weight of the conclusions that he rests on it.
Bauer sees himself as standing very much against the current. The “economic delusion” he refers to in the title of the book is, he argues, shared widely. “The poor are seen,” he complains, “as passive but virtuous, the rich as active but wicked.”
This picture is painted by certain groups who regard themselves as standing apart from rich and poor, and perhaps as above both. They are, in the main, politicians, social reformers, welfare administrators, social scientists, writers, artists, media people, churchmen and even entertainers. As noted in the Introduction, they now form much of what was once called the political nation.
It is certainly true that the views that Bauer attacks are widely shared. But Bauer isn’t particularly isolated himself. His arguments develop and reinforce deep-seated conservative beliefs. Also, as it happens, both in Bauer’s own country—Britain—and that of his publisher—the United States—the governments in power share Bauer’s economic outlook, even though that outlook is rarely defended as fluently and cogently as Bauer defends it. Bauer is, in fact, an eloquent, original, and influential member of the powerful conservative tradition in political economy. He may be facing a multitude of opponents, but he is also leading a large group himself. It is best to get this straight if his book is to be seen in perspective. If Bauer sees himself as David facing Goliath, then David has come to the battleground on the shoulders of a second Goliath—one that rules much of the world. Bauer’s arguments not only attack widely held views; they also provide justification for some of the most entrenched beliefs underlying official policy in such countries as the United States and Britain.
Two different types of reasoning can be found in Bauer’s book. They may be called—for want of better terms—“direct” and “indirect.” Direct arguments take the form of denying or disputing the substance of the claims—empirical or otherwise—of the opponents. Indirect arguments debunk opponents by showing that they stand to gain from the acceptance of the “delusions” they spread. The latter method of arguing is more common in law courts than in academic discussions, but Bauer is cogent in his defense of it.
It is both understandable and legitimate to ask how it comes about that leading academics or other influential people canvass plainly insubstantial notions which must affect both the intellectual scene and the course of events. Indeed, even if these ideas are successfully refuted, some doubts are likely to remain in the minds of readers, unless the critic can suggest some acceptable reasons why these ideas have come to be advanced.
Bauer then proceeds to argue that “the emergence and survival of most of the transgressions reviewed in this book” serve the interests of those who champion them, whether they are planners, economists, or politicians. “Almost all of these [transgressions] promote or underpin policies which enhance the role and power of groups which comprise a major part of the contemporary political nation,” and “the acceptance of these transgressions therefore serves their emotional, political and material interests.”
Bauer’s indirect arguments might look plausible, adding force to his main theses (indeed they are part of his main theses), but they are, in fact, inconclusive. First, they point to a very broad and rather vague congruence of the interests with the views of the people he attacks. In order to carry conviction, linking opinions with personal advantage has to be done much more precisely, discriminating between alternative hypotheses and examining the available evidence in detail, to refute some hypotheses and confirm others. Bauer, whose standards of empirical economics are exacting, is astonishingly tolerant of his conjectures about the sociological and psychological bases of economic and political theorizing.
Second, the indirect arguments essentially depend on the direct arguments, and if the opposing views cannot be rejected on direct evidence, they cannot be rejected on the grounds that these views coincide with the interests of their proponents. This point is not, in fact, in conflict with Bauer’s own case for pursuing indirect arguments, which are put forward essentially as supplementing direct arguments. The need to explain why “leading academics or other influential people canvass plainly insubstantial notions” arises only when these notions are first shown to be “plainly insubstantial.” It is, for these reasons, not unfair to Bauer’s approach to concentrate on the direct arguments he provides, reserving the position on the indirect arguments—to be taken up only if the direct arguments win.
Bauer’s rejection of egalitarianism as an “appropriate” goal is central to the rest of his approach, and it is best for us to begin with his case for rejection, as Bauer himself does. Although he moves freely from one argument to another, one can find four distinct—and basically independent—arguments against egalitarianism in his attack on “the unholy grail of economic equality.” First, he argues that most economic differences are deserved. They are, he writes, “largely the result of people’s capacities and motivations.” “…It is by no means obvious why it should be unjust that those who produce more should enjoy higher incomes.”
Second, he implies that there is a procedural justification for income differences, since “in an open society income differences normally reflect the operation of voluntary arrangements.” “Incomes, including those of the relatively prosperous or the owners of property, are not taken from other people. Normally they are produced by their recipients and the resources they own; they are not misappropriated from others; they do not deprive other people of what they have had or might have had.”
Third, there is an instrumental justification of income differences, based on their consequences.
Except perhaps over very short periods, redistributive policies are much more likely to depress living standards of the poor than to raise them. The extensive politicization brought about by large-scale redistribution diverts people’s energies and ambitions from productive economic activity to politics and public administration. It also encourages attempts to benefit from politically-organised redistribution, or to escape its consequences. An even more evident result is that these policies systematically transfer resources from people who are economically productive to others who are less so.
Fourth, he argues that “there is an underlying contradiction in egalitarianism in open societies.”
In an open and free society, political action which deliberately aimed to minimize, or even remove, economic differences (i.e. differences in income and wealth) would entail such extensive coercion that the society would cease to be open and free. The successful pursuit of the unholy grail of economic equality would exchange the promised reduction or removal of differences in income and wealth for much greater actual inequality of power between rulers and subjects.
The instrumental argument does not, in fact, provide grounds for rejecting egalitarianism as an objective of economic policy. First, Bauer heavily overstates the conflict between the pursuit of equality and the pursuit of other objectives, such as overall prosperity or diminishing poverty. Examples of relatively faster growth being accompanied by more equal distribution of incomes can be found not merely in many socialist economies, but also in several capitalist ones, such as South Korea, Hong Kong, Taiwan, and Singapore (which are favorably mentioned by Bauer in other contexts). Second, to the extent that such conflicts do exist, they cannot on their own undermine the view that “egalitarianism is an appropriate goal,” but only the view—not widely held—that the goal of egalitarianism does not conflict with other goals.
The same two objections apply to the “contradiction” argument. First, the conflicts are less severe than Bauer claims. Countries pursuing egalitarian policies, varying from Sweden to Sri Lanka, are not noticeably more coercive than other countries with comparable income levels, or similar social and cultural histories. On the other hand, many countries without policies emphasizing equality have exceptionally bad records on coercion, e.g., several in Latin America. Second, even if such conflicts existed and were very general, they would indicate only that economic egalitarianism can conflict with other types of equality, and not that economic egalitarianism is not “an appropriate goal.”
In contrast, the argument that differences are deserved and the procedural justification of inequality contradict the goal of egalitarianism itself. The goal of just desert—as defined by Bauer—requires that those who “produce” more should enjoy higher incomes. This amounts to a direct denial of the objective of egalitarianism. Similarly, the procedural justification can be so formulated as to be inconsistent with any system directed toward social goals (including the pursuit of egalitarian goals), demanding instead that any outcome that emerges from right procedures—such as “voluntary arrangements”—be accepted. However, unlike Robert Nozick,* Peter Bauer does not characterize a procedural view systematically enough to be able to rely on it as the basis for a moral argument. Further, unlike Nozick, he does not view the division of income as being justified by freedom of contract in production and exchange; his views on this question derive rather from a physical description of who “produces” what. In particular he holds that the incomes of “those of the relatively prosperous or the owners of property” are “normally…produced by their recipients and the resources they own.” Thus both the argument about who is deserving and the procedural argument ultimately turn on Bauer’s description of the process of production: that is, a rich person produces correspondingly more than a poor person. This description plays a crucial part in Bauer’s economic analysis—both of inequality within a country and of inequality across national boundaries, including the claims of the so-called third world. I shall call Bauer’s position here the “personal production view.”
It is quite plausible to think that the personal production view, if correct, can lead to a moral case for inequality. If, say, person A has produced—quite unaided—some food or some medicine, and persons A and B need that food or that medicine equally, then the case for A rather than B having the food or the medicine might well be seen to be strong. Of course, even with such a simple case of unaided production, this judgment may not have irresistible force, and it is quite plausible to entertain this value without giving it invariable priority over other objectives. If, for instance, person A has produced the food or the medicine (as in the previous example), but has little need for it, while B, who is hungry, or C, who is ill, needs them desperately, then—consistent with the earlier judgment—A’s relative claim on the food or the medicine can be seen as morally weakened. But it is difficult to deny that if the personal production view were correct in a particular case, it can be the basis of a prima facie argument for Bauer’s approach.
However, the personal production view is difficult to sustain in cases of interdependent production, i.e., in almost all the usual cases of production. Production is based on the joint use of different resources, possibly provided by different people, and it is not in general possible to separate out who—or even which resource—produced how much of the total output. There is no obvious way of deciding that “this much” of the output is owing to labor, “that much” to raw materials, “that much” to machinery, and so on. In economic theory, a common method of attribution is according to “marginal product,” i.e., the extra output that one incremental unit of one resource will produce given the amounts of other resources. This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions.
But even when all these assumptions have been made—quite a tall order—it is still arbitrary to assert that each resource’s earnings reflect the overall contribution made by that resource to the total output. There is nothing in the marginalist logic that establishes such an identification. Marginal product accounting, when consistent, is useful for deciding how to use additional resources so as to maximize profit, but it does not “show” which resource has “produced” how much of the total output. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others.
Furthermore, when incomes generated by the production of different goods are compared, relative incomes depend on relative prices of the products, and this introduces an additional element of arbitrariness in the personal production view. You and I may continue to produce the same two goods in unchanged amounts in exactly the same way, but a change in the relative prices of our respective products (caused, say, by changing demand conditions having to do with the functioning of the rest of the economy) can make our relative incomes change without any change of anything that you and I are, in fact, doing or producing.
Finally, there is the need to distinguish between what a person produces and what is produced by resources that he happens to own. The moral appeal of giving more—in Bauer’s words—to “those who are more productive and contribute more to output” does not readily translate into giving more to “those who own more productive resources which contribute more to output.”
The personal production view thus confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources.” These ambiguities are crucial to its moral appeal. The personal production view, it must be concluded, is richer in powerful rhetoric than in substance.
The same issues recur—among others—when Bauer moves from economic equality in general to the question of international distribution and the relation between the West and the third world. “The poorest, whether entire societies or the poorest groups within one society, are unlikely to possess the aptitudes and motivations for economic achievement to the same extent as those who are more prosperous.” “In fact, with a few clearly definable exceptions, which do not apply to the relations between the West and the Third World, incomes whether of the rich or of the poor are earned by their recipients.”
This again overlooks the arbitrariness and ambiguities of the personal production view, in this case applied internationally. An Indian barber or circus performer may not be producing any less than a British barber or circus performer—just the opposite if I am any judge—but will certainly earn a great deal less. The role of relative prices is crucial in this distinction. Relative prices play a major part also in the international distribution of benefits. Some of the arbitrariness of price-based accounting of productivity has been brought out sharply in recent years by sudden changes in the relative price of oil and the consequent changes in the distribution of income between oil-producing countries and others. The notion of being “more productive” is more complex than Bauer makes it sound. The smaller earnings and the lower “productivity” of the Indian barber and circus performer, compared with those of their British counterparts, need not, in fact, reflect only failure of what Bauer calls “aptitudes and motivations for economic achievement.” They may reflect simply the lower prices they get for haircuts and circus performances.
It is, of course, true that possession is nine points of the law. It is Bauer’s attempt at moral justification of possession that fails. Aside from the ambiguities and arbitrariness of the personal production view on which Bauer relies, he also fails to examine the claims of different approaches that would focus on variables other than production. Bauer is largely silent about utilitarian, Marxian, Rawlsian, and other moral arguments. Even within the production perspective, he does not show why “owning” is a productive activity. He does not explain why the benefit from favorable personal circumstances (e.g., inheritance) should be one’s legitimate due, while he treats it as if it were.
He even closes the door on a procedural historical justification in line with “entitlement theories” (e.g., Robert Nozick’s attempt to show what kinds of acquisition and inheritance have legitimacy) by firmly asserting that “except over very short periods, historical wrongs cannot be put right.” It remains, therefore, a mystery why one’s birth in a richer country—with the favorable circumstances of more resources, greater opportunity of acquiring skills, and the higher price of unskilled labor—should give one such an effective moral claim to incomes higher than those of others who are less fortunate.
Where Peter Bauer is on much firmer ground is in his discussion of the effects of international aid, which provides the basis for his instrumental criticism of such aid. He shows the relatively limited role that aid has played historically in fostering economic development. He gives evidence that such aid often does not go to the poor and frequently does not even help in relieving poverty. He points out that “aid increases the power, resources and patronage of governments compared with the rest of the society and therefore their power over it.” Bauer’s political and economic analysis powerfully illuminates various aspects of international economic relations that are often ignored.
All this could have formed the basis of an undogmatic and balanced reappraisal of the relations between rich and poor countries. But despite several sensible suggestions for policy, such a reappraisal does not, alas, take place. I believe there are two reasons why it does not. First, Bauer is not content with throwing light on unexplored aspects of aid and international relations; he wants to draw his policy conclusions exclusively from these aspects, ignoring many of the other things that we do know. Many of the countries whose economic achievements Bauer praises (e.g., South Korea and Taiwan) have received a great deal of aid—some of them appearing at the top of the list of recipients, if aid is measured on a per capita basis. He also overlooks the fact that some of the countries with the fastest growth performances have policies involving deep government intervention in economic life. This is true not only of communist countries, e.g., China, Yugoslavia, etc., but also of some with private-ownership economies. The government of South Korea, for example, with its nationalized commercial banks and financial institutions, has, according to some estimates, controlled about two-thirds of the investment resources of the economy, and has varied the interest rates charged according to the field of investment—from eight percent to thirty-three percent during one period—in order to reflect government priorities.
Second, in drawing policy conclusions from his empirical analysis, Peter Bauer emerges as a prisoner of his extremely limited moral outlook, based on the noninstrumental arguments discussed earlier, e.g., the argument that economic differences are deserved. Multilateral aid is bad because—among other things—“international aid organizations are not allowed to take into account the political interests of the donors”—a statement that has, in any case, more de jure validity than de facto accuracy. “Bilateral grants should be given for only limited periods…. The donors should also make it clear that these transfers do not represent restitution for alleged misconduct, nor an instrument for global redistribution, nor for securing specified rates of growth or levels of income.” “…aid should not go to governments whose external policies conflict with the interests of the donors.”
All this would be acceptable if no moral claims existed other than those that follow from ownership rights. Of course, that does indeed seem to be Bauer’s belief, but I have already discussed why his defense of that belief involves arbitrariness, ambiguities, and a failure to examine alternatives. Bauer’s policy prescriptions (despite several sensible remarks arising from his empirical studies) are geared to his narrow and parochial principles. A grand program of challenging worldwide “economic delusion” and providing a more sensible approach than the so-called “new international economic order” seems to have got stuck in the mud of the writer’s own back garden.
I have concentrated in this review only on some of the principal themes of Bauer’s absorbing book. There are other important issues that he takes up. Chapter 3, “The Population Explosion: Myths and Realities,” is probably the most perceptive and clear-headed analysis of this confusing problem that can be found in the literature. He also makes a powerful critique of “commodity stabilization arrangements” (Chapter 8). Part Three of the book, dealing with “the state of economics,” includes essays that have points of interest, but are more heterogeneous and of uneven depth, and only loosely related to the main themes of the book.
I need hardly add that for reasons I have already discussed, this is an extremely important work. It applies and extends a view that is widely held. It presents the ideas and analyses of one of the major and most creative conservative thinkers on political economy, covering some of the central policy issues in the modern world. The book is both illuminating and provocative. The reader is forced to ask himself if he accepts Bauer’s reasoning, and if not, why not. I have tried in this review to indicate why not.
Anarchy, State and Utopia↩
‘Just Deserts’: An Exchange June 10, 1982
Anarchy, State and Utopia↩