In defence of market liberalism for the third world

This piece started out as a rejoinder to James Farrell’s terse comments on a Catallaxy post about Peter Bauer’s work on “development economics” and the role of aid in helping (more usually not helping) poor nations.

Rafe Champion asks, apropos of nothing in particular, whether ‘well-meaning socialists and big government interventionists learned anything from the failures of local policy and foreign aid to the poor states of the world?’ Of course, it’s a rhetorical question, because – as any regular reader of Rafe’s posts will know – the answer is: obviously, no.

In fact the answer is “yes and no”. Some people have learned from the failures of past aid policies and some have not. Some of the lessons about the pitfalls of aid took a terribly long time to be learned, after all, Bauer started publishing in the 1940s, so a lifetime has elapsed (more than most lifetimes in the Third World) and the learning process has some way to travel to reach the proponents of dirigisme, that is, pervasive government control and regulation.

Starting with the bigger picture, the “nothing in particular” that the question was asked apropos of, is my project to explore how dud ideas about political economy have managed to persist for such a long time despite causing so much damage. Here is a contribution to this project in the field of industrial relations and the role of the trade unions.

This is the Coyne and Boettke paper that I really wanted to put in but could not find at short notice and put in anothe paper instead that referred to it. This paper points to some clues provided by Boettke and Coyne on the role of defective economic theories in perpetuating third world problems.

The Influence of the Cold War

From the end of WW2 until 1989 the Cold War (not always cold) between the international communist movement and the rest of the world was a pervasive and possibly over-riding influence in relations between the West and the leaders of aid-receiving nations. In this situation, influences as feeble as rational arguments and evidence-based policy proposals presumably had little weight against the interests of ruling classes who could threaten to turn to the Soviet Union if the US and allies did not give satisfaction. As a result the US felt obliged to support some obnoxious regimes simply because they represented the lesser of evils.

Under these circumstance it was next to impossible exert influence on corrupt regimes either by persuasion (carrots) or by the stick of threats to withdraw aid or trade because the other side could step into the gap and recruit that state to its zone of influence.
Under those circumstances bad interests would trump good ideas every time.

But how good were the ideas that were offered and when did they significantly improve under the influence of criticism and experience?

My references on this points are two books which happen to be at hand.

Samuelson et al Economics, (vol 2 macroeconomics) third Australian edition, 1992.
This is important because it would have reached many students who did not continue on to further study and so the views expressed in it would tend to become the conventional wisdom in the community at large.

Todaro and Smith Economic Development, eighth edition, 2003.
This is more up to date and it should represent something like the state of the art, produced by people who have devoted their whole careers to the close study of these issues and to the critical appraisal of the various rival theories in the field.

Samuelson et al.

They list the four central factors in economic development:
1. Human resources, including supply and education.
2. Natural resources.
3. Capital formation (machines, factories, roads).
4. Technology (science, engineering, management, entrepreneurship).

There is no mention of the institutional framework, free trade, property rights and the structure of incentives to produce for the benefit of consumers rather than the tax collector or crony capitalists.

They suggest that the best brains should be sent overseas to pick up the latest advances, but of in fact the best brains tended to go away and come back as nationalists, socialists and worse (Pol Pot studied in Paris under JP “don’t talk about the gulags” Sartre).

Tragically, the new states mostly decolonised in the immediate post WWII period when the faith in socialism, nationalization of industries and central planning was at a peak and the economics profession was stepped in Keynesian macroeconomics as a handmaiden of planning and dirigisme (steering the economy).

Under the heading of ‘comprehensive theories’ to account for differences in economic growth they note theories about climate, the Protestant ethic, rigid oligarchies. In critical commentary they wrote “Where is the Protestant ethic in a sleek Japanese factory? How can we explain that a country like Japan, with a rigid social structure and powerful lobbies in many sectors, has become the world’s most productive economy?”.

I would have thought that the work ethic (a significant part of the Protestant ethic) was clearly apparent in Japanese factories. And they spoke too soon about the productivity of the Japanese economy. By the time the book was published the Japan was two years into the recession that lasted almost up to the present time.

In a table depicting the vicious cycle of underdevelopment there are four boxes. Admittedly the box at the bottom of Low Productivity and the others are Low Average Incomes, Low saving and investment, Low pace of capital accumulation. But there is no hint about the political, social and cultural institutions and incentives that make for productivity. Consequently the readers would be left completely in the dark about the mix of policies required for success and the reasons for the failure of aid efforts in the past. This is hardly surprising in view of Samuelson’s absurd misreading of the performance of the Soviet economy until the fall of the wall revealed what should have been clear enough to observers who were not blinded by their own theories.

Moving on to Todaro and Smith (2003), the eighth edition of Economic Development, a comprehensive text that is supposed to represent the state of the art in studies of development and a critical review of the leading theories in the field.

The key chapter is Chapter 4: Classic Theories of Development: A Comparative Analysis
This covers four groups of theories:

1. Linear stages of growth models, whereby the developing nations are supposed to replicate the process of development that occurred in the west.

2. Patterns of structural change, using modern economic theory and statistical analysis to portray the process of structural change that is required for progress.

3. International dependence, including the Marxist exploitation theories. This is a radical critique that gained strength in the 1970’s reflecting the post-Vietnam ideological shift on campuses and frustration with the lack of progress since WW2.

4. The neoclassical, free-market counter-revolution.

The authors adopt the rather odd stance that the fourth group of theories assumed prominence in the 1980s as a result of the ascendancy of conservative governments in the west. In fact this line of thought existed from the 1940s in the works of Peter Bauer and others, and the cogency of its arguments has nothing to do with the political situation in the west.

The objections that the authors raise are mostly carping the conditions in the third world are not congenial for free markets. Doh! They confuse the descriptive and normative stance and pretend that the absence of competition, rule of law etc represent a case against the market liberal approach.

Instead of pointing out that the absence of the appropriate conditions represent a budget of issues that need to be addressed to obtain progress, they make out that the theories themselves are defective.

It seems that they are so determined to appear fair and even-handed in their treatment of all the theories that they cannot do justice to the market liberal approach. They raise the familiar canard about the supposed lapse from free market grace of some Asian tigers, without reference to the counter-arguments that the success of those nations was inversely related to the extent of state interference. Taiwan and South Korea succeeded despite state intervention (boo to the neoliberals) but finer analysis indicated that state intervention was not the active ingredient in the policy mix.

The end result is simply confusing for students who are required to take seriously the absurd ideological posturing of the radicals and the unhelpful formalism that pervades the presentation throughout the book.

The bottom line is that the ideas of Bauer have been shown to be robust, anticipating the more recent critique of grand planning that was launched by Easterly.

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Chris Lloyd
Chris Lloyd
17 years ago

Rafe. I did not get much clear take away from what is a very long post. I will a have a look at the paper you linked to, but can you not find a paper in a proper academic journal? Journals at are likely to be about as objective as the journal of marxist feminism.

Bring Back EP at LP
Bring Back EP at LP
17 years ago

with the exception of Libertarianstudies actually understanding something of economics.

Bauer interesting

Nicholas Gruen
17 years ago

Rafe is a cultivated, well read fellow. He reads serious books. But, at least judging from his links, once he hits the internet something comes over him and heads for those dark parts of town where the cults are :). Strange but true.

Jason Soon
17 years ago

err, have any of you guys actually read the JLS? true, it is a libertarian journal but hardly groupthink. One of its aims is to discuss controversies within the libertarian movement (i.e. things on which they disagree). It has some pretty good, scholarly articles. Just because the academics are not from Harvard doesn’t mean they’re not scholars,number&action=date&sortOrder=ASC

Bring Back EP at LP
Bring Back EP at LP
17 years ago

I was trying to make the point they actually understnd economics Jase and what has happened to Catallaxy. Steve Edwards gone on a bombing mission?

Chris Lloyd
Chris Lloyd
17 years ago

Well I said I would read the article. But not being an expert in the field (one of the distinguishing features of us academics is that we do not consider ourselves experts in everything and are interested in learning from others) I will not know how much weight to place on it.

The Journal of Marxist Feminism probably also discusses controversies within the Marxist Feminst movement. So what? But the man from Catallaxy has assured me that JLS is fair and balanced so that is good enough for me.

Jason Soon
17 years ago

I never said it was fair and balanced, Chris. Just that JLS is still worth reading and has interesting things to say despite its visible ideological leanings. I have always been suspicious of this ‘fair and balanced’ advertisment anyway. You guys are not children. You may not be experts but you have Logic 101 within your grasp and presumably a sense of credulity. if someone is feeding you obvious bulldust I’m sure you’d know. And the fact that you are at least reading a journal that openly advertises its leanings means there is no pretence and fraud.

Jason Soon
17 years ago

Catallaxy may be down for a day. We exceeded server capacity or something and our host took us down. c8to is negotiating but it may be a day before it comes back on.

Chris Lloyd
Chris Lloyd
17 years ago

We exceeded server capacity or something.

Christ that Birdy can type fast. Over 1300 comments on the banking thread alone!

17 years ago

Development economics uses such specific and politically-structured versions of the histories of the countries it studies, that I am not sure it can be taken at face value. See