The prize, which carries a $500,000 cash award, is named after Nobel laureate economist Milton Friedman, and will be given every other year to a single individual for significant achievement in the advancement of liberty.
The international selection committee for the award chose Bauer because of his pioneering work in the field of development economics, where for many years he stood as a conservative critic of state-led development policy, with its emphasis on central planning and external foreign aid.
From 1948, when his book "The Rubber Industry" was published, to the publication in 2000 of "From Subsistence to Exchange," Bauer, 86, wrote books that challenged the prevailing development orthodoxy, including the idea that poverty is self-perpetuating.
Through a half-century of scholarship, Bauer has outspokenly championed global economic liberty. Like the so-called classical liberals before him -- now usually known as libertarians -- Bauer believed in dynamic gains from trade, and emphasized that countries that failed to establish commercial contacts would inevitably perpetuate poverty.
Contradicting many in the international development community, Bauer wrote that economic achievement was well within the reach of poor societies. He said they could break out of the "vicious circle of poverty" -- a concept central to many development experts -- and promote sufficient capital formation on their own, without extensive foreign aid.
Bauer's study of small holdings in the Malaysian rubber industry and the importance of small-scale traders in West Africa convinced him that wealth accumulation was possible in poor nations. His global market ideas have become more prominent in the years since development economics has been changed by the collapse of the Soviet Union and the worldwide movement toward more open markets.
The libertarian Cato Institute says that Bauer's adherence to the liberal principles of free trade and free people reflects his deep respect for the dignity, rationality, and capabilities of poor people around the world.
"He is a hero to many of us for his courageous commitment to sound economic theory and the promotion of human liberty," said Edward H. Crane, president of Cato.
Last year, when he agreed to lend his name to the award, Friedman said in a statement: "Those of us who were fortunate enough to live and be raised in a reasonably free society tend to underestimate the importance of freedom. We tend to take it for granted. It has made us in the West more complacent, so having a prize emphasizing liberty is extremely important."
Born to the son of a Budapest bookmaker in 1915, Bauer immigrated to Britain in 1934 to study economics at Gonville and Caius College in Cambridge, where he later became a fellow. He taught at the London School of Economics and Political Science from 1960 to 1983. In 1982 he was made a life peer and is a fellow of the British Academy.
The international selection committee that chose Bauer is made up of nine individuals: Margaret Thatcher, former British prime minister; Václav Klaus, president of the Czech Parliament and former Czech prime minister; Antonio Martino, Italian defense minister; Jimmy Lai, an entrepreneur in Hong Kong and Taiwan entrepreneur; Hernando de Soto, Peruvian author; Frederick W. Smith, chairman and chief executive officer of the FedEX Corp.; John Blundell, general director, Institute of Economic Affairs in London; Edward H. Crane, president of the Cato Institute; and Rose D. Friedman, economist, wife of Milton Friedman, and coauthor of their best-selling book "Free to Choose."
The award will be presented to Bauer on May 9 in Washington at the Cato Institute's 25th anniversary dinner.