Bauer revolutionised thinking about the determinants of economic advance. Indeed, the World Bank, in its 1997 World Development Report, stated that the notion that "good advisers and technical experts would formulate good policies, which good governments would then implement for the good of society" was outdated: "the institutional assumptions implicit in this world view were, as we all realize today, too simplistic... Governments embarked on fanciful schemes. Private investors, lacking confidence in public policies or in the steadfastness of leaders, held back. Powerful rulers acted arbitrarily. Corruption became endemic. Development faltered, and poverty endured." This reflected the sort of arguments Bauer had been advocating for years.
For Bauer, the essence of development was the expansion of individual choices, and the role of the state to protect life, liberty, and property so that individuals can pursue their own goals and desires. Limited government, not central planning, was his mantra.
Bauer placed himself firmly in the tradition of the great classical liberals.
In his many articles and books, including Dissent on Development, Bauer overturned many of the commonly held beliefs of development economics. He refuted the idea that poverty is self-perpetuating and showed that central planning and large-scale public investment are not preconditions for growth.
He criticized the idea that the disadvantaged could not and would not save for the future, or that they had no motivation to improve their condition. He opposed "compulsory saving," which he preferred to call "special taxation," and, like modern supply-side economists, stressed the detrimental effects of high taxes on economic activity. Bauer also saw that government-directed investment funded by "special taxation" would increase "inequality in the distribution of power."
Bauer's experiences in Malaya (now West Malaysia) in the late 1940s and in West Africa influenced his views on the importance of individual effort by small landowners and traders in moving from subsistence to a higher standard of living. Bauer was perhaps the first economist to recognize the importance of the informal sector and advocated the "dynamic gains" from international trade - that is, the net gains that result from exposure to new ideas, new methods of production, new products, and new people. He demonstrated that trade barriers and restrictive immigration and population policies deprive countries of those gains.
For Bauer, government-to-government aid was neither necessary nor sufficient for development, and may actually hinder it. The danger of aid, according to Bauer, is that it increases the power of government, leads to corruption, misallocates resources, and erodes civil society.