ABSTRACT
Among development economists it is commonly believed that, as a general rule, development proceeds at a faster pace and/or at a higher level in open economies than in closed economies. Typically, partial support for this view is derived from the classical gains-from-trade proposition. Any version of proposition must include a clear statement of the sense in which a country as a whole may be said to be ‘better off’ in one situation (free trade) than in another situation (autarky), and it must include a detailed specification of each trading country. Concerning the first of these requirements, most economists have been prepared to follow Vilfredo Pareto who in 1894 formulated the (non-hypothetical) compensation principle. According to this principle, a country may be said to be better off in a new situation if and only if there is put in place a scheme of domestic lumpsum compensatory transfers such that, after compensation, no individual is worse off and at least one individual is better off. Any demonstration that free trade is beneficial to a particular country must consist of (i) the complete specification of the trading economies and of their schemes of lumpsum compensation and (ii) a proof that the world economy thus specified has an equilibrium defined in terms of market clearance.
