The Stone City

Words Made to Last

Thursday, April 21, 2005

The Scale of Nations

Gary Becker and Richard Posner have posted, with their usual authority, an analysis of the competing pressures encouraging larger or smaller nations. Some of their comments tie in with my previous posts on homogeneity and group initiative [not that I claim to have inspired them].

Becker focuses on some trends of the past half century, and on the incentives which have propelled them.
Smaller nations even have some advantages in a world with much international trade. Their exports are too little to be considered a threat to other nations, so they are not subject to as many barriers as those from large nations, They often specialize in niche markets that are too insignificant, or not accessible, to large nations. For example, the tiny principality of Monte Carlo with about 5000 citizens has become a tax haven and gambling center for rich sports stars and other wealthy individuals. Singapore and Hong Kong have been mainly trading centers for shipments of goods to their much larger neighbors. Mauritius has succeeded by concentrating on textiles and tourism.
Apropos of Hamilton’s other arguments, small nations can now free ride on the military umbrella provided by the United States, NATO, or the United Nations. Small nations may still be at a disadvantage in providing other government services, but powerful groups in large nations often use the economies of scale in raising taxes and dispensing subsidies to exploit weaker ethnic, national, or economic groups. Smaller nations are usually also more homogeneous, so the powerful interests there have fewer other groups to exploit.

This analysis seems accurate. However, to assume that it will remain applicable in the future, we must assume that the environment providing these incentives will persist.

First, consider the military free ride -- made possible outwide Europe largely by the American near-monopoly on the use of cross-border force, which dates only from the demise of the USSR. Dammit, Blogger ate my post. Starting over. The rise of China as a rival to the United States would almost certainly drive a new Cold War, possibly more intense than the last one due to China's much greater strategic vulnerability (stemming from its lack of oil and metals). Like its predecessors, this war would be fought through proxies; small and militarily weak countries, instead of profiting from a free ride, would find that they had become perfect stepping stones for superpower encroachment.

A related topic is the economic free ride enjoyed by tax havens. Monaco [referred to by Posner as Monte Carlo] is an interesting special case. Its location near the Italian border protects it from French coercion [short of outright invasion] in a nationally divided Europe. If European unification proceeds to the point of centralizing both tax and trade authority, however, this protection will not avail; it will be a simple matter for a unified Europe to coerce Monaco [e.g., through crippling tariffs or the threat of embargo] into exposing the wealth it is currently hiding from the taxman. This shows how fragmentation can encourage further fragmentation, by providing more niches for small countries.

Posner, in noting the strengths of large nations, provides a cogent case for federalism:
For just as a business firm can minimize diseconomies of scale and scope by decentralization, so a nation can greatly reduce those diseconomies by federalism. As a result, a large nation like the United States is able to compete economically with much smaller nations. In addition, its population size and consequent aggregate wealth enable it to achieve great military power, which prosperous small nations cannot do.

The "diseconomies" to which Becker alludes fall into two main categories. Some are false economies; for example, a nation without a common language cannot benefit much from the free movement of workers, whose productivity is substantially tied to their ability to communicate. There are also ways in which scale causes outright harm, the most important of which are in the disconnect between the making of decisions and their impact.

As a nation increases in scale, its government inevitably becomes less responsive to the citizens, while the citizens simultaneously lose the incentive to make responsible decisions. Bureaucracy and short-sighted populism are the result. "Small government" is a good thing, but "government of the small" -- government whose scope is the minimum necessary for its mission -- is even better. Federalism is the application of this principle at the national level, but it also holds for states and cities. The military force of a world power requires the weight of a continent behind it; a high school does not.

In fact, it is the schools which show most clearly the need for minimal scope. Small schools in areas of low population density consistently produce literate graduates, while far more heavily funded urban schools repeatedly fail. Attempts to mandate performance from on high, as currently implemented, seem more harmful than helpful. It is necessary to the nation that we have a mobile, assimilated [i.e., English-fluent] and literate populace; but Federal attempts to mandate the means for this will fatally separate causes from consequences. Yet we have chosen to mandate means rather than ends, adding Federal oversight while permitting bilingual, Spanish-only, and anti-scientific education to flourish. We have inherited the best of both worlds, if only we do not throw it away.