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04/17/2005

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Gary Becker and Richard Posner both have some interesting thoughts on the economic benefits of small countries versus big countries. Here are my thoughts: The primary advantage of being big is self defense. In a world where wars are [Read More]

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Ajay Shah

This is a very interesting question. If I may contribute a few more arguments on these questions:

1. Some large countries fail to harness economies of scale on internal trade through bad infrastructure and through taxes that penalise interstate commerce. Example: India. It is only in the last five years that India is starting to see gains from _internal_ trade.

2. There is the question of currency regime. Is Europe and the Euro better off than 20 currencies? Would the US be better off with 50 currencies? Economic logic would tend to favour more currencies, provided the little countries are able to find the right smart people to do their monetary policy. Too many small countries find it difficult to find the human capital to do things right. Israel is a great exception - they have consistently managed to find brilliant people in their central bank. But apart from that, human capital seems to be a big gap.

3. Which brings me to one aspect which (to me) is an argument in favour of big countries: the economies of scale of smart people. If top level decisions in corporations and government are best made by the best and brightest people who are "one in a million", then a country like India has 1070 of them. In small countries, it is just so much harder to find the intellectual capital to provide vision and leadership.

4. One area where there are pronounced economies of scale is the liquidity of financial markets. Few small countries have liquid financial markets. In some areas - such as common stock issued by firms - this problem can be overcome by trading at a regional financial centre. But that, in turn, requires a smart central bank that does not do capital controls, which can't be taken for granted.

On a related theme, I think there might be a problem in the world in terms of costs of information processing and the attention span of global decision makers. The CEO of (say) Apple Computer has to ask himself "What are we doing in India". But he is unlikely to ask himself "What are we doing in Mauritius?". It is harder for small countries to get noticed in the decision making of very-busy players who have a global footprint. This is related to observed manifestations such as home bias.

Jim S

Posner begins to address the aspects of the question that Becker ignores completely. Issues of nationalism, ethnicity, bigotry and other irrational thought processes have a great deal to do with the formation or dissolution of nation-states. Probably far more than any rational analysis of benefits of size and its advantages or disadvantages. Rational people who assume that other people will always be rational in their decision making will generally fail miserably at accounting for the actions of or predicting the actions of a large portion of humanity.

Tom H

A not-completely-on-topic question: In terms of military/police power and economies of scale, do either you or Becker believe that a military can ever become so large that gains begin to diminish? (And by "large," I don't mean in just sheer numbers of troops, but also resources invested in military equipment and other military capital).It seems to me that you can never really have too much force. Are there any empirical examples of armies/police forces becoming so large that gains in terms of military power begin to diminish? Of course, I recognize that the might of your military power is going to mostly be a function of your military budget (and correlate more with GDP than population), so this isn't necessarily an issue of the "size" of a nation. But I'm curious nonetheless.Also, I thought comment (3) made by Ajay Shah was interesting. Public Choice theory persuades me to believe that the "best and brightest" decision makers don't often become political leaders, but I think they do tend to rise to the top in business/science/etc. So doesn't the numbers argument have some merit here? For example, the big city high school of 5,000 kids is more likely to produce a top-notch football team or a future NBA basketball player than the tiny rural high school of 100 kids. Wouldn't the same hold true of nations and their abilities to produce great business leaders and technological innovators? All else held equal, I would expect the answer to be yes.But then again, all else is never equal. For example, the quality of the human capital seems to be one issue. As you increase the amount of capital invested in educating and making more productive each citizen of a nation, you would expect the probability of producing a "star" leader to increase. If the tiny high school of 100 kids has a top-notch gym, but the big city high school has shoddy athletic equipment and poor coaches, then perhaps the tiny high school can outcompete the big school.Finally, the incentive that any given individual has to become a great industrialist or scientific innovator is largely a product of a nation's law -- especially property and contracts. China has a much larger population than the US and places greater emphasis on education, yet we see more innovation from the United States. The United States has secure property rights and a relatively predictible rule of law, whereas China does not.And going back to the sports analogy, China interestingly can't produce a winning soccer team in spite of a massive population and tremendous national pride associated with the sport in China. Soccer is China's national sport and yet they fail to outcompete relatively small-population nations such as South Korea or Japan in the World Cup (much to the embarrassment of the Chinese government).(Note: I'm not an economist - please forgive me if I've misused any terms of art.)

Erik Johnson

Jim S: I fully agree with you that "Issues of nationalism, ethnicity, bigotry and other irrational thought processes have a great deal to do with the formation or dissolution of nation-states." However, I disagree that Becker ignored that point. Becker's argument was not intended to explain why countries are small or large. Instead, he was trying to assess whether small countries still face efficiency disadvantages. Those are distinct questions, and for the purposes of his article, the nationalism/etc points you mentioned are actually irrelevant.

simon

The discussion ignores the issue of whether special interest groups may find it easier to get preferential legislation in small countries than in large countries, an issue dealt with by writers from Madison to Mancur Olsen.

Zathras

The rapid increase in the number of independent polities in the 20th century followed an equally rapid decrease in the 19th century, caused by factors such as the unification of Germany, the creation of colonial empires in Africa, and the obliteration of the independence of native tribes in Central Asia, Africa and North America. More often than not, force was the decisive intrument of change, just as it was in the breakup of the European empires in after World War I.

Could the pendulum swing back the other way? Some proponents of the draft European constitution certainly think it should, and the rationales economic and otherwise for so many independent states in the Caribbean and Africa appear dubious over the long term.

Notwithstanding the psychological and other advantages of political independence, government is an expense. It is a greater expense if multiplied by many nations than if multiplied by fewer. Force may not be the decisive factor it has been in the past, but I don't think a consolidation of countries in many parts of the world is out of the question at all by the end of this century.

RWS

Ajay's interesting point about larger countries having a relatively better chance that there will be good people heading up the government is mitigated by two factors. First, a small government can (and do) hire experts as consultants to make recommendations and design strategies for particular policy issues. I think that greatly lowers the importance of achieving size to develop human capital for government.

Second, the larger the nation, the more likely that central government will commit those common fallacies of making decisions far away for other people that the governors falsely believe do not have their mess straight. So, larger nations may have better people at the top, but not good enough to offset the persistent problem of central governments making big errors in decision-making from a distance.

mark safranski

I think this discussion needs to be juxtaposed against the issues of state failure.

Small states probably have fewer barriers to survival due to economics than ever before, I think Becker and Posner are correct here. What potential new small states and many existing ones do not have is good systemic governance which in the long run matters more than size as a variable.

The Chechens,Uighurs, Daghestanis and other secessionist groups do no seem to have the modern social rule-sets that would permit market economics or social order that would allow them to set up and run a viable state appratus.

P. Gregory Neilan

One can point to notable instances in which economics was the precipitating factor in the formation of a nation. One need look no further than at the American Revolution and the formation of the United States. Taxation without representation was deemed tyranny, the Mother Country took unfair economic advantage of the colonies (stamp tax, navigation acts, etc.), and this had a direct impact on the ordinary colonial resident. A new nation was born, but pure economic interest, by itself, did not sustain the Continental Army from 1776 through 1783. Washington did not exhort his suffering troops at Valley Forge by encouraging them to think of themselves as rational profit-maximizers over the medium- to long-term.

My point is that in looking at the phenomena nation-building, nation-calving, or the absolute rise and fall in the number of nations, economics may be a factor, but is neither a necessary nor a sufficient one. Why would one think that nationalism, as it has evidenced itself in the modern era (say from the American Revolution to the present) is essentially economic in nature?

Lets look at the next event of comparable magnitude in American history, the Civil War. One can make an economic argument that the South initiated the War of Rebellion to preserve what their economically desirable institution of slavery. Under your analysis, the CSA in 1861 is a new nation. Was this really economically motivated? Slave-owners were clearly a small minority in the southern states. The rank and file of the Army of Northern Virginia (which marched into Pennsylvania barefoot, for the most part) did not own slaves. This was not because they didnt want to, nor because they thought slavery was wrong, but because they were too poor and owned too little land to make it either possible or profitable. Racism, fear-mongering, and propaganda about states rights had more to do with popular support of the war in the south than any purely economic consideration. Indeed, putting to one side the moral repugnance of slavery, Id argue that the Souths preference for agrarian manual labor over industrialization (and therefore the Confederacys fundamental raison detre) was the most wrong-headed economic choice in the history of this country.

Metternich imposed a similar preference for agrarian development on Austria-Hungary in the 19th century, and as a result it was far less developed industrially than France or England by 1914. In its day, Austria-Hungary was the largest multi-cultural state in Europe. Would the Hapsburg realm have been better off as a single country than as the series of little rump states into which it was carved as a result of the Versailles Treaties (plural intended)? Was Wilsons point on national self-determination economically motivated? I doubt it. I doubt equally that the economic interests of Belgrade shopkeepers were chief among the concerns of Gavril Princip and his cohorts in June 1914. Nationalism and racism, its first cousin, I submit, trump economics.

Ill grant that Messrs. Becker and Posner can identify economic factors in nation-building (or nation deconstruction, if I may use that term without import of its academic coloration). But looking at those phenomena as solely, or even principally, caused by economic factors doesnt add much, and other factors far outweigh the economic ones.

nebuer

"Pakistan, a large but noncontinguous state, split in two."

I am nitpicking of course, Prof Posner, but did you mean India or Pakistan here? Wasn't it India that fissured and split in two?

Ken

"Lets look at the next event of comparable magnitude in American history, the Civil War. One can make an economic argument that the South initiated the War of Rebellion to preserve what their economically desirable institution of slavery. Under your analysis, the CSA in 1861 is a new nation. Was this really economically motivated?"

Partly, but the outcome of the Civil War was mostly determined by economics. The fighting spirit of the Army of Northern Virginia, and the skill of its generals, was first-rate, but the agrarian slaveholding nation couldn't produce enough shoes for them. Their enemies embraced hard-core free-market capitalism, attracted hordes of foreigners to fight and to work, produced all the equipment and supplies needed and pioneered the use of the railroad to deliver them to the troops and move troops around, and won by attrition.

You have to look at economics to understand not just when or why secession movements start, but also when or why they succeed long-term. Military considerations became secondary for many current small nations because the United States maintains a first-rate military, which in turn is greatly assisted by the fact that the United States is itself a large nation that doesn't have a hostile power just on the other side of a border running all the way from northern Virginia to west Texas.

aram

1) It's so nice to find sites like this.

2) I think the reference to Pakistan being noncontiguous was a reference to Pakistan and East Pakistan (now Bangladesh). If memory serves, from 1947 to 1971 Pakistan was noncontiguous.

3) The question about uniformity of race/language/culture in smaller countries on the world stage is quite interesting. I think East Germany would have had the same advantages all other Iron Curtain satelites have in the global economy for the reasons stated by Becker (lower wages, etc.). More importantly however, there would have been added advantages for East Germany (massive West German capital influx and a softer border for goods and people) but those advantages would be driven by the same factors that lead to reunification - namely homogenaity of race/language/culture. Given the particular history of Germany, I suspect reunification was inevitable at some point (though certainly not necessary) but I wonder if East Germany, the small country, would have fared better economically by waiting for reunification.

I do wish there was more discussion on small countries and the WTO, which definitely tweaks the playing field in big vs. small countries.

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