I agree with Becker that the costs to nations of being small have declined and that this decline, along with the dismantling of the colonial empires (mainly of Great Britain and France), are factors in the growth in the number of nations since World War Two. I am going to focus, however, on the benefits side of nation size. Even if the costs of being small decline, unless there are benefits to being small one would not expect the decline to affect the number of nations, especially if we assume as we should that there are significant transitional costs to splitting up a nation.
The question of what determines the size or scope of a nation has parallels concerning the size of business firms and other private and public organizations, and even the size of animals. In the case of a firm, size is determined mainly by the relation of size to average cost. When the firm is very small, an increase in its size, by permitting greater specialization of its workforce, is likely to reduce the average cost of the firm’s output and thus make it more competitive. But beyond some point the gains from specialization will be exhausted and average costs will begin to rise because of increased costs of control. Effective control of a huge firm may require multiple layers of hierarchy, slowing and distorting information flows, although decentralization, as in a multidivisional firm like General Motors or General Electric, may enable the number of layers of supervision, and the associated costs, to be minimized.
Economies and diseconomies of scale (or scope—roughly, cost as a function of the number of products a firm produces as distinct from the quantity it produces of a single product) in the conventional economic sense also play a role in the determination of the size of countries. But other factors play a role as well, such as the advantage of size in defending against other nations. Here the analogy is to animals. Large animals are less vulnerable to predators than small ones are, and as a result tend to survive longer. (I am speaking of the individual animal, not the species.)
Historically, size has been enormously important to national survivorship. The nations that have disappeared completely, such as Prussia, Burgundy, the Republic of Texas, and the countless small kingdoms and principalities in Italy and Germany before the unification of those nations in the second half of the nineteenth century, have generally been small countries, though Becker is correct to note the continued survival of tiny “niche” countries, such as Monaco; this suggests that there is no minimum efficient size of a country, as there is of a steel producer. Large nations, however, have frequently fissured, such as Austria-Hungary and the Soviet Union, suggesting the existence of diseconomies of scale in the “market” for nations. Pakistan, a large but noncontinguous state, split in two. South Africa lost Namibia, Indonesia lost Papua New Guinea, Ethiopia gained and then lost Eritrea, and so on. What is new is that smallish nations, like Yugoslavia and Czechoslovakia, have also split; nevertheless, the splitting of small nations remains an infrequent phenomenon.
As Becker explains, with free trade the gains in specialization to a nation from having a large internal market diminish. And changes in military technology have reduced the military value of a large population, though not of a large GNP, which is a function in part of population. Nevertheless, if one glances over the entire history of nation formation and dissolution since the middle ages, one sees that the decisive factor has been the rise of nationalism. Nationalism is the belief that national boundaries should follow the contours of a “nation” in the sense of a population that has a common language, race or ethnicity, religion, historical origin, or culture, at least if that population lives in a contiguous area rather than being a diffuse minority in a larger polity, as some “nations” in the sense just defined, such as Jews and Armenians, are. The territorial nations of Israel and Armenia are limited to the areas in which the members of the ethnographic nation inhabit a compact, contiguous geographical area.
The greater the differences—in values, skills, language, and so forth—between two “nations” that inhabit adjacent territories, the fewer their common interests, and this complicates governance if they are made parts of a single territorial nation, in much the same way that corporate governance would be complicated in a firm that sold life insurance, diamonds, and hubcaps. The added costs may be offset, however, and in the nation case by defense considerations as well as by economic ones. If barriers to trade make large internal markets important for economic growth, then different “nations” in the ethnographic sense may share a single territorial “nation.” As those barriers recede and the military value of a large population declines, we can expect the nationalist principle to prevail. But this need not necessarily result in smaller nations. The mergers of the two Vietnams and of the two Germanies, and the reincorporation of Goa into India and Hong Kong into China, are examples of post-World II Two boundary changes that have increased the size of nations. (And in all likelihood someday the two Koreas will be united and Taiwan will be absorbed into China.) It may be an accident that the number of nations in the world has increased since the World War II. The number could have declined if more ethnographic nations had been divided up among different territorial nations rather than being combined in single territorial nations.
The merger of the two Germanies may have been an economic mistake, as Becker persuasively argues. But the diseconomies of scale in a nationalistic state, that is, a state with a homogeneous population (despite its racial, religious, and cultural heterogeneity, the U.S. population is homogeneous compared for example to Belgium, with its sharp regional division between French-speaking and Dutch-speaking populations, or even Switzerland), are small within a broad range. 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 analysis is incomplete, however, because one observes that many adjacent nations having a common language and culture do not merge: the U.S. and Canada, for example; Mexico and the other nations of Central America; the Spanish-speaking South American countries; Germany and the German-speaking Swiss cantons; and the Arab nations of the Middle East and North Africa. The explanation offered by Adam Smith for the American Revolution may have general application: within each ethnographic nation there is a governing class that anticipates greater benefits from ruling its nation than from sharing power with other elites within a broader territorial union.