January 12, 2004
From the desk of Jane Galt:The biological basis of behavior
Fascinating piece from Charles Murtaugh:
. . . "When small is beautiful", from this year's Christmas issue of the Economist. I actually read it over the holidays, but it wasn't available online to non-subscribers at the time; thanks to Orrin Judd for linking to it yesterday. The author asks the question, "How big should a nation-state be?" and refers to a very interesting new book on the subject:
Of the ten richest countries in the world in terms of GDP per head, only two have more than 5m people: the United States, with 260m, and Switzerland, with 7m. A further two have populations over 1m: Norway, with 4m and Singapore, with 3m. The remaining half-dozen have fewer than 1m people. What do such variations imply about the link between population size and prosperity? . . .The book argues that the best size for countries is the result of a trade-off between the benefits of scale and the costs of heterogeneity; and that openness to trade alters this trade-off. The gains from being big are considerable. Large countries can afford proportionately smaller government (although they often don't). Essential running costs can be spread over many taxpayers. . .
But size has costs too. Thus large countries are also likely to have a diverse population whose varying preferences and demands a government may find hard to meet: America, Brazil and India are cases in point. . .
However, the trade-off between the costs and benefits of size is affected by another factor: trade restrictions. The importance of economic size for prosperity depends crucially upon how open a country's economy is. Small countries that may not be viable in a world of trade restrictions can prosper when trade is liberal and markets are open. . .
None of this, however, satisfactorily explains the United States. It has a hugely successful economy and one of the world's highest levels of income per head, yet is also one of the most diverse countries on earth. Surely this winning combination of size and heterogeneity disproves the trade-off theory?
The answer, says Mr Alesina, lies partly in history: as in many countries, borders are partly a legacy from the past. In America, the cost of heterogeneity was a protracted and bloody civil war. More important is America's federal structure. If the United States were as centrally ruled as, say, France, the country would break up.
What struck me was how these findings seemed analogous to the problem of biological scaling, particularly as applied to respiration and circulation. Really little critters, like nematodes, don't have any sort of specialized respiratory system: oxygen just diffuses across their skin, and because their bodies are so narrow it has no problem penetrating to interior cells. Insects, on the other hand, have canals of air-bearing tubules running through their bodies, called trachea, through which air flows in and out to supply oxygen (and remove CO2) from inner tissues, inaccesible to diffusion from without.
Air tubules wouldn't work for vertebrates, though; to supply our large, very metabolically-active bodies, an even more complicated system of indirect respiration has evolved, via circulating red blood cells that literally carry oxygen from the lungs to distant target tissues. Thus, with increasing size comes with an increasing investment in efficient oxygen transport; a nematode that became "super-sized" to the scale of a Great Dane would have only a few moments to thrash around scarily, before quickly asphyxiating.
Does something similar apply to the movement of something -- goods and service? people? ideas? -- within the volume of a nation-state, such that unless that something moves very freely and efficiently, the "metabolism" of the state is impaired? Small states, thus, would be least affected, while large states more so. (Recall from above: "If the United States were as centrally ruled as, say, France, the country would break up.")
It's just a random thought. For warm-blooded animals, increased size actually confers at least one metabolic benefit, i.e. more efficient heat retention. Similarly, the Economist article notes a major benefit for the large nation-state: military might.
Embassies, armies and road networks are all likely to cost less per head in populous countries. Defence in particular is cheaper for giants. ?It is only safe to be small in a peaceful world,? say the authors. . .Orrin fondly extrapolates that this study portends the doom of China and India, but they might well choose to sacrifice the prosperity of their citizens for sustained military prowess: particularly if they face an otherwise single-superpower world.
I would point out one thing: the fact that rich countries tend to be small might be a statistical artifact of the fact that a little bit of luck goes a long way towards boosting your per-capita income if your number of capitas is small. Nonetheless, the thesis makes intuitive sense, particularly for this libertarian-type, and Charles' thoughts are fascinating to muse upon. Posted by Jane Galt at January 12, 2004 5:57 PM | TrackBack | Technorati inbound links
I also found the basic result intriguing. I wonder, however, if selection bias is operating. Small countries pop in and out of existence more than do large countries. So if you look only at those countries that survive over time, you get a select sample of the winners, not a truly random sample. Large countries are more likely to survive whether or not they solve their basic problems. Yes the USSR fell apart, but ultimately I suspect that Brazil is more likely to last than is Croatia.
China, as a country, has managed to survive 5,000 years of assorted strife (including, but not limited to, invasion, foreign rule, civil wars lasting hundreds of years, revolution, and so on).
It ain't going anywhere soon.
On the very last point you make, Megan -
When I read this excerpt on BroJudd, what immediately struck me was the absence of Japan from the list. A little Googling showed that the writer of the article (though I don't know if the book follows a similar methodology) may have selected the measure of 'richness' in such a way as to exclude Japan (approx 127 million population). Japan is in the top ten in GDP/GNP, and comes very close to being in the top ten in GDP/GNP per capita. From the data I found, the top ten nations in GDP/GNP per capita include Bermuda, the Cayman Islands, Luxembourg, and Liechtenstein (I found data from 1992, 1995, and 1999, all very similar in composition). I think the ranking on that particular list has a lot to do with having 'small capitas' and being an international banking/tax haven.
The biological basis of behavior? Yikes! I thought for a moment there that you were going to launch into a discussion of termite behavior, as it relates to international politics! (E. O. Wilson and all that.)
However, the 'heat retention' argument would seem to be completely in line with Bergmann's Rule, in essense, that a bigger, fatter country can weather more storms.
China, as a country, has managed to survive 5,000 years of assorted strife (including, but not limited to, invasion, foreign rule, civil wars lasting hundreds of years, revolution, and so on).
China hasn't survived for 5000 years; China has been repeatedly resurrected for 5000 years.
The PRC has existed around half a century or so, and is culturally and politically radically different from the previous claimant to the "China" title. For that matter, Taiwan still claims the "China" title, too; which one counts as having "survived"? :)
I agree with Chris, that it has a lot to do with having low per capitas than necessarily outsized GDPs.
Switzerland has a couple of major banks, insurance companies and pharmaceutical companies that bring its per capita GDP up. The smaller banking havens also have major financial institutions that probably account for the bulk of the high GDP per capita.
Larger countries have more diverse economies so a monster industry can't skew the results.
As for the US, would it have anything to do with the strong dollar? Are the numbers adjusted for purchasing power parity? Now that the US dollar has slid over the last year, the rankings might change.
There is a fair amount to suggest that a democracy, or indeed any more of government, might work better in a smaller country.
1. Citizens feel like they have a stake in the country if they have some sort of influence on the decisions of government. So the smaller a given electoral district, the more it "feels" like a real democracy. The more they can actually write or contact their representative and get a real response. The more chance their vote makes a difference.
2. You can't achieve 1 by just having a huge number of districts, because any voting chamber with more than a given amount of representatives will be unworkable. (Hence the USA has only 2 senators/state, whereas other countries have many)
So once you get beyond a certain country size, much of the population feels that politics is something they have no stake in. c.f. The percent of Americans who actually bother to vote.
Hence a large country like the USA either has to be very federal in nature (you can't control the President, but you have some influence at the state and local level) or there will be no feeling of citizenship.
It won't do to dismiss Switzerland's success as the result of a few mega-industries. They have been successful in so many areas - obviously financial services, chemicals and pharmaceuticals, but also engineering (Brown Boveri, now merged into ABB), foodstuffs manufacture, prestige jewelry, and indeed, agriculture. They have been successful in producing highly differentiated products, allowing better margins that make up for the undoubted difficulties (small home base, limited raw materials, historically expensive communications). This is not the result of luck - it is the consequence of centuries of good governance and hard work. After all, the Swiss have a federal constitution with even stronger roots than the US (over 700 years' worth).
Beyond the mega-bank arguments and such, there are two other effects that may contribute to the higher per capita income in certain countries:
Ultra-rich people establishing residence in those countries to avoid taxes
Businesses relocating headquarters there for the same reasons
Chris's list above looks suspiciously like both of these may be skewing numbers. It would be far more instructive to look at median income (and purchasing power) than per capita income.
I think limiting to the top 10 queers the sample. Going by the CIA's World Fact Book (2002), the top 20 for per-capita GDP includes:
Australia: population 19 mm
Canada: population 32 mm
Germany: population 82 mm
Japan: population 127 mm
Austria: population 8 mm
Belgium: population 10 mm
Netherlands: population 16mm
And #s 21 through 24 are France, Sweden, the UK, and Italy. Nor are the differences huge: #25 Italy has a per capita GDP of $24,915.27, while #9 Denmark (population 5 mm) has a per capita GDP of $28,963.37 per person.
Check it out for yourself here. I don't know about the book, but the headline statistics appear misleading.
San Marino is in there too. Speculate about the effects of size if you like, but don't pretend that this is meaningful data.
There are a couple other factors that are often left out in "small country advantages"
1) european nations had massive first mover advantage in industrialization. Sweden, for ex., up until recently had 2 major auto manufacturers (Saab & Volvo). No other comparable nation of 5 M would be able to do that today b/c of scale issues. Even a nation of close to 1B (India) will honestly have a difficult time becoming a top global player in autos. This extends across MANY industries where scale benefits players who started FIRST.
2) Many small european nations have very restrictive immigration and citizenship laws. Try becoming a citizen of Luxembourg if you aren't a Kajillionare. Many folks have observed that the fastest way to boost income per capita in the US, for ex., would be to stop accepting immigrants and particularly holding out illegal aliens. Obviously, there's a big price to pay for this statistical blip ;-)
- a son of Immigrants
There are a couple other factors that are often left out in "small country advantages"
1) european nations had massive first mover advantage in industrialization. Sweden, for ex., up until recently had 2 major auto manufacturers (Saab & Volvo). No other comparable nation of 5 M would be able to do that today b/c of scale issues. Even a nation of close to 1B (India) will honestly have a difficult time becoming a top global player in autos. This extends across MANY industries where scale benefits players who started FIRST.
2) Many small european nations have very restrictive immigration and citizenship laws. Try becoming a citizen of Luxembourg if you aren't a Kajillionare. Many folks have observed that the fastest way to boost income per capita in the US, for ex., would be to stop accepting immigrants and particularly holding out illegal aliens. Obviously, there's a big price to pay for this statistical blip ;-)
- a son of Immigrants
I'm not an authority on Latin, but I thought "capita" is plural already, and "caput ", the proper singular, was not used due to general ignorance. Any experts out there?
I'm not an authority on Latin, but I thought "capita" is plural already, and "caput ", the proper singular, was not used due to general ignorance. Any experts out there?
Wow, a thread with Latin and economics! Must be my lucky day!
Rick, "per capita" is apparently a Latin phrase (not a mixed English-Latin one), but of relatively recent origin. Merriam-Webster says it's Medieval Latin and translates to "by heads".
"Per" is a Latin preposition, and is usually translated as "through", but has a number of other related meanings, including "by". Our English preposition is related to the Latin one, but is more limited. (Eg, we use "by" for by; per is closer to "by each" or "for every". Although the English phrase "per head" is equivalent to "per capita", the plural seems correct in the Latin.)
"Capita", as you say, is a plural; "caput" is the singular, and means "head" (and has the same connotations as our "head", so it can mean a person, or the source of a river, or the summit of something, or the guy in charge). Our word "capital" is derived from it, of course. In this case, it's the plural accusative, which is the case that "per" takes in a prepositional phrase, and so we get "by heads".
...more than half the world's countries now have fewer people than the state of Massachusetts, which has about 6m.
I think phrases like this shout out "selection bias". Imagine a world with five states; the two largest have 500m people each, while the three smallest have 5m. The above phrase is true, but it's much more important to say "98.5% of the world's population live in a state with 500m population."
As most have commented, small states will tend to be high on the per capita GDP list because it just takes a few lucky breaks to push them to the top. I mean, what's Norway doing that they're in the top 10, and Denmark or Sweden is not? I think it comes down to North Sea oil. Britain also benefits from North Sea oil, but it's spread over many more people and so has less of an effect.
Look at the data another way: looking at populations and their average income (= per capita GDP), of the top 280m people, 260m live in a large country (the US). Maybe someone with a faster Internet connection could rough out the results on the "richest" billion people? (My 2000 almanac quotes the World Bank in 1999 and says the 54 richest nations have a population of 927m with a per capita GNP of $25,890.)
Granted, Alesina and Spolaore are looking at states rather than people. I'd suggest that grouping countries by size and considering their average per-capita GDP might be more useful. Using 1998 population figures, you could take the 4 nations with over 200m in population (China, India, the U.S., and Indonesia) as one group, then those with more than 100m (Brazil, Russia, Pakistan, Japan, Bangladesh, and Nigeria), etc. But I have to wonder if useful information can be gleaned this way, when Mexico, Germany, and Vietnam are equivalent-sized states (95.8m, 82.4m, and 77.9m, respectively).
I actually like the conclusion they've reached, and I do expect that China will eventually end up being split numerous ways. I just don't see how they got there (perhaps that means I need to buy the book, tho whether my need reaches $35, I'm not sure).
Something totally ignored in the linked copy is the role played by rule of law.
When I think of the differences between the United States and other nation-states of comparable or greater economic potential, the datum that stands out is that in the United States rule of law has gotten more than lip service from the get-go... perhaps short shrift under adverse circumstances, but more than lip service all the same.
...Which fact to a degree accounts for that "protracted and bloody civil war" as well.
Small countires can not afford significant accumulations of distortiortions, the barnicles that interest groups attach to governments. So accountable, free, well led small countries remain flexible and prosper because they intervene in their economies lightly. Large countries can afford years of accumulated distortions and if they avoid invasion or revolution degenerate and atrophy slowly thereby preserving accumulated wealth for decades, declining slowy, but declining. We are relatively young in accumulating distortions, and our heterogeneity makes centralized public goods more controversial than were we homogeneous or less free, so we are still fighting decline. This is why socialists and those who dislike freedom want political correctness, conformity, protectionism, and preserve their venom for people with views rooted in tradition and religion, and for policies that promote economic freedom. Heterogeneity combined with freedom blocks their socialist project because the joint consumption of public goods makes them impossibly controversial. The Soviet Union, being giant and heterogeneous could not govern centrally without totalitarianism, but could not prosper without freedom. It had to come apart.
Small countires can not afford significant accumulations of distortiortions, the barnicles that interest groups attach to governments. So accountable, free, well led small countries remain flexible and prosper because they intervene in their economies lightly. Large countries can afford years of accumulated distortions and if they avoid invasion or revolution degenerate and atrophy slowly thereby preserving accumulated wealth for decades, declining slowy, but declining. We are relatively young in accumulating distortions, and our heterogeneity makes centralized public goods more controversial than were we homogeneous or less free, so we are still fighting decline. This is why socialists and those who dislike freedom want political correctness, conformity, protectionism, and preserve their venom for people with views rooted in tradition and religion, and for policies that promote economic freedom. Heterogeneity combined with freedom blocks their socialist project because the joint consumption of public goods makes them impossibly controversial. The Soviet Union, being giant and heterogeneous could not govern centrally without totalitarianism, but could not prosper without freedom. It had to come apart.
Small countires can not afford significant accumulations of distortiortions, the barnicles that interest groups attach to governments. So accountable, free, well led small countries remain flexible and prosper because they intervene in their economies lightly. Large countries can afford years of accumulated distortions and if they avoid invasion or revolution degenerate and atrophy slowly thereby preserving accumulated wealth for decades, declining slowy, but declining. We are relatively young in accumulating distortions, and our heterogeneity makes centralized public goods more controversial than were we homogeneous or less free, so we are still fighting decline. This is why socialists and those who dislike freedom want political correctness, conformity, protectionism, and preserve their venom for people with views rooted in tradition and religion, and for policies that promote economic freedom. Heterogeneity combined with freedom blocks their socialist project because the joint consumption of public goods makes them impossibly controversial. The Soviet Union, being giant and heterogeneous could not govern centrally without totalitarianism, but could not prosper without freedom. It had to come apart.
I think that it's all wrong.
1: very small countries exist ONLY in peaceful, prosperous cultures.
2: they have a tendency to act as tax havens or gambling resorts
I don't know why the authors think heterogeneity is bad for the economy.
I have trouble with his analysis of the US.
The last 50 -100 years of US economic history is one of the regional differences contracting.
50-100 years ago the regional differences in the US per capita income were very big and had persisted for years, now they are relatively small and continue to contract.
I believe the main story behind the higher living standards in the US are more a result of the US being the first and to a certain extent the only country to have developed with a history of a relative shortage of labor-- i.e, labor was the relatively scare resource in the US compared to Europe or Asia (Japan).
Consequently, the US economy has developed as a more capital intensive economy. Put another way, US productivity levels are higher in the US than in Europe & Asia (Japan) because capital per worker (population) is higher in the US.
Backing up this idea is that the US has fewer
restrictions on the development and wide spread use of new technology even though it will create
unemployment among those displaced by the new development-- this is partially the free trade vs the fair trade argument.
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