Category: Political Science

Is it better to be a small nation?

Of the ten richest countries in the world in terms of GDP per head, only two have more than 5m people: the United States…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.

The Size of Nations, a new book by Alberto Alesina and Enrico Spolaore, addresses why some small countries have done so well. Here is a related working paper by Alesina, here are some related working papers by Spolaore. As some of the larger empires of the past break up, questions of national size increase in importance. More than half the world’s countries have fewer than six million people, roughly the population of the state of Massachusetts.

The Economist offers the following summary:

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. 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 (who, unusually for economists, offer two stimulating chapters on conflict, war and the size of nations).

Large countries are able not only to spend more efficiently; they can also raise taxes in more cost-effective ways. Income taxes are more efficient than customs duties, but require a bigger initial bureaucracy. Large countries have bigger internal markets, allowing more specialisation and returns to scale. And they can redistribute resources geographically, providing insurance when one part of the country is hit by disaster or recession and shifting income from rich regions to poor ones.

So why don’t all countries merge into one large superstate? Well, smallness has its benefits too:

…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. A study of local government in the United States suggests that Americans are willing to put up with the higher running costs of small municipalities and school districts in exchange for living in communities with little variation in income, race or ethnicity. This could imply that people also prefer to live in more homogeneous countries. With the main exception of America, successful big countries (such as Japan) have relatively homogeneous populations.

The authors argue that a worldwide regime of free trade will make the optimal size of nations smaller. If you can trade with other nations, there is no need to be large to ensure an open internal marketplace. So rising globalization should make secession easier to endure, which indeed seems to be the case.

My take: I am less convinced of the benefits of smallness. Think of small countries as having greater scope for experimentation, and thus a higher variance of outcomes. They also pop in and out of existence at a higher rate. Brazil will always be Brazil, but the fortunes of Croatia have varied over the years. If we look at the small countries that continue to exist, there is positive selection bias. We should expect them to do better than average, as the failures disappear, unlike with the less politically fluid larger countries. The observed superior performance of small countries does not mean that ex ante you should prefer to live in San Marino. In a small country, you face some very real chance that your system will fail, and that you will cease to exist, possibly under unfavorable terms. Especially if you are risk-averse, there is much to be said for the security of living in a larger nation.

Is deliberative democracy a good idea?

Richard Posner says no. The deliberative democracy idea is pushed by such scholars as Bruce Ackerman and James Fishkin. They call for the following:

In our soon-to-be-released book, we offer a new way of thinking about democratic reform, proposing a new national holiday–Deliberation Day. It would replace Presidents’ Day, which does no service to the memories of Washington and Lincoln, and would be held two weeks before major national elections. Registered voters would be called together in neighborhood meeting places, in small groups of 15 and larger groups of 500, to discuss the central issues raised by the campaign. Each deliberator would be paid $150 for the day’s work of citizenship. To allow the business of the world to carry on and as many as possible to participate, the holiday would be a two-day affair. If Deliberation Day succeeded, everything else would change: the candidates, the media, the activists, the interest groups, the spin doctors, the advertisers, the pollsters, the fundraisers, the lobbyists, and the political parties. All would have no choice but to adapt to a more attentive and informed public. When the election arrived, the people would speak with a better chance of knowing what they wanted and which candidates were more likely to pursue the popular mandate.

Posner responds with his usual aplomb:

Reform does not well out of deliberation, but reflects passions and interests. Abolitionism, the suffrage movement, the civil rights movement, the opposition to the war in Vietnam, the rise of free-market ideology, welfare reform, and the gay-rights movement were not the product of discussion among voters debating on the model of the academic seminar (the implicit model, naturally, of academic reflection on the political process by the proponents of deliberative democracy, academics all). They were the product of moral and political entrepreneurs tapping into wells of discontent among minorities and eventually getting the attention of the politicians…

I have difficulty suppressing the uncharitable thought that there may be an element of bad faith in the deliberative-democracy movement generally (I do not mean in Ackerman and Fishkin particularly). I think that what motivates many deliberative democrats is not a love of democracy or a faith in the people, but a desire to change specific political outcomes, which they believe they could do through argument, if only anyone could be persuaded to listen, because they are masters of argumentation. I infer this secret agenda from the fact that most proponents of deliberative democracy advocate aggressive judicial review, which removes many issues from democratic control; are coy about indicating what policies they dislike but would accept; and are uncommonly fond of subjecting U.S. citizens to control by international organizations of questionable, and often of no, democratic pedigree. I sense a power grab by the articulate class whose comparative advantage is–deliberation.

My take: I would expect deliberative democracy to lead to greater conformity and a less efficient aggregation of information. Crowds can talk themselves into bad ideas very readily. The main purpose of democracy is to prevent very bad ideas and very bad leaders. We are more likely to resist such dangers in private, and through periodic and gradual evaluations, rather than in open public forums. I award the debate to Posner.

Thanks to for the link.

The economics of capturing Saddam

Eugene Volokh draws our attention to the following article about Iraq. Here is a snippet from the abstract:

The capture of Saddam Hussein…demonstrates that poor intelligence is not inherent in U.S. guerrilla war-fighting; the United States overcame it by identifying the central weaknesses of its opponents. In this case, the central weakness was money — and this was not only a financial weakness, but also a cultural one.

Here is some more of the substance:

The guerrillas did have one major vulnerability: money. The Baathist regime long ago lost its ideological — and idealistic — foundations. It was an institution of self-interest in which the leadership systematically enriched itself. It was a culture of money and power, and that culture permeated the entire structure of the Iraqi military, including the guerrilla forces that continued to operate after the conventional force was defeated. Indeed, the guerrillas substituted money for recruitment. In many cases, they would pay people outside their ranks to carry out attacks on U.S. troops as a supplement to attacks by the main guerrilla force.

The culture of money made the guerrillas vulnerable in two ways. First, they relied on support from an infrastructure fueled by money. Whatever their ideology, they purchased cooperation with money and intimidation. Second, much of the money the guerrillas had was currency taken from Iraqi banks prior to the fall of Baghdad. A great deal of it was in U.S. dollars, which continued to have value, but most of it was in the currency of the old regime. One of the earliest actions of the U.S. occupation forces was to replace that currency. Over time, therefore, the resources available to the guerrillas contracted.

The United States brought its financial resources into play, purchasing information. As U.S. money surged into the system and guerrilla money began to recede, the flow of information to the United States increased dramatically. Obviously, much of the information was useless or false, and it took U.S. intelligence several months to tune the system sufficiently that operatives could evaluate and act upon the intelligence. Over time, the very corruption of the Baathist system was turned against it.

Mistaken predictions about this war have not been in short supply. But let’s hope they are right.

The soul of classical liberalism

Here is one of my favorite essays by my colleague James Buchanan, The Soul of Classical Liberalism. Buchanan starts this essay by noting that we have lost the “soul” of classical liberalism in the twentieth century. A new political vision is needed desperately if we are to build that “shining city on the hill.” I have long maintained that Buchanan is one of the last romantic economists, in the spirit of his mentor Frank Knight. By romantic I mean an economist whose work is driven by an intensely personal vision, and driven by an intense desire to root out the truth. Buchanan, perhaps more than any other economist, understands the tension between the objective and the subjective in economic science. Given our commitment to improving the real world, we cannot avoid objective standards for good outcomes. But at the same time economic values and costs are deeply subjective as expressed in neoclassical or Austrian economics. Buchanan’s critics, who do not generally understand this tension, think he is working on pseudo-problems or engaged in mere taxonomy. In contrast, I think Buchanan is far ahead of his time. We are not yet at the point where we can understand the full import of what he is up to. This essay is one good place to get started on his central problems.

Does evolutionary biology weaken left-liberal views?

An interesting review of Steven Pinker’s The Blank Slate suggests that a better understanding of biology does not damage the prospects for social engineering, “The more we understand our nature, the better we’ll be at nurturing.” Here is one lengthier bit:

Contrary to what its critics say, evolutionary psychology does not threaten our ability to assess and transform our social and cultural landscapes. Quite the opposite–understanding the particular channels that we’re prepared to learn can throw into sharper relief the achievements of culture. Knowing something about our reproductive drives and our tendencies toward violence makes the extraordinary drop in murder and birthrates experienced by many Western countries over the past few centuries all the more impressive. And just because our mental modules are implicated in political issues, that’s no reason to hand over our societal reins to the evolutionary psychologists. To include biological explanations in a discussion of human society by no means eliminates the validity of other kinds of explanations. What Pinker and E.O. Wilson are proposing is not biological determinism but rather biological consilience…

This is half correct. Future social engineering, if done with noble motives and an informed basis, will have a better chance of succeeding a century from now. But I have long felt that the “public choice” critique of social engineering — you can’t trust people, especially not politicians — carries more weight than the informational critique. Scroll down one post and read my remarks on the all-too-frequent lack of meta-rationality as well, or scroll up one post and read about the prosperous marvel that is North Korea. And evoloutionary psychology suggests that, short of genetic engineering (not the topic at hand, and besides, who do you trust to do that?), human nature is not about to change anytime soon. So score at least half a point against social engineering, which should make Michael happy at

African Americans and Government

Tyler may be correct that “the government as employer has done more for black communities than the government as purveyor of affirmative action.” But isn’t there something disturbing about this? Consider the following: Who do you think wrote:

The widely proclaimed growth in the black middle class in the 1960s and early 1970s associated with claims of “dramatic black progress” were in large measure attributable to the expansion of Great Society programs and the professional employment repercussions at levels of government. These programs played less of a role in generating an increase in the black middle class by uplifting the black poor than by providing direct employment to many blacks as social service providers to other impoverished blacks. Thus, one of the main legacies of the Great Society was to cement the symbiosis between the black poor and the black middle class – the former as the clients of the social service system and the latter as the service providers.

No, it wasn’t Charles Murray. It was the radical-leftist economist William Darity Jr., himself an African-American, writing in the May 1990 issue of the AER (JSTOR link). If true, what this suggests is that even middle-class black Americans were, and perhaps are, much less well integrated into the American economy than we might think from income statistics. I find this disturbing from just about any angle.

Which party is better for the stock market?

Democrats, it turns out, read Hal Varian on this question. Here is a summary of the data:

Professors Santa-Clara and Valkanov look at the excess market return – the difference between a broad index of stock prices (similar to the Standard & Poor’s 500-stock index) and the three-month Treasury bill rate – between 1927 and 1998. The excess return measures how attractive stock investments are compared with completely safe investments like short-term T-bills.

Using this measure, they find that during those 72 years the stock market returned about 11 percent more a year under Democratic presidents and 2 percent more under Republicans – a striking difference.

This nine-percentage-point excess can be broken down further into an average 5.3 percent higher real return for the stock market and a 3.7 percent lower return for Treasury bills under Democratic administrations.

This regularity is harder to explain than you think, and simply defending Democrats or attacking Republicans will not do the trick. Remember, high stock market returns mean, not that things are good per se, but rather that things are better than people had expected.

I might have thought that people simply overestimate how bad Democratic Presidents will be. But no, the market does not appear to decline as the election of a Democrat approaches. Nor do changes in the risk premium seem to account for the patterns. Take a look at the original research.

Small companies, by the way, do especially well under Democrats:

One interesting finding is that although both large and small companies do better under Democratic administrations, small companies do especially well, while larger ones do only a little better. The return on the smallest 10 percent of traded companies is 21 percent higher during Democratic administrations, while the return on the largest 10 percent is only 7.7 percent greater.

Email if you have any good ideas. Maybe being unduly pessimistic also causes us to vote for Democrats, that is the best I can come up with. It is in fact the case that conservatives are happier, and more likely to believe that they are in control of their lives, than are liberals. Maybe we see similar patterns, not just in the cross-section, but also across time. When people feel bad, and out of control, stock prices fall too low, and those people act more like Democrats in the voting booth.

Worrying Survey on Democracy

An article in Sunday’s Washington Post drew encouragement from a World Values Survey that found over 60 percent of people in Arab countries agree that “Democracy is the best form of Government.” It passed over without comment, however, the finding from the same survey that less than 40 percent of people in the U.S., Canada, Australia and New Zealand agreed. What were the other 60 percent thinking? Can this survey be accurate? The figure is not in the online WP article and I couldn’t verify it’s accuracy from the source but this United Nations report has the same figure (figure 1).

The origins of human freedom

I had lunch today with Paul Rubin, a very smart law and economics scholar who also likes chicken tacos. Paul has just published a book on the Darwinian origins of politics and human freedom.

Here is a very brief summary from Randall Parker at Futurepundit:

Rubin sees both the impulse for support of the welfare state and the opposition to high taxes and the resentment toward freeloaders as all consequences of Pleistocene adaptations. Helping others in tough times might lead to their helping you out at a later point. At the same time. food was too scarce to tolerate freeloading. Rubin also argues that libertarianism is contrary to human nature and that humans want to meddle in each others’ lives. Read the whole review. Very interesting.

He is referring to Denis Dutton’s recent review of the book on, worth reading as well. It also summarizes the book nicely and in much more detail.

Here is Parker’s provocative conclusion:

My guess is that the distribution of alleles for the desire to be altrustic or to enforce rules or to force people not to be freeloaders will be found to be different in different parts of the political spectrum. A lot of political divisions will turn out to be, at least in part, due to average differences in personality characteristics that have their origins in the Pleistocene era. my bet is that once people start genetically tinkering with their offspring purer forms of socialists, libertarians, social conservatives, and other political types will be born and the political divisions within some societies and between societies will become greater as a result.

On this point, I do suspect that much of our political orientation springs from our basic inborn temperament. Shouldn’t this make us more skeptical of any particular views we happen to hold? It may feel right to have those views, but hey, that would be a genetic accident, and not a reflection of which policies are actually good for us.

Rating the agencies and departments

How does the Bush administration rate its own agencies, in terms of management performance?

The “Executive Branch Management Scorecard” rates agencies in terms of human capital, competitive sourcing, financial management, e-government, and budget/performance. Eight of the twenty-six agencies earned the lowest possible score in all categories, see here, and then click on the top scorecard link to get to the evaluations. These agencies include the Department of Justice, Homeland Security, and the Treasury Department. Out of a possible 130 grades, 87 fall into this lowest category.

Education, Labor, and the Office of Personnel Management do the best, but this is little consolation if you, like me, would be inclined the abolish the first two of those.

It is nice to see the Bush Administration be frank about problems in government management. The scorecard claims the problem is getting better, but note two things. First, good management is not an end in itself, policy must also be good. Second, I expect little in the way of real reform as long as budgets jack up domestic spending for most of these agencies, regardless of their performance.

What is in a voter’s self-interest?

Alan Krueger reports on survey research that shows that people do not vote according to their self-interest. In particular, he bemoans the fact that a majority of the poor want to get rid of the estate tax. This and other odd results are due to “ignorance and uncertainty” says Larry Bartels, a Princeton political scientist. If only the poor were better informed they would vote against tax cuts for the rich. Moreover, a better informed electorate would be a good thing. I take issue with both of these positions.

Take the normative position first. Assuming that voters voted self-interestedly, would a more informed electorate be a good thing? Doubtful. If everyone voted their “interest,” as Krueger and Bartels conceive it, every bureaucrat, welfare recipient and old person living on social security would vote for more government. Naturally, I think this would be a disaster but even those who think this would be a good thing ought to give pause when they consider how much more polarized our society would become were it not for the fact that ideology cuts across class lines.

Moreover, isn’t it interesting that when the poor vote against their “self-interest” they are labeled “uninformed” – Bartels compares them to Homer Simpson. But when Hollywood liberals like Barbara Streisand or rich philanthropists like Bill Gates Sr. vote against their “self-interest” they are called enlightened. What Krueger and Bartels refer to as self-interest is actually masking an ideology.

Is it true that informed voters would vote differently? (Krueger cites some evidence suggesting that in fact this is not the case – at least not as much as one would expect – but he doesn’t offer an explanation.) To understand this one should first realize that voters are uninformed because it doesn’t pay to be informed. The probability that one vote sways the election is infinitesimal so voters are rationally ignorant. Does this imply that voting is random? Not at all. Voters who care about ideas even a little are free to vote their ideology at low cost. Thus, in my view, the fact that votes don’t matter gives us hope. It’s only because votes don’t matter that libertarianism has a chance of success. Of course, I recognize that the same facts gives socialism a chance at the polls but I hope good ideas will win out.

Addendum: I’ve been influenced on these issues by our colleague, Bryan Caplan – although I give the ideas a more positive spin than he does. I recommend his paper Libertarianism Against Economism: How Economists Misunderstand Voters, and Why Libertarians Should Care from The Independent Review and his other papers on rational irrationality which you can find on his web page.