What is the optimal size of a country?

Numerous interesting comments on previous posts expressed every possible theory. The topic is complicated, but here are a few brief responses:

Bigger (in the sense of population size, not land area) is better, because of economies of scale. Imagine that a country builds an expensive asteroid warning system that protects the territory from asteroids. The system has a large fixed cost. The greater the population, the less each person needs to contribute to the protection system. Large countries also can have larger markets, allowing for greater division of labor, and hence greater wealth. In a phrase, enormousness is not an enormity.

However, maybe small countries can obtain these economies of scale by contracting with each other. Countries can, by treaty, share the costs of asteroid warning systems and enter trade treaties that provide for the reduction of tariffs. Still, countries have trouble entering treaties and (especially) ensuring compliance, because no external power can force countries to comply with treaties. Evidence suggests that even when trade barriers are eliminated, trade across borders is more expensive than trade within borders, no doubt because of the difficulty of dealing with two separate legal systems with their often conflicting requirements.

Smaller is better, because of heterogeneity. As countries become bigger, they become more diverse, and diverse people have different preferences for political outcomes – taxes, environmental regulation, social welfare, and so forth. As people’s preferences diverge, political bargains are harder to make; either agreement can’t be reached, or transfers to losers must be arranged, and these transfers are economically costly. One might fear that people lose the ability to monitor leaders as the population increases, and so leaders can pursue self-aggrandizing or redistributive policies with little fear of political sanction. Still, maybe diversity brings benefits – cultural and economic – and it is possible, as Madison thought, that groups have more trouble taking control of the political system in a large polity.

Should we cheer whenever an ethnic minority obtains independence for its small or infinitesimal territory? Maybe if it the majority treated it badly. But note that when a minority breaks off from an otherwise adequately governed state, its gains (in the form of greater control over political outcomes in the territory it occupies) come at the expense of the people left in the rump territory, who lose the economies of scale associated with the larger population. There is no natural stopping point to this process if any group can separate for any reason. In an ideal world, other nation states might be skeptical of attempts to secede for this reason, plus the additional important reason that it is harder to cooperate with two little states than one big state, holding constant the effectiveness of the government.

Readers interested in these questions should consult this book, on which I have (loosely) relied.