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Why Small States Are Better

Andreas Marquart and Philipp Bagus (see their author pages here and here) were recently interviewed about their new book by the Austrian Economics Center. Unfortunately for English-language readers, the book is only available in German. Nevertheless, the interview offers some valuable insights. 

Mr. Marquart, Mr. Bagus, you have released your new book „Wir schaffen das – alleine!” (“We can do it – alone!”) this spring. The subtitle says: “Why small states are just better.” To begin: Why are small states generally better than larger ones?

Andreas Marquart (AM): In small states the government is closer to its citizens and by that better observable and controllable by the populace. Small states are more flexible and are better at reacting and adapting to challenges. Furthermore, there is a tendency that small states are more peaceful, because they can’t produce all goods and services by themselves and are thereby dependent on undisturbed trade.

How far can the principle of small states go? You are for example open to the idea of Bavaria seceding from Germany, or Upper Bavaria then from the rest of Bavaria. Ludwig von Mises stopped at the communal level, thinking that the secession of individuals would be unrealistic. You as well? Is there a point when your rule – the more decentralized the better – is not true anymore?

Philipp Bagus (PB): In principle not. We don’t want to arrogate, however, to know the optimal size and to say that this state is too small and that one too big. The optimal size would be determined in competition through the right of secession. If an apartment tower or street secedes from its municipality and then concludes that there are problems which were previously done better, then the secession could be revoked and the two entities reunited. Are they are better off alone, however, they will stay seceded. In this competition it will then show how successful small states can be.

At the moment we see more and more attempts around the world to secede – Brexit for example or recent attempts by Scotland and Catalonia. What all these cases have in common is that the secession is executed by governments which are economically more on the Left, and by that probably no advantage can be seen for the seceding entity, since the newly gained freedom is used immediately for more state intervention. Are cases such as these, where the secession would bring forth downsides for that country, also to support?

AM: Generally secession attempts should always be supported. The citizens must have a right to self-determination. Even the UN charter says that a people or a nation has the right to establish its own state or to join another nation. If a region wants to secede to try again if socialism works, then so be it. We learn from mistakes. And the smaller the states, the quicker and clearer the mistakes will become visible and the quicker changes have to implemented. After Brexit for example Britain will be under immense pressure to set itself apart from the EU. By the way, I don’t know any government and close to no party in Europe or any other country which isn’t in some way on the Left. In which way for example is the conservative CDU in Germany any different than the social democratic SPD or the Greens? Or the “classical liberal” FDP? Real classical liberal or liberty-oriented politics cannot be found anymore. All the differences are mere nuances and everyone is similar to each other in a more or less social democratic mishmash.

Would it be possible in your model that small states still cooperate with each other in supranational organizations? Or are the EU, NATO, UN etc. all obsolete in the end?

PB: Of course small states could or even have to cooperate with one another, especially on defense – at least as long as larger states still exist, which have a tendency to be more aggressive. Forms of cooperation like free-trade zones or also organizations which contribute to the harmonization of standards would exist. The EU in its current form is pointless, it has outgrown its original purpose of a pure cooperation.

On foreign policy you argue that small states conduct less wars. For many this will sound unintelligible at first, considering the common picture of the Middle Ages, where there were many more small states than today, is one of constant conflicts between kings and nobility. Why doesn’t this have to be the case?

AM: I don’t think we can compare those days with today. We are on a totally different level in terms of civilization. What has not changed of course: wars are about resources. In the past, most fighting occurred over land since farming was so significant and was in no way as productive as it is today. And when there were no possibilities to trade in the Middle Ages, it wasn’t too tragic, because the division of labor had nowhere near the significance it has today. Because of the very advanced international division of labor no small state of today can afford to deny itself from foreign trade or that the flow of goods is stopped – at least as long as it doesn’t want its population to starve as it happens in North Korea. So one has to behave peacefully. Just look at Liechtenstein: They haven’t even had an army since 1868. Free trade is the ultimate guarantor of peace.

You often use the example of Switzerland in your book. In which ways does this country show how small states work?

PB: It relies on free trade, open borders, has relatively low taxes, a high standard of living and didn’t have to moan over war deaths in the twentieth century. It is often asserted that small states can’t protect its population, that it would lead to different standards or new trade barriers which would prevent trade from happening, or that it would be overrun by economic refugees. Switzerland is the counterexample.

As good as Switzerland – or also small states such as San Marino or Liechtenstein – may work, there are still counterexamples like Belgium, a country which has always remained neutral, but was still overrun by Germany in both World Wars – among other things due to its overall weakness. How does the sorrow of Belgium fit into the overall picture?

AM: For one we are not saying that a world of small states would be heaven on earth. Libertarians should in general watch out for not creating the impression that in the world they describe all problems we are fighting over today would vanish. We can assume nonetheless that in a world of small states both World War I and II would not have happened in all likelihood. And if the gold standard hadn’t been suspended at the beginning of World War I, the war – if he had broken out at all – would have been over within a few days, since the warring parties would have run out of money. Of course there could arise the situation that a small state is threatened by a “big neighbor.” In this case the small state can enter a defense alliance. Examples from the past – the Hanseatic League or the German Confederation – are manifold. In the same way that goods and services are organized on the market to cover the demand of the consumers, alliances between small states would organize if they demand protection and security. Humans are very ingenious if they are allowed to act freely. We shouldn’t underestimate this ability.

Followers of the realist school of thought would probably argue that the idea of small states is surely nice, but that in the world we live in not everyone thinks that way. To give examples: Wouldn’t it be possible that assuming the US breaks apart, Russia would quickly invade Eastern Europe? Especially at the end of World War II, the Soviet Union would have had the chance to conquer the entire continent, but there was the US and Great Britain who restored the balance of power. Aren’t major powers on the global stage in this sense necessary to prevent the not-so-friendly states – who would never be pleased by the idea of small states – from taking over?

PB: Clearly we have to stay realistic. The Soviet Union would also have had the chance to subdue entire Europe at the beginning of World War II, when a Greater Germany was opposed to them. The Soviet Union possibly would have conquered the entire continent if the many small German states of the early nineteenth century had continued to exist. But maybe the German small states would also have implemented a common defense, we don’t know. To guarantee to win a war is impossible. Going back to today: Even if the US would break apart they could still forge a common defense alliance and the Baltic states could also search for allies and make a Russian attack as expensive as possible – for example by arming the populace. Maybe the separated US wouldn’t be as aggressive anymore abroad which would lead to fewer wars. We should also keep in mind that since World War II we are in a nuclear age which deters aggressors. Even after a split by the US this deterrence would remain. Moreover – as mentioned already – because of globalization the costs of war would increase constantly between mutually connected economies.

Specifically libertarians in the US are often accused of being in favor of isolationism or even autarky whenever they demand to leave supranational organizations, to intervene less in foreign conflicts and to look at the national interest first. Why is this accusation missing the mark?

AM: The problem is that the terms “isolationism” and “non-interventionism” are lumped together by proponents of an interventionist foreign policy. Non-interventionism – that means trade with other countries, travelling to other countries, cultural exchange, respect for one another, but not meddling in the affairs of other nations – has nothing to do with “isolating” oneself. I wouldn’t take the accusation of advocacy for autarky serious. By mixing up terms it is obviously tried to color libertarians in backwardness to win over support for an interventionist foreign policy. The type of foreign policy the US is conducting needs a certain amount of support from the population. This is only possible, though – when one doesn’t have any arguments – by discrediting the opponents.

You have an entire chapter in your book on monetary systems and why they would work better in a world of small states. We at the Austrian Economics Center are of course particularly interested in that. Could you shortly outline the advantages on that specific point?

PB: Larger states also imply monetary harmonization. Monetary competition in the Eurozone has declined due to the introduction of the euro. Before the euro, a Spaniard could buy DM, Franc or Lire to protect himself against inflation.  One could see which monetary policy worked better and which worse. The Dutch central bank for example followed the German Bundesbank. So there was an institutional competition and a trial and error process. Today we have an Italian monetary policy for everyone in the Eurozone. Small states have to offer their citizens stable currencies or attach themselves to stable currency zones or else they will quickly lose companies and citizens. Borders aren’t that far away after all.

On a final note the everlasting question that libertarians get to hear sooner or later: Only theory or also imaginable in reality? Do you think we will ever see a world of small states, a world in which those states live next to each other peacefully and a world in which free trade over borders is possible without any problems (or where borders become even completely irrelevant)?

AM: It sounds as if you are asking if it isn’t utopian to imagine a world of small states – but utopian is only what is not working in practice. A world of small states can work. And the path to that point? Brexit could be the beginning of the end for the EU. If Britain is smart, it will lower taxes and embrace truly free trade. By that, they could trigger an economic boom in Britain, encourage other countries to imitate them and put pressure on the individual EU members to follow. Another possibility is the collapse of the paper money system which unavoidably would lead to distribution battles. Distribution battles in the sense that wealthier regions, having their own problems, will refuse to co-finance others – northern Italy, Bavaria, Baden-Wuerttemberg for example. Borders can only become irrelevant concerning free trade, though. Otherwise they are needed. Only through borders can bad governments, which will exist, be challenged.

Why Small States Are Better


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Philipp Bagus
He is an associate professor at Universidad Rey Juan Carlos. He is an associate scholar of the Mises Institute and was awarded the 2011 O.P. Alford III Prize in Libertarian Scholarship. He is the author of The Tragedy of the Euro and coauthor of Deep Freeze: Iceland's Economic Collapse.
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