Independent Scotland – The power of small economies

With the Scottish independence referendum on the doorstep I have been tempted into expressing my opinion in a short post even though I have absolutely no skin in the game. I can sort of see the logic behind Westminster barging in for the run-up but it has always puzzled me why large businesses feel that threatening to move their headquarters abroad is a risk that anyone should seriously be concerned about. In a world of free trade the headquarters of businesses is hardly of cardinal importance for the supply of goods and services.

Not many decades ago I would have accepted the argument that the success of a country hinges on its size but that was a time when trade was abundantly limited. Today – even outside of the EU there are significantly fewer trade barriers. This is exactly the point Becker pointed out a couple of years ago in an interesting discussion with Richard Posner on the optimal size of the economy:

“Small countries can do well with small domestic markets by taking advantage of a globalized economy by selling large fractions of its production to consumers and companies in other countries. That is why smaller countries usually export a considerably larger fraction of its production, and import a much bigger share of its consumption, than do larger countries. Size of country was much more important in the past when many countries had high tariffs, and transportation costs were much more important.”

Moreover, Becker made another important set of points:

“Political interest groups tend to be less able in smaller countries in distorting political decision in their favor. This is partly because smaller countries are more homogeneous, so it is harder for one group to exploit another group since the groups are similar. In addition, since smaller nations have less monopoly power in world markets, it is less efficient for them to subsidize domestic companies in order to give these companies an advantage over imports. The greater profits to domestic companies from these subsidies come at the expense of much larger declines in consumer well being.”

As a classical liberal I have natural support for people’s choice to remain untampered by the government – which explains my aversion to the recent Westminster campaign. More importantly though, as an economist I am thrilled for Scotland if they vote yes because independence may bring them a world that embraces more freedom in trade and less rent seeking by behemoth local businesses through their politician cronies.

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