The Online Library of Liberty

A project of Liberty Fund, Inc.

• F. A. Harper, Introduction
• Gustavo R. Velasco, On the 90th Anniversary of Ludwig Von Mises
• F. A. Harper, Ludwig Von Mises
• Property and Freedom, Alberto Benegas Lynch
• Technological Progress and Social Resistance, Guillermo Walter Klein
• Principles Or Expediency? F. A. Von Hayek
• Protection For Farmers, Antony Fisher
• For a Philosophy of Choice, Lord Grantchester
• The Surest Protection, Ralph Harris
• Towards the Just Society, Ralph Horwitz
• Size and Well-being, J. Enoch Powell
• Pour Eviter “une Collectivisation Par Annuities”, René Berger-perrin
• En Défense De L'economie Libérale: Réponse à Quelques Objections, Gaston Leduc
• L'occident Pour Son Malheur a Choisi Keynes Contre Mises, Pierre Lhoste-lachaume
• Das Ordnungsdenken In Der Martwirtschaft, Ludwig Erhard
• Unsere Gesellschaftsordnung Und Die Radikale Linke, Edith Eucken-erdsiek
• Privateigentum— Die Für Mitmenschen Günstigste Lösung Bei Den Produktionsmitteln, Wolfgang Frickhöffer
• Macht Oder ökonomisches Gesetz, Ernst Heuss
• The Reliability of Financial Statements, Ulrich Leffson and Jörg Baetge
• Ist Die Inflation Unser Schicksal? Alfred Müller-armack
• Der Reiche Goethe Und Der Arme Schiller, Volkmar Muthesius
• Krise Der Politischen Formen In Europa, Otto Von Habsburg
• The Need to Make Cognizance Available, Ulysses R. Dent
• Ways to Communism, Giuseppe Ugo Papi
• Convergence Theories and Ownership of Property, Kenzo Kiga
• Soaring Urban Land Prices and Market Economy, Toshio Murata
• Jesus and the Question of Wealth, Alberto G. Salceda
• A Program For a Liberal Party, Gustavo R. Velasco
• On the Entrepreneur Andries De Graaff
• La Integracion Economica De America Latina, Romulo A. Ferrero
• Problems of Economic Responsibility and Initiative Re-emerging In Eastern Europe, Ljubo Sirc
• Rent Control In Sweden: Lessons From a Thirty Year Old Socio-economic Experiment, Sven Rydenfelt

Size and Well-Being
J. Enoch Powell

In the current debate about British membership of the European Economic Community one of the staple arguments turns on the size of an economy. It is asserted, for instance, that ‘the economy’ of the United Kingdom is too small, and that its allegedly unsatisfactory ‘growth’ is due, at least in part, to this inadequacy of size and would be improved if the United Kingdom became part of the Economy of the European common market. The object of this paper is to examine this and similar assertions.

If the term ‘economy’ in this context meant an area within which there is no artificial restraint upon economic activity and intercourse, the proposition would be self-evidently true: since economic advantage proceeds from specialization and exchange, it will be maximized by maximizing the scope for specialization and exchange. That is not, however, the sense in which the expression ‘economy’ is being used. What is talked about in this context as ‘an economy’ is a political thing, namely, a population inhabiting an area of which the boundaries are determined politically. Perhaps cases might be found, especially in primitive conditions, where economic intercourse beyond the political boundaries of a population was physically (technically) impracticable, and where therefore the outline was drawn as much by physical as by political factors: the population of an undiscovered island could be both an economic and a political entity. For practical purposes, however, when statements are made about the size, well-being, growth, etc. of ‘an economy,’ they are statements about a political entity, described and examined in economic terms.

Moreover, such statements about ‘an economy’ presuppose the existence of political interference with economic transactions. If the whole world were a common market, references to ‘the British economy’ or ‘the Swiss economy’ would belong to the same class as references to ‘the economy of the Middle West’ or ‘the economy of Cornwall’; but even when Britain's free trade policy was at its purest and most doctrinaire, there was still a specific meaning to the phrase ‘the British economy’ in a world where almost every other country's government interfered with trade. A fortiori today, ‘an economy’, is something which has an economic policy. We must therefore add another political dimension to the term ‘an economy’, as the subject matter of statements about size, growth, and the rest. They are statements not merely about an entity determined by political forces but about an entity whose government interferes deliberately with economic behaviour.

By this process of definition we have already arrived at two highly relevant observations. The economic policy which prevails in an economy must be of some importance, and possibly of high importance, to the economic well-being of its population. Therefore, even if increase of size were advantageous per se, the advantage might be offset, or more than offset, by the effects of economic policy. It follows that no generalization is possible: the economic policy, present and prospective, of the larger ‘economy’ must be taken into account in each case, and an attempt made to estimate its consequences. For example, in relation to the E.E.C., it would be necessary to evaluate the disadvantages (in comparison, of course, with the present and prospective policies of the United kingdom) of such features of economic policy as agricultural self-sufficiency, protectionism towards the external world, internal economic planning of various kinds, rigid external rates of exchange.

The mention of such common policies of an enlarged ‘economy’ brings up the other observation which flows from the definition. Since an economy is identified politically, economic advantage in relation to it is that of its own population and furthermore must not, at lowest, be inconsistent with its political existence. For instance, the inhabitants of a country might all better their economic condition by emigrating to another country, but this would count as the destruction of ‘the economy’ of Country A. The relevant economic advantage is that of the population occupying the territory with which all parts of that population identify themselves politically. Thus it is a presupposition for advantages to be derived from increased size that either they accrue uniformly throughout the larger ‘economy’ or that the enlargement reflects a political change in outlook and self-identification of the population concerned. In epigrammatic form - politics comes before economics.

In fact, some of the apparently economic benefits attributed to increase of size reveal themselves, upon examination, as political. Take, for example, the proposition, often heard in connection with Britain and the European Economic Community, that a large ‘economy’ is necessary as the base for modern nuclear, space or aviation industries. It is no doubt true that very large capital investment is essential for many activities within those industries. Experience, however, shows that capital is regularly raised from a number of countries to finance large projects in one of the countries, or elsewhere altogether. The petroleum industry would provide many instances. The difficulty in financing the projects to which the argument relates is not the difficulty of drawing risk capital, or other investment capital, across national frontiers. The difficulty is that these are projects which can only be funded compulsorily, that is, by governments taxing their subjects.

The cost of the American space programme would bear an intolerably high proportion to the national income of any other economy, except that of Russia. This is because it is a project on which only a government would determine and which could only be financed by compulsion. Therefore, the capital can only be extracted from an economy where the writ of government runs. Admittedly, several governments might freely arrive at a common decision to tax their respective subjects for a common purpose; but the political stresses and strains of such simultaneous compulsion are serious, and the history of several such joint projects of two or more European countries points the moral: E. L. D. O., E. S. R. O., the Anglo-French Variable Geometry Aircraft, the Multi-purpose Combat Aircraft, the European Airbus and perhaps shortly, the Anglo-French Concorde are skeletons along the caravan route. Hence the need to weld the taxpayers of several countries into a single political body, which can be taxed by a single political decision.

In short, the advantage proposed for an economy of larger size is in this context non-economic, indeed anti-economic, viz., the power to enforce investment in uneconomic projects. That a large empire is more powerful than a small empire, is not in dispute; but it is also not the point.

If projects dependent upon government compulsion are left out of account, the case turns upon the economic advantage of what is called the large, or larger, ‘domestic market’. The emphasis must be placed strongly on the word ‘domestic’. As already argued, the issue is not a larger ‘free market’, (in regard to which the assertion becomes a truism), but a larger ‘national’ market—if the word ‘national’ may be used to summarize the foregoing argument as to the political nature of ‘an economy.’ The proposition that it is advantageous to be part of a large, or larger, ‘domestic market’ is thus tantamount to the proposition that it is economically advantageous for a nation to be merged or amalgamated into a larger nation.

How can such a proposition be tested? If other things were equal, then if the proposition held good, it should follow not only that larger nations would do better economically than smaller nations, but that this advantage applied to all parts (or at least all major or substantial parts) of the larger nations. (The second deduction would be necessary, because the alleged advantage of amalgamation has to apply to each of the former units so amalgamated.) One ought, for example, to be able to draw up a table of nations in order of size and in order of economic well-being, whatever index or criterion of that might be chosen, and find that they matched.

Obviously, however, other things are not equal. It would clearly be absurd to expect that a large nation with a territory or a population poor in economic resources should compare favourably with a smaller nation which was rich in them. What is not unreasonable is to expect that, if the proposition were true, larger nations would make better use of whatever economic assets they possessed than smaller ones; nor is it difficult on this basis to institute some sort of comparison, because the concept of economic growth might be taken as an indication of the use progressively made of economic resources. It might, for example, be possible to test the proposition by comparing the growth rates of larger and smaller nations, and expect that, if it were true, there would at least be a tendency for larger nations to show higher growth rates than smaller nations, and for those higher growth rates also to characterize all the component parts of the larger nations.

There is no disputing that even this form of comparison is open to serious objections in logic and in method. It is true that the cruder fallacies of international comparison are avoided or lessened: the problem of exchange rates is eliminated; and though the basis of the various national statistics may (as it does) vary widely, the degree of error in a comparison between rates of change within each economy is likely to be much less than in a comparison of rates of change between economies. There remain, however, severe difficulties. There is the conceptual difficulty that at different stages of economic development the measurable (or at least the normally measured) “growth rate” may be more or less appropriate as an index of economic well-being and progress; there is, to mention only one, the well-known point about the failure to evaluate leisure, and the differing value of leisure at different stages of economic development. Akin, but more serious, is the difficulty of time. Unless all economies are capable of infinite progress at a uniform pace, it must be the case that, for reasons which have nothing to do with size, economies develop unevenly, and faster at some periods of history than others. It could therefore be that the rate of growth of an economy is related, partly at least, to its own life-cycle. This consideration is specially important in regard to the United Kingdom, in view of evidence∗ that it has been characterized by relatively low rates of economic growth for at least a hundred years, since its industrial revolution in the early 19th century. There is even a certain difficulty over the simple task of arranging nations or ‘economies’ in order of size—whether this refers to crude population or to work-force—and of making allowance for changes in size of population or work-force over the period of the comparison.

Yet when all is said and done, granted all the qualifications and crudities, it would be surprising, if the proposition under examination were true, to find no correlation between size and growth. I have therefore selected a range of tables to bring out the factor of national size. I put them forward with brief comment in each case, starting far away from Europe and its concerns.

There is not the shadow of a correlation of any sort between size and growth. If other criteria (e.g. growth, not per capita) or other periods had been chosen, there would have been considerable alternations in the growth order; but there would have been no greater correlation with size.

There are several striking features here. The UK and the four-times larger economy of the USA show roughly level pegging. Sweden, less than a sixth the size of the UK, does pretty consistently better. The EEC countries, taken as a whole, betwixt and between the UK and USA if treated as a single unit, show much greater growth; but subsequent tables look below the surface of that record.

The experience of the three main EEC partners was markedly divergent; the period after EEC was notably better for the UK as well as for the EEC as a whole. The next table shows that the same contrasts in individual experience held good over longer periods of comparison.

What appears from this comparison is that improvement took place at a faster rate before 1959 in Germany, and after 1958 in the other countries, while Germany fell to third place below Italy and France. Otherwise the relative positions and performance of the countries remained remarkably constant. The picture can however only be reliably seen in the light of what was happening in the rest of Europe.

The fallacy of averages, such as “rest of OECD” in Table IV, is thrown into relief: by treating EEC and EFTA as a whole, a totally unreal picture is presented. The national economies, both inside and outside the European Economic Community, follow their respective paths without relationship either to size or to membership or non-membership of the Community. Once again, a different run of years would produce a different ‘batting order’; but that ‘batting order’ would show equally little relationship to size.

I would emphasize, in conclusion, if that has not already been done sufficiently, that comparisons of nations and groupings by size and economic experience disregard an array of major factors which determine or influence the economic experience of the respective economies. If those factors were brought into the picture, nothing would be left of the comparison. But that is only another way of saying that there is no trace of size as a factor which affects the experience of economies favourably. Not only does the evidence not support such a proposition, but there is nothing in the evidence even to suggest that size is prima facie worth investigating as a factor in economic growth. What is remarkable, and significant, is that size should have been so widely assumed to play a part, and a positive part, even in the face of experience so strikingly in conflict with that hypothesis. When this sort of thing happens, it is a sign that some unconscious prejudice is probably at work. I suggest that in this case it is the prevalent prejudice in favour of bigness for its own sake. In Britain today both the economic and the political case for joining the European Economic Community resolves itself into the assertion, often treated without discussion as an argument, and a conclusive argument, that the Community is large and would thereby become larger, equal indeed in size to the ‘giants’ of common parlance, America and the U.S.S.R. The belief that the size of an economy is relevant to its well-being is not a conclusion from evidence or observation; it is a reflection of this contemporary prejudice.

[∗]M. Fores, Britain's Economic Growth, Lloyds Bank Review, January 1971, pp. 27 ff.