Why Small is Beautiful

At the Daily Reckoning, Dominic Frisby has a splendid article on why small societies have mostly been prosperous

First Mr. Frisby notes of the role played by decentralization and centralization in shaping Italy's present conditions

In the story of man, Italy has twice been the global center of innovation and invention — once under the Romans, and then again during the Renaissance, when it produced such great men as Leonardo da Vinci, Michelangelo and Galileo. No other part of the world can claim such an emphatic double — not China, not Britain, not the USA. You cannot doubt the potential of the Italian people. You cannot doubt their talent.

Yet throughout the 20th century, Italy has been (and still is) a cradle of corruption, political infighting, bureaucracy, crime (think Mafia and Camorra), corruption, rent-seeking, inflations, division, fascism, communism and goodness knows what else. Its state is bloated, its political system dysfunctional. The country might be nominally unified, but in reality it is anything but.

Where did Italy go wrong? The answer: It unified.

Admittedly, this unification was forced on it. As the city-states lost their independence, it came under foreign domination, first under Spain (1559-1713), then Austria (1713-1796), then France, then the Austrians again. Finally, in the mid-19th century, came the Italian Wars of Independence, unification, and birth of the Italy we know today.

Next he narrates a short history of "small is beautiful" in the global context.

Small is beautiful. In A.D. 1000, Europeans had a per capita income below the average of the rest of the world. China, India, and the Muslim world were richer and had superior technology: China had had the printing press for 400 years. Her navy “ruled the waves.” Even as late as 1400, the highest standards of living were found in China, in the robust economies of places like Nanjing. But the empires of the East became centralized and burdened with bureaucracy and taxes.

In Western Europe, however, made up of many tiny nation-states, power was spread. There was no single ruling body except for the Roman Catholic Church. If people, ideas, or innovation were suppressed in one state, they could quickly move to another, so there was competition. The cities, communes, and maritime republics that made up what we now call Italy — Genoa, Rome, and Florence, for example — became immensely prosperous. Venice in particular showed great innovation in turning apparently useless marsh and islands into a unique, thriving metropolis that would become the wealthiest place in the world.

In the 16th century, the repressive forces of Roman Catholicism, which was becoming corrupt, began to be overturned in Northern Europe. The Bible was translated into local vernacular. The Protestant movement saw deregulation and liberalization. Gutenberg’s printing press, invented a century earlier, was furthering the spread of knowledge and new ideas — and thus the decentralization of power.

Over the next two hundred years, Northern Europe caught up with Southern Europe, which remained Catholic, and then overtook it. First, it was the Dutch, also made up of many small states. Then, in the 18th century, it was England, which, in spite of its union with Scotland and its later empire building, had further dispersed centralized power by reducing the authorities of the monarch after the civil war of 1642-51 and by linking its money to gold.

Meanwhile, out East, the Ottoman Empire and China went into a relative dark age, centrally governed by autocratic or imperial elites, burdened with heavy taxes and slow to react and unable to cope with the plagues and wars that befell them. By 1950, the average Chinese, according to author Douglas Carswell, was as poor, if not poorer, than someone living there a thousand years before.

Third, Small is beautiful exists until today…

Nothing changes… The success of small nation-states continues even today. If you look at the World Bank’s list of the richest nations in the world (as measured by GPD per capita at purchasing power parity), you see Luxembourg, Qatar, Macau, Singapore, Norway, Kuwait, Brunei, Switzerland, and Hong Kong. Perhaps Macau and Hong Kong, as parts of China, should not be included, in which case you add the U.S. and the United Arab Emirates (similar nations appear on the International Monetary Fund’s list).

Why is being small beautiful?

In a small state, there is less of a gap between those at the top and bottom, there is more transparency and accountability, it is harder for the state to hide things, there is more monitoring, less waste and more dynamism. Small is flexible, small is competitive — small really is, as economist E.F. Schumacher said, beautiful.

Read the rest here

Small is beautiful because of decentralization. Decentralization promotes a culture of spontaneous diversity, heterogeneity, specialization, tolerance of failure, trial and error, and competition necessary for greater efficiency in the allocation of resources and innovation.

Decentralization thus extrapolates to individual advancement that accrues to, and reflects on the society level.

In short, small is beautiful because it is a bottom up dynamic where commerce or free markets drive real (not statistical) prosperity

Importantly decentralization disperses risks and promotes legal institutions which have mostly been attuned with local customs, traditions and grassroots social interactions.

Decentralization also is an optimum way for people to convert localized knowledge into productive activities.

As the great Austrian economist Friedrich von Hayek wrote: (bold mine)

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. 

In centralized political systems, “small is beautiful” can be seen in the informal economy.

And with the fast advancing information age, the world will eventually evolve towards decentralization. But the transition will not be smooth as the friction from the resistance to change by 20th century based centralized political systems vis-à-vis technology based decentralization have only intensified.