The union of parliaments between Scotland and England took place in 1707.  The triggering event was the failure of Scotland’s Darien expedition, an attempt to colonise a strip of land in what is now Panama.  This was a good idea, but an idea considerably ahead of its time:  world trade would indeed grow, and Panama would became a pivotal location although still an inhospitable one. The Company of Scotland did not have the skills and resources that would enable the US government to realise the vision two centuries later.

The financial impact of its collapse  on the aristocracy and leading merchants of Scotland paved the way for Union – this was the first great bailout of failed Scots financial institutions.  But some were prescient enough to realise the much longer term implication of these events:  that Scotland could not expect to take a major role in the development of global trade except through union with a neighbour which was fast becoming the principal naval power.

       The outcome in Scotland was one of the most extraordinary transformations in economic history.  A poor country on Europe’s periphery became, within a century and a half, one of the richest areas in the world. The contrast between Edinburgh’s old and new towns makes the point in stone.

       Entrepreneurial capabilities gave the Scots a disproportionate role in the trading – and looting – opportunities created by the growing British Empire.  An extraordinary constellation of intellectual talent in Edinburgh, led by David Hume and Adam Smith, advanced the Scottish Enlightenment.  Technological advances propelled Scots to leadership in the development of steam engines, and hence in locomotives and ship building, and in textiles.       

       The economic success of Scotland in the eighteen and nineteen centuries through union with England presaged a more general trend.  In the nineteenth century, states became larger.  That century began with Napoleon’s failed attempt to establish a European empire for France.  But Bismarck and Cavour, the Royal Navy which won control of the seas and the pioneers who settled America, would be more permanently successful in forging political structures with economic power.  The dominant political events of the remainder of the century were the expansion of empires, the unification of Germany and Italy,  and the emergence of the United States of America as a global political and economic power.

       In the twentieth century, states became smaller.  The century began with the collapse of the faltering empires of Turkey and Austria-Hungary and ended with the collapse of the last European empire, that of Russia.   In the second half of the century, the membership of the United Nations grew from fifty to two hundred.  A majority of the current members of the European Union are countries that have only recently become independent.  Several small, peripheral, European states – such as the Nordic countries and Switzerland – moved within a century from being among the poorest of states to being amongst the most socially and economically successful societies in the world.

       A primary motive of nineteenth-century expansionism was the belief that economic prosperity was founded on securing political control over natural resources.  There was something in this notion, but much less than was thought.  Those who subscribed to that view greatly overestimated the importance of resources in economic development. They had not recognised how large would be the military costs of securing resources, and of maintaining control over the associated territory without the consent of the local population.  These costs would come greatly to exceed any economic benefits.  Moreover, while the economic benefits of empire mostly accrued to private firms and individuals, the costs of administering and defending territory fell on the public purse.   Democracies were reluctant to sustain this imbalance.

        By the end of the nineteenth century, new technologies – railroads and steamships, cables and telephones – were transforming transport and communication.  These innovations facilitated trade in goods and services and allowed easier movement of capital across borders.  Market access became possible without political union as the world became more economically connected.  As a result, small states became able to achieve prosperity on the basis of narrow specialisation in a global economy.

      Small states also benefitted from the greater capacity of homogenous communities to reconcile economic dynamism with social cohesion.  Scandinavia benefited from these factors in the twentieth century, but Scotland did so earlier because the Union of 1707 gave the country free access to the world’s largest military and economic alliance while allowing it to retain some of the social attributes of a small state.

       Scotland’s relative economic position deteriorated sharply in the twentieth century.   This was part of a rebalancing which occurred in the UK, and subsequently in other European countries which had been early industrialisers.  In the nineteenth century, the northern part of the UK had been the focus of industrialisation and economic growth, while in the twentieth century the South would become more prosperous.  But Scotland’s manufacturing sector, taken as a whole, is a story of spectacular failure.  At the beginning of the century, J & P Coats, the textile conglomerate, was Scotland’s largest industrial company and one of the largest companies in the world.  In the hundred years that followed, the company would decline into oblivion.  Scotland dominated the world shipbuilding industry, and ‘Clyde-built’ was a symbol of quality.

       Textiles and transport were not the best industries to have specialised in – heavy capital goods industries generally suffered during the interwar period, and competitive advantage in the products of commodity ships and clothing would slip away to lower wage locations on the opposite side of the world.  But there was nothing inevitable about the scale of Scottish industrial decline, and Scots today wear Italian suits, travel to England in French trains, and cruise in Scandinavian built ships.

    A specialism in engine technology that comprehensively fails to make a shift from steam to internal combustion is a particularly narrow one.  There was a general failure in imagination, innovation, and investment, the production of weak management abetted by obstructive labour militancy which resisted change in the organisation of production.  Family control can often be positive – as it mostly has been in similar industries in Germany – but in Scotland such control seemed to be associated with arrogance and complacency, and a reluctance to recruit able managers from outside the family. History records a long list of successful industrialists of Scottish origin, from Andrew Carnegie in the late nineteenth century through John Reith in the first half of the twentieth to Alex Trotman in the second half of the twentieth, who would build their careers outside Scotland.

       Scotland’s role in the economic exploitation of the British Empire would, however, be translated into a continuing strength in financial services.  Banking, insurance and asset management were areas of competitive advantage, and while the imperial role would diminish as the empire itself did, Hong Kong had always been as much a Scottish colony as a British one and Scots and Scottish dominated institutions would play a principal role when the island became a centre of trade and finance for the Asian region.  In the twentieth century, white collar activities – including public administration –principally based in Edinburgh prospered while blue collar activities, mainly located in and around Glasgow, did not

       In the twentieth century, it became possible to build a prosperous economy based on mobile phones, on speciality chemicals, precision engineering – even to build an economy based on fish.  Iceland learnt that if your principal product is fish, you are poor as an autarchic state, but rich in a global trading environment..  Some of the greatest economic success stories of the twentieth century have been built on Adam Smith’s greatest insight – that the division of labour reflects the extent of the market. 

Switzerland and Finland, for example, were among the poorest countries in the world in the nineteenth century.[i]  In the twenty-first century, they are among the richest.  Inhospitable terrain, adverse climate, and absence of minerals, are no longer disadvantages.  Indeed the resourcefulness and mutual support that such unfavourable physical factors engendered is a positive boon.

       These changes in the nature of economic power went hand in hand with changes in the nature of political authority.  The primary role of the state was once coercive – to main social control at home and confront foreigners abroad.        Max Weber famously defined government as the body which sustains a monopoly of coercion within a defined geographical area.[ii]  And the nature of nineteenth-century government followed that definition.  Military expenditure was the largest component of government spending.  Typically the next largest component was debt interest, which mainly represented the costs of past wars.

       This view of the state was associated with what Norman Angell would term ‘the Great Illusion’:[iii]  the idea that nations could best  increase their prosperity by gaining resources through territorial conquest.  In a world of little or no economic growth, where the principal means of enhancing wealth was to steal it from someone else, there is much sense in that view.  

The associated rise of specialisation and world trade, the industrial revolution, which made sustained economic growth within national borders possible, and the rise of democracy, which required that national wealth be widely shared, would comprehensively undermine that analysis of the sources of prosperity , (although it would only change perceptions more slowly).  Wealth creation within the framework of security of property and stability of institutions would provide a larger and more enduring source of opulence than grabbing land, resources or treasure.   The Great Illusion would, at least for Europeans, be finally dispelled in the ruin of Europe in 1945, and the collapse of overseas empires that followed .The rapid recovery of European economies from the destruction of their infrastructure would provide a vivid demonstration that in the modern world wealth is the product of people not things. The Japanese co-prosperity sphere that had not been achieved by conquest would be established through trade.

       And so the influence of economic forces on the size of states has changed radically.  Many people will resist this economic thesis, preferring to explain the events I have described in political terms. Yet the units that nationalism defines have changed. Nineteenth century nationalism sought to establish attachment to larger units.  ‘We have created Italy’, said reunification hero Massimo d’Azzeghio, ‘now we must create Italians’ (and with the aid of railways and mass education, that is what happened in Italy, as it did in Britain, Germany and France)..   But since the Treaty of Versailles, global politics has favoured the claims to nationality of smaller units, even to the emergence of microstates such as Montenegro and Kosovo. This is because nationalism is as much servant of economics as master.

Nationalism is a potent force in defining social and political identity, a complex mixture of ethnic and cultural affinities, rooted in a shared history.  Individuals have an evident need for these group identities, but the identities they emphasise change.  The Scots have been British when it suited them, and Scottish when it suited them.  In the nineteenth century,  Scots as Britons gained access to the British empire and the apparently necessary protection of a great military power.  Today, Scots no longer attach much store to these advantages and are, once again, primarily Scots.  There is nothing reprehensible about this opportunism, which is by no means unique to Scotland.  To think otherwise is to believe that national identity is somehow innate, perhaps genetic, rather than a social construction which is the product of a particular time and place.

       And to ignore the changing expectations of the things the state should do. Modern Europeans rarely want their governments to kick ass.  Nor do they want to spend much on preparations for that activity.  As a proportion of overall public spending, defence is now well behind social security, education and health.  What modern Europeans expect their government to do is to provide schools and hospitals, and to assure their physical and economic security.  The notion of government as a hostile, coercive force, still widely encountered in the United States, has very little resonance in Western Europe. Services such as education, health and social welfare, are the predominant functions of government and larger states have few advantages and significant disadvantages relative to smaller ones in these activities.   

European government is an economic agent, like a supermarket.  The ideological content is steadily draining from European politics:  European leaders proclaim their competence rather than their convictions.  As with supermarkets we judge government mainly by the quality of its output and the perceived competence of its management.  And in general, we judge it less favourably than we judge supermarkets. 

       And, as in a world dominated by supermarkets, smaller units succeed by finding niches to which they are well suited and developing these niches on a global scale.  Extensive trade is key to the prosperity of small states, and the key development making such growth possible has been the dissociation of trading alliances from military alliances.  So long as the belief that prosperity depended on control over resources was prevalent, such an association was inevitable.   A war-going nation needed to be self-sufficient in resources, food and industrial capacity.  But this military requirement for autarchy has disappeared.

       The prosperity of small states is a direct consequence of globalisation.  Finland and Switzerland manufacture no cars, though they consume many.  They do make textiles, but as high end speciality products for a world market.  In the modern global environment, economic success depends not on scale but competitive advantage.  Such competitive advantage may be held by individual firms – the Disneys and Coca-Colas.  More commonly in Europe, groups of related firms exploit local competitive advantages – southern Germany’s strengths in precision engineering, Korea’s high quality low cost production work force. 

Scotland’s economic future should be seen in these terms.  The lesson from the success of other small European countries is the opportunity to develop growth and prosperity on the basis of quite narrow sources of competitive advantage.  Modern consumers increasingly want services rather than goods, and the goods and services they want are increasingly differentiated products tailored to their individual needs.  That is why firms like BMW have prospered, and in the richest economies such niche firms have won sales from global mass producers.  Their global success is a reminder that niche doesn’t necessarily mean local. But it frequently does, especially in services.  And services, to repeat, are what we now seek from government.  Welfare, health, education:  then we find defence:  followed by transport, internet security, environmental services.

       With privately produced goods and services the organisation of production adapts to the nature of the market.  Boeing and Airbus assemble aeroplanes for the world from single facilities at Seattle and Toulouse:  haircuts are, and always will be, locally produced and delivered.  The adaptation of the location of production to the needs of the customer is equally relevant to public consumption.  The level of organisation appropriate for elementary education is lower than the level of organisation appropriate for higher education;  most environmental issues, like river quality, are best dealt with at very local levels, but some, like carbon emissions, at very aggregate levels.  And so on.

       Trade policy needs to be handled at high level.  And so does monetary policy.  In an era of global finance small states need to be part of a trade bloc and an actual or de facto monetary union.  The experience of governments everywhere is that the levels at which it is most efficient to collect taxes are higher, on average, than the levels at which it is most efficient to make expenditure decisions.  Even for large states, jurisdictional and enforcement problems for corporation tax and the taxation of income from capital are becoming increasingly severe.  The mismatch between efficient tax raising and efficient expenditure allocation is why federal states generally have a system of distribution of centrally collected revenues to state or provincial governments.[iv]

       That matching of service delivery to efficient scale changes what we mean by sovereignty.  Weber’s definition emphasised the coercive role of the state:  along with coercion went monopoly.  But if coercion is no longer the defining characteristic of state action, the requirement for  monopoly falls away also.  We can envisage multiple layers of government operating within a single local area, each delivering the services in which they have a competitive advantage.  And that is what, increasingly, we observe.[v]

       The word sovereignty derives from the word sovereign.  Nobles exercised authority at the authority of the king and governed their territories through that authority.  The analogy in a world of many governments requires that both supranational and subsidiary governments operate under licence, as it were, from sovereign government.  But this constitutional analysis is without economic relevance.

       If sovereignty is the capacity to act without the agreement of other governments, then every government, even that of the United States, faces serious limits on its economic sovereignty.  The concept of sovereignty is a distraction from the issues of economic debate,  whether the debate is about Scotland’s relationship with the United Kingdom or the United Kingdom’s relationship with Europe.  The EU is a layer of government which appropriately wields authority on issues for which the appropriate level is the European.  There are not many such issues, but internal and external trade policy are at or near the top of the list. 

That view of the economic role of the EU sees it for what it should be, and substantially is a bureaucracy with limited, well defined functions.  Not everyone wants to see it that way:  officials and politicians who operate at the EU level naturally try to seize what powers they can from other levels of government, with modest success.  They often seek to create the appearance of a traditional Weberian coercive state at European level.  That means European involvement, and ultimately control, of fiscal and monetary policies and foreign and defence policies.  These advocates make little progress in these areas, and are likely to continue to make little progress. 

But in Philip Bobbitt’s words, ‘it is a failure of imagination, however, to assume that the only thing that will replace the nation-state is another structure with nation-state like characteristics.  It is in some ways rather pathetic that the visionaries in Brussels imagine nothing more forward-looking than the equipping of the EU with the trappings of the nation state’.[vi]

       Many people in Britain are still wedded to the concept of the modern democratic nation state as it developed through the nineteenth century.  That modern state used democratic institutions to legitimise its monopoly of coercion.  The post-modern state which is succeeding it is primarily an economic agent which gains legitimacy through its effectiveness in the delivery of services.[vii]  Many people in Britain remain hostile to the European Union and many of those who support the EU count themselves among Bobbitt’s “pathetic visionaries” who want to reproduce the nation-state at a European level. 

       But economic competition in the twenty-first century is not about capacity to mobilise divisions and dreadnoughts, but about the capacity to achieve high living standards by selling mobile phones and speciality chemicals. Economic success is not achieved by armies fighting political enemies on broad fronts, but predicated on the development of relatively narrow competitive advantages in firms and groups of firms.  In this modern competition, some of the major winners have been small states whose economies have been able to pursue their strengths without the paralysis created in larger countries by conflict between large, established vested interests: the paralysis the Thatcher government partially destroyed in the UK but which is so evidently persistent in Europe’s other large economies in France, Germany and Italy.[viii] 

         In 2011. the Scottish Social Attitudes Survey asked Scots how whether they would support independence for Scotland if it would make them £500 a year better off, and found a two to one majority in favour. The survey reversed the question – suppose you would be £500 a year worse off – and found that this would reverse the plurality. It is hard to imagine a similar finding in Ireland in 1921, or India in 1945. Patrick Henry’s cry to the American colonist of “Give me liberty or give me death”  lacks the same resonance when reframed as “Give me liberty or give me £500”

     Yet perhaps this represents a realistic advance. The modern debate about political structures is appropriately cast as a debate about economic  efficiency, not about a concept of sovereignty which has little meaning in the economically interdependent world which, to our great benefit, we have created.

[i] See Maddison (2001) for long term growth rates of many economies.

[ii] In his 1919 lecture ‘Politics as a Vocation’

[iii] Angell (1913)

[iv] See the survey by Oates (1999)

[v] Alesina and Spolaore (2003) is the best source on the relationship between government function and state size

[vi] Bobbitt (2002)

[vii] The concept of the post modern state is first expounded by Cooper (2003).  Bobbitt’s market state has a similar character.

[viii] The most powerful analysis of this remains Olson (1982)