Switzerland consists of 26 states, which are called cantons. Each canton enjoys ample autonomy, for example in setting its own taxes — taxes in Switzerland are primarily local and cantonal — or making its own laws. In Appenzell Innerrhoden, for example, there is no law that hasn’t passed a popular vote. Note the distinction: not laws that have been made by representatives of the people (as it is the case in Germany or France); nor laws that have been tacitly accepted by the people if no referendum is called against them (as it is the case on Switzerland’s national level). In Appenzell Innerrhoden, all laws must be explicitly approved by the people.

Appenzell with its 15,000 inhabitants isn’t a unique case. It is small and cherishes this. The same thinking applies to most (or all) Swiss cantons. When in 2014 a popular vote was called to unite the cantons of Basel-Stadt (175,000 inhabitants) and Basel-Landschaft (285,000 inhabitants), the people dismissed it by 60%. Switzerland’s newest canton, Jura (75,000 inhabitants), only joined the Confederation in 1979, when some of the francophone regions of the canton of Berne declared their independence and formed their own republic within the Helvetic Confederation.

These examples show that, from a Swiss perspective, small is beautiful. As important as recognizing this is, it is also worth considering the reasons behind this. There are three concepts rooted in economic anthropology that can help us understand this better: first, ‘scarcity and alertness’, which can help explain how small political entities react to opportunities; second, ‘bonding and bridging’, which can help us understand how small political entities can profit from their stock of social capital; and third, ‘competition’, which indicates how to implement a system in which small political entities can thrive.

Alertness and scarcity

The main subject of the American economist Israel Kirzner’s lifelong studies is the role of the entrepreneur in market processes. Kirzner argues that ‘alertness’ is the main characteristic of entrepreneurial action. In an earlier expression of this idea, the entrepreneur was an arbitrageur: the entrepreneur on the lookout for opportunities for profit. Such opportunities arise, of course, when there are differences in the prices of resources and products and these differences can be turned into profits by entrepreneurs.

Here’s a typical example: ‘A’ and ‘B’ both sell coffee at the same price. ‘A’ discovers that his coffee can stay longer in the sun, which attracts more customers. ‘A’ takes advantage of this situation and charges a premium for coffee. Nothing changes in the production structure of ‘A’; but ‘A’ takes advantage of a random factor that works to its advantage.

James M. Buchanan (1919-2013), who won the Nobel Memorial Prize in Economic Sciences, criticizes this conception. While he thinks the idea of ‘alertness’ is useful, at the same time it is unnecessarily restrained by Kirzner. Buchanan explores two specific criticisms. First, in an economy guided by supply and demand, prices are not a function of the production structure of supply but of the preferences of supply and demand. The entrepreneur doesn’t need to be an arbitrageur in order to charge a premium; the entrepreneur just needs to pay attention — to be alert — to supply and demand factors. Second, Kirzner seems to assume that there is no innovation in the entrepreneur’s actions (or that innovation simply means discovering possible imbalances and taking advantage of them). According to Buchanan, the future is not only unknown but open-textured; it is a matter of creation and not discovery. Thus, entrepreneurs actively create innovation, in the process becoming themselves the drivers of the innovative process. They create innovation because they are alert to their possibilities as well as to potential customer demand (see, for example, the 1991 essay, “The market as a creative process”, co-written by Buchanan and Viktor Vanberg). In 1997, Kirzner responded to this criticism.

How do we apply this concept to small-scale political entities? Switzerland, once again, can serve as an example. The above-mentioned canton, Appenzell Innerrhoden, never had a law about the opening hours of businesses. It was never considered necessary. But other cantons had — and continue to have — such laws. Business people in Appenzell realized that they could open on Sundays and thus serve tourists and other customers. Ever since Appenzell started keeping businesses open on Sunday, different larger cantons have been trying to change their laws in order to allow for the same. But because of their larger — and, in relation to Appenzell, relatively complicated — polities, they failed. A national attempt to liberalize business hours was then launched on the confederate level (but failed to pass).

Kirzner contends that ‘entrepreneurial alertness’ means taking advantage of a situation. In a small polity like Appenzell, this is easily done. In Appenzell, no regulatory environment was needed to address the issue of opening hours. The only thing needed was the mutual consent of the business people involved —  whoever wants to open, opens; whoever doesn’t want to, does not — and some consultations with stakeholders.

Israel Kirzner delivering a lecture at the Foundation for Economic Education (FEE) on 28 July 2006. Image courtesy of Felix Ling / CCA 2.0 Generic.

Here’s another example. The Swiss canton of Zug is a hub for commodity trading, asset management, and crypto-currencies. An attentive Parliament recognized that the other Swiss commodities hub, Geneva, was on its way to overregulating the sector. Zug opted to go in the opposite direction. Zug also noticed that banks were squeezing independent asset managers and other small-scale financial services providers out of Zurich, and actively offered its ’30-minutes-from-Zurich’ self as a new place. Zug’s regulatory ‘thrift’ thus allowed many enterprises to experiment with new financial products (such as crypto-currencies).

Alertness can — must — function on the level of the polity. And small-scale political instances are most quick to adapt. In the example of the entrepreneur as an arbitrageur, only the one who most quickly transforms alertness into a stream of revenue is successful. If an entrepreneur’s alertness also allows for innovation at large, it is still part of alertness not only to identify the opportunity but to seize it and turn it into a product. The same applies to political bodies. It is not enough to see a possibility; it is much more important to be the first mover — or to be among the first movers — and turn the opportunity into an advantage.

Naturally, this should not be understood as an exclusivity claim; there are quick and adaptable large polities, too. But small polities are more alert to new chances because they have to position themselves in a system of competition and they ‘know’ that they lack scalability — so they search for other means. This seems to be pivotal. Small polities act on their (relative) scarcity. It is this scarcity that is the driver for their alertness and efficiency in seizing opportunities. For small polities, scarcity is a blessing rather than a curse because it drives them to innovation and entrepreneurial action. While alertness is a sufficient condition, scarcity is a necessary condition for small polities to position themselves well — politically, economically, and socially.

These examples show yet two further features: in every one of them, cooperation and competition were important, even constituent factors of success.

Bonding and bridging

The social fabric of a community — what is sometimes called “social capital” — comes from social interactions in which individuals bond, create trust, and solve conflicts, or connect to different groups. As Robert D. Putnam has written: “Social capital refers to features of social organization, such as networks, norms, and trust, that facilitate coordination and cooperation for mutual benefit.” Bonding occurs within a community of individuals — such as a neighbourhood, a lineage group, or a network.

Bonding social capital is a necessary antecedent for the development of the more powerful form of ‘bridging’ social capital. Bridging social capital is what Putnam in 1995 refers to as cross-cutting ties. Bridging social capital occurs when members of one group connect with members of other groups to seek access or support, or to gain information. Bridging also refers to the capabilities of resolving conflicts without calling a third party (i.e. someone or some institution outside of the social group). As was the case with scarcity being a necessary condition and alertness being a sufficient condition for the development of the small polity, as far as social capital is concerned, bonding is the necessary condition and bridging the sufficient condition for small polities to succeed.

Small-scale polities can be at an advantage in bonding as well as in bridging. In small-scale polities, political decision-making supervenes on social capital. In large political bodies, politics suppresses, ousts, or replaces social capital. This warrants a more detailed explanation; it follows here, embracing two aspects:

First, this claim is not one by necessity but by probability. It is more probable for political processes to supervene on social capital in small polities because the managers of these processes are part of the community. They interact with the community not primarily as a political manager but as a member like any other. The political activity is secondary and depends on being a member of the community. In large-scale polities, however, managers of political processes rely on the political processes themselves to remain in power as well as to perform their duties. In larger scale political entities, with increasing political anonymity of the individual and multiplication of networks, one network alone — with all its bonding and bridging capital – is neither large enough to control nor powerful enough to empower the managers of political processes. Therefore, these managers resort to different networks becoming relatively independent from one system of bonding and bridging.

Second, politics suppresses, ousts, or replaces social capital because it substitutes the interpersonal relationship and accountability with impersonal processes, therefore limiting the individual responsibility for the whole. This dislocates bonding between people to ‘trust’ in procedures. And it externalizes — outsources — the bridging of interests to managers of political processes or judges, as various scholars such as Newton, and Robison and Ritchie, have written. Bonding and bridging, therefore, cannot be engineered top-down, as insinuated (according to Lowndes and Pratchett) sometimes by the political term ‘big society’. It has to grow bottom-up. In order for it to grow, however, it needs free space — i.e. the absence of political intervention — allocation and symmetry of individual responsibility, the possibility of failure, and the possibility of conflict. As Elinor Ostrom (1933-2012) was careful to point out, the stock of social capital only grows with its usage and shrinks with its administration. Using social capital also entails allowing for it to lose value, for it is in remedying the loss that instruments for bridging can develop.

Benjamin Franklin’s Philadelphia in the 18th century serves as an example. The Philadelphia of that time was a small political entity. It was part of a larger political body, but the city basically consisted of three networks (each with subdivisions, of course): Quakers, English-speaking inhabitants, and German-speaking inhabitants. These networks each functioned as a social group, with their own division of labour, stratification, social institutions, and ways of conflict resolution.

Franklin realized that the political set up of the city wasn’t able to cope with different challenges. He also realized that the colonial administration wasn’t even aware of the different areas in which problems had to be addressed. Instead of calling for political action — that happened later — he initially set out to mobilize groups of like-minded people that would do what they considered needed to be done. These were not ‘interest groups’. They would not make claims for provisions by the polity but would form a fire brigade, create a library, build a convention hall (or church), clean the streets, provide relief for the poor and education for German-speakers, or train a militia. These groups of citizens took matters into their own hands. But by doing so, they also took responsibility for their success or failure. The individual members felt responsible not only for the group’s endeavour but also for the whole community.

Another example of bonding and bridging communities are the Chinese villages in Hong Kong’s New Territories. It is not Hong Kong but its New Territories that are the example of a small polity. Due to a mix of a lack of interest and a lack of comprehension, the British administration did not extend its colonial bureaucracy to the New Territories. In fact, until the 1980s, this relatively large part of Hong Kong was left to self-regulation, according to Wesley Smith. Instead, the Colonial Office accepted that the different lineage groups in the New Territories had their own system of functioning. So instead of incorporating them de facto into the political system of Hong Kong, the British allowed for the different networks in the New Territories to access political institutions on an as needed basis.

It was with an equal lack of understanding that the British administration witnessed how these groups pushed for Hong Kong’s industrialization — while the Europeans remained essentially traders — and used the inflow of refugees from China as workers, integrating them (as Potter points out) into the community. The small, decentralized, and bottom-up system of the New Territories was better than the administration in dealing with problems such as hunger, criminality, and diseases. Because of the alignment of responsibility for success and failure in networks such as ‘clans’, ‘temples’, ‘villages’, and/or ‘brotherhoods’ (the quotation marks here only denote that these expressions are imprecise descriptions of local phenotypes), the New Territories could organize themselves, integrate the influx of migrants, and turn this social capital into productive assets — namely, into industrialization.

This system of social capital was enough not only to maintain order and stability, but also to allow economic development and cultural diversity. Larger elements of self-organization — such as temples for deities that transcended ‘clans’ and ‘villages’, hospitals, and schools — emerged. The leadership of these larger elements of governance made sure that the different networks in the New Territories cooperated in this exercise of self-regulation, thus bridging them (according to Watson and Watson). But cooperation is not everything. Competition, too, can explain why small is still — rather, can be — beautiful.

Gumsa and gumlao

Competition happens on three separate levels: first, between the agents of the small-scale polity; and, second, between the polities. But there is a third type of competition: political competition in the small-scale polity. The first and second are quickly explained. Despite all the cooperation described earlier, the individual members of a community are still in competition with each other. They might solve some problems and address some chances through communal channels; but in order to succeed, they need to use alertness to their own profit. A small-scale polity that allows for as much competition as possible is at an advantage. Small-scale entities then stand in competition to each other. The more they embrace the competitive principles, the more they can use resources within their communities to cooperate in identifying chances to differentiate themselves from other polities.

The third type of competition seems counterintuitive; but is as necessary as the other two. Political competition provides the inner momentum of a polity. It addresses how they stand in relation to themselves or their inhabitants. There are many ways of incorporating political competition into a polity. For example, taxation could be defined at a micro-entity level — village, neighbourhood, association — with such micro-entities standing in competition to one another in a given polity; or institutions of a polity could stand in competition to each other (for example, different courts, private-party-mediation, executive and legislative powers, etc.). But genuine political competition happens if the polity can be dissolved at any instance or if unhappy members can opt-out of the polity without having to fear retaliation.

Sir Edmund Leach (1910-1989), a British anthropologist, studied the peoples of Kachin in Highland Burma. In his work, Leach shows that the Kachin political system is in an in-equilibrium state because of the existence of two — from the point of view of anthropology — inconsistent and contradictory ideal modes of life. On the one side, there is gumlao, which is egalitarian and ‘anarchic’, and in which the political organization is characterized by the absence of chiefs, by the equal rank of all lineages, and by territorial units comprising several villages of the same status. On the other side, there is the ideal type of the ‘Shan’ – the name of the large-scale polity in the lowlands of the valleys — which is a feudal system based on hierarchical order and the autocratic rule of a chief. Leach’s central argument is that Kachin communities fluctuate between these two ideal types — democratic gumlao and authoritarian gumsa.

A Kachin couple photographed in 1900.

Gumsa communities are not static or in a state of stable equilibrium. In fact, the more authoritarian gumsa become, the more incentive there is for individuals to leave the group and become more gumlao.  Any member of the group can opt for leaving the group, even with followers, and has no need to fear retaliation. The result: Gumlao is a system of political competition that maintains the gumsa in check, thus stabilizing the general Kachin society.

This model of inner competition could also serve as a guiding principle in international politics. Political cooperation is a necessary condition, while political competition within the polity a sufficient condition.

Who fails — and who does not?

From a Swiss perspective, small is still beautiful. But this doesn’t automatically mean that every small polity is beautiful or successful just because it is small. In fact, empirical evidence drawn from the contemporary world suggests that most small polities are not successful: Switzerland, Liechtenstein, and Hong Kong might be the exception, not the rule. The question becomes, rather, how small political entities can become beautiful — and successful. As we have seen, there are three separate elements involved:

1. Scarcity is a necessary — alertness a sufficient — condition. Small polities embracing scarcity don’t rely on effects of scale. Instead, they seek for economies of scope, innovation, and efficiency. If they do so, they understand which chances to seize and how to turn opportunities into practical advantages — or, at the very least, they are in the position of doing so better or more quickly than their relative competition (i.e. other larger political entities).

2. Bonding is a necessary — bridging a sufficient — condition. In successful small-scale political entities, politics supervenes on social capital; in larger-scale ones, politics suppresses or displaces it. This is particularly problematic as the stock of social capital only grows with its use and diminishes with its administration. Social capital is much more effective than politics in creating trust, bonding, and bridging interests and conflicts.

3. Political cooperation is a necessary — political competition within the polity a sufficient — condition. The principle of competition is important for small-scale polities. First, their members need to compete among themselves; second, the polities themselves need to stand in competition to other polities. And third, small polities need political competition within themselves in order to prevent them from becoming like larger-scale polities and to maintain their closed links to their social capital. Although there are proxies for a political competition within themselves, the genuine way is to allow for individuals and communities to opt-in or opt-out — without fearing retaliation.

The more small-scale political entities approximate these three elements, the more successful they will be. It is not only from a Swiss perspective that a small state can be beautiful.