This isn’t really a theory, but an idea of what such a theory would look like. It tries to explain why countries wage wars of conquest — or, perhaps, why countries with large militaries have a strong incentive to conquer —, and why large nations end up (trying to) conquer small neighbors.

Internal economies of scale: Economies of scale exist when increasing production reduces the long-run average total cost per unit of output. External economies of scale refer to an industry, such as when a growth in the number of firms reduces average total costs for each firm in the industry. Internal economies of scale deals with a firm specifically; that there are internal economies of scale does not mean that there are also external economies of scale. We’re interested in the internal variant. Why would they exist, and why would firms want to exploit them?

Before offering some reasons for why internal economies of scale exist in the specific context of this post, allow me to quickly review my firms want to exploit them. One word: profit. By reducing the long-run average total cost per unit of input, the firm (or, in our case, the country) can increase it’s net revenue. This is because the value of the output is growing at a faster rate than the costs of the inputs. A firm reaches its maximum size when there are constant returns to scale, or both rates (costs and revenue) are the same — too much production, and it starts suffering from diseconomies of scale.

To narrow our focus, let’s assume that a country’s costs of production are those necessary to build a military. The country earns revenue through tax collection. Where are the internal economies of scale? Militaries require large overhead, or fixed, costs. By increasing “output” — the amount of territory occupied —, countries can spread these fixed costs. It interests countries to invest heavily into a military, if it can afford it, because buying inputs in bulk can also reduce their average long-run unit cost. There may also be a learning curve, although this is more of a stretch. One example of how this could work is if a larger number of officers within a military implies more competition in the creation of ideas (strategies, tactics, managerial/organizational techniques, et cetera).

Economies of scale exist only if marginal costs are below long-run average total costs. Therefore, it pays for countries to heavily invest in militaries only if the cost, at the margin, of conquest are low enough. In environments where populations are heavily armed, this might not be the case. But, where occupation is relatively cheap — e.g. the target country has a poor army, or the local population is largely defenseless —, internal economies can be exploited. What this suggests is that this incentive for conquest exists in monopolistically competitive “markets,” especially if there are significant differences in the “market power” of countries.1 I’ll return to this in a bit.

Monopolistic competition and internal economies of scale actually go hand-in-hand, because the greater the latter are the smaller the amount of firms in a market. Suppose an industry as a whole produces x amount of widgets. If there are internal economies of scale, it is more efficient to have less firms producing more output per firm, to take advantage of average unit cost reductions. Therefore, if internal economies exist in the context of countries, then we’d expect a diminution in their number, rather than an increase. Further, if overhead costs are a major driving force, then we’d expect larger nations to gobble up their smaller rivals.

I have not conducted an exhaustive analysis of the evidence. But, consider tendencies in changes in the size of nations before year zero. Borders were volatile, but there was a general pattern of imperial growth. And, usually this growth was exhibited by states which had certain qualities, namely the original value of their means. Prior to the Bronze Age collapse — brought about, perhaps, as a result of a real shock —, the Near East and Balkans were controlled by strong, wealthy states which assimilated poorer, weaker neighbors: for example, Mycenae (in Greece and, later [as a result of conquest], Crete), the Hittites, Assyria, and Egypt. These empires grew until the marginal costs of conquest were equal to or greater than their long-run average unit costs, which was usually when further conquest meant going to war with each other. The Roman Republic and, later, the Roman Empire offer further evidence; they grew until the additional costs of further conquest were too high. When large empires collapsed, there was also a tendency for competitors — who were originally uncompetitive — to exploit the vacuum and the economies of scale.

Where the returns to scale were closer to being constant, country’s territorial sizes were much more limited. Take, for instance, classical Greece. Military power was relatively competitive, and Greek city-states tended to remain small — or, whatever internal economies there were, they were very limited. But, when countries outside of Greece were able to accumulate “market power,” Greek city-states usually fell prey to them, as was the case with the Macedonian conquest of Greece, and later the Roman conquest.

Why have country sizes become smaller over time (in some cases)? This seems to contradict my theory. My explanation is that external economies of scale in related industries tend reduce internal economies of scale over time. Those countries which want to exploit internal economies should be interested in pushing suppliers to exploit external economies. What opportunities for external economies of scale are there? Consider, for example, that the larger the number of suppliers (of military equipment, for example), the greater the scope for a fall in costs if firms can communicate with each other and share (or steal) ideas. If, say, military equipment producers require industry-specific inputs, a relatively large concentration of firms might make these inputs cheaper for each firm. External economies tend to increase the number of firms in a market, lowering the price of output — making it cheaper for other buyers to acquire means of defense. If others are better armed, the marginal costs of conquest rise.

As long as marginal costs to conquest are lower than the average unit cost, countries in a favorable position can exploit internal economies of scale. As long as these exist, the total number of countries will shrink. As defense becomes cheaper, increasing the marginal costs of conquest, internal economies disappear, and the number of countries will rise — large countries now suffer diseconomies, and they break apart.

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