In the debate over whether or not China will soon rise to challenge the United States as the world’s hegemon, it is often assumed that states with large aggregate economies are necessarily more militarily powerful ones.

This stems from decades-old methods that remain popular among scholars and pundits who write on international relations and foreign policy.

The theory goes like this: states that rule over economies with a large gross domestic product (GDP) have more access to resources. This means more access to weapons, food, personnel, and a variety of other resources necessary to carry out military operations or project power in the international sphere.

Consequently, theorists in international relations have long used GDP and similar measures—such as the Composite Index of National Capability—as proxy measures for a state’s power.

The widespread use of these methods has led many to compare nations’ foreign policy prowess based on aggregate measures. Nowadays, for example, it is common to hear how China, which has a GDP approaching that of the United States—is now a peer nation in terms of foreign policy and war-making power.

But this can be misleading. Aggregate measures are less useful than many imagine.

Certainly, GDP obviously has something to do with a state’s ability to project power. It is, after all, a measure of production, and societies that can produce a large number of goods and services can presumably produce a large amount of weaponry while supplying large armies.

But measuring military capability isn’t really this straightforward. Aggregate wealth measures like GDP cannot account for differences in the net wealth that a society enjoys. It is net wealth that really demonstrates a nation’s power when it comes to international relations. Once we take these differences into account, we soon find that many large middle-income countries assumed to be very militarily powerful—a current example being China, of course—are not as powerful as assumed.

The Importance of Net Wealth and “Disposable Surplus”

States that rule over large populations usually have access to large amounts of resources. China and India, for example, are both among the top ten nations in terms of GDP.

At first glance we might conclude that, in military terms, these states can therefore easily compare favorably against states with smaller economies and smaller aggregate GDPs.

But there’s much more to the equation than that. In many cases, a country’s large output is due largely to its sizable population and not its economic efficiency or productivity. In a 2018 article in International Security, political scientist Michael Beckley explained why a big population isn’t always an asset for a state that desires to increase its power in the international sphere:

A big population is obviously an important power asset. Luxembourg, for example, will never be a great power, because its workforce is a blip in world markets and its army is smaller than Cleveland’s police department. A big population, however, is no guarantee of great power status, because people both produce and consume resources; 1 billion peasants will produce immense output, but they also will consume most of that output on the spot, leaving few resources left over to buy global influence or build a powerful military.

To rank among the most powerful nations in the world, a state needs to amass a large stock of resources, and to do that a state must be big and efficient. It must produce high output at low costs. It must not only mobilize vast inputs, but also produce significant output per unit of input. In short, a nation’s power stems not from its gross resources, but from its net resources—the resources left over after subtracting costs.¹Michael Beckley, “The Power of Nations: Measuring What Matters,” International Security 43, no. 2 (Fall 2018): 14, https://doi.org/10.1162/ISEC_a_00328

The relative scarcity of net resources limits a state’s ability to extract resources from the population for military purposes. While a state can theoretically starve a population—up to a point—in pursuit of military goals, this also presents significant political problems in terms of internal political resistance. Moreover, a starving population—or even an impoverished one—is not known for its efficiency in producing well-trained troops and high-quality military hardware.

Along these lines, Klaus Knorr, in his book The War Potential of Nations, points out that a state’s control over some factors necessary for war making is decidedly limited. Variables like “minimum civilian consumption,” “output of productive reserves,” and “labor productivity” cannot be changed much via government fiat.²Klaus Knorr, The War Potential of Nations (Princeton, NJ: Princeton University Press, 1956), pp. 231–32. These are limitations on state power. For Knorr what matters is a state’s “disposable surplus,” or the amount of resources above and beyond what is necessary to maintain a politically acceptable standard of living for the bulk of the population.

We can see that a state from a nation with a relatively wealthy population, highly productive workers, and a standard of living far above subsistence is less limiting for a state than a relatively unproductive workforce that lives closer to a subsistence level.

Nonetheless, international relations scholars have for decades focused primarily on aggregate resource totals. This has led to a reliance on GDP and the Composite Index of National Capability (CINC), which combines data on population, urban population, troop totals, military spending, iron and steel production, and energy consumption.

Why Do Smaller States Beat Larger States?

Beckley provides several examples of how these aggregate measures have failed to explain why smaller, richer countries often outperform much larger countries in international conflicts:

For example, why did China repeatedly lose to Britain in the Opium Wars during the nineteenth century? China had a much larger GDP than Britain at this time, and indeed, Britain never overtook China in terms of GDP. Although the CINC measure suggests a British advantage for the period, the advantage was by no means overwhelming. Yet Britain repeatedly devastated China in a series of military conflicts.

Nor can aggregate measures explain why Japan repeatedly humiliated China during the late nineteenth and early twentieth centuries. During this period—as today—China’s GDP was far more sizable than Japan’s. The CINC measure for the period shows an even bigger advantage for China against Japan. But Japan repeatedly prevailed.

Aggregate measures also fail to explain how Germany handily defeated Russia on the eastern front during the First World War. On paper, in terms of GDP, Germany and Russia were nearly evenly matched. According to the CINC measure, Russia held the advantage. But Germany overwhelmed the Russian Empire during the war, and the Russian regime collapsed soon after.

To see the questionable explanatory power of aggregate measures in a “cold war,” we need look no further than the conflict between the Soviet Union and the United States. Although the US held an advantage in GDP in the 1970s and 1980s, the CINC for that period indicates a Soviet advantage. By the 1970s, the Soviet Union was the world leader in terms of army size and military R&D (research and development). Moreover, “the chief analyst of the Soviet Union in the U.S. Central Intelligence Agency…concluded that the Soviet Union was twice as powerful as the United States, and rising.”³Beckley, “The Power of Nations,” p. 33.

Although the Soviet Union had a larger population than the US and was three times the physical size of the US, the Soviet Union essentially surrendered to the US in the Cold War in 1990.

In these cases we find that countries with smaller economies and smaller populations are often, in fact, the more powerful states in interstate conflicts. It is the more productive, well-organized, and more wealthy nations that appear to hold the advantage.

The CINC measure distorts reality in modern times as well. As Beckley notes, if we used the CINC as a gauge of global power, we would conclude that:

Israel is, and has always been, one of the weakest countries in the Middle East; Singapore is one of the weakest in Southeast Asia; Brazil dominates South America with roughly five times the power resources of any other state; Russia dominated Europe throughout the 1990s, with more power resources than Germany, France, and the United Kingdom combined; and China has dominated the world since 1996 and currently has twice the power resources of the United States.⁴Ibid., p. 41.

Obviously, none of these scenarios are true.

Measuring Foreign Policy Power More Accurately

Much of the problem in describing relative power in these cases stems from the fact that GDP and CINC exaggerate population as an advantage.

Rather, it would be better to come up with a formula that takes a more realistic view of the relative importance of both wealth and population size.

But how can we measure this?

In this, Beckley takes a cue from Swiss economic historian Paul Bairoch, who suggested that the “strength of a nation could be found in a formula combining per capita and total GDP.”⁵Paul Bairoch, “Europe’s Gross National Product: 1800–1975,” Journal of European Economic History 5, no. 2 (Fall 1976): 282.

Why use GDP per capita? The reason for this can be found in the fact that GDP per capita is a fairly reliable proxy for economic development. More developed nations are better at many things that make a state more likely to win in military power and power projection. Developed economies have more efficient workers, more reliable technology, more durable materials, more technically skilled soldiers, etc. More developed countries are also able to produce large amounts of weaponry without devastating drops in the population’s standard of living. In other words, highly developed societies are more efficient.

So, it’s not enough to look to measures that are heavily influenced by total population size. Beckley explains how incorporating GDP per capita into measures of power is important in putting total population size into proper perspective:

Dividing GDP by population controls for some of the costs that make the difference between a state’s gross and net resources. Combining GDP with GDP per capita thus yields an indicator that accounts for size and efficiency, the two main dimensions of net resources.

To create a rough proxy for net resources, I follow Bairoch’s advice by simply multiplying GDP by GDP per capita, creating an index that gives equal weight to a nation’s gross output and its output per person. This two-variable index obviously does not measure net resources directly, nor does it resolve all of the shortcomings of GDP and CINC. By penalizing population, however, it provides a better sense of a nation’s net resources than GDP, CINC, or other gross indicators alone.⁶Beckley, “The Power of Nations, p. 19.

With this method, Beckley correctly “predicts” the outcomes in the military conflicts listed above. It becomes far more clear why comparatively smaller, less populous, less militarized countries (i.e., Britain in the nineteenth century) have so often prevailed against states that rule over larger economies and larger populations.

This is, of course, relevant to modern comparisons between China and the United States.

If we look at GDP, we find that China’s GDP is approaching that of the United States. China’s GDP is 70 percent the size of the US’s GDP, and the second largest in the world. The US comes in at $20 trillion while China’s GDP is $14 trillion.

This would seem to make China a fairly even match for the United States, especially when fighting on its own turf. Moreover, the CINC measure, using the most recent index data—for 2007—shows China has an advantage. According to the Correlates of War Project, China’s CINC index value is 0.19, but the US’s value is only 0.14.

But what about GDP per capita? According to the International Monetary Fund, per capita GDP in the United States in 2020 was $63,051. In China, per capita GDP was $17,206. That’s only 27 percent the size of the US measure.

If we use Beckley’s formula and “simply multipl[y] GDP by GDP per capita,” we find that China’s advantage disappears. By this measure, the US’s power is more than three times that of China.⁷This incorporates purchasing power parity into GDP and GDP per capita comparisons. If nominal values are used, the US is five times as powerful as China under the GDPxGDP per capita calculation. Although much is made of the US regime’s debt and the declining relative power of the US, the fact is China suffers from all the same economic ailments the US does but without the high levels of worker productivity and without America’s dozens of economic allies worldwide.

The importance of looking beyond aggregate measures of military power naturally extends beyond the relationship between the US and China. We find similar situations when we use the Beckley method to look at European states’ power relative to Russia. Russia’s GDP per capita, for example, is only about half that of Germany, and when we compare the two states by combining GDP and GDP per capita, Germany’s military efficiency is five times that of Russia. Combining Germany’s potential military power with that of other European states, like France or the UK, Russia remains far, far behind its supposed western European adversaries.

Obviously, no single measure can provide a complete picture of the many factors relevant to analyzing the relative power of states. Yet pundits and scholars who comment on international relations have for too long relied on crude aggregate measures which suggest far higher levels of relative military power than is likely in cases like Russia and China, or even India, Brazil, and many Arab states. This isn’t to say that states like China or Russia are irrelevant. Their sizable conventional militaries mean they can indeed project power onto their immediate neighbors, just as the US can. But it is not the case that large, populous states hold all the cards, and economic development is a far more important factor than many give it credit for.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.