There has been a trend with the development of internal combustion engines (ICE) since their inception to make them smaller, lighter, cheaper, more powerful, and more efficient since they were invented.
Early ICE were extremely large, yet produced very little power when compared to modern engines. The first automobiles had to be made extremely large, and robust enough just to house these engines. In the early days, automobiles were also very expensive, and the average person would have not been able to afford them.
In October 1913, Louis Coatalen, chief engineer of the Sunbeam Motor Car Company entered a V12 powered car in the Brooklands short and long handicap races. The engine displaced 9 L (550 cu in), with bore and stroke of 80 x 150 mm. An aluminum crankcase carried two blocks of three cylinders each along each side, with a 60 degree included angle. The cylinders were of iron, with integral cylinder heads with L-shaped combustion chambers. Inlet and exhaust valves were operated by a central camshaft in the V. Valve clearance was set by grinding the relevant parts, the engine lacking any easy means of adjustment. This pointed to Coatalen's ultimate aim of using the new V12 as an aero engine, where any adjustment method that could go wrong in flight was to be avoided. As initially built, the V12 was rated at 200 bhp (150 kW) at 2,400 rpm, weighing about 750 pounds (340 kg). The engine powered the car (named ‘Toodles V' (for Coatalen's wife Olive's pet name) to several records in 1913 and 1914.
The 'Toodles V' engine was much larger and heavier than a modern engine, but despite that fact, it only produced as much power as a comparatively tiny modern engine. Early engineers simply lacked the ability to make the engines smaller, and lighter at that time.
Henry Ford helped change this drastically. He introduced a very light, and small 4 cylinder engine for the Model T. His engine only produced around 20 horsepower, but that was enough for the average person. There were still large, and powerful engines produced for the auto enthusiasts, but it did create a market for an affordable car.
Over the next several decades, engine designs steadily improved which led to the muscle car era. Auto racing became much more popular and mainstream, and car companies competed with each other to produce more powerful engines. There is an old adage that goes something like "Win on Sunday, sell on Monday". At this time, manufacturers had very few regulations on the types of the cars they could produce. The cars were basically death traps, and the manufacturers knew it, and chose to do nothing. Many of them lacked any basic safety features such as seat belts. There was also very little regard for fuel economy. Gas was cheap, and there weren't regulations on emissions, and fuel efficiency like there is today.
Beginning in the late 1960s, the government sought to limit emissions from automobiles. This led to the creation of the EPA in 1970. The gas shortage in 1973, and the subsequent rise of the cost of gas were also driving factors which marked the end of the muscle car era beginning with the model year 1974.
For the first time, manufacturers were mandated to meet the strict guidelines created by the US government for fuel economy and emissions. The problem was that manufacturers had no idea how to meet the new strict regulations, and were not given much time to comply. These new emissions rules forced manufacturers to add emission control devices such as catalytic converters, which reduced the flow of exhaust gasses. EPA regulations also had the lead additive removed from gasoline in 1973, which forced engine designs to change so they can handle unleaded gasoline.
In the mid 1970s, there were many cars made which had large 8 cylinder engines that only produced around 100 horsepower. The 1971 Corvette was offered with an engine that had 425 hp, and in 1975 it only had 205 hp. The base 1975 model was even worse which only had 165 hp, which is about the same power that a family minivan has today. This led to a large public outcry, and car manufacturers tried in vain to make improvements, but improvements came very slowly. It wasn't until the late 1990s when Corvettes had similar performance numbers to their muscle car predecessors.
Around this time, small and efficient cars from Japan were being introduced to US markets, and were well received. This eventually led to the loss of dominance for US auto manufacturers in the United States. US companies were forced to get into the compact car market because they were losing sales to imports. Prior to that, very few foreign cars were sold in the US. Many of those sales were for small European sports cars such as Triumph, Alfa Romeo, MGB, Austin-Healey, Jaguar, Porsche, Mercedes-Benz, Lotus, etc.
Over time, technologies such as electronic fuel injection, and turbo charging led to significant improvements in efficiency, and power. Many modern engines can deliver a large amount of horsepower, but still sip fuel. These new designs are so efficient, that it is no longer necessary to have a large engine in most cars.
Car manufacturers are still being pressured to produce even more fuel efficient vehicles. There are also regulations which limit the average fuel consumption across their entire fleet. They are basically forced to produce either all electric, or hybrid cars to get the average MPG down to the standard. There are still cars with big V8s, and V10s, but the reason why there are being less produced, is because of strict regulations.