It's a bit of both I think -- the 650c wheels are lighter, so that's an advantage, and the smaller diameter means less energy to get them going or to speed them up (see
this page for the explanation). But then you lose out with the higher rolling resistance on the small wheels, so it takes more effort to keep them going and you lose more energy on bumps and rough road.
It's interesting because both my frames are the same size (48cm) by the same manufacturer (Cervelo). I wrote a blog post about this a while back comparing the two
here. Biggest differences are that the 650c bike has a lower front end (smaller diameter wheel and its short headtube as a TT bike), and the seattube angle is steeper. No toe overlap as I have on the 700c bike. Both bikes descend and corner really well, but the lower front end on the 650c bike makes it a bit more aggressive for racing.
I think Cervelo's done a great job making a 700c bike in small sizes though, given the inherent geometry problems with that. After all there is a market for those wheels on a small frame, so it's nice that a manufacturer has thought through the problems and tried to find the best solution rather than compromise on handling. They also make a 650c carbon model (the RS), though the headtube on that is quite long so more a comfort than a racing bike.