Who moved my capital?

It has become harder for some to earn a decent wage and increasingly others may struggle as well

“Who moved my cheese?” was a best-selling motivational book about how to deal with change in life. Change is something that we have all had to deal with of late amid massive shifts in the economy but it has hit some people more than others. Part of the reason for this is that many of the things needed to make us productive in the workplace have become concentrated in just a few places. It is not only those that have seen their productivity decline that should be worried as this trend might catch up with all of us.

There are two basic inputs that go into an economy, labour and capital, which are mixed together in different combinations to generate output. In this context, capital is what we use at work to help us get the job done and can include anything from a screwdriver to a computer (and even knowledge we have acquired). Improvements in technology means that capital has been able to do more of the work by either making people more productive or by doing away with the need for workers.

This development has increasingly split workers into two camps – those who work with lots of capital and those who work with very little. Part of the reason behind this is the demise of manufacturing which was a productive combination of (wo)man and machine that offered work accessible to anyone with even just a basic education. The automation or offshoring of manufacturing jobs essentially took away the tools of the workers and hence one major route to higher wages. Investment in many areas dropped away as the newer forms of technology were typically employed elsewhere.

On top of this, the economy also shifted away from producing good to managing the growing complexities involved in global production. Such work often involved handling information and required cognitive and analytical skills that required extra education. Skilled workers have thus become the main productive asset in the economy and have migrated to work in the big metropolises of the world. While good for the individuals involved, this gathering of skilled workers in a few locations has resulted in other places losing some of their best and brightest minds.

The effects of the movement of both physical and human capital are profound as the output (and hence wages) of most workers depends on who and what they work with. It therefore makes a big difference whether you do the same job for a local firm or a global multinational, whether it be your colleagues on the job or the resources (such as IT) that help you with your work. As such, people who work outside of the big cities lost access to capital in their work places, both in terms of technology but also in terms of the human capital of skilled workers.

The situation is compounded by the tendency for economic activity to follow capital. More capital at work tends to mean higher wages which can be spend on goods but a large portion is also paid out for services provided locally. So the vibrancy of the local economy typically relies on the capital that workers use at their jobs. If the, let’s call them, de-capitalized workers were spread evenly within their respective countries, their plight would not be such an issue as there would be more jobs either working with or serving the capitalized workers.

Moving the workers to follow the capital might seem like the obvious solution but it is not so simple. Having the productive assets concentrated in a few areas means that the cost of living nearby goes up. Rent and land prices have increased as the supply of housing has struggled to keep up with the influx of people. Other issues also mount up such as congestion, overcrowding on public transport, and pollution. The opposite policy of moving capital back to the people might also seem plausible, but to get the best out of skilled workers, it is increasingly important to have them all working in close proximity.

Some tinkering may help such as better transport links to connect more people with the capital. More could also be done to compensate those that have been left stranded who might otherwise use the political system to claw back lost gains. We should not just worry about what has happened but also what might happen if capital is further concentrated. The result of this would be that fewer and fewer people would be able to earn decent wages, impacting not only the individuals but the health of the economy as a whole. All the more reason to watch where capital might be moving to next.