Social (and economic) distancing

Globalization is a boon for the economy but is politically splitting us apart

Many people increasingly feel distant from the economy and see it as something that has little to offer. One reason behind this is that much of the goods (but not yet services) that we consume are produced far away. This separation comes from production being centralized as improvements to transportation and communication remove constraints that limited where factories might be set up. While helping to lower prices, this trend has also resulted in the concentration of high-earning jobs in a few locations and thus caused growing separation between the economic winners and losers. Without anything to reverse this shift, greater separation of production and purchasing may deepen the split within society.

Before the advent of what we think of as the economy, (almost) everything was made by people for their own use. It was only with larger societies that people began to specialise in certain tasks and increasingly relied on obtaining things from others for many of their needs. It has become easier to move goods, people, and information around so that the places where goods were made and shops for selling the goods were located further and further apart. The result of this development has been for larger scale operations that can make things more cheaply since there is the potential to serve a wider range of customers.

This outcome has been more typical in manufacturing which has increasingly been concentrated in fewer places with higher output. Gains in productivity, as businesses apply more automation and improve their operations, mean that less labour is required in output. As well as producing more with fewer workers, manufacturing has also become less important to the economy as we spend more money on services which tend to be produced differently. Instead of output being generated in mass at one location, services are more likely to be produced in numerous scattered locations. This is because services are often consumed at the site of production, whether it be a meal, a massage, or a manicure.

The dispersed nature of services means that it is more difficult to generate efficiency through mass production as was the case with manufacturing. Greater productivity is the main driver for higher wages (workers that produce more tend to get paid more) and so more people employed in the service sector means that wage gains are likely to be harder to come by. Another reason why such jobs pay less is that the work typically involves less technology that would raise the output of workers. The overall labour market might also suffer if workers have less options in terms of work opportunities and hence are inclined to accept lower levels of pay.

With workers closer to the point of consumption in the service sector, any wages are likely to benefit the local economy where the services are offered. Such jobs are also more numerous and continuing to grow in number, but the lower wages seems that the impact is limited. The overall result is that the greater quantity of service jobs does not seem to make up for the drop in quality (in terms of pay) even though the money from wages is more likely to be spent locally. Low-paid service jobs in themselves are not enough to keep a local economy afloat without customers with more money to spend (either from work in manufacturing or other skilled employment).

The effects of the transition from manufacturing to services has not been felt evenly between countries or even within national borders. The offshoring of manufacturing has resulted in the benefits of productivity gains (such as higher wages) being realised in places that are distant from the place of purchase (even though lower prices benefit everyone). Western countries had been the initial beneficiaries of industrialization but now many in the West feel as if they are missing out as production shifts elsewhere. Such a development would not be a problem if higher manufacturing wages would spur on economies elsewhere but the impact seems to be limited. A further issue is that manufacturing is increasingly concentrated in fewer places due to efficiencies generated in large-scale production.

Despite factories being moved overseas, the West has maintained its role in managing the increasingly complex global production system. Yet, the jobs involved in management along with auxiliary tasks such as financing, law, and accounting have also been grouped together in a concentrated manner and expanded to take on international work. So while old manufacturing hubs have deteriorated and pulled down surrounding areas, larger cities have thrived as office work expands (both in terms of numbers and in higher wages) to fill out the new global role.

These divided fortunes for countries in the West have complicated the response by government as politics typically focuses on the split between left and right rather than balancing the pros and cons of being part of a global economy. The economy can be running both hot and cold within the same country but any tendency for this to even out seems muted. Taxes had previously been used to transfer funds from the more prosperous to the less fortunate but the majority of voters no longer see that as an option. Without some other economic or political means to bring us together, the differing economic fortunes can only drive us further apart.