Economic growth is generating more but also more trouble
It is said that you can never have too much of a good thing. Yet, while more workers or funds for investment will help an economy grow, the flipside is that businesses have to be able to absorb the labour and capital that is on offer. Although it could be taken for granted in the past that more inputs could always be used to produce higher output, changes to the economy may mean that this is no longer the case. While many workers have struggled to find high-paying jobs, there are still plenty of options for those with money to invest. Despite growing frustration that wage-earners are missing out, the main cause that has brought lots of labour and capital to the market also hampers attempts to readdress the balance.
The main function of an economy is to make as much as possible from what is at hand. Along with any economic growth, more people are put to work (often in better jobs) while capital is invested so as to boost production. Both workers and investors share the resulting economic gains in the form of wages and investment returns. The development of the manufacturing sector has been one of the key drivers of economic growth due to the ideal mix of machinery (paid for by capital) and muscle (supplied by labour) in large quantities. The scope for productivity gains in the factories also meant that output could rise, with the benefits being spread throughout the economy.
There was a hidden contradiction within this setup as the trend would be for more to be produced but also for productivity gains to mean that relatively less capital and labour would be needed as output expanded. Any extra workers or investment funds could be used elsewhere as long as there was something else that people wanted to buy. On top of this, there was also a requirement that money was ready and available to be spent on the ever-expanding levels of production. And the cash has to be in the hands of those willing to go out and buy things.
Money for such purchases mostly comes from earnings of either working or investing, but wages and interest rates (which are the returns for labour and capital) have been in the doldrums. Part of the reason behind this is that as production becomes more efficient, businesses need fewer workers and less money to get going. At the same time, globalization has expanded the worldwide workforce as well as enabling more capital to flow into the financial system. The Internet has added to this trend with online companies often getting away with fewer employees as well as less buildings and equipment (that would have needed to be brought with capital).
Although both labour and capital have seen their value decline as supply has risen relative to demand, it is those investing rather than those working that seem to have come out on top. Part of the reason behind this is that capital is relatively mobile and can more easily get to where it will be able to earn more. While the Internet allows some people with specialist skills to now ply their trade on a global scale, many workers are limited by location in terms of their employment options. Money can be invested anywhere but workers tend to remained rooted within their own borders (or even the neighbourhoods where they grew up).
Another factor in the favour of capital is that wealth tends to beget more wealth, not only in terms of the individual but for society as a whole. If more surplus cash is being generated, it will often go towards bidding up the prices of financial assets such as stocks or property. More money in the system therefore benefits those who already had funds invested and this trend will continue to build on itself if the volume of investments keeps rising, especially if less capital is needed to plough into the actual economy.
Labour does not benefit in the same way from more workers as there is more of a tendency to compete amongst itself. For starters, workers tend to look for jobs within a limited geographical space that is not something that investors are restricted to when investing. Employment opportunities are often relatively fixed in the short-term so that the livelihood of workers within any region tend to operate like a zero-sum game where job gains for one person will result in losses for someone else. Any downturns will also impact more on workers who will typically have all of their eggs in a single basket when it comes to their employment, whereas capital can be diversified across a number of investments. Hence, any economic disruption will tend to have a bigger impact on labour and capital often benefits from flexibility.
Growing economies will eventually result in more jobs so workers will see benefits but only in the long term. Gains for capital tend to be more forthcoming as asset prices can see a boost from the notion that the economy will expand sometime in the future. On the other hand, labour does see any substantial fresh gains as more workers turn up in the neighbourhood. The potential short-term benefits from more workers, such as lower prices or a greater range of services on offer, pales in comparison to the likelihood of depressed wages and job losses.
The extra size that comes with economic growth has also tended to shift the balance between labour and capital as companies have beefed up in scale so as to better operate in the global market. Size often can generate higher profits as a bigger market means businesses can gain access to more customers and greater efficiencies from a large output. Shareholders benefit from the greater profitability through such means as being able to situate production where the required labour is cheapest. While capital can band together in the form of ever larger companies, workers are increasingly fractured and on the back foot.
The size of business operations also matters when it comes to influencing government policy as does a common interest in a more dynamic economy. The leverage that capital has stems from a past when it was relatively scarce compared to the many hands that could be put to work. Capital still holds its privileged position for policymakers although so little is needed nowadays to get a company set up. Yet, with “good jobs” being relatively scarce and large companies often being the most productive and thus able to offer up better wages, big business has held onto much of its ability to hold sway over government.
These trends for workers and investors do not seem likely to change anytime soon. It is the result of overwhelming economic forces involving globalization and the Internet in the face of which even governments hold little sway. Globalization, which is the cause generating lots of both capital and labour and putting the former on a stronger footing than the latter, also inhibits the political means for dealing with the potential downside. The reason for this is because increased competition between countries for the better work opportunities means that there is less scope for measures to spread the wealth. For example, policies such as higher taxes or hikes to minimum wages could be used to help alleviate hardship but would also make workers more expensive to employ.
On top of this, citizens of the same country often tend to feel less camaraderie as the economy becomes international with the accompanying rise in movement in goods and people. As yet, politics has struggled to find a balance between the mounting levels (and dominance) of capital and the growing frustration among workers. And with little help from economics which is fine-tuned to deal with getting the most out of scarce resources, how to deal with abundance is a fresh challenge that has yet to be overcome.
Free Range Economist 