Economics in the time of excess

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.

Getting less from more globalization

Productivity improves as markets expand until big business weighs in

Like any athlete, the economy needs to stick to a strict regime to stay in shape. And similar to the world of sports, businesses within any healthy economy must be made to compete against each other. A growing marketplace on the back of globalization means that better-run companies have a chance to scale up while bulking up in size also adds a further impetus to productivity. Yet, these benefits may only mount up to a certain point at which big business is more likely to capture more of the gains from globalization and offer less in return.

The economy operates best when companies need to thrive on a diet of competition, whereby a large number of businesses set out their stalls to attract customers in the metaphorical marketplace. The ideal is for there to be many businesses offering similar products with anyone able to set up a new company or shut down operations. It is also optimal if customers need to come back for repeat purchases so as to be able to judge which businesses offers their favourite combination of price and quality. No company should be able to dominate as rivals are there to mop up any disappointed buyers.

An expanding marketplace is good for competition as more businesses can operate as markets grow in size, giving people a better choice of who to buy from. Companies can serve more customers as improvements to transport and communication extend their reach. Within larger markets, better-run companies can prosper at the price of other firms that get put out of business. Through this mechanism, better management practices get spread throughout the economy, resulting in more being produced without any extra effort. Such an effect will continue to add up as long as the market size is expanding and businesses are vying for customers.

Increases in size also help to make businesses more productive as operating costs can be spread over a higher volume of sales. Larger corporations are also more likely to invest in automation which boosts productivity, while also enabling individual workers to focus on a narrow range of tasks. The Internet has added further impetus in helping business to pile on extra bulk, while container ship has enabled goods to be easily moved around the world. As such, while it would have taken decades for a normal company to bulk up in size, online businesses can do it in just a few years since their reach can extend globally and they can produce goods anywhere.

For all of its potential benefits, this process of expanding the scale of the economy can only go on so far. Once the individual domestic markets are joined together into a global whole, further gains from improving business or larger scale operations are harder to come by. The issues are compounded by the forces of competition being weakened as large firms rise to dominate their separate industries. In this situation, big companies have been shown to compete less on price and quality while still generating large profits.

While technological change continues to open up avenues for potential threats, smaller companies increasingly struggle in the face of established rivals. Even if an upstart grows to a position to challenge big business, the larger companies have the financial heft to buy up the competition. Corporations also have the ability to move operations to different countries, giving them leverage to gain concessions from both workers (in the form of lower wages) as well as government (through less taxation and lighter regulation). As a result, it is big business that is reaping greater gains but it also means that others miss out on what are already diminishing returns from globalization.

This change impacts on the economy as more prolific profits tend to flow to investors who are already well off and are thus less likely to spend any extra cash. But perhaps the more serious issue is with restless populations that no longer benefit from globalization as they have done in the past. The temptation has been for populist politicians to call for the drawbridge to be pulled up and the clocks to be turned back. But the potential fragmentation of the global market threatens what has been built up and would push the whole process into reverse. The low prices of mass production would no longer be achievable if goods were to be made in more places in smaller batches. Consumers would also have less to choose from if imported goods were taken off the table.

Yet, voters seem to be flirting with this potentially harmful outcome due to a perceived lack of other options. Despite their promises, mainstream politicians seem unable to make much of a difference in terms of bending globalization more towards the will of the people. As long as someone has money to spend, what we think of as the economy will continue to tick over, so it is the realm of politics where things may potentially come to ahead. The economy is expected to at least provide hope for a better future, and without much to look forward to, it is voters that may start to throw their weight around.

Big business, small government

Governments increasingly pale in comparison to business but this is about more than size

The title of this post is not a slogan but a mere statement of fact. Globalization has resulted in businesses spanning borders and increasing in clout, whereas governments seem to, if anything, have become more diminutive. This trend not only stems from the bulking up of global multinationals but is also due to changes in the nature of both business and government. The potential solution to weakening powers of government might come from a change in size but to being smaller rather than bigger.

More than ever, bigger is better when it comes to business. With companies able to operate on a global scale, a wider scope of business means that more running costs can be spread over a large volume of sales. Size can bring heft in other ways such as big retailers like Amazon or Walmart being able to get better deals from their suppliers. And for some companies such as banks and many online businesses, their size is the big drawcard with network effects playing an important role in their business models.

Having operations spanning across borders gives companies greater leverage in terms of where to locate. Governments, on the other hand, like business to set up shop within their borders to provide jobs for their citizens as well as to pay taxes. Yet, governments often struggle to get much out of multinational companies. International firms from Amazon to Starbucks are known for managing to get out of paying much tax. Many businesses such as banks or online business also have a habit of getting their own way in terms of regulation. And with lots of funds to spend on lobbying, it is easier for big business to keep government onside.

As the scales have tipped in favour of big business, governments have struggled to get on the front foot. The current fractious nature of politics in many countries means that it is more difficult to form a general consensus about how governments should act. Without a clear sense of direction, governments often seem as if they are flailing. And with higher taxation or more regulation typically involving more government action, such policies make for a tough sell when governments seem so out of sorts.

With politicians finding it difficult to enact policies within their own borders, international cooperation as a means to deal with big business seems well beyond reach. Elites across different country often see the world in similar ways but only because the rise of business works in their favour, which puts them at odds with their many of own countrymen and women who are on the economic backfoot. Any response is further hampered by global firms often being the source of the good jobs that are so prized by both workers and their government.

The solution may not be in bulking up in size to compete with the heft of business but instead in making countries smaller. A smaller nation would likely to have a stronger sense of identity and higher degree of social solidarity, thus helping to facilitate government action. It would also make democracy function better due to politics being less remote while also enabling more grass-roots participation and policies better fitted to the smaller economy. And smaller political units would allow for greater experimentation of different policies rather than a one-size-fits-all measures within the system of globalization. Small might also be better in terms of more pragmatic politics rather than falling back on ideology as a means of governing.

Part of the argument behind smaller political units is that globalization has done away with many of the function of what a state might have done in the past. The main reason behind bigger being better for countries was in terms of defense, but the interconnectedness created through the global trade system has made it much less likely that trading partners will go to war. Global flows of money and goods also dwarf even the biggest national economies so that even the US government struggles to bend international economic forces to its will. And national prosperity no longer means wealth for the majority of its citizens as it might have done in the past, with regional economic differences within countries becoming increasingly pronounced.

These old elements of the nation state could be realised in new ways with smaller countries. Even though trade might reduce the possibility of war, it would still be prudent for likeminded small countries could band together their less considerable resources to man their mutual defense. And groupings of similar countries might have more success in clubbing together to influence global rules in the same way that the European Union has made some progress on data protection. In this manner, the larger collections of countries could provide the proverbial “night-watchman” role on international matters, while leaving governments free to focus on domestic issues.

While seeming to be optimal in theory, it is still unlikely that anything like this will be put into practice anytime soon. But still, the idea in itself can be used as a reference point to evaluate our current circumstances. One particular conclusion could be that local government will likely help in the implementation of policy. For example, regional leaders did seem to garnish more authority when dealing with the COVID pandemic compared to national politicians who were trying to manage measures over larger range of diverse areas. And a further step in this direction would involve giving more regions the possibility of moving towards outright statehood.

Business is only likely to get bigger as the global market continues to expand and prosperous companies take an expanding share. Instead of trying to compete on size, a multitude of small governments might be the best way to balance out big business.