Economic purgatory

With many suffering much pain for little gain, people may lose faith in the economy

A certain degree of belief is required for anything in which hardship is endured to get to an end goal. Without the conviction that short-term pain will pay off with long-term gain, people would give up at the first hurdle. The economy demands such faith in that the downs (both in terms of personal misfortune as well as economy-wide recessions) must be endured for the good of capitalism to be realised. The market economy also decides who gets how much earthly rewards with the hardworking often being blessed. But with less being shared around and people not always seen as getting their due, more and more are not willing to wait around for the land of milk and honey.

Capitalism offers up a path to the promised land – both for individuals in their own personal circumstances but also for society as a whole in terms of prosperity for all. But this route to salvation requires much toiling along the way – not to show worthiness for a glorious afterlife but as a means to reach the end goal of (economic) heaven on earth. The economy requires sacrifice even just to maintain the current standard of living and much more to reach a higher plane of wellbeing. Without continual investment, the economy would be damned to a backward slide with much of the past gains slipping away.

For capitalism to stay on track, people must be willing to take the good with the bad and to play by the rules no matter the outcome. Job cuts and businesses going bust are the price that we need to pay for the economy to grow and create more wealth. For those having to endure these trials and tribulations, it helps to keep in mind that capitalism often works to deliver up just rewards. Similar to most religions, hard work and perseverance are seen as the righteous path to be blessed. The market can be seen as a fair arbitrator treating everyone in a similar fashion without anyone being able to sidestep to salvation.

This system of payoffs worked for individuals, businesses, and even countries as a whole. Fortune looks kindly on those willing to hold off from spending everything they have to either save for a rainy day or to put money towards something that might pay off in the future. Examples of funds used in such ways include cash a person might spend on a training course or money that a business uses to buy new equipment. A country will also prosper if it can encourage more of this type of behaviour through, for example, subsidies for education or lower taxes for investment as well as the rule of law and open markets.

Such investments that rely on spending money now for rewards in the future requires the right setup so that these choices are seen as being more worthwhile. It also often depends on a past track record to ensure that people can see the benefits of acting with an eye on the future. It has helped that the capitalist economy has produced decades of solid economic growth that lifted most in the West out of poverty and is now doing the same in China and elsewhere. While the economy continues to generate more and more, biases in how this output is distributed (both within and between countries) means that there are lots of people in the West that feel as if they are missing out.

One of the reasons behind a narrower spread of economic gains is that technology is not the helping hand that it used to be for lifting up those with fewer skills. Manufacturing was a boon for labourers in terms of machinery adding to the muscle of workers, but computing, while boosting the capacity of some, has taken away the need for knowledge from many jobs. Less input from workers tends to mean lower wages, with less spending feeding through into the local economy. The growing dependence on service employment means that any hit to jobs opportunities in the neighbourhood impacts on the regional economy.

Capitalism has also become more unruly with the development of international markets and governments have struggled to bend the global economy to their will. The expansion of markets around the world has not only resulted in greater competition among companies but also countries having to fight among each other to attract the more productive bits of the global economy. The need to compete on an international scale means that governments have less scope to extract taxes or to lift the wages of the domestic workforce, leaving the populous at the whims of market forces. The ups and downs were more manageable when the economy was less international, and with this in mind, voters still expect government policies to help make their lives better (as no politician would admit their limited capacity to make a difference).

All is not lost as greater global competition and a bigger international market has resulted in further economic gains, with the increased scale of production across global markets meaning that more could be made with relatively fewer inputs, helping to drive down prices. This process also involves employing more workers where wages are cheaper as improvements to technology means that machines can do more with less-skilled operators. As such, the advantages that industrialised countries had over the rest of the world have been eroded, and more hard work (such as long-term investment in measures such as research and development as well as education) will be required to stay on top. It is as if the gap between the penance and the payoff has widened and more faith is required to stay on track.

The potential prize that awaits has also grown as the global economy drags in the best and brightest from more places and technology is more quickly diffused around the world. Yet, for a growing number of people in the West, the longer wait is proving too much of a leap of faith. The global economy has also grown more distant from many people who might get to buy cheaper goods but who also find that there is little to offer in the way of work opportunities. The immediate gains that used to be forthcoming as people saw their standards of living rise now seem much further away and others seem to be ordained for greatness.

There is also less impetus to toe the line when considering that some people seem to be thriving without having done the hard work to get there. The notion of people being able to jump the (economic) queue to get ahead tends to greatly offend our sense of justice. If the economy is beginning to act like a fickle arbitrator, people are more likely to not play by the rules. The scope for creating mischief is limited within the economic realm itself as people need to play along or else suffer the consequences.

Instead, many who are worried about the future are choosing to “act up” politically through rallying around less conventional politicians. With mainstream politics seemingly offering up little to help, radical options on the populist Left and Right have attracted more of a following. The populist politicians often offer little relief once in power but there is the concern that even more extreme versions will come into being if the situation does not improve. Shoddy and haphazard policies could be enough to see the past gains be reversed and erode away the means by which the economy can operate. Without capitalism offering up more hope for redemption, the whole economy along with everyone who is a part of it could be dragged down into damnation.

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.

Conspicuous consumption vs inconspicuous investment

Even though it rankles, splashing the cash may be missed as funds are stashed away instead

Wealth has always been something to put on display as it shows that you are doing better in life than other people. Even though it can be irksome, there is some good in people parading their wealth as their outlays provides employment opportunities for others. Yet, it may be the case that such shows of prosperity are becoming less common as flaunting one’s good fortune is increasingly frowned upon. Instead of being spent, money is likely to be put to use so as to bring in more wealth, and the resulting shift from showy spending to prudent investment could be hurting the economy and driving up inequality.

It is commonplace in most cultures for the upper echelon of any society to have a way of showing that they were above everyone else. It often would require, as a way of showing their dominant position, getting their hands on objects that took much effort to produce but tended to serve little practical purpose. Such shows of prestige could include anything from extravagant head dresses for a native American chief to a modern-day highflyer driving a high-performance sports car around city streets. It is such a common occurrence that it has been given its own label – “conspicuous consumption”.

Putting aside whether such a practice was good or bad for those at the top or for society as a whole, the economy benefits from the extra spending. Any cash used for flashy clothes or showy interiors would provide work for people who may have otherwise been left unemployed. And funds used to purchase luxury items would result in more money flowing out of the wallets of the wealthy into the economy and hence benefiting a wide range of people. The overall effect would thus be to boost employment while also acting to reduce inequalities.

The concentration of funds in fewer hands can be seen as unfair by some but can also have a positive impact on the economy. Large differences in wealth had been justified (by those on the right) through the notion that more money in the hands of those who have been successful in business can be used to create more jobs. The label for this is the supply-side trickle-down effect whereby funds of the rich help create opportunities for others. In comparison to this, conspicuous consumption has a similar effect but works through the demand-side of the economy so as to raise spending and shift wealth to those with less.

Yet, as society as a whole becomes better off, the tolerance of extravagant displays of wealth could be diminishing. It could be that, with their hard-earned prosperity, the middle classes dislike being shown up by those higher up the social ladder. Yet, frowning on the lavish habits of those with more money also means that the extra spending that would provide jobs is less forthcoming. As a result, the irony is that the growing social stigma against displays of wealth could then act to increase the likelihood of a larger gap between rich and the rest. Hence the dislike of the wealthy could actually serve to strengthen their position at the top.

Money that might have been spent conspicuously on consumption is now more likely to be put to use inconspicuously as investments. Along with less money going towards lavish spending, the well-off have also benefited from changes in the economy and so have larger incomes with which to invest. The growth of the finance sector also means that there are an increasing range of avenues for putting funds to work so as to earn more of a yield. Yet, investments do not benefit the economy as in the past due to much of the extra cash tending to go toward lifting the prices of existing assets rather than towards new business or infrastructure.

On top of this, the rich are also devoting funds so as to cultivate their talents as a means to gain access to high-earning employment now on offer in the global economy. While such routes to large incomes also open up an avenue for gifted individuals to rise up the ranks, it is also true that those already at the top are best placed to pass on the advantage to their children and others around them. Large outlays on education are the main route to ensure a spot at the top table, while connections with those already at the top also proves helpful for up and comers.

As such, the frivolity of conspicuous consumption has been replaced with the more circumspect approach of inconspicuous investment. It is not yet clear whether these changes to the economy have had enough of an impact to warrant concern. If it is the case that economic growth is being hampered by a decline in spending by the wealthy, the government could always step in to readdress the balance. Higher taxation targeting those with big incomes or large pots of wealth could be used to shift spending power to where it is more likely to be used. This action would come with the justification that a healthy economy is for the benefit of everyone, but such a stance may be difficult to sell politically given the current political climate. However, a change could be possible if it were the growing gap between rich and poor that became more conspicuous.

Breaking up (the economy) is hard to do

After manufacturing, the service sector is a bad rebound option for workers

Change happens all of the time (in a healthy economy) but sometimes it is harder to take. Amid the constant churn of companies going bust and people losing their jobs, new businesses reshaped the economy as manufacturing took over from agriculture before the service sector became the mainstay. The initial shift from farm to factory created new combinations of man and machine that, after a rough start, seemed to be like a match made in heaven with productivity gains spurring on higher wages for workers. The good times could not last forever however with fewer people needed on production lines, but service jobs have proved to be a poor replacement and have left workers wanting more.

From the Industrial Revolution to modern day China, factories have provided employment that has acted as a route to escape the drudgery of toiling on the land and to realize a better life. Yet, as much as manufacturing jobs are still prized in many places, such work has been hard to find, due in part to offshoring of production but also growing levels of automation meaning that even more goods can be made with fewer workers. The productivity gains that have enabled more to be produced with less could be seen as a success as maximizing output with limited resources is one of the primary goals of any economy.

Even though more goods can be produced at lower cost, there is a tendency for people to shift their spending to services instead as the level of wealth grows. As such, the trends of rising productivity combined with falling demand (relative to services) meant that manufacturing could only power on the economy for a limited period of time. There would inevitably be a point in which more stuff could be produced but people would rather spend their cash on something else. With the manufacturing industry needing less resources (capital and labour) to provide what consumers wanted, more inputs went into offering up a greater range of services.

Services are inherently different to manufacturing for workers with fewer skills in the extent to which the jobs typically involve less technology that boosts the capacities (and hence wages) of workers. The transition from manufacturing to services was also different in that previous cases of shifts in employment between different sectors in the economy had been driven by workers seeking higher wages. Employers in factories could pay more than what people could earn through agriculture as the use of machinery in producing goods lifted the productivity of workers.

The rise of services as the dominant employer is different in that many of the workers with lower skills are not being drawn away from manufacturing through the lure of bigger pay packets. It is more obviously the case that the lack of work opportunities in producing goods have left workers with few other options. As such, the service sector did not have to win over workers by paying them more but could attract staff even offering only low-paid work. The only competition for workers without specialist skills was between service sector companies themselves and productivity and hence wages for such workers in this sector has always been low, so that there were no economic forces to help bolster pay levels. Employers would only need to ensure that their employees were generating enough output to justify paying at least minimum wage, although the gig economy has found ways to sidestep such restrictions.

The overall impact was to not only see a decline in wages for those moving into the service sector but for the pay packets of the low skilled across the whole economy to suffer as fewer well-paid jobs eroded their bargaining power. Much of the economic hardship has been concentrated in areas where manufacturing jobs dominated as the remaining service sector work only tends to move money around the local economy rather than to draw in funds to help sustain businesses. The resulting weaker spending would also feedback into shaping what is produced for the consumer market and likely increase the likelihood of more goods and services being made with low-paid workers.

These changes have thrown up two challenges to the status quo of economic theory that have not been properly dealt with. The dismantling of large chunks of an economy is something that has never been seen before to the degree that is happening to the manufacturing industry in the West. It has been relatively easy for the large investments that were ploughed into the buildings and machinery to be written off as capital is relatively mobile and able to absorb such risks. It is the labour force that has struggle to adapt with people being left behind even as the economy moves on. Previous transitions from farm to factory involved the same movement of people but also came with the lure of higher pay and greater freedoms compared to living off the land, whereas service sector jobs tend to offer less fulfilling work at lower pay and security.

The shift to services also served up a second problem in terms of the notion of economic growth being a linear progression of the economy with relatively minor bumps along the way. Getting people to work hard in the present is easier when they expect life will be better in the future, even if it is just for their children. Yet, the breakdown in the reliable advancement of living standards over time could be translating into a weakening in the willingness to sacrifice for greater prosperity at some point down the line. With the economy not providing the wage gains and job stability as it did in the past, people are venting their frustrations through the political system which is struggling to cope.

It is as if the economy has gone through a separation in the same way that a couple might. The combination of labour and capital in manufacturing was such a boon for the economy in terms of higher wages and rising prosperity but it was also like one of the pairings that cannot last. After it was no longer feasible for workers and the machinery to stay together, what came next for wage-earners in the service sector has been a let-down and it seems unlikely that such a good match will ever show up again, thus creating frustration among workers about what has gone before.

As such, it is not the breaking up of the economy that is the problem but that what has come after offers up less for most people than in the past. If the service sector is merely a poor plan B for many workers and there is little pay going into wallets, outlays by the average consumer will be depressed and people may see little benefit from working hard. Without this virtuous cycle of striving and spending, the economy may struggle to get its mojo back and irritation will build as people think of past glories. A breakup is even harder to take when you have to worry that your best is behind you.

All work and no gain

Workers may need to battle for more than just their jobs

It is one of the big truths in economic theory – there will always be plenty of jobs to go around. Even if some workplaces disappear, businesses are expected to come up with ways of putting any excess labour to good use. As long as people can earn wages and have money to spend, there will be employment options to via for this cash. But this insight was based on how the economy had been operating in the past when workers could move so as to use more technology at their new employers. With the job market increasingly offering up less scope for wage gains, more work may not be the solution.

Labour is like any other resource in the economy in that it needs to be able to move around to be put to the best use. Losing one’s job (which even the Free Range Economist has experienced) may put the individual in a tight spot but would be good for the economy as it would help get workers to where they are most needed. This process is easier for workers to stomach if there are lots of other employment options available and especially if decent wages were on offer elsewhere. Manufacturing was a bonus in this regard as workers could be made more productive compared to other forms of employment through greater use of machinery.

Yet, this trend seems to have gone into reverse as factories have been moved offshore and automation often means that workers need fewer skills and are more interchangeable. Along with the demise of manufacturing, the transition from producing stuff to offering up services has exacerbated the deterioration in job prospects with the service sector notorious for low productivity. The changes have not hurt everyone but a lucky minority have benefited through being able to provide specialist skills over a global market. As such, the productive capacity of those at the high end have shot up while work options for many other continue to dry up.

Amid these changes, the economy continues to grow with average output among workers edging upwards. Yet, stripping out the extremes in the earners of global highflyers would likely show that most workers are suffering from a tapering off in productivity (and hence wages). This trend would be worrying not only for workers shifting to jobs that are lower in pay (and likely less fulfilling) but also that there might be mechanisms at play in which a decline in the spending capacity of the bulk of consumers could make the situation worse.

Smaller pay packets for many people would see more money being spent on cheaper goods which are more likely to be mass produced with high levels of automation. Such a feedback loop could see falls in spending power bolstering businesses that pay out less in wages. The income of the middle class which had been the bulwark of the modern economy would be eroded with only a minority being able to generate higher earnings. Even if a few high earners have even more cash to splash around, such free spending would unlikely be enough to replace the drop in incomes elsewhere.

The overall result could be a splitting of the economy to either use mass production at low costs to serve people with little to spend or provide high-value products in small batches for the affluent minority. This outcome would be markedly different to the first few decades of the postwar era when inequality was less prevalent and people would shop at the same places irrespective of their income. The current state of affairs is, in some ways, a return to the past in terms of the opening up of a large gulf within society, similar to but not as extreme as that between princes and peasants.

Economist have not raised much concern about such an eventuality as it is more the quantity of jobs rather than the quality that has been given priority. But this rationale in economic theory has been backed by the tendency for wages to rise over time which has been a feature of modern economies since workers left farms to work in factories. People could be put to use with higher levels of technology but this trend may have gone into reverse as automation picks up more of the slack in the workplace. The deteriorating prospects for workers with fewer specialist skills means that business has the upper hand in setting the rules as shown by the way in which companies can sidestep labour regulations in the gig economy.

Companies have been given the freedom to go about their business with government policies often aiming to offer support with the ultimate goal of providing people with employment. Despite business and workers often being promoted by different sides of the political spectrum, there is common interest in finding a balance in which both sides prosper. As such, any decline in the fortunes of workers will ultimately hurt their employers if lower wages feed through to drag down revenues due to the economy getting trapped in a loop whereby lower wages mean less spending.

If this trend persists, any changes in the economy will likely come with increasing levels of hardship as the loss of work will also tend to come with a pay cut. The skills required to rise up the pay scales have also become harder to come by as technology can accomplish more of the tasks required in workplaces. Making sure that everyone has a job may not be enough if workers are facing deteriorating prospects. The politics of self sufficiency and individual responsibility may become less palatable if hard work on the job no longer provides a route to prosperity. Putting in the hours will not be enough if more work does not make up for less pay.

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.

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.

Labouring over higher output

Full employment may no longer be working for the economy

It seems like common sense to say that more is better. As such, the main function of any economy has been to produce the most output from the resources available. One of these resources is labour, but rather than make as little use of it as possible, the objective seems to be to use as much of it as is available. Enough work needs to be created so that at least everyone that wants a job is gainfully employed. Yet the need to have everyone toiling away comes from a time when there was not enough to go around. Amid growing material abundance but limited employment options, it may be time that we gave ourselves more of a break.

Outside the garden of Eden, labouring has been a part of human existence. The primary objective of such efforts has been to provide enough for everyone to live off. Organizing the economy to produce as much as possible is a relatively recent phenomenon that developed in the West and spread elsewhere. The extra production was first put to use for nation building at a time when warfare between states in Europe was common, thus giving motivation for rulers to free up market forces so that more wealth could be created.

Greater output helped facilitate higher tax payments as well as giving funds for trade with other countries, which enabled increases in the amount and variety of goods on offer. In this way, both nation states and their citizens benefitted from a higher output. Such a mentality continues to linger within economic theory such as with the concept of GDP which is a measure of national wealth (that reflects the wealth of the whole rather than the parts). But this is not the only organizing principle for the economy – as well as maximizing output, everyone who is able must be employed in work.

The need to have all hands on deck to work would seem common sense – the more workers, the greater the output. Yet, having everyone on the job is not always compatible with generating the highest level of production. The requirement for a certain amount of labour to be employed could potentially limit the extent to which capital can be put to use. When invested in businesses such as in the form of machinery, capital is typically most productive when brought together in just a few places as larger scale operations tend to result in greater productivity. Yet, such a setup would not only require less labour but also concentrate highly-productive businesses in a small number of locations to the detriment of other places.

Such developments within the economy are beneficial to the overall output but also result in economic hardship. As such, governments often need to manage these trade-offs so as to ensure that wealth is spread out and any pockets of poverty are not left to fester. Yet, aiming for both a growing economy and jobs for everyone has proven to be a difficult challenge for most countries in the West in the face of globalization. The greater scale enabled through the global economy has unleashed market forces that can generate bigger shifts in economic activity with both positive and negative outcomes.

Along with global shifts in production, another popular target of ire is immigration. Fears of missing out on a job in the West limits the movement of people around the global economy despite the fact that shifting workers from poorer to richer countries would boost output. More of such flows of people had been permitted in the past but only came about with the prospering economies in the West (which no longer seems to be the case). As well as globalization increasing access to workers around the world, the amount of labour to be used has also increased as women have entered the workforce.

Workers not only have to compete with each other but also need to be more productive or cheaper than capital. The impact of globalization seems to have increased the supply of capital with funds flowing from around the world into the finance sectors in rich countries. The ability to be able to invest money in a growing range of ventures has also helped to keep capital mounting up. Yet, the need for business funding has tended to diminish as gains in productivity and online operations means that companies have become less capital intensive.

Greater supply along with falling demand has seen the price of capital drop off (as can be seen in persistently lower interest rates) which in turn makes it harder to maintain full employment. The economy as a whole will suffer if governments need to take policies to keep people in jobs which also reduce the use of capital (such as measures to lower trade). Workers will also struggle if wages are kept low so as to make employment of labour viable in the face of low prices for capital. Both of the trends of cheap capital and growing labour supply look set to continue, so the challenges with maintaining everyone in jobs may become more difficult.

Whether or not full employment will be possible is one issue but whether it is desirable is something else that should be thought through. While putting all pairs of hands to good use was needed in the past, output has reached levels that have allowed many people to live in relative comfort. The problem seems to have shifted from producing as much as possible to ensuring that everyone has enough. If the focus is to move away from maximizing output, the main sticking point could be how to organize the economy if not on the basis of everyone working.

One possible solution would obviously be for less people to work if they could get by without a job or with only working part-time. This option would only be available for people who have sufficient financial resources or who earn enough from limited working hours. Yet, the normal setup for well-paid office jobs does not permit workers to have much choice in terms of their own work schedule as it benefits employers to limit their options of their employees. Our economy could cope with more flexibility in terms of working arrangements as shown by the way in which most essential goods and services were still available during the Covid lockdowns.

Without much scope for even individual workers on high incomes to choose between work or leisure, changes may need to be made across the whole economy (especially since it is those on low incomes that might be working more while getting less). Currently, we receive wages relative to our contribution to the economy (well, that is the theory anyway). Without us each getting paid for doing our bit, there would be no way of gauging who should get how much, but also there would be no guarantee that enough work would be done for everyone to have enough.

One way to look at this is that even with the current economy, production is not as high as it could be. Society allows for exceptions for some people (such as students, the elderly or disabled, and parents with young children) to not work. From this point of view, greater scope for people to not work could be a potential way for the economy to operate on less labour. For example, further reductions in working hours (a long weekend or more national holidays), more funding for adult education, or earlier retirement would allow for less to be produced. Less availability of workers would mean that the use of capital could expand to make up the shortfall. Applying such measures on a country level may put their businesses at a disadvantage relative to foreign rivals, but changes within one set of borders could expand elsewhere if popular.

Cutting back on more marginal uses of labour would help to make those left in employment to be more productive. The reasoning behind this is that the remaining workers will pick up the slack left by the labour that has left the economy. The same effect happens after job cuts during recessions – productivity rises as less useful workers are dismissed. Output per worker would increase even more if more capital is used to replace any labour that is no longer used. And instead of making space for everyone to work, more resources (such as capital or training) could go towards getting more from the remaining workforce. This approach is how we deal with agricultural land – investing heavily in fertile regions while not taking a harvest from less arable areas.

What is different to our use of land and labour is that people who do not work are seen as not contributing. It was important that everyone played their part during times of scarcity which accounts for most of human history. While helpful when hunger and disease were a genuine threat, the prosperity in the West means that the bulk of people have been freed of these hardships. Rather than genuine need, the toil of many continues due to a cultural aversion to allow people to stay idle. As such, the challenge could be to find a way in which both work and not-working can be shared out fairly and in a way that the economy can still provide all that is needed. Otherwise, we will continue to labour away even though it will be more pain than gain.

Rage without the machine

The disappearance of an old foe leaves workers angry in its absence

Machines are normally portrayed as something threatening and potentially overpowering. Yet, it was only with the rise of the machines that people were able to boost their output enough for the bulk of society (in the West) to live in relative comfort. The combination of man and machine working in tandem also brought the middle class into existence, with the bounty of economic growth being shared relatively widely. Yet the forces that brought this about seems to have gone into reverse as both machines and the way we use them have changed, leaving many raging for times since passed.

The extent to what we could produce was limited in the past to what a person would achieve with the help of tools or farm animals. More could be harvested through harnessing the power of wind or water but the extent to which is could be applied was limited. It was only with the advent of engines powered by steam or petrol that output capacity really took off. It was not just individual workers toiling with their machines in isolation but coming together under one roof that raised labour to its most productive.

Such manufacturing enterprises offered up big gains in output per worker, especially with the shift of the population from their previous existence eking a living off the land (without the use of technology). The machinery involved was simple due to both the basic level of technology as well as the reliance on workers without technical knowledge. Over time, the machinery became more complex and increasingly required specialized skills, with demand for education rising so that workers could keep up. Pay improved as output rose (and workers banded together to demand more), but machines also developed to be able to handle an increasing range of tasks.

As such, automation enables factories to produce more while keeping labour costs down. Offshoring of production provided a different route to a similar outcome but made the change seem more dramatic as factories in the West were shuttered (instead of a gradual diminishing of employment in manufacturing that would have occurred with automation). As factory jobs became increasingly scarce, more employment shifted to the service sector where the level of technology (and hence pay) is typically low. Thus, the employment prospects of workers with low levels of specialist skills suffered due to both starting at lower levels of pay with, as described below, less opportunity for advancement.

As well as offering up higher wages for new recruits, manufacturing also allowed for workers to build up skills on the job as their knowledge of the production process expanded along with their length of employment. The production of goods would typically require a large number of different actions, and as such, the machinery would be designed with different tasks in mind. The vast division of labour into separate roles within a factory would mean that workers would develop knowledge relating to their individual sphere of work. Productivity (and hence pay) would typically rise with the length of service as more skills are learnt on-the-job.

Even in the case of workplaces in the service sector with high levels of technology (such as a logistics warehouse), the skill levels are low as machinery does much of the work. The use of software (in terms of, for example, how to fulfil an order) means that there is little scope for workers to get better at their job. It would be expected that workers could reach peak productivity within a relatively short period on the job. As well as being separated from machines, workers in the service sector also suffer from less division of labour with much of the work being similar in nature rather than specialized on separate tasks.

Any technology that is used in the service sector tends to be in the background so as to organize rather than to produce. This organization typically involves making sure that people or goods are in the right place at the right time. The limited use of technology is partly because the service sector is inherently impervious to technological improvement. Services often involve people being at the point of sale ready to act out their task when required. As such, jobs such as a waiter, teacher, or nurse would have changed but only at the margins, while the core features would remain the same.

Not only were men and machine working together in manufacturing but many people gathered in one place to work under the same roof. This higher density of workers was probably important in the formation of trade unions and demanding higher pay and better conditions. Workers in the service sector are more spread out, which, along with the limited scope for picking up skills on the job, leaves them with little leverage to get concessions from their employers. This decline in relative position is obvious in lower levels of pay for labour but also in other aspects such as shown through zero-hour contracts which gives employers more control over workers.

Not only is the predicament of service-sector workers hurting those employed in such jobs but may also be having a wider impact across the whole labour market. The lower pay for workers in service jobs also damages the job prospects of those working in other sectors of the economy as it limits the options of people to move to better jobs. Higher pay in manufacturing had been seen to boost the plight of all workers, but the switch in employment in services may be having the opposite effect.

These changes within the job market go some way to explain how employment can be high but wage gains have been weak. Even with a relatively tight labour market (such as after the Covid lockdown), increases in wages remain limited in scope (which may be in part due to an inability of employers to pass on the costs of a higher wage bill through higher prices). The shift from manufacturing to services also seems to have the effect of concentrating economic activity in larger cities with other places suffering as a result. The broad consensus regarding an open economy with free movement of goods and people was, in part, based on the economic security provided through manufacturing jobs.

Without the relative abundance of such “good jobs”, the politics of economic growth becomes more difficult. Much about politics these days is about a return to a better past, with slogans such as “take back control” and “make America great again”. These glory days of old often involve a large manufacturing sector and all of the jobs and prosperity that comes with bring with it. Yet, the economy has changed and does not work in reverse. Even attempts to keep manufacturing jobs from moving overseas is also likely to be a lost cause as machines have reached the stage when only minimal human input is necessary for a growing number of tasks. And on top of this, the impact of a few manufacturing jobs will likely be much smaller relative to when factory work was readily available.

The focus on jobs and employment (like the emphasis on economic output) hides many of the important details. It seems to be the frustration bubbling up in politics rather than the usual economic indicators that might provide a better measure for the health of the economy. Without an understanding of what lies behind the numbers, all can seem well while the reality might be that the economy is not providing prosperity as it once did. It may be discontent, rather than data, that paints a truer picture.

Growing where

As the economy grows, much of the extra cash may not be spent

We all change as we grow, and this is also true of the economy. With incomes typically rising with economic growth, what we tend to buy changes as well, and this shift in spending also goes on to shape what is produced when we are at work. What we normally think of as the economy typically revolves around things to consume but increasingly money goes towards buying into investments. While this trend is given little attention within economic theory, it is perhaps having a bigger impact than is thought.

There has been a change to the things that we buy as economic growth has progressed. With more people earning bigger pay checks, spending is shifting from things that we need here and now to money put away for the future. Like most things in the economy, more demand for places to put away cash has resulted in an increasing range of options of what to invest in. A whole industry has been built up on providing investment products for those with money where ever they might live.

In the past, any money stashed away as savings in the bank didn’t really earn much. The financial deregulation that started in the 1980s changed this with an increasing emphasis on money being put to work. More choice about where your cash could go also meant that funds could better be directed to areas of the economy where it could be put to the best use. Along with the extra cash to be made by investors, those who played their part in moving money around also got paid well for their role.

Economic theory would suggest that any money put aside is beneficial as it frees up important capital to be used by businesses to expand profitable ventures. Yet, the reality seems to be that many of the large companies have a surplus of cash, much of which is used in share buybacks rather than investing in new business. And banks no longer rely on deposits to issue loans to smaller businesses as they might have done in the past. Rather than going towards supplying goods and services to sell, funds for investment often go into buying an asset that someone else owns and wants to sell. This asset could be a stock or a bond but could also be a property or something more exotic like an artwork or vintage bottle of wine.

It can be assumed that demand for such investments must be growing as the prices for things that people buy to invest in are increasing. Rising demand seems intuitive as greater levels of wealth mean that there is more money available to be invested. For prices to rise, it is not enough for demand to be high but also that supply must be unable to keep up. It seems to be the case that coming up with new ways of making money from money is not that easy. Excess demand is most notable for less riskier investments with some investors prizing safety so much that they are willing to tolerate negative returns on some government bonds.

This trend might be something that is inherent to capitalism and will continue to build up over time. But there are also factors that are not permanent which may mean that demand may ebb away in the future. For example, less money might go into investments due to selling brought on by the retirement of the baby boomer generation who have built up financial assets to provide them with income into their old age. Also, some countries, such as China, also generate surplus capital that is channelled into foreign financial markets but these flows may dry up once options for investing in their domestic markets increase.

Whatever the source of excess demand, the resulting rising prices for financial assets contrasts with the relatively weak demand for goods and services in the underlying economy and the low levels of consumer price inflation. It may be the case that funds diverted towards investment tends to take money away from spending on goods and services which may have contributed to subdued inflation. After all, higher earnings are not likely to translate into more and more consumption, while investments can continue to mount up as incomes rise.

The increasing amounts of money going into investment products has the potential to change the way money flows around the economy. Normal consumption involves buying things that would have been made elsewhere and transported to the location of sale where staff wait to provide assistance. Or it may involve a service whereby an output is provided by someone on request. Purchasing goods and services thus typically involved substantial amounts of labour enabling a wide range of people to earn a pay packet.

Investment products do involve some labour but the amount of input involved is usually relatively small especially considering the large sums that are typically involved. The workers involved are also concentrated, both in terms of geographical space (financial centres such as New York or London) but also with regard to the type of workers (educated and white-collar). Their spending could also be seen as being different to the average worker such as more money flowing to other places through, for example, the purchase of imports.

While the production of investment goods is narrow in its scope, the benefits from the money put away are also mostly captured by those owning the assets rather than being spread out through the whole economy. Higher asset prices do not serve any economic purpose (an increase in the cost of buying property should increase the number of houses being built but often doesn’t) but instead just results in a shift of funds to the owners of the assets. This issue is likely to worsen as the gap between those who have and do not have money in investments expands as financial assets are becoming pricier while wages (which cannot grow much faster than consumer inflation) are relatively flat.

On top of this rise in inequality and its economic consequences, a bigger finance industry is also problematic in terms of being a source of instability in the economy as seen in the dotcom bubble and the global financial crisis. Growing disparities in earnings also create problems in terms of social cohesion and can impact negatively on the political system. Another potential issue is the effect on aggregate demand in the economy. Not only is potential spending diverted into investment but the extra income going to the wealthy is less likely to be spent. This is because those with high earnings are likely to spend less when provided with more cash to spend compared to people on lower incomes.

The obvious conclusion from this trend is that asset prices will continue to rise as more money gets drawn into investment products unless there is a dramatic shift in either demand or supply. Such a trend would impact on how the economy functions and thus on attempts by policymakers to manage economic booms and busts. For example, the abilities of central banks would also likely suffer as measures such as quantitative easing (designed in part to boost asset prices) would have a diminishing effect. As already mentioned, boosting the earnings of holders of investment has less impact on overall spending and so monetary policy often struggles to gain traction.

Such difficulties have resulted in a recent shift to give greater emphasis on fiscal policy which allows for money to go towards people more likely to spend it rather than add it to their stockpile. Further government action might be necessary to avoid an economy where wealth continues to grow faster than incomes. Such was also the case around a century ago and it took unprecedented social and political change for wage-earners to make up lost ground and broader economic growth to take hold. With the value of investments climbing higher while prices for other things remains relatively flat, it is not obvious what it might take to (yet again) rebalance the economy and where, left to its own devices, economic growth might be heading.