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.

Unspreading the wealth

Manufacturing was about more than jobs as problems still linger

The ideal role of the economy is not only to generate wealth but to make sure that everyone gets their fair share. Spreading the cash around is important in terms of everyone having enough to get by but also for providing a source of funds that can be used to purchase what is produced in the economy. The relevance of where wages are earnt and spent seems more pertinent as the drop off in employment in manufacturing has impacted on whole regions in industrialized countries. Without the higher wages earnt from employment in the factories, not only the individual workers but whole communities suffer while economic activity shifts elsewhere.

What we think of as the economy only really took off with the rise of the manufacturing industry. Previously, most people had eked a living off the land with workers scattered across farms and toiling away in relative isolation. The rise of factories was a significant change in that it brought people together under one roof and allowed for mass production of goods that had been made by hand. Despite the often-horrendous living and working conditions in the beginning, manufacturing eventually offered a route to a better life, both in terms of providing a large volume of cheap goods but also the higher wages paid out to workers. The lure of factory jobs still draws in people from the countryside in countries that have not industrialised enough to benefit from manufacturing.

In this way, manufacturing was crucial both in terms of generating greater levels of output as well as providing money for people to spend. It was through higher factory wages that a middle class rose up to not only buy the goods rolling off the production lines but also to help create other jobs in the service sector as they spent their earnings. The boost to wages came from the use of machinery on the factory floor which set it apart from agriculture where more basic equipment had been employed. The greater use of technology meant that workers could earn more even without having to acquire any specialist knowledge for the job. The wider spread of wealth was a profound shift from how society had been set up in the past with the middle class filling the long-established gap between an impoverished majority and affluent elite.

On top of these changes, manufacturing also moved people away from their previous attachment to the land and gathered them together to work in much closer proximity. Yet the extent to which cities could grow in size was limited by the need to have essentials such as food and fuel be transported in from the surrounding farms or further afield. As such, manufacturing resulted in a larger number of towns rather than a few big cities. Even once these limits had been overcome with improvements in technology, cities often did not provide suitable location for factories which were instead more likely to be set up in places where land and wages were relatively cheap.

Manufacturing thus acted to offset the tendency for economic activity to be concentrated in cities, serving to not only distribute wealth among a wider range of individuals but also among different regions within an industrialised country. This second effect was due to the higher pay packets for factory workers acting to support a bevy of service jobs in the surrounding community. This spending from the wallets of the employees of manufacturing firms came from sales of goods beyond the immediate confines of the local community. As such, it could be argued that manufacturing brought money into the local economies where ever production was situated.

It is easy to see then that the influx of cash for spending locally would thus dry up if the factories were moved away. Any local economy needs money coming in as funds are always flowing out in the purchase of goods made elsewhere or for other things such as taxes or services not offered locally. It is often the case that the service jobs that remain tend to serve people within the community but are insufficient to sustain the existing businesses as such transactions tend to merely see money moved around the local economy.

Not all sectors within services are like this but some professional services such as finance, accounting, or law serve a wider range of clients who can be based in more far-flung places. Such businesses with their skilled workforce tend to be concentrated in a few places and provide the basis for the large cities which have flourished. The demand for such professional services has grown along with the spread of international markets and the growing complexity of global production. At the same time, a mass of jobs has been created around such global service centres which have become the new focal points for the economy.

The large metropolises may be booming now, in part because of such a role in managing the global economy but also because they are, in some ways, the “last man-standing” in terms of offering high-paid jobs. On top of this, manufacturing is unlikely to make a comeback as, just like agriculture before it, the number of jobs on offer was always likely to diminish over time. Similar to farms, factories have a workforce declining due to the rising use of machines and greater wealth causing people to spend more money on other things. Yet, while rising food prices can bring wealth (if not much employment) to the countryside, trends in manufacturing are more likely to see fewer and fewer sites for production as bigger factories are more efficient especially when goods can be transported cheaply.

Cheaper transport and communication mean that factories no longer need to be limited to places where labour and land are cheap within industrialized countries but are free to be situated anywhere. As such, the effect of manufacturing spreading the wealth, while greatly diminished in Western countries, now instead operates on a global scale. While everyone has benefited from cheaper prices thanks to lower labour costs, it is the places at which manufacturing sites have been located that have seen the most advantages as the higher wages act to lift the local economy. It is as if the jobs in services that would have provided employment in the factory towns in the West have also been offshored.

While many have moved on, these changes have left some in industrialized countries stranded as the shift towards cities offers up little in terms of job opportunities. Manufacturing provided a workplace for people with a range of skills that are different to those who might thrive in the new knowledge economy and even get by in the broader service sector. The wider dispersion of economic activity also allowed more scope for people who preferred the greater security and closer community of smaller towns to the more individualist cosmopolitan culture of city life. On top of this, such challenges would have been easier to bear when placed on the shoulders of individuals dispersed throughout society, but the concentration of people left behind by economic growth is more difficult to deal with.

Although people are deemed to be responsible for their own fortunes, this stance is more difficult to defend when it is previously prosperous regions that suffer as economic activity moves elsewhere. With more to lose in terms of both material possessions as well as a sense of identity compared with the past, many individuals have proven unable to keep up with the demands of economic change. Government policies such as “levelling up” suggest more sympathy towards communities that have fallen behind, but the scope of the problem and the relentless forces of global capitalism mean that there is little that can likely be done. Only time will tell if it is people themselves that will need to continually reshape their lives to fit with the changing economy or if more will be done to bend the economy to the will of the people.

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.

Have we reached a globlock?

Growing grievances against globalization may see further progress blocked if left to fester

Globalization seems like a force of nature when considering the expanding rate at which goods circulate around the world. But globalization has also prompted resistance as some have done better than others. Trends suggest that the unequal share of gains from globalization is not likely to change and could instead become more pronounced. With discontent feeding through into the political system, it may reach a point where globalization hits up against its own built-in limits.

Both the growth and demise of globalization could stem from the notion that markets will always grow in size. Successful businesses expand as they search out new customers as well as offer up different products. This process has been given a further boost by the growing ease at which products can be transported. Goods can now be mass produced in one location and shipped across the world, providing benefits in terms of growing economies of scale. Even online businesses such as Google and Facebook prosper as the reach of their services spreads across the globe.

The expansion of globalization has provided dividends in the form of greater efficiency, higher corporate profits, and cheaper prices. Yet, globalization has attracted increasing levels of unease in Western countries as many workers have missed out with benefits being captured by a shrinking portion of the population. The issue has been further exacerbated as the main means by which economic gains have often been shared (taxes and social spending) have been curtailed in the past few decades.

The bulk of those losing out from globalization in Western countries are made up of low-skilled workers whose jobs can be easily automated or moved elsewhere. While being pushed towards the side lines of the economy, those being left behind still have their political voice. The volume of their resentment has been turned up with the rise of populist in many countries. With their attacks on the status quo, populist threaten to derail the gains from globalization.

This begs the question of whether globalization was always likely to create resistance within democracies and thereby halt its own expansion. The bigger markets and greater levels of automation have resulted in gains that workers had made in the past being eroded away. Manufacturing had opened up a route for low-skilled workers to climb into the middle class (through exports tapping into global markets), but improvements in productivity have meant less need for workers. Transitioning people from manufacturing to the service sector has involved a drop in the level of technology on the job and hence wages.

These trends would still play out even without the economy expanding across borders. But globalization has served to act as an accelerant, both in terms of increasing the rate at which businesses could scale up in size as well as resulting in low-skilled workers (who were already set to lose out from automation) being hit even earlier due to offshoring. The international element also meant that it is the overseas rather than domestic winners from globalization who have been attracting people’s anger.

Governments have also been hampered in their response as globalization has seen its power wane relative to business. Along with their increase in size, the ease at which companies can move operations across borders has resulted in growing leverage over government policy. The resulting business-friendly policies have tended to be good for the global economy but also hampers the ability of governments to deal with the consequences of globalization within their borders.

Populists have stood up as the flag bearers for the anger against globalization as the mainstream political system offers up few solutions. The traditional left/right split in politics is ill equipped to deal with issues such as whether the economy should be more or less open. Politicians may be able to patch together a compromise, but the outlook does not look bright. Without genuine solutions to the economic pain wrought by globalization, the lure of populist will grow and may reach the point at which globalization stalls and begins to be reversed (in Western countries at least).

As much as populism is seen as wayward by those who think that they know better, it is likely to continue as a force in politics if the underlying frustrations that it feeds off remain. And the structural nature of the issues to do with both globalization and the political system means that they will not go away anytime soon. Without any solution in sight, globalization may be stopped in its tracks by, for want of a better term, a democratic globlock. Without enough winners from globalization, we might all lose out.