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.