Back to the village? Globalisation is changing direction

The human mind is hard-wired to think that present trends will continue, as many a study cited by behavioural economists attests. It takes a real effort to see things another way, even when there is evidence aplenty. So it seems inevitable that technology change and globalisation will continue to hollow out society, destroying jobs while a rich elite enjoys the high life in specially protected enclaves. But a change of direction is coming.

Recently I read a review in the Economist of a book by Richard Baldwin: The Great Convergence Information Technology and the New Globalisation. This is another variation on the same old story of advancing globalisation, but it offers a narrative that is useful.

Mr Baldwin sees the advance of technology affecting the human economy in two waves. Originally mankind was stuck in a village economy, forced to produce virtually all it consumed. The first wave of technological revolution detached production from consumption through advances in the technologies of transport. Goods (and energy) could be moved cheaply and easily. Society rearranged itself around industrial centres that produced things that were distributed worldwide. But knowledge, ideas and skills did not move so easily, which meant that production was concentrated in integrated geographical clusters.

The second revolution came with information technology, which allowed the spreading of knowhow, which in turn allowed the traditional clusters to fragment. Sub-assemblies could be manufactured far away. And indeed whole factories could be transplanted from Detroit to Mexico. This proved wrenching for the developed countries, but a big opportunity for the rest of the world. It is a backlash against this process which is behind the current wave of political turmoil. Mr Baldwin seems to assume that this process has further to run, and that we should facilitate its progress.

He may be right, but we should not miss two further dynamics, both based on conventional economic theory. The first dynamic is convergence – a different aspect to that suggested in the book’s title. Just why is it that so many factories have been relocated to developing world countries? The knowledge economy facilitates the move, but does not tell us why it is happening. It happens because workers in the developing world are paid less than those in the developed countries. But why?

The reason is that developing world economies have very low productivity. This low productivity is mainly because they have very inefficient agriculture, which ties up a huge proportion of the workforce, and which is massively uncompetitive in world terms. This drags down the cost of labour. But as developing world societies adopt modern technologies, and as more of their populations flock to cities, the productivity gap between town and country reduces. We have witnessed this in Japan, followed by South Korea and Taiwan. Now mainland China is following these exemplars. This means that what economists call comparative advantage (driven by the balance between different sectors of an economy, and considered to be the main engine of trade) is equalising. It’s quite a subtle point (which I explore in my economics essay on trade on why global trade is going into reverse), but the upshot is that the economics of outsourcing overseas is becoming less attractive.

There is plenty of evidence that this trend is quite advanced. It does not mean that large numbers of manufacturing jobs are coming back to developed countries though – because many of the jobs have been automated away. It does mean that future disruptions wrought by technology (and there are more to come, especially in white-collar work) will be less international in scope.

The second dynamic comes from looking at the economic impact of consumption. Not so long ago, the world’s consumption was mainly food. The agriculture sector comprised most of the economy. Now agriculture takes up a tiny share of national consumption in developed economies, and we take it for granted. That same process is evident with so much else of what we consume. Manufacturing industry is vanishing as a proportion of the economy. Various parts of service industry are following suit. So what does that leave? Increasingly our economic activity is about interpersonal contact with people in or around our neighbourhoods: hospitals, care homes, schools, gyms, restaurants, cabs and so on.

And what about technology itself? Though we hear much about it driving a process of mass automation, including through the use of algorithms in artificial intelligence, we may not have noticed that much technology is not about this at all. It is about the empowerment of individuals. Think about what you can do with your smartphone. Think of the personal liberation that comes about through such services as Uber (though not for the drivers perhaps, admittedly). And think about additive manufacturing (or 3-D printing) that makes it more economic to have a production run of one. And think of energy technology. The idea of massive nuclear power stations at the heart of a huge grid of high voltage cables is fading, as it becomes harder to make the economics work. It is being replaced by the idea of localised renewable energy sources, much more efficient consumption, supplemented by medium-sized power stations.

Put these things together and you might start to see the village coming back together again. The centrifugal forces are becoming centripetal. Not yet, to be sure, but the idea is becoming more technologically viable. And there is human need: most people crave denser social networks where recent trends have weakened them.

The new village will be very different from the old one. The old village was very insular, with people rarely mixing with their neighbours. In the new village people will travel freely, and the interchange of ideas will be global. And the new village remains dependent on national and global supply networks and information infrastructure. But most economic activity will be within the village (which could be a small town or suburb or network of actual villages in fact- or perhaps even a large town). The old village was a prison. The new village, or the liberal vision of one, should not be.

Let me hazard a further guess at this new village economy: public services will comprise a very high proportion of what it does. Education, health care, public protection, social care; I do not think these will be marked by high productivity gains in the future, so their importance in the overall economy will rise. And much of the infrastructure that the new society will depend on will be provided by natural monopolies, many of which will end up being run publicly, if not run publicly already. That poses some big challenges for governance and tax.

Those challenges will be among the many for public policy posed by this trend. Another is the status of that liberal icon, free trade. We are stuck in an old way of thinking about it, appropriate to older phases of technological advance. We will be still be dependent on the free trade of things, even if the distances shrink: but things will be less important to us, compared to the services we receive from our neighbours. Free trade may hollow these out by sucking resources away to centres of power elsewhere. Compare a Starbucks to a locally run café.

And another point is that I am coming at this with a very optimistic and liberal gloss, but there may be darker ways that these trends can take shape, with a return to insularity.

But that said, we need to adapt our political ideas to the world as it is, and what it is becoming. We should neither expect current trends to continue forever, nor for the past to return. Not enough political thinkers are responding to this challenge.

 

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9 thoughts on “Back to the village? Globalisation is changing direction”

  1. I wonder how this might dovetail with another idea I’ve been having: and that is of the new tribe. I think that the new tribe might not be geographically local at all. As social media becomes more factional (as we all retreat into our ideological/cultural/political/economic bubbles) we may see ourselves developing new notions of tribe that span the global. I often say that I sometimes feel I have more in common with the New Yorker, the Parisian, and even to an extent the Muscovite, than I do with the Northerner. If e-tribal identities are formed, wouldn’t that have significant implications, even for the new village?

    1. That’s an interesting thought. Even the nativists are forming bonds with likeminded people from other countries: Trump and Putin are international heroes in spite of focusing their appeal on narrow nationalism. But I think people also have a need to bond with people who live near them, and, if I’m right, these bonds will grow as the world of work starts to become more local. I think the answer is that people will live with multiple identities. Reconciling those identities will be a lot of what politics will be about. But mono-cultural ghettoes could be the result.

  2. I must admit that I’m very sceptical of this kind of approach. If we look back on what happened previously we almost always get our ‘futurism’ wrong. Remember the talk about paperless offices? We now consume more than ever.

    Increased automation was supposed to lead to a reduction in working hours. There are now more than ever in the economy.

    We either trade with the rest of the world in real things that have to be transported by ship, or we trade in services such as tourism which require the people to be transported, or we trade in ideas and other services which can travel instantaneously around the world in milliseconds. We could outsource all our banking to India if we wanted to. There’s no technical reason why not. There might be political reasons though.

    Changes in world trade patterns are brought about mainly by improvements in technology. Globalisation is nothing new. Marx wrote in the 19th century:

    “Modern industry has established the world market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land…

    So the easier the communications and transport, the more globalisation there will be. The creation of the internet was a huge leap forward. Did anyone see that coming? Will anyone see the next one (if there is a next one)? I doubt it.

    We may just as well get on with it and go with the flow. Imports aren’t a threat to jobs. Imports have a deflating effect on local prices. This allows the Government to reflate the economy, without the risk of creating inflation that might otherwise be a problem.

    1. Fair point Peter. My hope in the article is not really to predict the future but to try and undermine a sort of consensus that we are just going to get more of the same in terms of globalisation – and we should work towards more and further-reaching trade deals. There is in fact a wider range of possibilities. I also think there is a mass of unmet need in many local economies that economists should be thinking harder about.
      My point about trade is that tradable items, whether in goods, services or ideas, are getting so automated that they will become less important in terms of the overall economy – like agriculture now compared to two centuries ago (and we produce much, much more food then then). There is a lot more globalisation to come, but that isn’t where the big economic questions will lie. It won’t help the queues at A+E, poor social care for the elderly or dire mental health services for young people.

      1. I think there it is always difficult thinking about these kinds of issues, in our type of society, because we have trouble separating the general from the particular. My wife and I, to avoid a queue, went through one of those automated supermarket check-outs recently. She’d been keen to use the old person operated aisle to “save jobs”.

        I suppose if my job was threatened by automation I’d be worried too, but in general, it is better to have as much automation as possible. That can be automation in a car factory on the other side of the world from which we import cars or it can be in a factory in Sunderland or it can be at the local supermarket.

        Because, then, that automation frees up people to do other things like work in the local A&E, or more generally with the sick, elderly or very young. If we had a socialist based economy, that would be such an obvious point that it would need hardly any explaining. But because we live in a capitalist economy and we are so hung up on such things as budget deficits and the question of “where is the money going to come from”, we lose sight of the basics. But, the same process can happen in our society too if we can see through the economics of it all.

        1. I agree. Automation is often alienating as it forces people to conform to a standard not of their making. But it should be compensated by giving them more time and money to spend on activities that counteract alienation. Who cares if you can’t talk to a human being at your bank, if there are people with time to examine your needs at A+E? My concern is that the new jobs aren’t being created because the money ends up in the wrong place. I accept your argument that governments can compensate by running deficits and/or printing money, but I feel it is a short-term answer and it could be very inefficient.

  3. The government running deficits, in a net importing country like the UK, isn’t just short term. That’s quite normal. It is, and was, quite normal for Tory and Labour Governments alike, including Mrs Thatcher’s.

    Say we have a closed economy (ie no imports or exports). The economy is at a primate stage and working population is largely occupied with growing food and making the necessities of life. Building houses and making clothing etc. We then start to see technical innovations so that only 90% of the working population is needed for the same level of production.

    According to classical economics we should see a 10% reduction in prices. But, I don’t believe that happens in practice. The owners of the means of production will want to see their profitability increase. If they spend that increased profit there’ll be no problem. But if they save it, Government will have to deficit spend it on something, preferably on something useful like health or education, but more likely to be on increased military spending, to keep everyone fully occupied.

    1. You are perfectly right in terms of financial flows, and there is nothing wrong with deficits per se. The issues are around financial stability as financial balances accumulate and will at some point have to be liquidated through default or inflation, both of which cause substantial collateral damage. Mass confiscation of money, as Modi is attempting in India, can be massively damaging too. I think we need to be looking at ways of reducing or taxing those super-profits.

      1. I’ve been trying to make sense of what happening in India. It’s not what is generally supposed. That’s because people don’t really understand what money is. The central bank ie government can either choose to accept, or not accept, 500 and 1000 rupee notes. It’s a binary choice. There’s no in-between. A 500 rupee note is worth 500 rupees if the central bank accepts it. It’s worth nothing if it doesn’t.

        Sure, politicians like Modi can spook the population by declaring them to be no longer legal tender and stampede everyone into paying them into their bank accounts. But just saying these notes aren’t legal tender doesn’t mean anything if they are still accepted by the central bank and hence other banks.

        So when the panic subsides and the queues dwindle, people will carry on using the notes. Knowing that they can pay them into their account at any time.

        There’ll just be a nagging doubt in people’s minds that they will at some point be dishonoured, which will stop the hoarding of notes. But undermining people’s confidence in the currency is a dangerous game. What’s to stop the PTB freezing bank accounts or confiscating part of them?

        I wouldn’t want to keep any signifiacnt number of euros in a Greek, Italian or Spanish bank for example. I’m not sure even about a German bank right now!

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