Following the Brexit referendum, the election of Donald Trump and the electoral performance of the far-right in Europe there have been many people questioning whether the economy of the world today is working for ordinary people. Clearly it isn't, with stagnant wages and widening inequality. Many politicians and commentators are adept at identifying the problems and causes but seem hopeless at suggesting solutions.
Over the last generation the economic mantra have been the promotion of ever increasing circles of free trade. Opinion has become entrenched in the view that free trade is always, always, good and that we must have as much of it as possible. The latest manifestation of this has been a free trade agreement between the EU and the US which has met much resistance, especially in Europe.
The Western World has been plagued for nearly twenty years with stagnant wages. Many reasons are put forward for this, such as low interest rates keeping low-productivity "zombie" companies going that should otherwise go under, the lack of bank finance to fund technology investments, and mass immigration driving wages down through an over-supply of workers. But there is an additional reason that many economists have been saying for some time. Business profits are record highs but business investment is low. Competition in the world economy is lower than a generation ago due to a decrease in the number of companies operating in each market sector. A small number of huge companies are dominating world markets. These companies are so massive they face little serious competition so instead of investing in new technology to keep ahead they are simply hoarding their cash and buying back their own shares. Productivity growth has stalled. How has this situation arisen?
The argument for globalisation is that it encourages greater economies of scale - one of the key drivers of wealth creation - and that it allows countries to specialise more and develop comparative advantage. It seems that economists have just never believed that there could ever be any downsides to this, and serious criticism of the globalisation juggernaut has been non-existent. But when economies of scale get so big then markets become dominated by a small number of huge incumbent multinationals and it becomes impossible for any serious competition to emerge to challenge them. To build up a new business that can compete with the biggest is just not worth the risk. The incumbent multinationals are so cosy in their dominance that they are not investing and therefore productivity growth is on the wane, which lowers wages and living standards. Economies of scale have become too big. There is no reason why a country like Britain could not produce an entire car or aircraft from start to finish, but supply chains have become so vast and specialised, and cross continents in the production of every product, resulting in an ever-decreasing amount of competition being able to muscle in on existing operations.
Globalisation has gone too far. The ending of massive supra-national free trade agreements and a few tariffs would discourage the domination of the world by fewer and fewer companies and shrink those vast economies of scale that have led to this problem in the first place. It would be a step backwards in order to then go forwards but one that will have a longer term gain of ensuring that no businesses get so big that they can rise above the threat of entrants into their market. Those economies of scale do push down costs for consumers but if they push down their wages as well they are not serving any purpose. Investing in productivity would again become a business imperative to ensure competitive advantage in the marketplace - to the betterment of economic growth and the wages of the workforce.