Saturday, September 22, 2018


389. Locality and flexibility

In mainstream economics, next to the assumptions of rationality and autonomy of the individual, the focus on optimal outcomes, and the neglect of uncertainty, a further problem is the assumption that local roots of people and communities hinder the flexibility that optimal allocation of resources requires. That is related to the assumption that the individual is autonomous.

The human being derives its identity from interaction, and that works best in local contacts of some duration. Some time is needed to get to know each other, cross cognitive distance, and to build trust and shared conventions, taken for granted habits and orientations. Human beings require a certain amount of community.

I don’t want to idealize such communities. The sharpest of conflicts and excesses of rivalry, jealousy, and revenge, developing into feuds, can arise there. To prevent such festering and stagnation, loosen dependencies, and obtain fresh ideas, there must be variety and room for entry and exit, and outside contacts.

Also, local bonding can increase what I discussed in this blog as ‘parochial altruism’, with altruism within the group and discrimination of outsiders, further worsening its isolation.  

Nevertheless, some continuity and locality of relations in communities is needed. Formerly, people found community in religious associations and bonds of neighbourhood, school, sport, pubs, etc. And in a job, in the community of a firm, often on the basis of teams. For the lower educated, all these bonds have largely disappeared, as a result of increase of scale, resulting in concentration outside local communities, move to low wage countries, and spatial development of roads, office blocks, and shopping malls that destroyed social infrastructure.

And some of what remained of facilities went with priority to immigrants who needed to integrate; at least that is how it was perceived. More highly educated and mobile people found community of some sort in departments and teams in larger firms or professional bonds, which did not depend on geographic locality. But that now is also crumbling through individualization of work and shorter and more flexible employment.
    
These losses have been an important part of the feeding ground for populism.

The dominant stream in economics, excluding spatial economics and economic geography, had no eye for this. On the contrary: the central dogma was that of ‘comparative advantages’ and maximum flexibility, needed for the optimal allocation of resources. Locally one should engage in activities in which in comparison one was best, and other things needed to be acquired in trade with others. Labour and capital should not be locally bound but maximally flexible, to move to where their yield was greatest.

Local roots were seen as causing rigidity, and that, the suggestion is, is always bad. That is part of the rhetoric of maximal flexibility. The more the better. But that is often counter-productive, also from a purely economic perspective. That applies to both local communities and firms. It is good for both the firm and for the people working in it that one invest in knowledge and capabilities that are specific to the firm, yielding higher profits with specialties and novelties. That requires sufficient continuity of jobs and teams, because otherwise such investments are not made since they require continuity for them to be recouped. That lack of specific investments lowers quality of products, and the intrinsic quality of working in teams.

The goal should not be maximal but optimal flexibility: sufficient duration of location and relation without yielding rigidity. That is to be part of a new economy.