Earlier quoted context omitted.
Generally speaking there are two broad camps in this argument There's at least one more camp. Those who think that there's large body of evidence that, all other things being equal, a good co-located team will be much more productive than a distributed one. And I say this as somebody who lives in a relatively rural part of the UK, runs their own company, and spends a pretty large chunk of my time telecommuting and wo…
I could go on.... Yes, I wouldn't argue against the notion that - in general - co-location is better for (at least short-term) productivity. The question, to me, is "what about the other effects?" Does forcing co-location decrease job satisfaction, for example, and what's the effect on turnover? Or what about morale, and it's impact on productivity over a longer period of time? There are also issues like "what if the…
That said - it's generally been my experience that people are happy when they're being most productive, and vice versa. The most productive, gelled and happy teams I've worked with have all been co-located (which does not mean I think distributed teams are unhappy or unproductive).
I think many folk see teleworking as a solution to a bad onsite working environment. Often those people are not in a position to "fix" their normal working environment and it's the only option they have to be happier and more productive. More power to them.
Unfortunately, since poor onsite working environments are common, when those people are in a position to build their own teams, working environments and businesses they often miss the opportunity to build a great productive onsite environment - and then miss out on the productivity (and general happyness IMHO) wins that can get you.