"Know that feeling you get when you finish making something and turn it on for the first time to experience the power and joy of invention as your device springs to life? Gnomes don't."
-Nixx Sprocketspring, Master Goblin Engineer of Gadgetzan3
Anyone with a pair of eyes and a pulse is well aware of the rivalry between the gnomes and the goblins, but none are truly cognizant of its origins. Part of the reason for this is that the gnomes and goblins themselves, lacking the attention span to learn their own history, remain ignorant of the reasons for their interracial feud. Of course, ignorance does not stop them from fervently propagating the rivalry.
I shall not endeavor here to explore the distant reaches of gnomish history (there are no extant records, and for all their efforts gnomish engineers have yet to invent a time machine), but rather I shall attempt to elucidate something of the psychology that contributes to the continuing feud. I shall touch upon issues of warfare, engineering, and culture which may shed some light upon the mutual disdain between these two diminutive races.
There was a time when the rivalry between gnomes and goblins could in no way be classified as "friendly," as they actively contributed to opposite sides of a bloody martial conflict. On the off chance that a portion of my audience may have spent the past two decades irradiated or trapped in an underground cave, I am referring of course to the Second Orc-Human War. The goblins transported explosives for the orcs2) while the gnomes built flying machines and submarines for use by the humans and their allies1. Though there was never any direct combat between the two races, this seems as likely a time as any for the fires of mutual distrust and disdain to have been kindled. By the time of the Third War, however, the goblins had committed to neutrality (an amusing paradox) and the gnomes had withdrawn completely from trade and communication with other races. The truth of the matter of course was that they were busily trying to solve (and hide) the massive problems they had unleashed upon their own home city of Gnomeregan2.
So why, then, did the rivalry between gnomes and goblins not dissolve after the Second War? The most obvious answer is engineering. Both races are renowned for their engineering skills, and their engineers frequently submit competing bids for major projects. Gnomes are at a profound disadvantage when competing with goblins for three reasons. First, goblins have devoted themselves to the study of negotiation and commerce, making them far more savvy when it comes to pricing their services and meeting customer demand. Second, due to their neutrality, goblins have access to the massive Horde market, which is largely closed to the gnomes. Third, gnomish engineering, though undeniably imaginative, has a (perhaps deserved) reputation of being somewhat unreliable3. It is for these reasons that goblin zeppelins (as opposed to gnomish flying machines) have become the standard overseas air transport throughout the lands of Azeroth.
In Ratchet and the surrounding areas, the gnome/goblin rivalry has recently heated up with the hiring of infamous gnome engineer Gerenzo Wrenchwhistle (mastermind behind the Gnomeregan irradiation project) by the goblin-run Venture Company. Some of the Venture Company's goblin engineers were so enraged by the presence of a high-ranking gnome that they left to join the rival goblin engineering organization: the Tinker's Union4. Aside from the direct competition for lucrative markets, there is another reason that engineering deepens the divide between the races: there is a profound difference in philosophy between the races' respective disciplines. Gnomish engineering serves imagination and whimsy above all, and aims to make life more convenient and amusing for its users. Meanwhile goblin engineering is more pragmatic, focused around destruction and demolition3.
The differences between gnome and goblin engineering reflect, in small part, the differences between gnome and goblin culture. Although both gnomes and goblins are atheistic societies who value individual endeavor and innovation, there are three significant points upon which gnomes and goblins differ culturally: exploration, imagination, and procreation.
Gnomes, for the most part, prefer to stay within the walls of their home city - once Gnomeregan, now Ironforge1) - whereas since the Second War the goblins have made a point of preceding both Horde and Alliance pioneers into almost every new frontier, in order that they might set up shops to service the explorers6. Meanwhile, for all the goblins' exploration and contact with other cultures, the gnomes would argue that these single-minded and avaricious entrepreneurs have managed only to find new ways of destroying things and making profits. Meanwhile the gnomes, who scarcely venture beyond their own front doors, obsessively explore the inner landscapes of possibility and innovation. Gnomes are largely concerned with what could be; goblins are concerned with what is. Each finds the other's mindset shortsighted and pitiable.
Another source of deep mutual contempt is the matter of procreation. Gnomes are continually baffled by the rate at which goblins seem to reproduce5. When it comes to childcare, gnomes value quality over quantity, considering it more praiseworthy to properly educate a single child and prepare him for outstanding achievement than to have a large family. Goblins, on the other hand, tend to have a great number of children, not for sentimental reasons but once again for practicality's sake. It's easier to form a massive trade empire if you have plenty of cheap family labor. Gnomes deeply resent the fact that goblins vastly outnumber them, and find the goblins' laissez-faire approach to procreation and parenting rather appalling.
So it would seem that all though it has been many years since these two races actually stood on opposite sides of an armed conflict, a true amity between goblins and gnomes is not likely forthcoming. Despite their common interest in engineering and their shared mistrust of religion, the other cultural differences are too deep to overcome. It seems obvious, however, that the gnomes must learn to adjust certain of their attitudes if they wish to compete with the goblins in engineering... or in sheer numbers.
Sources (OOC)