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De-industrialisation

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 DE-INDUSTRIALISATION

W. Stanners

1. Introduction.

From time to time, and in various guises, the issue of de-industrialisation is raised.
Sometimes the central concern is the dereliction of a once staple industry, sometimes
the effect on UK trade, sometimes the decline of the proportion of GNP related to
manufacturing, sometimes a discussion of whether industry matters so much when the
rapidly developing sector is now services.

These discussions tend not to start at the beginning, which is assumed, naturally, to be
largely known. The terms of the discussion, such as output and productivity, are thus
used as if their meanings were perfectly clear. They are not, of course, but no purpose
would normally be served by continually rehearsing this, as long as the subject is year
to year economic development. When the period concerned is decades and centuries,
it is necessary to be more explicit.

2. Background.

Perhaps the first point to clarify is a self-evident one, but, since it runs counter to
usual perceptions, one that is easily lost sight of. This is simply that the producer and
the associated technology are primary. The monarch, priest, warrior, scholar,
administrator, merchant and shopkeeper are secondary. The fundamental difference
between the first civilised societies and primitive societies, was not the cultural and
structural notions we associate with civilisation but the less interesting fact of
agriculture. It required millenia of technical progress by producers to free gradually a
small fraction of the population, finally perhaps one fifth, from the necessity of
production, to lead, think and serve. The paradox that the more esteemed is also the
less important will appear several times in this paper.

In the same way, the essential difference between the society of Adam Smith and that
of today is not the vast expansion of services, but the advances in technology which
have reduced agricultural effort from 80% to 5%, and led to the situation where
another 25% produce most of the things we need, liberating the majority to lead,
think, and serve.

The pre-historic agricultural revolution was just as explosive as the industrial

revolution. They are both parts of one continuous process of innovation, albeit one
with accelerative phases separated by several millenia. The essential basis for each
was the use of solar energy, the first directly to raise crops and animals, the second
indirectly by releasing the stored solar energy in fossil fuels. A consequence of this
single continuous process has been the increasing liberation, at varying rates, of labour
from the needs of production.

1
The producers have thus shrunk from nearly 100% in the primitive society to 30% or
less today. As the productive force dwindles numerically, it is little wonder that it
may begin to seem that it is of less importance, when in fact it is the continuing sine
qua non of modern society.

3. Productivity.

The numerical decrease of the productive labour force while production increases can
be described as an increase in productivity. There is no difficulty in this change of
vocabulary, except that the objective ring of the word can obscure the fact that any
attempt to quantify it, especially as a function of time, is fraught with difficulties.
Indeed, the compilation of tables of numbers denoting, say, annual increase in labour
productivity, is useful only when considering a limited region of space and time.
Rigorous quantification is, in general terms, impossible. There is no objective way of
comparing the productivity of a medieval shipbuilder with that of a present day
shipbuilder, still less with that of a spaceship builder. All we know is that a modern
worker is vastly more productive.

A further problem is that the ratio denoted by this word, namely items produced over
labour involved, is subject to wholly arbitrary decisions as to the definitions of both its
numerator and its denominator. A computer systems analyst is by no means a service
worker in the sense of a barber or a nurse, but the item he produces, and the scale by
which he can be said to be producing more items today than yesterday, are not easy to
define. Similarly, in an industrial enterprise, the size of the work force to which the
productivity gains are to be ascribed is not a matter for objective assessment.
Secretaries, personnel staff and so on may or may not be included, or the staff of such
outside consultants as may be employed.

What has this to do with the problem of de-industrialisation? Well, in discussing de-
industrialisation, we must constantly be aware that there are difficulties in knowing or
objectively measuring what we are talking about, and still more in assigning an
importance to it. These are not just difficulties in the sense that a lot of care and effort
is needed to surmount them. They are in principle insurmountable. There is thus a lot
of room for undeclared pre-judgement and emotion to be felt to be fact, and presented
as such.

4. Numerical illustration - preamble

In order to pursue the matter further, a numerical illustration will be given. But first
some necessary remarks will be given on productivity, wages, and prices.
Since the output of a given group of people, measured in current money terms, is
simply the sum of their incomes, and since across the various activities of society
people by and large have comparable incomes, it follows that productivity, measured
in value-added current money terms, is about equal for every type of activity. Also it
changes from year to year only in so far as real GNP per worker changes (but note that
the quantification of GNP, and of real GNP, suffers from exactly the same difficulties
as those mentioned above for productivity). If this basic reality seems surprising, it is

2
only because economists and commentators stress the detailed departures from this
general picture. Money and success for individuals (or enterprises, or nations) are
obtained by momentarily taking advantage of an advance, that is an increase in
productivity, before its fruits diffuse throughout society. The fact that, level for level,
incomes in all spheres of activity, the traditional as well as the innovative, are roughly
equal, demonstrates the reality of this diffusion. A person is paid as a person,
irrespective of his product, so his productivity in current money terms is essentially
his wage, and his wage is more or less the same as everyone else's. The productivities
in real or volume terms that are tabulated for different activities at different times may
be obtained by performing an anachronistic calculation, i.e., by pricing the worker's
output today at yesterday's prices. In principle, productivity can be measured just as
well by the change in price as by the change in volume. If it can be said that the
average worker's yearly wage can today buy 4 small cars, whereas 30 years ago it
could buy only one, then a car worker's productivity has increased about four-fold (car
workers being understood to mean all persons involved in the final product). The fact
that the small (how small?) car of today is not at all comparable with the small car of
that time is one of the insuperable difficulties already referred to, which ensure that
the answer to a question on productivity gain over a long period is more defensibly "a
lot", or, "various experts would, with many qualifications, obtain results around 4",
than, say, "a factor of 4.27".

Cases of the latter essentially spurious precision can be found (and must be found,
since there is no computational alternative) in any compilation of relevant statistics.
For example, in an invaluable and rightly esteemed work, on the second page of the
text, and without caveat, may be found lists of numbers which imply that the
GDP/head in real terms of the UK in 1989 is 12.94 times that of Austria in 1820.
Another universally ocurring example is the fact that official statistics of GNP at
current, or constant (anachronistically calculated), prices are given to an absurd
number of significant figures, in the case of Italy to an apparent precision of one in a
million. This is a number which in its relation to reality, however defined, might be
defensibly given to a precision of 1 in 10, or at best, 1 in 1000.

In the numerical example given below, the radical simplification is made that the
products do not change with time. Only the technology does. In this way, the wholly
unquantifiable element of changing quality (the extreme form of which is complete
novelty) is eliminated. This means that productivity, so long as it is confined to one
good, has a precise meaning. Every person is paid the same wage, receiving his/her
equal share of the total product. As explained above, this is not as unrealistic as it
sounds, and in any case could equally well be understood to refer to average wage in
each sector of activity.

Economic activity is assumed to be divided between two sectors, one capable of a

high rate of increase of productivity, the other not. These are called the primary and
secondary sectors. The first may be visualised as embracing agriculture and industry,
the second services, but it is the rate of change of productivity which is the essential
distinction between them, not the nature of the activity. The economy consists of one
unchanging primary product and one unchanging secondary product - say golf balls
and haircuts. In order to avoid the repetition of clumsy phrases like "wages are so
many currency units per unit time and unit of labour", or the invention of new name

3
for a fictitious currency unit, the units used here will be pounds, years, persons, and
"items" of the two goods involved. To simplify the numbers, the state consists of one
person, although this can be thought of as one million or one billion if wished. The
person is always employed, or, what is the same thing, any idleness is incorporated in
the value of the productivity. The starting conditions begin with setting the wage at
one pound per year. This defines the currency. At this starting point we are free to
define what is meant by an item of each good, and we define it as the production of
one person in one year. Therefore, at the datum point, the productivity in both sectors
is one item per person and year. The price of the item is the wage of the person, so it
is one pound per item in both sectors. GNP per year, wage per person and year, and
price per item are all equal to one pound. To summarise, a pound buys a primary or
secondary item which initially takes one person-year to produce, the wage of course
being also one pound.

As long as one deals with one good of fixed quality, there is no problem in principle
or in practice. The above definiton of currency or of an item is arbitrary but not
subject to any conceivable objection. However, the above has implicitly introduced
the notion of value, because, in assigning a price of one pound to each item, it is
arbitrarily fixing that one item of an primary good is of equal value to one item of a
secondary good.

As explained above, there is no objective way whatever of justifying this. Whether

the value of 1 kg. of water is less than, equal to, or more than, that of 1 kg. of gold
depends entirely on the circumstances in which the question is posed. One can only
assign the values which pertain by chance at one point in time, in our case the datum
time, and stick to this, anachronistically as said above, at all later (or earlier) time.
This is what official statisticians do, and must do, only they move the datum time
forward from time to time, as the differences in quality (which are not present in the
present formulation) and distribution (which are present) of goods become too great
for the process to remain credible. It is important to acknowledge, and keep
constantly in mind, that this process, no matter how dedicated the practitioners, is
fundamentally not science. It is a modus operandi.

The GNP at later times, is shared equally among workers. The wage of the worker in
the more productive sector therefore reflects the mean productivity of the economy, is
in fact the GNP/head, so the price of items (wage costs divided by the number of
items) in this sector continuously falls. In current terms, the primary fraction of GNP
is simply the labour fraction, which is numerically the same as the item output costed
at current prices. In real terms , however, the primary fraction of GNP is the output
costed at datum prices. "Real" is used here equivalently to its normal use in the
context of economic statistics, but, as explained, the basis for its quantification is in
no sense real, but depends on an entirely arbitrary choice of datum time.

5. Numerical example - formulation.

The formulation, given data, and starting conditions are given in the appendix. The
algebra gave some indispensible insights, but the text can be read without a study of it.

4
6. Numerical illustration - results.

It is assumed that primary productivity rises at 5% per year, while secondary

productivity grows at only 0.5% per year. In order to determine the evolution of the
primary and secondary work forces, it will be assumed that some circumstance
constrains GNP growth to 2.5% per year. So the factors of growth per year are

p(p)=1.05
p(s)=1.005
g =1.025

where p and g denote the productivity and GNP growth rates referred to above. The
actual productivities and GNP are denoted by P and G.

Since the GNP is simply related to the labour forces and productivity, it is found that
at all times apart from T=0
the primary fraction of the labour force is

L(p)=(G-P(s))/(P(p)-P(s)).

At datum time (year 0), G(0), P(p,0), and P(s,0) are all set at unity, so L(p,0) is
indeterminate from the above formula. It can be verified, however, that at this point
(and only at this point), L(p,0) is given by the same formula, with the G and P's
replaced by their rates of growth

L(p,0)=(g-p(s))/(p(p)-p(s)).

The given rates result in L(p,0)=0.44.

Thus, with G and the P's being given at all times by the starting values combined with
the growth rates, all prices and outputs can be calculated for the datum and any later
or earlier year, using the simple algorithms given in the appendix. The results are
given in Table 1.

A line by line commentary for the 200-year period -100 to +100 will be given, in order
to explain the formulation and at the same time the results.

The primary labour force, line 2, diminishes, while the secondary one rises at a rate of
the order of 1% per year (line 3). In absolute terms, of course, the rates for any given
time are equal and of opposite sign. The productivities, line 4, grow at 5% and 0.5%
per year as defined. The output in items, line 5, is the product of these two elements
of data. The items are valued at the datum (year 0) price of one pound, so the GNP by
volume of product, line 6, is numerically the same as the number of items, the total
GNP (column 3) being that imposed by the given growth rate. It is here, of course,
that the arbitrary process of adding apples and pears takes place, reflected later on line
12.

5
Copyright W. Stanners 1993, 1995
Table 1

Simple Economy: Evolution of Various Parameters with Time

Primary Sector Growth rate of productivity 5% per year

1 Year -100 -50 0 10 30 50 100

2 Labour force 0.87 0.71 0.44 0.40 0.30 0.21 0.08

3 Deind rate (%/y) -0.26 -0.62 -1.20 -1.33 -1.57 -1.79 -2.15
4 Productivity * 0.01 0.09 1.00 1.63 4.32 11.4 131.50
7
5 Output (items) 0.01 0.06 0.44 0.65 1.28 2.43 10.30
6 Volume (money) 0.01 0.06 0.44 0.65 1.28 2.43 10.30
**
7 Wage (money) 0.08 0.29 1.00 1.28 2.10 3.44 11.81
8 Price (money) 11.13 3.34 1.00 0.79 0.49 0.30 0.09
9 Infl(T) (%/y) -2.41 -2.41 -2.41 -2.41 -2.41 -2.41 -2.41
10 GNP (money) 0.07 0.21 0.44 0.51 0.62 0.73 0.92
11 GNP-fract 0.87 0.71 0.44 0.40 0.30 0.21 0.08
12 Vol-fract 0.08 0.21 0.44 0.50 0.61 0.71 0.87

Secondary Sector Growth rate of productivity 0.5% per year

1 Year -100 -50 0 10 30 50 100

2 Labour force 0.13 0.29 0.56 0.60 0.70 0.79 0.92

3 Deind rate (%/y) 1.79 1.49 0.99 0.87 0.66 0.48 0.18
4 Productivity * 0.61 0.78 1.00 1.05 1.16 1.28 1.65
5 Output (items) 0.08 0.23 0.56 0.63 0.82 1.01 1.52
6 Volume (money) 0.08 0.23 0.56 0.63 0.82 1.01 1.52
**
7 Wage (money) 0.08 0.29 1.00 1.28 2.10 3.44 11.81
8 Price (money) 0.14 0.37 1.00 1.22 1.81 2.68 7.17
9 Infl(T) (%/y) 1.97 1.97 1.97 1.97 1.97 1.97 1.97
GNP (money) 0.01 0.09 0.56 0.77 1.48 2.71 10.89
10
GNP-fract 0.13 0.29 0.56 0.60 0.70 0.79 0.92
11
Vol-fract 0.92 0.79 0.56 0.50 0.39 0.29 0.13
12

Totals/Averages Growth rate of GNP 2.5% per year

1 Year -100 -50 0 10 30 50 100

6
 2 Labour force * 1.00 1.00 1.00 1.00 1.00 1.00 1.00
3 Deind rate (%/y)
4 Productivity
5 Output (items)
6 Volume (money) 0.08 0.29 1.00 1.28 2.10 3.44 11.81
*
7 Wage (money)
8 Price (money)
9 Infl(T) (%/y) -1.82 -1.10 0.01 0.25 0.69 1.06 1.64
GNP (money) * 0.08 0.29 1.00 1.28 2.10 3.44 11.81
10
GNP-fract 1.00 1.00 1.00 1.00 1.00 1.00 1.00
11
Vol-fract 1.00 1.00 1.00 1.00 1.00 1.00 1.00
12

* "given" data
** at base (year 0) item prices

7
The wage, line 7, is by definition the same as the total GNP, since there is one person
and the GNP is shared equally between the workforce in the two sectors. The wage
thus increases at 2.5% per year. The price per primary item, line 8, steadily decreases.
In fact, since
it is the wage divided by the productivity (the labour content cancelling), it must
diminish at a rate which is roughly the difference between the growth rates of these
two parameters, or -2.5% per year (the exact value is -2.41%). Similarly, the price of
secondary items increases at approximately 2% per year (exact value 1.97%). It is a
consequence of the definition of the currency unit that the average (or item-weighted)
price per item is always one pound, i.e., in this economy, there is zero inflation.

There is, however, a small apparent inflation of prices. In the real world, inflation of
prices is, by definition, calculated by comparing today's prices with yesterday's. Of
necessity, this can only be done by costing a certain basket of goods at the two sets of
prices. As discussed generally above, this means that there is unavoidable
anachronism in the sense that today's basket is different from that of yesterday. In the
real world there are differences both in the distribution of goods (i.e., how many of
each sort), and in the quality (i.e., some may be improved, some wholly novel), so that
an objective and accurate calculation is in principle impossible. In the simplified
world of the above table, the goods are supposed to be unaltered in quality, but the
distribution changes. Inflation of prices in each sector separately are constant and can
be calculated precisely, as already described above. The overall inflation rate is
calculated by pricing yesterday's basket at today's prices. (It has been explained above
that the synchronistic inflation rate is zero - today's or yesterday's basket, costed at,
respectively, today's or yesterday's prices, always has an average item price of one
pound.) The apparent inflation rate can be calculated according to the basket of last
year or of any time in the past. Numerically, it makes little difference what datum is
chosen. The value shown in the table (line 9, 3rd section) relative to one year is the
instantaneous value at the given year. This over-estimation of the inflation rate due to
the use of an anachronistic basket in the calculation well known. Since generally
inflation rates are calculated against a basket defined up to 10 years earlier, the
appropriate degree of overestimation in the model is about one quarter of one percent.
In the real world, small or radical innovations result in continual improvements in
quality, i.e., the golf ball becomes not only cheaper but also better. This is ignored
both in the present formulation and in official calculations.

The GNP by income, line 10, is simply the wages of the labour force, totalling, of
course, to the same value as the GNP by volume of produce. This identity follows
from the fact that the wage is by definition the GNP, i.e., in this one-person state, the
GNP/head.

Lines 11 and 12 show the fraction of GNP represented by each sector, discussed
further in the next section.

7. De-industrialisation

Lines 10 and 11 show that the fraction of GNP represented by the primary or
secondary sector is very different when calculated by volume and by income. When

8
alarm is expressed at de-industrialisation, it is usually in terms of the fraction of GNP
at today's prices, or by income in the sector in terms used above, or by fraction of the
labour force employed. These are all approximately equivalent in the real world, and
exactly so in the formulation used here. The table shows that de-industrialisation of
GNP and employment can proceed apace while the real situation is that well-being is
being more and more assured by a growing volume of primary goods. At the end of
the 100-year period relative to the datum year, the primary sector has shrunk to only
10% of the GNP or the work force, but, by the standards of 100 years earlier, primary
goods account for 90% of total well-being. In other words, although the primary
labour force has diminished by a factor of 5, primary goods have increased by a factor
of 20, while, on the other hand, a near-doubling of the work force in the secondary
sector has expanded secondary goods by only a factor of three. The increase in total
GNP, and the current level of GNP at T=100, are accounted for almost entirely by
primary activity.

If one takes a 200-year span (here it is necessary to re-state that the "year" is a
mythical year), the primary labour force diminishes by a factor of 9, while primary
output rises by a factor of 1500.

It will be remembered that any statement above referring only to one sector is, within
the terms of the formulation, exact, while any reference to total well-being or GNP or
sector share are to be evaluated with all the caveats made above. That is, the phrases
"by the standards of 100 years earlier" and "90% of total well-being" are quantitatively
virtually meaningless (and similar statements about the real world even more so),
except, and that only to some extent, by reference to the modus operandi lying behind
it.

The picture presented suggests, with all due reservations, that de-industrialisation is
not the doom-laden process sometimes portrayed, with images of derelict factories,
and scenarios of Britain leading the way downwards, but an inevitable and universal
consequence of the fact that the motor of progress, by the very fact that it is the motor
of progress, works people, whether farm or factory workers, out of a job, or, in an
alternative formulation, frees them for better things.

8. The bias of language

De-industrialisation is a very poor word for this process, at least for the discussion of
economics as opposed to sociology, since it suggests that industry, after a period of
going up, is now on its way down. This no doubt is due to the contemplation of the
fact that unemployment is going up while the industrial labour force, which once went
up in the process known as industrialisation, is now coming down. The fairer picture,
it is suggested, is that the primary sector, including food-gathering, hunting, and
agriculture, as well as ancient and modern manufacture, has always been in decline in
terms of the fraction of the labour force employed, albeit at an accelerating rate, and
this decline is the essential counterpart, indeed the cause, of the rise of civilisation. It
adds to the confusion and paradox that the process of decline has, in real terms, been
one of stupendous advance. It is only due to it ("de-agriculturalisation" at that time)

9
that Plato was enabled to spend his life in thinking, teaching and writing instead of in
hunting small animals or picking berries.

While the complete phrase "de-industrialisation of employment" is a reasonably clear

and neutral expression, the fact that it is almost always shortened to "de-indust-
rialisation", and then loaded with negative images and qualifications, conveying that it
is in fact the opposite of industrialisation, and mainly or entirely a problem, means
that the word should be avoided altogether. This applies even more strongly to "post-
industrial", which is often used in the same contexts, and for which there is no
possible defence.

As illustrated copiously above, language has its own dynamic. A bottle can be half
full or half empty. The same process, which freed Plato for teaching, freed the farm
labourer for the city slums, and frees the factory worker for the dole queue.
Alternatively they, or quite realistically their children, have been freed to become
today's script writers and financial consultants. In any case, it seems that the using of
negative language like "decline" or de-"anything" to discuss a process which is not
only a facet of progress, but is synonymous with everything one has ever understood
by progress, is a wrong turning which should be rectified.

9. Public services and taxes.

The public services, that is, services provided through taxation, are in great part
activities which have a tendency to be in areas less susceptible to high productivity
gains. Assuming that people generally are just as keen to have better public services
(such as health and education) as private ones (such as banking), it follows that de-
industrialisation, or progress as it might be better called, must be accompanied by a
growth in the fraction of GNP represented by public services, in line with services in
general. For example, if in year 0, public services were half of all services, and so
25% of GNP, then by year 100, if they improved in line with all services, they would
represent 45% of GNP. The consequence would be that if public provision of these
services was still desired, taxation would need to rise from 25% to 45% of GNP, and
hence of incomes. Ignoring details, this must indicate a tendency, at least, for related
taxation to rise, as a fraction of income, from the mere fact that the services provided
by taxation have less room for productivity gains than the average for all economic
activity. The alternative to tax rises could only be a privatisation of some services
which are at present provided collectively. Whichever way is chosen, to say, as is
currently fashionable, that we cannot afford to pay an ever increasing fraction of
income for these services, is just as absurd as to say that we cannot afford to pay an
ever increasing fraction of income for better banking and leisure services.

10. Diffusion of productivity gains.

One of the striking elements in the above analysis is the equalisation of the benefits of
high productivity throughout the population. Give or take a few inequalities, this
reflects an observable reality. The benefits, which originate with the innovator and

10
are mediated by the capitalist and machine operator, are transferred virtually
instantaneously to the barber and banker. However, the equalisation tends to stop at
certain frontiers. Even small natural barriers, like the Irish Sea, seem historically to
have obstructed the process of equalisation. This must partly be due to the
geographical range within which services can be delivered, e.g., the factory worker
necessarily transfers his money to the nearby barber, and partly to the mobility of
labour, e.g., the barber would become a factory worker if his income would thereby be
greatly improved. Clearly, goods are relatively mobile, and services tend not to be. If,
somehow, a UK primary worker could conveniently have had his hair cut in
Bangladesh, and the Bangladeshi barber could somehow not conveniently take the UK
worker's job, and this could have been true of all services, the workers within the high
productivity gain sector would have been able to keep the fruits of their productivity.
The fact that this convenience is not available presumably explains the rather
mysterious contrast between the rapidity of diffusion of prosperity in certain
geographical areas, compared with persistence of inequalities between those areas and
others. It is as if the populations of the advanced countries had managed to keep the
fruits of advanced technology, not to the workers in those advanced fields, but to a
boundary defined essentially by distance measured in terms of transport costs, and by
linguistic, cultural and administrative features.

One may speculate that the likely globalistion of culture and communications may
well have the effect of globalising incomes in the same way that national incomes
have been internally diffused. In that case, for many, the equalisation could be, at
least for a prolonged period, downwards.

11. Full employment.

In the above formulation, the transition rate between primary and secondary activities
amounts to something of the order of one half of one percent of the labour force per
year. Any imperfection in this transition would be of little explanatory value in the
scale of existing real unemployment rates of 10% and over. However, there is no
doubt that lay-offs are often perceived as being due to productivity gains, in the sense
that they are often not accompanied by corresponding falls of production.

The formulation, involving only two productivities, is a poor representation of the real
situation where the mean productivity of a sector covers a wide variation within it, so
that the real situation is one of labour being, as it were, decanted down a cascade of
sub-sectors of decreasing rates of productivity gain, and thus with more scope for mis-
match than in the formulation. Moreover, it is quite imaginable that in good times,
industries might tend to carry their labour force unchanged, while in bad times, they
might be forced, or given an excuse, to identify and squeeze out redundant labour all
at once, rather than in a continuous way.

It is not suggested that this might be the specific mechanism giving rise to the current
wide-spread rise in unemployment, but it might be a factor superimposed on others.
In any case, it does suggest that unemployment is an unacceptable way to impede the
equalisation of incomes. It represents an anomaly in a system which in general
rapidly spreads the fruits of innovation from the innovators to the non-innovators. It

11
would point to an additional injustice that the people who, albeit through no merit of
their own, mediate the implementation of innovation, should be those most at risk of
suffering through transitional mis-matches, while service workers, equally or even
more undeserving, enjoy the rewards of this innovation. Although it is logical that
those who have the highest rate of productivity gain are those who most quickly work
themselves out of a job, it is surely unjust.

Insofar as this is a correct perception, it would follow that a permanent cure for
socially unsustainable levels of unemployment is not to be sought in regaining or
increasing the rate of growth of GNP, but in administrative measures to regulate and
brake the rate of lay-offs. This would automatically entail a slow down in the rise of
wages of those in work. Assuming that this process could be adjusted merely to
prevent people becoming permanently unemployed, and not to prevent transition to
other employment, perhaps via temporary unemployment, it would have no effect on
money measures of productivity and competitiveness. Its only effect would be to
reduce the number of unemployed, and the mean level of wages per employed person.
It is not suggested that this solution would be in practice easy to implement. It would
tend to promote inflation, at least in cultures where social cohesion is low. But others
might be even more difficult, and even less sure in their outcome.

12. Differential growth between regions

Table 1 can be used to illustrate remarks on the consequences of differential growth

between regions. Let it be supposed that two regions with higher and lower
productivity growth rates, called, say, Utopia and Subtopia respectively, have at one
point in time a common economic situation as defined at year zero in the table, and
that the difference in the rate of growth of productivities in the two regions is such
that when Utopia reaches the year=50 state, Subtopia has arrived only at the situation
shown for year=30 (numerically, this implies that for Subtopia p(p)=1.030,
p(s)=1.003, and g=1.015).

Wages in Utopia are much higher than in Subtopia, but the price of primary goods is
lower, while secondary goods are more expensive.

Clearly the two regions cannot be part of one country, since no one would buy primary
goods from Subtopia, while on the other hand, all new Utopian factories would be
located in Subtopia to benefit from the lower wage rates. In other words, the within-
country diffusion process described in previous sections makes marked and sustained
productivity differentials impossible.

Let it be supposed, then, that the regions are two separate countries, but that they still
have the same currency. Subtopia would have to protect its primary sector from
Utopian imports by imposing a duty of at least 63% on primary goods, and Utopia
might have to restrain exports of capital and tourist expenditure to Subtopia, attracted
by low wage rates and low prices of secondary goods. It will be recalled that although
both economies have zero inflation, Subtopia appears to Utopians as a low price area,
relative to their expenditure basket.

12
An alternative for Subtopia (this is mentioned only because it happens in reality - it
would otherwise not come to mind) would be to conclude that its already low wage
rates are too high for international competitivity, and to deflate the economy in order
to introduce discipline into the labour market. This means trying to cure too low
output by decreasing it further.

Now let it be assumed that the currencies, identical at year=0, are allowed to float, and
that administrative constraints are abandoned. Although both economies are at all
times inflation-free, their currencies are forced to diverge. Otherwise Subtopians
would import their primary goods from Utopia instead of buying their own. If trade is
predominantly in primary goods, the Subtopian pound must become lighter than the
Utopian one. Indeed, it can be seen that to the extent that trade is not entirely in
primary goods, the Subtopian pound must be overvalued for primary trade and
undervalued for secondary trade. Subtopia will then tend to have a negative balance
of trade for primary goods and a positive one for secondary goods, while for Utopia
the opposite obtains.

Suppose finally that Utopia and Subtopia were amalgamated so that their differences
in productivity growth could be counterbalanced neither by constantly adjusted
administrative measures nor by constant changes in currency exchange rate. What
would happen? If the imbalance were as great as shown in the table, the answer
appears to be that there would be severe social problems, unless there were vigorous
and successful efforts to cure the regional imbalance accompanied by internal
administrative measures of regional protection.

It would appear from this simple analysis, that once the geographically localised
industrial (productivity) revolution started, the world had a choice between, on the one
hand a single currency (gold/silver) plus protection or force, or, on the other hand,
locally administered paper currencies plus free trade. This choice presumably lies
behind the eventual abandonment of the Gold Standard and the subsequent
unprecedented world inflation, in terms of paper currencies, since 1945.

Insofar as the above is correct, it would seem curious that the criteria for convergence,
as pre-conditions for monetary union, set out in the (Maastricht) Treaty on European
Union (1992), omit any reference to the absolute level of development, since it has
been indicated above that even countries with zero inflation rate could not easily have
a single currency, if their absolute level of development were too far apart. However,
in the period 1980-90, when exchange rate discipline was largely in force, only Greece
among the poorer countries failed to narrow the gap between their GNP per head (in
units adjusted for purchasing power) and the Community average (Eurostat, 1993).
This may possibly indicate that Community policies of regional protection are more
effective than is often assumed, and that these, aided by an increased rate of diffusion
(in the sense used above) fostered by co-operative measures, including disciplined
exchange rates, more than make up for the negative elements regarding competitivity.

13. Relation to previous work

13
An account of the historical primacy of production can be found in many works, for
example that of Renfrew (1987), an archaeologist commenting on linguistics, but
incidentally summarising the impact of agriculture, to which cause he attributes the
spread of Indo-European speech, rather than to the more exciting hypotheses
involving warriors, horses and weapons. Adam Smith (1776), of course, makes
several relevant remarks. For example, on his first page, he describes the starting
point of history when productive labour is 100%: "Among the savage nations of
hunters and fishers, every individual who is able to work, is more or less employed in
useful labour, and endeavours to provide, as well as he can, the necessities and
conveniences of life, for himself or such of his family or tribe who are too old or too
young to go a hunting and fishing". And later he notes (Book 1, XI, Part II): "by the
improvement and cultivation of land ... the labour of half the society becomes
sufficient to provide food for the whole. The other half, therefore ... can be employed
in providing ... clothing, lodging, household furniture and what is called Equipage".

Maddison (1991, p. 32) estimates that the fraction of the total labour force in the UK
which was devoted to productive activity diminished in the series 78%, 72%, 60%,
and 31% in the years 1700, 1820, 1890, and 1989, demonstrating the tail end of what
is presented here as a monotonic diminution stretching, albeit at varying and generally
much reduced speed, from the beginning of history.

The following is the result of a literature search originating from the bibliography
given by Crafts (1993).

Sir William Petty is credited by Clark (1957) with noting in 1691 that labour is
progressively transferred from agriculture to manufacture, and thence to merchandise.
Marshall in 1873, cited by Bell (1973), seemed clearly to anticipate that workers
would become completely de-industrialised when he said, "the question is ... whether
progress may not go on steadily, if slowly, till, by occupation at least, every man is a
gentleman. I hold ... that it will". Baumol (1967) noticed that taxes in US cities had
to go up because of the inherently inferior productivity, hence rising costs, of
municipally provided services. Bell (1973), the sociologist inventor of the term "post-
industrial", quotes James O'Connor as naming this process "the fiscal crisis of the
state".

Baumol (1967), Skolka (1976), and Rowthorn and Wells (1987), present algebraic
formulations similar to that used here. Skolka credits Baumol (1967) and Fabricant
(1972) with the notion, used here, of dividing the economy into sectors by
productivity level rather than by the type of activity. Figures 1.2 (a to e) in Rowthorn
and Wells show results similar to those in Table 1. They differ principally in that it is
assumed there that the real output of the service sector is a constant fraction of total
output, a constraint which here is replaced by the imposed growth rate of GNP.

Baumol and Skolka both state conclusions derived from their formulations (for
example that the economy will in time cease to grow) rather as if they necessarily
followed from the fact of differential productivity, without making it clear that they
flow simply from their chosen constraints. The constraint of constant GNP growth
seems to the author of the present paper more realistic and less arbitrary than the
imposition of equal real growth rate in each sector, and gives a result less reminiscent

14
of "the end of history" in that there is steady growth indefinitely, in both sectors.
Also, these authors express the view that certain services and entertainments might
price themselves out of existence. This is not so, since prices must go up less than
wages.

Cairncross in Blackaby (1979) says that, "the share of manufacturing in GDP at

constant prices was on a fairly upward trend from the late 1950's right up to 1973,
although at current prices the trend was downward." Similarly, Ginzberg in his
introduction to Stanback (1979) says, "his analysis points up beyond challenge that
there has not been any significant tilting of the economy in terms of the value of the
output from goods to services", and again, "when output is measured in constant
dollars there has been little shift from goods to services."

In his introduction to Bailey and Hubert (1980), Sir John Greenborough confirms one
of the themes of this paper, namely that, "productivity is one of the most elusive
commodities and one which we are at a loss to know not only how to define but how
to measure satisfactorily". Nevertheless, a few lines later, and without much further
ado, he compares productivity increases for 7 leading countries ranging from 27% to
100%, thus illustrating the unavoidable difficulty of quantitative discussion based on
concepts which are not rigorously definable. Crafts (1993) says in his introduction,
"the data are, of course, estimates rather than facts". However he adds, without
offering evidence, "but they can bear the weight of the interpretation placed on them".
In reading Broadberry (1992) on what was essentially a failure to reconcile the
evolution of US, German and UK manufacturing productivities with the greater
convergence of GNP per worker, one wonders whether the explanation might not lie
in the fact that both sets of numbers are attempts at quantifying the unquantifiable,
useful within limits in their own sphere, but not necessarily reconcilable.

Chapter 1 of Rowthorn and Wells (1987), in its account of what is called (p. 5)
"positive de-industrialisation" (it may be noted in passing that UK literature is often
concerned with what are seen as specifically UK problems of negative or morbid types
of de-industrialisation), contains remarks relating to nearly everything of substance
which is in this paper, and indeed, nearly the same might be said of Skolka. For
example, Rowthorn and Wells clearly state the basic notion (p.15) that, "with a given
pattern of output, differential productivity growth will always cause the pattern of
employment to shift away from the most dynamic sectors towards those in which
productivity is rising more slowly", and mentions (p. 5) that this happens "despite
increasing output" in the manufacturing sector.

A common feature of the literature is that agriculture is treated as a mere repository

for a supply of labour for the industrial revolution. Rowthorn and Wells adopt a fairly
representative stance when they say (p. 8),

"when modern economic growth first gets under way in earnest, the share of
agriculture in total employment falls rapidly and there is an enormous expansion in
both the proportion and the number of people engaged in non-agricultural pursuits ...
new industries ... commercial, administrative activities ... community services ..."

15
and again (p. 11),

"de-industrialisation ... is merely the logical culmination of two basic trends ... (1)
the decline of agriculture as a source of employment and (2) the growth of services.
As agriculture declines and services rise, it is only a matter of time before the share of
industry in total employment begins to fall. At first, services grow at the expense of
agriculture and later, when this is no longer possible, they grow at the expense of
industry. This is the essence of the argument."

The penultimate sentence clearly pictures services as the primary and in some way
autonomous driving force of the evolution of labour structure, draining first
agriculture and then industry of their labour forces, and this process is at the expense
of these latter sectors. That this phrase is not a neutral, but a pejorative formulation is
shown by the fact that it is used several times, and indeed the whole tone of the
discussion in most of the literature is in this sense. de-industrialisation is not just a
process, not even just a process of change which gives rise to problems of adjustment;
it is in itself the problem, for which solutions are needed.

In the author's view, this perception differs radically from the viewpoint formulated in
this paper, in three ways.

The first is that agriculture is, implicitly at least, presented as something old, pre-
existing, while industry is something new, created by the industrial revolution, and of
an entirely different logical nature. In reality, agriculture and industry have co-existed
and co-developed for thousands of years, and are logically similar (for the purpose of
considering de-industrialisation) apart from the fact that one is done in the fields and
the other in workshops. Both make things, one things for eating, the other things for
wearing, sheltering in, tilling the soil with, or fighting with. Agriculture involved the
first massive exploitation of solar energy, and later the power of draught animals.
From the beginning, it involved huge increases in productivity. Later, when modern
industry arrived, agriculture did not just passively have labour poached from it. Like
other types of pre-existing productive industry it was itself fully involved in
innovation, the use of machinery, energy and chemicals, as part of the industrial
revolution, and not just as a convenient source of labour for it. Of course, there were
shifts of labour within this total primary sector. One does not want an infinite supply
of potatoes any more than of television sets. The conventional mis-perception of
agriculture is further illustrated by Broadberry (1992) who remarks that, "the
reduction of employment in low productivity agriculture is important in explaining the
extent to which Germany caught up" (with the UK). Statistics of the Statistisches
Bundesamt (1991), however, show that between 1960 and 1985, for example, German
agricultural output increased by 50% while the labour force fell by 60%, implying a
rate of increase of productivity of 5 or 6% per year.

The second is that agriculture and industry are viewed, it may be guessed, with a habit
of mind conditioned by the important strand of sociological/political thought which
has opposed the ideas of country, peasant, conservative, to those of town, worker,
progressive. This habit of mind leads directly to what is, in the present author's view,
the mis-perception of industry as being successively in pre-mature, mature and post
mature phases, maturity being defined as the point where industrial employment

16
reaches a maximum. In the view presented here, there is no point of maturity.
Employment in the primary or productive sector is in continuous diminution, although
all kinds of sub-sectors within it, including as a mere (economic) detail that of
agriculture, may rise and fall, in terms of employment, of output, or of both.

The third is that services take labour from the agricultural and industrial sectors at
their expense, thus making it seem that the service sector is the active, aggressive,
primary agent, whose growth harms the other sectors, like the growing of a cancer,
and that the process is to be deplored. Naturally, since people are more interesting
than things, the sector which is growing in terms of people may tend to be thought of
as the active agent compared with the "declining" sector, or even worse, the sector
which is "in decline". What is really happening however is not that an embattled
industrial sector is left with the people that a dynamic services sector has not (yet)
taken, but that the services sector is left to absorb the people whom the dynamic
primary sector, due to the use of fossil fuel energy and to technological advance, no
longer needs, even as its output is expanding.

The most striking discrepancy in emphasis between the literature and the viewpoint
presented here, however, is that since the authors are nearly always proceeding from
their initial theoretical reflections to the discussion and solution of a perceived
problem (city taxes, industrial dereliction in the sociological sense, structural
unemployment, UK balance of trade), there is almost total neglect, often complete
omission, sometimes outright denial, of the fact that industrial output is rising in spite
of everything. Even Crafts (1993), who, in view of the title and general stance of his
booklet, might have been expected to give prominence to this, devotes only 7 lines of
text to commentary on his Table 9, which gives growth rates in manufacturing output,
all positive, for 5 leading countries, including the UK, from 1950 to 1989. The
commentary is concerned entirely with the position of the UK in the merit-order, and
to the fact that the UK avoided last place only in the period of 1979 to 1989. Surely,
however, the message from this table is that while much of the industrial world is
experiencing de-industrialisation, industrial output is bounding upwards.

Much of the gloom in the literature is due to factors specific to the UK, and often
expressed in the most emphatic terms. For example, Martin and Rowthorn (1986), in
their preface, referring to a relative and absolute decline in (among other things)
manufacturing output, say: "Since the late 1960's, and especially since the early
1970's, British manufacturing has become caught in a process of progressive and
accelerating contraction." However, the more recent data cited by Crafts show that,
despite periods of contraction, the long term trend was upwards. This appears to
continue. OECD (1992, 1993) figures for 1985 to 1992, a period encompassing a
severe UK recession, show a calculated trend line for UK industrial output which
implies a rise of 14% in this period. This compares with 18% for the European
Community and 23% for OECD. No trend line is given for UK manufacturing output
but the unadjusted annual data for this show a similar rise.

What is notable about the UK situation is the remarkable fall in manufacturing

employment, but Crafts shows in his Table 8 that from 1973 to 1989, the UK
manufacturing employment ratio moved from a very high to a more representative
value, Germany and Japan being the significant countries left with high and outlying

17
values. This exceptional rate of reduction of manufacturing employment may be
continuing, since the OECD data already cited shows a 12% fall from 1988 to 1992,
but it seems more likely that this temporarily reflects the full force of the UK
recession.

14. Conclusions.

The main conclusions are listed in brief form, with the warning that brevity gives a
false air of certitude.

- the production of things is paramount or primary

- this activity has most scope for productivity gains
- it therefore occupies ever decreasing human resources, but with ever increasing
output
- this process has proceeded since the beginning of the human race
- by freeing people's time from the needs of production, it is the sine qua non of all
ancient, modern and future civilisation
- it is based on learning to use solar energy, first directly, then accumulated stocks -
nuclear energy is a recent addition
- it will continue as long as energy per head is sufficient
- quantification of the above is not rigorously possible
- agriculture and industry are logically one - they have co-existed from the beginning
- the "industrial" was more properly the "primary" revolution.
- terms like de-industrialisation, post-industrial, declining, in decline, post-mature, in
relation to the primary sector, are inappropriate
- a few related reflections:
- taxes must tend to go up in relation to GNP
- hardly anyone merits the fruits of innovation which they receive - no one merits
being denied both fruits and work
- a single currency goes with protection, floating currencies with free trade
- this paper does not address specifically UK problems, with which much of the
literature is concerned
- it does however draw attention to the fact that, whatever the problems, UK primary
output is in long-term upward trend
- this paper essentially supports those who have argued for the importance of
manufacturing - the primary sector, of which it is a major part, is not only important,
it is of absolute and primordial importance.

18
Appendix

Nomenclature

Time lapse from year 0 in years T

GNP (pounds per year) in current and real terms GC, GR
Total GNP (pounds per year) G
Factor of increase of GNP in one year g
Labour force (fraction of) L
Factor of increase of labour force in one year l
Wage per person and year W
Productivity (items per person and year) P
Factor of increase of productivity in one year p
Number of items per year N
Price in pounds per item PR
Average apparent yearly inflation of prices using
basket of items appropriate to year T-1 pr(T)

"Suffices" (given in brackets)

primary (p)
secondary (s)
total (t)
datum time (0)
current time (T)

19
 Assumptions, derived quantities, identities

Note: * means "multiplied by" ** means "to the power"

At datum time (year 0):

W(0) = G(0) = PR(p,0) = PR(s,0) = 1

P(p,0) = P(s,0) = 1

Given data, constant in time:

p(p)=1.05
p(s)=1.005
g =1.025

The following is valid at year 0:

L(p,0)=(g-p(s))/(p(p)-p(s))

The following are valid at all times:

P(p)=p(p)**T (This is approximately e**((p(p)-1)*T) ) P(s)=p(s)**T

G=g**T
W=G
L(p)=(G-P(s))/(P(p)-P(s)).
L(s) = L(t)-L(p) = 1-(p)
l(p)=1+(L(p,T+0.5)-L(p,T-0.5))/L(p,T)
N=L*P
GR(p) = N(p)*PR(p,0) = N(p)
GR(s) = N(s)*PR(s,0) = N(s)
PR = W*L/N = W/P = G/P
Item weighted average price (pounds) per item = 1
Real price inflation rate is zero at all times.
pr(T) is calculated using N(T-0.5)-weighted current prices PR(T+0.5), compared with
N(T-0.5)-weighted past prices PR(T-0.5):
pr(T) =N(p,T-0.5)*PR(p,T+0.5)+N(s,T-0.5)*PR(s,T+0.5)
GC(p) = L(p)*W GC(p)/G = L(p)
GC(s) = L(s)*W GC(s)/G = L(s)
G = GC(t) = GC(p)+GC(s) = GR(t) = GR(p)+GR(s)

20
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Gower.

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Bell, D. 1974. The Coming of Post-industrial Society, London, Heinemann.

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Long-run Data Show, CEPR No. 708.

Clark, C. 1957. The Conditions for Economic Progress, London, Macmillan.

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Martin, R. and Rowthorn, R. E. (eds.). 1986. The Geography of De-industrialisation,

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21
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