The Postindustrial Society’s Dilemma

Many economists and commentators are celebrating the alleged advent of the postindustrial society – a society whose economy is based on the services sector, with industry playing a negligible role at most. Indeed, the economies of the United States and many European countries are already post-industrial – the secondary sector (i.e., industry) accounts for about one-fourth of GDP in these countries, while services account for more than two-thirds. However, the recent (and still not overcome) crisis has shown that a postindustrial society has problems of its own. In an illuminating article a Polish journalist describes the postindustrial society’s dilemma – and since I cannot expect all of my blog’s readers to understand Polish, I shall summarize the article in what follows.

The theory is simple: after the pastoral, the agricultural, and industrial societies a new one is going to emerge – a postindustrial society, based on what is sometimes called the knowledge economy. The premise is that industry is going to lose its weight – due to a transition in demand structure on the one hand, and to ever higher productivity, on the other. Ever few people are presumed to be working in the secondary sector, the services becoming ever more dominant instead.

Meanwhile, the rich countries of today’s world have become rich thanks to a rapidly expanding industrial sector – be it the US or Germany in the early years of capitalism, be it the Asian Tigers and China in the more recent past. However, this by itself does not mean that a postindustrial prosperity is not possible – until the middle of the 19th century it wasn’t thinkable to get rich without agriculture and craft trade. Then James Watts came, to put it picturesquely.

However, the modern society’s demand structure hasn’t changed in a meaningful way. We still need cars, computers, furniture etc. – goods produced by the broadly defined industrial sector. Furthermore, most services cannot be provided without the usage of some “tools” – which themselves have to be produced in the first place.

As Andrzej Lubowski points out, we can learn a lot about the postindustrial economy when considering the recent history of the United States, a country that has experienced a transition away from industry during the last 40 years, and an especially rapid transition since China joined the WTO 10 years ago. In these years, a large part of the US industrial sector moved to other, mostly developing countries – particularly to China. Last year the US lost its position as the world’s largest industrial producer. Ever fewer people are working in this sector – by now only about one-twelfth of the US-American work force.

However, as was pointed out by some commentators (and partly recognized by the Japanese), this move away from industry is not necessarily a good thing. The median wage in the US has been stagnating over the years – even though the average has soared. This is understandable to some extent – while in the industry you need a lot of engineers and mechanics, most of the jobs in services are not the (too) well-paid bankers but clerks, cooks, chars or nurses. Indeed, average pay in the US industrial sector is about 20 per cent higher than in the economy as a whole.

A further problem, already raised above, is that “the services sector cannot function in a vacuum”. Many services depend on the secondary sector (think of accounting, to name just one example). If there is ever less industry, services lose their “means of existence”. Furthermore, services cannot be easily traded – with the (in)famous exemption of financial services, most of them are of a rather local nature. So, while industry is going, new service branches are not necessarily coming to fill the hole.

Lubowski’s intermediate conclusion is that there are three possible consequences of deindustrialization:

  • a loss in living standard in the so-called developed world (due to outsourcing), or
  • a return to protectionist practices aiming at shielding own industries from foreign competition, or
  • a renaissance of industrial policy (whose roots go back to Friedrich List, Alexander Hamilton and other 19th century thinkers).

Europe has not yet reached the stage of deindustrialization that the United States experienced. Indeed, the European Union’s economy is still heavily depending on some industrial branches – e.g., chemicals, food and automobiles. And it seems to be successful with this mix. Nevertheless, without proper policies it is likely to follow suit in a few decades.

The problem is that the most appealing solution to the postindustial society’s dilemma – industrial policy – is a highly controversial one. There are some distinguished economists who embrace the idea and call for active, strategic influence of the sectoral development by governments (Dani Rodrik and Joseph Stiglitz are among them), but many people think “socialism” when they hear that. However, while there certainly are many examples of governments doing the wrong thing (e.g., letting lobbyists “dictate” their policies), there are positive experiences too – think of Airbus, the Sillicon Valley or South Korea’s development history. In democratic societies the government is accountable to its voters – thus it is in its own vested interest not to exaggerate with bad practice. Furthermore, there are good concepts how to pursue successful industrial policy. It is rather a question of will, not that much one of feasibility.

So, as Lubowski concludes, the flaws of a postindustrial society teach us one more time: an unechecked government is bad, but unchecked markets are not good, too. A strategy from the middle is needed, one that would stop the outsourcing and keep an industrial base upon which the services sector can thrive.

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