Rowthorn and Wells distinguish between deindustrialization explanations that see it as a positive process of, for example, maturity of the economy, and those that associate deindustrialization with negative factors like bad economic performance. They suggest deindustrialization may be both an effect and a cause of poor economic performance.
Automation Pitelis and Antonakis suggest that, to the extent that manufacturing is characterized by higher productivity, this leads, all other things being equal, to a reduction in relative cost of manufacturing products, thus a reduction in the relative share of manufacturing (provided manufacturing and services are characterized by relatively inelastic demand). Moreover, to the extent that manufacturing firms downsize through, e.g., outsourcing, contracting out, etc., this reduces manufacturing share without negatively influencing the economy. Indeed, it potentially has positive effects, provided such actions increase firm productivity and performance.
Inflation George Reisman identified
inflation as a contributor to deindustrialization. In his analysis, the process of
fiat money inflation distorts the economic calculations necessary to operate
capital-intensive manufacturing enterprises, and makes the investments necessary for sustaining the operations of such enterprises unprofitable.
Offshoring and outsourcing Institutional arrangements have also contributed to deindustrialization such as
economic restructuring. With breakthroughs in transportation, communication and information technology, a globalized economy that encouraged
foreign direct investment, capital mobility and labor migration, and new
economic theory's emphasis on specialized
factor endowments, manufacturing moved to lower-cost sites and in its place service sector and financial agglomerations concentrated in urban areas.
Preferences A study covering advanced economies between 1995 and 2014, shows that the shrinking share of manufacturing
value added in
GDP was mainly driven by relative price movements and by shifts in final demand. Services became relatively more expensive than manufactured goods, so manufacturing’s share in GDP fell for largely
nominal reasons. At the same time, services behaved as
superior goods, with consumption rising faster than income growth, while the demand for manufactured goods increased more slowly; this theory is referenced as a result of
Engel's law. Other factors, such as technological changes in input use or shifts in trade patterns, played only a minor role in the observed decline.
Other Robert Rowthorn, a
University of Cambridge professor of economics, argues that
Karl Marx's theory of declining industrial profit may be regarded as one of the earliest explanations of deindustrialization. This theory argues that technological innovation enables more efficient means of production, results in increased physical productivity, including a greater output of use value per unit of capital invested. In parallel, however, technological innovations replace people with machinery, and the organic composition of capital decreases. Assuming only labor can produce new additional value, this greater physical output embodies a smaller surplus value. The average rate of industrial profit therefore declines in the longer term. ==See also==