There are different interpretations of what deindustrialization is. Many associate
American deindustrialization with the mass closing of automaker plants in the now so-called
Rust Belt between 1980 and 1990. The
US Federal Reserve raised interest and exchange rates beginning in 1979, and continuing until 1984, which automatically caused import prices to fall.
Japan was rapidly expanding productivity during this time, and this decimated the US machine tool sector. A second wave of deindustrialization occurred between 2001 and 2009, culminating in the
automaker bailout of GM and Chrysler.
Research has pointed to investment in patents rather than in new capital equipment as a contributing factor. At a more fundamental level, Cairncross and Lever offer four possible definitions of deindustrialization:
A shift from manufacturing to the
service sectors, so that manufacturing has a lower share of total employment. Such a shift may occur even if manufacturing employment is growing in absolute terms
That manufactured goods comprise a declining share of external
trade, so that there is a progressive failure to achieve a sufficient surplus of
imports to maintain an economy in external balance
A continuing state of
balance of trade deficit (as described in the third definition above) that accumulates to the extent that a country or region is unable to pay for necessary imports to sustain further production of goods, thus initiating a further downward spiral of economic decline.
Theories that predict or explain deindustrialization have a long intellectual lineage.
Rowthorn argues that
Marx's theory of declining (industrial) profit may be regarded as one of the earliest. This theory argues that technological innovation enables more efficient means of production, resulting in increased physical productivity, i.e., 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 and surplus value. The average rate of industrial profit therefore declines in the longer term.
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.
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.
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.
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.
The term deindustrialization crisis has been used to describe the decline of labor-intensive industry in a number of countries and flight of jobs away from cities. One example is labor-intensive
manufacturing. After free-trade agreements were instituted with less developed nations in the 1980s and 1990s, labor-intensive manufacturers relocated production facilities to
third world countries with much lower wages and lower standards. In addition, technological inventions that required less manual labor, such as
industrial robots, eliminated many manufacturing jobs.