Deindustrialization
Agglomerations run out of steam, and the industry/sector profit cycle proved very real. How to fix a broken agglomeration, excuse me, cluster will remain one of life’s ED/CD mysteries. Below we give the beast its name: Deindustrialization.
Like a Sledgehammer: Bluestone and Harrison
“Deindustrialization” is associated with Bluestone & Harrison’s (B&H) Deindustrialization of America (Bluestone & Harrison). They defined deindustrialization as plant closedowns, disinvestment, mobile capital and runaway plants. B&H’s deindustrialization lay squarely within our Progressive-Communitarian tradition. Playing off the June 30th, 1980 special issue of Business Week, Business Week’s issue rang out like an alarm in the night warning: “The U.S. economy must undergo a fundamental change if it is to retain a measure of economic viability let alone leadership in the remaining 20 years of this century. The goal must be nothing less than the reindustrialization of America … to rebuild America’s productive capacity is the only real alternative to the precipitous loss of competitiveness of the last 15 years, of which this year’s wave of plant closings across the continent is only the most vivid manifestation”.Invalid source specified.
Deindustrialization was happening precisely as Schumpeter (Schumpeter, 1942) had predicted—only he called it “creative destruction”. As described by B&H, Schumpeter asserted “capitalist economies can only evolve to higher levels of prosperity through a ‘process of Creative Destruction’ … like a forest with its cycle of decay and renewal, must undergo constant transformation [or] the economy and the entire society surrounding it will stagnate and eventually crumble….Disinvestment, and lots of it, provides the only engine for reinvestment somewhere else”. (Bluestone & Harrison 9) Disinvestment—and reinvestment—in falling and rising sectors and industries is how capitalism grows. Capital disinvestment/reinvestment is a conscious decision, a corporate strategy to maximize profits.
The visible manifestation of capital disinvestment is a closed facility and/or a runaway plant. Community jobs are lost, accompanied by tax base reductions, and workers on the streets. Creative destruction has geographic consequences which were not acceptable to B&H. In their view, the national productive capacity was crippled by conscious corporate decisions who chose short-term profits and shareholder returns in preference to reinvestment in existing productive facilities, their workers, and the community. Instead, corporations relocated investment into unproductive and unnecessary mergers, foreign investment, and profit-making financial speculation that “shuttered factories, displaced workers” creating “ghost towns”. (Bluestone & Harrison 6) Disinvestment causes deindustrialization. This is the “runaway shop”. The root of B&H’s disinvestment lay in the “fundamental struggle between capital and community” (Bluestone & Harrison 19)–the “capital mobility option“. Capital mobility severs the bond between workers, community, unions, the firm and corporate management.
B&H advocated a Progressivist, if not socialist, definition of deindustrialization that fell within the CD approach—it was people and community-centered, and anti-corporate. Worker and community are left “holding the bag” forced to deal with the pathologies, despair, and wrecked families. Disinvestment and runaway plants violate the social contract, a breaking of promises made to the community by the firm when it first located. Disinvestment and closed plants are corporate strategies to “discipline labor” and generate regional war from which tax subsidies could be exacted for new facilities. In place of Schumpeterian disinvestment B&H advocate a place-based ED that is concerned with the effects corporations have on people and communities.
B&H urged upgrading business retention. The special vulnerability of branch facilities, the realities of global competition and capital mobility necessitated a watchful eye and aggressive role by economic developers. B&H urged developing a constant relationship with corporate decision-makers and an “early warning system” be devised to anticipate problems. They called for worker lay-off pre-notification early warning system and advocated enhanced workforce training focused on dislocated workers and skills retraining. Advocacy of worker ownership (ESOP) as an alternative to plant closing brought visibility to a new concept.
Great Reindustrialization Debate: Platform for 21st Century ED Strategy
Scientific Management Background: Pre Elgar Chapter 22
While scientific management and Frederick Taylor[1] are sometimes reduced to synonyms, the movement even in the early 1900’s was always more than Taylor and it certainly didn’t end with his death in 1915. Henry Ford and “Fordism” demonstrated the power of the assembly line and Taylor’s negative, at times almost vicious, depiction of worker motivation sparked further research which discovered the “halo effect” proving conclusively that positive human motivation could increase production, The Hawthorne studies, completed at the Western Electric Cicero Illinois factory, following Taylor’s death have been called the “seed bed of the Quality revolution”. All of these developments occurred during the transition years and should be considered as derivatives of scientific management.
Of particular note, was the work of Walter Shewhart, an engineer who today is considered the father of statistical quality control. Shewhart also worked, as did Taylor, at Western Electric, and its Hawthorne Works and he later worked for Bell Telephone. A leader in his field, he wrote several impactful works, and was a founding member in American Society for Quality and a leader in the American Society for Testing and Materials (ASTM) His works and reputation came to the attention of two physicists in 1938. One of these physicists, W. Edwards Deming and Shewhart became collaborators on applying Shewhart’s work to increase productivity. The result, called today by various names, including PDCA (Plan-Do-Check-Act), the Shewhart cycle or the Deming circle is the foundation of continuous improvement of processes. Continuous improvement became a cornerstone principle of Deming who applied it to World War II production, and in the 1950’s carried it to Japan and was credited with launching the post-World War Japanese manufacturing miracle. That, however, is a story for another chapter. In many ways, Shewhart was the force that carried scientific management, under new titles, into the twenty-first century.
The Reindustrialization Debate
For many economic developers, B&H defined the problem and finally gave a name to the “beast: with no name that had been devouring Big City jurisdictional economic bases. B&H did not arise “out of the blue”; it was only one of many strategies/definitions put forth in the ED Policy World. The “Disease with No Name” had not lacked for theoretical responses to deal with its consequences. During the Seventies, most solutions advocated a strategy to “reindustrialize” America. B&H were part of that “reindustrialization” debate—indeed B&H’s Part IV discussed the “Great Reindustrialization Debate” stating their contribution to it was “Reindustrialization with a Human Face”.
For our purposes this history identifies five related, but quite different strands of thought engaged in the Seventies Great Reindustrialization Debate.
- The oldest, harkening back to the 1930’s originated within the American manufacturing itself (Shewhart, Deming, Drucker);
- The second, deeply buried in the bowels of economic theory focused on oligopoly and asserted innovation was a coequal driver of economic growth along with supply, demand and investment (Lucas, Solow, Romer, and Krugman);
- A third, evolved classic Keynesian economics into Neo/Post Keynesian Liberal Economics focused about growing/declining industry sectors, comparative advantage, productivity, strategic planning and global competitiveness (Thurow, Rubin, Rohatyn, (Krugman also), (1986) Markusen, Michael Porter, and the Business Week Special Issue of 1980);
- The fourth strand, originating with Hayek stressed supply-side (savings and investment) was adopted by the newly-elected Reagan administration (Gilder, Laffer, Butler);
- And finally, our CD (B&H) advocates who “named the disease”: deindustrialization caused by disinvestment and mobile capital, inherent features of a capitalism that built and threw away communities and workers in their quest for profit. (B&H, Reich, Birch and later Markusen).
The unifying threads that ran implicitly or explicitly through all five was Joseph Schumpeter’s 1942 “creative destruction” and knowledge-based innovation.
From these strands came much of the 21st century contemporary ED strategies which are commonplace at the time of writing. Porter (clusters/corporate strategy), Solow-Lucas—Romer innovation/knowledge-based economics, Gilder’s supply-side, limited government capitalism, B&H (deindustrialization) neo-liberalism, and Birch (small business) are the most well-known. In retrospect, the Neo-Keynesian strand, stressing comparative advantage/free trade, sector-driven economic growth arguably exerted the most impact, and become cornerstones of “21st Century global competitive hierarchy.
Schumpeter and Deindustrialization
Deindustrialization repudiated (but did not deny) creative destruction. In its repudiation, B&H deindustrialization reflected core assumptions of American community development. In so doing it formulated an alternative to other strands listed above, which accepted or were congruent with creative destruction. These latter strategists worked within the comparative advantage/free trade global hierarchy while those who followed the road blazed by B&H are likely to decrying Neo-Liberalism that created inequalities/abuses such as the “two city/luxury city” ED, and drifted to a “protectionist” position advocated by many American unions. Schumpeter’s creative destruction has evolved into a fault line of American ED/CD.
B&H’s deindustrialization alternative is more apparent if we contrast B&H with Lester Thurow’s, Zero-Sum Society (Thurow).
As reported by B&H Schumpeter believes: “capitalist economies can only evolve to higher levels of prosperity through a ‘process of Creative Destruction’ … a healthy economy requires perpetual reincarnation. The old industrial order, like a forest with its cycle of decay and renewal, must undergo constant transformation to provide the material sustenance for fresh enterprise. If this fails to occur, the economy and the entire society surrounding it will stagnate and eventually crumble…. Disinvestment, and lots of it, provides the only engine for reinvestment somewhere else (Bluestone & Harrison 9).. Lester Thurow’s Zero-Sum Society argued disinvestment in declining sectors and reinvestment in growing sectors is normal and a required feature of a healthy capitalist economy. That is what he means by Zero-Sum.
For Thurow America had to disinvest in declining “sunset” sectors if it were to compete effectively internationally: “To have labor and capital to move into new areas we must … withdraw labor and capital from old, low-productivity areas. But … disinvestment is what our economy does worst. Instead of adopting public policies to speed up the process of disinvestment, we act to slow it down with protection and subsidies for the inefficient” (Thurow 77). Classical economic models stress the need to shift from sunset to sunrise sectors as creative destruction moves into new industries and locations. There is no “runaway shop” in this approach to ED which is compatible with comparative advantage.
B&H simply do not accept disinvestment. Disinvestment for B&H’s is the principal cause of deindustrialization. “The essential problem with the U.S. economy can be traced to the way capital–in the forms of financial resources and of real plant and equipment–has been diverted from productive investment in our basic national industries into unproductive speculation, mergers and acquisitions, and foreign investment. Left behind are shuttered factories, displaced workers, and a newly emerging group of ghost towns” (Bluestone & Harrison 6). Corporate leadership chose short-term profits and shareholder returns in preference to investment in existing productive facilities, their workers, and communities Do ‘sunrise’ sectors make up for the losses elsewhere and make the whole process worthwhile? No!
Boomtowns like Houston, Texas that have doubled in population since 1960 have had their highways, water, sewer, and school systems stretched to the limit, as capital has rushed in to take advantage of the ‘good business climate’. The lopsided development that goes along with such frenzied capital investment, almost invariably leaves its mark: abject poverty counterpoised to extravagant wealth, a despoiled environment and crime rates that eclipse even those in the deindustrialized regions from which capital is fleeing”… the creative destruction process has become synonymous with our conception of the ‘throwaway’ culture…the pace of capital mobility has become so fast that people and communities are carelessly discarded to make room for new ones (Bluestone & Harrison 11-2).
This is the nature of B&H’s disinvestment. It bears little resemblance to that of Schumpeter. The “root” of B&H’s disinvestment lies in the “fundamental struggle between capital and community” (Bluestone & Harrison 19). It is what we now call “the mobility of capital”.
It is at this point that we truly see the implications of B&H and their clear break from mainstream liberal-classical economics. There is in B&H a core belief disinvestment severs the bond between workers, the community, unions and firm and its corporate management. To avoid disinvestment B&H’s treatment of sunrise industries injects a strong government involvement, in their words “public-private partnership” “Partial public ownership of subsidized private corporations is a minimum requirement” and “planning agreements” with claw backs if public goals are not achieved. This, to us, exposes best (1) B&H communitarian roots, and the (2) clear, unambiguous rejection of comparative advantage.
Deindustrialization: a Retrospective View
A sober view of B&H has since emerged which takes into account decades of coping with deindustrialization. First, we didn’t actually deindustrialize[i]—if by that we mean suffer a severe loss of manufacturing employment. Citing BLS data 14.9 million worked in 1960 manufacturing, increasing to 17.3 million by 1970 and 18.6 million by 1980. In 1990 manufacturing employment was still at 17.9 million, falling to 17.2 million in 2000. The collapse occurred during the 2007-9 Great Recession when manufacturing employment dropped to 11.6 millionInvalid source specified..
While not challenging the reality of plant closedowns, runaway plants, manufacturing unemployment, or even disinvestment, we had not, as a nation, thrown millions of manufacturing workers on the streetsInvalid source specified. when B&H wrote their book. What did happen was manufacturing’s share of the total workforce declined significantly after 1980 (an 11% decline between 1980 and 1990 alone). Non-manufacturing sectors, i.e. service, office and FIRE sectors left manufacturing in the dust. Manufacturing “declined” because the service sector skyrocketed. More precisely, manufacturing stagnated after 1980, and facilities that could not compete globally downsized and some eventually closed down. As suggested, after Breton Woods expired, comparative advantage hierarchy acquired a definitely nasty edge augmented by a recessionary and inflationary U.S, economy.
Second, B&H’s concept of “plant closedown and runaway plant” was painted too broadly. For example, B&H’s opening Chapter 2 sentence portrays the Chance-Vought Division of United Aircraft that moved from Connecticut to Dallas as a “runaway plant” and “capital flight” (Bluestone & Harrison 25-6)—despite our earlier description of that movement as not only ordered but financed by the Dept. of Defense as a key part of their industrial decentralization policy. There is no denying that a lot of plants moved, downsized and closed in the period previous to 1982, we have in past chapters spent a good deal of time in that description, but a simple “body count” of jobs lost and companies relocated over an extended period of time can be quite large, imparting a false sense of simplicity to what was a very complex, uneven and multi-faceted series of phenomena.
What was to be done with mature firms, sectors, industries and the regions in which they concentrated was not at all evident once the problem had a name. Assuming the reader accepts in some form our profit/ oligopoly life cycle, deindustrialization and/or mature profit life cycle do not come with known solutions. That is why oligopoly and mergers occur as consolidation and productivity prolongs survival. In the Contemporary ED World, a sort of permanent innovation has become the magic bullet to resolve its woes. Good luck with that; agglomerations age. As they age, they exhibit a propensity to become mobile, downsize, merge, closedown and runaway. They need to find new meaning, competitiveness and profitability, before they go not-so-gently into the night. Stage 4/5 firms are vulnerable, and their workers depend on them for paychecks and occupational survival. Economic developers cannot escape this. Should they be helped to survive as long as they can, providing what payrolls they can—or let to go to find their way into the night. This history has uncovered no magic elixir or miracle cure.
Deindustrialization/Profit Life Cycle has emerged as a fundamental tension in our contemporary ED/CD, Cowie and Heathcott rightfully acknowledge the costs of closedowns to communities and most importantly to workers; many, maybe most, will never recover. As Bluestone asserts in his Forward, this was a very tumultuous time for our jurisdictional economic bases—and as he would insist—for the workers and communities left behind. Such trauma tears at the political culture, crushing the identity and resilience of affected workers, but community, its residents and decision-makers as well. Worse, it pushes the young away into distant jurisdictions. The fabrication of Stone-like “stories” is real; they haunt the implementation of ED and have created a Third Ghetto where economic assimilation is next to impossible (Wilson, 1996). Disinvestment inserts a wedge between ED and CD that can develop into a fault-line.
[1] An interesting treatment of Taylor is included in Page Smith’s, America Enters the World: A People’s History of the Progressive Era and World War I (Volume 7) (New York, Penguin Books, 1985) pp. 376-378.
[i] Part of the problem with B&H data results from its use of David Birch’s Dunn and Bradstreet database—which has been severely critiqued to the point that Birch himself, moved away from it in subsequent publications. See Davis, Haltiwanger & Schuh, Small business and Job Creation: Dissecting the Myth and Reassessing the Facts, NBER Working Paper 4492, October 1993. http://www.nber.org/papers/w4492
Ron W. Coan 