I.

Introduction

Industry, in a general sense, the production of goods and services in an economy. The term industry also refers to a group of enterprises (private businesses or government-operated corporations) that produce a specific type of good or service—for example, the beverage industry, the gold industry, or the music industry. Some industries produce physical goods, such as lumber, steel, or textiles. Other industries—such as the airline, railroad, and trucking industries—provide services by transporting people or products from one place to another. Still other industries, such as the banking and restaurant industries, provide services such as lending money and serving food, respectively.

The word industry comes from the Latin word industria, which means “diligence,” reflecting the highly disciplined way human energy, natural resources, and technology are combined to produce goods and services in a modern economy.

While societies have always produced goods and services, large-scale production did not occur until the Industrial Revolution, a period of mechanization that began in Britain during the 18th century. Large-scale production is driven by machinery, makes use of advancing technologies, and employs a sizeable workforce unconstrained by preindustrial relationships, such as those of slavery or feudalism.

The Industrial Revolution did not occur in the United States until the first half of the 19th century. Although many countries have since developed or are beginning to develop industries in the second half of the 20th century, most of the world’s poorest countries have yet to establish a solid industrial base.

II.

Industry Classifications

An industry is usually classified either by a major input (good or service used to produce the final product) or by the industry’s final product. When a final product is used by another industry, it is called a producer good. Steel, which is used by other industries to produce automobiles, airplanes, construction materials, and numerous other products, is an example of a producer good. Final products, such as automobiles, which are purchased and used by individuals, are called consumer goods.

Industries also may be classified as primary, secondary, or tertiary industries. Primary industries use raw natural resources as major inputs. Agriculture, commercial fishing, mining, and the forest industry are primary industries. They use farmland, oceans, mineral deposits, and forests, respectively, as their major inputs.

Secondary industries use producer goods to assemble their products. For example, the construction industry produces houses, other buildings, and roads. Its inputs include lumber manufactured by the forest industry. The largest group of secondary industries is the manufacturing industries. Manufacturing industries produce a vast array of consumer and producer goods, such as processed food, clothing, heavy machinery, automobiles, electronics, and household appliances.

Final products manufactured by secondary industries are classified as durable goods and nondurable goods. Durable goods are products that are used repeatedly over long periods of time, such as automobiles and washing machines. Nondurable goods are products that are used for a short period of time, such as disposable contact lenses, clothing, food, toothpaste, soap, and other items.

Tertiary industries are those that provide services. For example, retail stores, universities, hotels, banks, television stations, hospitals, and travel agencies are all tertiary industries. Also classified as tertiary industries are all forms of government activity, ranging from local trash disposal to the armed forces.

III.

Components of Industry

Industries use a range of inputs, such as capital, technology, natural resources, labor, and management, to produce goods and services. In order to manufacture products, money is needed to purchase buildings, equipment, and machinery and to pay workers. This money is called finance capital. Buildings, machinery, and other equipment are referred to as physical capital.

Physical capital, natural resources, and labor (workers considered as a group) are combined to yield the final product, which is sold for money. The amount of money received that exceeds the cost of producing the good is called profit. Profit can be used to pay for another cycle of production. When profits are used to hire more labor and purchase additional physical capital, production expands and industrial growth occurs.

A.

Physical Capital and Finance Capital

Industrial growth depends on the availability of both finance capital and physical capital. Finance capital is often raised by borrowing money from a financial institution, such as a bank, or by selling stocks (certificates representing shares of ownership in a business). If finance capital is scarce in a country, industrial growth may be curtailed. Similarly, if a country lacks the resources to manufacture or import its own physical capital (such as buildings, machinery, and equipment), industrial development will also be limited.

B.

Production Technology

Production technology refers to the way capital, technology, natural resources, and labor are combined to create final goods. Businesses choose these inputs depending on the type and quantity of goods they produce. For example, a snack-cake factory and a local bakery will each use different equipment and methods to produce cupcakes (see Factory System). A production technology that requires many workers and relatively few machines is called a labor-intensive technology. A technology that uses many machines and relatively few workers is called a capital-intensive technology. Generally, as industries grow, they become more capital intensive. In the United States between 1950 and 1997, for example, the number of workers employed for every million dollars of commercial capital decreased from 33 workers to 1.1 workers.

C.

Natural Resources

Natural resources play a critical role in industrial growth. Primary industries are directly connected to natural resources, and many secondary and tertiary industries rely on the goods that primary industries provide.

Natural resources are either renewable or nonrenewable. Renewable natural resources, such as agricultural land, forests, and fisheries, are able to regenerate themselves over time. Nonrenewable natural resources, such as minerals, are fixed in quantity and will be used up over time. Industries often fail to use natural resources in a way that is best suited for society. For example, without catch limits, commercial fishing fleets may overharvest fish populations. Similarly, if companies are not forced to clean up pollution, they might release more wastes than they would if required, by laws or contracts, to pay cleanup costs.

D.

Management

Managers supervise, monitor, and coordinate the different areas of an industry. For example, financial managers focus on generating and reinvesting finance capital. Human resource managers help recruit people with desirable skills and place them where they are most needed. Marketing managers help sell final goods and services to customers.

E.

Labor

Labor refers to workers as a group. Workers in an industry sell their own labor in exchange for an income they negotiate with the management. While these negotiations may occur on an individual basis, many wage negotiations occur between employees who have organized into a group called a labor union (formed to improve the members' wages and working conditions) and managers. This group wage- and benefit-negotiating process is called collective bargaining.

The relationship between labor and management can involve substantial conflict. While labor often requests higher wages to improve its standard of living, management may resist because wage increases may cut into industry profits. Managers can use the threat of layoffs(releasing employees) in order to keep wage increases down, while workers can go on strike (withhold their labor) if their demands are not met. Specialists in the field known as labor relations study how workers organize themselves, as well as the subsequent interactions between management and labor. In most developed countries, labor relations have changed significantly in the second half of the 20th century. While approximately 25 percent of U.S. workers belonged to unions in 1955, 13.5 percent belonged to unions in 2000.

An important distinction between labor and other inputs, such as capital, machinery, and equipment, is that employees have the ability to develop innovative solutions to production problems and to learn new skills. The collection of skills and knowledge that employees possess is called human capital. The production process can support or undermine the development of worker skills and knowledge. If workers are inhibited from developing new skills and are required to repeat simple tasks, the process is said to be de-skilling. At the end of the 20th century, many industries were trying to boost productivity by helping employees to expand their skills.

During much of the 20th century, most manufacturing employees worked on the assembly line, a system in which work in process passes progressively from one group of workers to the next until the finished product emerges at the end of the line. In this system, each worker specializes in a specific task, or in part of the production process, along the assembly line and performs that task repeatedly. This type of mass production, characterized by high job specialization, is known as Fordism. This term is derived from the assembly line process developed for building automobiles by the early Ford Motor Company.

Fordist production processes increase the speed of work and production. However, they depend on endless repetition of highly specialized tasks, so the workers often do not learn a productive range of skills. Thus, Fordist production processes may limit an industry’s flexibility in adapting to changing markets.

In the late 20th century, many industries replaced Fordism with new management practices that allow workers to have more of a say in decisions, as well as greater job flexibility. These new management techniques, known as post-Fordism, de-emphasize assigning specific tasks to individuals and instead emphasize cooperative decision making, skills building, teamwork, and custom production. Post-Fordist management techniques are now used in many forms in a wide range of industries, including the motor-vehicle, computer software, and machine-tool industries.

IV.

Industry in Developed and Developing Countries

Combinations of technology, management, labor, and machines vary significantly among industries and among countries. Economists study the ways different countries assemble these assets to develop an industrial base.

A.

Physical Capital

Countries with well-developed economies possess large amounts of physical capital. On average, each worker in such a country has more machines, plant, equipment, and tools to work with than do workers in countries with developing economies. For example, in 1992 the private capital stock (total value of privately owned physical capital) per worker was $41,286 in Japan and $35,993 in the United States. In Chile, the economy of which is not as developed, the private capital stock per worker was $11,306. In the developing country of India, the private capital stock per worker was $1,997, while in Sierra Leone, where there is almost no industry, the figure was only $227.

B.

Finance Capital

Investments in physical capital can increase production and generate industrial growth. However, enterprises require finance capital in order to purchase the plants, machines, and equipment necessary to produce goods and services. Because there is no guarantee that a particular business will be profitable, financial institutions assume a certain level of risk when they lend capital. Developing countries have a less established industrial base, less infrastructure, and less financial stability, and in some cases they suffer from political instability. As a result, they are often perceived as risky environments for starting businesses, and financial institutions may be less willing to lend money to these economies.

Developing countries generally depend on foreign investors for the finance capital that they need. Multinational corporations carry out much of this foreign investment. However, in 2001, 68 percent of all foreign direct investment went to industrialized countries. In the developing world, Latin America received 11.6 percent, Asia received 13.9 percent, and Africa received 2.3 percent. Many developing countries also borrow money on international financial markets (by selling bonds), but they usually must pay higher interest rates (the cost of borrowing money) than developed countries do. In addition, foreign investors may refuse to buy bonds if they fear that a government may not be able to repay its loans.

C.

Training and Education

Developed countries also have more resources than do developing countries to invest in basic and vocational education, training programs, and higher education. As a result, workers and managers in developed economies typically receive more education and training. In 1998, for example, educational expenditures relative to the gross domestic product (the value of all goods and services produced within a nation's borders) were 5.6 percent in developed countries and 4.1 percent in developing countries. Adult literacy rates also reveal educational disparities among countries. In 2005 the adult literacy rate in Japan and the United States was more than 99 percent, while it was 87.1 percent in Brazil, 56.6 percent in India, and 18.7 percent in Niger.

Disparities in education lead to shortages of skilled workers and educated managers in developing countries. An unskilled workforce is less productive and receives lower wages. Lower wages, in turn, encourage highly educated workers in these countries to migrate to industrialized countries to earn higher salaries. This migration, known as the brain drain, increases the scarcity of educated and skilled workers in developing countries.

D.

Research and Development

Some economists believe that research in technology (the application of engineering and science to develop machines and procedures that improve human efficiency) contributes more significantly to industrial growth than does any other factor. Scientists and engineers usually conduct technological research in university and other research facilities that are funded primarily by government and business. Like finance capital and education, facilities and personnel for technological research are more scarce in developing than in industrialized economies. For example, in 2000 Japan had 5.0 and Sweden had 4.5 research scientists and technicians per 1,000 people in their populations. In contrast, during the same period Egypt had 0.5 scientists and technicians per 1,000 people, El Salvador had 0.02, and Pakistan had 0.08.

Many developing countries have tried to stimulate economic growth by simply acquiring machinery from developed economies, assuming that the technological knowledge necessary to use the physical capital could be as easily transferred. This perception was strengthened in the era after World War II (1939-1945), when the Japanese successfully manufactured automobiles, electronics, cameras, and other products by imitating American and European technologies. However, many of the developing countries that tried this have not experienced similar economic growth after acquiring equipment and machinery from industrialized countries. Economists believe that the Japanese were successful because their nation already possessed a skilled and educated workforce.

E.

Role and Use of Natural Resources

In the 19th and early 20th centuries, the industrial nations of Europe established colonies near natural resources to support industrial growth at home. Today, many developed countries still secure access to natural resources located in developing economies. For example, U.S. petroleum companies obtain oil in the Middle East and other regions. However, large stores of natural resources are not necessary for industrial growth. While countries like Russia, South Africa, Australia, Canada, and the United States have based industrial growth in part on their natural resources (such as timber and petroleum), some industrialized countries, such as Singapore, Switzerland, and Japan, do not have significant amounts of natural resources.

Industrialized countries consume a disproportionate amount of the world’s natural resources. As a result, the standard of living in these countries may be more dependent than that of developing countries on the continued availability of timber and petroleum and other minerals. For example, the developed countries of the world contain only 19 percent of the world’s population but consume more than two-thirds of the world’s natural resources. These countries also consume a disproportionate amount of the world’s energy. On average, each person in the United States consumes the annual energy equivalent of 12,657 kg (27,905 lb) of coal. Worldwide, in contrast, each person consumes the annual energy equivalent of 1,825 kg (4,022 lb) of coal.

F.

Government Policies

The type and extent of government involvement plays a strong role in a country’s industrial growth. A government may take a free market approach and let industries organize and grow with minimal government intervention. At the other end of the spectrum of government planning and involvement is socialism, a system in which the means of production are, in theory, owned collectively by the whole community. For example, the centrally planned economies of the countries of Eastern Europe and the Soviet Union achieved rapid rates of industrialization. However, these centrally planned economies eventually developed a lack of dynamism and innovation that produced slower growth rates and economic crises.

After the Great Depression of the 1930s, many developing countries, particularly in Latin America, pursued economic growth in accordance with a model called import substitution industrialization. Under this model, governments bought controlling interests in energy production and other key primary industries, as well as in some manufacturing industries. These governments followed policies of favoring domestic products over imported goods in order to create favorable conditions for domestic industries to grow and to achieve technological progress. This model led to substantial industrial growth in many countries. However, inefficiency, bad decisions on providing government subsidies, and heavy debts made this model vulnerable to inflation (aggregate rise in prices) and to ups and downs in the international economy (see Inflation and Deflation).

In the later 20th century the governments of several East and Southeast Asian countries, notably South Korea, Malaysia, Indonesia, and Thailand, developed an alternative model known as government-directed industrial development. The government of Taiwan also used this model. In this model the government protected a few chosen industries that were selected for development, including export industries. The government also carefully regulated the flow of finance capital out of the country. This model seemed to stimulate industrial growth. However, these governments freed the outflow of finance capital in the 1980s and 1990s. The outflow of finance capital soon became torrential, and growth stopped. The halt in economic growth, combined with bad loans and overinvestment in certain industries, led to an economic crisis in this region in 1997.

V.

Shifts in Industrial Development

Since World War II, many developed countries have shifted to varying degrees from goods-producing activities, such as manufacturing, agriculture, and mining, toward service activities. For example, the number of U.S. workers employed in manufacturing industries decreased by 9.1 percent between 1980 and 2000, while the number of workers in service industries increased by 72.8 percent during the same period.

Initially, many service activities were created to support the manufacturing industry. For example, the transportation industry evolved in part to distribute mass-produced goods. As industrialized economies matured, rising standards of living and increasing scales of mass production led to growth in wholesale and retail trade and in financial and insurance services. In addition, higher household incomes stimulated growth of personal services, such as fast-food restaurants, hotels, recreational services, and entertainment businesses.

Since the late 1960s, communication and computing technologies have stimulated growth of service activities associated with managing information. Some economists believe developed countries such as the United States are entering an information age, an era based on gathering, managing, and disseminating information.

While developed countries are evolving from manufacturing- to service-based economies, many developing countries are acquiring manufacturing economies, in part because developed countries are transferring physical capital (or manufacturing capacity) to developing countries. Since the early 1970s, international competition, rising labor costs, and environmental regulations have prompted many companies in industrialized countries to search for new markets, lower labor costs, and less restrictive regulations in some developing countries. For example, companies from the United States and other industrialized countries have relocated manufacturing operations to countries such as Mexico, Brazil, South Korea, and Singapore, as well as to Taiwan and Hong Kong. As a result, some of these developing economies have grown dramatically. For example, between 1970 and 1980 the economies of South Korea and Taiwan grew at average annual rates of 15.6 and 13.5 percent, respectively.

VI.

Economic Cycles

Industrial growth goes through cycles of expansion and contraction. Business cycles are of short duration, lasting approximately six to ten years. They may be thought of as repeated waves of growth and decline in business activity. Industrial cycles are of longer duration. They are often linked to major changes in a country’s institutions, technology, and global economic relationships. For example, in the 19th century the introduction of the locomotive and the growth of railroads in the United States triggered a cycle of industrial growth. Likewise, the government-managed export-based strategy pursued by many Asian economies in the 1980s and 1990s characterized a cycle of industrial growth followed by a recent period of economic decline. In many Asian countries, including Korea and Malaysia, economic activities were closely coordinated by the financial, industrial, and government sectors. This highly coordinated relationship produced a period of extremely high growth. However, as many of these governments eliminated regulations, such as trade restrictions and the movement of financial capital into and out of their countries, the economies became increasingly exposed to risk from outside. In particular, much of Eastern and Southeast Asia suffered a financial crisis beginning in 1997. This crisis disrupted the established relationship among the financial, industrial, and government sectors, marking the end of the Asian model of economic growth.

Economists study economic cycles to understand factors that cause industrial growth and decline. These factors may include a new technological innovation that improves manufacturing equipment and subsequently sparks an industrial cycle. Conversely, a financial crisis or stock-market crash might limit the finance capital available to businesses and subsequently limit industrial expansion (see Stock Exchange). For example, financial instability in Brazil in 1998 and 1999 prompted the government to raise interest rates. While higher interest rates encourage foreign investors to keep their money in the Brazilian economy, higher interest rates also increase the cost to Brazilian businesses of borrowing money. The higher cost of borrowing money discourages firms from pursuing additional investment, eventually stifling economic growth. As a result, the financial crisis in Brazil has raised unemployment and pushed the economy into a recession.

Other factors can influence industrial cycles. If workers successfully bargain for higher wages, industries might react by reducing production or moving to a country with lower wages. Production cuts may ultimately decrease the number of workers needed by industry, increasing the unemployment rate and reducing living standards. If unemployment levels rise, consumers may have less income with which to purchase products, hurting business profits and possibly contributing to an industrial decline.