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.