Joseph Stiglitz, Structural shift from manufacturing economy to service economy

The structural shift from manufacturing economy to service economy can be denied or encouraged by society in general, and governments in particular.  Joseph Stiglitz writes:

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. [….]

Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. [….]

Monetary policy is not going to help us out of this mess. [….]

What we need to do instead is embark on a massive investment program — as we did, virtually by accident, 80 years ago — that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. [….]

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed — even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want — into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. […] A banking system is supposed to serve society, not the other way around.

Original article as Joseph Stiglitz | “A Banking System is Supposed to Serve Society, Not the Other Way Around” | Jan. 2012 | Vanity Fair

Subsequent commentary by Steve Denning.

If the phase change in the Great Depression was a transition from agriculture to manufacturing, what is the transition to today? Stiglitz sees it as a transition from manufacturing to a service economy.

A service economy is certainly one looming possibility for the US economy, but a service economy per se is unlikely to be an American success story. If all American workers do is mow lawns, cut hair, export raw materials, and market and sell goods manufactured in other countries, the wealth of the nation is unlikely to be great. The US will in effect have become a Third World economy. It will be unable to support even the current standard of living, let alone an improving quality of life. In effect, a service economy with sharply lower incomes and standard of living for most people will be politically unacceptable.

Instead the needed transition is from a factory economy to the Creative Economy. The Creative Economy is one in which both manufacturing and services play a role. It is an economy in which the driving force is innovation. It is an economy in which organizations are nimble and agile and continually offering new value to customers and delivering it sooner. The Creative Economy is an economy in which firms focus not on short-term financial returns but rather on creating long-term customer value based on trust. It is described in Chapter 3 of Richard Florida’s classic book, The Rise of the Creative Class (2003).

Amplified by Steve Denning | “Is The US In A Phase Change To The Creative Economy?” | Jan. 31, 2011 } Forbes at

Surfaced by Jim Spohrer on Twitter as @SteveVargo @RobertLusch @ireneclng Must read review of Stiglitz economic phase change article… SDL thoughts?

DOMINO THEORY The financial meltdown is the Depression parallel everyone notices. The more frightening parallel is everything else.