The Frontiers of Management. Peter F. Drucker

      Why this decline? It is not that industrial production is becoming less important, a common myth for which, as we shall see shortly, there is not the slightest evidence. What is happening is much more important. Industrial production is steadily switching from heavily material-intensive to far less material-intensive products and processes. One reason for this is the emergence of the new and especially the high-tech industries. The raw materials in a semiconductor microchip account for 1 to 3 percent; in an automobile their share is 40 percent; and in pots and pans, 60 percent. But the same scaling down of raw-material needs goes on in old industries, and with respect to old products as well as new ones. Fifty to one hundred pounds of fiberglass cable transmits as many telephone messages as does one ton of copper wire, if not more.

      This steady drop in the raw-material intensity of manufacturing processes and manufacturing products extends to energy as well, and especially to petroleum. To produce one hundred pounds of fiberglass cable requires no more than one-twentieth of the energy needed to mine and smelt enough copper ore to produce one ton of copper and then to draw it out into copper wire. Similarly plastics, which are increasingly replacing steel in automobile bodies, represent a raw-materials cost, including energy, of less than half that of steel.

      And if copper prices were to double—and that would still mean a fairly low price by historical standards—we would soon start to “mine” the world's largest copper deposits, which are not the mines of Chile or of Utah, but the millions of tons of telephone cable under the streets of our large cities. It would then pay us to replace the underground copper cables with fiberglass.

      Thus it is quite unlikely that raw-materials prices will rise substantially compared to the prices of manufactured goods (or of high-knowledge services such as information, education, or health care) except in the event of a major prolonged war.

      One implication of this sharp shift in the terms of trade of primary products concerns the developed countries, whether major raw-materials exporters like the United States or major raw-materials importers such as Japan. The United States for two centuries has seen maintenance of open markets for its farm products and raw materials as central to its international trade policy. This is in effect what is meant in the United States by an “open world economy” and by “free trade.” Does this still make sense? Or does the United States instead have to accept that foreign markets for its foodstuffs and raw materials are in long-term and irreversible decline? But also, does it still make sense for Japan to base its international economic policy on the need to earn enough foreign exchange to pay for imports of raw materials and foodstuffs? Since Japan opened herself to the outside world 120 years ago, preoccupation, amounting almost to a national obsession, with this dependence on raw-materials and food imports has been the driving force of Japan's policy, and not in economics alone. But now Japan might well start out with the assumption, a far more realistic one in today's world, that foodstuffs and raw materials are in permanent oversupply.

      Taken to their logical conclusion, these developments might mean that some variant of the traditional Japanese policy—highly “mercantilist” with strong deemphasis of domestic consumption and equally strong emphasis on capital formation, and with protection of “infant” industries—might suit the United States better than its own traditions. Conversely the Japanese might be better served by some variant of America's traditional policies, and especially by shifting from favoring savings and capital formation to favoring consumption. But is such a radical break with a hundred years and more of political convictions and commitments likely? Still, from now on the fundamentals of economic policy are certain to come under increasing criticism in these two countries, and in all other developed countries as well.

      They will also, however, come under increasing scrutiny in major Third World nations. For if primary products are becoming of marginal importance to the economics of the developed world, traditional development theories and traditional development policies are losing their foundations. All of them are based on the assumption, historically a perfectly valid one, that developing countries pay for imports of capital goods by exporting primary materials—farm and forest products, minerals, metals. All development theories, however much they differ otherwise, further assume that raw-materials purchases on the part of the industrially developed countries must rise at least as fast as industrial production in these countries. This then implies that, over any extended period of time, any raw-materials producer becomes a better credit risk and shows a more favorable balance of trade. But this has become highly doubtful. On what foundation, then, can economic development be based, especially in countries that do not have a large enough population to develop an industrial economy based on the home market? And, as we shall presently see, economic development of these countries can also no longer be based on low labor costs.

      What “De-Industrialization” Means

      The second major change in the world economy is the uncoupling of manufacturing production from manufacturing employment. To increase manufacturing production in developed countries has actually come to mean decreasing blue-collar employment. As a consequence, labor costs are becoming less and less important as a “comparative cost” and as a factor in competition.

      There is a great deal of talk these days about the “de-industrialization” of America. But in fact, manufacturing production has gone up steadily in absolute volume and has not gone down at all as a percentage of the total economy. Ever since the end of the Korean War, that is, for more than thirty years, it has held steady at around 23 to 24 percent of America's total GNP. It has similarly remained at its traditional level in all of the major industrial countries.

      It is not even true that American industry is doing poorly as an exporter. To be sure, this country is importing far more manufactured goods than it ever did from both Japan and Germany. But it is also exporting more than ever before—despite the heavy disadvantage in 1983, 1984, and most of 1985 of a very expensive dollar, of wage increases larger than our main competitors had, and of the near-collapse of one of our main industrial markets, Latin America. In 1984, the year the dollar soared, exports of American manufactured goods rose by 8.3 percent, and they went up again in 1985. The share of U.S.–manufactured exports in world exports was 17 percent in 1978. By 1985 it had risen to 20 percent, with West Germany accounting for 18 percent and Japan for 16 (the three countries together thus accounting for more than half of the total).

      Thus it is not the American economy that is being “de-industrialized.” It is the American labor force.

      Between 1973 and 1985, manufacturing production in the United States actually rose by almost 40 percent. Yet manufacturing employment during that period went down steadily. There are now 5 million fewer people employed in blue-collar work in the American manufacturing industry than there were in 1975.

      Yet in the last twelve years total employment in the United States grew faster than at any time in the peacetime history of any country—from 82 to 110 million between 1973 and 1985, that is, by a full third. The entire growth, however, was in nonmanufacturing, and especially in non–blue-collar jobs.

      The trend itself is not new. In the 1920s, one out of every three Americans in the labor force was a blue-collar worker in manufacturing. In the 1950s, the figure was still one in every four. It now is down to one in every six—and dropping.

      But although the trend has been running for a long time, it has lately accelerated to the point where, in peacetime at least, no increase in manufacturing production, no matter how large, is likely to reverse the long-term decline in the number of blue-collar jobs in manufacturing or in their proportion of the labor force.

      And the trend is the same in all developed countries and is, indeed, even more pronounced in Japan. It is therefore highly probable that developed countries such as the United States or Japan will, by the year 2010, employ no larger a proportion of the labor force in manufacturing than developed countries now employ in farming—at most, one-tenth. Today the United States employs around 18 million people in blue-collar jobs in the manufacturing industry. Twenty-five years hence the number is likely to be 10—at most, 12—million. In some major industries the drop will be even sharper. It is quite unrealistic, for instance, to expect the American automobile industry to employ, twenty-five