The Post-Industrial Production Economy

Sometimes when I write about the shift from the consumer economy to the production economy, people assume that ‘production’ equals ‘manufacturing’ .  That’s just not true.  So I asked Mary Adams of  I-Capital Advisors, and co-author of  Intangible Capital,   if she would write a guest post on  “The Post-Industrial Production Economy.”  She graciously agreed, and here it is. 

In follow-up to Michael’s post on production vs. consumption economies, he asked me to take a crack at describing what the post-industrial production economy will look like. So here goes!

We live at the cusp between the industrial and the knowledge eras. In the U.S., the shift is already very much underway. But there is still much change to come, including in the production economy.

Industrial-ize

To understand what will happen, let’s first look at what happened during the industrial revolution. Yes, mass production and factories drove huge growth. But manufacturing was not the only part of the economy that was created or “industrial-ized.” Education was industrialized to provide large numbers of capable workers. Energy production was industrialized to provide cheap, available power for factories, homes and offices. Agriculture was industrialized to provide reliable, economical food sources. The change affected almost every corner of our society.

This industrialization process occurred under a number of very simple conditions or design constraints. Some of the most important included the availability of relatively cheap energy, the relative lack of importance placed by society on externalities (such as pollution and health risks), the availability of large workforces and continued returns available from mechanization that provides greater and greater returns on the work of employees.

These design constraints began to shift a long time ago in the U.S.For example, we have known for a long time that our patterns of energy and resource use were not sustainable. But rather than rebuilding or remaking our industrial economy, we chose to/had the opportunity to send much of it off shore. If you look at the rise of China in the last 20 years, you will see a replay of the industrialization process, not the end of it.

The Chinese also know that the model they are imitating is not sustainable. But the Chinese have an opportunity to use the model to quickly raise the level of living of their enormous population and generating enough wealth in time to simultaneously invent a new model. Or to follow whomever can invent the new model.

Knowledge-ize

What will the new model look like? Moving into the knowledge era does not mean the rise of services and consumption and the decline of production. Humans will have the same needs to live. Housing, transportation, consumer goods, food, healthcare, education will all remain constants in our economy. These needs require a production sector. But this new production sector will be built under a new set of constraints.

Some of the design constraints for the post-industrial production model will be minimizing energy use (or creating alternative sources of energy), minimizing/eliminating waste, and maximizing health and wellness. Just as every corner of society was industrialized in the past, we can expect that every corner of the economy, including the production sector, will be “knowledge-ized,” that is, re-made using information technology and knowledge to drive efficiencies. In this scenario, cheap order-taking labor is less valuable than workers who can think on their feet and contribute to continuous innovation and improvement.

The solutions that will emerge in the knowledge economy will turn many industrial models on their head. The industrial economy was based on control of scarce resources and top down flows of knowledge. If I owned the factory, I told you what to do. The knowledge economy is based on leveraging a theoretically infinite resource (knowledge). I can’t own or control knowledge beyond a very limited set of circumstances so in the long run, I can’t tell you what to do. I need you to cooperate and collaborate with me.

The easiest place to see the implications of this top-down versus bottom-up dynamic is in the sphere of social media and IT-related projects where knowledge moves around the world constantly without a lot of top-down control.

But it’s also happening in the production economy and gives us hints of what the post-industrial production economy will look like:

All these examples share the thread of bottom-up flow of knowledge and production. Here are a few more references on making things in the U.S. http://www.i-capitaladvisors.com/2011/04/23/making-things-and-the-future-of-the-u-s-economy/

As we move into this new kind of production economy, there will continue to be great tension between top-down, large-scale solutions and bottom-up, smaller-scale solutions. For example, do we need a national energy grid or neighborhood energy networks? Do we need large-scale, subsidized production of basic foods like corn and soy (like we have now) or smaller-scale local production of vegetables in urban gardens? Will the cost advantage remain with self-assembled furniture shipped halfway around the world or will it shift to self-designed and produced furniture closer to home? Is alternative energy (such as solar and wind) better driven by large-scale industrial production or smaller-scale bottom-up solutions? There are a lot of people betting on both models.

And, of course, the changing design constraints around energy, resource use, health and wellness will not only influence how things get done, they will create opportunities to innovate what gets built-in the form of new products. This is why there is so much attention on the current race to create sustainable energy production systems.

In the short run, we have to live in both worlds. We have to fight the cost competition from industrial China. But we can’t ignore the opportunities of the knowledge era. The future is in using knowledge to radically knowledge-ize every aspect of our lives and economy. Production has an exciting future.

Mary Adams is the co-author of Intangible Capital: Putting Knowledge to Work in the 21st Century Organization www.intangiblecapitalbook.com  and creator of the IC Knowledge Center www.icknowledgecenter.com, a community of over 300 thought leaders in next generation management. She blogs at Smarter Companies www.i-capitaladvisors.com

Comments

  1. Hmm, I wonder why people “assume” that you mean manufacturing when you say “production.” In that previous post, you include a chart of “production,” measured through manufacturing structures as a share of all structures, then say “buildings used for manufacturing (production)” and that Apple “does not manufacture the iPads, iPhones, iPods, and so forth that it creates and sells. Creation and distribution, but no production.” You explicitly made the connection, nobody had to assume it.

    As for Mary’s post, it’s directionally correct, ie the broad thrust is certainly in the right direction, but some of it is faulty. She lists “Housing, transportation, consumer goods, food, healthcare, education” and says we still need to “produce” those goods. But we already have too much housing, hence the current bust. Transportation is about to undergo a massive collapse as telecommuting takes off, because video-conferencing and other communications tech are obsoleting the central office. Consumer durables are a small portion of household wealth these days. Food as a share of disposable income has already fallen to 9.5%, from 24% 80 years ago. Most of the value in medicine and education doesn’t consist of “production” but information services, so they will both be radically transformed in the information era. Because both are greatly bloated today because of heavy govt involvement, they will undergo massive cuts in costs and employment when the technology shock finally hits them.

    Also, some of the possibilities Mary points at are half-baked at best: has any successful product ever come out of the arduino? No doubt this is inherently difficult to predict, but one can try to whittle the possibilities down better. There is no doubt that such tinkering is going to be much more important, but it is still nascent. The new successes are still more about new ways of funding or organizing simple ideas that leverage established businesses. As I’ve said many times before, the bottleneck is micropayments. Once you can monetize the internet, all else follows and a tech boom begins.🙂

    • “She […] says we still need to “produce” those goods. But we already have too much housing, hence the current bust.”

      Housing as well as other things are not done with initial production, they need upkeep arguably in excess of the initial production effort. A perhaps simpler example is cars. If you set out to get something approximating the maximal lifetime out of a car (15+ years), the maintenance effort will probably exceed the initial production effort. Whether the resource footprint of a long maintenance effort is smaller than producing a new car can probably be argued, but it will be at worst a close call.

      “Transportation is about to undergo a massive collapse as telecommuting takes off, …”

      Only for “knowledge jobs” not requiring office presence at certain times. If you have to be in the office any time of the day, it’s still going to be a full commute. Also don’t underestimate the social aspect. Videoconferencing has progressed a lot but I don’t see it replacing more than 2 parties interacting in a room, anytime soon. Some activities can be handled over the wire but not everything.

      “Consumer durables are a small portion of household wealth these days.”

      Really? I guess it depends on how you define “durables”. If something is really durable you are going to keep it for a while, and it accumulates. Maybe your point is that much of your “wealth” is/goes for services, which is undoubtedly the case.

      “Most of the value in medicine and education doesn’t consist of “production” but information services”

      Based on personal experience, most of the “value” in medicine consists of charging me whatever they want because of a legal monopoly or oligopoly situation, not information services, because the US healthcare system is seriously fucked up. If it is transformed in any way it will not be by way of technology but by way of legislation outlawing current abuses and market “distortions”.

      As for monetizing the internet, what do you think Google, Facebook, Zynga etc. are doing? That’s the kind of “monetization” wew are going to get, I suspect.

  2. cm, I highly doubt that most people spend more on the upkeep of their house or car than they did buying it. Telecommuters can still meet up in person once every 2-4 weeks, like some distributed businesses do now, but the point is that is still less than 5% of how much non-telecommuting businesses do so now, so transportation will crash. Since most jobs will be “knowledge jobs” soon- service jobs already dominate- this is particularly relevant. Social impact? Right, because we all know we work for the office social scene. [/sarcasm] Since most videoconferencing software can already handle many more than two parties, almost everything can be handled over the wire already. The only reason it isn’t is because established businesses sometimes already have a sunk cost in their office lease and they don’t often realize they could be saving a lot by getting out of the office as soon as the lease ends. Among other reasons, that’s why many of them will simply be put out of business, just like how random bloggers typing away at home are putting the newspapers out of business.🙂

    As for consumer durables, I was going to link to the Fed’s numbers before, but here it is now. Consumer durables are about 7% of household net worth; I was surprised to see it was so low when I first saw the B.100 balance sheet a couple years ago. Yes, my point is that services is where much more money is spent, hence “production” isn’t that important. Considering it is precisely govt interference that gives the doctors their monopoly, you are deeply naive if you think you can use that same tool against them and fairly ignorant if you think it’s because of ‘market “distortions.”‘ Google is monetizing their search engine, nothing else. Facebook is selling customer profiles to advertisers, nothing else. Zynga does god knows what in their little gaming enclave. If you think that’s all the monetization we’ll get, you must also be deeply pessimistic about the future of internet services, as that won’t pay for much. I think what comes out of micropayments will be so much better, but obviously it hasn’t happened yet, despite the idea being around from almost the beginning, so there are no guarantees.

    • Regarding car/house maintenance – note I didn’t say “what you spend”, but effort and resource footprint. If you do the full maintenance schedule, so the car will actually last you 15 years in good condition, it will cost you a few hundred every year. Then add new tires, brakes, and other wear and tear replacements and things will add up. Mandated inspections (smog and mechanical where required) are also associated with efforts maintaining the car and so on.

      My “social aspect” remark was not aimed at social club games, but was meant to include the very real apparent need of many managers for “face time” and having workers under direct supervision or at least away from the comfort of their home. Also collaboration and information exchange is much more efficient in person. Some and perhaps even many activities can be successfully shoehorned into a standard process where all needed information can be transmitted over a wire, but particularly “creative” work or anything requiring frequent interactive exchanges often cannot. For example drawing stuff together in front of a whiteboard cannot currently be done efficiently, or even effectively, over a wire. In theory it is possible, but when it is too cumbersome or too drawn out because responses take time, people will not do it or only when there is no other choice. And often there *is* the default choice of skipping it.

      • Willem de Leeuw says:

        ‘Transportation is about to undergo a massive collapse as telecommuting takes off, because video-conferencing and other communications tech are obsoleting the central office.’

        People have been saying this for decades and it hasn’t worked. My father allowed some of his employees to work from home and some of them tried to bill him for their heating and electricity costs when they realised that staying at home all day cost them more in this regard and a few of them asked to return to the office when they realised it wasn’t as much fun as they thought it would be.

        Don’t underestimate the social aspect of working: humans tend like to be around other humans to socialise. Like me, I’ve known a lot of people who’ve met girlfriends and wives through work (one guy married his secretary!). I’ve worked from home and in offices and I think I prefer working in offices. I also like my 30 minute commute as it gives me a chance to think whilst perfoming a menial task, I like driving and it provides a gap between home and work life. Perhaps age, how many friends you have and whether or not you are in a relationship are also factors to consider, and so different people will prefer different circumstances depending on their own circumstances?

    • Willem, perhaps past telecommuting hasn’t worked because the internet is pretty new and is only now getting widespread and fast enough to handle video-conferencing? Also, the software to handle all the various communications takes time to imagine and develop. Office space is going to cost a lot more than a small spike in heating/electricity costs, so that’s not a real concern. I don’t know who said working from home would be “fun,” I’m talking efficiency. It cracks me up to see all the dimwits talking carbon footprints and electric cars, when the technology that is going to cut pollution the most is already here: video conferencing. Yet nobody ever talks about this real solution that is going to get people out of their cars more than any current “energy tech.”

      Obviously work has a social aspect, but that’s not why we work. Perhaps some SF hipsters will still get offices together to be around each other and goof off while working, but most don’t need the proximity to get work done, while video-conferencing can handle all the face-to-face communication that’s necessary. And need I mention that most people don’t need “the office” to socialize, in this world of facebook and foursquare? You may prefer working in an office and commuting and paying the higher cost for those things, I certainly don’t (I’m a little weird though, I can’t imagine more than a 5-10 minute commute🙂 ). But if you’re willing to pay a bigger cut of your paycheck to have a separate space that you can drive to, I’m sure you’ll be able to make that choice, but I can’t imagine many others following your lead.😉

      • I’m not sure this thread is still alive, but as you mention facebook/foursquare, presumably to designate the internet startup culture, if I’m not misinformed in nearly all startups and young “Web 2.0/mobile” companies most of the staff works in central offices. Working from home or otherwise over the wire is usually reserved for job descriptions that historically don’t have a strong office culture or dependency on “right here and now” interaction modes, or for (senior/specialty?) contributors who have some negotiating leverage and/or who have earned the management’s trust.

        I would also second Willem’s point about deliberately drawing a line between work and home life. That’s probably more a cultural thing with Europeans, but I’ve heard it from “Americans” too.

      • The thread lasts as long as someone’s reading, as Mike doesn’t close the comments after a set time period like some other blogs do. I mentioned facebook and foursquare solely as social networking tools that can be used instead of the office to socialize, for those few who ever needed the office for that. I have no idea in how much of a decentralized manner those two companies are run, but you’re probably right that even most tech startups probably still work from central offices. It is a sad commentary on how backwards their thinking is, but it can’t last and there are many that have already transitioned to purely telecommuting, particularly in open source.

        As for drawing a line between home/work, as I said already, you will always be able to make that choice. Simply rent a small office for yourself in some strip mall if that is so important for you.🙂 But once most don’t have that choice forced on them, I can’t imagine even you and William choosing to rent an office for yourself. You will simply follow the herd and set aside a room in your house as your home office, as many have already done.

  3. Thanks to Michael for posting this. And thanks for the comments.

    My point about the sectors I mentioned isn’t that more of the same will be coming in the future. It is that, if you accept the thesis that the constraints and tools/technology shift, then the solutions will also shift.

    So, if the new constraints include minimizing energy use (or creating alternative sources of energy), minimizing/eliminating waste, and maximizing health and wellness—what does this say about how the sectors I mentioned have to change? In housing for example, it isn’t necessarily about building more houses, doesn’t the challenge (and economic opportunity) become making every existing house (and building) carbon, energy and environmentally neutral?

    By the way, thanks Ajay for mentioning the internet. The internet and social media are core technologies that will enable the kind of bottom-up solutions that will inevitably emerge. The changes that the internet will influence in finance and markets are also interesting.

    The ideas are indeed half-baked. So is the new economy that is beginning to emerge. But it’s right to ask these questions and I thank Michael for asking this question.

  4. The friction between bottom-up and top-down approaches to addressing social and economic issues is fundamental. Top-down approaches arguably reinforce institutionalized assumptions and behaviors that preclude innovation. Bottom-up approaches accommodates situational heterogeneity, and arguable enhances the potential for innovative and effective solutions. The first is a push strategy, the second is a pull strategy.

  5. cm, if you’re referring to “effort” and not money spent, then your point is even more irrelevant. Who cares how much “effort” a carpenter exerts on fixing your patio, what matters is how much you paid for the house vs the upkeep. As for managerial face time, that’s what video conferencing is for. What is “direct supervision” about an office, the fact that you can drop by at any time? The same is true with email and video conferencing. Even better, you can often directly measure the work output daily in knowledge jobs, whether lines of code or iterations of a graphic design. “Collaboration and information exchange” is often much less efficient in person, which is why many abhor meetings for the giant time suck they are. If it’s just seeing each other that’s important, there’s no salient aspect of that presence that’s not reproduced by video conference.

    All information activity will be over the wire soon. The fact that almost nobody is doing it yet just exposes them to being put out of business by those who do. Bloggers often write from home and don’t have the giant cost base that the NYT has with their expensive headquarters. That means they can cut their prices, which is why the NYT is going out of business.🙂 Whiteboard drawing has been simple and effective online for more than a decade. That almost nobody used such online whiteboards was more of a testament to their backward thinking than anything else.

    Mary, whether the constraints change or not is not in question. While your overall thrust about the information economy and accompanying decentralization is certainly correct, what I’m poking at is your claim that “the knowledge era does not mean the rise of services and consumption and the decline of production.” In terms of raw goods produced, of course production will not decline. But you can’t compare a spa treatment to a sofa anyway, so when you compare them in any meaningful way, ie the dollar amounts, your statement is dead wrong. For example, manufacturing has been dropping as a share of world GDP for at least 40 years. Manufacturing, or production or whatever you want to call the assembly of physical goods, has little value in the information era, which is why you and Mike need to stop clinging to the past, even in the limited form you two do so in these blog posts.

    • Maybe I have been seeing the wrong parts of business, but many managers want you “under the gun”, and certainly not in a cozy slacking-encouraging comfort. In most cubicle farms, the cubicles are laid out with the screen and the worker’s back facing the door, and that’s for a reason. There are better (legal or illegal) surveillance methods, but secret surveillance doesn’t drive home the point as well.

      If you are measuring creative “knowledge” jobs with industrial age ton-metrics like lines of code or iterations of churn, god help you. You can measure standard processes like that (number of data records entered or invoices reviewed per hour etc.) but not creative work, where the problem is not “performing” any volume of work, but effective work that goes in the right direction, and determining or judging what the/a right direction is is the very problem. I’m familiar with multi million line software, and the fact (or rather expert assessment) that too many lines of code with many arcane interdependencies are expended to do stuff not justifying such volume and complexity is considered one of the larger quality issues. Of course, it is a standard adage how people respond to such easy to goose metrics.

    • cm, it is precisely the types of environments you describe that won’t survive the coming competition online. If you are hiring a bunch of slackers and hoping to surveil them into getting work done, that’s a questionable business to begin with. With the coming competition on the internet, such dumb workplaces won’t be able to compete. Also, it’s funny how the college apologists often say that, “yes, what you learnt in college is useless in the workplace but employers are filtering for discipline,” but then those very same people will often turn around and say you have to keep constant tabs on the workers.🙂 Funny how the dumb rationalizations crumble so easily.

      Ah, but nobody said you’d measure creative work using the metrics I gave. I simply pointed out that you can check activity by remotely checking lines of code and file iterations, as opposed to going to a worker’s cubicle everyday and rifling through his papers, only possible because everything is already online now. Obviously if a dumb manager uses lines of code as a measurement for anything much more than daily activity, you are doomed to the bloated codebases you describe. But such degenerate cases are neither here nor there, the point is that surveillance is easy to do even for telecommuters.

      • Those are social, not technical, problems, and I don’t expect the internet to solve them, at best recast them in different form. And I’m certainly not going to argue with you about what the future will bring.

        I will not hesitate to admit that my experience and outlook may be heavily colored by big-product environments. In such environments, and also in many smaller ones, there is an additional concern that I haven’t mentioned, which is confidentiality and trade secret protection. Most places don’t have the kind of surveillance to really protect themselves against a determined adversary, but it is still a big deal and a big minus for outsourcing, in terms of labor as well as IT infrastructure. In my opinion many players who readily go (external) “cloud” and ASP (now called SaaS), outside of strictly regulated domains, don’t know what they are getting into.

        We discussed your paradigm of online collaboration on larger projects already some time ago. I think I’m getting your point, but I can simply not imagine how this can realistically happen. But as always time will show, certainly I’m riding a dinosaur if you are right.

  6. Back to Mary (and Michael’s) original point. In the knowledge intensive production system, the emphasis shifts away from the creation and delivery of relatively standardized goods and services (what we now call “production”) to a process of solving customer needs. Thus, we buy “home security” rather than an alarm. The process of what we used to call “production” continent but both that process and the ultimate process of delivering the final output to the customer are infused with more knowledge. Knowledge in the form of a better “product” and knowledge about the customers ultimate need. Thus the boundaries between goods production and services blur.
    Apple is the perfect example. What do they really sell. Not just a piece of hardware but a platform for various activities and a strong customer experience.

    • “solving customer needs”

      This *is* pretty much the definition of services. Of course, even with the “products” paradigm, your product better address a customer need (in actuality or just by way of suitable marketing). As opposed to products, services, in particular service subscriptions, have the property of generating sustained cash flow. In the case of the Apple platform you mention, that’s mediated through services (Apple’s services or third party apps from which Apple takes a cut to begin with, and where you presumably either have service charges or pay by exposure to advertisement).

  7. Hello there! I know this is kinda off topic however , I’d figured I’d
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Trackbacks

  1. […] The Post-Industrial Economy. Ridiculous phrase for a concept I really care about. Bottom line: people will have ever greater […]

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  6. IPAS video review

    The Post-Industrial Production Economy – Mandel on Innovation and Growth

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