From Hobson's Choice
A structure within an economy that imposes hierarchy, structure, and continuity to that economy's institutions. The industrial system incorporates rules and customs that provide further guidance to economic actors, besides the principles of competitive utility maximization.
The term "industrial system" has ceased to be used very frequently.
Industrial System versus Economy
While an economy represents the space in which transactions and production occur, economic theory seeks generic, or isotropic, explanations of all observed phenomena. At the aggregate, this makes sense—economies do consist of vast numbers of surprisingly flexible actors—as one proceeds downward in scope of observation, this has to break down. Certainly economic laws are not very useful in explaining the behavior of a particular individual, because that particular person has unique motivations, conceptions of reality, morals, and circumstances. Given the difficulty of economic theories actually making useful predictions, it seems reasonable to claim that this breakdown occurs very high up. A nation's economy is an arbitrarily-designated space in which economic transactions take place, which comprises parts of several industrial systems. If the nation is very large, or politically very isolated, or technologically very backward, then those industrial systems may be wholly contained inside the nation's official boundaries.
We usually think of industry as either the business of manufacturing and construction; an industrial system, however, is a process of converting available factors of production into goods, and using the goods to obtain further factors of production. "Using the goods to obtain further factors of production" may include selling the goods to a population of grateful customers for money, but it may also include pointing the "goods" at fearful natives and extorting factors of production from them; or combinations of the two (selling extorted goods for money to buy goods like rifles and gunboats).
The need of industrial systems to convert outputs to future inputs has always been a serious concern, even with the widespread use of money. Partly this is because the industrial system may have to interact with other industrial systems, sometimes in predatory ways. Industrial systems usually involve numerous firms, of varying sizes, which depend on each other and which have distinctive political interests. For example, in the antebellum era of US history, there was the South, which favored low tariffs and free trade, and the North, which favored high tariffs for infant industry. The rival demands of these two industrial systems played a significant role in the outbreak of civil war. The industrial system of oil and gas, for example, favors urban sprawl and drilling in federal lands. Manufacturing interests do not; they require large compact cities with heavy spending on infrastructure: manufacturing is heavily reliant on network spillovers and easy transport. In Europe or Northeast Asia, where manufacturing interests are powerful, there is a major public sector role in the economy.
Characteristics of Industrial Systems
Since World War II, usage of the term "industrial system" has largely faded from use. In its place, economists and business writers have tended to assume that regional, sectoral, national, or historic variations in economic phenomena could be explained by traits unique to that particular region, sector, nation, or time period. Also, it is standard to use national statistics for a sector, or of the whole economy, in order to develop stylized facts about economic activity; this, despite the fact that economies are open, and subject to capital flows, special market relationships, and so on.
This is possibly inadequate, since the behavior of different industrial systems is likely to be only loosely correlated with each other. Another problem is that, supposing an industrial system embarks on a discontinuous technical change that involves finance capital transfer to (say) a small, underdeveloped statelet, then the statelet will experience a phase of economic growth which will not have been caused by, or explainable by, local economic conditions. It's impossible to explain the magnitude of Hong Kong's economic boom (1949-1997) in terms of economic theory; even if one focuses on its low taxes, limited regulations, and clean government (things which are not policies, but the results of very successful policies), one is stuck with the problem of estimating some correlation for the purpose of making a prediction. Simply saying, "tax cuts and business deregulation will turn water into wine," even if true, is still not useful (How much wine? When?).
An industrial system includes many firms in different business sectors; these firms have mutually competitive management, or competing interests, but they have a common regime of rules, technology, capital markets and inter-business relations; in some cases, they will be members of a cartel. Interdependent relationships bind them to a common (i.e., more or less correlated) fate. The industrial system's business management will tend to have a peculiar ideology, which is frequently of great historical importance. The constituent firms will have multiple trade associations, which serve to send signals, allowing a common front against customers.
Many characteristics of the industrial system are determined by prevailing technology. However, the concept of the industrial system is not related to the theory of path dependency, under which prior investment in technology generates rents that "deflect" subsequent investment away from optimal allocations.
Agency and the Industrial System
Industrial systems are guided by the laws of economics, of course, but these "laws" are only part of the total picture. And in most cases, economists play dumb about what those laws are. For example, a firm's managers are not interested in maximizing profit, unless they own the firm themselves. Even then, they probably aren't interested in maximizing profit. Many of the clues that a textbook manager would have to indicate whether to expand or shrink are not available anyway. Bidding prices upward to get marginal revenues to equal marginal costs may only get customers to resent you. And anyway, the managers may not find it useful to know that they're supposed to increase output until MP = MC: increase output of what? A more reasonable expectation is that managers are trying to maximize rents they can expropriate from the firm. They need to convince the board of directors that they're good managers, not maximize profits. If they can do both, that's nice, but expecting someone to perform a service for which they are not compensated is bad economics.
The fact that managers do not necessary share the interests of those for whom they manage is called "the agency problem," and comes up in the New Testament (Luke 16:1-8). Now, Jesus clearly expected his audience to understand the agency problem. Economists usually make some mumbling acknowledgment that this exists in the corporation, but they punish you with excommunication (or really huge dollops of utter nonsense) if you make too much of it.
But there are consequences of this sort of nonsense. Economics in its current state is not merely in the business of proclaiming the infallibility of the free market, but insisting that the free market is whatever the nation's cadres of industrial managers want. For decades this shilling has become so extreme it has lost any shred of academic merit. We are drifting into a state of affairs where industrial managers have command over wages, prices, and regulatory climate; where well over 3% annually of GDP is spent on shaping and manipulating public tastes (suggesting that managers have a great faith in the efficacy of advertising); and where the military power of the state has become a handmaiden of the industrial system we have. This is not unlike the situation that prevailed in the USSR. And yet, the same economists who ferociously defend this as the apex of free market democracy, will erupt in a towering rage at any regulation in the public interest, with the most extravagant red-baiting rhetoric.
By acknowledging the existence of industrial systems, we can begin to at least discuss the possibility (I would say, the blatantly obvious reality) that our economic space is occupied by command and control. It is time we realized this is command and control by agglomerations of firms known as industrial systems, that these industrial systems have rival desires with respect to each other, and that they are the holders of the whip hand.
- Clarence Ayres, "The Theory of Economic Progress" (1996-internet edition), originally written 1962;
- Bo Carlsson, ed., Industrial Dynamics: Technological, Organizational, and Structural Changes Case Western Reserve University (1989)
- John A Hobson, The Industrial System: An Inquiry Into Earned and Unearned Income, Longmans, Green, and Co. (1909)
- John A Hobson, The Evolution of Modern Capitalism, C. Scribner's Sons (1901)
- Frank H. Knight, Risk, Uncertainty, and Profit (complete text online), 1921
- William Lazonick, Business Organization and the Myth of the Market Economy, Cambridge University Press (1991)
James R MacLean (10:44, 12 September 2007 (PDT))