Transformation in economics refers to a long-term change in dominant economic activity in terms of prevailing relative engagement or employment of able individuals.
Human economic systems undergo a number of deviations and departures from the "normal" state, trend or development. Among them are Disturbance (short-term disruption, temporary disorder), Perturbation (persistent or repeated divergence, predicament, decline or crisis), Deformation (damage, regime change, loss of self-sustainability, distortion), Transformation (long-term change, restructuring, conversion, new “normal”) and Renewal (rebirth, transmutation, corso-ricorso, renaissance, new beginning).
Transformation is a unidirectional and irreversible change in dominant human economic activity (economic sector). Such change is driven by slower or faster continuous improvement in sector productivity growth rate. Productivity growth itself is fueled by advances in technology, inflow of useful innovations, accumulated practical knowledge and experience, levels of education, viability of institutions, quality of decision making and organized human effort. Individual sector transformations are the outcomes of human socio-economic evolution.
Human economic activity has so far undergone at least two fundamental transformations, as the leading sector has changed:
From nomadic hunting and gathering (H/G) to agriculture (A) From agriculture (A) to industry (I)
Beyond industry there is no clear pattern now. Some may argue that service sectors (particularly finance) have eclipsed industry, but the evidence is inconclusive and industrial productivity growth remains the main driver of overall economic growth in most national economies.
This evolution naturally proceeds from securing necessary food, through producing useful things, to providing helpful services, both private and public. Accelerating productivity growth rates speed up the transformations, from millennia, through centuries, to decades of the recent era. It is this acceleration which makes transformation relevant economic category of today, more fundamental in its impact than any recession, crisis or depression. The evolution of four forms of capital (Indicated in Fig. 1) accompanies all economic transformations.
Transformation is quite different from accompanying cyclical recessions and crises, despite the similarity of manifested phenomena (unemployment, technology shifts, socio-political discontent, bankruptcies, etc.). However, the tools and interventions used to combat crisis are clearly ineffective for coping with non-cyclical transformations. The problem is whether we face a mere crisis or a fundamental transformation (globalization→relocalization).
Four key forms of capital
Fig. 1 refers to the four transformations through the parallel (and overlapping) evolution of four forms of capital: Natural→Built→Human→Social. These evolved forms of capital present a minimal complex of sustainability and self-sustainability of pre-human and human systems.
Natural capital (N). The nature-produced, renewed and reproduced “resources” of land, water, air, raw materials, biomass and organisms. Natural capital is subject to both renewable and non-renewable depletion, degradation, cultivation, recycling and reuse.
Built capital (B). The man-made physical assets of infrastructures, technologies, buildings and means of transportation. This is the manufactured “hardware” of nations. This national hardware must be continually maintained, renewed and modernized to assure its continued productivity, efficiency and effectiveness.
Human capital (H). The continued investment in people's skills, knowledge, education, health & nutrition, abilities, motivation and effort. This is the “software” and “brainware” of a nation; most important form of capital for developing nations.
Social capital (S). The enabling infrastructure of institutions, civic communities, cultural and national cohesion, collective and family values, trust, traditions, respect and the sense of belonging. This is the voluntary, spontaneous “social order” which cannot be engineered, but its self-production (autopoiesis) can be nurtured, supported and cultivated.
Parallelism of crises and transformations The triggers that induce the catharsis of a crisis often coincide with and are undistinguishable from the triggers launching qualitative transformations of the economy, business and society at large. While crises are cyclical recessions or slowdowns within the same paradigm, transformation represents a paradigmatic change in the way of doing business: moving towards new standards and quality, in a unique and non-recursive way. Most developed and mature economies of the world (USA, Japan, Western Europe) are undergoing long-term transformation towards a “new normal” of doing business, state governance and ways of life. Cyclical crisis is a parallel, accompanying phenomenon, subject to different causes, special rules and separate dynamics.
Milan Zeleny cautions that confounding crisis and transformation as one phenomenon brings forth the confusion, inconsistency and guessing. While many changes in the market system are cyclical, there are also evolutionary changes which are unidirectional and qualitatively transformational. The transformations of the US economy from agricultural to industrial, or from industrial to services, were not crises, although there were cyclical crises along the way. Transformational “losses” cannot be recovered or regained by definition. Not understanding that is at the core of wasteful spending of rigidly hopeless governmental interventions. Barry Bosworth of the Brookings Institution confirms: “The assumption has always been that the U.S. economy will gain back what was lost in a recession. Academics are coming to the realization that this time is different and that those losses appear permanent and cannot be regained.” In transformations there are no “losses”. only changes and transitions to a new economic order.
Underlying pattern of recessions
When comparing major US recessions since 1980, as in Fig. 2, it is clear that they have been getting deeper and longer in terms of the recovery of initial employment level. Only the first is classical V shape, there are several W, U and finally L shapes. There clearly is an underlying causal phenomenon which is getting stronger and more persistent over time. Such underlying causation is of interest, as it may signal the prelude and gathering of forces of another emerging transformation.
Looking back, even the Great Depression of the 1930s was not just a crisis, but a long-term transformation from the pre-war industrial economy to the post-war service economy in the U.S. However, in the early 1980s, the service sector had started slowing down its employment absorption and growth potential, ultimately leading to the jobless economy of 2011. No such comparisons with the 1930s are useful: one can compare recessions but not transformations. Industrial economy of 1930s and the post-service economy of 2000s are two different “animals” in two different contexts. It is still not clear what kind of transformation is emerging and eventually replaces the service and public sector economy.
The unrecognized confluence of crisis and transformation, and the inability to separate them, lies at the core of old tools (keynesianism, monetarism) not working properly. The tools for adapting successfully to paradigmatic transformation have not been developed. An example of a paradigmatic transformation would be the shift from geocentric to heliocentric view of our world. Within both views there can be any number of crises, cyclical failures of old and searches for new theories and practices. But there was only one transformation, from geocentric to heliocentric, and there was nothing cyclical about it. It was resisted with all the might of the mighty: remember Galilei and Bruno. While crises are cyclical corrections and adjustments, transformations are evolutionary shifts or even revolutions (industrial, computer) towards new and different levels of existence.
The most important indicator is the arena of employment, especially in the US, providing clues to transformational qualities of the current global crisis phenomena. Persistent rates of unemployment, combined with falling workforce participation rate indicate that also this crisis is intertwined with underlying transformation and so it displays atypical dynamics and unusual persistence, presenting new challenges to conventional economic thought, business practices and government interventional “toolbox”. Sector evolution and dynamics is the key to explaining these phenomena.
Sector dynamics Economic sectors evolve (in terms of employment levels), albeit through fluctuations, in one general direction (along so called S-curve): they emerge, expand, plateau, contract and exit—just like any self-organizing system or living organism. We are naturally interested in the percentage of total workforce employed in a given sector. The dynamics of this percentage provides clues to where and when are the new jobs generated and old ones abandoned.
Sector's percentage share of employment evolves in dependency on sector's productivity growth rate. Agriculture has emerged and virtually disappeared as a source of net employment. Today, only ½ percent or so of total workforce is employed in US agriculture – the most productive sector of the economy. Manufacturing had emerged, peaked and contracted. Services have emerged and started contracting – all due to incessant, unavoidable and desirable productivity growth rates.
The U.S. absolute manufacturing output has more than tripled over the past 60 years. Because of the productivity growth rates, these goods were produced by ever decreasing number of people. While in 1980-2012 total economic output per hour worked increased 85 percent, in manufacturing output per hour skyrocketed by 189 percent. The number of employees in manufacturing was about a third of total workforce in 1953, about a fifth in 1980, and about a tenth (12 million) in 2012, This decline is now accelerating because of the high-tech automation and robotization.
A public sector of employment has been emerging: government, welfare and unemployment, based on tax-financed consumption rather than added value production, sheltered from market forces, producing public services. (Observe that the unemployed are temporary “employees” of the government, as long as they receive payments.) Creating employment in GWU sector is achievable at the expense of productive sectors, i.e. only at the risk of major debt accumulation, in a non-lasting way and with low added value. Sustaining employment growth in such a sector is severely limited by the growing debt financing.
The Four Basic Sectors The Four Basic Sectors refers to the current stage of sector evolution, in the sequence of four undergone transformations, namely agriculture, industry, services and GWU (government, welfare and unemployment)
The US economy has become among the most mature (with Japan and Western Europe) in terms of its sector evolution. It has entered the stage – perhaps as the first economy ever – of declining employment share in both the service and government sectors.