CityReads│Replacing Three-Sector with Four-Sector Categorization

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Replacing Three-Sector with Four-Sector Categorization

An alternative framework replacing the three-sector theory: Agroextractive, manufacturing, urbanization and control.

Alex Schafran, Conor McDonald, Ernesto Lopez Morales, Nihan Akyelken &Michele Acuto (2018): Replacing the services sector and three-sector theory: urbanization and control as economic sectors, Regional Studies, DOI: 10.1080/00343404.2018.1464136.

The three-sector theory established the basic division by which economic structure is still largely understood. The primary sector is generally considered to include agriculture and mining, extractive industries connected to the natural environment. The secondary sector is generally considered to be various forms of manufacturing and activities that produce‘goods’ from products of the primary sector. The tertiary or services sector includes everything from banking and legal services to retail, hospitality and waste disposal. The World Bank and the Central Intelligence Agency (CIA) databases, common access points for international economic data, are generally rendered in three-sector fashion.

Almost 80 years have passed since the notion of the ‘services’ sector was proposed as a way of understanding economic activity beyond agriculture, mining and manufacturing. Virtually any economic activity not involved in agriculture, mining or manufacturing can be considered a service. Yet how do we account for the building and rebuilding of cities? Is construction manufacturing or a service? What about transportation? Is the buying and selling of property a service? The service sector would include banking and hamburger-cooking in the same economic sector. While perhaps equally vital to human happiness, are they truly part of the same broad economic sector? Perhaps most critically, is the notion of the service sector helpful under current economic conditions?

A newly published paper on Regional Studies, Replacing the services sector and three-sector theory: urbanization and control as economic sectors, argues that the notion of the service sector, while perhaps useful in the post-war era, is no longer suitable for a 21st-century urbanized world. Building on a long history of frustration with three-sector theory in general and the services sector in particular, this paper develops and proposes an alternative framework for envisioning the economy as a whole through economic sectors. We largely leave as is the extractive and manufacturing sectors, although we break from some economists who would place construction in the manufacturing sector. Instead, inspired by Henri Lefebvre’s notion of the ‘urban revolution’, we develop a new sector based on the economies and industries of urbanization. By this we mean the industries that fix or move materials, both tangible and intangible, to form human settlements of any size or scale: property (real estate), construction and the production of the built environment, core systems of social reproduction such as schools or healthcare, major systems of consumption such as retailing and wholesaling, and the systems that move goods and people. What remains is primarily finance, law and government, a sector which we refer to as the ‘control sector’.

It is a holistic vision of economic activity based largely on how the economy operates materially–natural resources are extracted by one sector, manufactured by another, fixed and moved and distributed by another, and controlled and regulated by yet another sector. The framework offers urban and regional studies a fresh perspective into the economic role of urbanization in the contemporary moment, helping to envision the centrality of the economies of urbanization, not simply the economics of urbanization.

The history of three-sector theory

The concept of economic sectors dates back at least to the pioneering work of William Petty in 17th-century Britain. It began a tradition of what Kenessey calls the ‘sectoral-structural’ approach to economics, one which was particularly influential on the early political economies of Adam Smith, David Ricardo, Karl Marx and James Mill. It was the epitome of historical materialism, asking how the material production of some sector of the economy related to the production of another.

It was the broader definition used by Colin Clark in his treatise on The Conditions of Economic Progress (1940) that became an established component of the economic lexicon. In it Clark describes a tripartite economic structure consisting of primary, secondary and tertiary economic activities. Primary activities are agricultural or extractive in nature and are limited by natural growth factors. Secondary activities are primarily composed of manufacturing and production activities and are limited by mechanical factors. Tertiary activities are service based and are dependent on, and limited by, human skill and expertise. Primary and secondary activities can be further distinguished from tertiary activities by the nature of their output, which is tangible in nature, whereas tertiary activities produce intangible outcomes.

Clark’s central thesis is that technological progress parallels a decline in primary and secondary activities and an increase in tertiary activities. Over time, the tertiary sector becomes the dominant economic sector within a nation. Structural change or transformation is, therefore, the reallocation of economic activity and capital across the primary, secondary and tertiary sectors. Clark’s work became part of a long tradition attempting to understand national economic growth through the lens of sectoral structures. The three-sector model has been widely, almost universally (and often uncritically) adopted as a basis for classifying, categorizing and monitoring economic progress at various spatial scales, despite the fact that no standard definition has ever taken hold.

One response to the limitations of the model was to extend it into a quaternary or quinary sector. the quaternary sector included finance, administration, communication, transport and commerce; quinary involved activities that required the refinement and extension of human capacities. this version of the ‘four-sector’ model never replaced the ‘three-sector’ version as the dominant paradigm.

A new four-sector approach: agroextractive, manufacturing, urbanization and control:

For clarity, and to avoid any implied hierarchy, we eschew the language of primary and secondary. We attempt to define these economies without using the term ‘services’, again for conceptual clarity and as a signal of the intent to break from prior understandings. This is a conceptualization of human economic activity that is not based on an arbitrary division between tangible or intangible goods, production processes or methods, nor based upon any specific moment in history or any geographical region, as it has been historically. It is not based on a supposed difference between goods and services. Instead, we base our sectoral divisions on how the economy works materially– we extract materials from the earth, we process them into widgets, we fix and move these widgets to form the nests in which we live, all the while having certain sectors which function to control or regulate these other three sectors.

Extractive sector: materials we pull from the earth, oceans and sky: energy, agriculture, mining, water supply.

Manufacturing sector: the formation of materials into widgets. This included mostly extracted materials but increasingly recycled materials and non-material materials, such as ideas. Unlike some definitions, it does not include construction manufacturing, but also some parts of recycling, computer programming, the arts, R&D etc.

Urbanization sector: the transformation of materials and widgets into the nests we inhabit (of any size or scale) through both fixing and movement: Fixing includes construction, real estate, retailing, entertainment and recreation, accommodation and food services, health, education, social services. Movement includes transportation, and wholesaling.

Control sector: the governance and control of all three other sectors: finance, accounting, law, government, certain civil society actors, other administration.

Rather than see this new framework as a demand to overhaul all renderings of national accounts data, what is needed instead is for agencies to provide more disaggregated data.

Charting the evolution of the French economy from 1959 by the four sectors as a percentage of the total economy.

Why replacing the service sector with urbanization and control?

Seeing urbanization as an economic sector offers potentially new approaches to the conundrum of urbanization without industrialization occurring in parts of the Global South and to the challenges of increasingly unequal urbanization everywhere. Separating the ‘urbanization sector’ from the ‘control sector’ offers a new lens onto the growing challenge of financialization and investor ownership of the core economies of urbanization, including infrastructure. Finally, our approach provides a new platform for the broader effort in economics to rethink what matters and to see core, foundational and social reproductive activities as a major part of our economy.

It can capture key historical and emerging differences between countries that urbanized on the back on manufacturing and those whose urbanization is linked to extractive industries or control industries. In 19th- and early 20th-century Europe and North America, industrialization drove the rapid expansion of urban areas. This brief historical window helped produce a series of problematic assumptions regarding the links between urbanization, industrialization and development. one fundamental problem of three-sector theory was that it was designed in a way that imagined economic development in historical stages. Increasingly, empirical changes in the North and the South shows that one will never find economic rules or laws for every economic system and every period of history.

In much of the Global South urbanization is decoupled from industrialization. The processes underway outside Europe and North America do not adhere to historical models of urbanization. State structures, local politics, cultural forms, relationships to colonialism – the grist of urbanization and economic change is vastly different, even if certain processes remain similar. As observed about major urbanizing regions in Asia and Africa,‘urbanization is something that seems increasingly to make itself’, a form of urbanization-driven urbanization.

In the Global North, the combination of deindustrialization and the growth of finance and technology clusters have similarly destabilized this relationship over the past half century, with widely divergent outcomes. Industrial restructuring has been linked to widespread abandonment and depopulation, rising housing prices, sprawl and gentrification. Scholarship has also begun to recognize that in nations such as the United States, urbanization in the form of suburbanization drove industrialization (‘urbanization-led industrialization’) by providing an unprecedented market for automobiles and consumer goods.

Decomposing the three-sector economy and combining different subsectors into the realm of the urbanization sector helps one to move away from production-centric measures to human-oriented well-being measures, in part because of the deep connection between the economies of urbanization and basic social reproduction. Seeing the economies of urbanization as a sector integral to economic structure can help ensure they are given greater political and scholarly attention. Too often, these vital economies are considered as secondary. They are often rendered as inputs into the ‘real economy’, whose purpose is not to house or move people, or to grow the specific economies of housing and transportation, but to spur the growth of some other sector by attracting investment, firms or certain types of people

The establishment of the control sector can potentially shed a light onto the size and scope of the financialization of housing and infrastructure, and to the related exploration of Harvey’s capital-switching hypothesis

Urbanization is arguably the most powerful economic force in the 21st century, not only because it produces growth or innovation but also because it has the largest number of participants and is central to our basic reproduction. More and more, people are engaged in the economies of building and provisioning the settlements we call home, and it is time these economies have greater visibility. This can only happen effectively if these economies are conceptualized within a holistic framework of economic structure, as part of a vision of the full human economy.

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