How industries are created

Australia has, officially, 465 classes of industry that generate our GDP, which this fiscal year is expected to be around $1.38 trillion in output of goods and services. IBISWorld creates a number of “themed” industries, such as tourism, and singles out some major product groups within industry classes, bringing the number of reports closer to 500; but without adding to this output figure. They are there for customer benefit reasons.

However, the real economic output is bigger than the official figure since we do not yet count household work in the economy; although our ABS does estimate it from time to time. This DIY component can be valued at $566 billion in fiscal 2010, including cleaning, maintenance, child minding, meal preparation and much more. This means the real output is closer to $1.95 trillion. Interestingly we have already outsourced plenty of activities that were DIY at the end of the Industrial Age in 1964 – in fact, $320 billion in household activities in fiscal 2010. So, just over a third (36%) of household activities at that time found their way into the official economy via do-it-for-me (DIFM) services, creating new industries in the process.

And therein lies the clue as to how almost all of our industries are created: outsourcing. It is a bit like the universe. The stars and planets weren’t always there — until a lot of evolution after the Big Bang. And neither were our industries always with us. Indeed, we had only a handful in 1788 with European settlement such as public building construction, water supply, mining (stone and coal), a prison, government administration and defence (the Red Coats), some agriculture and that was about it.

By Federation in 1901, 113 years later, we were up to about 180 classes of industries and now 465 early in the 21st century.

These industries were born out of outsourcing for the most part. We would not have the dozens of industries in agriculture and mining if families were still self-sufficient at milking cows; growing grains, fruit and vegetables (horticulture); chopping down trees (forestry) to erect a house; and collecting water (a utility today). The Agrarian Age was a period when agriculture, mining, finance (banking) and trading (wholesaling and retailing) were outsourced from households to become DIFM industries.

The Industrial Age from the mid-1860s in Australia saw the addition of the outsourcing of manufacturing, more and more construction and utilities (water, sewerage and eventually gas and electricity, which replaced candles and lamps and gave us power).

The New Age (1965 to the late 2040s) is seeing the outsourcing of services both from the home and the business world. This latest outsourcing is already creating over a trillion dollars in revenue of the nation’s $3.8 trillion, and over a third of our GDP in the process — remembering that there is a lot of double-counting down the input-output chains of goods and services that means the nation’s revenues are almost three times the value of final goods and services produced for consumption or investment.

Today’s 465 classes of industry are aggregated into 19 divisions as shown in the first exhibit.

In turn, these 19 industry divisions can be aggregated into five sectors as highlighted by the five colours in the same exhibit. These sectors are titled primary, secondary, tertiary, quaternary and quinary.

Agriculture and mining are primary as they come directly from the earth.

Manufacturing, utilities and construction are secondary as they are value-added earth products. Wholesaling, retailing and transport are tertiary as they are the distributors of value-added earth products. Communications, finance, business services, public administration and education are quaternary, meaning they are outsourced information and/or finance-intensive service industries. And finally, the quinary sector consists of recently outsourced household activities such as health, entertainment, hospitality and other services (including cleaning, gardening and childminding).

Interestingly, all five sectors have been around for thousands of years since humans abandoned a hunting and gathering existence and settled into communities and towns.?But all five sectors have added new industries over time, and continue to do so — even in agriculture and mining. There are now hundreds of classes of industry housed within major divisions (shown in the first exhibit) and growing. Clearly, Australia was one of the last nations to stop depending on one class of industry (hunting and gathering) and begin the above progress after European settlement in the late 18th century.

What happens over time is that the newly outsourced activities – from the home and, in this New Age, also from businesses – gradually account for a bigger and bigger share of the nation’s output (GDP) until such outsourcing nears completion after many decades and economies of scale emerge to actually reduce the share of GDP as newly outsourced activities come into the economy.

However, the actual volumes of the older goods and services continue to grow due to population growth, although free trade these days mean that many of the goods and services can be imported.

These patterns are clear in the second exhibit, tracing the evolution of our economy over two centuries and now into a third.

The rapid growth of the quaternary sector is, naturally, more the result of outsourcing by businesses, as seen in the list below.

To household outsourcing and the above business outsourcing can be added the outsourcing by overseas countries to us (which become our exports).

But not all industries are the result of outsourcing. Each new age emerges coincidentally with new utilities that become ubiquitous to businesses, government and households alike.

The indispensable utility sector for the Industrial Age consisted of electricity, gas, water and telephony. The New Age utility sector (1965 onwards) consists of information and communications technology.

Other new systems and technologies also emerge, the result of inventors and innovation, but they tend to be industry-specific as distinct from pervasive across all industries. In the Industrial Age, they included production line systems, chemicals and more. In our New Age, they include self-service (in retailing), biotechnology and nanotechnology.

So thank goodness for outsourcing and innovation. They help raise our standard of living and make life more comfortable in the process.

Phil Ruthven is the chairman of IBISWorld.