Baumol's disease and dematerialization of the economy

This paper argues that there is reason to be skeptical about the idea that the transition to a service economy will bring about dematerialization of production and consequent environmental improvement. This is because the shift to a service economy is an illusion in terms of real production, but is instead generated by the fall in the price of manufacturing goods relative to services, which is in turn caused by more rapid productivity growth in manufacturing than in services. This argument relies on the insights Baumol provided on the nature of the service economy and uses Swedish long-term data on relative sectoral development as an empirical illustration. On the other hand, the paper argues that there is reason to be cautiously optimistic that structural change may bring about a greening of growth, namely the changes in growth patterns sometimes labeled the third industrial revolution, which is connected to the emergence of microelectronics. Swedish CO2 emissions show a decline after 1970, which is mainly explained by a politically driven change in the mix of energy carriers, but is also related to the stabilization of energy consumption. This energy stabilization was caused by slow growth of the economy in conjunction with substantial declines in energy intensity within industrial sectors and an absence of relative growth of the heavy sectors, a growth that had marked the economy between 1870 and 1970. Microelectronics have contributed to permanently transforming the Swedish industrial sector in a lighter direction, reducing energy losses in heavy industries and stabilizing household energy consumption. So it appears as if there may be some environmental gains from this development that was initiated in the 1970s, but not from relatively more production in the service sector.