Scale and the origins of structural change

Structural change involves a broad set of trends: (i) sectoral reallocations, (ii) rich movements of productive activities between home and market, and (iii) an increase in the scale of productive units. After extending these facts, we develop a model to explain them within a unified framework. The crucial distinction between manufacturing, services, and home production is the scale of the productive unit. Scale technologies give rise to industrialization and the marketization of previously home produced activities. The rise of mass consumption leads to an expansion of manufacturing, but a reversal of the marketization process for service industries. Finally, the later growth in the scale of services leads to a decline in industry and a rise in services. ∗We have benefited from helpful comments from Gary Becker, Patrick Kehoe, Virgiliu Midrigan, Ellen McGrattan, Enrique Martinez-Garcia, Joel Mokyr, Chiaki Moriguchi, Ed Prescott, Richard Rogerson and participants in presentations at the AEA 2007 meetings, Northwestern University, the FRB of Chicago, the FRB of Minneapolis, the NBER Summer Institure, the University of Wisconsin, and the University of Chicago. †Northwestern University, [email protected] ‡Ohio State University, [email protected]