What If The Service Economy Never Became Dominant?

The Actual History

The transformation of advanced economies from manufacturing-centered to service-dominated represents one of the most significant economic shifts of the late 20th and early 21st centuries. This transition fundamentally reshaped the economic landscape of countries like the United States, United Kingdom, and much of Western Europe, altering everything from labor markets to urban geography.

In the United States, manufacturing employment peaked in 1979 at 19.4 million jobs (22% of the workforce). By 2023, that figure had fallen below 13 million, representing less than 8% of employment despite a much larger total workforce. Similar patterns occurred throughout the developed world—the UK saw manufacturing decline from 25% of GDP in 1970 to less than 10% by 2020. Meanwhile, service sectors grew dramatically, with healthcare, finance, information technology, and other service industries becoming the dominant employers and economic drivers.

This transformation was driven by multiple interconnected factors. Technological innovation automated many manufacturing processes, reducing labor requirements. Trade liberalization, particularly following the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO) establishment in 1995, enabled manufacturers to relocate production to regions with lower labor costs. China's economic reforms beginning in 1978 and its 2001 WTO accession accelerated this trend dramatically, turning the country into "the world's factory."

Concurrently, policy decisions in developed nations often prioritized financial sector growth and service industries. The UK under Margaret Thatcher deliberately pivoted toward financial services while allowing manufacturing to contract. In the U.S., the Federal Reserve's tight monetary policy under Paul Volcker in the early 1980s strengthened the dollar, making American exports less competitive and accelerating deindustrialization.

The rise of the service economy created winners and losers. Urban centers with concentrations of knowledge workers, financial institutions, and technological innovation flourished—New York, London, San Francisco, and other "global cities" prospered. Meanwhile, former manufacturing centers like Detroit, Sheffield, and the German Ruhr region faced significant economic and social challenges. Educational attainment increasingly determined economic prospects, with college-educated workers gravitating toward high-value service sector jobs while those without advanced education faced diminishing opportunities.

By 2025, services account for over 75% of GDP in most advanced economies. Manufacturing, while still economically significant, employs relatively few workers compared to historical levels. The global production system has become highly integrated, with complex supply chains spanning multiple countries. This service-dominant economic structure has produced record corporate profits and innovation but also contributed to inequality, regional disparities, and heightened economic insecurity for many workers in formerly manufacturing-intensive regions.

The COVID-19 pandemic temporarily disrupted these trends, exposing vulnerabilities in global supply chains and prompting renewed interest in domestic manufacturing capacity, particularly for essential goods. However, the fundamental shift toward service-sector dominance has remained intact, with digitalization and automation continuing to reshape both manufacturing and service industries.

The Point of Divergence

What if the service economy never became dominant? In this alternate timeline, we explore a scenario where manufacturing retained its central role in advanced economies, fundamentally altering the trajectory of economic development over the past five decades.

The point of divergence centers on the critical period of the late 1970s and early 1980s when several key policy choices set the stage for accelerated deindustrialization. In our alternate timeline, these decisions unfolded differently:

The first divergence occurred in U.S. monetary policy. Rather than Paul Volcker's aggressive interest rate hikes that reached nearly 20% in the early 1980s to combat inflation, the Federal Reserve pursued a more moderate approach. While still addressing inflation, this alternate policy avoided the extreme dollar appreciation that devastated American manufacturing exports and made offshoring increasingly attractive for corporations.

Simultaneously, trade liberalization followed a different path. Instead of the comprehensive free trade model that accelerated after the Cold War, Western nations maintained more strategic and selective trade policies. The GATT Uruguay Round (1986-1994) in this timeline resulted in a more measured agreement that included stronger labor and environmental standards, offering fewer incentives for manufacturing relocation purely based on regulatory arbitrage.

A third crucial divergence emerged in how governments approached industrial policy. Rather than the market-fundamentalist approach that gained dominance in the U.S. and UK, this timeline saw the continuation and refinement of strategic industrial planning. Taking inspiration from Japan and Germany's more coordinated market economies, countries like the United States developed comprehensive industrial strategies that preserved manufacturing capacity through targeted investments, worker training programs, and strategic trade policies.

These alternate approaches might have emerged through different political outcomes—perhaps a more moderate Reagan administration that balanced free-market reforms with industrial planning, or a Thatcher government that, facing stronger opposition, preserved more elements of the UK's manufacturing base rather than aggressively transitioning to financial services. Alternatively, the Japanese economic model might have proven more resilient in this timeline, continuing to demonstrate the viability of state-guided industrial development and influencing Western economic thinking.

The oil shocks of the 1970s could also have played differently, perhaps driving faster development of alternative energy sources that created new manufacturing opportunities rather than accelerating service-sector growth. This confluence of different policy choices, political outcomes, and economic responses created a fundamentally different trajectory for global economic development—one where manufacturing remained the cornerstone of advanced economies.

Immediate Aftermath

Restructured Manufacturing Rather Than Decline

The immediate consequences of this alternate path became apparent throughout the 1980s as advanced economies experienced manufacturing restructuring rather than decline. While some labor-intensive production still migrated to developing nations, the process occurred at a much slower pace and more selectively.

In the United States, manufacturing employment stabilized around 20 million jobs rather than beginning its steep decline. The difference was particularly noticeable in sectors like electronics, textiles, and automotive production. Silicon Valley, rather than focusing almost exclusively on software and services, maintained significant domestic hardware manufacturing capacity. The electronics industry retained a stronger presence in regions like New England, Southern California, and the Midwest.

The auto industry's transformation looked markedly different. While Japanese competition still drove efficiency improvements in American and European automaking, much more production remained domestic. Cities like Detroit, Flint, and Toledo experienced difficult transitions but avoided the catastrophic collapse seen in our timeline. By 1990, a more balanced auto sector emerged, with American manufacturers having modernized their facilities and processes while maintaining much of their workforce.

Different Regional Development Patterns

The geography of economic prosperity followed a dramatically different pattern. Without the extreme concentration of growth in financial and technology service hubs, economic development remained more evenly distributed across manufacturing regions.

The American Midwest retained its economic vitality, with cities like Cleveland, Pittsburgh, and Cincinnati successfully transitioning to more advanced manufacturing rather than facing decades of population loss and economic struggle. The same pattern held across the industrial regions of Northern England, the German Ruhr, and northern France.

Urban revitalization took a different form. Rather than the service-economy model of gentrification centered around knowledge workers in downtown areas, cities invested in modernizing industrial districts and connecting them better to residential communities. Urban planning prioritized maintaining affordable housing for industrial workers alongside improved transportation networks.

Altered Corporate Strategies

Major corporations pursued fundamentally different strategies in this timeline. Instead of the massive wave of offshoring and outsourcing that characterized the 1990s, companies focused more on automation, process improvements, and developing higher-value manufacturing capacity domestically.

IBM, for instance, never abandoned hardware to focus predominantly on services as it did in our timeline. Instead, it integrated advanced services with continued hardware manufacturing, maintaining a more balanced business model. Similarly, General Electric didn't pivot toward financial services (GE Capital) to the same degree, instead focusing on advancing its core industrial businesses.

Corporate governance evolved differently as well. The shareholder value revolution still occurred but was tempered by stronger labor institutions and industrial policies that encouraged longer-term investment horizons. This resulted in less aggressive downsizing and more emphasis on worker training and retention.

Different Financial Sector Development

The financial sector's evolution took a markedly different course. Without manufacturing hollowing out, financial services grew more moderately and maintained closer connections to productive enterprises. Investment patterns prioritized capital improvements in productive capacity rather than the explosion of complex financial instruments seen in our timeline.

Wall Street still innovated, but many financial innovations focused on funding manufacturing modernization rather than creating ever more sophisticated trading mechanisms. Venture capital still emerged as a significant force, but maintained stronger connections to hardware and physical product development rather than shifting overwhelmingly toward software and services.

By the early 1990s, the U.S. trade deficit with countries like Japan and emerging Asian economies existed but remained much smaller than in our timeline. The persistent global imbalances where some countries maintained large surpluses while others ran deficits were less pronounced, creating a more balanced international trading system.

Education and Training Systems

Educational systems evolved differently to support this manufacturing-centered economy. Rather than the growing emphasis on four-year university degrees as the primary path to prosperity, robust technical education and apprenticeship systems gained prominence.

Germany's dual education system, combining classroom learning with workplace training, became more influential globally. The United States developed stronger vocational education pathways that carried high social status and led to well-compensated careers. Community colleges expanded their advanced manufacturing programs, creating stronger bridges between education and industry.

By the mid-1990s, the foundations were firmly established for a fundamentally different global economic order—one where manufacturing remained central to advanced economies, shaping everything from urban development to education systems, corporate strategies, and international trade relations.

Long-term Impact

Alternative Globalization Model

By the 2000s, this manufacturing-centered economy produced a distinctly different form of globalization. Rather than extensive offshoring and global supply chains optimized primarily for cost, international trade centered more on regional production networks and strategic specialization.

The integration of China and other developing economies into the global system proceeded more gradually. Instead of becoming the world's factory, China developed a more balanced economy earlier, with domestic consumption playing a larger role. Manufacturing capacity spread more evenly across regions, with Southeast Asia, Latin America, and eventually Africa developing industrial bases that served regional markets rather than concentrating production for global export.

Trade agreements evolved to emphasize balanced development rather than simply reducing barriers. The alternative to the World Trade Organization that emerged in this timeline included stronger provisions for labor standards, environmental protection, and technology transfer. Rather than the hyperglobalization of our timeline, a more managed form of international economic integration emerged.

This altered pattern of globalization resulted in fewer extreme imbalances in trade. The massive U.S.-China trade deficit never materialized to the same degree, and the global financial system faced fewer distortions from countries recycling large trade surpluses into U.S. debt markets.

Technological Development Pathway

The trajectory of technological innovation followed a markedly different course in this manufacturing-centered world. Rather than the overwhelming focus on information technology, software, and digital services that characterized our timeline's early 21st century, innovation remained more balanced across physical and digital domains.

Advanced manufacturing technologies developed earlier and more extensively. Additive manufacturing (3D printing) received greater investment in the 1990s and became mainstream production technology by the 2010s. Robotics advanced on a different trajectory, with greater emphasis on collaborative robots designed to work alongside human workers rather than replace them entirely.

The development of renewable energy technologies accelerated compared to our timeline. With manufacturing capacity and engineering talent concentrated in advanced industrial economies, solar panel and wind turbine production scaled up more rapidly in North America and Europe rather than shifting predominantly to China. By 2025, the green industrial sector had become a cornerstone of Western manufacturing, creating millions of jobs.

The development of consumer technology followed a different path as well. While digital technologies still advanced rapidly, the hardware-software integration remained tighter, with more electronic products manufactured closer to their design centers. Apple, in this timeline, maintained significant U.S. manufacturing operations rather than relying almost exclusively on contract manufacturing in Asia.

Labor Markets and Income Distribution

The preservation of manufacturing had profound effects on labor markets and income distribution. The hollowing out of middle-skill, middle-income jobs that characterized our timeline occurred to a much lesser degree. Manufacturing continued to provide pathways to the middle class for workers without four-year college degrees.

Labor unions maintained greater relevance and power, as manufacturing workplaces remained more conducive to collective bargaining than the dispersed service sector. Union membership declined from its mid-20th century peak but stabilized at much higher levels than in our timeline—perhaps 20-25% of the private sector workforce rather than falling below 7%.

Income inequality, while still increasing somewhat due to technological change and globalization, remained significantly less extreme. The ratio between CEO and average worker pay grew but remained closer to 40:1 rather than exceeding 300:1 as in our timeline. The middle class retained greater economic security, with more households able to achieve conventional milestones like homeownership and retirement savings on single incomes.

Regional inequality also developed differently. Without the extreme concentration of economic activity in a few superstar cities, prosperity remained more evenly distributed geographically. The extreme divergence between thriving coastal hubs and struggling interior regions never materialized to the same degree, resulting in less pronounced political polarization along geographic lines.

Political Economy and Governance

The different economic structure profoundly shaped political developments. In the United States, the traditional alliance between organized labor and the Democratic Party remained stronger, while Republicans maintained their business orientation but with greater focus on manufacturing interests rather than finance and services.

The political realignment that saw working-class voters increasingly support right-wing populist candidates occurred to a lesser degree. With manufacturing jobs providing economic stability across regions, the economic grievances that fueled populist movements were less acute. Political polarization still increased, but along different lines than in our timeline.

Government maintained a more active role in economic planning, with industrial policy remaining a mainstream approach rather than becoming taboo in policy circles. Public investment in infrastructure, research and development, and workforce training remained higher priorities, supported by a broader political consensus.

Environmental Outcomes

The environmental implications of this manufacturing-centered world were mixed. On one hand, advanced economies maintained higher levels of industrial activity domestically, potentially increasing local pollution compared to our service-dominated timeline.

However, stronger environmental regulations in advanced economies meant that production occurred under stricter standards than when outsourced to less regulated regions. More regional production networks also reduced the carbon footprint associated with shipping goods globally.

The stronger manufacturing base also accelerated the development and deployment of green technologies. By the 2010s, manufacturing capacity became increasingly focused on sustainable technologies—efficient transportation, renewable energy systems, and smart infrastructure. Industrial policy actively promoted this transition, creating a virtuous cycle where environmental protection and industrial development reinforced each other.

Resilience and Crisis Response

The COVID-19 pandemic, when it arrived in 2020, revealed significant advantages of this manufacturing-centered economic structure. With more distributed global production and stronger domestic manufacturing capacity, advanced economies proved more resilient to supply chain disruptions.

The production of essential medical supplies, pharmaceutical ingredients, and electronic components needed for the pandemic response could be ramped up more quickly domestically. The economic recovery proceeded differently as well, with less extreme divergence between sectors and regions.

By 2025, this alternate world features a more balanced global economy with several notable characteristics: more evenly distributed prosperity both within and between nations; stronger labor institutions; more active government involvement in shaping economic development; and greater emphasis on sustainability in industrial processes. While not without challenges, this manufacturing-centered world has avoided some of the extreme imbalances that characterize our service-dominated global economy.

Expert Opinions

Dr. Margaret Chen, Professor of International Political Economy at Oxford University, offers this perspective: "The dominance of the service economy in our timeline wasn't inevitable but rather the result of specific policy choices made during the critical juncture of the 1970s and 1980s. In an alternate timeline where manufacturing remained central, we would likely see significantly different patterns of inequality. The extreme concentration of wealth we've witnessed would be moderated by stronger labor institutions and more broadly distributed productive capacity. Perhaps most importantly, the link between geographic location and economic opportunity would be less pronounced, resulting in more balanced regional development and likely less political polarization along urban-rural lines."

Richard Hernandez, former U.S. Secretary of Commerce and Industrial Strategy Fellow at the Brookings Institution, provides another view: "The collapse of manufacturing employment created a vacuum in our economy that services haven't adequately filled. In a timeline where we maintained our industrial base while modernizing it, the economic security of the working and middle classes would be on much firmer footing. The mistake in our timeline wasn't pursuing services growth—it was allowing manufacturing to hollow out so rapidly. A balanced economy needs both. The resilience benefits alone would justify a different approach, as we painfully discovered during the pandemic and subsequent supply chain crises. The question isn't whether services or manufacturing should dominate, but rather how to ensure both sectors develop in complementary ways."

Dr. Yuki Tanaka, Economic Historian at Tokyo University, challenges some assumptions: "We should be careful not to romanticize manufacturing's potential to create broad-based prosperity. Even in an alternate timeline where manufacturing remained dominant in advanced economies, automation would still reduce labor requirements over time. The key difference would be in how societies managed this transition. With stronger industrial policies and labor institutions, productivity gains could be more widely shared through reduced working hours rather than reduced employment. What's most interesting about this counterfactual scenario isn't just that manufacturing jobs would be preserved, but that the power dynamics between capital and labor would be fundamentally different, creating space for more egalitarian arrangements in work and society."