Despite the economic downturn, the 'weightless economy' offers our best hope for the future

There are said to be three phases of economic development: hunter gathering, agriculture and manufacturing. Yet beyond the manufacturing stage, it is now widely accepted, lies another, post-industrial phase of “weightless” or “knowledge-based” economic development.

Certain aspects of this economy have long been with us – trade, finance, services, media communications and culture – but it is only comparatively recently, with important breakthroughs in information technology, that the weightless bits have become, at least for advanced western economies, not only the largest constituents of GDP but also far and away the biggest source of growth. Apparently healthier, cleaner, more efficient and less cyclical, development of the weightless economy seemed to offer a bright new future to developed economies as well as a potential way of leapfrogging them for the populous emerging markets of the developing world.

Certain aspects of this contention have been exploded by the credit crisis and accompanying downturn. Banking, it has transpired, is just as cyclical as manufacturing, if not more so, while countries that have become unduly reliant on “weightless” financial services, such as Britain, may now face a deeper economic contraction than those that have maintained a substantial manufacturing sector.

The supposed environmental benefits of “weightless growth” are also being questioned. The new, computer-based economy uses up a lot of power. According to one calculation, emissions created by server centres alone, which create vast amounts of heat and therefore need to be air-conditioned, will eventually outstrip those of the aviation industry. Some companies propose to deal with the problem by locating the data centres in cold places, such as Iceland; there is no reason why with modern telecommunications they need to be close to centres of usage. All the same, the idea that the weightless economy may be environmentally friendlier because it enables people to communicate and stay in touch without travelling may in part be something of a myth.

What’s more, economies that become less reliant on manufacturing are not really contributing to reduced emissions if all they are doing is in effect outsourcing the manufacture of goods to the developing world. They will still be consuming the goods even if they are not making them.

All that said, there is no doubt that making things is no longer the most important source of growth for advanced economies. Intellectual property has replaced production line toil as the biggest source of employment and wealth creation. A supreme example of a corporation that has growth rich on these trends is Apple, which on the face of it is a maker of things to buy, from iPods to desktop computers. Yet in truth, Apple doesn’t make anything. All its manufacturing is outsourced to the developing world. The company itself is just a hothouse of development, marketing and distribution.

Diane Coyle, in her excellent book, The Weightless World, attributes the origins of the expression to Alan Greenspan, former chairman of the US Federal Reserve, who observed in the mid-1990s that as economies grow richer, they become less heavy – by which he meant that they use less in the way of materials for every unit of economic output generated.

Even taking account of imported manufactured goods, use of metals, biomass, oil, aggregates and so on remains broadly flat once economies have achieved a certain level of development, and in some cases even begins to decline, despite continued economic growth. Growth in the service-based elements of the economy takes over where the production and consumption of goods leaves off. This sort of development is at its most extreme in Britain, where manufacturing, oil and mineral extraction, and agriculture are now a smaller proportion of economic output than in any other large country in the world.

By contrast, financial services have grown rapidly to nearly 10 per cent of GDP. Taking into account the business services that revolve around the City, such as IT, accountancy and contractual law, this largely London-based industry may account for as much as a fifth of our entire economy.

With the financial services industry in sharp retreat after the worst banking crisis in living memory, the wisdom of allowing the economy to become dependent on such an apparently fragile, single sector, is being widely challenged. The British economic renaissance of the past 15 years is being condemned as little more than a credit-fuelled illusion.

The terms of trade, which for so long have worked strongly in favour of the big current account deficit nations, are going into reverse. A possibly quite long period of austerity is upon us. Yet this is an economic contraction that will affect everyone, whatever the make-up of their economies. We will always need goods and food, but the real power-house of development for advanced economies now unambiguously lies elsewhere, in intellectual property and knowledge. That is where recovery will come from. And, yes, even financial services will eventually begin to grow afresh: for although it is for the time being unfashionable to say so, financial innovation is one of the great dynamos of economic progress.