The Economics of the Modern Construction Sector
Also by Stephen L. Gruneberg and Graham J. Ive
THE ECONOMICS OF THE MODERN CONSTRUCTION FIRM
Also by Stephen L. Gruneberg
CONSTRUCTION ECONOMICS: An Introduction
FEASIBILITY STUDIES IN CONSTRUCTION (with David H. Weight)
RESPONDING TO LATHAM: The Views of the Construction Team (editor)
The Economics of the
Modern Construction
Sector
Graham J. Ive
Senior Lecturer
Bartlett School
University College London
and
Stephen L. Gruneberg
Lecturer
Bartlett School
University College London
© Graham J. Ive and Stephen L. Gruneberg 2000
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DOI 10.1057/9780230510913
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Contents
List of Figures
xi
List of Tables
xiii
xv
Preface
xviii
List of Abbreviations
1
Introduction
PART I
1
2
PRODUCTION
Construction and value added
Introduction
Defining the construction sector of production
Is the construction sector really several different
industries?
Factors of production
The structure of value added in the production of the built
environment
Input–output analysis and the value added by the
construction sector.
Gross and net profit
Concluding remarks
Appendix: Standard Industrial Classification, 1992
The capitalist construction industry labour market
Introduction
The technological and social relations of production
Labour markets
The supply and demand for labour
Inefficient labour markets and non-clearing labour
markets
The dual labour market
Construction labour
The role of collective bargaining in construction
Supply and demand in labour markets – a theory of
construction wages and employment
Formal and real subsumption of labour by capital
vii
3
3
4
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13
16
19
23
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25
29
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30
32
33
39
42
44
47
51
55
viii Contents
3
The use of labour in the construction industry
Structure of the construction labour force
Concluding remarks
56
58
59
Productivity and the production of profits
Introduction
Productivity
Average net productivity
Alternative estimates of level and rate of change of
construction productivity
Rate of increase in productivity: alternative estimates
Marginal productivity theory
The production function
The production of profit
Unit labour costs and labour and profit shares in output
Division of labour in the construction industry
Concluding remarks
61
61
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65
PART II
4
66
68
71
73
74
75
76
78
ACCOUNTING FOR PRODUCTION AND ASSETS
The logic of accounts
Introduction
The structure of national accounts
The logic of national accounts statistics
Income
National income and the standard of living or economic
welfare
Output
Domestic and national product
‘Output’ from real estate
Accuracy and reliability of the components of the National
Accounts
Expenditure
The structure of company accounts
The production account
The appropriation account
The capital account
The financial account
National accounts again – the composition of national income
National and expenditure in the corporate sector
Stocks and flows of the construction industry
Concluding remarks
81
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87
90
91
92
92
95
95
96
97
98
100
101
104
105
108
111
Contents ix
5
6
Value of stock and flows of built capital at national level
Introduction
The valuation of property and real estate
The capital stock in the National Accounts
Types of fixed capital stock
The valuation of fixed capital in the National Accounts
Stocks of capital and flows of investment
Retirements of built stock, life-spans and replacement
demand
Concluding remarks
113
113
113
115
118
121
123
Ownership of and investment in built stock and land
Introduction
The book value of assets
Devalorisation
Schumpeterian innovation, super-profits and
revalorisation
Techniques of valuation of buildings
Payback period
Life cycle investment appraisal models
Discounting
The creation of money and credit by financial institutions
Landowners and capitalists in the development process
Concluding remarks
129
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PART III
126
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145
THE NATURE OF THE CONSTRUCTION PROCESS
7
Actors and roles
Introduction
The nature of construction as a process
The nature of team-working in construction
Systems and their main types of actor
Speculative builders and contractors
Construction as a manufacturing process
Other roles in the process
Projects and firms
Portfolio risk management costs
Concluding remarks
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150
164
166
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171
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179
8
The contracting system
Introduction
Fragmentation and innovation in the development process
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x Contents
The contracting system
Concluding remarks
Part IV
188
190
Construction and the Economy
9 Construction investment, the multiplier and the
accelerator
Introduction
Aggregate construction demand
The multiplier
The accelerator
Change-induced demand for buildings and works
Concluding remarks
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206
209
217
218
10 Business cycles and construction
Introduction
A profit-led model of private sector investment demand
and of business cycles
Cycles
Trend and cycle
Business cycles
The 9-stage business cycle: a method of description of
business cycles
Measurement of construction demand
GDP and aggregate construction demand
Product cycles and the trend rate of change in aggregate
construction demand
Economic development and the trend in construction
demand
Building cycles
Price fluctuations
Concluding remarks
222
222
Bibliography
260
Index
269
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250
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258
List of Figures
1.1
2.1
2.2
2.3
3.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
6.1
6.2
7.1
7.2
7.3
7.4
9.1
10.1
10.2
10.3
Main sectors of production and service contributing to
building production
Derived demand for labour and the demand for
construction (orders)
Substitution effect: labour and capital
Diagram of the unstable cobweb effect
Manual labour and construction output, 1983–97
The logic of national and company accounting
systems
Time series of national income per capita, at constant
factor cost
Time series of GDP in current money and constant
value or ‘volume’ terms, both at market prices
Profit and loss account
Balance sheet
Cash flow statement
Stock flow relationships in a world without qualitative
economic change: the gross built capital stock
Stock flow relationships in a world with no qualitative
economic change: the net built capital stock
Diagram showing consumers’ surplus, ABC
Diagram showing simplified producers’ surplus and the
effects on costs of product and process innovation
Partially integrated construction systems
Percentage distribution of firms of main contractors,
by number of employees, and number and value of
industrial new work contracts (payment), 1997
Contractors’ new orders, by duration and number, 1997
Contractors’ new orders, by duration and value, 1997
Effect of increase of investment on national income
and savings
Total net construction component of GDFCF, 1981–91,
expenditure-based measures of construction demand
Contractors’ orders at market prices, 1987–97
Orders and output series compared, 1957–93
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41
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84
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xii List of Figures
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Orders lagged by one year and contractors’ output,
1987–97
Contractors’ output, 1983–97, output-based measures
of construction demand
New build and repair and maintenance output, 1955–97
Linear trends of contractors’ output, 1955–93
New build and repair and maintenance output, 1955–68
New build and repair and maintenance output, 1969–93
Construction output and GDP, 1971–93
Transformed construction output and GDP, 1971–93
Linear trend of construction output and GDP, 1971–93
Construction as a percentage of GDP
Contractors’ output (new build), 1955–93
Contractors’ output (repair and maintenance), 1955–93
Construction output price indices, 1983–97
Price indices of construction materials, 1987–97
Smoothed tender price index for all public sector
non-housebuilding contracts, 1987–97
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List of Tables
1.1
1.2
1.3
1.4
1.A
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
4.1
4.2
4.3
5.1
5.2
7.1
7.2
7.3a
Final demand products and sectors by activities
Estimate of people engaged directly and indirectly in
the production of the built environment, 1993
Value added by industry, 1939 and 1997, at current
prices
Value added at current basic price, by industry, 1989
and 1997
Summary of SIC 92 definition of construction and
related activities
Full-time male manual workers’ earnings and hours in
construction and in all industries and services
Full-time male non-manual workers’ earnings and
hours in construction and in all industries and
services (adult rates, not affected by absence)
Full-time male manual and non-manual workers’
earnings and hours in construction
Operatives, by craft, 1981 and 1989
Productivity index, 1975 and 1980
Level of productivity; alternative estimates, 1995
Rate of increase in productivity: method 1, 1989–97
Rate of increase in productivity: method 2, 1989–97
National income, at current factor cost, 1983–93
National Accounts, 1992, by type of income and
sector of employment
Financial balance of the corporate sector, 1992
Net capital stock, by sector and type of asset at current
replacement cost, 1992
Percentage of fixed assets, 1982 and 1992 at current
replacement cost
Project types and functions of participants in the
property development process
The roles of participants in the process of providing
the built environment
Actors and roles in a private new housing project,
suburban England, 1980s
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12
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21
25
50
51
52
59
66
68
69
70
94
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106
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126
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xiv List of Tables
7.3b
7.4
7.5
9.1
9.2
9.3
9.4
10.1
Actors and transactions in a private new housing
project, suburban England, 1980s
Actors and roles in a typical new public housing
project, Inner London, 1950s/1960s
Actors and roles in typical new office project, City of
London, 1980s
Investment in fixed and circulating capital at current
market prices, 1985–94, £m
Total investment and its composition, by industrial
sector, at current market prices 1985–96, £m
Simple model of accelerator effect
Accelerator model ignoring time lags, expectations
and spare capacity
Schematic illustration of trend, differences and cycle
relatives
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Preface
The Economics of the Modern Construction Sector is the companion
volume of The Economics of the Modern Construction Firm, and in many
ways The Economics of the Modern Construction Sector sets the context for
an understanding of the operation of firms within the construction
production process. As economists our particular interest is focused on
the production processes of industrial activity. We are also concerned
with the economic and social environment with which firms interact.
This environment is comprised of the economy as a whole, its construction and other industrial sectors, government and consumers. It is
also determined by the resources available for the production of particular outputs. These are the labour, materials, both natural and manufactured components, and the plant and equipment used. In turn the
productivity of these resources depends on the state of technology and
the methods of production adopted. Finally the behaviour of firms in
the construction sector is also to a large extent determined by the
behaviour of the other firms in the construction sector itself.
We are therefore interested in understanding the economic roles and
relationships within the construction process, in that we wish to
understand how and why production takes place. We also wish to
know who benefits from the system of production and how these
benefits are distributed. The general economic issues raised up to this
point could be applied to any industry or sector of the economy, and
discussion of these and other topics can be found in all introductory
economics texts. However, if the general textbook approach to economics is applied to construction several features of the construction
process intervene to invalidate the conclusions. The result can be a
frustration with economic theory and ultimately a rejection of economics on the grounds that it is neither realistic nor practical.
In this book we attempt to provide a realistic theoretical economic
framework for understanding the construction sector in particular, in a
particular country, the UK, and at a particular phase of its development,
at the end of the twentieth century. What may be true of the construction sector here and today, does not necessarily apply to the construction sector somewhere else and in another period. Armed with this
approach, it should be possible to discuss policies related to construction and account for the behaviour of firms within the construction
xv
xvi Preface
sector. Nevertheless, the methods of analysis and the general approach
to the economic issues of the construction sector in this book should
be a useful starting point for the analysis of any construction sector or
construction firm working anywhere in the world. This book therefore
provides the necessary background for firms operating in construction
and together with the The Economics of the Modern Construction Firm, it
is hoped that The Economics of the Modern Construction Sector will enable
firms to improve their decision making, strategic thinking and planning effort.
The four parts of The Economics of the Modern Construction Sector are
entitled Production, Accounting for Production and Assets, The Nature
of the Construction Process, and finally, Construction and the
Economy. In the first chapter we begin by defining the production of
the built environment and then move on to examine the process of
adding value to inputs. The value added approach highlights the
source of wages and profits. In Chapter 2 the industrial relationship
between construction labour and capital is used to show the subsumption of construction labour by capital. In Chapter 3 the argument is
developed to show how labour is used to raise productivity and
produce profits.
In Part II, we are concerned with a meaningful statistical analysis of
the data surrounding construction. We show how data is used to
analyse the national income, the construction industry and firms
within construction. By describing the logic of accounting systems at
all levels, it is possible to draw conclusions and gain insights into the
operations of firms involved in the production of the built environment. The framework of all accounts is based on stocks and flows and
we use this approach to understand construction in Chapter 5. Chapter
6 provides an analysis of the distribution and ownership of the property assets produced by the construction sector in the form of buildings
and land.
Part III describes and accounts for the economic roles of the various
participants in the construction process. These roles combine in different ways depending on the nature of the project and the type of client.
The complexity of the production process in construction is explained
further in Chapter 8 on contracting systems. Moreover, many of the
conflicts within construction between constructors and their employers can be seen in the fragmentation of the production process
described in Chapter 8.
In the fourth and final part of this book, we deal with the wider
issues of construction and its relationship to the rest of the economy.
Preface xvii
In Chapter 9 we look at the economic concepts of the multiplier and
the accelerator in relation to construction and construction firms.
Chapter 10 deals with economic cycles and the construction sector and
discusses the business cycle and the causes and effects of variations in
demand on construction.
Very few books can claim to be the final word on their subject, and
The Economics of the Modern Construction Sector is no exception. Instead
we want the reader to find the contents stimulating and thought provoking. One of the aims of this book is to act as an aid to further
research. We hope therefore that many of the questions raised by the
book will stimulate research into the economic processes involved in
the field of construction economics.
GRAHAM J. IVE
STEPHEN L. GRUNEBERG
List of Abbreviations
ACE
APTC
BS
CAD/CAM
CFR
CIBSE
CIC
CIRIA
COP
DETR
DLO
DOE
EMS
ENR
EU
FAME
GCS
GDFCF
GDP
GFCF
GOP
HA
HCS
ICE
ICOR
ISIC
IT
JCT
LA
LFS
LOSC
MBO
MES
Advanced capitalist economy
Administrative, Professional, Technical, and Clerical
Building Society
Computer aided design and computer aided
management
Construction Forecasting and Research
Chartered Institute of Building Services Engineers
Construction Industry Council
Construction Industry Research and Information
Association
Census of Production
Department of Environment, Transport and the
Regions
Direct Labour Organisations
Department of the Environment
European Monetary System
Engineering News Record
European Union
Financial Analysis Made Easy
Gross Capital Stock
Gross Domestic Fixed Capital Formation
Gross Domestic Product
Gross Fixed Capital Formation
Gross operating profit
Housing Association
Housing and Construction Statistics
Institution of Civil Engineers
Incremental Capital Output Ratio
International Standard Industrial Classification
Information technology
Joint Contracts Tribunal
Local Authority
Labour Force Survey
Labour only sub-contractor
Management-buy-out
Minimum efficient scale
xviii
List of Abbreviations xix
NACE (Rev1)
NBER
NEDO
NFCF
NOP
NPV
NWRA
ONS
O–O
PBR
PFI
R&M
RIBA
ROCE
RPI
SET
SIC
SPC
SSE
SSHP
SSOCP
SSP
TGWU
UCATT
VIBO
WES
The General Industrial Classification of Economic
Activities
National Bureau of Economic Research
National Economic Development Office
Net Fixed Capital Formation
Net operating profit
Net Present Value
National Working Rules Agreement
Office for National Statistics
Owner-occupier
Payment by results
Private Finance Initiative
Repair and maintenance
Royal Institute of British Architects
Return on Capital Employed
Retail Price Index
Selective Employment Tax
The Standard Industrial Classification
Special Purpose Company
Social structure of the economy
Social structure of housing provision
Social systems of organisation of the construction
process
Social structure of production or provision
Transport and General Workers Union
Union of Construction Trades and Allied Technicians
Vertically Integrated Building Owner
Work to existing structures
Introduction
An explanation by way of introduction: the value of realism and the realism
of value in economics.
The search for a theory of value in economics is for a ‘unifying grand
theory’ capable, in principle, of explaining the totality of economic
phenomena – a search for a common unit of measurement, to be sure,
but beyond that, the underlying sufficient cause of values, in the plural
(i.e. prices of this and that), and the force capable of yielding a determinate set of economic outcomes from certain non-economic givens –
in short, the idea that both back economics’ claims to be a science, by
giving it a unifying object of study and a method, and at the same time
lays it open to accusations of being no more nor less than metaphysics.
For value is abstract, and not directly visible.
The great arguments in the history of economics have been arguments between theories of value (Cole et al., 1991; Varoufakis, 1998).
Following Cole et al. (and many others) we can call these contending
theories of value the ‘subjective preference’, ‘cost-of-production’ and
‘abstract labour’ theories. Of these, the academically dominant school
of thought, throughout the last century, has been based on the ‘subjective preference’ theory of value: rational, calculating, self-interested
choice between given alternatives.
Economic debate has got lively and deep whenever this dominance
has come under challenge – and ‘economics’ has stagnated into an
orthodox body of doctrine whenever that challenge has faded. To be
clear: we believe, along with an increasing number of other economists
critical of the orthodoxy, that economics took a profound ‘wrong turn’
when it tied itself, as a ‘reputable science’, to the subjective preference
theory of value in what is known as its ‘neo-classical’ form. We believe
that this mistake has led both to bad theory and a wrong agenda for
xxi
xxii Introduction
economics – and explains especially the difficulties which arise when it
is attempted to apply economic theory to the interpretation (we will
not say, explanation) of the ‘real world’ of modern industry. Nor, in
our view, is it simply a matter of the ‘wrong’ theory of value having
been chosen, whereas the ‘right’ choice would have solved all problems. Rather, one source of the difficulty for a practical economics lies
in the drive, perhaps innate in all value-theories, towards an excess of
abstraction, at too great a price in terms of realism and relevance.
However, statements such as those made in the previous paragraph
open up such a range of arguments and issues between economists,
and moreover arguments necessarily conducted in languages more or
less impenetrable to non-economists, that it is certainly not our intention to develop systematically those statements or claims in the work
that follows, in the sense of conducting an ‘argument’ or critique of
orthodoxy – for to do so would exclude the possibility of this being a
work of utility to students and practitioners in the production of the
built environment. Instead, we hope the work will speak for itself, at
least in respect of the range of issues our approach enables us to cover,
the analytical methods we propose and the agenda of questions (for
research and otherwise) which we raise. We do, however, think it both
useful and necessary to give ‘fair warning’, especially to readers who
have a knowledge of orthodox neo-classical economics – for such
readers will not find in what follows much of what they will expect,
and will find much that they will not expect.
We believe that our approach, as exemplified in the chapters that
follow, is sufficiently consistent and straightforward as to be reasonably
clear in its application to economists and non-economists alike. However,
we also feel we owe a duty to both kinds of reader to explain in this
introduction just what kind of economists we are – that is, what position
we take in the fundamental debates that divide economists today.
The approach of many economists when they come to write ‘practical’ works on the economics of a particular sector or industry, is to start
with received value theory, expound a version (to a greater or lesser
degree simplified) of that theory, and then to give ‘examples’ of its
application by nominally substituting apparently recognisable phenomena of that industry into the purely formal categories of that
theory. An instance would be a discussion of market price for a commodity in terms of the thought-experiment that demonstrates the possibility of a set of pre-reconciled independent choices made by
possessors of given productive endowments and given consumption
tastes (each with perfect knowledge, and all acting in ‘analytic’ time to
Introduction xxiii
explore all hypothetical options fully before making actual choices)
leading to an equilibrium of demand and supply; moves on to describe
this imagined market as one of ‘perfect competition’; and then discusses how the idea of perfect competition can be used, to some extent
or other, to describe and illuminate actual markets for grain, or fish, or
stocks and shares.
Our approach, by contrast, is to start by making a model of the
actual processes by which economic actors arrive at their decisions – in
terms which we hope will be recognised by practitioners as capturing
certain (inevitably, not all) interesting or significant aspects of that
process. We are in a position, since we are concerned here only with
the construction industry, to develop and to prefer ‘local’ or special to
general theory – to adapt our models to capture local circumstances,
even at the cost of loss of ability to generalise about the economy at
large. This we are happy to do.
The substantive content of our theory is to an extent eclectic, formed
by taking and melding together, magpie-like, whatever catches our
interest from a diverse range of sources. However, just as magpies
prefer that which glitters from the array open to them, so we prefer
that which looks to us more ‘realistic’. Our approach often involves
simply relaxing the stays of a pre-existing theoretical corset, by introducing some added degrees of realism.
All of this courts the danger of over-compensating, to the extent that
any and all classificatory or descriptive coherence is lost – the point
where each instance becomes unique. Naturally, we hope that our
readers will agree with us that we have not gone so far as that.
One powerful inspiration for us, in our quest for a sufficient, minimal
consistency and theoretical coherence, has been the approach to the
treatment of time, uncertainty, surprise, the past and the future. Time,
throughout what follows, is we hope almost always perspective not analytic
time. In perspective time, decisions are made sequentially, not simultaneously, and are made using the exercise of economic imagination about
possible futures – that is, under real uncertainty, where what is envisioned ex ante often differs from what is realised ex post. In this, like other
economists of construction (Hillebrandt, 1985; Bon, 1989) we have been
inspired by the writings of G.L.S. Shackle and other ‘Austrian’ economists
– even where we disagree sharply with the political economy of much of
Austrian economics. It is to Shackle, however, that we owe a particular
debt – and Shackle was both an ‘Austrian’ and a post-Keynesian.
The post-Keynesian economists are, of course, best known for their
macroeconomics – and for insisting upon the profound theoretical
xxiv Introduction
implications of Keynes’ critique of macroeconomic orthodoxy, and
thus resisting the absorption of the Keynesian legacy into a slightly
modified orthodoxy – the so-called Keynesian neo-classical synthesis.
However, there is also a very distinctive and coherent post-Keynesian
microeconomics, and this has often provided us with at least a starting
point or point of reference. We are also indebted to those economists
who have sought to fuse elements of Keynesian and Marxian
economics – the tradition beginning with Kalecki and Robinson, and
carried on today by, inter alia, such inspirations for parts of our work as
Bowles, Weisskopf and Marglin.
Nearly twenty years ago, a book appeared whose publication in our
view (and that of many) deserves to be seen as seminal to the development of a truly modern, non-orthodox economics – Nelson and
Winter’s An Evolutionary Theory of Economic Change (1982). The
‘Introduction’ to that work contains an argument about the nature of
the malaise afflicting orthodox microeconomic theory (what is known
to economists as general equilibrium theory), and directions for its
remedy, with which we wholly agree. Indeed we could wish, if academic convention and copyright law did not forbid us, to reproduce it
more or less entire as our own introduction to the present work.
Among the very many indications therein for positive directions for a
new microeconomics let us cite at least the following:
(1) theory must seek to comprehend, in stylised settings, the unfolding of economic events over (perspective) time; we must escape
from the grasp of a purely ‘analytic’ time, that is really no time at
all.
(2) firms are motivated by profit, seek it and search for ways to
increase it, but ‘firms’ actions will not be assumed to be profit-maximising over well-defined and exogenously given choice sets’ (p. 4).
(3) analysis should not focus on hypothetical states of industry equilibrium, in which all unprofitable firms have left the industry and
the profitable ones are at their desired size.
(4) firms learn; at any given time a firm has limited capabilities, and
habitually uses certain decision-rules: ‘Over time these … are
modified as a result of both deliberate problem solving efforts and
random events.’
Meanwhile, orthodoxy itself has been invaded by the practitioners of
the so-called ‘new institutional economics’, an economics of incomplete information, bounded rationality, complex organisations and
Introduction xxv
transaction and organisational costs. This we welcome, and use happily
where the only developed alternative is the old orthodoxy – while
recognising that it too is suffering the fate of Keynesian economics – to
be re-absorbed, in somewhat travestied form, into a revised orthodoxy.
This, then, is the kind of economics, and the approach to the use of
economics to study industry and business, that a reader will find
exemplified in what follows. We hope you, the reader, will find it yields
both light and fruit.