# Production versus the service economy



## Smurf1976 (21 June 2009)

I could write a book on this, but to keep it brief I've been thinking a lot about a few things lately.

I contend that:

1. *A large portion of the service economy creates no real wealth even though it may fill a local need*. 

Whilst we've all heard that argument in regards to the public service, it applies regardless of who is running the operation. If it's not creating actual wealth then it's not creating actual wealth whether it's paid for voluntarily or via taxation. 

If it provides services that can't be sold overseas (eg dog washing) or is an industry largely of its own creation which produces no valuable product as such (eg the legal industry - ultimately it's largely a money shuffling exercise in a "big picture" sense) then it's not adding to national wealth. It may create activity (GDP) and it may be something we need (we do need police and we do need some form of government with its associated administration) but it won't make Australia a wealthier nation.

2. *What does add to national wealth is production of something of actual value in a real tangible sense*, preferably things which are either sold overseas (exported) or replace something that would otherwise be imported. For example, mining, manufacturing, agriculture, software, a small part of the service economy (eg we export education via overseas students) etc.

That's it. 

We have economic activity that creates real wealth and we have economic activity that whilst it may add to GDP, doesn't really make us economically wealthier as such. Smashing windows and fixing them certainly adds to GDP, but only if we start exporting glass does that become a source of national wealth. Simply running around smashing and replacing windows, washing dogs, mowing lawns and taking holidays isn't bringing so much as a single cent into this country no matter how much GDP it may add and how many people it may employ. It's activity, not wealth creation.

Now, *can anyone punch a serious hole in my thinking here?* Not little bits or specific examples, but the fundamentals? Can we really be a wealthy country with an economy based on dog washing and distributing imported consumer goods but without actually producing anything of value for export? My own thinking has always been no, that can't work. But it seems to have become so universally accepted that I'm starting to wonder.

Do we really need the mines, factories and farms? We could easily replace their GDP contribution via the service economy and that is a point many have repeatedly made in the broad community over the past 30 years. But I don't see how such a shift works overall - the mines bring in export income whereas taking an interstate holiday and getting the dog washed doesn't.

Relevance? Well this argument is ultimately what underlies most of the economic debate in this country over the past three decades. It is also right at the centre of many of the big environmental debates - production of something tangible versus the service economy (particularly tourism) as an alternative. So it's about as mainstream an economic issue as you could find, and yet practically nobody seems to even mention it.

Thoughts? Can an economy based on taking holidays, washing dogs and waging war in court actually work? Or do we still need the mines etc so we've got something to export in order to fund our imports of consumer goods?


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## It's Snake Pliskin (21 June 2009)

Smurf,

Japan has a production economy which has created the vast wealth the country has. The vast wealth is in the hands of average people, not only the big businesses, who have savings levels higher than that of other nations. I don't think a service economy would be able to maintain vast wealth alone, but a mixture of the two could complement each other.


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## beerwm (21 June 2009)

Hey smurf,

the best way i would think to judge economic wealth would be 'standards of living'.

a society produces so it can consume/ it sells so it can buy.

take cattle - we produce and sell. - crude oil, we buy and consume.
medical care - we produce and consume.

I think consumption is much overlooked.
China produces alot, but what does it consume/ and look at there standard of living.

when it comes down to it doesnt every single person want their lifelong, [consumption.>.production]

I dont think governments should 'save' any money and i dont think governments should go into debt, if its not to increase the standards of living - in the longrun [ taking into consideration debt and repayments.]

just one man's opinion


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## brty (21 June 2009)

Smurf,

I agree with your thoughts on this, except that tourism is also an export and if the infrastructure was not supported by the locals, it wouldn't exist for visitors.

What keeps our service industry going and therefore the economy, is not the mining exports per se, but the thought of future exports by those who invest in Australia (keeps them investing). 
Think of a new gold mining town, 100 years ago. Money poured into the local economy before much gold was taken out, then prosperity continued in all sorts of ways while the mines kept producing, then the whole place fell apart when the mines left.

Luckily for us as a country, the mines don't look like running out of what the world wants anytime soon. Same goes for Agriculture to.

brty


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## ducati916 (22 June 2009)

*smurf*



> 1. A large portion of the service economy creates no real wealth even though it may fill a local need.




Without a definition of wealth, it becomes difficult to ensure that the discussion starts and progresses under consistent useage. I am assuming that we are talking about economic wealth.

Economic wealth must start from the fundamental inputs or resources: land, labour, capital. Further _wealth_ refers to some accumulation of resources, whether abundant or not. _Richness _refers to an abundance of such resources. 



> Whilst we've all heard that argument in regards to the public service, it applies regardless of who is running the operation. If it's not creating actual wealth then it's not creating actual wealth whether it's paid for voluntarily or via taxation.




I'm assuming public service refers to government. Here we enter the ideologies of Socialism, Capitalism, [Fascism, Communism] Socialism and it's offshoots [Communism & Fascism] would lay claim through state ownership of the means of production, they [government] can, and do, create wealth. With the abject failure evidenced through history of this assertion, Socialism moved to the _redistribution of wealth._

Taxation is not creating wealth, merely redistributing existing wealth.



> If it provides services that can't be sold overseas (eg dog washing) or is an industry largely of its own creation which produces no valuable product as such (eg the legal industry - ultimately it's largely a money shuffling exercise in a "big picture" sense) then it's not adding to national wealth. It may create activity (GDP) and it may be something we need (we do need police and we do need some form of government with its associated administration) but it won't make Australia a wealthier nation.




Labour is a finite store of a productive resource. Goods and services are produced through labour. In a market economy, the market [demand] mandates what goods and services are required and in what proportion through the price mechanism. Thus, if dog-washing has a market [demand] and a market derived price, then it by definition provides a valuable service.

Goods and services in a market economy are not static. They constantly rearrange themselves to adjust to demand through the price mechanism. Thus while dog-washing currently has a value, it may not in 1 years time.



> 2. What does add to national wealth is production of something of actual value in a real tangible sense, preferably things which are either sold overseas (exported) or replace something that would otherwise be imported. For example, mining, manufacturing, agriculture, software, a small part of the service economy (eg we export education via overseas students) etc.




You are confusing the concepts of utility and value. Utility denotes a use. Take oil as an example. It can be used in hundreds, possibly thousands of ways through a myriad of products and services. It has a very high utility.

The value of oil however is reflected in bringing it from the ground or seabed to the particular good or service that you are consuming, say petrol.

The value lies therefore in exploration costs, developing costs, pumping costs, transport costs, refining costs, transport costs [again] delivery costs. These are the value inputs that along with other factors, speculation, derive the market price which will [should] provide a profit.

The washed dog, however also delivers a profit. The profit, is a derivative of value, which is labour [effort] which may include other inputs land and capital, or not as the case may be.



> Now, can anyone punch a serious hole in my thinking here? Not little bits or specific examples, but the fundamentals? Can we really be a wealthy country with an economy based on dog washing and distributing imported consumer goods but without actually producing anything of value for export? My own thinking has always been no, that can't work. But it seems to have become so universally accepted that I'm starting to wonder.




Here we run into the need for a common definition of _wealth._ This is due to the requirement [yours] to compare Australia to America to Africa. I'll rest here for brevity.

jog on
duc


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## Smurf1976 (23 June 2009)

brty said:


> Smurf,
> 
> I agree with your thoughts on this, except that tourism is also an export and if the infrastructure was not supported by the locals, it wouldn't exist for visitors.



Agreed that tourism is an export - assuming we're talking about overseas visitors.

But what I'm thinking is this.

Suppose that we got rid of the mines, farms and factories and relied totally on service industries. We could all get the lawns mowed twice a week, go on an interstate holiday once a month and have every service imaginable provided by others. 

But I contend there's a problem. We would still want to consume cars, TV's, computers etc, all of which would need to be imported under this scenario.

BUT we would have nothing, apart from tourism, to sell to foreigners.

So why would other countries then supply us with cars, TV's and so on when there would be little prospect of them ever receiving payment, other than in that they could come here on holiday?

Now, I don't think anyone is proposing to get rid of _all_ the mines, farms and factories but various political parties do have policies likely to lead to major downsizings in some or all of these. 

Even if it's only a 20% cut in output, that's still a lot of money that we then don't have from exports. But with the growth in the service economy to keep locals employed that such people generally propose as the alternative, won't this lead to some sort of crisis as our spending on imports massively exceeds any likely level of exports? Or can we really just accumulate debt and not worry about it?

As I've said, I personally don't see how a major excess of imports over exports could be sustained without leading to a crisis at some point. But the notion that it is a viable option is implicit in a vast political movement embraced increasingly by Labor and Liberal and which is central to Green economic thinking. Don't produce physical things, just create jobs in the service sector instead since such industries are safer, less polluting, easier working conditions, don't have to compete with slave labour and so on. 

But how will it work in the long term? Won't we end up in serious trouble if we attempt to forever import far more than we export? That is essentially what even mainstream politics is now proposing or at least accepting.

Note here that I'm talking about the overall economic wealth of a country and its people and not that of an individual living within it.


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## ducati916 (23 June 2009)

Smurf1976 said:


> Agreed that tourism is an export - assuming we're talking about overseas visitors.
> 
> But what I'm thinking is this.
> 
> ...




The answer is very simple.

Exports = Imports

To import, you must export, or incur a debt [assuming the seller of the imports will provide you with credit]

Therefore, if we assume a country has zero national resources, and they want to import, they then need to create something demanded to trade for their imports.

Assuming zero resources, capital must be borrowed to create the productive elements required to produce. The goods/services are then traded against the imports and the profit derived pays down the borrowed capital + interest.

Examples include Germany after WWI and Japan after WWII

jog on
duc


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## Aussiejeff (23 June 2009)

ducati916 said:


> The answer is very simple.
> 
> Exports = Imports
> 
> ...




Which is the exact position where the gawd-almighty YooEssofAyyy finds itself. 

Ergo, a MASSIVE importer & consumer of *stuff* at the expense of monster, runaway DEBT funded (so far) by increasingly nervous exporters (China, India, Brazil et all).

Hmmm. Might this just conceivably be a factor that has driven world economies to the current brink of collapse, with so many *civilised* societies desperate to emulate the fantastic, dream-on economy of Unca Sam?

Stagger on...


aj


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## Beej (23 June 2009)

Smurfie - in a general sense I think your contention is correct. Ie without the actual "production" industries, the (purely internal consumption focussed) service industries cannot create wealth on their own.

However, things are more complicated than that for several reasons.

Firstly, "Productive" industries NEED certain service industries to be able to exists/thrive. For example the factory needs cafe's/shops nearby where the workers can buy their lunch, they need public transport services etc for the workers to get to/from the factory, and so and so on. There are many many service industries that support the "pointy end" production industries. 

Another way to think of this is with a military analogy - can an army fight with it's "arm crops" (ie, infantry, armour, artillery etc), without the "service corps" that supply the food, transport, fuel and other logistics etc to the pointy end? The answer is clearly no. 

So bottom line is there is a symbiotic relationship between so called production and service industries. As Ducati also points out, "Mr Market" will sort out which service industries are needed at any point in time to support whatever "productive" activity is going on.

And re dog washing etc, even that may really be needed: For example I might be a highly skilled mining engineer living in a remote town. But living out there my dog get's dirty all the time! My wife doesn't like that because it makes the house smell, and so she says if I don't do something about she will leave me (which I don't want) leaving me the option of finding a new job somewhere "cleaner". So instead I start to pay for dog washing (I can afford it easily), as that's what I found out all the other mining engineers in the same predicament do!  So the dog washer ENABLES me to remain in a  "productive" export focused job/industry that could not exist without my skills and presence. It's a contrived example but I think it illustrates the point!

Secondly, service industries are not necessarily "unproductive". As pointed out tourism generates export income (a true source of new wealth yes?). Tourism is based almost exclusively around the provision of services - hotels, resorts, transport (trains, buses, airlines), restaurants, tours etc etc etc. Additionally many other services can also directly generate export income - eg some financial services industries, consulting, and so on.

So while on the surface the production = wealth creation, service = no wealth creation argument appears to have some merit, in reality a modern productive economy cannot exist (and thus create wealth) without service industry sectors, and it seems best to let the market work out what it needs for itself as much as possible in this regard.

Cheers,

Beej


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## Happy (23 June 2009)

Beej said:


> ...
> So while on the surface the production = wealth creation, service = no wealth creation argument appears to have some merit, in reality a modern productive economy cannot exist (and thus create wealth) without service industry sectors, and it seems best to let the market work out what it needs for itself as much as possible in this regard.
> 
> Cheers,
> ...





Another good reason to be self sufficient with all the excessive labour cost with it, plus surplus funds from exports as extra sushion for harder times.


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## sunshineboy (23 June 2009)

What can you say about our economy? Its going in recession.


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## algis (23 June 2009)

In summary to the above:
* to import you must export of equivalent value or become a debtor or creditor nation
* GDP is not a measure of whether the country is becoming more of a debtor or creditor nation

Economic rationalism policy (tariff reduction, open markets) has sought to reduce the nation's industry down to it's core competencies (agriculture and resources).  The thinking is that if the country specialises, it will become more efficient doing a small number of things rather than being a jack of all trades.  You can see the benefit here: efficiently produced items traded for nicer imported stuff.

We could become self-sufficient and not import or export - but that would involve being involved in every industry, lacking economies of scale and the cost of capital required to start up.  It would not be feasible unless the country would be happy with stuff or far less quality for the same price (or the same quality at a much more cost).  This is a bit like an island economy..  so is Smurf's reasoning that we are heading that way and currently we are living off debt-fuelled momentum?


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## Smurf1976 (23 June 2009)

algis said:


> so is Smurf's reasoning that we are heading that way and currently we are living off debt-fuelled momentum?



My thinking is that over the past 30+ years we have become focused largely on agriculture, mining and limited downstream processing of those products (eg smelters etc). 

Meanwhile, the manufacturing of finished goods has steadily declined and there seems to be fairly broad acceptance that it's headed for oblivion. In every state there are numerous once huge enterprises that now sit idle as barren land, empty buildings or at best a warehouse for the distribution of what is now imported product.

But, and this is my real concern, it is now starting to look as though agriculture and mining may also be doomed, at least in an economic value sense. 

Except in Tasmania, the entire focus on agriculture in this country seems to be about buying back farms and/or water and general downsizing due to the water situation. Nobody's talking about increasing or even sustaining output, it's all about how to best manage the decline.

And with mining, the various proposals for emissions caps etc do imply that at least the downstream processing part of the industry will at best shrink if not disappear entirely. Trouble is, that's where a lot of value is created - eg $100 worth of bauxite becomes $2000 worth of aluminium when processed.

So I see it as:

Finished goods - Declining and heading towards virtual extinction

Agriculture - Declining, the only question being to what extent

Mining - We'll keep digging holes but all 3 major political parties seem prepared to downsize or abandon downstream processing, thus reducing the exports from the minerals industry. 

So that leaves us with not too much to export. Meanwhile, the general idea seems to be to keep people employed via the service economy, thus maintaining their spending on imports. 

I just can't see how this is going to work in the long term. Short term yes we can borrow, but surely that's got to stop at some point? If it did work, then why would any country bother with dirty, dangerous etc industries in the first place? Why not just sit back, borrow and sustain domestic GDP with tourism and mowing lawns? I don't think it's going to work.

For the record, I work in a service industry that does in some way directly support virtually all economic activity in the entire state. But to me the point has always been that it is something necessary to facilitate wealth creation elsewhere (in industry etc) rather than my own work being an end in itself. Now I watch in amazement as I come to the conclusion that virtually all that productive activity seems likely to cease (at the national level) at some point, replaced by more and more of the service economy. And politically that's fine since the service economy necessarily creates a lot of jobs, and jobs seem to be the only measure of economic success. 

Where does that lead us in the long term? *That's my real question here. What does it mean to the average Australian living in Sydney, Melbourne etc if the exporting indusries in the bush simply disappeared?*


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## Trevor_S (23 June 2009)

As mentioned elsewhere, you fuel it with debt, at some stage that will come back and bite you, big time.

Here's an interesting article on Iceland, where debt suffocated them.  Much like housing has done in lots of western countries, the good thing is that UK/USA are in the process of resetting that benchmark, which is a good thing but not yet in Australia, and the Government is hell bent on not letting it reset by pouring vast amounts of tax payer dollars into propping it up (not that this worked in the UK or the USA).  Sure China has been chased away from RIO but they are buying second line miners up at an alarming rate, eventually they will own the right to mine the minerals as well as export them back to us, we will just have to live off the royalties and not actually do anything  

Much of our nations "wealth" (COUGH !) is tied up in residential housing, something of which I despair as it's a non productive asset...  that aside.

The country despairs of downstream processing.  The Government has made it to difficult to bother, by appeasing to small groups that would rather export the problem overseas.  The green movements hypocrisy is monumental and why I despair of the Greens and their NIMC (Not in My Country) attitude.  Export the dirty industries elsewhere, rather then concentrate our knowledge and expertise in producing high quality engineering solutions to the problems and doing it in Aus. 

Don't smelt it here !  whack up a coal fired power plant and a smelter in China where the industry is welcomed ?  Another example is Gunns in Tassie and their paper plant, we'd rather export wood chip then build a high quality plant in Aus.  So the green movement trys to stop it and would rather export the production over seas, inevitably to a third world country where the  standards are much less, with no recognition we all live in the same biosphere. Let's do it here and do it well is no longer an option.  The greens still wipe their bum with paper I am sure.

Paying each other to take each others washing off the line, does not make a nation wealthy.

Excellent topic though BTW !


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## Smurf1976 (24 June 2009)

Trevor_S said:


> The country despairs of downstream processing.  The Government has made it to difficult to bother...
> 
> Another example is Gunns in Tassie and their paper plant, we'd rather export wood chip then build a high quality plant in Aus.  So the green movement trys to stop it and would rather export the production over seas, inevitably to a third world country where the  standards are much less, with no recognition we all live in the same biosphere.
> 
> ...



Precisely the sort of thing I'm thinking of. We seem to be determined to dismantle or not build in the first place virtually every industry that actually produces something we can export. And I don't see how the dog washing, washing off the line economy is going to work with nothing much left to export.

As for the Gunns mill, well that's a classic one. I wonder how many people in the other states hearing the debate realise that the location, Bell Bay, is a heavy industrial zone best known for power stations and smelters as well as the various other factories there? It ain't no wilderness and housing is banned there too due to the impact of industry. So it's not exactly an inappropriate location for another factory and it's not as if we don't already have very similar facilities operating without trouble elsewhere in Tas and interstate.


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## Beej (24 June 2009)

Wasn't the Gunns factory all approved and ready to go but financing issues due to the US created GFC that are currently holding it up???


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## Timmy (24 June 2009)

Smurf1976 said:


> Now, *can anyone punch a serious hole in my thinking here?*




No, not at all - spot on.
Such thinking can also be applied at a regional or local level.  




Smurf1976 said:


> the mines bring in export income whereas taking an interstate holiday and getting the dog washed doesn't.




Export income is the key to it.  Again, thinking at a local or regional area, an 'export' could be something produced in a local area sold to another area, so bringing income to the 'exporting' area.

Someone, in another thread, mentioned that every second household in the new housing estates being built on city fringes in Australia rely on a building trade to bring in income (obviously anecdotal and approximate data).  This is a really local form of 'exports'.  There will be plenty of lawn mowers, hairdressers, dog washers and so forth servicing these areas, but unless income from 'exports' (in this case largely building trade income) comes into the area there will be no injection of money to support the local economy.  (Of course income can come from other outside sources, like welfare, office workers in the CBD, etc. too).

Australia is like a big new housing estate on the edge of the world.  Plenty of lawns to be mown and dogs to be washed, but export income is needed to ultimately keep the local economy going.


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## algis (24 June 2009)

Agreed that much of the service industry involves the shuffling of money internal to the country.  It may increase productivity and increase standard of living, but will not increase income to the country from outside sources.  The exception is when those using foreign money (tourists) come in to make use of those services - stay at a hotel, have dinner.  Otherwise an analogy to becoming increasingly reliant on the services industry is like having a beautiful office with the latest technology computer, super-comfy ergonomic chair and no one to do the work.  Or the rowing team with 8 managers, a steering commitee and research group, and maybe the one rower.

When you look at it, infrastructure is something that is a support industry as well (unless the skills are exported).  It serves to increase the productivity of a nation along with its standard of living.

Agreed in the "transferance" of greenie issues to other countries.  This is a very good point.

I am concerned that with the reduction of the manufacturing sector, not only is their a reduction in jobs and exports, but their is also the reduction in skills related to the field.  This reduces the possibility of sustaining the industry or seeing its growth.

I believe that with economic rationalism that instead of killing off entire industries, there should simply be a reduction.  Take cars for example.  We once had a good number of car manufactures (in the 90s we had Toyota, Nissan, Ford, Holden and Mitsubishi).  This has reduced to Toyota, Ford and Holden.  I don't like the future of the Ford Falcon and see only Holden remaining.  So long as their export market is strong, economies of scale can be maintained and a highly skilled workforce and industry can continue.  I see this as a good thing, but it becomes increasingly reliant on the market success of the few models Holden sets out to produce.

The Germans and Japanese have proven that a highly paid manufacturing workforce can succeed in the world market because of the overall efficiency of their manufacturing process.  So high wage rates should not stop Australia.

A question, what value does the financial services add to the country overall?  I am thinking that it should accentuate any earnings in offshore investments and serves as a utilitarian function to financial business in the country.  Does it have a direct export function?  It should serve as a risk management function to the countries earnings, but in recent years I don't believe many people would think it has lived up to this function.

Are there two ways of looking at this topic?
* lining up the country so that it succeeds as a net exporter (effectively at the disadvantage of other countries)?
* improving overall world standard of living through ensuring sustainable levels of resources and improvement of technology?


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## Trevor_S (24 June 2009)

Timmy said:


> Again, thinking at a local or regional area, an 'export' could be something produced in a local area sold to another area, so bringing income to the 'exporting' area.




Actually, that's an interesting point.  For the sake of debate, if we were one world economy, with the free flow of goods, labour , services and a single currency (yes a dream of mine, too much wasted youth watching Star Trek perhaps ?  )... how does one earn "export income" in that closed economy ?



Smurf1976 said:


> As for the Gunns mill, well that's a classic one. I wonder how many people in the other states hearing the debate realise that the location, Bell Bay, is a heavy industrial zone best known for power stations and smelters as well as the various other factories there?




I see it locally, Chinalco wanted to put an Al smelter here in Townsville (which already has Cu, Ni, Mo and Zn refineries, so it's not pristine wilderness) , the local Greens representative was constantly in the paper saying what a environmental disaster it was....  another photo on another issue later on had her riding her push bike with an ALUMINIUM frame, so one presumes she has no problem with Al per se, just prefer it refined overseas or elsewhere at least and then imported back as a high value push bike after the bike is manufactured and assembled in Taiwan ? (and all the pollution involved in doing all the transport is easy to ignore I guess ?)

If she was TRULY concerned with the environment, she should be advocating we have it here in a western country, advocating we build it to worlds best standards, that we have engineers in scientists with oversite, that it is monitored to ensure those standards are complied with and THEN go on a crusade to reduce Al usage !


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