With all the economic trouble in the news lately, I’ve been pondering a question I occasionally ponder: what’s so bad about a service economy?
I’m not sure what else to really say in this OP, so let’s go with that.
Mods, if this is too vague for GD, feel free to move it.
Somebody, somewhere has to actually make something (which reminds me of a line one of the interviewees used in Ken Burns’ “The War” – that described the economy of Mobile, AL as based on taking in each other’s laundry.) You’d have to import all your hard goods, for one thing, and would need to export some services to balance your trade.
How many people do you need to say
a- welcome to Wal Mart?
b- do you want fries with that order?
answer that and you answer your question.
Because. for the most part, service jobs do not grow the economy by bringing foreign cash, they just circulate the same dollars. To grow the economy, you have to export something, and that is difficult with service jobs.
Well, add to that how many people you need to check you out at Wal Mart, how many people you need to manage a Wal Mart, how many people you need to manage the distribution warehouse, how many people you need to manage the region, how many people in its officer corps. Now expand that to McDonalds and every other major corporation you can think of.
Justin Bailey The service economy is based off of the notion that if we are outsourcing manufacturing we are still managing the companies from here. When the factories overseas learn how to be good factories and get setup with modern technology, they don’t necessarily require us to manage them, and then they can sell to the highest bidder. So if China doesn’t need our management teams (service) anymore, then we have no leverage over them, and our service people become unemployed while we are still dependent upon their goods.
While there are many intelligent points of view to economic analysis, this is not one of them.
I do not mean to be rude. I do, however, mean to brutally cut this thought out of contention. It is one of the msot completely untrue things I have ever heard concerning economics. It is utterly false, wholly nonsensical, and cannot be backed up or justified by any economic theory or practice, ever period, end of story.
Some economies developed using a deliberate export-oriented strategy. Most did not, and the idea that it is required is totally incorrect.
It is quite silly to think only tangible goods have value. Services also have value. You just need to produce something which has value and can be sold, it does not matter in the least whether it’s material goods or intangible services.
I do not understand why some people think material manufactured goods are somehow superior. They are not. Widgets can be produced cheaply in China and good luck trying to compete with them. But the engineering design is a high value service where it is worthwhile to compete.
Some people seem to think some things are “special”. We have to produce our own food or we will starve. Well, that is just silly. What you need to produce is anything which is worth a lot of money. Once you have a lot of money you can buy anything else you need. Just ask Bill Gates. Look what he’s been selling: bits and bytes.
I guess my thoughts on the subject have always meshed well with sailor’s.
Being around computer service people a lot has shown me that their services will always be in demand. For a more blue collar example, plumbers and mechanics are also two job classes that wouldn’t be going anywhere, even in a “service economy.”
But then I think about what sailor said. The US entertainment industry is bigger than nearly every other country’s entertainment industry combined. It is a ridiculous number of books, movies, TV shows, CDs, video games, etc, etc, etc that are imported every day. And then there’s the business related stuff connected with that, PC software that does special stuff is everywhere. Where’s the line between service and manufacturing there?
So what if the gadgets are made in China. China can’t do that cheaply forever. And isn’t there a market for homemade goods made close to home like Amish furniture?
In fact, although China’s manufacturing sector is growing, they are actually being undercut by other, cheaper countries already. It’s their total lack of anything resembling pollution controls and good harbors which make them such an attractive location. 
No, they still do good work most of the time and are pretty efficient at it, but they import, export, and import and re-export, more stuff than anyone else. Hong Kong and Shanghai are the big hotspots for this.
It’s very easy to understand why a material good is valuable. Understanding the value in services requires a little bit more abstraction, which most people aren’t going to come up with on their own.
Perhaps some folks are truly clueless when they recite, “we must make stuff in the USA ourselves”. However, when Austrian school economists advise that “the USA must stop consuming and borrowing and instead start making stuff”… the “stuff” they are talking about can either be tangible or intangible (intellectual property, computer chip designs, music copyrights, whatever). It’s a more sophisticated position than the soundbite would indicate. Even though intangible goods have value just like material goods in theory… they are overshadowed by manufacturing goods because of dollar volume. Check out USA Fortune 100 companies or Global Fortune 100 list – the overwhelming majority of companies are manufacturing companies. (Yes, Wal-Mart is big but it’s still overshadowed by manufacturing.)
The key issue is that the USA is trying to sustain its standard of living by depending on the loans of foreign countries. Btw, for all those who dismiss Austrian school thinking, even Warren Buffet agrees with this particular concept as stated in his well known essay Squanderville versus Thriftville.
Does it matter if USA builds the plasma TVs that its citizens want locally vs importing them from Korea/China? It doesn’t matter if the USA has “goods” to pay for it (exports). What high-value tangible/intangible goods can the USA offer as trade (export) to the countries that manufacturer plasma TVs? Oil? Nope, USA doesn’t have any surplus oil. Cars? Nope–foreigners don’t buy enough of USA cars. The USA does have Hollywood and produces the world’s top-grossing movies. But exporting intangible products like movies and computer design does not offset the enormous amount of stuff that Americans want to buy on the global market. Since the USA doesn’t offer enough “goods” to support its consumption habit, it can only offer US govt dollar debt (t-bills). If and when foreign countries determine that USA can’t repay its debt (because of increasing Medicare/Medicaid/SSN obligations) or that its debt is being repaid in funny money (inflation), then the export countries will stop doing trades. No more plasma TVs for the USA market. One strategy to deal with that withdrawal is to have an economy that makes its own necessities (such as plasma TVs).
Foreign companies continue to do business with USA because of their (current) faith in the USA dollar (debt) instead of actual goods that’s worth something. When talking heads say that USA is in an enviable position because the US Dollar is a “reserve currency”, this is one of the side effects they’re speaking of. In any case, this is a very precarious economic position to be in. What if the import item the USA wants is something more important than plasma TVs? Something way more important… like oil from Saudi Arabia? If the Saudis distrust USA currency, then they will not sell oil to USA — or they will sell it at prohibitive prices (denominated in Euros) that the USA can’t afford.
To be content with a “service economy” is to be the self-deluded citizens of “Squanderville” that Warren Buffet describes.
In one way, you are 100% correct but that correct answer is misplaced in this particular thread. If I look back at OP’s question, I assume he’s asking, “what’s so bad about a service economy [in the USA]?” (Context of [in the USA] added for editorial clarity.)
The reality is that the USA today is not completely self-sufficient. The most obvious deficiency is its energy requirements. The USA needs to import millions of barrells of petroleum to keep the country running. An “export” strategy of some type by the USA is needed to give foreign countries a reason to sell oil. A service economy does not offer enough intangible goods to the world marketplace to offset all the stuff Americans want to keep buying. Maybe when the USA has all the solar panels, windmills, and hydrogen cars to stop oil imports, then it might be able to forego exports.
Japan also imports all of its oil. But they’re in better shape because the world buys its cars (Toyota, Honda) and electronics (Sony, Canon, etc). They sell fresh fish too but not sure if that makes a big dent in their trade portfolio.
One thing that has somewhat of a wildcard effect on trade imbalance is USA’s military power. It’s not a factor that’s quantifiable on the balance sheets of trade portfolios but there’s a psychological effect on the world markets that affects the strength of the US Dollar. I think this side topic alone however warrants a PhD thesis.
A service economy does not invent. It does not develop. It does not come up with the new product and industry. If an American came up with a product he would have to have the Chinese make it. They ignore patents and copyrights.
What nation are you looking at? Americans come up with new stuff all the time. Hell, we invented the modern processes of business that plan, develop, and create new products! Probably most new products are even really service sector products, anyway!
Again, thogh I am not trying to be rude… Pay Attention!
What I wrote was exactly in response to the post I quoted, which not only had nothing to do with America, or service sector economies, but was wholly wrong about the economics anyway.
All the inventions that streamline manufacturing, all the new auto inventions and manufacturing inventions ,all the material changes and concepts, and you counter with a better method of paper shuffling. We are talking computers,programming,chemistry,engineering ,machining ,assembly and a lot of well paid jobs.Whats bad about it is we will not make anything. Our middle class was built on industrial production. The standard of living for the many will suffer.
That’s silly – exporting services is not only possible, but desirable. Services are not necessarily domestic –think IT call desks in India. Most Western countries could reasonably be described as service-oriented, and I doubt that every one of them runs a negative balance of trade. Hong Kong certainly doesn’t, and it’s mostly services.
gonzomax, invention and development are services. The fact that the United States runs a negative balance of trade has far more to do with overconsumption than with our economic tendencies.
Well, I propose that you “pay attention” to this thread or you at least cut the folks in this thread some slack.
The OP Justin_Bailey asked about a service economy. Even though he didn’t explicitly state USA, many reasonable people would assume he’s talking about the USA. And then Fear Itself replied with a reasonable answer if we interpret his answer to be about the USA… which makes sense because the OP’s question seemed to be about the USA.
If one really wants to nitpick, it was your answer that seemed totally out of place because it ignored the implied “USA’ness” of this thread.
What exactly are you so angry about?
Are we talking in theory or reality? Are you contending that the USA could rely purely on a service economy (including exporting services such as IT call centers) to pay for all the imports Americans want (petroleum, all the electronic gadgets, all the raw materials – steel, wood, etc, etc) ?
Ok, let’s think this out. America has today what most economists call a “service economy”. If the “service economy” is the desirable state, then why are foreign companies/countries continuing to accumulate USA debt as payment for their goods? Is this accumulation good for the long-term health of USA economy? Why or why not? Did you read the Warren Buffett piece?
I feel the burning need to point out one thing: Having a service economy does not mean that everyone works in a service job, just like having a manufacturing economy does not mean a nation has precisely zero farmers or service workers.
Erm - huh? While a 100% service industry has it’s obvious faults, are you honestly contending that there are no service industry jobs in computers, programming, etc? Computers and programming are almost entirely service industry jobs, manipulating the 0s and 1s to make data. It actually produces nothing physical at all.
Call it paper shuffling if you want, but the world has long since moved on. Information and the abilty to process it does have value.
Seriously, you think the US doesn’t invent things? Or for that matter Western Europe or any ‘service economy?’