Further to my earlier posting, 304. Democrats, Tories, economists and innovators are all clueless together, one respondent has suggested that I am concentrating too hard on the supply of physical consumer goods. Surely, he suggests, we are now moving into a service economy.

Indeed we are! In terms of the numbers employed in the service economy compared with previous eras when the primary sectors, mining and farming, and the secondary sector, manufacturing, employed the vast majority, the percentage is certainly rising all the time -- at least so far. But when you analyse service employment of any sort you will find that, in every instance, the jobs involve either personal services (that is, to someone else's physical environment, body or brain) -- which actually add nothing to overall wealth production -- or they involve skills (e.g. computer software, insurance, banking, etc) which are necessary appendages to the production and purchase of physical goods.

It is quite possible to imagine a world in which absolutely everybody is employed in service jobs even though this will never happen, of course, because we will still need the satisfactions of producing or using a modicum of physical things to pass the time of day, even if it's only in an uneconomic activity such as painting a picture or playing the piano. Factories could be planned, built and go into production by means of purely service jobs -- even service jobs that are far distant from a factory. But the end product is always a physical thing.

Even software products like films, music and educational material which are produced by personal skills alone also need a physical manifestation of some sort on which an artificially inflated price can be hung in order to cover the cost of the personal skills. But there's also a very practical warning sign here, too -- as Microsoft is discovering by its very low sales of software in Asia. Disembodied informational products lend themselves to copying and the more that a product is popular, the more that it will be copied, so the artificial premium applied by the supplier will be reduced to vanishing point in due course -- and the profit also. In this case, there's no economic effect at all apart from the minor costs to the copier in using a physical substratum for convenience (e.g. a CD or a DVD). This is totally opposite from the production of stratum goods as they steadily make their way down from exclusive sales to mass sales. The profits amplify enormously at each stage as the market deepens and widens.

I'm afraid that the notion that a largely service economy world is somehow economically different in character from a largely agricultural or an agricultural-plus-manufacturing world is incorrect. At the end of the day, it is food and material goods that keep both us and the civilised world going.

Whenever you read an economist talking about the coming service economy as though it were something special and different -- Beware!

Keith Hudson

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