Are services economies sustainable?

Sam Burmingham, founder and editor of the WeMoney Newsletter, has written a thought provoking article on his blog questioning the sustainability of service-based economies. Sam’s article is provided below for your reading pleasure. As always, comments are welcome.

A couple of week ago Ross Gittins wrote:

If ever there was a time when it’s obviously stupid for rich countries to be propping up their manufacturers against competition from developing Asia, it’s now.

The obvious way to maximise our lasting benefits from the resources boom is to let secondary industry take its chances and put all our effort into boosting tertiary industry, with all its clean, safe, well-paid, high value-added and intellectually satisfying jobs.

I’m all for tertiary education (heck, I’ve got four pieces of paper hanging on my wall!), but contrast that sentiment with an article on the front page of Wednesday’s AFR, entitled Work’s Cut Out For Graduates:

Job prospects for university graduates have significantly deteriorated over the past two years as employers shied away from inexperienced hires amid uncertainty over the economic recovery.

This isn’t intended to be another critique of Gittins!’ analysis, let alone his penchant for unfounded hyperbole (don’t you think ”obviously stupid” might be overstating things a touch, Ross?)

Instead, what I want to do here is propose a theory which goes against the grain of conventional wisdom.

My hypothesis? That service-based economies are not as sustainable as we might like to think.

Here Goes Nothing…

Obviously, industries which exploit finite resources (like mining) are inherently unsustainable.

Recognising this, the developed world has championed service industries, with the ultimate goal of building knowledge-based economies which, because they rely on humans’ intelligence and ability to communicate, are regarded as being inherently sustainable.

But is it really that simple? Let’s consider a few scenarios…

Education

As someone who spent six years at university and has completed further post-grad studies, it’s not for me to argue that tertiary education is a bad investment.

However, there is an interesting school of thought that the cost-benefit equation of education is skewing away from universities.

This view is increasingly common in the US, where the cost of a college degree is exorbitant, student debts are sky-high and employment prospects are poor. Indeed, 17 million college-educated Americans are doing jobs that don’t need qualifications, and that’s without even considering the millions more who can’t find work at all.

I am mindful that years of fiscal mismanagement coupled with the sub-prime meltdown got America into this hole, but is that the only reason that the world’s biggest economy is in the midst of the worst employment recession since the Great Depression?

Perhaps it is also the case that too many people have spent too much time acquiring too many skills which, in the absence of cheap money and artificially-inflated economies, aren’t as valuable as they once thought?

Globalisation

We Australians like to think of our education system as being the envy of the rest of the world; good enough to attract tens of thousands of students from India, China and other developing nations every year. They pay us handsomely and we instill knowledge and skills in these young people, making them more valuable commodities in their own right. They then apply those skills here in Australia or return home to ply their wares in a country which might not have as many tertiary educated workers.

I guess what I’m trying to get at is that – like the goods being shipped around the world every day – knowledge is a global commodity. And its value is subject to the same local standard of living factors that make factory labour cheaper in poorer nations.

Consider the rise of freelancing and the success of global outsourcing websites… Thanks to the internet, knowledge can be transferred around the world in real-time; and value can be extracted from those cross-border flows, as the purchasers of services chase the best result for the lowest price, from a growing pool of potential service providers.

As much as we might like to think that we are better educated than everyone else, perhaps that competitive advantage isn’t as strong as we once thought?

Liquidity

Maybe I’m oversimplifying, but if there is one thing that a service economy relies upon, it is liquidity… A real estate agent pays a solicitor to handle all her property settlements; the solicitor pays an accountant to handle his tax affairs; the accountant hires a personal trainer to keep him healthy over the winter months; the personal trainer gets her public liability insurance from a broker who she met at a networking event organised by the local council; and so on.

Whilst the music keeps playing, there aren’t any problems. The money merry-go-round keeps spinning, faster and faster, and we all feel wealthier and wealthier in the process.

But what happens when the chain breaks: When the solicitor decides that, because he isn’t handling as many settlement to he used to, perhaps he should do his own tax return?

Not for a moment am I suggesting that service industries aren’t an essential part of our economy. However, what I am suggesting is that, like everything else, there needs to be an element of sustainability in the way that we look at our service sector.

By all means, let’s embrace knowledge as a valuable resource. But let’s also be careful about the extent to which we rely on it as our saviour – whether that be mitigating the risks of Quarry Australia, warding off Dutch Disease, or in response to the decline of manufacturing.

Over to you…

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. An interesting angle and well worth exploring as well. Certainly some services roles seem to be more vulnerable than others.

    Personal Trainers, secondary health practitioners, domestic cleaners, Lawn mowing and garden services are just a few I can think of that are likely to be cut back on when household dollars get tight.

    I feel part of the reason Australia was attractive for students, particularly from Asia, was based largely on cost and being in a similar time zone. However with the strong AUD, I would imagine the cost is awfully onerous for some families. Especially when compared to a US education.

    I think retaining the skills and ability to design and build ‘stuff’ is critical for the long term success of this country.

    • Yes, those services might get cut back. But so might electronics, cars, new fridges, toys, and a brazillion other manufactured items.

      And so might high quality produce, but on that point, it’s seldom that we hear these days about how an economy can only survive with a strong agricultural base. I think we’ve moved on from those (quaint) beliefs. It’s about time we did the same with manufacturing.

      There are some countries that have a competitive advantage with supplying food, and some that can supply manufactured goods. If I recall, this concept has been covered before, in some earlier economic writing…

      • Nathan, you’re right when you say that households may cut back on tangibles also, however what you have to understand is that physical products (durables) have a greater notional “lasting value”; that is, the euphoric feelings one gets from buying and using a physical item, lasts longer than the glow from a massage, or the feelings after a session with the personal trainer. This is why personal services get cut first.

        Additionally, what you say as far as moving on from manufacturing is true to some extent and has already happened here. For Australia to have moved from ~26% of GDP in manufacturing in the early 80s to now ~7% is a staggering decline our capacity to produce tangible goods (the numbers are approximate as I couldn’t be arsed looking them up again sorry.) We have well and truly moved on already, so any further decline is just rubbing more salt in to the wounds. This has all been done as a consequence of subscription to conventional economic wisdom, which tells us that we have no factor endowments which justify our participation in the manufacturing sector. Sure the natural resources are here, but it’s so much cheaper to ship them out and ship back the finished product than to make them here.

        Factor Endowment theory however only holds true if:
        – The “global” economy is truly global (without restrictions and barriers)
        – Any given country which doesn’t possess a factor endowment in one area of industry has some benefit in another

        Of course, not only to we know that the global economy still has its fair share of barriers and distortions, but we also know that many countries have NO FACTOR ENDOWMENTS which are relative to the global economy. They therefore have no prospect of wealth creation in the global market, and the best bet their citizens have is to become economic migrants/refugees in the event that their own country’s economy goes bankrupt. This doesn’t mean to say that the endowment is not there, but the costs or risks associated with them are unattractive so long as there are alternatives available (think resources in certain African nations versus others and the corresponding political climates of those nations.)

        In the real world however, the theory is flawed as it disregards market participants (countries) who have nothing of value to offer at a particular point in time – they are simply ignored and disregarded. At best they will be used as sources of immigration to keep the music playing in countries who can still participate, and who still need to grow.

        UE’s point strikes to the heart of this…what happens when you have no more relevance? When the competitive advantage of your “knowledge economy” has been replicated by your global economic competitors, what will you offer then? How do you keep the music playing long enough to avoid people realising that you’ve been subtly exporting the “value creation chairs” over the preceding decades to low cost countries?

  2. Aren’t you forgetting Engineering, IT and Science students who actually build stuff (even if those stuff are not physical, e.g. intellectual properties like wifi patent created by CSIRO)

    • Sam Birmingham

      Duly noted, Kevin. When it comes to academic talent, give me someone who actually knows how to create something useful any day of the week.

    • Sam Birmingham

      I’m certainly not forgetting those professions, nor am I trying to discredit other tertiary skills.

      All I’m trying to say is that we need a bit of balance to our economy – sustainability is the key word.

      As MacroBusiness readers know, Australia has depended on agriculture, mining and construction to get us through nigh on a century. Whilst service industries are still valuable, let’s not forget that it wouldn’t hurt us to have a manufacturing sector and a bit more diversification too.

    • The_Mainlander

      True Kevin, and thank god we sued for payment of the WiFi standard invented by the CSIRO.

      But my question is “Why is Australia so shit at creating benefit from our brilliant ideas IP and people?”

      We have bugger all Venture Capital and no one seems to believe we can do it.

      NO one even seemed to notice that the CSIRO invented this standard which has changed the world of computing.

      Let alone the new work being done in Australia on photonic routers!

      WE need to learn to believe and compete and be prepared to commercialise and eventually commidify our ideas/product not just quarry stuff.

      Great article thank you Sam.

      • Amen to the Mainlander. It seems the US is far better at turning new ideas and research findings into businesses – whether the ideas come from universities or the private sector. Why is Australia so bad at this? Is it cultural? Do we have no venture capitalists willing to take risks on new technologies?

        • Sam Birmingham

          No doubt the US is better than us (and pretty much the rest of the world) at backing startups and cultivating an innovative environment.

          As per my post below, I think a lot of this is (a) cultural; and (b) that whilst we may be pretty good at supporting innovation in a few industries, our focus / core competencies are pretty narrow.

      • Sam Birmingham

        Too true, Mainlander.

        Entrepreneurship is something that I’m really passionate about and, as you’ve pointed out, I don’t think we’re overly supportive of it in Australia.

        You might be surprised about the availability of VC funding, albeit that (i) we’re still nowhere near the levels of elsewhere in the world; and (ii) there are probably only a handful of industries where the support is available.

        I think the problem goes beyond VC and funding though… We need to get better at plugging in people across the entire entrepreneurial ecosystem — from helping the kids with ideas to realise that they’ve got ideas, teaching them how to give that idea life, connecting them with the people they need to start building some teams, then comes all the commercialising and scaling up — which is where VC etc obviously get involved.

        I would suggest that Tall Poppy Syndrome also plays a part in Australia… We love knocking people and bringing them down a peg or two — who is an easier target than someone who is trying to do something completely new and out there?!

        • The_Mainlander

          Same page, just like to see Australia make a go of it.

          We don’t need to be ‘battlers’ anymore. (in fact that is just a convenient play on the MSM sheeple for the benefit of repressive apparatuses)

          We are long past being a colony outpost and we should be prepared to act like a Nation with self belief.

          We need to look to ourselves and believe that we are more than good enough.

          We don’t need OS talent, we just need to allow the best to be recognised as the best. And I am not talking about innovation we already have it.

          Why do we think that sport is the only place that is acceptable to be Number 1?

          We’re an odd bunch.

          😉

          But if we recognise this and focus on making stuff ourselves and that is even better than the competition. Then we will be free.

          Hmmm sorry liberal rant.

          TM.

        • As an american now living in Australia, it is a culture issue on multiple levels.
          It starts in the schools- where the curriculum and decision are determined at state level for the whole state- this means that all students receive the same “education” but stifles any creativity the teacher may input, and any local preferences about education. There seems to be an expectation that someone (a bureaucrat) has a better understanding of which textbook will be most appropriate, when a person on the ground might have a better idea.
          The other issue seems to stem from the status as an English colony- same issue- that someone else far away knows better than the person on the ground what is needed and what is required.
          Independent decision making and risk taking not encouraged.
          THe cultural myth that Australia has embraced is that of the “battler” the little guy doing it tough in a world set againsthim, where the best he can hope for is a steady job (employee) and a home and family in the burbs.
          By contrast, the american myth (no closer to the truth) is the Horatio Alger(sp?) hero- who works his way up from bootshine boy to millionaire (employer) through grit and honesty. Neither is true, but both influence the decisions made

  3. Great article
    if you put all industries on a scale from meeting basic human needs (eg agriculture) to meeting wants (eg wedding planner), then busineses further up the scale thrive in highly liquid, credit growth driven economies and disappear in contracting/deleveraging economies.

    When things are tight people outsource almost nothing, even growing food. When things are great people outsource fitness, gardening, etc

    • Sam Birmingham

      Thanks for the support 🙂

      I think that needs vs wants dichotomy is spot on – well said!

      In the context of credit-driven economies, I can think of another scale which provides a pretty good guide to the utility of various industries: The extent to which the industry relies on commission-based payment / transactions.

      Doctors, scientists, engineers = Actual value
      Brokers, investment bankers, fund managers = Perceived value

  4. While the economic arguments against protection of manufacturing and agriculture are manifold…..I feel there is another dimension that is often overlooked. That is the geopolitical one.
    Unbridled global population growth will produce increasing conflict over water, food and energy…in fact raw materials of all kinds. Growing enough food to feed your own people is a good place to be in an insecure world and we would be wise to make sure that is always the case here on our island…..and we may need to fight to defend it. With the geopolitical decline of both the UK and the US already apparent who will be there when we need help in the future….the chinese?? Which I think is why successive governments always appear willing to continue subsidizing automotive manufacturing here, and ill fated submarine construction. We may need at short notice the machinery and expertise to manufacture armaments.

  5. While the economic arguments against protection of manufacturing and agriculture are manifold…..I feel there is another dimension that is often overlooked. That is the geopolitical one.
    Unbridled global population growth will produce increasing conflict over water, food and energy…in fact raw materials of all kinds. Growing enough food to feed your own people is a good place to be in an insecure world and we would be wise to make sure that is always the case here on our island…..and we may need to fight to defend it. With the geopolitical decline of both the UK and the US already apparent who will be there when we need help in the future….the chinese?? Which I think is why successive governments always appear willing to continue subsidizing automotive manufacturing here, and ill fated submarine construction. We may need at short notice the machinery and expertise to manufacture armaments.

  6. I think this is a false dichotomy.

    Consumable goods aren’t so different from services. A good consumed was still essentially a provision service – there’s nothing left to show for it once the good is gone.

    A more interesting distinction can be drawn between survival goods and services, and luxury goods and services.

    We all need the survival goods and services. If international trade were suddenly cut off, any population that is not currently producing these will suffer in the short term as they scramble to reorganize.

    So it could be argued that a country that is overweight on luxury goods and services should be incentivizing some kind of restructure, for strategic and safety reasons.

    • Sam Birmingham

      Thanks for the feedback, Paul.

      I think that you really hit the nail on the head with the distinction between survival goods/services and luxuries…

      The problem is that it is those luxuries which make us all feel richer and happier — which is why Governments are so keen to push us in that direction

    • Paul, this is not consistent with globalisation theory which suggests that we shouldn’t hedge against these risks as it creates imperfect market conditions.

      Unfortunately, our political overlords bought this utopian approach hook, line and sinker somewhere in the past, and since the early 80s, we have done our best to turn our back on any type of production based industry we can.

      The real difference between goods (consumables) and services is that that unless you are in a life threatening situation, or have a need which is governed by some technical or regulatory constrained structure, services are not a necessity to the individual on a day-to-day basis.

      I have long said that services are provided entirely in support of the production, consumption or delivery of tangible goods. This holds true regardless of how you look at it (directly or indirectly, upstream or downstream contribution), and extends from dog walkers (free up time for manufacturing worker to work overtime) to skydiving instructors (utilise goods made by manufacturers.)

      If we start to look at things from this perspective, we will see that in many, many cases however, we are simply facilitating the consumption and/or delivery of goods manufactured by our economic competitors, and if we fail to generate sufficient corresponding capital inflows to sustain this through upstream value creation, our standard of living will begin to steadily decline.

      To your point, a country that is overweight in luxury goods and downstream (delivery and consumption) support services, will eventually need to restructure for all kinds of reasons.

  7. Sam,

    Great article. Definitely need balance.

    Gordon Brown famously said all the UK economy needed was a service economy, and the city, and that has been shown to have significant problems with much of the manufacturing, engineering etc. shrinking as has the city.

    I blogged on another article tonight here that my uni professors say many engineering students now can’t get engineering jobs, and it’s been that way for a few years. We do need science, engineering, and manufacturing, but they are slowly being sidelined.

    • Oz does not have much of an REAL innovation culture, which is a shame (i am an engineer!).

      Attitudes that more culturally prevalent, as they are in, say Germany and the USA, would benefit both the economy and the social fabric (innovation is exciting!!)

      my 2c

  8. The main problem with services is that apart from a few exceptions such as telecommunications they are not very scalable. How many clients can a lawyer or personal trainer have? Manufacturing on the other hand is characterised by significant capital investment. A modern factory that employs a handful of skilled technical workers can produce a high volume of goods which allows them earning higher salaries than people employed in most service industries.

    I remember that during the credit boom time before the onset of the GFC the main employment growth was in low paid service jobs in hospitality, retail and personal services which seems to confirm UE’s liquidity thesis.

      • As pointed by Peter:

        > Service Industries really ride on the back of
        > basic industries – … – but you get the
        > idea – no quarries, no hairdressers; no
        > farmers, no waitresses.

        There must be some highly productive base on which the service based economy is built upon. Obviously mining with its heavy capital investment can be such a base and usually, if all goes well, is very productive. Given the size of trucks and excavators that they use they don’t need too many people when the production commences. However, mining can be very volatile and risky and it often takes years between exploration and production. I’d rather be in the business of building those trucks and excavators than digging out dirt (it’s the old thing about gold and shovels). While you can build trucks and excavators in places where people want to live with their families and sell your equipment to miners around the world, mining is inherently transient. You dig all the stuff out and you move on living ghost towns behind. If you make mining trucks and the demand for them falls you can always try manufacturing normal trucks or some other machinery which may be in higher demand. You will have the capital base and skilled human resources to do it. When you dig out coal and the demand for it falls you can’t start digging out gold in the same pit.

        It’s quite a common theme in developed economies that about the same time they were losing manufacturing base, their FIRE industries were rapidly growing with their main product being credit and derrivatives. Since they were in a way highly productive (one mortgage broker was, in a short period of time, able to sell millions of $’s in loans produced by banks in arbitrary quantities) they could support other service industries. How it all ended up we can see based on the example of the US.

  9. Thanks – a much-needed input to the “is Globalisation REALLY good for everyone?” debate.

    You chose to focus on education as an example of our Service Industries. Two points about that – first, what happens when the overseas students go home and start educating their own people, as a far less costly alternative to sending them here to be educated?
    Second – we probably have an over-inflated idea of the quality of our education. Having worked in some sectors, I’m only too well aware of how poor some of our technical education is, and the way some Colleges in (say) India are already far, far better than ours.

    As several comments have already suggested, Service Industries really ride on the back of basic industries – (sorry – I got edumakated when we still used the primary-secondary-tertiary classification) – but you get the idea – no quarries, no hairdressers; no farmers, no waitresses. There has to be some essential value-creation as a basis for the economy, and without it, the Accountants & Bankers are useless – as the US is about to discover.

    • Peter is right , Indias education system is supported by the industries it has which feedbacks onto the kind of education that is possible. India launches it’s own satellites into orbit

    • Sam Birmingham

      Right on, Peter.

      I agree that we’ve probably got an over-inflated sense of belief in the quality of our education system. Perhaps even worse is that we’re really bad at matching people with the skills that we actually need.

      Look at the number of lawyers and accountants that universities have churned out in the past few years… When my father studied Law, the degree was only available at one university in Perth. Now it is available at three or four.

      Why? Because courses like law and accounting are relatively cheap to teach and (until now, at least) there has been an ever-increasing appetite for more young lawyers and accountants… I don’t think that appetite will last forever

  10. Re Creeping Credentialism, a parable.
    Imagine we are interested in doing better et sprinting. So we study the winners. We note that all the winners are wearing running shoes and all the losers are barefoot. That is an impressive finding! We conclude, based on this remarkable and consistent finding that if we want more people to win at sprinting what they all need to do is buy running shoes.

    It is worrying that people really are this stupid – and government policy is based on it. But fear not for the uni’s, they have shown themselves to be well capable of surviving by producing useless degrees.

  11. Great article Sam. However, I’ve always struggled with the concept that economies develop towards a services base. Does that mean one day when China, India, Russia, Africa etc are first-world nations the world will be full of lawyers, hairdressers and personal trainers eventually? I struggle with the concept that passing money between these service professions actually makes people feel richer and the grow economy. If the lawyer pays the hairdresser $200 who then uses this income to pay the personal trainer, who then pays $200 to the lawyer for a will – how does that little merry go-round actually increase wealth? It’s just a barter system with money as the intermediary. And throughout this process, how do they pay for food or the items they use in their jobs (you know, those things that come from agriculture and manufacturing).
    The idea of a “service-based” economy seems like a fallacy to me as it doesn’t increase productivity or add value (on the same scale) as economies devoted to efficient manufacturing and production. Am I missing something?

    • Sam Birmingham

      Thanks for the feedback, QC.

      Like you, I have always been bemused by the “conventional wisdom” that developing economies can progress up the value chain — raising standards of living along the way — until they end up with the consumption and service-oriented economies that have served the developed world so well (I say with a hint of sarcasm…)

      If the Chinese and Indian are to be driven by services and consumption, then who is making the “things” that we Westerners are so fond of buying?!

      What gets my most of all is that our pollies (and commentators like Gittins!) continue proposing these “silver bullet solutions”, when surely what we need is a more balanced, self-sufficient economy across the board?!

    • IMHO, such a system is “closed”, in the sense that it’s “entropy” (quality degradation) will build up and render the system that slows until it is dead.

      The only “solution” for maintaining the system, in that sense, is for it to keep increasing its indebtedness (debt-injection)…but that has a Ponzi structure, and, therefore, only delays the inevitable slowing and failure of the system (via “slow debt poisoning” of the system).

      But primary industries are the new, quality “input”, along with intellect, which improves the quality of the primary input, to truly maintain the system – and even increase the internal quality of the system.

      My 2c

      (and, yes, i’m making Thermodynamic analogies there!)

      • Yes, you’re making Thermodynamic analogies there, but damn they are accurate too. Unless we actually produce things and increase productivity, well…

        I agree Aussie culture is an issue. Partly this ‘tall poppy’ thing.

        In Asia or the US if you have two BMW in the driveway, the folks around you think you are a success, here in Oz the are more likely to think you are a wanker… go figure.

  12. Not only that but half the services jobs can be automated – they’ll soon be doing your accounting (though likely not the audit just yet), tax, wills, personal training (check out the new Virgin gyms) as well as half the mundane office work. They are also on the way to being your checkout chick as well as various other lower end jobs too. Automation will be cheaper, faster and more reliable than people – and at first embraced because it will be easy and available as a impersonal 24 hour iPad app.

    Not that this will mean more IT guys either – it will be Software as a Service (SaaS) all running on servers in some global data centre that you access from your browser for a monthly fee.

  13. A great blog piece and congrats to all contributors. I think you are right Q and it explains that why during times of war and depression cities are the the worst places to be.
    What are the essential products and services we need and can export? Answer this question and one knows where Australia should direct its economic and political policies.
    Of course it is not that simplistic because there are some (high tech) industries which whilst they may seem peripheral to the ‘essentials’ argument are vital enabling and supporting industries – like satnav yield mappers or neutron probes which help improve the efficiency of farmers.
    My 2 cents.

  14. When lawyers start mowing their own lawns it means they can’t make more money doing something else instead.

    The Government increasing the costs of production would do this just nicely. Watch for yourself on Sunday afternoon when Kermit’s ventriloquist announces the latest impost.

  15. With regards to the education systems throughout the world, you seem to paint the image of China and India having terrible schools and Australia having the best in the world. Both scenarios are untrue: the Indian Institute of Technology is supposedly one of the most difficult to be admitted into in the world, China bears host to many rising institutions that have rigorous courses and seek only the best of their students. Australia has okay universities, in other worlds they’re acceptable by the standards of a developed country, but they aren’t great, like those in the UK and the US.

  16. It really is a tough call. Over the next few years everything will change. The decision for entrepreneurs will be 1) will the internet affect me? 2) can China make it? 3) will Apple replace me?
    If it is no, then you have a business for the future, if not then you will be sucked up into the Global market. Ouch.
    Services are only, now being affected. Good bye newspapers, TV stations, photo developers, manufacturers.

  17. Thanks UE for the topic.
    I think other contributors here have raised some particularly pertinent problems with the growth and concentration of the ‘Service Sector’ so I’ll not try to comment on their take except to agree with those who have questioned the presumes superiority of our education system. In my view this is just misplaced disgraceful European arrogance by those who have not seriously looked at what is going on in India, japan, China, Korea, Taiwan et al

    I always have a problem with macrobusiness in so much as there are so many good topics and so much great contribution that I cannot keep up with it and run a business at the same time.

    Now by way of clarity I am an importer selling recreation type items. So what I consider to be good for the nation is of, at least, short term disadvantage to my business and to me personally financially.

    IMHO the topic requires a lot more thinking and, indeed, is a much larger topic than modern economists realise. I always quote Mark Twain and feel we will end up in the same place as his poor women who ‘eke out a living taking in each other’s washing’. Prince and I have touched on this previously.
    I think it is a bigger topic than even the contributors to the discussion here realise.
    It is some 40 years since my formal education in Economics. So you modern blokes may well consider my thinking passe. Yet, economically and socially the nation is at about the structure and position I thought it would end up when I looked forward all those years ago. So there is something to be said for my reasoning if it can prove so accurate.
    At the time of my formal education the great new economic thinking was that a high service content meant you were running some sort of ‘sophisticated’ advanced economy. Unfortunately it seems to have been a notion that has survived in academic circles resulting in the corruption of our whole economic and productive system.
    I wasn’t a ‘good’ student in that I was not averse to stand-up fiery debates, in the middle of lectures, with both lecturers and tutors and the occasional Professor. Those who know a little of my history of late will know the latter class are still in my sights. I tire of pretentious claptrap which this site, mercifully, seems to generally avoid.

    The topic is so massive I need to break it up and perhaps this may become a little disjointed, repetitive, and necessarily incomplete.

    I think the first thing that needs to be categorically stated is that the term ‘service sector’ has got to be one of the great misnomers in the whole of history. What we now have is not so much a ‘service sector’ so much as a whole self-interested, over-paid, over-indulged group whose main activity and goal is impede those who actually produce things. Does anyone think the whole judicial and legal system strive for any other goal other than to enrich their closed group? How much of Government actually assists productive people? Who in the Government really sees themselves as a servant of the peoplke but rather as some superior class destined to rule over us peasants! One could ramble on through pretty much all the ‘service sector’ professions. There are some notable exceptions and in particular it seems to me the medical profession is way undervalued RELATIVE to other groups.
    Let’s not divert the discussion by trying to work out who is who!

    In addition to the points made by other contributors I’d add the following observations in regard to the unsustainability of an economy largely consisting of a ‘Service Sector’

    Foreign Debt

    Again here, as usual, we have a discussion that has proceeded for some pages without ‘Debt’ and in particular, ‘Foreign Debt’ rating a mention. In our Western style economies the growth of the ‘Service Sector’ has been characterised by increasing Foreign Debt and, in Australia’s case at least, a massive degree of foreign ownership of our resources, production and food chain.
    The growth of the ‘Service Sector’ is characterised by an increasing Currrent Account Deficit. For those who think the long-term in economics is 10 years, including my esteemed ‘Magic Pudding’ professor, take a look at the RBA tables for Current Account balance. It dates back past 1959, but to me the problem which started in Universities some time about then, was well in evidence by about 1970-71.

    If you take the Service Sector as a functioning entity then Solicitors charge people outrageously for even minor services. With the money they earn they buy a Mercedes Benz. They also inhabit coffee shops where the Coffee is imported. The owners and ‘servants’ of said Coffee Shop earn income which they spend. They spend it on food, much of which we do grow ourselves although that has now coming into question as to whether we can grow enough. They spend it on houses. Now that is a topic that is well covered in these pages. They buy goods for the houses most of which are imported. So the growth of the ‘Service Sector’ has been at the expense of increasing CAD’s and Foreign debt.
    Again, in Australia’s case this is accompanied ‘pari passu’, by the massive sell-off of our resources and production. We either close it down or sell it off. Bob Brown’s conclusion of 83% Foreign Ownership of our resources dovetails rather nicely with Stephen Mayne’s Company by company analysis which realised a figure of 80% a couple of years ago and my own crude analysis that came up with a number of 78% about five years ago. No matter how you look at it, the outcome is a disgrace.

    Credit creation (for the sake of brevity let’s not try to distinguish any difference between credit and money)
    You can continue to run an increasing ‘Service Sector’ provided that you can keep printing your own currency without severe detriment while, at the same time, covering the increasing CAD that results So….
    Firstly you need to be able to cover the increasing CAD’s through the process of offering higher interest rates to creditors than almost anyone else in the world.
    Secondly you maintain the value of your currency mainly by allowing holders of your currency to buy whatever assets they please.
    Both of these things are apparent in the Australian economy. The process seems to be accelerating every day. Almost every day another Aus institution passes into the hands of Foreign interests. Unfortunately this hides the extent of the sell-off that is going on below FIB limits and from Private Companies and individuals.

    In the last 30 years the negative results of unlimited credit creation, whether by Government or Banks, have been hidden by asset sales and the rise of China as a source of manufactured goods. What would in the past have shown up in inflation now shows up in, houese prices (inflation?), CAD’s, Foreign Debt, and Asset sales.
    So sure you can print unlimited amounts of your own currency as long as you don’t give a rats about the long-term welfare of your country, your people, or our future generations.

    House prices
    The inflation that would normally result from an increased service sector, and increased resutlant credit creation, has been masked by increasing imports and declining prices from China for our everyday consumption items. Inflation has shown up in housing, medical, legal, education etc that we cannot import. Those who recklessly advocate abandonment of our farming and manufacturing sectors should take a very close look at what is happening ‘on the ground’ in China. You need to go there and talk to workers, factory owners and see what is now happening. Listening to such as the RBA, Treasury etc is a total waste. They don’t observe or listen, and they don’t think. “ A man who knows not, and knows that he knows not, is a fool. Shun him!”
    The process of the last 30 years is about to be thrown into sharp reverse. Again take note ‘Magic Pudding’

    So the economic beliefs re increasing service sectors, abandoning manufacturing and ‘productive’ sectors in favour of a more ‘modern’ economy are about to come unstuck.
    An economy that is based on an increasing ‘Service Sector’ is NOT sustainable. It relies on the notion of unlimited debt at negative interest rates. Fair dinkum! The Magic Pudding’ was a fairy story not a true story!

  18. It’s ‘a man who knows not and knows not that he knows not is a fool’

    Sorry as I’ve said elsewhere I can spell. I’m just a seriously bad careless typist

    • The_Mainlander

      Here here, me as well!

      TM.

      “I have begged and pleaded for the MB Admin to add the Disqus plug in for WordPress so we can edit our comments (Typos) but alas poor Yorick his code hath no poetry!”

  19. I’m thinking combine harvester instead of dozens of men, Farm tractor instead of a ox. We have replaced human labour with machinery which has allowed us to produce more for less cost, subsequently allowing us to have the thousands of different jobs that we have now.

    If we wish to increase our prosperity sustainably then a greater PROPORTION of our jobs need to be in the service industries as a greater proportion in agriculture & manufacturing are replaced by machines, we can only have more things if we can produce them at a cheaper price relative to the average wage.

  20. Peter why do the men replaced by the combine harvester have to take up jobs that require taxation of the farmer and owner of the machine? By taxation I mean any function that costs the enterprise without adding anything to it.
    Why couldn’t they have jobs say creating irrigation ditches to enhance the productivity of the land or more efficient use of the water? Why couldn’t they be building better tractors instead of importing them? Why do they have to become part of those who absorb and confiscate rather than doing something else productive?

    Why is ‘service industry’ regarded as in any way efficient, let alone more efficient than production itself?

    • Flawse, Must say I haven’t looked at exactly what jobs are classified as “service industry” but agriculture & manufacturing would still decline as a percentage of the total jobs available, if we are to increase our prosperity sustainably.

      “Why is ‘service industry’ regarded as in any way efficient, let alone more efficient than production itself?”

      I’m not arguing that, our prosperity IS because of increasing efficiently in agriculture & manufacturing not in the service industries.

    • I guess that a way of expressing this/my notion, is that a “service” industry should function as a utility to the “needs” industries: to make those needs-industries more efficient and stable.

      ie. service industries can never be considered a means to their own end – they cannot sustained themselves.

      Similarly, when service industries become their own “macro-cycle”, their end cannot be too far away.

      • “service industries can never be considered a means to their own end – they cannot sustained themselves.” no argument from me, but it does not translate into more jobs in the needs-industries, as I’ve said above – we can only have more things if we can produce them at a cheaper price relative to the average wage.

  21. Sorry Peter. Maybe I misunderstood what you were trying to say.

    Burbwatcher. Well summarised!

  22. Most people don’t understand the difference between wealth creation and wealth distribution. Most people don’t even know the factors of wealth creation. Most modern uni students can tell you the factors of production but not the factors of wealth creation.

    Basically services are derived from OPM-other peoples money. The Government in all its forms is only a service racket. Ditto the FIRE economy+ superannuation. Banking, accounting, law etc. Most or all are totally dependent on government policy for their livelyhood.

    Are the “needs” real or political policy artificially induced? Debt based money? Flat tax? No red tape? Minimal government(no large bureaucracies). Remember a social contract for civilisation is where the benefits of coming together outweighs the cost. Without the delusions of government, banking and credit and debt and inflation most “service” nonsense would cease to exist.

    If you want to look at real service economies then look at the former USSR, former China and the Indian bureaucracy, to see them in all their glory.

    Most people can’t differentiate between socialism and services. They are so intertwined that it is often hard to unravel.

    However, as Margaret Thatcher observed, the problem with socialism is that sooner or later, you run out of other peoples money. (pension ponzi schemes, government ponzi schemes, etc.).

    So people in the service sector should not bite the hand (producers) that feeds it. Look to the oldest profession ( a service) and show me the freebies? OPM?

  23. Where is the holistic point of view? If we discuss any subject separately from any other, our economy will be doomed. It is time to reconsider and reassess the individualistic approach of our western economics. Everyone is digging his own hole and no one wants to see the big picture.

  24. Elephant in room. I wish I had got onto this thread earlier.

    “URBAN LAND PRICES”, especially relative to incomes:

    HIGH: China. India. Australia. Britain. California.

    LOW: Texas, Southern USA, Central USA. Germany.

    High urban land prices relative to incomes, always precede an economic meltdown. Japan and Korea, late 1980’s.

    The urban land prices in China and India are now so ridiculously high that they are high in absolute, international terms – let alone what their average citizen and average genuine small new start up business can afford. “Bye bye, social mobility”, hello, social instability (and revolution?).

    The trend for industry to locate in Southern USA INSTEAD OF CHINA has already started. (Apart from “instead of California”, which has been a “given” for at least a decade).

    Australia COULD have utilised its land as a competitive advantage. It chose not to. Think this through.

    Land prices are the LAST place where “wealth increase” does any GOOD to an economy. Higher discretionary incomes: tick. Higher savings and investment in business: tick. Debt-free population: tick. Even higher consumption levels: a qualified tick.

    Rising land prices: a tick for a small minority of people who are actually going to cash in their “wealth” – and even this wealth is “transferred”, NOT newly created. It is transferred from the future incomes of every new entrant to the property market. It is matched dollar for dollar by debt burden. It distorts urban economies, erodes productivity, raises future labour cost inputs, reduces new business start-ups, inflicts lower health and educational and well-being and social mobility outcomes on younger generations. It drives the most land intensive industries out of existence, including “recycling”.

    “Service” economies are very nice from some points of veiw, especially urban planners and greenies. But read “The Flow of Money” by William Fruth. It all has to be paid for by SOME part of your economy that brings money IN from outside the economy – and “primary industry” is the thing that does that the best.