The Big Picture…
Commonly, we classify economies based on their main output. For example, we see agricultural, goods, and service economies.
Since we now see service as the fundamental basis of exchange, then we must believe (derive) that all economies are service economies. And that is foundational principle #5.
But, what does that mean to our old – and useful – view of economic eras? Well, an era is now “defined” by the competences – skills and resources – that are predominantly applied and improved upon. That is to say, the competencies seen as most beneficial to society.Economic eras highlight when the application of particular competencies are seen as the most beneficial (and so most dominant). Click To Tweet
It turns out we can identify similar eras to the old way, by considering the following competencies:
- mass production and management
- resource integration
The two take-aways are:
Foundational Principle #5
If we agree with the 1st foundational principle of service-dominant logic, that service is the fundamental basis of exchange, then we naturally arrive at the 5th foundational principle:
All economies are service economies.Vargo & Lush (2016) – Foundational Premise #5
It’s hard not to. Since if every exchange is vased on service then everything in the economy is a service; hence the economy is a service economy.
However, in the old world, we usefully classified economic eras, and could draw some conclusions on the shift between them. These eras were based on outcomes the predominant economic outcome – agricultural, goods and services.
Let’s see how we would divide our service-only economy to explain the observations. And in passing get a better intuition the clearly observed shifts in economic eras. And we’ll start by looking at the classic way of defining economic eras.
Economies viewed in a classical way
Even those of us with a small appreciation of economics will remember learning about agricultural economies and the industrial revolution. And Figure 1, adapted from Chesbrough’s book “Open Innovation“, nicely represents our classical thinking of economic eras.
Such thinking leads us to view three specific types of economies: agricultural, goods and services.
We usually identify three eras: agricultural, goods and service. And a general progression across them. That might (erroneously, as we’ll see) lead us to equate an agricultural economy with less developed times/areas. As well as seeing moving to the goods economy as progress.
One argument against the graph above is that the pie is not the same size. But let’s leave that aside, for now, as it’s not part of our discussion. Let’s briefly look at each era.
The agricultural era
When an economy’s output is predominately food- and live-stock based, we classify it as an agricultural economy. And that economy is seen as having an emphasis on optimizing the production and distribution. The more, and better quality goods that can be produced the greater exchange the farmer can get (under the constraints of supply/demand).
At first, each farmer initially seeks to be self-sufficient. A farmer that generates surplus can exchange/bater their surplus and/or take it to market. Eventually farmers specialise – one begins focussing on grain as their land is good for that; another with poorer growing land perhaps focusses on livestock. And that specialisation is seen as driving a need to exchange goods. The grain farmer, for example, might want an animal to cook; whereas the animal farmer wants the grains to feed their animal.
Agricultural economies are seen as giving way to goods economies as, due to growth, less proportion of income is spent on food.
The goods era
As less proportion of income was needed to buy food, more becomes available to buy goods. Farmers can buy better ploughs to get better yields and higher incomes; to buy more goods. Goods themselves started requiring other goods to be purchased – machinery required replacement parts; batteries were needed for electronic toys.
As goods become important we seek ways to make their production more efficient (cheaper) and consistent (quality). And that gives an advantage to those that can manufacture at scale.
Always hovering in the background was the service economy.
The service era
Back in 1776’s ‘Wealth of Nations‘, Adam Smith viewed manufactured items (goods) as wealth-generating. Services, he argued, could not contribute to wealth generation. And this thinking really underpins the goods vs services theme we see time and time again. Goods are good, services are bad (inconsistent, require involvement, are inseparable, you cannot create an inventory etc)
However, an unescapable observation is a growth in the service economy over time. The Organisation for Economic Co-operation and Development (OECD) was saying in 2000:
manufacturing [is] slipping to less than 20% of GDP and the role of services rising to more than 70% in some OECD countriesOECD, 2000
Later still, in 2017, the UK reported its economy as already being 79% service-based (products: 14%, agriculture: 1% and the remaining 6% was construction).
And, Deloitte’s 2018 article, “The services powerhouse: Increasingly vital to world economic growth” is a fascinating article to read. Not least in the way it talks about transition and goods/service eras.
But as we’ve noted, this focus on agriculture, goods and services as eras looks at the outcomes of economic activity. As an alternative, let’s look at these eras through a service-dominant logic lens.
Let’s think differently
Vargo and Lush encourage us to look at things not as the outcome, but as the actions used to get the outcome:
each era ‘might be better viewed as macro specializations, each characterized by the expansion and refinement of some particular type of competence that could be exchanged’Vargo & Lush (2004)
That is to say that the entirety of the economy is service-based. But, there are periods where certain competencies are favoured. When society starts to view a different competence as beneficial, a shift to another era could be starting. (It is of course, hard to claim a new era is beginning when you are at the start of it)
If we want to align with the previous view of economic eras, we can draw on the following competencies:
- Mass production and management
- Resource Integration (to get a job done)
And therefore, we can redraw Figure 3 as Figure 4.
The competences which are dominant are those that beneficiaries uniquely and phenomenologically determine as being beneficial.
Era of Cultivation Competence
Maslow’s Hierarchy of Needs (“A Theory of Human Motivation” (1943)) places physiological needs – eating, drinking, etc- at the base. In order to eat, we need to have base competence in foraging.
Following close to foraging, there are advantages to having cultivation competence. Not least an element of control in production. Grain farmers apply and improve their competence to cultivate more grain in varying conditions. Both in the knowledge of the ground – what grows well and where; as well as how to select better varieties for next year’s cultivattion.
Similarly, pig farmers apply and improve animal husbandry competences to rear more of their litter; or through selecting better traits for the next generation.
As we saw earlier, an economy develops due to specialisation. The pig farmer begins relying on the competence of the grain farmer to feed his pigs. Others rely on the pig farmer’s husbandry competences to a variety of meat for the table.
Shifting to mass production and management competencies
Rather than cultivation competence being something to move from as soon as possible (as Figure 1, and some economics, might suggest), cultivation can be a high tech industry. Genetic engineering, for example, of species hardly suggests a developing, poverty stricken society.
Early bartering of service (the pig and grain farmer’s exchanging their services with each other, for example) soon gets masked by an indirect exchange. And as grain farmer’s income grows, then Engel’s tells us:
As a family’s income grows, then the proportion of income spent on food reduces (even if the absolute value increases)Engel’s curve/law (1857)
Thus the grain farmer might start also exchanging his service with the blacksmith’s competence in creating a new plough. One that is specially tuned for the grain farmer’s needs and particular soil type. This increases the grain farmer’s yields, and hence income. So he wants to exchange more with the blacksmith. Who is also getting more requests for his service. And so now the blacksmith needs to develop some new skills – those of mass production and management.
Era of Mass production and management Competence
Making one item lovingly – the craft industry as we might be tempted to call it nowadays – requires a different skillset to mass production. As society starts to require more competent people with craft skills, society can either create more craft competence or start to value mass production. And with mass production competence comes a need for managerial competence.
So, now we are in an era that values mass production and management competencies. This has an impact on our view of service-based economy. Because it is here that indirect exchange masking is in full-flow. It is hard to observe, casually, that we are still using service as the fundamental basis for exchange. But we are.
The Lewis (dual-sector) model explains how labour transitions between the capitalist and subsistence sectors. And it explains growth in a “developing economy”. This is a little out of my comfort/knowledge zone, so I won’t describe or discuss. But, suffice to say, we get a growing industrial sector. Perhaps even explosive growth if we look at the UK’s industrial revolution.
Shifting to resource integration competences
There are several reasons why society starts to favour resource integration competencies (service). I’ve broken them down into the four categories you can see in Figure 5: economic, user behaviour, asset, and leveraging of data.
I go into them in detail in my article “Service is eating the world – the shift to the service economy“. So I won’t repeat them here.
Era of Resource Integration Competence
And so we arrive at the era of applying and improving resource integration competencies. That is to say back to it being more obvious that it is service in action.
We see value propositions being offered. And resources are integrated (provider and customer) in order to take those value propositions and co-create value. In my article “Describing a service – to help discover innovations” I use Gallouj & Weinstein‘s model of service to explore this integration. Figure 6 shows this model, and intuitively, a service has a set of external characteristics. These are achieved by some combination of the customer, provider and goods/processes being integrated.
What about firms?
Under service-dominant logic we also believe that a firm acts as a service economy. That is to say that all firms are service firms. Additionally, all firms are internally service economies. Interactions between departments all follow service-dominant logic foundational principles.
So, as we see service as the fundamental basis of exchange, then we can derive that all economies are service economies. And as we know that service is the application of competence (skills and resources) for the benefit of an entity, or the entity itself, then all economies are economies where we apply competencies.
The concept of using plural for economy implies that the dominant competencies are different. And we saw that the old-school agriculture, goods and services economic eras can be thought of as economies where the following competencies are dominant:
- Mass production and management
- Resource integration
And finally, we can say that shifts between economic eras are driven by society deciding that a new set of competencies are more beneficial than the current set. The “shift to service economy” is actually society favouring resource integration competencies over mass production and management.
There is a challenge with truly embracing that all economies are service economies and that service is the fundamental basis of exchange. And it comes from our casual observations of today. In service-dominant logic, we refer to it as “indirect exchange masks the fundamental basis of exchange“.