The Big Picture…
Instead of viewing economies by their predominant output, as we classically do, we view them by the predominant skills applied and improved.
Since the application of skills for benefit is the definition of a service, we find that all economies are service economies.
Shifts in economic eras are therefore shifts in the skills that beneficiaries see as beneficial. We shift not from agricultural to goods economies, rather the skills seen as beneficial shift from farming skills to those of mass production. And the “shift to service economy” talked about today is really a shift to see resource integration skills as most beneficial.
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
But we can also arrive at this foundational premise by considering how we view economies. Classically that is through it’s outputs. We see economies as agricultural, or goods or service economies. And that is what we’ll briefly review next. After that, we’ll take a look at how we view economies in the service-dominant logic.
Economies viewed in the classical way
Even those of us with a small appreciation of economics will remember learning about agricultural economies and the industrial revolution. Many of us might equate agricultural economy with less developed times/areas. And see the goods economy as progress.
Our classical thinking labels eras based on the predominant output. You can see this in Figure 1.
Such thinking leads us to view three specific types of economies: agricultural, goods and services.
The agricultural era
When an economy’s output is predominately food- and live-stock based, we classify it as an agricultural economy. And in such an economy, there is an emphasis on optimizing the production and distribution.
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 focusses on livestock. And that specialisation drives a need to exchange goods. For example, the grain farmer might want an animal to cook; whereas the animal farmer the grains to feed their animal.
Agricultural economies give way to goods economies as growth means less proportion of income is spent on food.
The goods era
Goods are tangible items (although nowadays we also have a intangible digital goods, such as eBooks or streamed songs). And the goods economy is all about manufacturing and selling such goods.
As less proportion of income was needed to buy food, more became available to buy goods. Farmers could 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). Soon we are mass producing consistent goods, and selling to make profits, for vast companies and conglomerates.
Always hovering in the background was the service economy. Though economists were not always excited about it.
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, we observe the service economy growing 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 countries”OECD, 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).
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 this classic view, with a focus on tangible outputs, is blinkering our perspective and understanding. Haskell and Westlake give a lot of food for thought on why economist need to pay much more attention to intangibles in their book ”Capitalism without Capital”. As an alternative, lets look at these eras through a service-dominant logic lens.
Lets think differently: Service-dominant logic
What if we looked at the process instead of the output? That is to say to take the view that service is the fundamental unit of exchange. Then we could say:
each era “might be better viewed as macrospecializations, each characterized by the expansion and refinement of some particular type of competence that could be exchanged”Vargo & Lush (3004)
The implication is we are always in a service economy – all economies are service economies. But over time, we are applying and improving different skills. And it is the change in dominant skills being improved and applied that appear as era shifts.
We can redraw Figure 2 as Figure 4.
[True?: Further, which skills are dominant are those that beneficiaries uniquely and phenomenologically determine as being beneficial ]
Farming service – applying and improving cultivation skills
The agricultural economy is really the stage in the economy where most people were applying and improving their skills in agriculture. Grain farmers improved their skills in how to grow more and more grain in varying conditions. Pig farmers developed animal husbandry skills to rear more of the litter.
The basis of exchange is those farming services. Grain growers bartering their growing service with animal farming services.
And we can’t ignore the growing security service of the time. Where both types of farmers would exchange their skills for the protection services provided by lords of the manor.
As a family’s income grows, then the proportion of income spent on food reduces (even if the absolute value increases). Engel’s published this in 1857 and it has become known as Engel’s curve/law. For us, the implication is that if less income is spent on food it either gets stored for later or used on goods and/or services.
2. Manufacturing service – applying and improving mass production and management skills
Along with the farmers there were also tradesmen. Folk who specialised in producing goblets, or forging steel, for example. At some point these people started organising into larger units. And those larger units led to a need for specialising in the skills of mass production and management.
It is also a time where we see an increase in indirect exchange, i.e. money. The concept where service (application of skills/resources) are not directly swapped with another service. Instead, there is an indirect exchange, usually money. I look at this more in my next article. But for now we can say instead of service A and B exchanging and growing together, service A exchanges for money. And then uses that money to exchange for a completely different service C. This is where the value-in-exchange view starts and grows. Taking us away from what is truly happening.
Why the shift in skills seen as beneficial?
This is quite out of my comfort/knowledge zone. But, we could point to the Lewis (dual-sector) model. Which explains how labour transition between two sectors – the capitalist and subsistence sectors – explains growth in a developing economy. It follows that the capitalist sector requires greater skills in management and mass production to fuel it.
What the classic view calls the service economy is really the applying and improving resource integration skills. Or put another way, integrating a set of resources to get a job done.
3. Applying and improving resource integration skills and co-creating value
Why the shift in skills seen as beneficial?
The macroeconomic reasons for why resource integration skills are now seen as beneficial are summarised in Figure X. They are broken into 4 categories: economic, user behaviour, asset, and leveraging of data.
In Figure 3, I capture some of the reasons why an economy “shifts” to service based
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”.