Production Economy vs Service Economy

Economics Economics Questions
1

So as I understand it the United States used to be a production economy where we made stuff in factories and sold it to each other and rest of the world.

Now we have a comparatively limited manufacturing base and much of our economy is based in the service sector.

I don’t really understand how a service economy is supposed to work. For an economy to work don’t things need to be produced? Is the fact that we now have a service economy and don’t produce much part of the reason we’re in economic trouble?

I’ve watched some youtube clips of Peter Schiff where he basically says as much. But obviously he’s being interviewed on TV and can’t go into detail. Can anyone expand on this for me, or perhaps recommend some articles to read that explain this stuff in greater detail?

Thanks!

2

Suppose that there is somewhere in the USA a little village called ‘serviceville’ where only people who serve in the ‘service industry’ work; will these people be poor, because their region is ‘just’ serving and not ‘making’ stuff?

Our is it possible that they will be rich, because they play a part in a production process that ‘makes’ stuff, but is just geographically spread out in the country - or world for that matter.

And make no mistake: the USA is still producing a lot of stuff: http://cafehayek.com/2009/11/still-manufacturing-myths-aplenty.html

3

I think the dichotomy isn’t as useful as it seems: doctors are part of the service economy, for instance.

http://en.wikipedia.org/wiki/Service_(economics)#The_service-goods_continuum

4

The basic problem with a service economy is that you can’t eat services, you cannot drive them on the highway, you cannot build houses made out of services. We all need many many many concrete things to enjoy the quality of life that we currently have. Valuable as doctors are, they too cannot be ridden on like horses to get us from place to place, or keep our food cold so it won’t rot, etc.

So where are these concrete things going to come from, if we don’t make them? Here are some possible answers:

  1. We are making them, as evidenced by the link posted earlier in this thread. Yes we are making things, but not enough. Proof positive of this is that we IMPORTING SO MUCH from China. If we are making enough, why are we buying theirs? Tell you what. Go to Walmart, pick ten things off the shelves at random, and look at where they are made. My guess is 8 out of 10 will be from China. Now do the same thing in your home. Same thing. or you could look at the trade deficit, and see that is [I think] a billion dollars A DAY.

  2. So we get them from China, so what’s the big deal? The big deal is, how are we going to pay for them? Why should the Chinese give us their refrigerators and everything else? Obviously we have to give them something back in return. There are 3 possible things we can give them in return.

A. Other concrete things. Sadly, we don’t have what to give them. The ships sailing in from China come in crammed with stuff, and return empty.

B. Services. Well, it’s hard to cut hair or serve a meal, or even diagnose a patient, from across the ocean. Now there are some services we can export, but apparently we can’t do it enough. Once again the proof is the billion dollars a day trade deficit.

C. Paper money. Yes, that’s what we are giving them, and that’s what’s keeping us happily supplied with their stuff, for now.

The problem is, one day the Chinese are going to get up and ask themselves, what are we going to do with this multi trillion dollar mountain of money? Every day its purchasing power declines. Not to mention that you can only buy American things with it, which we don’t want. [Again, the billion dollar a day trade deficit shows they don’t want what we have to offer them, be it goods or services].

Until now, they have been just lending it right back to us with interest. But just as Greece fell apart when nobody wanted to lend to Greece anymore, the same thing is going to happen to the US of A. Because the very same reasons that made people refuse to lend Greece money apply to us ten times over.

In other words, the day of reckoning will come, when the Chinese just turn their backs on us and say, “No tickee no washee”. They will refuse to fill up our Walmarts. We will have nowhere to turn for the concrete things we need. And the rules and regulations and taxes and forced unions that closed down our factories will also prevent them from reopening.

All this is collected from the works of the maestro, Peter Schiff.

5

Goods vs. services is a fallacy. All goods are valued for the services they render. Nobody wants a car for the sake of a car but for the sake of the service it can provide to you. In this respect, the economy is only a service economy.

6

Perhaps because we’re buying more things than we used to?

7

I am having trouble in my mind squaring the “we produce too little and consume too much” argument (which seems to be obvious given the trade deficit), with the ABCT argument that artificially lowered interest rates disproportionally increase investment in capital-intensive projects. According to ABCT, shouldn’t the low interest rates of the past decade have resulted in us having TOO MANY capital goods at the expense of the less capital-intensive “service” industries, which didn’t benefit to the same extent from the low interest rates because of their shorter production period? Someone help, please.

8

I just want to reply to the “pick 10 items, chances that 8 out of 10 are “Made in China””- maybe, but open the thing up, and very little INSIDE is made there- it really should say “ASSEMBLED in China”… especially electronics- they are typically tiawan/singapore, etc

9

What you mean is more investments in higher stages at the expense of lower stages. Not capital intensive or less intensive.

The answer is yes, however, the really lower stages near consumption actually enjoy a boom also. Look at it this way. capital goods are drawn from intermediate stages for the benefit of new lower stages precisely because consumers have not restricted their consumption to support these new investments. The situation is further exacerbated because the lower stages (consumption) tends to experience a boom also.

10

Besides DD5’s answer, I’d like to add the when Mises wrote his book, there were no such things as credit cards. Most of the money lent went to businesses. With the introduction of credit cards, lots and lots of money is being lent to consumers. I mean, nobody builds a factory with money he drew with his credit card.

11

Although the terms good vs. service, in the strictest sense, may appear as a fallacy, let’s look into how a service economy may be viewed from non-economists.

Let’s say you are building a house and you need to air conditioning. You have two options

  1. Buy the good which provides the service, in other words buy and own the air conditioner, as well as the service it provides. You are responsible for all maintenance, breakdowns, and the associated cost of the air conditioner.

  2. Buy the service of cooling, but where ownership of the actual air conditioner still remains with another entity. The company providing the cooling service is responsible for the maintenance, breakdowns, and associated cost of the air conditioner.

This second model is used often with copy machines in the corporate world, you buy the service of being able to use the copier, but not the copier itself.

Both still rely on goods. Both provide a service. But the ownership of the good will differ, while the receiver of the service remains the same.

12

Agreed. It’s an arbitrary distinction.

People who work in “production” are selling their labor, just like people who work in “financial services” or “research”. If these other uses of labor were useless, companies and people wouldn’t be making any profits from it.

13

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x6198648

14

this is where I think Schiff can be a little iffy. On tv, he talks a lot about about ‘making stuff’

15

That is out of context. He is a broker after all.