Service Economy vs Manufacturing Economy

Answer these questions before we continue. . .

Overlooking Economic Fundamentals: Service vs Manufacturing

02/11/11

If you answered manufacturing, you would have a lot of company, but you would be incorrect. The fact of the matter is service occupations have existed long before manufacturing was ever conceived. You'll have to excuse my lack of political correctness here: Prostitution, one of the world's eldest professions, would be an example of a service. A courier, messenger, or delivery person has existed since the time people needed to communicate vast distances. This too is an example of a service. Taxes have existed long before the production line was ever constructed, your tax man is doing a service.

Most trades that have existed for thousands of years could be classified as services as well. Trades such as bakers, blacksmiths, potters and jewelcrafters. While such trades did have a production component in the individual craftsman that was but a small part of the actual business. They had to take the time to individually sell and market their products. They also had to spend a lot of energy performing customer service. While making the individual product was probably what the artisan enjoyed most, unfortunately the reality of the situation back then was it only made up 25% of the business. 75% of the business that was done by the tradesmen would fall under the service category.

With but the few examples I've given of human industrial history, we're already starting to see the definitions between a service economy and a manufacturing economy are convoluted at best, or pure nonsense at worse. In fact, I would go on to argue that by manufacturing a product your providing a valuable service to the individual who needs that product. In that respect, all probable employment would fall into the category of a service economy.

However, even if we were to take the definition of a manufacturing economy at face value. That the definition being an economy based upon the mass production of products. We must understand that throughout human history our economies have been mostly agrarian/service or manufacturing/service, with service work leading the head count. A majority manufacturing economy was all but a brief moment in human history, mostly represented by just a single nation: America, from the mid 19th century to the mid 20th century. Service industries have predominantly ruled the economy across all lands since humanity came to existence. So the fact that America is by and large moving to a service economy is certainly nothing new, I would argue it's returning to something old. Perhaps that is the fear, many see that as regression, but understand that even in manufacturing power houses such as China, the majority of their employment is still in services.

Detroit devastated by Americas manufacturing collapse.
Detroit devastated by Americas manufacturing collapse.

So Are People Who Whine Over Manufacturing In America Just Making Noise?

Yes and no.

While many who lament over America's manufacturing woes may not understand the implications of what they're discussing. Indeed, one could argue that there is no such concept as a service economy vs a manufacturing economy. They do inadvertently have a point that a strong manufacturing base is necessary to remain competitive in a global economy. It's this point that brings me to the second question that you were posed on the quiz.

Does a global economy lower the demand for manufacturing? If you answered yes, while you may once again be in good company, you would be wrong. A global economy increases demand for manufacturing simply because there are more probable buyers for the products that you choose to manufacture. While the demand for manufacturing in America has gone down, world wide it has gone up. This is an important dynamic in the global economy, because it's ultimately what determines wealth generation of a given nation. Buyers of manufactured products abroad represent money coming into your country that you otherwise couldn't get domestically. There is no way to lose selling stuff abroad. Everything is a surplus.

A strictly services economy has its limits. For starters, you can only serve one person at a given time, meaning you cannot advance production through technological improvements. Technological improvements in manufacturing can vastly increase profit margins that are just not possible in a service industry.

Another limit to service industries is the money being exchanged is for the most part done domestically. Meaning a country with a limited manufacturing base isn't taking any advantage of the global economy. All the trading is being done in house, meaning the amount of wealth being generated is limited to what the country is domestically capable of producing. 

The final, and perhaps most gruesome reality, of a strictly services economy is it can only produce as many jobs as people. It's impossible to have more jobs than people with an economy that is 100% services without a manufacturing component. The reason for this is simple, because the economy would be strictly domestic, the economy would naturally only grow to the size to meet the populace.

Now, if we were to add in a manufacturing component that involved several million potential buyers from other nations, then the economy would naturally have to expand to meet the demand of the million additional buyers. In such a situation we would then have more jobs than people. This is an economic boom and a good deal for everyday citizens. Because there are more jobs than people, wages go up. It's good for the government as well due to additional tax revenue. When employers discover they can't possibly fill all the positions with the current labour pool, they then start investing into technology and labour. They invest heavily into a person so they can perform two jobs instead of one, and that person's wages go up even further. That person will become better skilled and productive. Employers will have to innovate better technologies to increase the productivity in workers, and they'll need to hire yet more people to create such technologies. The end result being is wages go up, skills go up, tax revenue goes up, and everyone gets richer. All of this is made possible because we gave room for a manufacturing base that allowed the market to expand beyond the nation's current population. It goes without saying that success begets success. What starts a chain reaction of success in a global economy is in manufacturing and its associated exports. While manufacturing jobs may not come across as the most glamourous or highest paying, they're the seed that makes a booming economy possible.

Without manufacturing, an economy can only hope to stagnant or weaken. There will always be just as many people as jobs or more people than jobs. What neo-Libertarians, such as the likes of John Stossel, fail to realize is that America's trade deficit is a big deal. Indeed, the concept of a trade deficit is vastly misunderstood. America doesn't owe China a pile of money because it bought more from China than China bought from America. A trade deficit is often misinterpreted as debt. In this respect, Stossel is right, a trade deficit isn't debt. However, a trade deficit isn't a stat that should be easily dismissed. What America's vast trade deficit represents are lost opportunity costs. In other words, America's vast trade deficit represents what America could have made had they matched the level of exports from other countries. Americans are essentially pissing away the opportunity to have trillions of dollars in the near future by condescendingly demeaning and devaluing a manufacturing base.

Economic recovery will only become possible in America if they can come up with at least three respectable products to sell to the world that people will want. American politicians, businesses, and ordinary people will need to do some serious thinking as to what exactly these products will be and how they can go about constructing industries around them. Ben Bernanke seems to think printing a pile of money and devaluing the currency will magically sprout manufacturing jobs from the ground. Selling key products that are the envy of the entire world that everyone wants will take hard work and vision. It isn't something that can be loosely financially managed or manipulated.

It's a contrasting environment.
It's a contrasting environment.

If Manufacturing Is So Great, Why Not Make The Economy 100% Manufacturing?

This rebuttal of a question explains the difficult tight rope to walk that is balancing manufacturing industries and service industries in a given country. Ideally, you want to have as few manufacturing industries as possible, while still maintaining healthy economic growth.

Manufacturing is what allows economic growth, but manufacturing has huge side effects in environmental degradation and lowering the quality of living in human beings. In laymen’s terms, manufacturing increases the quantity and expansion in your economy, while service increases the quality and human lifestyle in your economy. On the flip side, manufacturing lowers the quality and human lifestyle in your economy, while service contracts growth and expansion in your economy.

If we were to have a 100% manufacturing economy, we would be living in a cesspool and die under the age of thirty, but our GDP would look great on paper. On the other hand, if we have a 100% service economy, it may look pretty at first, but without growth we'll essentially slowly dissolve into an agrarian and de-industrialized society (this is what is currently happening). Manufacturing is necessary for growth. America will have to make some sacrifices. Most likely whatever dwindling real estate land values you're currently experiencing will have to go down even further because some heavy industry will have to move closer to a town near you.

-Donovan D. Westhaver

Comments 5 comments

CHRIS57 profile image

CHRIS57 5 years ago from Northern Germany

A farmer who grows and harvests a potatoe is a very lucky guy. He can eat the potatoe.

And if the potatoe is big enough, he can share it with someone else and maybe he gets part of a turnip in return to enrich his meal.

He is also lucky, because if he has harvested more than one potatoe, he can store the excess harvest - for winter times, for bad times, for trading.

There is another guy. He owns a cart to transport goods. This guy offers his service to the farmer. The farmer needs this service to bring his potatoes to the next market. Of course the serviceman gets payed with potatoes.

What is the difference between the producing farmer and the servicing cart owner? Both contribute to the GNP of this archaic economy.

First - the farmer has something unique: he can store his production. Maybe not for long, but he can store. The serviceman cannot store his service, it is void in the moment service was delivered.

If both, the farmer and the serviceman break a leg and can´t work. Very bad, no potatoes - they both starve to death.

If the farmer broke his leg, poor guy, same thing, no potatoes...

If a wheel on the cart breaks, guess what happens? The serviceman starves, the farmer may not get his favorite turnip, but he will survive. The farmer is the lucky guy.

My opinion: Only production/manufacturing creates prosperity. Service is then needed to distribute that prosperity among all people participating in an economy.

And - if there is a crisis, production relied economies are always better off than service relied economies.

Sometimes there are economies, where running around with carts is more envogue than getting dirty fingers picking potatoes out of the soil.

What is currently happening on our planet is no archaic economy game, but the essentials are not so much different, if i may say.

Thanks for your essay.


American_Choices profile image

American_Choices 4 years ago from USA

The strongest force in the world outside of Mother Nature is the consumer. The American consumer has the power to change the global balance. IF the American consumer understands and uses this power.

Buying American is more than patriotic is it economic. Returning some manufacturing to the shores of the United States is essential not just for me but also to my grand children.

Jobs are freedom and the best way we can fight for freedom today is to return the economic power to the United States.

Actively seek out bubble gum, chocolate, coffee with corporations headquartered and paying taxes in the United States.

Send a strong and clear message to those who leave and forgo the federal taxes, we know what you are doing and we don't like it.

The American consumer is the strongest power in the world. We have been running like a car without steering, we need to take control of the steering wheel.

Great post. Thank you! Rated up and useful - a must read for all global citizens.


pramodgokhale profile image

pramodgokhale 4 years ago from Pune( India)

DonDWest

Sir, I am an Indian, know service industry,But the thousand year old civilization either India and China why they lost race of Industrialization and modernization.

because they had skills but lack of innovation or they oppose it,something is wrong somewhere.

manufacturing when it started mass production and mass mobilization of products and process , it was necessary service backup.

If a nation is under embargoes ,then local manufacturing which keeps their economy growing and sustain.

India experiences this when we had conflicts with our hostile neighbors. We sustained because of strong manufacturing base.

What India is doing at present? We are exporting our skilled manpower to developed nations and joined local service industry.

Highly competent Indians are called as Computer Coolies. It hurts me also.

Very few of them have started their own business. They used to be routine oriented workers ,not much innovative or out of box.

I agree their should be open forum and discussion .

I prefer manufacturing .

Thank you Sir,

pramod gokhale


CHRIS57 profile image

CHRIS57 3 years ago from Northern Germany

Unfortunately the economic situation on our entire planet can be nailed to the headline of this hub.

In addition to my comment from almost two years ago, i want to pick up a hint, you left in your hub: "While making the individual product was probably what the artisan enjoyed most, unfortunately the reality of the situation back then was it only made up 25% of the business. 75% of the business that was done by the tradesmen would fall under the service category."

Very true, i would only add that the percentages are determinedd by technical progress. While in the 18th century more than half of the population had to grow food (agricultural manufacturing), today we have combines, heavy equipment and many organizational aids to boost productivity and reduce the percentage for agricultural work to some 2% on a world basis.

So today the average productivity in an economy that is enabled through technology is in the range of 15% (worldwide). 15% is manufacturing in your terms, and 85% is service.

What do economies do who have less than 15% manufacturing? They import from the world. If the world watermark is 15% and some countries like the US, UK, southern Europe are below that mark, then other countries (China, Korea, Germany, Japan, Northern Europe..) have to be above and they export.

Now there is no such thing as having a choice. Countries like the US with little manufacturing will have to import good, if they don´t, not enough goods will be produced to replace products that fall apart (that is also what technical progress dictates: how fast assets, products deteriorate)

This gives an analysis for the world economic problems:

- Why is the trade imbalance between China and the US so huge?

- Why is the US economy still in sick bay?

- Why does the Eurozone have problems of not falling apart?

All these problems and more have in common that economies on our planet are not evenly productive in manufacturing. Some like the US have 10% manufacturing, which requires 5% to import and just look at the trade balance, there you find the 5%. Some like Germany have more than 20% manufacturing and that is why Germany runs persistent trade surplusses.

A perfect mix of manufacturing/service would be 15%/85%. But there are only very few countries that come close. The past 30 years have only shown that economies divide and separate on 2 poles: too much service or too much manufacturing.


Sanxuary 3 years ago

The biggest problem is globalism and the Corporate mind set. In all aspects cheaper and bigger runs a tread mill that has no choice but to fail at a certain point. Fair trade would not destroy small business if it was fair. The claim that its cheaper is false if shoes can be made locally but we still get them from Vietnam. The term is to big you will fail on the current model. You purchase A and A becomes collateral to purchase B. No corporation survives if it can not continue to produce higher dividends. If the small Corporations are failing, what small businesses are going to survive? We of course already know that they were not allowed to make loans or sell to any corporations and that is why they are gone. I find it odd that these large Corporations are trapped by their inability to down size most of the time. One store can be running at 500 percent and another less then one hundred and failing. Yet all its employees are treated the same and even if it is a successful portion of the Company. They will close it to keep a higher market share even if its failing. Greed determines everything they do and they no longer care about the local economy.

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