New Paradigm in the Service Economy The Search of Economics for Scientific Credibility: In between Hard and Soft Sciences

3. The Limits of the Industrial Revolution

3.1 Production is not isolated from the Non-Monetarized World
Common sense people, and even economists, have always admitted and considered it a fact that a substantial part of productive activities in life and in society are performed within a non-monetarized context. Most of the great classical economists from Adam Smith to John Stuart Mill have devoted a considerable part of their writings to the notion of productive labour and of value broadly inclusive of non-monetarized activities.

In fact, however, the very notion of value upon which Adam Smith founded the first comprehensive synthesis of economic theory has, in practice, led to the exclusion of a non-monetarized contribution to the creation of wealth in industrial societies.

Given the priorities and functioning of the Industrial Revolution, given also the type of scientific and philosophical ideas dominant up to the beginning of last century, this attitude was ultimately both legitimate and theoretically justified.

First, there was the problem of managing what was a clear priority: It was obvious that the wealth of nations could be developed in an unprecedented way, thanks to the advance of industrialization. The main social mechanism for promoting this process, which meant specialization, increase in trade and investment, was the development of the monetarization of the economy. Money was clearly, and often still is, the tool in social engineering which can solve the complex logistic problems which accompany the development of industrialization.

Second, at a more theoretical level the notion of value proposed by Adam Smith was derived from a measurement system based on a market price born of the interplay between supply and demand. The price, the monetarized value of goods, is the clear, easily quantifiable yardstick by which economics has seemed able to measure its own performance in an unambiguous way. But this is not all. The reference price of a good, defined by its monetarized value, is a type of measurement which has had a great advantage over other parameters in social sciences. It is a quantified, apparently precise reference, which avoids the vaguer statements, indicators and performance evaluations used in other social sciences. In this way economics came very close to the dream of having at hand an instrument by which to measure value (price), which would bring this discipline much closer to natural sciences where phenomena are normally more clearly defined and frequently enjoy self-evident systems of measurement. In this sense the monetarized economic value derived from price could be considered the equivalent of measuring the speed of light, the weight of a body, the boiling point of water or the thermal inertia of a metal.

To summarize: convenience, practicality and reference to the scientific method of analysis, combined during the Industrial Revolution, focused attention on monetarized activities as the key tool for developing the wealth of nations.

Today, in the new service economy, the predominance accorded to monetarized activities has to be placed in a broader perspective. The mastering of monetarized phenomena and the smooth functioning of the monetarization process are a key condition in situations where increasing the quantity of tools and products and their utilization is the prime priority. Another phenomenon becomes fundamental: the crossing back and forth of products and services over the line separating scarce (priced) goods from free ones.

One has to also consider the fact that criticism of “money” during the Industrial Revolution very often derived from pre-industrial attitudes: from philosophies and cultures of an essentially conservative nature, even when presented in “progressive” terms, which always retained some abstract reference to the past. As a result many socialist thinkers, even the young Karl Marx, tried to envisage a society “without money”. Such visions, while purporting to address the future, were in reality the product of social inertia and nostalgia for a time when – prior to the Industrial Revolution – monetarization was limited to a small part of economic life, and when the accumulation of money was socially unproductive. However, it was a more mature Marx himself who, as one of the last classical economists, was to lay to rest the discussion on ‘use-value’ (including both monetarized and non-monetarized activities). In The Capital he reduced it to the idea that “use” simply refers to the destination of goods, and thus finally eliminated any residual interest in the actual non-monetarized activities of economic life.

“The transition to the modern Service Economy represents in fact a basic shift in the notion of value.”

Later, neo-classical economists did, from time to time, return to the notion of non-monetarized economic activities, but always explained them by analogy with the monetarized system (for example, the practice of attributing “ghost” prices to non-monetarized transactions).

The transition to the modern Service Economy represents in fact a basic shift in the notion of value: the importance of restoring to non-monetarized activities full economic value is at last beginning to be acknowledged. The notions of “human capital” and “sustainability” are cases in point.

“There is a price for every good that is scarce. If it has no price it cannot be scarce, but must be freely available”. This typical economic assertion applies to many situations: air is essentially free whereas a piece of bread costs money. But it completely obscures the process whereby a good might become free or, vice versa, become scarce. When resources, which were once free or available at very low cost, become an increasing cost component within the industrial production system, we realize that, after all, the monetarized economic system has had, and continues to have, an effect on the non-monetarized one, that, in the drive to reduce scarcity through increases in productivity in the monetarized system, scarcity is sometimes produced in the non-monetarized sector (and at best “internalized” only after the scarcity producing process has started). On the other hand, we may start to consider today that some technological advances (e.g. the use of the computer) as well as some modifications in social behaviour can result in the transformation of scarce products and services into free goods.

The limits to the Industrial Revolution – as an efficient system for increasing the overall wealth of nations – thus become apparent when the increase in scarcities in the non-monetarized world offsets or over-compensates the decrease in scarcities in the monetarized one. This also means that these two worlds are interdependent. Clearly, a system for accounting and monitoring increasing scarcities in the non-monetarized sector must, more than it is at present, be built into our overall accounting systems (using existing pollution tax schemes might be one way of achieving this).

This should also be the basis for integrating, in a wider vision, the goals of economics and the ambitions of the environmental movement in their quest to promote the wealth of nations.

Within this framework the very notion of sustainable development is based on the best use and preservation of resources, human and material, taking into due account the notions of utilization in time and the issue of uncertainty.

4. The “Service” Economy

4.1 The Growth of Services in the Production of Wealth
As our society becomes more complex, so do the regulations governing human interaction including product utilization and safety limits.

In pre-industrial society very few people could, or needed to read. In the service society however, most people will need to be “computer literate”. Mass education has been among the service functions which, throughout the Industrial Revolution, have undergone a period of rapid expansion, so that today it constitutes a large sector with great potential for improvement.

As vast as and, in some cases even larger than the education service in the modern economy are the health and national defence sectors.

In order to understand properly and evaluate the modern Service Economy, it is essential that one bears in mind that the growth of services is the result of the specific and successive evolution of the production process itself. The development of technology, which changed production processes in order to enhance efficiency, produced the great development of service functions at all phases of the transformation process.

All the services we have mentioned are essential in planning, accompanying and supporting production up to the point-of-sale as well as products during their period of utilization. The maturing Industrial Revolution however, has brought to light another important service to be added to the list: the management of waste.

Waste has always been the by-product of any type of human activity and production: by peeling a banana we produce waste; the same is true when we cut an arrow from a piece of wood. When the Industrial Revolution set in motion a vast trend towards the concentration of production and its specialization, waste inevitably also started to be concentrated and to accumulate. This is not necessarily a negative phenomenon. During the history of the Industrial Revolution waste had often been turned into usable by-products and even major new products such as, for instance, nitrogen fertilizers as by-products originating from the explosives industry or phosphorous as a base for detergents and fertilizers from waste produced by the iron and steel industry. At its most advanced stage, when the principle of product specialization had been stretched to its limits, the Industrial Revolution created a growing number of problems because of waste which could not be economically transformed into useful products.

Concentration, specialization and increased levels of dangerous secondary effects are therefore the negative outcome of the use in various sectors of more sophisticated and advanced science-based technology. Parallel to the increase in industrial waste, the extension of conspicuous consumption to a constantly increasing number of people has also meant an enormous increase in the amount of waste produced by millions of consumers in both quantitative and qualitative terms.

Every product ends up as waste in the long run! Most materials, including our own bodies, become waste at the end of their production and utilization cycle and some of that waste can be transformed into new raw material. In some cases this transformation process occurs naturally (as with organic waste), in others, only after a lapse of time involving recycling intervention by man. The recycling of waste is in most cases limited, either by “economic entropy” (when the cost of full recycling would be prohibitive) or by physical (absolute) entropy (when full recycling proves impossible for physical reasons).

Waste prevention and recycling are therefore one of the key economic concerns of the Service Economy.

Figure 1 indicates that, in a situation typical of the Industrial Revolution, the production process was considered to be complete the moment a product or tool was available for sale on the market. In the Service Economy, the real issue in terms of economic value appears to be the maximization of the combined utilization of products and services during their lifetime, an operation which takes into account a series of costs prior to, during and after production.

Figure 1. Services and maintenance in the production sector


On the one hand the traditional notion of economic value is linked to the existence and marketability of a product. On the other, the notion of economic value in the new Service Economy is extended to include the period of utilization and the costs incurred, including those for waste treatments. The notion of value in the Service Economy is in essence linked to the value of any product (or service) in terms of its performance or result over time. It is this utilization value during the utilization period which is the key issue: the effective performance (value) of an automobile as a mode of transport has to be accounted in terms of its period (and frequency) of utilization, and the effective benefit (value) of a drug has to be accounted in terms of the level of health achieved. Whereas, in the industrial economy, the key question was: “What is a product’s ‘monetarized’ value?” The Service Economy asks another question: “What is a product’s ‘utilization’ value? What function does it serve, how well and for how long?”

The development of the Service Economy in the future has to be thought of as a global process involving the whole economy following on from the Industrial Revolution, rather than simply the result of growth of the traditional tertiary sector.

In fact, service functions are integrated into all productive activities in the industrial as well as the agricultural sector. It is essential to note that modern technology has, in most cases, greatly reduced manufacturing costs and increased service costs. The distinction between the functions performed in a modern computerized office and a control centre in a production factory is often rapidly disappearing. This fact has led some authors, when describing the characteristics of the contemporary economy, to speak about a “super-industrial” economy or a “Third Industrial Revolution” instead of the “Service Economy”. These authors cite those sectors where the technology is most advanced and then point out that what is in fact happening is a process of industrialization of the traditional service sectors.4 This is clearly an important phenomenon but it overlooks the spectacular increase of service functions within the traditional productive sectors.

The development of telecommunications, of banking and financial services, of insurance, of maintenance and engineering, cannot be accounted for in terms of their being merely new kinds of “production”, extensions of what had already occurred in textiles, iron and steel and the chemical industry. Selling a product (i.e. a machine) once (i.e. at a given moment in time) is a different business from fulfilling a maintenance contract over an extended period of time, during which the seller remains contractually committed to the consumer for the utilization of the “product”. The relevant issue here is really one of understanding, of what the selling of products in a Service Economy actually involves. We switch from an “Industrial Revolution” mentality to a Service Economy mentality, when we add to the cost of producing products that of maintenance (washing and possibly repairing) during their lifetime, plus the cost of their disposal and replacement when we assess their value in terms of their actual utilization.

† Source: Orio Giarini, Dialogue on Wealth and Welfare, an Alternative View of World Capital Formation (Oxford: Pergamon Press, 1980).
4. Irving Leveson, “The Service Economy in Economic Development” paper presented to the Graduate Institute of European Studies, University of Geneva April 16, 1985.

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