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CHAPTER IV In one of his more whimsical, yet nevertheless
profound, moments, John Maynard Keynes (1935, p. 383 wrote: As we shall see, none other than Adam Smith, that venerable economist who wrote his path breaking book The Wealth of Nations at the dawn of the industrial revolution, thought that service workers were unproductive and a burden on society. Today, service work is still widely equated with low productivity, low wages, and marginal jobs for those unfortunate enough not to have real jobs producing goods. Yet, only a small proportion of the work force is actively engaged in producing goods, and most of those with blue-collar manufacturing jobs dream that their children will have higher status white-collar jobs in offices. One of the factors that contributes to the continued hold that these ideas have on public perceptions is the inadequacy of statistical measuring tools. Real domestic output of services and trade in services are both difficult to measure, and the result has been that data on both productivity and trade have been consistently underreported. The data that have been published by governments have thus tended to reinforce traditional notions about the unproductive nature of services work and the unimportance of trade in services. Improvements in statistical collection efforts could produce better data, but one of the reasons that effort has lagged is that the data showed that services were not important. WHY SERVICES HAVE BEEN CONSIDERED UNPRODUCTIVE One of the ideas that has a dominant hold on thinking about services is that services are ancillary activities that are not in themselves productive and have no independent value. Consider the following quotation from Adam Smith (1776, p. 315). The labour of some of the most respectable orders
in the society is, like that of menial servants, unproductive of any
value, and does not fix or realize itself in any permanent subject,
or vendible commodity, which endures after that labour is past, and
for which an equal quantity of labour could afterwards be procured.
In the same class must be ranked, some both of the gravest and most
important, and some of the most frivolous professions: churchmen,
lawyers, physicians, men of letters of all kinds; players, buffoons,
musicians, opera singers, opera dancers.... Like the declamation of
the actor, the harangue of the orator, or the tune of the musician,
the work of all of them perishes in the very instant of its production....
Both productive and unproductive labourers, and those who do not labour
at all, are all equally maintained by the annual produce of the land
and labour of the country. This produce, how great soever, can never
be infinite, but must have certain limits. According, therefore, as
a smaller or greater proportion of it is in any one year employed
in maintaining unproductive hands, the more in the one case and the
less in the other will remain for the productive, and the next year's
produce will be greater or smaller accordingly. To put the issue in more objective terms, the factories turning out industrial goods were the key source of economic power and national wealth in eighteenth-century England. It was therefore natural to conclude that workers producing services rather than industrial goods were not productive, in the sense that they did not contribute to the industrial output that defined national power and wealth. Echoes of this eighteenth-century view are still heard today. At an earlier time in world history, anyone who did not grow food was viewed as unproductive and a burden on society. This view was natural at a time when the availability of agricultural workers limited the amount of extra food that was available to support the army and the craftsmen who produced the weapons and the other implements that defined national wealth and economic power. Today 4 percent of the U.S. population is able to raise all the food that the country can consume and that it can export. Nevertheless, farming is still regarded by many as a more desirable economic activity than other types of work and farmers are still accorded special economic and political privileges. Old ideas thus maintain their hold on people long after they are no longer relevant, and the old idea in this case is that workers producing services perform a less desirable form of work. The surprising thing about these attitudes today is that a large majority of the population continues to believe that service work is less desirable even though more than half of the work force have service jobs and virtually every factory worker hopes that his or her offspring will have a higher status professional job in an office rather than on the factory floor. The attitude toward services is perhaps best symbolized by the fear that in the future everyone will be employed serving hamburgers in a fast food restaurant. One might call this the McDonald's syndrome.
The intellectual foundations for a change in the interpretation of the nature and role of services in the economy were laid by Daniel Bell (1967), who coined the phrase postindustrial society. In a number of articles and books, Bell has described the increasing role of information in the modem economy and the growing importance of work associated with the production, processing, analysis, and distribution, of information. Bell's theoretical work was followed ten years later by the empirical work done by Marc Porat (1977) in a study for the Department of Commerce. Porat's study demonstrated that 46 percent of GNP and 53 percent of national income in 1967 was produced by workers tied in one way or another to the production, processing, and distribution of information.1 A number of writers have popularized the concepts
pioneered by Bell and Porat. The best known of these books is Megatrends
by John Naisbitt (1982). At the same time, a number of economists
have analyzed the changing structure of the economy and the new role
of services in the economy. Two books, in particular, provide a good
overview of this work. Services: The New Economy (1981 is a comprehensive
study of services written by Thomas M. Stanback, Peter J. Bearse,
Thierry j. Noyelle, and Robert A. Karasek, four economists associated
with the Conservation of Human Resources Project at Columbia University.
The other book, Managing the Services Economy: Prospects and Problems,
edited by Robert Inman (1985), includes a selection of thought-provoking
articles by a number of economists, political scientists, and business
executives who have analyzed the role of services in the economy.
Old perceptions, however, are difficult to eradicate, and there is
a general public impression that the work done by many of the authors
cited above is futuristic-that it presents an unrealistic projection
of the future rather than a hardheaded analysis of the present. Data Problems in Services Perpetuate Old Shibboleths One of the reasons why many people remain convinced that jobs in services are less productive than jobs in manufacturing is that data published by the government tend to show lower productivity gains in services than in manufacturing. One has to approach these numbers with a great deal of caution, however. Data on productivity growth in services are notoriously bad because it is very difficult to develop an objective measure of output in services, and this tends to result in a consistent understatement of gains in the real value of services produced in the economy. Services do not come in discrete units like goods, and services are subject to large variations in quality that are difficult to measure in a consistent and objective manner. Statisticians thus generally find it very difficult to develop accurate measures of real output in services, independent of the monetary value assigned by the market. The task of measuring real value is particularly difficult insofar as the gain in real output takes the form of improvements in the quality of services. Indeed, the quality of services that require direct contacts between the consumer and the supplier is often a function of the number of sales clerks available to meet consumer needs, but how can statisticians measure the real value of personal attention? Since they cannot measure it very well, improvements in the quality of services through increased personal attention show up as a major deterioration in the productivity of the service industry involved. Data on investment show that service industries consistently invest large amounts of money in new capital equipment. something they would not do if it did not result in real gains in productivity. Misinterpretations of the Postindustrial Economy One reason for the resistance to the message about the productive contribution of the service sector is that the analysis of the postindustrial, information-centered economy has been misinterpreted by many who have used the term, creating the impression that in the new economy services and information would be displacing the production of hard goods. What many people who casually use this term have missed is that it does not imply that services are displacing the production of goods, but rather that services in general, and information-based services in particular, are a growing input into the production of hard goods, and that such service inputs make it possible to produce more and higher quality goods for consumption. In other words, the nature of work related to manufacturing is changing, and this is reducing employment in the traditional manufacturing sector but not the physical output of the manufacturing sector. Another reason why many analysts miss or play down the growing input of services into manufacturing is that a much larger number of new service workers are employed in producing services consumed by individuals in the course of their daily life. In effect, the fundamental change in the pattern of employment associated with manufacturing is overshadowed by employment data on personal services. As more consumers are able to satisfy their needs for the basic goods associated with the average life-style, consumer demand has shifted toward buying more services such as health, education, tourism, and entertainment. There should be no reason why anyone should feel that producing these services is less productive than growing food or producing manufactured goods. As long as the economy also generates the tangible goods that people and the government want to buy, the production of consumer services adds as much to national well being as the production of goods. The U.S. Trade Deficit and the Growth of Services Employment- A Source of Confusion The debate over the changing role of services in the United States has been clouded in recent years by an argument that has been used by some official spokesmen that there was no need to worry about the impact of the trade deficit on the manufacturing sector since employment in the services sector has been growing rapidly, offsetting any loss of employment in manufacturing. This line of argument has led to a number of books arguing that manufacturing does matter, and that the productive role of services has been overblown. This debate has totally confused the analysis of the underlying, longer-term changes taking place in the economy. Recent macroeconomic policies in the United States
have created a large gap between the total output of goods and services
in the United States and the demand for goods and services by consumers,
businesses, and the government. A gap between domestic production
and domestic consumption is possible as long as the difference is
made up by imported goods and services. Most services purchased by
consumers are not tradeable, however, and an increased demand for
such services can be met only by shifting resources from the production
of manufactured goods, which are tradeable, to the production of nontradeable
services. In other words, the rapid growth of services employment
can be traced, in part, to the same macroeconomic policies that created
the trade deficit. This does not explain all of the growth in services
employment, however. In addition to the short-term shift in resources
from the manufacturing sector to the services sector, there has been
a long-term shift toward increased use of service inputs in manufacturing
and increased consumer purchases of services. ll Economic Activity Utilizes a Stream of Services to Produce a Stream of Services By far the largest input into production is human labor, all of which can be classified as service inputs. Whether labor services are supplied by full-time employees, contract employees, or other businesses that sell services, the basic ingredient is still labor services. Moreover, while the nature of the work performed by white-collar workers and blue-collar workers is somewhat different, the basic ingredient in both cases is still labor service. By looking at labor inputs as service inputs, both government policymakers and managers of enterprises might be able to get a clearer understanding about the changing nature of work in the modern economy and the implications of that change for the management of enterprises and for public policy in areas such as education. Machines are increasingly displacing human workers in the advanced economies in performing repetitive and boring tasks, both because the machines are cheaper and because they are more reliable in carrying out such tasks. Human workers, on the other hand, provide the inputs that require thought, creativity, special skills, or an ability to interact and communicate with other human beings. This change in the nature of work is taking place not only in. the high-technology industries but also in the traditional mass • production industries such as consumer electronics, steel, automobiles, and textiles. The companies that have recognized this trend and have taken steps to make it possible for their employees to develop and use these human qualities have generally outperformed competitors that still see their workers as unthinking automatons. The countries that recognize this trend and the implications for public education will outperform countries that do not. Looking at all economic activity in terms of service inputs thus will help to focus attention on the quality of labor input generally. The ultimate purpose of all production activity is
to generate a stream of services. Most people do not buy an automobile
to own an object, but to produce a stream of transportation services.
An automobile company that understands that it is in the business
of producing a stream of transportation services will tend to be more
successful than one that does not focus on the stream of services
that its cars will generate. Many manufacturers have failed to produce
what consumers want because they thought they were producing objects
that people wanted to own, rather than objects that were merely the
means for generating a stream of services. Even some service companies
tend to lose sight of this basic concept. WHY TRADE IN SERVICES WAS CONSIDERED AN OXYMORON Until a few years ago, it was generally assumed that services were not tradeable because services had to be produced where they were consumed. One obvious way to overcome the contradiction between the requirement of proximity in services and international trade is travel. Travel to another country to buy services, however, was assumed to be impractical. We saw in the last chapter that international travel remained relatively difficult until the last few decades, and that anyone who traveled to another country was expected to stay for a prolonged period. It was therefore generally thought that anyone who traveled to another country became attached to that country, and that it could be assumed that purchases of services could be treated as internal domestic transactions in the country in which they were performed. What American would be crazy enough to travel to another country for a haircut? In effect, international travel was considered a one-way street. Anyone who traveled to another country became a part of that country, and any services produced or consumed in another country were treated as internal transactions of that country. This was not an unreasonable assumption in the days of Marco Polo. Marco Polo did not return from his trip to China for eighteen years, and it was reported that his relations failed to recognize him on his return. Over the years economic theorists reinforced the view that international travel did not have anything to do with international trade. In his theory of comparative advantage, David Ricardo (1817) showed that international trade could be explained in terms of each country's relative supply of factors of production such as labor and natural endowments such as land and climate. It followed from David Ricardo's theory that an international movement of labor was quite different from international trade. In more recent years, two economists, Heckscher (1919) and Ohlin (1933), showed that international trade tends to reduce wage differentials among countries in the same way that the international movement of labor tends to reduce such differentials. They concluded that trade will therefore reduce the economic incentive for international labor movements. Conversely, they argued that international movements of labor tend to reduce the volume of profitable trade. An international flow of money, like an international flow of people, has been treated as a one-way flow. It has traditionally been assumed that anyone who went through the difficult and risky process of transferring money from one country to another would want to leave it there. Money invested abroad thus became part of the foreign economy, and any investment service provided by a foreign financial institution was viewed as an internal domestic transaction. Economists have thus looked at money that is invested in another country in the same way they have looked at people who travel to another country. It has been treated as an international movement of a factor of production that reduces the scope for international trade in goods, and therefore is something that is quite different from trade. In the traditional view of the world, information and knowledge have been treated not as either tradeable items or factors of production, but as part of the economic environment like mountains, air, and water. In fact, there has been a tendency to view the international flow of information as a phenomenon that had more in common with natural laws and moral principles than with mundane economic considerations. Governments have recognized, of course, that information about market opportunities or trade secrets could be extremely valuable, particularly if no one else had access to it. They have recognized the value of exclusive information, for example, by granting inventors exclusive rights to patents and authors exclusive rights to manuscripts for fixed periods of time. Nathan Meyer Rothschild made a fortune in the London commodity market by obtaining advance information on the outcome of the battle of Waterloo through his own carrier pigeons. None of these considerations, however, have been tied in the past to international trade in something quite so ephemeral as services. Like international movements of people and money, international movement of information has ultimately been viewed as a one-way flow out of the country. This brings us to international shipping and communications services. Under the long-standing cash, insurance, and freight (CIF) method of valuing international trade in goods, exports of services related to trade in goods were incorporated in the value of international merchandise trade. This method of valuation reinforced the assumption that trade in transportation and other services was so closely tied to trade in goods that it was not necessary to pursue a separate analysis of trade in services. Another convention frequently used by statisticians fully removed trade in transportation and communication services as a subject for analysis. It assumed that each country's ships or airplanes carry only its own people to other countries, and that each country's communications companies transmit only messages from its own people to other countries. The key point here is that under some long-standing statistical conventions international trade in support services was defined as something else. Economists thus built a model of the world economy that did not have to account for trade in services. This model was a workable model for many years because international trade in services remained quite limited in practice. As international trade in services grew in volume and economic importance, the model of a world economy without trade in services became less and less credible. Another convention frequently used by statisticians fully removed trade in transportation and communication services as a subject for analysis. It assumed that each country's ships or airplanes carry only its own people to other countries, and that each country's communications companies transmit only messages from its own people to other countries. The key point here is that under some long-standing statistical conventions international trade in support services was defined as something else. Economists thus built a model of the world economy
that did not have to account for trade in services. This model was
a workable model for many years because international trade in services
remained quite limited in practice. As international trade in services
grew in volume and economic importance, the model of a world economy
without trade in services became less and less credible. GROWING INTERNATIONAL RECOGNITION OF TRADE IN SERVICES A model of the world economy that does not accommodate trade in services has become increasingly unacceptable to enterprises selling services. These enterprises do not see a fundamental distinction between the sale of services and the sale of manufactured goods to customers in other countries; yet they see governments spending a great deal of effort in reducing foreign barriers to the sale of manufactured products and very little effort in reducing foreign barriers to the sale of services. The only obvious difference is that the sale of manufactured products to foreigners has been called trade and the sale of services to foreigners has not been called trade. It is therefore natural for them to ask why the sale of services to foreigners should not be considered a form of trade and given equal treatment by governments. The appendix to this book describes how a group of business executives from American companies producing services persuaded the U.S. Congress to extend legislative provisions dealing with international trade to foreign sales of services, and how U.S. trade officials ultimately persuaded other countries to initiate multilateral negotiations to liberalize trade in services. As governments began to give serious consideration to trade in services and the rules that might be devised for such trade, economists began to reexamine old assumptions about the nontradeability of services and to extend international trade theory to services. (The outcome of the resulting theoretical and empirical work is described in considerable detail in Chapter 6.) Out of the debates and studies has come a growing awareness that advances in transportation and communication technologies have made it economically feasible to trade services, and that such trade is growing rapidly. There is now a much broader realization that trade in services can take place through international travel by either consumers or producers of services and, more important, through international flows of information and money. There is now also a greater awareness that international communication and transportation policies can have a major impact on the competitive position of firms competing in world markets. The evolution of opinion is perhaps best illustrated by excerpts from a statement released in 1981 by the International Chamber of Commerce in Paris, with members in over 100 countries in both the developed and developing world: A vigorous and comprehensive liberalization of international
trade in services is now urgently necessary. The International Chamber
of Commerce therefore urges all governments to enter into reciprocal
and mutually advantageous undertakings to reduce impediments to international
trade in services in as far-reaching manner as possible.... The ICC
believes that the inclusion of trade in the international market economy
system is the best guarantee for the continued growth of international
trade in both visibles and invisibles. In calling on governments to
liberalize trade in services, the ICC recognizes that, as in the case
of trade in goods, free trade in services is the standard against
which the liberalization process should be measured. The debate over trade in services has also led to a growing recognition in many countries that their domestic policies in services were badly in need of rethinking and reform. Work is now underway in many countries to gain a better understanding of the role of services as well as trade in services in economic growth and development. Profound changes in the technology underlying the production of both goods and services have fundamentally altered the role of services in the world economy over the past few years. They have accelerated the international flow of services and increased the importance of service inputs in the production of goods. Old ideas about the nature of service and its role in international trade have thus become less and less useful, and indeed a major hindrance, to managing the policies affecting the organization of service activities in the world economy. Old ideas, however, tend to have a tenacious hold on us and shape our perception of the world around us long after the world has changed. Long-standing assumptions about the nature of things affect how all of us-average citizens, senior government officials, scholars, and in particular statisticians-see the world. Since trade in services has not been considered a viable activity, little effort has gone into measuring it. Thus even as the world was changing, people clung to the idea that it was not possible to trade services. A revolution in human thought was required in order to develop both the means and the will to identify and measure the growing trade in services. That revolution in thinking has only begun, and it may be some time before public perceptions have adjusted themselves to the new economic realities. Just as outdated assumptions about trade in services have camouflaged the growing importance of trade in services to the world economy and to the economic interests of many countries, even older assumptions and prejudices about the unproductive nature of services have distorted public perceptions of the role of services in the domestic economy. These perceptions have led to a general neglect of the services sector in many areas of policy such as taxation and regulatory reform. The growing international debate over trade in services has now led to a growing interest in the role of services in domestic economic growth. Trade negotiations in services thus could prove to be an important catalyst in facilitating long overdue reforms in domestic policies on services.
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