From Goods To Services Revising The Basis Of Profitability

From the earliest days of the industrial revolution, economic output has been based on the sale of material goods: first cotton, then iron and steel, leather, metal goods and pottery; later plastics, synthetic textiles, pharmaceuticals, industrial chemicals, mercury, chlorine, and water purifiers. Since profitability depends on economic output, the more of these material commodities a company sells, the better off it becomes. Embedded in the logic of the industrial revolution is the incentive to increase the throughput of materials into the environment.

In Chapter 4 I presented a concept of the economic system which differs in a significant sense from this historical vision. I suggested there that the principal role of the economy was as a provider of services. Figure 9 illustrated the basic principles of this role. There are material dimensions to the scheme outlined in Figure 9. In particular, we know from the considerations of thermodynamics that all activities require material inputs and lead to material outputs. But the functional output from the system—the one which we intend for some purpose—is not presented in an explicitly material form. This is because the provision of services is not generally representable by material outputs. The units of measurement are different. The concepts are not the same.

Ultimately, we could argue, it is services rather than material products which the economic system ought to be designed to deliver.6 So the most obvious and yet the most radical revision of the economic system that we could suggest would be to change the basis of profitability of that system from the throughput of products to the provision of services. The suggestion is obvious, because that is precisely what we would like the economic system to do: provide the services which we need to survive and to enjoy our lives. It is radical because it implies a reappraisal of the classic division of the economy between commerce and manufacture, between industry and services.

In the early days, the commercial sector of the economy was mostly concerned with retail trade. Merchants earned their living by buying up cheap material goods in one place—often the colonial markets—and selling them at a profit elsewhere. After small-scale manufacturing developed into a thriving industrial sector, the merchants profited from the rapid throughput of material goods which mechanisation brought with it. And as economies expanded and diversified, the commercial sector became known more broadly as the service sector—that sector of the economy which provided 'services' as distinct from the sector which manufactured products.

The basis of this broad, emerging service sector was really split into three distinct parts. A part of the service sector derived its profitability directly from the retail and trading of material goods. This was the extension into the industrial economy of the formerly powerful base of merchant commerce. Another increasingly important subsector of the service economy was that of financial services. During the economic boom of the 1980s, the fastest rising sector of the British economy was the financial services sector, which practically doubled its contribution to GNP in the decade between 1979 and 1989.7

This increasingly important subsector of the service sector appears at first sight to bear little relation to materials throughput, and its rise in industrial economies has contributed significantly to an apparent dematerialisation of those economies. This is an illusion, however. The economic basis for financial services is mostly speculation about commodity prices and trading in investment capital. Speculating on commodity prices both requires and encourages the flow of material commodities somewhere in the economy, and trading in investment capital is empty if capital is not actually invested—generally in materials-based industries. The financial services sector may appear to reduce the materials intensity of the advanced economies. In fact it serves only to promote material throughput and encourage material consumption.

Despite all this, the idea of extending and redefining the service base of the industrial economy is a valid one. To see why, we must look at the third subsector of the service economy. This is the set of economic activities whose profitability is already based specifically on providing certain kinds of physical services: hairdressing, catering, hotels and so on. Naturally, materials and energy are required in order to provide those services. Thermodynamic considerations insist on this. But the crucial point is that these activities do not base their profitability on the throughput of materials, and they do not operate under an economic incentive to increase material throughput. In fact, the reverse is true: profitability is based on the provision of a certain service, and there is a built-in incentive to reduce the material throughput associated with that service through the profit motive.

Of course, my suggestion here is not that we build post-industrial economies on the expansion of the hotel trade and hairdressing.8 These may be the least of our concerns in ensuring national welfare. Rather I

am using this example to point out how a service-based profit motive works in practice. And if it can work for one sector of the economy, why should it not work for another? Historically, commercial activities and manufacturing activities have been divided. But there seems no a priori need for this division. And there seems no reason in principle why we should not heal that 200-year-old rift, and reunite manufacturing and commerce under a new conception of the service economy.

The heart of this new conception would be a change in the basis of profitability from the sale of material products to the sale of services. This kind of profitability is already the basis for certain kinds of industries. For a wide variety of other industries it would require significant modifications to existing operations. It would also imply some fundamental revisions of current commercial relationships. What might these revisions mean in practice? In the following sections, a number of explicit examples are presented which illustrate how this kind of change might occur.

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