What is (a) service?

The information and service economyAugust 29 2007

Bob Glushko and Anno Saxenian

Outline

1. Residuals and other conceptual confusions

2. Tangible v. intangible goods v. service3. Service as a relationship

4. What is the link between information and the service economy?

What is (a) service?

Services as a residual category

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1850 1880 1900 1925 1950 1975 2000

Services

Manufacturing

Agriculture

US employment as % of total

Service sector as a residual

1992 SIC-based service sector, US census Finance, Insurance, Real Estate Industries (FIRE) Retail Trade Services (e.g. health care, hotels, schools, etc.) Transportation, communications, and utilities Wholesale trade

Service sector as a residual, II

1997 NAICS-based service sector, US Census Accommodation and Food Services (Sector 72) Administrative and Support, Waste Management, Remediation

Services (Sector 56) Arts, Entertainment and Recreation (Sector 71) Educational Services (Sector 61) Finance and Insurance (Sector 52) Health Care and Social Assistance (Sector 62) Information (Sector 51) Management of Companies and Enterprises (Sector 55) Other Services (Except Public Administration) (Sector 81) Professional, Scientific and Technical Services (Sector 54) Real Estate and Rental and Leasing (Sector 53) Retail Trade (Sector 44-45) Transportation and Warehousing (Sector 48-49) Utilities (Sector 22)

Service sector as a residual, III

2002 new categories proposed Tertiary: FIRE, wholesale and retail trade,

transportation, communications and utilities Quarternary: information-based services

(software, Quinary: people-oriented services (culture,

recreation, entertainment, etc.) Does this help?

Classical economists’ confusions

Adam Smith, J.S. Mill, A. Marshall, et al. Good = material, tangible commodities Service = immaterial, intangible, perishable

Stocks (v. flows) basis of wealth creation Manufacturing = productive labor Service work = unproductive labor

Peter Hill on good v. service

What is a good? Goods are entities of economic value that can

be owned, traded, inventoried Goods are produced prior to consumption

What distinguishes a service? Services cannot be produced without

agreement, cooperation and possibly even participation of consumer

Simultaneous production and consumption; producer and consumer of service inseparable

The rise of intangible goods

Entities that are like goods, but no physical dimensions, spatial coordinates Software, law brief, musical score, blueprint Entities that are recorded and stored on

media such as paper, films, tapes, or disks Can be replicated, distributed, manipulated,

traded, stored, customized These intangible goods—not services—

and are growing very fast

Where does this leave us?

For Hill, services involve relationships Services cannot be produced without the

agreement and co-operation of the consumer Outputs of services are not separable from the

consuming unit; no independent existence But does producer-consumer interaction

in service provision limit location, scale? e.g. surgery, massage, advertising, haircut What about large scale software customization

process? On-line purchasing or auction?

Information as an input

Data and information of any sort can be considered raw material as well as goods

In physical form (paper, books) it takes great effort to search, retrieve, store, manipulate, transform information

When digitized, information is: Easily stored and processed – databank, data

warehouse, data mining Easily customized, enriched, accumulated,

transformed - even across great distances Easily distributed - infinitely scalable

Growing information content of services

Web-based platforms and reusable software components transform services as well as goods: eBay, Google

Information systems allow separation of production and consumption of services: global supply chain management, remote medical screening

US information sector, 1967-97

1967: Information sector 46% of GNP Of which information services 36%

1997: Information sector 63% of GNP Of which information services 56%

US GNP value added and wages concentrated in information services

US employment dominated by non-information service jobs

Source: Apte, Karmarkar, Nath 2007

Professional, scientific & technical services

Fastest-growing sectors (employment, output and productivity) in advanced economies Finance, accounting, insurance, law, consulting,

graphic design, surveying, etc. Once a service, performed by individual practitioners,

now can gain scale through re-use of components/modules of info or artistic output

About 45% of gross output by these sectors is intermediate output rather than to final customers

Aggregate service value-added to final manufacturing output now close to 25%

Computer and software services trade

Trade in business, professional & technical services

Beyond classification schemes

“There are no such things as service industries. There are only industries whose service components are greater or lesser than those of other industries.”

Theodore Levitt, 1972

We’re all in services now, more or less . . .

Focus on service relationships

Early observers of service economy Daniel Bell, The Coming of Post-Industrial Society: A

Venture in Social Forecasting ,1973. Rise of white-collar information and service jobs,

liberation from drudgery of manual work, professionalism & creativity

Robert Reich, The Work of Nations: Preparing Ourselves for 21st c. Capitalism, 1991. Inherent inequality of 21st c. economy: Routine

producers, in-person servers & symbolic analysts

Peter Drucker“The Age of Social Transformation” 1994. Knowledge work requires not only new forms of work

organization (teamwork), also social and political innovation

Drucker’s “knowledge society”

Growing importance of specialists, specialized knowledge (applied knowledge) v. generalists

Shift from knowledge to “knowledges” Requires knowledge workers to work in teams

– teams, not individuals, as work units If not employee, knowledge worker must have

affiliation with an organization “The knowledge investment . . .determines

whether the employee is productive or not, more than the tools, machines and capital ...”

“The essence of management is to make knowledges productive.”

Drucker on management

Management is the distinctive organ of all organizations, even if they don’t use the term

Management is taught in business schools as a bundle of techniques & procedures (e.g. budgeting, personnel relations)

“The essence of management is to make knowledges productive.”

Management is a social function—and in its practice it is truly a liberal art

Twentieth century is century of organizations, will require social and political innovations

Paradigms of economic growth

Mainstream economics Adam Smith and perfect competition All firms have access to same “recipes” Allocation of resources via invisible hand Productivity growth via specialization and

division of labor; no intangible assets Main threat is monopoly=>government’s

role Posits equilibration and equalization of returns;

no role for innovation / creativity

Paradigms of the economy

Schumpeter’s creative destruction Entrepreneurs and technological change as main

drivers of growth Incentive to innovate: short term monopoly rents,

enforced created by copyrights and patents Continuous innovation creates losers in a “continuous

gale of creative destruction” Network effects (increasing returns) amplify costs

Challenge of continuous displacement of older firms, products, regions, workers, and inherent inequality