Chapter 6: Towards the Service Economy

6. Economic Science and Industrial Revolution
The fact that “economics” (or economic science) is a consequence of the Industrial Revolution should not be undervalued. For Adam Smith – the founder of the first modern theory of economic activity – it was clear that the true productive value that leads to an increase in wealth is the one that derives from what we today call industrialisation, or the manner of industrial production. This observation, which today can appear banal, was not so at that time, when it was clear that agricultural production was at the basis of almost every­thing that could be done to nurture and maintain a population. And one was never allowed to forget it. For Adam Smith, the important thing was to draw attention to a change in production possibilities – thanks to the Industrial Revolution then in progress – that would become the key to every policy aimed at seriously increasing the wealth of nations. Agriculture itself would, in time, end up being widely industrialised.
Industrialisation went ahead step by step with a great development in trade and, as a consequence with a greatly increased use of money. Although it had been around for millennia, money covered less than 50% of the production and consumption of every society. We are dealing essentially with an agricultural industry that was self-producing and self-consum­ing. The power of the nobles who dominated this type of society was not built on money (which was scorned) but on the sword. Many books give us a distorted version on this subject because the customs of the present are projected on the past.
Adam Smith grasped the opportunity and the experience of the new Industrial Revolution, in which money was becoming increasingly the key element of economic and social organi­sation. At the centre of his analysis there was a very simple observation. A price was established by the will of someone to sell a product to someone else who wanted to buy it. This price became the reference point for defining the economic value of a piece of goods. It is to the exchange of an item of goods on the basis of a price that reference is made in economics when one speaks of “equilibrium”. Equilibrium between supply (the seller) and demand (the buyer).
In a traditional agricultural world in which transactions were limited it was difficult to see a general phenomenon and, in any event, neither Charlemagne nor any of those who came after him, and created empires, possessed a bank account. At most they had servants paid not with a salary but at best with the right to plunder like armies at war. It was left to peripheral groups – often Jews – to handle the task of dealing with money, an activity unworthy of a real lord. Go today and tell that to the various Rockefellers, Agnellis, Schneiders of our day.
The “scientific” claims of the 18th century adapted perfectly to the price equilibrium discussed by Adam Smith. This founder of “economics” had actually introduced the notion according to which this equilibrium was imposed by an “invisible hand”, i.e. it was the consequence of a kind of natural phenomenon. More recently much has been written about the “invisible hand” as if it were the banner of the free market. Free perhaps, but under the aegis of a “scientifically objective” phenomenon. Karl Marx only had to follow a large part of Adam Smith’s concepts to then simply add the idea that in the real market even the price depended on the relationships between the forces, themselves considered a social “scientific reality”, and at the end introduce the notion of class struggle.
Today, it is beginning to be increasingly understood: “science” ideology (essentially deterministic) dominated the entire variety of political ideas from the 18th till the 19th century. The worm stayed inside the fruit in every fruit for a long time.
Here then is a first point to study: to what extent is economic “science” as it exists today, strictly linked to the experience of an age during which the Industrial Revolution, in the strictest sense, was the most important and dominant phenomenon in economic development conducive to the wealth of nations? What consequences must be drawn if the contemporary economy is a Service Economy?

7. The Service Economy

In every introductory economics text and in current practice, economic activity is sub-divided into three sectors: the primary or agricultural, the secondary or manufacturing (industrial), the tertiary or service (a kind of dump where everything is put that cannot be put into the other two). The three sectors are also quoted in WTO (World Trade Organisation, ex GATT) negotiations and in national and international economic statistics.
In short it is a generalised and universally accepted convention that no longer corresponds to reality. Worse still it is increasingly false. It is once again the story of the sun that “rises”.
Actually in the golden period of the Industrial Revolution that lasted till almost 40 years ago this sub-division was justified by the fact that the absolute priority was industrialisation. On the one hand, agriculture’s relative economic weight has fallen steeply and in the most advanced countries represents much less than 10%, or even 5% of the total production of wealth. In particular, even where agriculture claims to be organic, its management is pretty industrialised.
On the other hand, the service sector is the one that has long been considered “secondary”. And even unnecessary. In the same spirit with which in his time Adam Smith was taken to task for not understanding that agriculture was the basis of everything. They will now tell you that it is essentially all about producing a car. Today, in fact, it is thought that industry is the foundation for everything.
Now, especially, but not only, in the developed countries, 80% of the people work in services, and that probably includes you who are reading these lines. Ask Jack Welsh, the Napoleon of American industry, who set up the most capitalised, richest industry in the world, General Electric: He knows well, as do today’s great “industrial” managers, that quantitatively and qualitatively every modern business depends first of all on its service activity.
Services no longer simply represent a sector (even if it is industrialised on a smaller scale); they are a FUNCTION that crosses all economic activities.
It is often said that services are nothing other than immaterial products.
Nonsense, as the English say: There is no such thing as a material product that to be conceived and used doesn’t require several services. Nor is there an activity belonging to the service area that does not use material tools. Whatever the “production” of which one speaks, in any sector, the material part represents, on average, at most 20-30%, while the rest are services.
The great start to this far-reaching change began around the 1930s, when research had begun to become a specific professional activity, for which important laboratories and allocations were needed. Research management introduced new elements into the production system. When one is about to take up a research project one must take account of the fact that every study has a limited probability of success that can range on average from 10% in certain branches of the chemical industry to less than one percent in some sectors in the pharmaceutical industry. It is a first element of uncertainty. The second derives from the fact that even important and innovative research destined to succeed, will require a long period, often a decade and more, to pass from the initial idea to its exploitation in the market.
So it is then that a service function such as research (that requires a lot of equipment) resembles, like the reflection in the mirror, the insurance business, which is based on the probability of something happening (in this case something negative, such as an accident or an illness) gives life to its business; insurance is a “traditional” service sector to which we devote the next chapter.
In the majority of cases service functions are predominant even within the chain of production, and deal mainly with maintenance (production checking and repairs) safety, logistics (arranging for the products necessary for the production line to arrive in time). Then there are the distribution and sales services. At the end of the utilisation cycle there is recycling or waste treatment. “To produce” means allowing 80% for managing all the service functions and it is essential that everything is well organised or contracted.
In classical economics texts there are long discussions on the notion of use. The “old” economists claimed that it was limited and reductive to base value on sale and purchase price only. This debate that has nothing to do with the notion of utilisation related to services ended up being abandoned.
In a way the economist John Stuart Mill ended the discussion on the value of use when he asserted that every material produced contains within itself the use that is made of it. Use, therefore, is included in the product as such and in its price. This principle can be accepted so long as we live a simple industrial experience, with simple products. The problem of the service economy began to be felt when it was no longer possible to hold that the utilisation of products formed part of or was included in the product. This holds good for a hammer but not for a computer. It is precisely technological evolution that requires increasingly greater investments, not for the tools, whatever they are, but for their utilisation over time.
When one buys a car, a washing machine, a computer today, the price paid (which already pays for a good number of service functions carried out during manufacturing) is only a first payment to be followed by others for the utilisation of the product or car whose “use” is no longer “built in”.
Hence, the debate on the difference between material products and service functions is not a question of the sub-division between what belongs to the material and that which forms part of the immaterial. A transport business or service can be considered immaterial or if one refers only to the vehicle that does the transporting, it is a material tool. What is essential is to take into consideration the PERFORMANCE of a system or a product over time, for which services have a decisive weight (an economic cost).
What is at stake, therefore, is the very notion of economic value. In a period when the absolute priority was the development of the wealth of nations by manufacturing all kinds of goods, it was possible to concentrate on the notion of value defined by the sale price at any given moment.
In an advanced society however, performance over time demands that account is taken of a whole series of costs, beginning from the research stage (before any production whatso­ever), manufacturing, then distribution costs and above all utilisation, and finally disposal. Value results from the utilisation of a product or a system during its life cycle. It is about the notion of value founded on a double uncertainty: that of the costs and revenue over time (a good part of which is in the future) and that caused by the duration of the utilization cycle.
We are not dealing here with a new economic “value” for sheer intellectual pleasure, but with showing what happens in reality. An economic and social reality in which, at the end of the day, as the English say, we must confront an uncertain world with increasingly greater risks of every type.
The effort of common sense and management can no longer be geared to promises of certainty, but rather to all those methods that allow us to turn our uncertain reality, full of risks as it is, into a MANAGEABLE reality. To this end we must stress (where they exist) the margins of better actions available in the majority of uncertain situations.

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