Chapter 6: Towards the Service Economy

8. Reversal of Perspective

One of the key ideas on which economics is based both in theory and in practice is that we live in a world in which resources are scarce and poverty is still all too visible, even in the most advanced countries. Free products exist, such as air, at least so far. But to live or to survive we usually have to work, in one way or another.
In paradise, instead, there should be an unlimited abundance, no pollution problem, no work, neither salaries nor unemployment. On earth it’s clear that we are in a purgatory and it would be wise to make the best use of it.
The development of the Industrial Revolution can be considered as a heroic development against scarcity. Classical economics concentrated on understanding how to stimulate to its maximum the capacity for producing what is known as supply. Demand, motivated by necessity, can only follow.
But there was a crucial moment! In order to work well the Industrial Revolution increas­ingly spread the use of money to form the capital needed for the acquisition of machinery and to make exchange easier.
From this it follows that the demand, the need to have products for consumption also had to be expressed in monetary terms. Consumers have to be able to pay for their purchases, so that their demand may be met.
All this might seem banal and obvious but this was not the case during the first 150 years of the Industrial Revolution. Actually, apart from the periods of war, naturally inflationary (when prices increase), and a brief period in the 1870s – following a large importation of gold – economic crises until the beginning of the 20th century were deflationary ones. Too many products were produced for too few purchasers as consumers did not have the necessary money. Penury and poverty on the one hand and over-production on the other. Not even the great economists have managed to calculate the extent of the Industrial and technological Revolution and the essential role of monetisation of commercial and social relations.
So, after a century and a half in which economic experts concentrated on “supply” (the production aspect), priorities were reversed thanks to the economists of the first half of the 20th century, especially John Maynard Keynes and at a more philosophical level John Hicks.
Keynes was an expert conservative, an intellectual and lover of classical ballet and champagne. Of rather free habits for the age. He revolutionised economics though. If there was an excess of production the demand could be financed – through the State and public authorities – even if this resulted in deficits, on condition of course that this did not go so far so as to cause inflation.
A balance between supply and demand had to be maintained so that the maximum use might be made of all the factors contributing to supply and demand.
In this way Keynes brought about profound changes in the culture of that age: he rendered debt not only morally acceptable but even desirable; he even opened the way to the intervention of the State as an economic entrepreneur.
Since then, whether one was right or left wing, it has been thought possible to regulate the economy mainly according to demand. In recent years newspapers have carried out detailed inquiries to discover whether car sales or the sales of other products were increasing sufficiently, little, or not at all. Buy, buy to keep the economy afloat! And if you are a business person then obviously you prefer to have a greater number of clients rather than the opposite.
But since 1973 in the industrialised countries especially, there has been a tendential revival of inflation, sometimes reaching a rate of over 10%. Since then the average rate of growth has significantly diminished. What had happened? Why was it not possible to reraise the economy everywhere to the rate of 6% annually, something that would have helped more than a little to resolve several problems, such as welfare financing.
In my opinion, not enough attention was paid to the fact that on the supply side – the production side – there had been a move from a prevalently manufacturing economy to one based on services. The very notion of economic value, and hence of growth, was tending to change. The rhythm of technological innovation, increasingly dependent on basic research, could not but advance in an uneven manner, when some basic discoveries were available and utilisable. It was not enough to invest in massive programmes of technological research to be certain of quick results.
Forced by necessity to curb inflation and having become increasingly independent, the central banks were committed to carrying out policies based on the control of the economy through monetary tools.
From the point of view of economic theory on the balance between supply and demand, I think it is useful to suggest another way of viewing this relationship. Classical economics had favoured the supply aspect (production), the neo-classical economics (of the last sixty years) concentrated on demand. Both suppose that the point of reference remains the notion of equilibrium between supply and demand.
It could be thought that in the service economy we are dealing simply with a return to the economy of supply, given the suggestion for a more detailed analysis of the ways of pro­ducing the wealth of nations today.
But this point of view is insufficient, if one also considers the definition of the value of utilisation given earlier. In reality, in real economics, as in life and nature, productive activity always exceeds, often by a lot, consumption or demand possibilities. Every businessman knows that he will never sell everything he offers but that every product (above all new ones) undergoes a difficult trial period at different levels including those relating to consumers. The totality of the production process therefore must cover the costs of all the surpluses, as in the case of research strategies that take into account the fact that most projects will not result in success.
As far as “demand” is concerned its primary function is that of choice. This function is indispensable and demand will pay a price, not only for the purchase of a product or a system but will be responsible, directly or indirectly, for all the expenses relating to its utilisation over time. Certain classical economists say that, in a notion of equilibrium, so long as one half of the equation is understood (supply = demand) the other is also automatically understood.
It may be rational but it does not make much sense. In the service economy, supply and demand, production and utilisation, must both be studied and understood well within their own logic and manner of working. Demand costs in the utilisation period remain uncertain for a long time (and even after the utilisation stage).
Finally, one must also consider that the user very often plays a part in producing results. Alvin Toffler has spoken about the “prosumer”, i.e. the producer-consumer, in whom the two functions are increasingly less distinct. The paths of contemporary economics offer enormous possibilities and challenges.

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