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Blurring the Lines between Products and Services: What matters is producing value by SANDY IKEDA

Angst over the alleged shrinking of the so-called industrial sector has been a staple of business journalism and fodder for political bloviating since at least the 1970s.

Is the United States losing manufacturing jobs to other countries? Or are manufacturing jobs coming back to the United States? Is the hamburger flipper pushing out the drill-press operator?

I won’t try to explain why or even whether all this has been happening. I’ll leave that to those better informed on the issue, like my friend, economist Don Boudreaux. Instead, I’d like to focus on the distinction people tend to make between manufacturing jobs and service-sector jobs, because that distinction is not as clear as many believe.

Does manufacturing matter?

One view is that, desirable or not, there’s no point in hoping for a return of manufacturing to the United States:

More than 70 percent of the wealth created in the U.S. today comes from providing services, a 33 percent increase since 1950. The shift from goods to services is likely to continue. In other words, our future prosperity is not going to come from buying more stuff, but from doing more for each other.

So accept harsh reality, strap on our aprons, and keep flipping those burgers. But that attitude simply hides a deeper confusion.

In a recent column, Steve Horwitz made the important point that:

[T]he purchase of a service is no less able to improve our lives, and thereby be a source of economic growth, than are the production and purchase of material goods. In fact, what we really care about when we purchase a material good is not the thing itself, but the stream of services it can provide us.

Looking beyond superficial differences, what matters from our individual perspectives is whether those services provide meaningful improvement in our lives, not whether driving a car is somehow “better” than eating a hamburger. I’d like to pick up on Steve’s theme and take it in a slightly different direction.

Producing versus selling

My great teacher Israel Kirzner has pointed out that all production costs are really selling costs.

No single penny of the outlay — even those usually considered as strictly production, rather than selling, costs — can be perceived as anything but costs incurred in order to sell.

That might sound a little confusing at first, because most of us see producing something as a very different activity from selling something. Production involves combining labor and capital, in often complex ways, over time; sales involves marketing and advertising what has been produced. Right? But look a little deeper.

What is production but the attempt to make inputs — labor, know-how, machines, raw materials, organization — more attractive and more salable to the final consumer? What clothing companies such as Gap actually do is increase consumers’ demand for cloth, thread, sewing machinery, electricity, and skill by putting these inputs together in a more marketable way. Gap might be able to sell a bag of inputs to a person and hope she buys it, but it’s probably had greater success by making the package a little more attractive. That’s what production does; it makes inputs more marketable to buyers.

The false division between production and advertising

Seeing production as essentially a selling activity erases the distinction between production and advertising. If the seller and customer aren’t aware of each other, it doesn’t matter a bit if a seller makes a shirt that a customer is willing and able to buy at a price that would more than cover the shirt’s opportunity cost.

Without that awareness, it’s as if the shirt had not been produced. So more than simply providing information about the shirt’s qualities, advertising serves to bring the shirt’s very existence to a customer’s attention. In that way, advertising completes the selling process that began at the earlier stages.

The false division between manufacturing and service

Seeing the production process as a selling process also erases the distinction between manufacturing and service.

A person who operates a drill press is using her knowledge to maximize the machine’s effectiveness. She is providing a service to the buyer in the next stage of production, no less than the Apple worker at the Genius Bar is servicing the computers that buyers use for their individual purposes. All labor is, in this sense, a service.

Such service, if appropriate, represents value added to the selling process. Labor services can enhance the value of capital, just as capital can enhance the value of labor. When successful, labor and capital complement each other, increasing their respective value productivities, because they make the final product more valuable, more salable, to the final customer. What we conventionally call a “service job” is merely the final stage of delivering a product, whose inputs have been serviced and sold, stage by stage, all the way down the supply chain.

Viewed this way, it’s easy to see that some services along the production process (even in the “manufacturing sector”) add little value, just as there are services (in the traditional “service” sector) that add much more value in the eyes of the final consumer. That’s fine, because people differ in how much they are willing to sacrifice for high-paying jobs, and each worker chooses the job that she thinks comes closest to having the best trade-off between labor and leisure.

Thus, the issue is not service jobs versus manufacturing jobs, but low-value-added services versus high-value-added services. There’s no need to bemoan the loss of “manufacturing jobs” or celebrate their return. No need to flip out over flipping burgers. All jobs are services.

Matching, not flipping, is the problem

So services include not only labor applied at the final stage of production — the final point of sale — but also knowledge and skills that can be and often are highly valuable. Those services include the traditional practices of medicine and legal and financial consulting, as well as newer sectors in computational and Internet technology — the so-called knowledge economy — and a host of others.

Looking at all jobs as services brings into focus what may be of greater concern: whether jobs on the whole are becoming more or less value productive. The problem, if it is a problem, should not be framed in terms of working in manufacturing or in service. The question is whether people who want to work and earn more have the skills that match the requirements for such jobs. If the answer is no, then that may be a problem.

And the solution may then be to reexamine the role and effectiveness of formal education and training. These are big, complex issues. But at least now we’re asking the right questions.

Sandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.