In a world of abundance we will all still face the same constraint on our activity: time. Time runs out for all of us, on a daily, weekly, yearly and ultimately lifetime basis. It is for this reason that economic activity has been ordered towards the creating of more time, or higher quality time, for the whole of history. There is not one purchasing decision any of us make that is not ordered towards increasing the time we have, or increasing the quality of the time we have (even if this is perceived rather than real). Indeed, time is inherent to the definition of productivity; productivity is doing things we need to do as quickly as possible to create time for other things.
Think of how we create time for ourselves; we employ machines or others to do tasks we would rather not do or we cannot do as efficiently.
Agriculture allowed the formation of towns which allowed for the pooling of resources and greater division of labour (a town only needed one or two blacksmiths – not everyone needed smithing skills). The Industrial Revolution in turn brought manufactured goods to the world, all of which helped save time or improved the time we have and further encouraged division of labour.
The next stage is the golden age of services I described in my first post. This golden age has already begun. The data from the US is clear. Both in terms of GDP and employment, goods production is falling as a share of the economy, as the following charts show.
The data for GDP is nominal. On a real basis, manufacturing is holding its spot in the economy but the nominal data highlights how hard this is for labour and capital in wages and dividends (capital’s currently winning that battle). To maintain competitiveness prices have to continue to fall or quality rise, otherwise production moves offshore.
The services story is very much a demand-led story. It is not a supply-side failure of government to institute appropriate industrial policy and the mercantilism of other nations. It is demand-led because increasingly adding to our time requires us to hire another person to create more time for us. As this report from UBS via FT Alphaville highlights - the world has most of the manufactured goods it needs and crucially, the cost of these goods is falling in price. There are diminishing marginal productivity gains from manufactured goods.
As the manufactured goods we need cost less and become a smaller share of our income, we spend more on services. We employ others to lengthen and improve the quality of our lives. This has substantial benefits. We live longer and more healthy lives due to a lesser requirement for physical labour and greater wealth allocated to healthcare. We also enjoy greater levels of universal education with benefits for both the individual and society.
This demand shift to services continues the specialisation of labour. Today, the comparative advantage of an American worker will not be producing TVs or other goods for export but providing services to the largest and richest household market in the world. This can be a self-fulfilling economic expansion. As specialisation accelerates, the demand for labour rises due to increasing sophistication in the economy and increased demand for leisure (time or quality of leisure) all of which employs more people.
But, and it’s a big but, policy has to help and it’s not. Policy must be different: developed world currencies must strengthen, continued re-skilling of workforces and investment in economies needs to increase. This requires seeing services as something households desire, not as a policy failure.