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Pondering The Service Based Economy…

14 December 2009 2 Comments

As our manufacturing and production economy has eroded over the decades, we’ve replaced it with a service based economy.  As we’ve shipped manufacturing jobs overseas, we’ve bought into the idea that economic growth is possible and sustainable when most Americans work in service capacity.  This is false.

Wealth is generated in this country when we produce things and sell them abroad.  This causes wealth to pour into the country.  Service based jobs are worthy jobs, but they are not what produce wealth for the country.  Service jobs need production/exports based jobs.

An Example

Let’s supposed there is an island and there are three people living there.  One is a farmer, one is a handyman and one is a therapist.  The farmer grows food and sells the extra food to the handyman and the therapist.  The handyman builds homes and maintains them for the farmer and the therapist.  The therapist provides therapy for the farmer and the handyman when they need it.  Sure, they are able to exist in such a scenario but there is no net wealth being created.  It’s being moved around.

Now, let’s say that the farmer begins to grow so much food that he can export half of it to another island.  This brings wealth into his island.  He then invests that wealth into the handyman’s business because the handyman has a great idea.  The handyman develops a product that is really amazing.  He builds many of them and sells them to the other island.  This brings even more wealth into the island.  Now, the therapist has a great idea for a book that will change the way people think about the world.  The handyman and the farmer both are flush with capital and they invest it in his book idea.  Now the book is produced and sold to other islands also.  They are all getting very wealthy.

Because of the growing businesses on the island, many people move to the island.  They work in the production of the products that are selling abroad.  Other service based jobs also develop because there are more people with more needs of services.  But, this is all driven by the exports and the inflow of wealth to the island.

Our Problems

A big part of our problem is our focus on stupid economic indicators.  We view two things for the most part as telling the whole story:  the unemployment figure and the stock market.

First, the unemployment figure is manipulated.  It was changed in the early 1990’s to be much more “pretty” where 10% unemployment today is more like 15-17% unemployment prior to 1990.  The government wants the picture to be rosy.  Why?  Re-election.  Also, jobs are not the most important thing we should be focused on even though it is what most people focus on.  If everyone worked a job digging holes and then filling them back up, that is not good for the economy.  Even if the result was 0% unemployment.  Get it?  The jobs have to serve a productive capacity otherwise it’s a waste.

A few years ago, unemployment was low but almost everyone was in a service based jobs such as home builders, mortgage brokers and so forth.  We saw how that turned out…

Second, the stock market can also be manipulated based on Wall St. firms and government action.  Easy monetary policy can cause asset prices to shoot up including stocks.  This doesn’t necessarily mean a healthy economy.  Also, if stocks are rising but the dollar is losing value (the story of 2009), it doesn’t necessarily mean a healthy economy.

Our economy should be measured by the productive capacity of our economy, our exports that bring wealth into the country, the strength of our currency, and rising profitability of American businesses.  Let’s see.. productive capacity has been going down for years, we import WAY more than we export and our currency is plummeting.  You tell me how strong our economy is…

2 Comments »

  • tom said:

    Still wondering how I would make any difference If the farmer grew his produce in another Island and reduced his costs on production, with his increased profits uses more brain power to develop more efficient infrastructure to service his customers and get more distrubution of his produce at a lower cost. The Farmer still lives on the same Island and most of the profits are being redistributed back into his business to improve servicing his customers. The problem only exists when the labour pool cannot adapt to the new labour skills which are in demand. The United States is faced with this problem, they are too good for low skilled employment and not skilled enough for the new skills the economy requires. that is why there is the current rate of unemployment at 9%

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