Ultimately, the service economy depends on manufacturing. From Bill Bonner at acting-man.com:
An Abrupt Drop
Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least.
Groping in the dark, Yellen-style
Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed… and that a rate hike isn’t such a good idea after all.
Mainstream economists regularly dismiss worries about falling employment and output in the manufacturing sector.
“Don’t fret about it,” they say. “We have a robust service economy.”
Well, on Tuesday, the news came out that the service economy is not as robust as we thought. Bloomberg:
An abrupt drop in the Institute for Supply Management’s services gauge on Tuesday to a six-year low is the latest in a string of unexpectedly weak data for August.
Besides, the promise of a “service” economy has always been a fraud. We can’t all get rich by mowing each other’s lawns and parking each other’s cars!
You can make money by offering services, but only if there is someone who can pay for them. And you can only pay for services if you are doing something that generates real wealth.
Wealth Drain
Just look at India. It has over half a billion people willing to do just about anything for peanuts. Services? You can get all you want. But that doesn’t make India a wealthy country.
Services are better thought of as a drain on wealth, not a way of building it. Let’s say you want to go out to the movies. Instead of watching your children yourself, you hire a teenager from the neighborhood.
You pay, say, $20 for the evening. This results in an increase to the nation’s service industry income of $20. And you had the benefit of the service. You had $20. Now, someone else has the 20 bucks. Where’s the additional wealth?
Manufacturing, on the other hand, creates wealth. You take $20,000 worth of labor and materials. You put together an automobile and sell it for $25,000. The automobile is worth $5,000 more than what it cost to build it. You are $5,000 richer.
But wait… You will say that someone must be out $5,000. But that isn’t true. He had $25,000 worth of cash. Now, he has $25,000 worth of automobile. He’s even; the world is $5,000 richer.
Crack and Snapchat
Readers will be quick to point out how Silicon Valley has added to the real wealth of the nation with its many services and innovations. Social media companies alone are said to be worth $500 billion – evidence of how much wealth they are bringing to the world.
And it’s true – some are useful for improving productivity. They speed the output of real wealth. But even profitable innovations can destroy wealth as well as create it.
Crack cocaine and television, for example, have probably cost the nation a trillion dollars of real output. Are Facebook and Snapchat much different? As in any other service industry, money passes from one person to another. But is wealth created? Or destroyed?
To continue reading: How is Real Wealth Created?
I agree with Bill Bonner a lot more often than not, but I think he’s dropped (or at least has a tenuous hold on) the ball here. I am suspicious of the notion that ‘real wealth is stuff’ for a number of reasons, the primary one being that it is a major justification for all kinds of mercantilist perversions. To the extent that manufacturing has declined below a level commensurate with its contribution to ‘real wealth’ – the means to satisfy human wants – that is an effect, not a cause. India is not poor because it doesn’t make stuff; it doesn’t make stuff because it’s poor, and it’s poor because its economy is suffocated by the State, with much of that suffocation being the aforementioned mercantilist perversions. The ability to go to a movie instead of sitting around watching the kids is no less ‘real wealth’ than having an automobile. Manufacturing is every bit as dependent upon agriculture as services are upon manufacturing, but few complain about the fact that agriculture employs an order of magnitude fewer people now than 100 years ago – although I would argue that particular trend has gone a bit too far, but the reasons have nothing to do with is or is not ‘real’ wealth. The distinction between ‘real wealth’ and not ‘real wealth’ is not spurious, but it is not between ‘stuff’ and ‘services’. A doctor produces little if any ‘stuff’, but I don’t think one can argue that the doctor is not producing ‘real wealth’. The F-35 contractors are producing a whole bunch of ‘stuff’, but only a moron or a neocon (but I repeat myself) would argue that they are producing ‘real wealth’.
To continue reading link is broken.
Great response to Bonner’s article and the link has been fixed if you want to read the rest of it.