1. What is (a) service? The information and service economy August 29 2007 Bob Glushko and Anno Saxenian

2. Outline 1.Residuals and other conceptual confusions 2.Tangible v. intangible goods v. service 3.Service as a relationship 4.What is the link between information and the service economy?

3. What is (a) service?

4. Services as a residual category US employment as % of total

5. Service sector as a residual 1992 SIC-based service sector, US census  Finance, Insurance, Real Estate Industries (FIRE)  Retail Trade  Services (e.g. health care, hotels, schools, etc.)  Transportation, communications, and utilities  Wholesale trade

6. Service sector as a residual, II 1997 NAICS-based service sector, US Census  Accommodation and Food Services (Sector 72) Accommodation and Food Services (Sector 72)  Administrative and Support, Waste Management, Remediation Services (Sector 56) Administrative and Support, Waste Management, Remediation Services (Sector 56)  Arts, Entertainment and Recreation (Sector 71) Arts, Entertainment and Recreation (Sector 71)  Educational Services (Sector 61) Educational Services (Sector 61)  Finance and Insurance (Sector 52) Finance and Insurance (Sector 52)  Health Care and Social Assistance (Sector 62) Health Care and Social Assistance (Sector 62)  Information (Sector 51) Information (Sector 51)  Management of Companies and Enterprises (Sector 55) Management of Companies and Enterprises (Sector 55)  Other Services (Except Public Administration) (Sector 81) Other Services (Except Public Administration) (Sector 81)  Professional, Scientific and Technical Services (Sector 54) Professional, Scientific and Technical Services (Sector 54)  Real Estate and Rental and Leasing (Sector 53) Real Estate and Rental and Leasing (Sector 53)  Retail Trade (Sector 44-45) Retail Trade (Sector 44-45)  Transportation and Warehousing (Sector 48-49) Transportation and Warehousing (Sector 48-49)  Utilities (Sector 22) Utilities (Sector 22)

7. Service sector as a residual, III  2002 new categories proposed Tertiary: FIRE, wholesale and retail trade, transportation, communications and utilities Quarternary: information-based services (software, Quinary: people-oriented services (culture, recreation, entertainment, etc.)  Does this help?

8. Classical economists’ confusions  Adam Smith, J.S. Mill, A. Marshall, et al. Good = material, tangible commodities Service = immaterial, intangible, perishable  Stocks (v. flows) basis of wealth creation Manufacturing = productive labor Service work = unproductive labor

9. Peter Hill on good v. service  What is a good? Goods are entities of economic value that can be owned, traded, inventoried Goods are produced prior to consumption  What distinguishes a service? Services cannot be produced without agreement, cooperation and possibly even participation of consumer Simultaneous production and consumption; producer and consumer of service inseparable

10. The rise of intangible goods  Entities that are like goods, but no physical dimensions, spatial coordinates Software, law brief, musical score, blueprint Entities that are recorded and stored on media such as paper, films, tapes, or disks Can be replicated, distributed, manipulated, traded, stored, customized  These intangible goods—not services— and are growing very fast

11. Where does this leave us?  For Hill, services involve relationships Services cannot be produced without the agreement and co-operation of the consumer Outputs of services are not separable from the consuming unit; no independent existence  But does producer-consumer interaction in service provision limit location, scale? e.g. surgery, massage, advertising, haircut What about large scale software customization process? On-line purchasing or auction?

12. Information as an input  Data and information of any sort can be considered raw material as well as goods  In physical form (paper, books) it takes great effort to search, retrieve, store, manipulate, transform information  When digitized, information is: Easily stored and processed – databank, data warehouse, data mining Easily customized, enriched, accumulated, transformed - even across great distances Easily distributed - infinitely scalable

13. Growing information content of services  Web-based platforms and reusable software components transform services as well as goods: eBay, Google  Information systems allow separation of production and consumption of services: global supply chain management, remote medical screening

14. US information sector, 1967-97  1967: Information sector 46% of GNP Of which information services 36%  1997: Information sector 63% of GNP Of which information services 56%  US GNP value added and wages concentrated in information services  US employment dominated by non-information service jobs Source: Apte, Karmarkar, Nath 2007

15. Professional, scientific & technical services  Fastest-growing sectors (employment, output and productivity) in advanced economies Finance, accounting, insurance, law, consulting, graphic design, surveying, etc. Once a service, performed by individual practitioners, now can gain scale through re-use of components/modules of info or artistic output  About 45% of gross output by these sectors is intermediate output rather than to final customers  Aggregate service value-added to final manufacturing output now close to 25%

16. Computer and software services trade

17. Trade in business, professional & technical services

18. Beyond classification schemes  “There are no such things as service industries. There are only industries whose service components are greater or lesser than those of other industries.” Theodore Levitt, 1972  We’re all in services now, more or less...

19. Focus on service relationships

20. Early observers of service economy  Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social Forecasting,1973. Rise of white-collar information and service jobs, liberation from drudgery of manual work, professionalism & creativity  Robert Reich, The Work of Nations: Preparing Ourselves for 21 st c. Capitalism, 1991. Inherent inequality of 21 st c. economy: Routine producers, in-person servers & symbolic analysts  Peter Drucker“The Age of Social Transformation” 1994. Knowledge work requires not only new forms of work organization (teamwork), also social and political innovation

21. Drucker’s “knowledge society”  Growing importance of specialists, specialized knowledge (applied knowledge) v. generalists  Shift from knowledge to “knowledges” Requires knowledge workers to work in teams – teams, not individuals, as work units If not employee, knowledge worker must have affiliation with an organization  “The knowledge investment...determines whether the employee is productive or not, more than the tools, machines and capital...”  “The essence of management is to make knowledges productive.”

22. Drucker on management  Management is the distinctive organ of all organizations, even if they don’t use the term  Management is taught in business schools as a bundle of techniques & procedures (e.g. budgeting, personnel relations)  “The essence of management is to make knowledges productive.”  Management is a social function—and in its practice it is truly a liberal art  Twentieth century is century of organizations, will require social and political innovations

23. Paradigms of economic growth  Mainstream economics Adam Smith and perfect competition All firms have access to same “recipes” Allocation of resources via invisible hand Productivity growth via specialization and division of labor; no intangible assets Main threat is monopoly=>government’s role  Posits equilibration and equalization of returns; no role for innovation / creativity

24. Paradigms of the economy  Schumpeter’s creative destruction Entrepreneurs and technological change as main drivers of growth Incentive to innovate: short term monopoly rents, enforced created by copyrights and patents Continuous innovation creates losers in a “continuous gale of creative destruction” Network effects (increasing returns) amplify costs  Challenge of continuous displacement of older firms, products, regions, workers, and inherent inequality