International Studies in the Service Economy – serie

The second edition of "The Limits to Certainty" has been thoroughly revised and edited. A new chapter on facing social uncertainty has been added, while the section on value and time in the service economy has been extended in order to include the conclusions of recent research conducted by the authors on the subject of waste prevention on the product level (ie making a better use of resources during the utilization of goods). The key to economic progress has always been the better allocation of resources, and the majority of resources available today are in the form of service activities. In order to measure and exploit such resources, one needs a theoretical frame of reference based on the notions of risk and uncertainty, rather than on the "certain" equilibrium of the present economic system. Service means performances, in real periods of time, which means that the identification of values must be based on probabilities: the assessment of the probability and cost of a distribution of events in the future. "The Limits to Certainty" is thus about the economic foundations of the service economy.Published under the auspices of the Club of Rome, it is, in fact, a follow-up to a report published by the Club in 1980, "Dialogue on Wealth and Welfare". In this report it was proposed that the limits to growth were the limits of a specific type of economic growth that had successfully been developed over a period of two centuries. This earlier report went on to propose that a new economic growth needed to integrate economic and ecological factors, in practice as well as in theory, and therefore revise the notion of economic value. This economic transition developed parallel to a growing movement at a more fundamental philosophical level favouring indeterminism against determinism: the notions of risks and uncertainty are increasingly considered as the realm of the new challenges, as compared to a perception - typical of the deterministic era - according to which risk and uncertainty reflect a level of "imperfect knowledge" which science would or should eliminate: a positive versus a negative connotation of risk and uncertainty.

The recent global recession has revealed the vital importance of service-sector productivity in all developed economies. The challenge for scholars and professionals in productivity management (economics and management science) in the coming decade is clearly to improve the productivity of the services sector. Section I addresses the economy-wide problems of measuring service productivity and its impact on economic performance. The growing volume and recognition of trade and international competition in services is the subject of Section II. The first two sections together outline the broad parameters facing the economy and individual managers as they struggle to improve service productivity in an increasingly competitive international market. The specific steps to be taken are addressed in Section III. Section IV presents an operations management perspective on the productivity problem. Section V presents the problems and opportunities that exist in productivity improvement in market services (that is, those industries where some degree of competition and market pricing exists). Finally, non-market services, a vital part of all developed economies, are discussed in Section VI.This text aims to present the state-of-the-art thinking on the service productivity challenge from a variety of disciplines.

Services today account for a major share of employment and national product in the U. S. , with the employment share up from 57 percent immediately post-war to well over 70 percent today (if communications, utilities and transportation are included). This transformation (which is also occurring with varying lags in the othereconomically advanced economies) is driven by a variety of forces : by changes in consumer demand, by the rising demand for health and educational services, by new ways in which businesses are organized and the increasing importance ofcertain functions (e. g. new demands for monitoring, financing, sales promotion, and responding to regulatory agencies), and, closely related, by the continuing advances in electronic technology. Moreover, these multiple transformations have been accompanied by changes in the way work is carried out (e. g. the dramatic increases in the utilization of white collar workers, particularly professionals and managers, and the employment of women and educated workers), and by shifts in the location of work and of the population (e. g. rising importance of key cities within the urban system and of suburbs generally). The role of services in modem capitalistic economies is not yet integrated into the body of economic theory, although the need for such integration, especially as regards theories ofgrowth, market structure, and pricing, is critical. Some economists and sociologists, however, have since the days of Adam Smith, dealt with certain aspects of the role of services.

3 While all of these explanations seem to have merit, there is one dominant reason why the percentage of GDP and employment dedicated to services has continued to increase: low productivity. According to Baumol's cost disease hypothesis (Baumol, Blackman, and Wolff 1991), the growth in services is actually an illusion. The fact is that service-sector productivity is improving slower than that of manufacturing and thus, it seems as if we are consuming more services in nominal terms. However, in real terms, we are consuming slightly less services. That is, the increase in the service sector is caused by low productivity relative to manufacturing. The implication of Baumol's cost disease is the following. Assuming historical productivity increases for manufacturing, agriCUlture, education and health care, Baumol (1992) shows that the U. S. can triple its output in all sectors within 50 years. However, due to the higher productivity level for manufacturing and agriculture, it will take substantially more employment in services to achieve this increase in output. To put this argument in perspective, simply roll back the clock 100 years or so and replace the words manufacturing with agriculture, and services with manufacturing. The phenomenal growth in agricultural productivity versus manufacturing caused the employment levels in agriculture in the U. S. to decrease rapidly while producing a truly unbelievable amount of food. It is the low productivity of services that is the real culprit in its growth of GDP and employment share.

I consider it a privilege to have been invited to write a preface for "The Limits to Certainty". It is however paradoxical that a theo­ retical physicist be asked to write about a monograph dealing mainly with service economics. Notwithstanding, I am delighted to do so. Indeed, it is striking that two so widely different fields like physics and social science, and more especially economics, can interact in such a constructive way. There is no question here of reductionism. Nobody claims to be able to reduce social scien­ ces to physics, nor to use patterns of social interaction in order to formulate new laws for atoms. What is at stake here is more im­ portant than reduction; the age-old separation between the so-cal­ led "hard" and "soft sciences" is breaking down. This separation has a long history. First, one should recall the influence of Newton's achievement on the formulation of scienti­ fic goals. This influence led to the formulation of equilibrium mo­ dels for supply/demand adjustment. As was noticed by Walter Weisskopf: "the Newtonian paradigm underlying classical and non-classical economics interpreted the economy according to the patterns developed in classical physics and mechanics, in analogy to the planetary system, to a machine or clockwork: a closed auto­ nomous system ruled by endogenous factors of a highly selective nature, self-regulating and moving to a determinate, predictable point of equilibrium" (The Geneva Papers on Risk and Insurance (1984), Vol. 9, no. 33, pp. 335-360).

Services today account for a major share of employment and national product in the U. S. , with the employment share up from 57 percent immediately post-war to well over 70 percent today (if communications, utilities and transportation are included). This transformation (which is also occurring with varying lags in the othereconomically advanced economies) is driven by a variety of forces : by changes in consumer demand, by the rising demand for health and educational services, by new ways in which businesses are organized and the increasing importance ofcertain functions (e. g. new demands for monitoring, financing, sales promotion, and responding to regulatory agencies), and, closely related, by the continuing advances in electronic technology. Moreover, these multiple transformations have been accompanied by changes in the way work is carried out (e. g. the dramatic increases in the utilization of white collar workers, particularly professionals and managers, and the employment of women and educated workers), and by shifts in the location of work and of the population (e. g. rising importance of key cities within the urban system and of suburbs generally). The role of services in modem capitalistic economies is not yet integrated into the body of economic theory, although the need for such integration, especially as regards theories ofgrowth, market structure, and pricing, is critical. Some economists and sociologists, however, have since the days of Adam Smith, dealt with certain aspects of the role of services.