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The Substitutability of Manufacturing and Services

Picking up on a thread we dropped last week, Ryan Avent makes the excellent point that a lot of economic progress consists of finding ways to substitute services for manufacturing and vice versa:

Goods and services are, to a large extent, interchangeable. They constantly replace each other. A whole range of household tasks — services, fundamentally — that used to fall to family or hired help was replaced by manufacturing — off laundry machines, dishwashers, and so on. An entire range of a clerking and administrative services has been replaced by manufacturing — of computers and related hardware. And then there’s the programming; is that production of a good or a service?

Conversely, making boxes of frozen fish sticks is manufacturing, whereas cooking fresh fish in a restaurant is services. Or you could have an economy that manufactures tons of hair-cutting implements and every household cuts its own hair, or else an economy that manufactures relatively few of those implements and people generally get their hair cut by professionals. In those cases, a move toward more services is a sign of economic progress.

I do think, however, that part of what gets people tripped up is confusion between manufacturing output and manufacturing jobs. As employment in the industrial sector has declined, it’s become cliché to say that we “don’t make things” in America anymore. The reality is quite different. Industrial production declined during the recession (as it always has) but the long-term trend is way, way up. It’s just like the situation in agriculture — we’re not a society of farmers anymore, but we grow lots of food. Over time, we hope more and more of the developing world will industrialize, but that’s not to say we hope the world won’t make anymore food. We hope food will be made efficiently and that people will find more productive employment elsewhere.

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