As has been argued in the previous pages, value in a service economy is delivered by two factors: the relationship, which involves constructive interaction among value-seeking human beings, and the process, which facilitates that interaction but does not create value itself.
This one will develop the concept of service industry value-creation, the role of the relationship in it and the emergence of intuitively-defined communities as the key human association in the post-tangible era.
The exposition entails a new presentation of the factors of production, the elements necessary for value to be created and distributed.
In classical economics, the key factors of production were land, owned by landlords; capital, provided by investors and embodied in machines, and labour. In the classical model, landlords, capitalists and workers co-operated and clashed. The results were products and a particular and, essentially, inescapable distribution of income. Classical economists believed that, without proper government policy, landlords would be enriched because there would inevitably be a shortage of cultivatable land, capitalists would be under-rewarded for the risks they took and workers would, in the long-term, be paid no more than what was sufficient to live and reproduce. The outcome would be economic stagnation, starvation and political turmoil. It is for this reason that economics was named the “dismal science”1.
Neoclassical economics reconceptualised the engine of production as a contest, driven by human desires, that involved consumers and producers2. Consumers jostled with each other for scarce goods and producers competed for the limited amount of money in consumers’ pockets. This contest was both unavoidable and, eventually, beneficial. Over time, resources would be properly distributed among individuals, households, companies and, to finance its proper purposes, the state. Production would be effectively promoted and the total of human happiness would grow at the highest possible rate. The results might not be ideal, but they would be as good as you could get, at least in principle. Tensions within the system would be properly resolved by law, dispassionately deployed, and the actions of a state working for the best interests of all by removing obstacles to trade. It was a different kind of pessimism.
Economics as presented by neoclassical economists could be seen as an exciting game of soccer with plenty of goals and occasional fouls that would be appropriately dealt with by an impartial referee. There would be winners and losers, but it would be a fair. The only essential difference between football and the workings of the market was that competition on the pitch didn’t involve price3. Competition, if it was to have a beneficial impact on economic outcomes, had to involve the market-clearing price.
To understand the operation of a service economy, the factors of production have to be redefined. There are two. First, there is the value-seeking individual working within overlapping networks of intuitively-defined communities producing value in different forms. The intuitively-defined community, not the farm, factory and market which dominated the tangible era, becomes the place where value is created and distributed. Payment is in reality an exchange of gifts necessary to ensure relationships are sustained and become more productive over time.
The second factor of service production is the process. This encompasses the tangibles supporting for value-creating interaction to take place and the human activities involved that can be automated. The most effective processes are the most efficient; in other words, the ones with the lowest long-run average costs. This can be promoted by conventional economic prescriptions.
But how do you encourage value-creation in service transaction interactions? Relationships occur because human beings intuitively and naturally interact, initially to survive and then to create the value needed for them to prosper and reproduce. Coercion is unnecessary. People, rational or not and regardless of their technical skills and education, must interact constructively. Compulsion is bad because it may produce relationships that conflict with intuitive requirements. The coerced interaction may lead to value creation but it may also produce negative value as well that could offset the positive. In relationships, the cost of sacrificing the voluntary principle may be prohibitive.
The concept of the role of the individual in value-creation echoes the arguments of the Austrian School of liberal political economy, which originated in Vienna in the late 19th century. Its outlook is based on the idea of the purposeful human agent, an individual capable of logical thought and consciously acting to increase his or her happiness or satisfaction. The definitive statement of the idea is found in Human Action by Ludwig Von Mises.
“Human action is purposeful behaviour. Or we may say: action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his (sic) life.”
Acting Man, Chapter 1, Human Action, Ludwig Von Mises, 1949
This way of looking at human behaviour (and the pre-feminist use of the word man can be forgiven) was named praxeology5, or the theory of human action, a word that was invented by Von Mises, at least in part, to distinguish it from psychology, or the theory of human thought. One of Von Mises’ goals was to establish the primacy of action in human affairs over ideology or motivations, in part as a response to the growth in popularity of Freudian ideas. For praxeologists, psychology is of no use in understanding economies. What matters is what people do and have done, not why. Von Mises’ conception also focused on the individual as the starting point for understanding society and the world. Upon these foundations was constructed modern libertarianism. Critics argue that the outlook is passive to the extent that it becomes inhumane since it provides an intellectual case for disallowing any kind of government intervention to alleviate human suffering and satisfy human needs. This is unfair and inaccurate. The Von Mises’ liberal tradition places the individual, not the state or the corporation, at the centre of civilisation. It is an attractive conception at a moment of widespread corporate and government failure. But where it falls short is in failing to acknowledge the existence of the universal human impulse to interact and not just act. The Von Mises’ concept of the individual suggests that the association, being voluntary, is optional and that the community is accidental rather than inescapable. In Von Mises’ world, humanity can flourish regardless of the degree to which individuals choose to interact with each other. This idea fundamentally conflicts with the conception of how value is created in a service economy presented in this book.
The idea that the human interaction necessary for value creation is driven by the motive of obligation also clashes with the ideal of the supremacy of rights enshrined in Von Mises’ conception of society. From the Von Mises perspective, repeated by his modern followers, no one has an obligation to do anything. Obligation is eliminated by definition from the idea of a purposeful human agent who wakes every morning and retires every night to the incessant, unconscious rhythm of the ego which demands action rather than reaction, as obligations require. Neither Von Mises, nor any of his followers, have managed to explain what the ego is, where it resides and what makes it different from psychological categories, despite the fact that their system is based on the argument, as demonstrated by the extract from Human Action shown above, that it is the starting point for their world view. The ego may or may not exist. But it is incontrovertible that human beings haven’t just acted. They have sought to interact with other human beings throughout recorded history, starting with the Biblical story of Adam and Eve. The fact that they have often been unsuccessful doesn’t mean it doesn’t happen or can’t. They try.
The strenuous manner in which followers of the Von Mises’ tradition and libertarian thinkers have sought to deny or minimise the unavoidable compulsion for human beings to interact can be attributed to the impact collectivism in its various forms had on the course of the 20th century. In their efforts to demonstrate that collectivism, from Soviet totalitarianism to Keynesianism, is both wrong and unnatural, radical liberals and libertarians have dismissed the central experience of human history: the inevitability and the necessity of human interaction. The idea of value-creation in a service economy rejects the idea that human interaction requires intervention by the state or other collective institutions. Nevertheless, this presentation of how human beings create value may be wrongly perceived to be collectivist. Constructive human interaction is essential for human progress, but not obligatory. Those that wish to withdraw to the Appalachians are free to do so. The loss of value that ensues is a matter of concern to them alone, so long as their behaviour does not prevent everyone else getting on with the business of interacting as they see fit. Just as those that interact should not try to force others to do so, those that choose not to interact should be allowed to follow their own course. The argument presented in this book is that the overwhelming majority will seek to interact because that is the only way they can create and share value, not because they are told to or even taught to. And it is likely that, however much any individual might wish to retreat from the world, he or she must, to survive and reproduce, find a relevant community where constructive relationships can be formed. The ethical argument that it is better for people to interact is powerful. But the main strength of the economic case for promiscuous interaction is that it leads to a much greater production of value and, consequently, higher living standards.
It can be argued that the biggest increase in value occurs when there is a constructive interaction between people who begin a relationship with no or low expectations that it will be productive. People who know and like each other are probably already interacting and creating value. But people who have never met or who feel mutual antipathy may create unexpectedly productive relationships, if ignorance and dislike can be moderated or eliminated. The Biblical injunction to “Love thy neighbour as thyself” may, therefore, be good business advice. A similar message was delivered by the Prophet Mohammed in his farewell sermon on Mount Arafat outside Makkah in 6326.
The idea that there is a natural desire for human beings to interact constructively demolishes the distinction between the private and public behaviour. The compulsion to find a partner, nurture a family and raise children is essentially the same as the one that encourages people to work together. The same principles apply: there are value-seeking individuals interacting with each other in relationships conditioned by obligations that involve the exchange of gifts, expressed in money or in kind. The role of the community in the service interaction is to facilitate and increase the value-creating those relationships allow.
The family unit is the simplest and most powerful expression of a value-creating community in action. A mother cares for a child and the child responds in a way that rewards the mother. Whether this is the result of genetic programming, rational thought or environmental pressures are irrelevant. All that matters is that it occurs. The mother’s ability to create value in the relationship with her child is affected by the contribution made by other members of her family community. Her partner may constructively interact with the mother and child in a way that increases the value-creation in the original relationship. Siblings and members of the extended family also play roles to varying degrees of constructiveness. Friends and neighbours make their own contribution to the value-creation process. Around the original mother-child interaction are a mass of other interactive relationships that create value to be shared among all those active within the community of which the mother and child see themselves as part. It is possible that some or all of the interactions may at times be non-value creating or negative-value creating. Family communities experience lows as well as highs: arguments, unfaithfulness, separation and even violence. The community is of itself neither good nor bad. It exists. But its existence, provided it is essentially spontaneous, is evidence that value-creation in some form must be taking place. For a family community to exist without value-creation taking place within it suggests that people associate for the opposite reasons to those that bring people together in the first place: the conviction that interaction will create value that can be shared.
Throughout human history, the family unit in various forms has been the location for most constructive human interaction. Its principal purpose has been to provide a means by which the young can be trained and the defenceless protected. But the family unit has also served a range of other purposes: to increase the production of the processes necessary to facilitate constructive human interaction and to expand the opportunities for constructive human interaction by increasing the numbers an individual can easily associate with. The structure of the family has varied considerably. Even in the modern era, family associations known as tribes can encompass hundreds of thousands of individuals in Africa, the Middle East, Central Asia and the Far East. Only in the US and Europe has the family community been understood to encompass only individuals closely connected in terms of close kinship and through formal and informal marriage.
The family community changes over time and location, adapting to the environment in a way that allows its members to interact optimally within it. Early human societies living by hunting in hostile natural environments were defined by the technical requirements associated with processing the food they lived off. Communities that survived by hunting large animals or large groups of animals tended to require more members than those that survived by consuming naturally-occurring fruit. What determined the size of the associations was the efficiency with which they secured the processes necessary for constructive human interaction. If the processes were less than the minimum required for reproduction, the group would die out. Interaction among individuals from different groups simultaneously provided the means by which inherited competences could be transferred through the generations.
Nomadic associations that mastered the art of husbanding animals for the purposes of securing milk and meat expanded to the extent allowed by the processes at hand in the form of sufficient grazing and water. The first towns emerged in the Middle East when nomadic communities mastered the processes involved with planting and harvesting seed-bearing grasses. The resulting increase in tangible production in those communities liberated human energy to create additional value to be shared in the form of the skills required to construct permanent homes. About 5,000 years ago, the grain and grazing based communities of the Nile Valley produced sufficient tangible goods in the form of food to free a section of the community to focus on advanced value-creating activities. These included inventing the technological processes that made possible the construction of enormous monuments and public buildings and the development of complex religious activities and rituals.
Mediterranean communities reflected a variant on the same theme. The technical processes were mastered for a highly-productive agricultural system based on the vine and the olive tree. This liberated people from the need to find and produce food and to focus on advanced value-creating activities such as the law and the arts. The processes that made them possible were slavery — human labour in a tangible form — and land. The Roman economy depended upon the capacity of slaves to produce sufficient surplus tangibles to meet the requirements of his or her master, support a leisured class and a permanent, professional army. Those regions where a slave could only produce enough to meet his or her own needs were of no value. Germany was largely beyond Roman rule, but not because of the ferocity of its people or its distance from Rome. It was because of the technological limits of Roman food-production processes which could not cope with long, cold winters. Slave labour in much of northern Europe could produce just enough food to feed themselves. The relationships through which Romans created value could not be supported and, therefore, no Roman civilisation was possible.
Feudal European society was shaped by the processes involved in producing tangibles through agriculture in an environment where there was a shortage of labour. Unlike the Romans, who required slaves to rule, feudal societies depended upon free farm labour that could also be mobilised for war7. The challenge was ensuring that labour remained within the control of feudal lords. This was addressed through relationships that involved the labourer promising to serve the lord and the lord promising to protect the labourer. These were mutual obligations discharged through an exchange of gifts: foodstuffs and military service from the labourers and protection from the lords. Although apparently far less sophisticated than the Roman economic system, which involved long-distance trade by sea and along a magnificent system of roads and a common currency, feudalism facilitated economic development in parts of Europe that the Romans couldn’t settle or govern. Thousands of churches and castles, including some of the largest buildings ever constructed, were erected during the feudal era in northern Europe because the interactive relationships feudalism depended upon produced sufficient value and the requisite processes to support architects and stonemasons as well as a large religious community. A factor in feudalism’s remarkable productivity was that it was not a single community in the sense that the Roman Empire was. It comprised many: the reproductive or family community, the farm community, the court community, the military community and the religious community and so on. The value-seeking individual consequently had more than one value-creating role. It may in fact have been the disaggregated nature of feudal European societies — compared with the homogenisation in the Roman one that history admires — that made them so economically-robust and long-lasting.
The industrial revolution, which began in Britain, was a phase in economic development allowed by the productivity of its economic system. This benefitted from the transatlantic slave trade, plantations in North America and long-distance commerce under the protection of a powerful navy. But it was made possible by the relationships and communities those processes supported in Britain: a parliamentary system; a national Christian church; a volunteer army and, from the end of the 14th century, a linguistically homogenous value-creating community largely free from the threat of foreign conquest.
Why industrialisation started in the UK rather than somewhere else continues to be a puzzle, but an irrelevant one. The industrial revolution was in fact no such thing. It was a variant of the system of value creation that can be traced to the origins of humanity. Human beings, interacting constructively, developed technologies that led to the creation of machines. These increased the availability of processes which in turn liberated human energy to develop new technologies that supported relationships where the scale of value-creation was massively increased. We call them factories.
The writings of Friederich Engels about the condition of the English working class, an inspiration for his ally Karl Marx’s critique of the capitalist mode of production, presented a powerful depiction of humans being entirely subordinated to industrial processes. Marx went so far as to define human labour as a process, a thing that produced goods and, in the form of labour power, a commodity that could be bought and sold. The value-creating relationships supported by industrialisation were obscured by the unprecedented concentrations of workers in a single workplace. But an improved understanding of the history of the times shows that factory workers were heavily involved in value-creating relationships through a number of different communities. New processes massively increased the availability of books and promoted literacy, brought clean water and efficient sewage systems and led to telegraphic communications. This in turn freed factory workers, and their rural counterparts, to devote a growing proportion of their time to value-creating interactive associations: the family, religious movements, orchestras and choirs, trade unions and political parties. The most durable legacy of the British industrial revolution is not the factory or the mine. It is professional English football clubs which formed their own interactive, value-creating community in 1863 when the Football Association (FA) was formed.
The digital revolution and the coming of the internet is seen today, like manufacturing was 150 years ago, as constituting a discontinuity in the development in human civilisation. Marx declared industrial capitalism to be the penultimate stage that would be inevitably followed by the final revolution. A society would then emerge where most tangibles would be collectively owned and a single value-creating community, involving all human beings, would participate as equals. Joseph Schumpeter, an influential economist 20th century economist who studied at the University of Vienna under Boehm-Bawark, echoed some of the themes developed by Marx, but drew different conclusions. There would be no final revolt but a continuous process of “creative destruction” that replaced the old with the new.
But a longer-term perspective of the human journey — one that recognises value-creation through constructive interaction as the key to economic growth — suggests there is a remarkable degree of continuity. The process, the means by which tangibles are deployed to facilitate value-creation, is constantly being changed as the result of the liberation of human value-creating competences. But value-creation itself through constructive human interaction is as unchanged as the beaks of eagles. You can see it as the irresistible consequences of the human genetic programming: the compulsion to reproduce and survive. Or you can see it as the consequences of God-like competences endowed on humanity at creation. What matters is that it exists and, is in fact, essential.
This description of human development addresses one of the enigmas of human behaviour. What explains the tension between humanity’s conservative impulses and its simultaneously relentless pursuit of the new? It can be simplified as follows. The relationship, where value is created, requires consistency and repetition. It is not an act of consumption or production but a sequence of constructive interactions that addresses the need to create value by conjoining people with each other in various ways. Societies that attempt to commodify and price the interactive relationship, at the very least, waste time. They normally undermine the very thing the application of such processes is meant to promote: the value-creating potential of spontaneous human interaction.
The conservative impulse originates in the demands of value-creation process, which requires stability and predictability. The radical one comes from the parallel human quest for the new processes that will allow greater value-creation facilitation. A mind that rejects novelty will fail to develop processes that liberate humanity to create more value in the future. One that rejects stability may undermine value creation now. Human beings can be coherently radical and conservative at the same; an observation, put in this context, which appears obvious but one that most political thinkers have failed to understand.
As has been explained, the original interactive human relationship was probably the family. As the original family or families worked together to defend themselves against the natural environment, they developed processes that allowed them to be freed to devote more time to value-creation, including in the development of new technologies for economic and social activities. In the 21st century, the family community continues to be for most people the location of the majority of their value-creating activities, particularly to address the demands of raising children and caring for the sick and aged. Its shape will vary according to the needs of each value-creating individual. Some will be active within what is described as a nuclear family: a man and woman and their children. Others will develop unstructured family communities involving many participants.
The value-seeking individual will normally also seek relationships in other contexts. This might include a faith community: the Christian church, the Muslim mosque, Buddhist and Hindu temples, the Jewish synagogue and so on. These communities will allow the value-seeking individual to interact with other value-seeking individuals beyond the psychological boundaries that define his or her family community. It is also normal for the value-seeking individual to be involved with a geographical community: neighbours, neighbourhoods, villages, towns, cities and countries. There is usually a national community: people with a common language, history, culture and perspectives. And then there are the novel communities facilitated by the internet that involve people who might never have met but who come together electronically to share ideas and information.
None of these communities need be exclusive. Usually, it is impossible to make them exclusive. Most are unstable and unstructured. There is no overarching commander or even a hierarchy. Individuals join and leave them spontaneously and voluntarily. Their size and character constantly changes. And for most people that are not members of a specific association of value-creating individuals, their existence is often difficult to comprehend or even locate. They are intuitively obvious to its members but unquantifiable and even mysterious to those that are not.
The conclusion is that the factor that matters most in the value-creating relationships around which the community is formed is the intuitive nature of the interaction. The rational, purposeful individual creates and shares the most value when he or she abandons rationality as it is normally understood. Intuition, a human quality that economists invariably discount, is critical for the success of service economies where communities are impossible to define scientifically and value-creation expresses itself in things that can’t be seen. In service economies, the quality required for production to occur is faith: the belief that what can’t be seen or touched can be exchanged and, in fact, actually exists at all. Since value in a service community is created at the point where human interaction occurs, it can’t be traded or stored. It decays almost the moment the relationship between participants in a service transaction ends.
This contrasts starkly with way an economy dominated by the production of tangibles functions.
Tangibles are physical items that can commodified, stored, processed and exchanged on a mass market. Value is created by combining capital, land, labour and technology. Commodities are traded where comparative advantages exist to the greater good of all. Tangible production is based on competitive tension between and among rational individuals acting through markets as consumers or producers who relate to each other within a system of enforceable rights and claims. Service economies, in contrast, are based on constructive human interaction within intuitively-defined communities governed by obligations.
Economies of scale in tangible production encourage the concentration of capital and labour in factories and offices. In service production, where there is no connection between scale and cost, concentration is unnecessary.
Tangible production requires systems of command and control exercised through hierarchical organisations capable of capturing information, mobilising capital, aggregating consumers and servicing them on a national, regional and international basis through the mediation of the market and law. Intangible production is optimised through intuitive communities where unmanaged and spontaneous interaction occurs without the mediation of markets or contracts.
The change from an economy dominated by the production of tangibles to one dominated by services, a development that is inherently evolutionary, is probably, nevertheless, the most radical in history. If this line of argument is accepted, then the consequences for individual, household and corporation, whether it’s makes profit or not, are profound.
The starting point for economic analysis in a service economy is the relationships among people where value is actually created, not the processes that facilitate it. The capacity for human beings to create value by interacting constructively will be affected by, but does not depend upon, the process, or the tangibles at their disposal. Increasing the quantity and quality of tangibles may have no matching increase in value production. It is entirely possible for it to produce the opposite effect.
Natural, intuitive and honest interaction is almost certainly the best kind since it increases confidence in one party that the other party is being honest and can be trusted to fulfil the obligations every service interaction requires. Direct, unmediated interaction is also better than one managed by a third party or through the market for the same reason.
Attempts to secure shares of the value created by the interaction through contractual rights will reduce the capacity and willingness to accept the obligations that value-creation in a service transaction requires. Ideas should be shared rather than monopolised since value is only created when the parties demonstrate that they are prepared to give as well as take.
There are some pitfalls. People who don’t know or dislike each other should not attempt anything that is beyond the existing state of their relationship. It may in fact be better for everyone if they were not to try in the first place since a failed service interaction can make bad relationships worse. It is perhaps here that mediation, provided it respects the honest feelings of both parties, can be productive. But that does not require the involvement of the state. The best mediator is probably someone known and liked by both parties to the attempted relationship.
There are implications for individual, household, business and government behaviour. Someone seeking to increase the amount of value they can enjoy should seek out first people they know and like. The productiveness of the relationship will depend upon openness and honesty. The willingness to accept an obligation and to offer more than is apparently on offer in return is a further valuable characteristic. But this is not recommendation for naiveté. The value-seeking individual should be fully conversant with the processes that are essential for the satisfactory completion of a successful service transaction. Ignorance is not bliss.
For the household, value-creation depends similarly on the development of constructive interaction at the individual level and the support of the appropriate processes, which can take the form of a decent home and enough money to support the multiple relationships a household creates. For the business, similar principles apply.
Businesses normally employ people on the basis of their process competences: measured intelligence, education and technical skills. The argument presented in this chapter suggests, however, that relationship competences are the most important for value creation when a business is involved with making services. The essential requirement of a service business employee, therefore, is not technical competence, education or even the capacity to work hard, though customers won’t respect someone who is incompetent and apparently lazy. It is honesty. Without honesty, it will be impossible for service employees to establish relationships with customers that deliver more than a fraction of the value that is possible. Honesty is the most elusive human quality and one that cannot be measured or compared. And it is a skill, like dishonesty, that cannot be taught. It can only be learned.
The foregoing exposition probably reads like a sermon, a declaration of principles and ethical imperatives that could be heard tripping easily from the lips of any street-corner philosopher or religious hack. It conflicts in practically every way with the practical lessons most of us learn in life and work. It’s a normative proscription of what the world should be, not a positive description of how it is. It’s impractical and, from the perspective of conventional business practices, silly. But those that have read the previous chapters will be able to see a logical train of thought that leads from the accepted concept of the market-clearing price, the Godhead of the secular and scientific age of tangibility, to this point.
There are hard facts supporting the line of argument. Services account for the majority of employment in every advanced economy and there is no reason to suppose that their significance will not grow still further in the years to come. We are, therefore, forced to confront an issue in economics that we have had no need to for more than 100 years. How can you rationally evaluate things that you can’t see or hear, smell, touch or taste and, therefore, coherently price? How can you scientifically organise the production of things that have no physical components and that only exist in the mind of those making and consuming them.
The horrible truth for the rational mind is that most people working in advanced economies for almost 50 years have been doing something beyond rational understanding. And this trend is set to become more pervasive and intense as the facilitating processes become, through technological change, increasingly available in the years to come.
Once the concept of the value-creating community, and the role of the individual within it, is understood, the process component of a service transaction is easily grasped. The process is those things and activities that support and facilitate value creation. It encompasses food and clothes, portable durables like machines, non-portable durables like buildings and the activities of people operating and maintaining the process including computer programmers. The frontier between value-creating and non-value creating human activity is inevitable fuzzy, but nevertheless clear. A shop worker spends part of his or her time serving the customer but also part of the time making sure the processes are in place and functioning: that there are enough goods on display, the payment mechanism is working and so on. There is not yet a complete separation between process and relationship in most service industries. But the trend is for the process and relationship to divide. Technology now allows process to be separate from relationship and for the time absorbed by the need to maintain and operate processes to fall.
Processes retain all the familiar characteristics associated with goods in market economies. Process production involves opportunity costs: time and resources used in one type of process could have been used in another kind of process or in value-creating activities. People buying processes, whether it’s clothes or an IT system, decide how much to pay based upon their subjective assessment of the contribution a particular process will make to a value-creating interactive relationship. There will be, therefore, supply and demand for processes. Price, which has practically no role in value-creation itself, has a part in helping people decide what processes people use and the processes they invest in.
Trade mediated by the market will continue in processes and, therefore, money has a role as a unit of account and medium of exchange. Money, however, is a process like the other processes that facilitate value-creating relationships. Like other processes, it can have an adverse impact on value creation. Too much money leads to a decline in its cost through inflation. This will complicate decisions about buying and selling processes and raise questions about the desirability of gifts exchanged in a value-creating service interaction. Too little money, which leads to a rise in its cost, will have a similar impact. But the effect of money on value-creation is indirect, as it is with all other processes in services. It facilitates, like clothes, cars and computers. It is not a source of value in its own right.
Whatever process is required for the completion of a service interaction, it should be available in sufficient quantity and in a timely manner. But do process arrangements inherited from the era when tangible manufacturing was the dominant form of productive activity address the requirements of economies dominated by services? More specifically, are business corporations and the state, as they have been structured, appropriate to the needs of the future? This question will be addressed in the following two chapters.
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Notes to Chapter 5
1 The Scottish writer Thomas Carlyle used the phrase “dismal science” in an essay published in 1849 named Occasional Discourse on the Negro.
2 Perhaps the definitive statement of what economics is according to neoclassical principles was contained in Essay on the Nature and Significance of Economic Science by Professor Lionel Robbins (1898-1984) which was published in 1932. He wrote that “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. Robbins was head of the department of economics at the London School of Economics from 1929 until 1961. He was a follower of the Austrian School of Economics and played a critical role in establishing the school as a centre of neoclassical orthodoxy. Robbins was made a life peer in 1959.
3 At a tutorial at the London School of Economics in the spring of 1975, Brian Griffiths, who was then on the academic staff, created a lasting impression by talking about the role of the market in economics by telling a story about two economists watching a rugby match. One says it’s a bit like a free market. The other retorts: “No. There’s competition about everything except price”. Griffiths became professor of banking and international finance at The City University and was subsequently head of the policy unit at Number 10 Downing Street in 1985. He was made a life peer in 1991 and sits in the House of Lords as Lord Griffiths of Fforestfach.
4 Ludwig Von Mises (1881-1973) was born in Lemberg, now part of the Ukraine. He studied at the University of Vienna and completed a PhD in law in 1906. Until 1934, Von Mises worked as a teacher, secretary of the Vienna Chamber of Commerce and adviser to Austrian governments. He left Austria for Switzerland in 1934 and, finally, arrived in New York in 1940. From 1945 until 1969, Von Mises taught at New York University.
5 Praxeology was strenuously assaulted by Karl Popper (1902-94), professor at the London School of Economics, a philosopher of science and a contemporary of Hayek. Popper’s epistemology (theory of how human beings develop knowledge) is based on the idea of falsifiability. This posits that an argument is not scientific if it is incapable of being scientifically disproven. There are no facts, only hypotheses. Von Mises argued, in contrast, that some ideas were a priori and no scientific observations were necessary to prove they were true. He said that economics was an a priori science. “Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.” Page 32, Human Action, Ludwig Von Mises. Von Mises’ thinking, which originates in Critique of Pure Reason by Immanuel Kant, leads to the conclusion that economics is the result of human action, which is not a scientific category as Popper would define it. Austrian school thinkers see human action as the bridge between the subjective and the objective. “…the gulf between the mental and the real, outside, physical world is bridged. … through actions that the mind and reality make contact.” Economic Science & the Austrian Method, by Hans-Hermann Hoppe, Ludwig Von Mises Insitute, 2007. This is an interesting contrast with the Lutheran Christian view that the only bridge between the subjective and the objective was faith. Catholics, in line with its historic dichotomy, disagreed with Luther and said the bridge took the form of faith and action.
6 The Farewell Sermon was delivered a couple of months before the Prophet Mohammed died in Medina aged 62 on 8 June 632. The sermon was not written down at the time but is referred to by most of the Hadiths, accounts of what the Prophet said and did.
7 The economics of north European societies in the early Middle Ages reflected a combination of physiological and technical factors. Descended from communities that lived off the milk and meat of cows, goats and horses, they had over many generations developed the capacity to digest animal milk and became lactose-tolerant. This meant the tribes that dominated Germany and Scandinavia at that time could derive at least some of their required nourishment from grazing animals. In contrast, the people of settled Mediterranean communities and the riverine civilisations of the Nile, Mesopotamia, the Hindus and China failed to develop the capacity to digest animal milk and milk products. A significant proportion of the people in the southern Mediterranean, the Indian subcontinent and China continue to be lactose-intolerant. The critical technical development in northern Europe and Scandinavia that supported growing populations in regions the Romans couldn’t settle was hay production which involved cutting and storing grass to be used in the winter months to support animals for meat and milk. A derivative technology was butter and cheese production which allowed the lactose-tolerant peoples of northern Europe and Scandinavia to store high-calorie milk products for future consumption.