Value-creation in services is exclusively the product of constructive interaction at the level of the individual.
This fact is testing business corporations and states in different ways.
For businesses creating intangibles, the challenge is delegating responsibility for interaction with customers to those best qualified to accept it and retaining individuals skilled at creating value in partnership with those customers.
Whether the conventional corporation can create and sustainably maintain a structure that maximises service value creation is an open question.
Can corporations in reality allow its employees the autonomy they need to maximise value-creation with customers?
Will corporations be able to reward and recognise value-creating employees without suffering unsustainably low profits?
Will talented value-creating employees want to remain with corporations where pay and status is determined by their position in the corporate structure and concentrated in the few at the top?
For the state, the challenge is even more complex as events in the UK and Iraq this summer suggest.
A state is a political association, representing a population, with sovereignty over a geographic area. Its powers are exercised over people and land. For the state, the people are those that permanently reside within the borders of the state. By definition, the state has coercive powers.
In an era when farms and factories were the principal location of value creation, machines could be put to work and people were both encouraged and coerced into work by the market, the law and tradition. For conventional economists studying agriculture and industry, whether workers were volunteers or conscripts was irrelevant. Capital and labour responded automatically to price signals and the direction of management and government.
In the service era, a new approach is needed. Coercion and direction destroy the principal source of value-creation in services: the voluntary nature of the value-creating interaction itself. Price, which automatically allocates and rewards capital and labour in the theory of tangible good production, has limited traction in economies driven by the dreams and prejudices of workers whose sole equipment is their brains.
The theory of value creation in services suggests that workers should be liberated to interact with customers regardless of borders and nationality. This calls into question the economic validity of the state in principle.
If the state is necessary or unavoidable, however, then it follows that the smaller the state — and the less it unnecessarily exercises its powers over the discretionary capacity of the individual to create value — the better.
For service value creation maximisation, the state should focus on the supporting processes, which is essentially but not exclusively the physical infrastructure. The theory of value creation in services, therefore, suggests that smaller states with policies tailored to support service value creation at the level of the individual will be more successful than large and powerful ones.
An independent Scotland with a population of 6m people would be more likely to develop policies appropriate to service value creation maximisation than the UK, a country with more than 60m people whose government is based in London.
The critical difference between the long-term performance of the Scottish economy will, therefore, depend upon the extent to which an independent Scotland will be able to develop and implement economic policies that promote service value creation. This will require focussing resources on supporting processes and allowing greater freedom for individuals to interact as they see fit with customers and colleagues.
A government that controls a smaller area and population with the closer contact with the people and communities it is responsible for this allows is more likely to make the right decisions about ways to promote service-value creation.
The main short-term issue is the economic disruption that will follow from the structural and institutional changes independence requires. This will create serious fiscal challenges for the government of independent Scotland and may result in higher unemployment and inflation.
Public pressure on the government of independent Scotland may lead to an inappropriate and counterproductive policy response. One may be concessions to corporations to encourage them to incorporate in Scotland. The result might be that Scotland will exchange the overweening power of the British state based in London for the equally overweening power of service corporations based nowhere.
That is why the debate about the economics of independence in Scotland – and in other regions entertaining dreams of separation from a larger state such as Catalonia, Sicily and Kurdistan – needs to be reframed to take into account the theory of value creation in services presented in Economics2030.
For a fuller investigation of the implications of the rise of services for the state, click here.
And for an investigation of the implications for the corporation, click here.