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Trying to understand some of the core mechanics of tertiarization in developed economies.

According to the WorldBank,

"As incomes continue to rise, people’s needs become less “material” and they begin to demand more services—in health, education, entertainment, and many other areas.

Meanwhile, labor productivity in services does not grow as fast as it does in agriculture and industry because most service jobs cannot be filled by machines. This makes services more expensive relative to agricultural and industrial goods, further increasing the share of services in GDP."

Trying to understand in a bit more detail some of these claims though, such as:

  • Why does higher income imply less "material" demands, i.e. products specifically formatted as services rather than goods (couldn't rich people in theory just crave more expensive pharmaceutical drugs, textbooks, and gaming consoles, rather than associated healthcare, education, and entertainment services)?
  • Why can't most service jobs be filled by machines? Does this just mean as technology stands today (vs. roombas, retail kiosks, self-driving cars, etc.)? What if any inherent characteristics of services make them more difficult to automate?
  • Why does inefficient production make services more expensive, and this make them a higher percentage of GDP? (Here I'm just trying to understand the economic principles involved)

Thanks! Benji

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I' m not sure its a law, its what has happened because manufacturing productivity has moved faster. Indeed, the robot economy might well get rid of most service jobs and we'll all be making or programming service robots for each other.

It's related to this paper Buera-Kaboski, Rise of the Service Economy But here are some potential explanations:

  • Maybe after you eat and get dressed you want to be entertained. Entertainment needs novelty, creativity, showmanship, etc. These will always be services because they are a constantly changing stream that needs to be adapted. Imagine a machine that produces new TV shows for you. You would still buy a stream of new ideas for the machine to produce TV shows with contemporary content.

  • Maybe its best understood as a relative statement. Richer people/countries can have a consumption level that demands more tailoring and specialization that existing manufactured goods provide: Gap produces all kids of clothing, but you want something just a little more specific for you, a tailored suit that's better than the off the shelf one. Naturally, tailored, consumer specific consumption is more a service than a good, because in its nature it is not mass-produced.

  • In general, goods are produced for the masses, (Bill Gates cannot buy a better iphone than you can), so as a country gets rich, it moves towards services....

Why does inefficient production make services more expensive, and this make them a higher percentage of GDP? (Here just trying to understand the economic principles involved)

This seems counterintuitive right?: Why would they become a larger part of the economy if they are inefficient? Clearly, this depends on the exact substitutability of products and the rate of satiation.

However, in principle, its not difficult to imagine how this happens. Suppose we can only eat about 2000 kilo-calories a day. Back when we were eating 1000 kc/d, increasing farm productivity increased out consumption of food, and potentially the size of our income we devoted to food until we hit the 2000 kc/d. But as farm productivity increases more, we eat the same, but it costs less and less to produce it, so we devote less and less of or budget to it. Which means we devote more and more to services...

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  • $\begingroup$ Ok, this is tremendously helpful! This mostly I'd say just leaves the third question. Think I basically get why slower productivity growth makes services more expensive (given in a competitive market, prices will be determined by the cost of production), but why does this automatically equate to a higher percentage of GDP? $\endgroup$
    – Benji Decker
    May 4, 2016 at 13:53
  • $\begingroup$ Added some ideas to understand the last part... let me know if it makes sense. $\endgroup$
    – Fix.B.
    May 4, 2016 at 15:46
  • $\begingroup$ Thank so much again! Hmm… ok. This definitely makes sense. Although, as efficiency increases, why is it that the income leftover (from the basics being covered more cheaply) couldn’t be applied to higher quality goods, rather than deferred to services. As in, say it used to cost \$100 for a week’s worth of bread, whereas now it only costs me \$10. To get the equivalent calorie intake, couldn’t I spend \$7.50 on bread and the remaining \$92.50 on steak and truffles? $\endgroup$
    – Benji Decker
    May 4, 2016 at 17:02
  • $\begingroup$ which I suppose is to say, is this ultimately a re-statement of the idea that excess income leads to higher consumption of services for the reasons laid out previously? Or is this different somehow? With the perhaps related question of, if services productivity did improve (commensurate with that in the first and second sectors), does this imply their share of GDP should be less? $\endgroup$
    – Benji Decker
    May 4, 2016 at 17:05
  • $\begingroup$ Yeah, that makes sense too. Still if you use to spend 50 on manufactures and 50 in services, and now you need only 25 in manufactures and split the extra 25 between higher quality manufactures and more services you would still be spending 37.5 in manufactures and 62.5 in services... $\endgroup$
    – Fix.B.
    May 4, 2016 at 17:06
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The excerpt does not say "inefficient production", so I'm assuming the question is not exactly well put. Regarding this problem, I recommend checking literature on Baumol's cost disease.

As to why services will then make up the lion's head of GDP, well if you'll spend relatively more on them than on material "things"... [it'll come by the definition of GDP itself]

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So, to understand what the World Bank is saying, you need to understand who the World Bank is and how they view the economy. What's been apparent to me is that they are part of the global neoliberal capitalist and state capitalist school of thought. These two bankrupt ideologies more or less define their policies and worldview which is the reliance on an expansion of credit and State power which will and already is resulting in unhappy endings.

There are also structural end-games such as the one someone above mentioned, the Baumol's cost disease at work, which is the inefficient sectors of our economy end up dominating the national income, as counterintuitive as it may be.

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