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Samizdata quote of the day “Here the most fundamental relevant principle is the one discovered by Bastiat: economic value lies in service; an economic exchange is an exchange of services, each valued more highly by its beneficiary than the alternative situation in which the service is not performed. We are accustomed to talking about “goods and services”, of course. But the distinction, while perfectly all right in its place, does not reflect anything fundamental – rather, it obscures what is fundamental. When A buys some object, x, from B, what he gets from B is the right to use x. That is what it is to “have” x, in normative terms.”
Jan Narveson. His essay – which touches on an old bugbear of mine (!) – nicely slices through the fallacies that people engage in when they disparage services as opposed to manufacturing or other, more supposedly “real” kinds of wealth, as happened on the thread in this article.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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Excellent. This also has some interesting implications on intellectual property rights issue.
Alisa, and of course he gives those LVT folk a bit of going over. (grin). It is a great essay, very nicely cuts through a lot of misconceptions.
If you haven’t read Narveson’s The Libertarian Idea, then I recommend it as an interesting read.
Jonathan, I haven’t read the essay yet, but I now see why you liked it so much;-P
People get so het up about services v. manufacturing. Much of the service sector’s growth has come from redefinition (as Marshall pointed out decades ago when the debate was manufacturing v. agriculture).
If a metal basher has 5 people employed in accounts and payroll they are classified as manufacturing employees but as soon as this function is outsourced to a specialist (presumably more efficient) third party provider that same work becomes classified as a service.
Bastiat is SO important to understanding economics and liberty that we put The Law as a fundamental starting point for learning when we developed our 9th grade economics class at our charter school. We later added Basic Economics by Sowell.
There is so little clear thinking on economics that it is impossible for there to also be clear thinking on liberty. The two are inextricable as Bastiat and Sowell reveal.
Excellent article; fairly long but worth the read. I especially liked the part near the end:
“Things are things. As Bastiat puts it, they have utility, but no (economic) value, as such. Value happens when we start exchanging, and when we do, what we exchange are services, . . . “
in which he neatly demolished the concept of intrinsic value of goods.
Any idea where I could find Narveson’s The Libertarian Idea?
Never mind; I found it.
Johnathan,
I was unfortunately late for that previous thread, but I’d definitely say that Gabriel and Peter Schiff both had a very good point, which you’re not addressing at all.
You are arguing — correctly — against the crude misconception that there exists some crucial essential difference between manufacturing and services that somehow makes only the former “true” wealth creation. There are indeed many people who have such a naive view, and you’d certainly be right if you were merely correcting their misconceptions — but you’re in fact making a much stronger claim, which doesn’t just follow from theory, and needs empirical justification.
You are claiming that the actual move towards a service economy in Anglosphere nations in recent decades has been a consequence of normal, healthy operation of the free market, which simply directed their economies towards whatever their comparative advantages are, thus increasing the living standards and wealth unambiguously. While economic theory certainly says that such a scenario is possible, and even that it will necessarily occur under certain idealistic assumptions, it doesn’t imply at all that this is what actually happened. Think about it: are the present comparative advantages of the Anglosphere a result of natural and healthy development, or have they been squashed and distorted by all the taxation, regulations, destructive interventions, and perverse incentives imposed by the government? Pure economic theory can’t answer that question at all – if you believe this wasn’t the case, you need to argue from empirical data. The important point is that if the decline of manufacturing is due to government distortions, then the complaints of protectionists about the disappearance of good jobs might well be true, even if they’re totally mistaken about their ultimate causes and culprits.
Moreover, when it comes to debt, the situation seems even more contrary to what all the cheerful free-marketers claim is happening. The Keynesian attitude that debts don’t matter since “in the long run, we’re all dead” has become firmly entrenched in the modern mainstream economic orthodoxy. In this regard, even the free-marketer Friedmanite economists are, for the most part, no less guilty than others; to hear any voices of sanity in this regard, you have to go all the way to the Austrian fringe to find people like Schiff. And this attitude has trickled to people’s private attitudes too. Debt used to be considered a condition akin to slavery, and getting into uncontrollable debt used to be viewed as the ultimate act of irresponsible self-destruction, kind of like drinking oneself to death. Not any more – but why? Surely at least some of that development is due to the innumerable government interventions that discourage thrift and saving, increase time-preference, and incentivize all sorts of financial irresponsibility by enabling people who drive themselves into ruin to claim victim status and get out of it cheaply instead of facing the harsh but deserved consequences of their folly. And yes, in the long run this has caused an awful amount of cultural decay, no matter how much most libertarians loathe to make any conclusions that sound so traditionalist.
Additionally, it is an interesting question if these two phenomena are reinforcing each other. It seems to me like the answer is most likely yes, in a very Austrian-business-cycle-theory sort of way. The government has – directly, indirectly, and by example – encouraged people to borrow irresponsibly and spend the money on stupidities, along with investing into artificially induced bubbles. At the same time, it has saddled the actual productive economy with ruinous taxes, destructive regulations, perverse incentives, etc. And voila, when the next crash due to a burst bubble happens, not only are the people saddled with ruinous debt backed by wretched assets, but the economy is tanking because of all the capital invested into bubble-related and stupidity-producing industries for which the demand has now plunged. Again, ask yourself: how much of the growth in the service sector has been due to this pathological and unsustainable demand, and how much due to sound operation of the free market?
To sum it up, the important point is that free-marketers are way too quick to cheer at developments that seem to be a consequence of free market in action, even if in reality they are in large part a consequence of destructive policies and perverse incentives.
Ivan, when taken apart your comment is comprised of some very good points, but when mixed together…For example:
Very true, but exactly how does this relate to the tangible vs. intangible issue? Surely you are not equating ‘stupidities’ with intangibles and ‘actual productive economy’ with tangibles? I mean surely the houses in the housing bubble are not part of the services sector? As to gov. regulation, taxation and all the other evils, they are equally and evilly present in both sectors, no? My point is that rather making the artificial distinction between stuff and services when talking about markets distortions, we should be talking about markets distortions, period.
I just typed out two comments on the “article” bit – but they have not appeared (or been held up) possibly a system problem.
Anyway I am not typing them out again.
So I will just say the following.
Yes a service like haircutting is economically productive.
As is taking real savings and lending them to someone to build a barber’s shop.
But selling government debt is not economically productive (or playing with it in complex games).
Nor is other credit bubble activity.
The role of banking and other financial services is either to finance consumption (buy now – pay later) and that depends on WORK (someone has to have made the savings that are being lent out – and the borrowers have to work of their debt sometime, by producing real goods and services). Or investment.
And “investment” must mean investment in real things – whether it be a barber shop or a steel mill.
Finance can not create real wealth via fantasy castles in the air.
Alisa:
Well, yes, I wrote it in a hurry and in a bit of a cranky mood. Now when I look at it, I am rambling too much indeed. But with regards to your comment:
You are right that it’s wrong to frame the issue in terms of manufacturing/tangibles vs. services/intangibles. However, in order to make my (and, presumably, Schiff’s and Gabriel’s) point and criticize the naive free-marketer optimism about the developments in recent decades, these categories don’t even have to be mentioned.
It’s enough to notice that there have been massive sectoral shifts in the economy, and ask oneself to what extent this has been a consequence of normal and natural free market developments moving countries towards whatever their comparative advantages are, and to what extent it has been due to the governmental strangulation and distortion of many productive industries, which has greatly reduced and twisted the overall scope of the comparative advantage of the Anglosphere, together with the government’s perverse influences on people’s financial and consumption habits. If the latter effects have been significant, then we must allow for the possibility that people complaining about the increasing scarcity of good jobs perhaps aren’t driven just by unreasonable nostalgia and economically illiterate protectionist populism.
Libertarians all too often insist that the economic shifts in recent decades are overwhelmingly a consequence of the former mechanism, i.e. of natural and healthy free market developments, and behave as if the only contrary perspective is naive and fallacious protectionism and luddism. Now, they might be right as to the causes of these developments – but what they overlook is the possibility that there has been a real decline in the actual productive industry, even if the causes of this decline are completely misdiagnosed by those who complain about it most loudly.
At the heart of this libertarian confusion, in my opinion, is the naive view that focuses on the liberalization of international trade and draws the cheering conclusion that liberty and free markets are winning, while at the same time underestimating the countless ever worsening ways in which most productive enterprises are being not just suffocated by taxes and regulations, but also corrupted and forced into absurd behavior by a myriad of perverse incentives, both intended and unintended. Libertarians also tend to ignore the very real possibility that many recent apparent increases in the standard of living may be driven by unsustainable debt rather than true wealth creation, and that this pernicious trend might be masking the effects of the decline temporarily, only to make them even worse afterwards.
Now, it may be the case that on the net, the positive developments are indeed overwhelming the negative ones and that the pessimists are wrong, but this is a complex issue that has to be discussed with reference to extensive empirical data, not with the usual brusque dismissal of pessimists as economically illiterate.
Again, this doesn’t depend at all on the fact that the overall sectoral shift happens to have been, for the most part, from manufacturing to services. The same question could also be asked in a hypothetical inverted situation where the service sector has been largely strangled and distorted, and the government has incentivized inefficient and pointless manufacturing enterprises. In fact, as you correctly note, the oversupply of housing and other construction produced by the recent bubble falls exactly into that category.
However, when we look at the actual situation, why would it be unreasonable to conclude that: (1) many manufacturing industries have been crushed and perverted disproportionately badly (just think of environmental regulations, for start!), and (2) the government-induced increase in people’s personal financial irresponsibility has lead to a pathological boom in certain service industries that have now spectacularly crashed, perhaps with even worse to come? I’m not promoting these conclusions as certain, but I do believe that they are not implausible, not at all contradictory with any free-market principles, and not presuming any inherent worthiness of manufacturing vs. service enterprises.
Ivan, I agree with everything you say, I really do – in fact, I have often had similar thoughts, especially when reading some of Jonathan’s commentary, which at times strike me as at least a bit rose-tinted. The only point I am trying to make is:
that these sectoral shifts are irrelevant, since the original division into these sectors is meaningless. Yes, the way the world economies have played out is far from being the sole result of the forces of free market, governments’ interventions in markets have indeed led to many bad things (duh) – but sectoral shifts are not one of those bad things, because those sectors of which everyone speaks simply do not exist as far as actual economic considerations are concerned.
The right to use X? Um, not necessarily. Or rather, not absolutely.
If I purchase a house that is currently rented out, I cannot ‘use’ the house. Not until the lease runs out. What I *can* do is use the rent, but not the house itself.
In Germany back during the 30 Year War, merely buying a piece of land does not guarantee you its complete and total use. You see vestiges of this even in modern property laws – if you find oil or uranium on your property you cannot simply just go and extract it, oh no…
And as for living things, ah dear me, the number of restrictions on the usage of living things. Can’t just cut a forest down, can’t just kill and cook a legally owned dog or cat, can’t just have sex with your sheep (No offense to Kiwis)…
When you buy and sell stuff (or ‘exchange’ stuff) in a free market society, you’re actually buying and selling *ownership*. A completely different animal from the ‘right to use’. Even bloody Vietnam allows you to buy and sell the ‘right to use’ land… but the land still belongs to the Commie government, not you.
Perhaps a more useful distinction than between “goods” and “services” would be between “goods of long duration” and “goods of short duration” (taking “good” here to mean that which is desirable).
Example: with one unit of expenditure, you could gain five hamburgers, or three hamburgers and a hammer. At the end of the day, you would be nearly as full, and you would have the hammer. This hammer will continue to generate dividends in a way that your already-digested hamburgers will not, except as fertilizer.
My point being that certain classes of goods allow for the accumulation of wealth or happiness over time, and others do not. I suspect that our economy is focused on the latter class rather more than is helpful.
Mastiff:
Yes, only this is totally subjective, in addition to being beside the point of Bastiat’s argument. The subjective part is wealth/happiness. For some people it’s the hammer that allows for accumulation of wealth/happiness as they subjectively perceive it, for others it’s the hamburger (there were times and places where being fat was considered a good thing). For yet others it’s knowledge, etc.
Mastiff
How many hammers could you have bought instead of the best holiday you’ve ever been on?
The intangible /tangible argument is an interesting one (as is the wider IHIP issue for services generally). Try searching on “service dominant logic” to see how academic marketing is currently trying to get to grips with it.
“The right to use X? Um, not necessarily. Or rather, not absolutely.”
Gregory, it seems that you are trying to show that there is some sort of difference between “ownership” and the “right to use”, but your semantic distinction is unsuccessful. The technical definition of “ownership” is a bundle of rights in property, and those rights can be sliced up and separated in various ways. You can only “sell” to another whatever rights you possess. And that’s all that “ownership” means.
Thus, if you own a house subject to a lease, all that you “own”, and all that you can sell to another, is the right to the rental income stream plus the reversionary interest in the property. Temporary right to enjoyment of the land has already been “sold” to another, via the lease. The purchaser knows this, and prices accordingly. (Note that your tenant could also sell the “rights of use” he owns, i.e. the leasehold itself, to another, unless there is some restrictive clause in the lease agreement.) Similarly, you can separate out the mineral rights under the land and sell the surface and mineral rights separately, or you can sell a mere right of transit (an easement). None of this changes the fact that when you sell property you are selling some or all of whatever “rights to use” you possess.
Nor does the existence of governmental restictions on that use. Zoning ordinances, environmental regulations, non-discrimination laws, etc., all impose limitations on the manner in which property can be used, but if they exist at the time of your purchase you know that and factor it into the price (and if they are subsequently imposed, some of the value of your property has been usurped by the governmental entity involved and you should receive compensation for the “taking”; there is much litigation over that in the US right now). But no one ever said that the right to use property was absolute. Your straw-man argument does nothing to refute the very valid points made by Narveson.
Laird: Ah, but that is not so!
Webster defines ‘ownership’ as
“The total body of rights to use and enjoy a property, to pass it on to someone else as an inheritance, or to convey it by sale. Ownership implies the right to possess property, regardless of whether or not the owner personally makes constructive use of it.”
The Free Dictionary defines ownership as
“ownership n. legal title coupled with exclusive legal right to possession. Co-ownership, however, means that more than one person has a legal interest in the same thing.”
and
“OWNERSHIP, title to property. The right by which a thing belongs to some one in particular, to the exclusion of all other persons.”
In other words, ownership is a set that *may include* (but not necessarily completely) the set of ‘rights to use’.
As I’ve mentioned, what you buy and sell on China and Vietnam are the ‘rights to use’, but ownership remains vested in the government – hence, if your farm is in the way of a proposed highway, either you get out of the way of the bulldozer, or you *become* part of the highway.
Which fits in well enough to what Narveson describes, but is hardly the way any normal person would consider ‘ownership’.
You know what I define as ‘ownership’, and what I suspect most people would agree in a general sense with? Possession. As in, “to have and to hold”. As in, no one can take it away from me without my permission. I’m not saying this is a sufficient condition, of course it’s not; it is however a necessary condition.
Commonwealth nations have ‘leasehold’, which is fairly similar to what the Commies do. Do I *own* the land for which I have a leasehold title? Em, no. I don’t (unless it’s a ‘one peppercorn’ 999-year leasehold, which I would argue is de facto freehold). Not legally, and now that more people are becoming aware of the ramifications, not colloquially either. I may own the *house* on the land, mind you, but not the land itself.
Strata titles are even more interesting. Strictly speaking, you don’t even own that bit of the airspace where your apartment is located. This too is not real ownership.
And the whole thing breaks down when you consider things other than real estate. I can hire full-time maids, which means I have exclusive rights to their productivity and labour, but do I own them? Boy, I surely hope not!
In summary, both in a legal sense, as well as in a metaphysical sense, therefore, when parties engage in buying and selling (or exchanging), they’re usually engaging in transfer of ownership rights. Yes, this usually comes bundled with ‘right to use’. But if you’re just talking about ‘rights to use X’, then you’re don’t usually label it ‘buying and selling X’. What if X was a lawyer? Or a consultant?
Not sure what you call it, though. Renting? Leasing? Retaining?
And as for the minutae of ownership and property law (albeit not necessarily in a Commonwealth context);
http://volokh.com/posts/1206859543.shtml
http://lawiscool.com/2008/03/29/lord-of-the-rings-as-property-law/
http://web.archive.org/web/20040201232402/http://blog.qiken.org/archives/000196.html
Not really on buying and selling, but the point, I believe is quite clearly made that ownership and ‘right to use’ are necessarily separate concepts.