J.R. Hicks, Value and Capital, 1939, pages 38-41.
This correlation declares that productivity declines where services predominate. It is tempting to conclude that one causes the other. We are tempted to conclude this when we read that the productivity of an economy, notably in Europe but almost as remarkably in America, has been declining from the 1980s to the 2010s when measured as the ratio of the national product to the gainfully employed population. This presupposes that labour alone is responsible for the national product. If instead we take it that the product is the result of some combination of labour and capital, we will reason in terms of "total factor productivity" and have to take account of changes in the productivity of one factor in terms of the other, and our picture of the economy will come to be greatly complicated by technical progress. Nevertheless, productivity in both the simplified and in the total factor productivity sense will be more or less closely related with the importance of services in the economy.
While agriculture and industry cause no fundamental problems for the conscientious statistician, services do present him with a question of discipline. He can account for goods, including even intangibles provided that they give rise to an exchange or even the simulation of an exchange, but many of the most important services have a value dimension which is not part of an exchange, can only be valued by intuition, convention, or tradition and cannot be included in some account by the statistician's arbitrary evaluation. This, in as few words as we can make it, is the explanation of the title of this article which promises "Invisible Richness".
Many economists consider and provide statistically plausible evidence that the national product over the last hundred years was characterised by the most important technologies gradually becoming "old hat" and the new ones failing to replace them. The internal combustion engine was responsible for more economic growth than the computer is today. Productive resources nowadays will not be fully employed in industry, and therefore migrate to services as witness the blue collar industrial worker menaced by unemployment and the white collar clerk with a lower salary taking his place. It is almost as if services expanded because the old hat industries were contracting and the new ones were not hungry enough to take the place they vacated.
For the sake of orderly thinking, let us apply a rather neglected doctrine, the doctrine of consumer surplus (as John R. Hicks1 decided to call it). Walter has recently graduated and is about to accept a job which will change his life to some extent. He decides to buy an automobile. He would be willing to pay $15,000 for it. We will call this his private price. Thanks to old hat technology, he can buy it for $10,000. There will then be a sum of money, the compensating variable, which he could forgo and still be at least as well off as if he had bought the automobile for $15,000. We must not forget that this is not a sum of money he will spend but only a notional amount which he would take to make his income just as high as if he had to buy the automobile at the "private" rather than at the "public" price. It compensates for the increase in income thanks to the existence of the public price. Arthur is about to retire, which will change his standard of living. He is considering changing his automobile as he has always done every four years, but, he is of two minds because running a car would be just as expensive as taking a taxi or public transport. Buying a new car and selling the old one looks to him just as attractive as selling the old one and not replacing it. He decides for one or the other on the flip of a coin. His is a marginal choice, his income does not change by doing one or the other, and his compensating variable is zero.
I.M.D. Little2 has pointed out, by courteously implying that Hicks should have done it before him, that Arthur must be dealing with some indivisible object, for otherwise a marginal choice would have no real meaning. This may well be a point to remember, but it is also the case that the majority of market choices deal with indivisible objects; even a six pack of beer is bought as indivisible, although it will in due course be divided into single bottles. Consumer surplus is not confined to bulky objects, but can be interpreted to include, for instance, pills that you take day-by-day, week-by-week, and perhaps for the rest of your life.
Pills, entire protocols, or the intervention of a surgeon are part of medical technologies that are almost numberless and in almost numberless cases entirely new. They are the children of the human genome, a technological prodigy, which, together with biology and chemistry, is very far from having disclosed all its secrets yet. The automobile has the electric engine and the driverless technology for its children, but they are far less important in comparison with what medical technology has already produced and is likely to produce in our generation. Nano-technology, and indeed artificial intelligence and robots are all promising products that will make everyday life richer beyond all recognition, though not necessarily happier.
Economics has succeeded in making much out of little. It has one datum, the public price, and two others which exist only in the consumer's head- namely the private price and the map of indifference curves, each of which represent various degrees of a consumer's satisfaction with the portfolio of one good and various sums of money. From one datum and two guesses, the economist deduces the compensating variable that would be consistent with them. The public price must, moreover, be consistent with all the substitute goods and their prices that comprise the environment. The compensating variable is not a real but only a virtual sum, and its virtual expenditure on one good is not an opportunity cost which the virtual expenditure on another good has to be bear. By consuming little, and dispersing little of a virtual compensating variable, he will not be more able to consume another good and spend a larger sum of this virtual variable. This point may have a bearing on the problem of the consumer when he steps beyond the rationality of economics. Jerome may have a child suffering from a very serious and painful illness, and Jerome would be willing to make any sacrifice to buy his recovery. His private price would be an indefinite sum because no price would be too dear. On the other hand, his own resources would not suffice and he would have to steal, beg, or rely on the public purse which would have to pay, no matter how large a sum, in his place. The public purse may not be open, the child may not recover, and the consumer surplus will fail to manifest itself.
Walter, as we have seen, will buy a new car and Arthur may sell his old car and may or may not buy a new one. Both will have to do with the old hat technology of the automobile, and the two of them will not make a heavy demand on it. All the other old hat technologies taken together will only account for a part of the national product, which is smaller than the part due to services and new technologies. Jerome has to make a living among the technologies, many of which are new, with which the service part of the national product is populated. Many of them are the offshoot of the computer, such as information technology, electronic entertainment, or the so called "social networks", and with its wedding with various old industries which have been renewed by it. If not the largest, certainly the most sensitive part of the whole family of services relies on medical technology. Most others resemble it, in that their private price is often far removed from their public price. This is the case when the service in question serves one individual alone and any substitutes that it may have are far removed. Medical technology, however, is perhaps the most representative of the services whose private price is high, that have no close substitutes, and whose public price does not benefit from mass production.
Michael has cardiovascular troubles; he will submit to surgery and to continuing surveillance by a cardiologist. His life expectancy is estimated to be extended by five years and he is liberated from further worries about his heart as long as he is under medical surveillance. His surgery performed by a surgeon and trained assistants, as well as the equipment they need and the continuing surveillance after the operation are together what we recognise as the public price, accounted for by a conscientious statistician and added to the national income. His private price is likely to be many times this sum, because he expects to live about five years more and with less anxiety.
Consumer surplus is the intrinsic reason for most exchanges, and as exchanges are registered by statistics, the national accounts and the exchanges that they reflect are of some, though perhaps, only a little, help in assessing the role that consumer surplus might play in understanding an economy. Any such exercise is of course guesswork of a sort. Perhaps more seriously, it involves the addition of individual people's surpluses in some aggregate, which may well be condemned as an exercise of adding incommensurability. In the present instance, we may well accept the charge and go ahead all the same.
For more on these topics, see David Henderson, Taking Consumer Surplus Seriously, EconLog, Jan. 2011; the EconTalk episode Jerven on Measuring African Poverty and Progress; and National Income Accounts, Concise Encyclopedia of Economics. See also the EconTalk podcast episode Diane Coyle on GDP; and GDP Fetishism by David Henderson, Library of Economics and Liberty, March 2010.
In our list of areas of the world, the national income of Africa looks much smaller than that of Europe, but it also enjoys faster growth than Europe. The share of services in its income is below 50 per cent, where that of Europe is over 90 per cent. Furthermore, much of the services in the African accounts are old hat services, while the European services have more recent technologies which, in addition, are likely to generate more consumer surpluses than the old hat services in Africa. This is taking us to the doorstep of a conclusion that advanced economies, equipped with modern technologies, have to be satisfied with an ever slower growth rate. They advance to stagnation.
Consumer surplus, however, that does not appear in any statistics but which we can recognise as the motive for exchange, cannot recognise the diagnosis of advanced stagnation. It is consistent with any forecast of some virtual prosperity and richness except that of stagnation. Better than stagnation is perhaps not a great deal, but it should be enough to give us courage.