The current debate over the future of the Australian economy (in terms of a mixed economy or one that is primarily based on either services or manufacturing) should ideally consider the far reaching implications of such determinations.
A little studied yet important subject is how “impersonal” manufactured products deliver social interactions of merit, that in turn lead to and support structures of social equality that otherwise may not exist.
A consumer chooses to buy a manufactured product based on some type of performance merit. As a manufacturer cannot personally know every customer, the value and conditions of the market transaction must be impersonally built into the price/performance of the manufactured product.
In a manufacturing economy it tends to matter little if we know or like any one personality who works in the factory. The product must succeed primarily on merit; personalities have almost nothing to do with transactional outcomes.
Conversely, in a service economy personalities, friendships, family relationships, round robin systems of favours and gifts, cabals, clubs, clans and socio-political groupings are the principal means by which business/money decisions of any import are made.
Accordingly and socio-economically, a services based society is structured quite differently from a manufacturing economy, and wealth is disbursed along a much narrower path concentrating disproportionately to capital ownership and asset appreciation rather than productive skills.
To Illustrate this difference; when we analysed a selection of service-based businesses, over 95% of incumbents of the better paid service jobs were related to, or already knew each other.
Merit based job interviews for the better paid service jobs appeared at best to be an afterthought, and often the very idea was a source of restrained polite amusement such as in the case of witnessing a social faux pas of which the uncouth perpetrator is blissfully unaware.
Similarly, their revenues came primarily from customers who were also umbilicaly attached through family connections, elliptical nod/wink favours and personal relationships dating back to early post pubescence or before.
Pivotally, the well paid service industry participants saw their personal relationships as being the one and only source of wealth along with a commercially non-meritorious sense of entitlement to prestige and, interestingly, access to co-worker sexual partners.
In addition the relationship between employee up-skilling and moving up the pay scale in a services business can be tenuous.
Manufacturing is not without its challenges or shortcomings particularly where big finance is involved. Nonetheless, the lower paid manufacturing jobs still pay more than many of the lower paid service industry jobs and wage mobility opportunities are greater as incomes can be bolstered through overtime work.
Upskilling along with additional machine operator training can also often provide a direct path to a higher wage. Manufacturing businesses also contained a higher proportion of merit based hiring where more than half of the people in the better paid positions did not previously know each other.
Many of the people in manufacturing jobs had only ever gained their jobs via a competitive hiring process. This contrasted with service based hiring where many of the most handsomely remunerated had never attended an interview in their lives.
Even in family owned manufacturing businesses the proportion of family members was more often less than much larger services businesses.
To put Australian services businesses in perspective: outside of services created to meet and comply with Government red-tape legislation, and where oligopolies and monopolies exist under Government legislative protection or dependence on Government procurements, the services sector is quite small and fragmented.
Needless to say such heavy dependence on Government creates a layer of cosiness where sweetheart deals can easily proliferate, but where no appreciable ongoing net commercial benefit is derived.
While software automation of repetitive task jobs in service industries can improve relative productivity through cost reduction it also reduces levels of service without improving output. Service based businesses can only improve productivity through reducing wages or demanding workers work longer for the same pay.
Manufacturers meanwhile always have the option of increasing output without increasing costs or can add features and benefits to the product to gain competitive market price premiums thereby generating the economic surpluses a services business could never do.
Other than a socialist 'everybody works/everybody consumes' model (which is quite one-off and finite in its possibilities) the only remaining untapped frontier of services productivity is in organisational development which requires top drawer quality management, and thus may remain elusive given the seeming distorted acceptance of commercially non-meritorious relationships as the gold standard path to executive wealth and power.
A services economy provides fewer jobs of sufficient income and security to allow the bulk of the citizenry to have a stake in and perceive any sort of economic future for themselves. We must ask the question- is this a society we really want?
A services based economy does not guarantee a crony economy will develop it just creates many more of the pre-conditions and distortions required for such an outcome. Already we can see in Australia cosy executive roles in quangos and NGO’s outnumber private sector roles by 2:1.
Fifteen years ago private sector advertised jobs made up more than 90% of executive roles. Similarly, politically invented jobs such as multicultural liaison officer pays a higher income than any design engineer, research scientist or manufacturing manager.
A vibrant wealth creating economy where wealth is widely dispersed can only come about through the constant multiplicity of new commercial relationships, new technologies, new technological applications and new organisational development where realising goals and objectives transcends patronage and where well paid employment is not seen and treated as a gift for friends and relatives.
Perhaps Federal Minister Sinodinos, Shadow Minister Senator Kim Carr, and independent champion of Australian manufacturing Senator Xenophon, could place clear and coherent policies in the public domain that articulate how Governments will support a mixed manufacturing value-add economy.
David Gray is lead consultant at Digital Information Partners.