Manufacturing vs. Service, Value vs. Competitive Advantage

I would like to assert that part of the cause for recent economic problems is related to the fact that most of our modern work creates no value.  These jobs include everything from cashier to manager to CEO.  Disagree if you want, but let me explain my reasoning.

First, most people will disagree with the assertion that most service jobs do not create value.  I would argue that rather than value they create competitive advantage.  Let me explain the difference.  When work creates value, the value created exists regardless of whether the work is eventually compensated.  When work creates competitive advantage, if that work does not immediately create value, then the work will never be compensated.  An example of the first is when someone builds a house.  The labor value (arguably, the purest measure of value) of the house persists whether someone buys it or uses it immediately or not.  Even if no one wants the house now, the value will still be there when the housing market improves.  The second example is a cashier.  The cashier is getting paid even when there are no customers to serve.  If the cashier spends an eight hour shift, with no customers, the value of the work done by that cashier will never be compensated.  That eight hour shift will not have any value the next day, when the store is very busy.  In other words, the wages paid to the cashier did not create any value.

Now, let's look at the idea of competitive advantage.  If work of the cashier does not actually generate value, why do we even have them?  The reason we have cashiers is that they create competitive advantage.  In theory, if everyone was honest, we could eliminate cashiers, and customers could ring themselves up and pay without any human intervention.  In fact, self checkouts are evidence of this, except that to make up for human error, most stores provide one cashier per four or six self checkouts, for oversight.  So why don't we replace all cashiers with self checkouts, with one overseer per four or six?  The reason is that many customers prefer dedicated cashiers.  Stores could eliminate cashiers, but they would loose customers.  Cashiers provide competitive advantage.  If you think that competitive advantage can be translated to value though, you are wrong.  No value is created by competitive advantage.  Competitive advantage affects how value is distributed.  This is a problem of looking at an open system as a closed system.  A single store might see that increased competitive advantage increases profits and conclude that competitive advantage generates value.  This is an invalid conclusion because the single store is not a closed system.  If a store has low competitive advantage, the lower profits do not mean that they are generating less value than the other guy.  The lower profits mean that the profits are being distributed in favor of the other guy.  In plain English, the money is being spent somewhere else.  Assuming that competitive advantage creates value is the same as assuming that lower competitive advantage reduces the amount spent everywhere.

So, here is how service jobs can create problems.  When a store has to pay cashiers, that is overhead that costs money, but that does not create value.  In other words, the money spent on cashiers (in the open system, not per store) generates negative profit.  In fact, evidence of this is that many stores keep track of the labor costs as a percentage of revenue.  They recognize that non-productive labor generates negative profits, and they spend effort to try to minimize those costs.  The problem here is that when a business spends extra money to increase their competitive advantage, they must also raise prices to counter the negative profit created.  What this does is, it increases the number of people employed without increasing average wages (typically it actually lowers them, because the number of lower paid service workers hired is disproportionately large compared to higher paid service workers), while also increasing prices.  In other words, it causes unbalanced inflation.

Now you are probably wondering what I mean by unbalanced inflation.  You might recall in a previous article that I mentioned that between 1960 and 2010 average inflation was 659%, while average wage increase was somewhere around 75%.  This is what I mean by unbalanced inflation.  The problem this causes is that price inflation outpaces wage inflation, which makes the average person have decreasing relative wages.  Otherwise stated, prices increase faster than wages, making workers more and more poor.  Adjusted for inflation, the average worker now makes around one quarter what the average worker in 1960 made (I think my math is right; I'll make a chart from this data at some point).  No wonder we are having a credit crisis, and no wonder people are spending less money.  Adjusted for inflation, people have less money to spend.

The point of all of this is that service jobs need to be considered carefully.  Part of the fault is the consumer, who is often too lazy to bring their cart back to the return, do their own research for their project before going to buy supplies, clean up their own messes, and do anything else that they can reasonably do on their own.  When an employee of a business has to spend thirty extra seconds to get your cart from the far end of the parking lot, that increases prices slightly.  When this happens for hundreds or thousands of customers each day, it can result in a significant price increase.  Similarly, when a service associate spends half an hour helping you plan a poorly thought out project, that increases prices.  And again, when this happens for hundreds of customers per day, it results in a significant price increase.  Research and development teams also cost money where no value is created (if you disagree, read on; I am getting to this).  With the widespread automation of manufacturing, most modern jobs are service jobs.  Since service jobs do not create value, no wonder we are having problems.

I am sure there are still objections to the idea that service jobs do not create value.  I would now like to discuss what is probably the biggest objection.  This relates to my comment on research and development.  R&D does not create value.  The reason is that the product of R&D has no value in itself.  While you can use a blue print to built a house, which has value, the blue print itself has no value.  In fact, information in general has no value (right, knowledge is power, but without action, it still has no value).  The value in information is its use.  A blueprint for a new kind of computer processor is of no value itself, but it can be used to help create a large number of computer processors, which do have value.  Don't mistake my claim as saying that service jobs are worthless.  Many certainly have worth, because they are one step that leads to the creation of value.  However, there are many service jobs that are worthless.

Businesses typically use R&D as a means to increase competitive advantage, but R&D can also fuel increased ability to create value.  Good R&D produced the designs and ideas used to create hybrid cars, which most people will agree have higher value than gas only cars.  While the motive may have been increased competitive advantage, the result is higher potential for generating value.  This is sometimes also true of service jobs like accounting.  Sometimes even CEOs can improve ability to generate value (keep in mind, however, that increasing competitive advantage by itself does not generate value; the CEO that improves profit margins with a slick new ad campaign is only redistributing value,  not generating value).  It might sound like I am trying to justify spending huge amounts of money on some service jobs, but not others.  This is not true.  Any company that spends huge amounts of money on R&D, while severely underpaying their employees, is acting unethically and is ultimately harming the economy.  When employees cannot afford to buy the things they need, because money that they deserve is being redirected to R&D or any other competitive advantage service jobs, the economy suffers.  This is even more true when the employees have to resort to government aid, because that increases taxes, which further raises prices.

Businesses need to carefully weight the need for service positions against the need to pay their employees fairly and charge fair prices.  Most businesses do not recognize that this is important, because they do not look beyond their profit margins.  This is why we are having economic problems.  We might be seeing improvement in things like unemployment right now, but it will not last unless we can reform how we think about value.  (Recent research on unemployment has shown that part of the current downward trend is the result of people giving up on finding employment, so decrease in unemployment does not necessarily mean people are getting jobs.)  It turns out that this may be less difficult than most businesses think.

There is some irony in the idea of increasing service to increase competitive advantage.  The first is that it is malignant.  When one business increases competitive advantage, others must follow or die.  So, when a business increases service, value distribution is transferred to that business.  Others typically respond by increasing service to maintain balance.  There are more ethical alternatives though.  People like better service, but people also like lower prices.  Employees like higher pay as well.  If a business increases wages, they have a bigger selection of potential employees and can choose higher quality workers, which increases profits.  Higher pay also results in better morale.  Many customers will respond to the better treatment, even if there are fewer service employees.  Lower prices are always a good competitive advantage.  Many customers, especially the large spenders, will not mind fewer service employees if it means that they can save 5% or 10%.  (This is evident in the success of WinCo, which even requires customers to bag their own merchandise, to keep prices low.)  Having a big R&D department to compete with the other guys might sound good, but again, if cutting the size of R&D can lower prices significantly, more customers will come (even if they might occasionally go to the competitor for a more advanced product).  Note that all of these will appeal more to higher spending customers.  Higher spending customers typically know what they are doing, so they need service less.  They will prefer the better treatment over the larger number of service employees.  They will certainly prefer the lower prices, because they are getting more significant savings.  These are the most valuable customers, so pleasing them should be a priority.

This is a complicated matter.  We are finding service to be a more and more prominent aspect of our lives.  Many people feel that time saving services are valuable, even though they have no intent to use the time saved for anything productive.  Leisure time is great, but we are getting to a point where we are paying through the nose for it.  Businesses may not respond to the ideas I have written about, but consumers can.  We can start by bringing our carts all the way back to the store, cleaning up our own messes, doing our research so we don't need to spend half an hour of a service employees time for every project, and doing anything else we can do reasonably, instead of expecting someone else to do it.  If we really want to send a message, we can keep track of prices and only buy the cheapest (we don't have to sacrifice quality though).  If everyone in a town only ever bought gas from the cheapest station, even if it took an extra minute or two to get there, gas prices would drop.  The other stations would have no other option.  If people kept track of food prices and did the same thing for food, stores would be forced to compete on prices.  Our laziness has told businesses that we care more about service, which does not generate value, than prices, which at least save value.  If we would get off of our lazy duffs and take the effort to be cheap, prices would drop.  (And, certain cable shows about couponing have shown that the monetary savings can be well worth the time spent for shopping around.)

While I blame businesses for their irresponsible management of value (659% inflation to 75% wage increase), everyone has a responsibility for regulating this.  We have the ability to control how businesses handle value, by choosing where we buy.  If we really do value service more than value, then we are on the right track.  If we value low prices more though, then our laziness is betraying us.  So many people in the U.S. complain about high prices, but then do nothing about it.  People who are too lazy to shop cheap have no business complaining about prices and frankly deserve what they get.