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1.4. Theories Explaining the Growth of Services

Economists have been studying the reasons for the growth of services for many years. An early contribution to this line of inquiry was by A.G.B. Fisher who introduced the concept of primary, secondary, and tertiary industries.3 Primary production was defined as agriculture, pastoral production, fishing, forestry, hunting, and mining. Secondary production consisted of manufacturing and construction. Some authors included mining in this category. Finally, tertiary production was composed of transportation, communications, trade, government, and personal services. Fisher suggested that an economy can be characterized with respect to the proportion of its labor force employed in these sectors. He also argued that as income rises demand shifts from the primary to secondary and then to tertiary sectors. Sociologist Daniel Bell described the development of human societies in three general stages.4

Preindustrial society—The dominant characteristic of economic activity in pre-industrial society is extractive, that is, agriculture, fishing, forestry, and mining. Life is primarily a game against nature. The level of technology is low or nonexistent; people are dependent on raw muscle power to survive, and therefore the productivity is low. Their success is largely dependent on the elements: the seasons, the rain, and the nature of the soil. The social life is organized around the family and extended household. Because of low productivity and large population, there is significant underemployment, which is resident in both the agricultural and domestic-service sectors. Because most people in this society struggle not to starve, they often seek only enough to feed themselves. Thus there is a large number of people employed or available to be employed in personal or household services (see Exhibit 1-8).

Exhibit 1-8. Preindustrial Society













squf.jpg Farmer

squf.jpg Primitive

squf.jpg Game against nature

squf.jpg Common sense and experience

squf.jpg Orientation to the past

squf.jpg Traditional


squf.jpg Miner

squf.jpg Raw materials

squf.jpg Limited resources

squf.jpg Agriculture

squf.jpg Fisherman

squf.jpg Ad hoc responses

squf.jpg Mining


squf.jpg Fishing

squf.jpg Timber

Source: Adapted from Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social Forecasting (New York, Basic Books, 1973), p. 117.

Industrial society—The dominant characteristic of economic activity in industrial society is goods production. Life is a game against fabricated nature. Economic and social life has become mechanized and more efficient. Machines and the energy that powers them dominate production; they have replaced muscle power. Productivity has increased tremendously; the art of making more with less is valued. The economic watchwords are maximization and optimization. Division of labor is further extended. Technological advancements lead to new, faster, and more specialized machines that constantly improve productivity and replace more workers. The workplace is where men, women, materials, and machines are organized for efficient production and distribution of goods. It is a world of planning and scheduling in which components for production are brought together at the right time and in the right proportions to speed the flow of goods. The workplace is also a world of organization based on bureaucracy and hierarchy. People are treated as “things” because it is easier to coordinate things than people. The unit of social life is the individual in a free market society. Quantity of goods possessed by an individual is an indicator of his standard of living (see Exhibit 1-9).

Exhibit 1-9. Industrial Society













squf.jpg Semiskilled worker

squf.jpg Energy

squf.jpg Game against fabricated nature

squf.jpg Empiricism

squf.jpg Ad hoc adaptiveness

squf.jpg Economic growth: State or private control of investment decisions

squf.jpg Goods producing

squf.jpg Engineer

squf.jpg Experimentation

squf.jpg Projections

squf.jpg Manufacturing

Source: Adapted from Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social Forecasting (New York, Basic Books, 1973), p. 117.

Postindustrial society—The dominant characteristic of economic activity in postindustrial society is service production. Life is now a game between persons. What matters now is not muscle or machine power or energy, but information and knowledge. The central character of economic life is the professional. She possesses the kinds of skills and knowledge increasingly demanded in this society. This demand for increased technical knowledge and skills in the workplace makes higher education a prerequisite to entry into postindustrial society and good life. The quantity and quality of services such as health, education, and recreation that an individual can afford are indicators of his standard of living. Citizens’ demand for more services such as healthcare, education, arts, and so on and the inadequacy of the market mechanism in meeting these demands lead to the growth of government, especially at the state and local level (see Exhibit 1-10).

Exhibit 1-10. Postindustrial Society













squf.jpg Transportation

squf.jpg Recreation


squf.jpg Trade

squf.jpg Abstract theory: models, simulation, decision theory, systems analysis

squf.jpg Finance

squf.jpg Centrality of and codification of theoretical knowledge

squf.jpg Insurance

squf.jpg Professional and technical

squf.jpg Future orientation

squf.jpg Real estate

squf.jpg Scientists

squf.jpg Information

squf.jpg Game between persons

squf.jpg Forecasting


squf.jpg Health

squf.jpg Education

squf.jpg Research

squf.jpg Government

Source: Adapted from Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social Forecasting (New York, Basic Books, 1973), p. 117.

Several substages are involved in the transition from an industrial to a postindustrial society. First, an expansion of services such as transportation and public utilities is needed for the development of industry and distribution of goods. Second, mass consumption of goods and population growth require an expansion of wholesale and retail services, as well as services such as finance, real estate, and insurance. Finally, as personal incomes rise, the percentage of money devoted to food declines. Increments in income are first spent for durable consumer goods, such as housing, automobiles, and appliances. Further increases in income are spent on services such as education, healthcare, vacations, travel, restaurants, entertainment, and sports. This tendency in consumption behavior leads to the growth of the personal services sector.

There are many other reasons given to explain the growth of services; some inspired by the theories previously discussed, and some are independently developed by various researchers. Some of these are summarized as follows.5

  • The increase in efficiency of agriculture and manufacturing that releases labor to services
  • The flow of workers from agriculture and other extraction to manufacturing and then to services
  • The application of comparative advantage in international trade
  • A decrease in investment as a percentage of gross domestic product (GDP) in high-income industrialized countries or an increase in the percentage of the GDP in low-income countries
  • A rise in per capita income
  • An increase in urbanization
  • Deregulation
  • Demographic shifts
  • An increase in international trade
  • Joint symbiotic growth of services with manufacturing
  • Advances in information and telecommunication technologies
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