Services constitute a
very heterogeneous economic category, and it is one which has become more
difficult to define over time. Older definitions of services tended to
rest on the fact that services were often difficult, if not impossible, to
separate from the service-provider and recipient, so that people became
crucial to the definition. More recent definitions have incorporated
"business services" which also externalise part of R and D and management
functions, and include activities like retailing, banking and insurance,
For Adam Smith, a service was defined in terms of its transient nature,
thus they were seen to "perish in the very instant of their performance".
The simultaneity of production and consumption in services provision led
Smith to argue that they "seldom leave any trace or value behind them".
Since this meant that they could neither be stored nor transacted again,
they amounted to unproductive activities for most classical economists.
Similarly, until very recently the national accounts data of socialist or
centrally planed economies tended to make a distinction between material
and non-material production. Those services (such as trade and transport)
that contributed directly to material production were also classified as
such themselves, while other services remained in non-material production.
Even such a distinction was not entirely clear-cut, because of the
possibility of longer-term effects of some services on material
production, but the basic distinction between productive and unproductive
economic activities was maintained.
Modern sensibility has tended to stand such reasoning on its head, giving
tremendous importance to a range of services in terms of their potential
for raising productivity in other economic activities. One recent
definition treats a service as " a transformation of the user or the
user's goods, as a result of the voluntary intervention by the producer of
services". [T. P. Hill, 1977] This does not imply an acquisition which is
transferable, but rather a modification of the characteristics of the
recipient, and it allows for a variety of different interpretations,
incorporating both person-based services such as education or health care,
and goods-based services such as in transport and R and D.
The expansion of the services sector has always been seen as a necessary
concomitant of economic growth, to the point where it is often listed as
one of the indicators of the economic development process. The theory
underlying such an assumption (which was elaborated by economists like
Kuznets, Clark and Fisher) was one which viewed development as a
three-stage process, with the primary, secondary and then tertiary (or
services) sectors becoming more dominant in successive phases. Typically,
therefore, a rise in the share of services in national income was viewed
as being positively associated with both economic growth and quality of
At a very broad level, such an assumption would appear to be confirmed by
the evidence on the share of services in national income across a range of
countries, as presented in Chart 1. With the highest share of services
being found in the industrial countries, and the lowest in the least
developed countries, the basic argument seem to be quite plausible.
This theory in turn was based on certain assumptions about both
production and consumption. First, in terms of production, productivity
gains - or changes in value added per worker - were assumed to be faster
in material production, especially in industry, than in services. Second,
in terms of consumption, it was assumed that the income elasticity of
demand for services was greater than that of demand for goods.
The assumption of differences across material and non-material sectors in
terms of productivity growth was taken as axiomatic for many years.
However, it is now increasingly widely recognised that making any such
statement is problematic, not only because of the sheer difficulty of
measuring productivity in the service sector, but because of the many
links between growth and technological change in industry and services.
Measuring productivity in any economic activity requires at the very
least, some knowledge of the quantities produced. For some services, there
are indeed some basic production indicators (the number of haircuts given,
the number of cheques processed, the number of telephone calls made) but
even these are not always comparable because of issues of quality
variation. But for a whole range of other services, even such indicators
are not available, and calculations of output are then made on the basis
of input volumes, which can help us very little when it comes to
productivity measures. Often, there are various kinds of ad hoc
assumptions made in estimating output, and the estimates tend to be quite
sensitive to the particular assumptions made.