Service-based economies are bad

28 November 2011
These days the UK economy is what is technically known as a tertiary economy, which is one dominated by the service sector. This is a very bad thing, as any service sector needs non-service sectors for support, otherwise the whole system is doomed to collapse. In the UK this is well underway.

Until a few years ago, one active part of the UK's service sector was the financial sector, which is basically a shadow of its former self. A bigger problem, and one that affects not just banking, is who the customers actually are. A service industry requires someone to service, and it has to be someone other than each other. That means a significant non-service sector, which in short the UK does not have. That leaves two possibilities: export, and government sub-contracting. Both have significant problems.

Services for export

Export of services seems like an odd concept at first since no physical goods are involved, but if viewed as something that brings money into the country, most of the concepts still apply as they do to tangible goods. Problems arise because services are a lot more foot-loose than other industries, and the UK (at least for IT services) is thoroughly uncompetitive. The UK is both the most expensive place in the world to host online services, and regulations such as data retention a complete legal liability.

More generally, particularly in these days when all countries have major unemployment problems, is that service exports have to compete with local companies. This is where the lack of physical goods becomes a liability, as it means there is no real anchor to keep these overseas markets buying British. Just about the only exception is services that require the customers come to the UK, most notably education, but even that is being killed off by misguided visa policies.

Corporate welfare

With no domestic nor overseas market, there is only one potential customer left: the government. The problem is that this brings with it all the problems of big government, in particular bureaucratic scope creep, cronyism, and above all rampant inefficiency. To make matters worse only big (usually international) companies have a hope in hell of winning contracts, so innovation is also stifled out. Lobbying to increase vetting requirements is a good way barriers are put up, as incumbents get grandfathered, while newcomers go bust.

More generally, it means that money simply goes in circles, as the government is just using taxes on the service companies to buy their services. This does not last long, especially since an ever-increasing amount of regulation is needed just to keep everyone busy. Problem is that such structures are kept on the life support drip better known as borrowing, which guarantees things end in tears.

Either way, it falls apart

A pure service based economies is doomed to fail because there is simply no original source of actual work. You either end up with incestuous businesses in an empty market, or you end up with a bloated approximation of communism.