Eli5: What is service economy?


I know that there are primary sector (raw resources) and secondary (manufacturing). The first one is deriving value from land (agriculture or digging stuff up). The second one is creating value by adding work (making chairs out of extracted metal). But service sector sounds like creating value out of thin air.

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Creating value out of skill and knowledge: nursing, teaching, engineers, housekeeping, waiters etc. All provide benefit to others who need or are willing to pay for their services.

All value is subjective. Realistically utility is a basis of assigning value. And that utility can come in the form of services as well as product. A bar of gold today might be assigned some value to most people but that same bar of gold given to a primitive caveman probably has zero value. Value is not intrinsic.

Think of things like music or art.

In a way, it is creating value out of thin air in that there’s nothing tangible that value is created from – no physical raw material. But that doesn’t mean the value created isn’t real. A doctor who properly diagnoses and treats what would be an otherwise debilitating or even deadly illness certainly adds a huge amount of value, but the doctor isn’t digging anything out of the ground. An engineer who designs a bridge adds considerable value to those who eventually use that bridge (and those who benefit from such use). A personal trainer who provides programming and guidance to a client who loses weight and reduces or eliminates medical treatment as a result adds considerable value. There are countless examples where a person’s mental abilities, knowledge, skills and talents add lots of value to the lives of others without that person extracting, processing, or distributing any sorts of tangible materials.

Chairs are not a good example but let’s think of electrical wiring. You have the mining of copper, making it into electrical wires and finally the people that install the wiring. Not everyone has the skill or the time to install the wiring themselves so they pay someone else to do it for them. That’s the service sector.

Look at it from your home perspective:

The first sector gives you the food for the kitchen.

The second sector makes the kitchen, furniture, builds the house, tv and computer, and gives you electricity/gas.

The third allows you to: have a doctor, consult an interior designer, plan your neighbor to look good and be efficient and nice to live in, provide bus service, a mechanic for your car, a shopping mall, tv programs to watch, games to play, movies, books, art, life/car/house insurance, bank account, trading platforms, e-commerce, deliveries, take away food, restaurants, movie theaters, news.

It’s the sector that produces most of the “quality of living” things.

Back in the ancient time, you had first: hunter/gatherers, second: crafters, third: shaman, singers, musicians, artists. Imagine the hunter/gatherers and the crafters finally resting in the evening, and sharing their food and products with the shaman and artists that prepared the bonfire. That’s the third sector purpose.

Third sector has always been there. It just became really really big. Look at the third sector value not as a “creating value” sector, but a “worth spending your spare money for it” sector. And because technology made us richer, we have more spare money to throw in those services. A lot more than feeding a single shaman out of 100 villagers. More like having a couple of personal serfs for each first/second sector worker.

Service economy is one built on labor providing value–you are buying time and expertise. It’s spending money on non-tangible services, experiences, etc. Eating at a restaurant vs. cooking food at home; going to a salon vs. cutting your own hair or painting your nails; having a plumber fix your toilet or mechanic repair your car vs. buying parts and doing it yourself; hiring the expertise of a lawyer, accountant, architect; staying at a hotel or flying someplace; having somebody come clean your house; the daycare center you send your kids to. It’s also things like cell phone plans, TV streaming services, etc. These are part of the service economy and make up a large chunk of where people spend money vs. buying tangible goods.