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Does India Prove 'Service' Economies Can't Create Wealth?

Sep 8, 2016


BUENOS AIRES, Argentina - In the Northern Hemisphere, the warm days are becoming less warm and less frequent.

Chilly winds blow, and the wishful thinking falls like leaves off a tree.

Always an Adventure

We'll come back to that in a moment, but first, we take a comment from a reader in response to our recent reports of the 'Originario War' on our ranch in northwestern Argentina:

  • Bill, quite frankly I'm surprised at you. You of all people should have realized that we cannot hide from those who wish to take what they cannot earn or create from those of us who have succeeded in life. We're simply outnumbered. Your choice of Argentina to establish your safe house I suspect was one of the biggest mistakes of your life.

Oh, no... We've made much bigger mistakes!

Besides, we don't regret buying the ranch. It was always meant to be an adventure and a learning exercise. In that sense, it hasn't let us down. We even got more than we bargained for.

Besides, there's something exhilarating about being at war without being killed. We're fighting man and nature down there. Probably, we'll be beaten by both of them. But we want to see how it will turn out.

If we can just prevent the government from taking a big part of the ranch in the next couple of years, time will probably work in our favor.

What the originarios are demanding isn't worth much - to anyone. That will become clearer with time. And the new government, under businessman Mauricio Macri, is not supporting them the way it did under the populist Cristina Kirchner regime.

Most likely, the agitators will get tired of the struggle...or need to get real jobs. That would leave us with only an economic problem. And we're working on that.

The high pasture gets a lot of water in the rainy season. It rushes down the valley and is soon gone. If it could be captured, it might allow us to water more alfalfa. The trouble is, the pasture is so high in the mountains, we can't get equipment up there.

'It's too dangerous,' said our old ranch foreman, Jorge, when we posed the question.

'The backhoe could do the work. But the road around the cliffs is not wide enough. And it's not solid enough. [It's a footpath originally built by the Incas.] If the machine goes over the edge, we lose the backhoe and the driver.'

'Don't worry,' we replied. 'I wouldn't ask anybody to drive it up. But I might drive it up myself.'

We rode up by horse on Sunday to check it out. The road looked dangerous. But with some work in places, it might be passable. So, we asked a hydrologist to go up and check out the possibilities.

The other ace up our sleeve we have is you...

Yes, dear reader, we're going to make a proposition. Well worth your while - promise.

Stay tuned...

Abrupt Drop

But let's turn back to our regular beat: the US economy and its capital markets.

We've been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least.

Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming.

But each time, it turns out that the economy is not as robust as she had believed...and that a rate hike isn't such a good idea after all.

Mainstream economists regularly dismiss worries about falling employment and output in the manufacturing sector.

'Don't fret about it,' they say. 'We have a robust service economy.'

Well, yesterday, the news came out that the service economy is not as robust as we thought. Bloomberg:

  • An abrupt drop in the Institute for Supply Management's services gauge on Tuesday to a six-year low is the latest in a string of unexpectedly weak data for August.

Besides, the promise of a 'service' economy has always been a fraud. We can't all get rich by mowing each other's lawns and parking each other's cars!

You can make money by offering services, but only if there is someone who can pay for them. And you can only pay for services if you are doing something that generates real wealth.

Wealth Drain

Just look at India...

It has over half a billion people willing to do just about anything for peanuts.

Services? You can get all you want. But that doesn't make India a wealthy country.

Services are better thought of as a drain on wealth, not a way of building it.

Let's say you want to go out to the movies. Instead of watching your children yourself, you hire a teenager from the neighbourhood.

You pay, say, $20 for the evening. This results in an increase to the nation's service industry income of $20. And you had the benefit of the service.

You had $20. Now, someone else has the 20 bucks. Where's the additional wealth?

Manufacturing, on the other hand, creates wealth. You take $20,000 worth of labour and materials. You put together an automobile and sell it for $25,000. The automobile is worth $5,000 more than what it cost to build it. You are $5,000 richer.

But wait... You will say that someone must be out $5,000. But that isn't true. He had $25,000 worth of cash. Now, he has $25,000 worth of automobile. He's even; the world is $5,000 richer.

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Crack and Snapchat

Readers will be quick to point out how Silicon Valley has added to the real wealth of the nation with its many services and innovations.

Social media companies alone are said to be worth $500 billion - evidence of how much wealth they are bringing to the world.

And it's true - some are useful for improving productivity. They speed the output of real wealth.

But even profitable innovations can destroy wealth as well as create it. Crack cocaine and television, for example, have probably cost the nation a trillion dollars of real output. Are Facebook and Snapchat much different?

As in any other service industry, money passes from one person to another. But is wealth created? Or destroyed?

Check your children's smartphones, tablets, and laptops. Let us know what you find. Foolish, idle, insipid - most of what we see in social media is a waste of time.

And what about the internet? Was that just a summer delusion, too?


Since the internet took off, economic growth rates have been roughly cut in half. And the median American household income has fallen 20% when you account for real inflation, not the government's phony inflation figures.

What kind of service is that?

BILL BONNER Founder, Agora Inc

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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9 Responses to "Does India Prove 'Service' Economies Can't Create Wealth?"


Sep 10, 2016

Wealth is always there in the world but with time its distribution may change. Mining ore , processing and converting it into a product which is usable and desired by someone creates a value chain in which all get benefitted .The price of precious ore , the basic ingredient is relatively inexpensive ,since it is picked up from poorer nations who cannot afford to bargain. The flip side is the mining cavity which can cause ecological or other disasters about which we do not know or care not to know is left for the countries from where ore extracts were made. This is a mix of services and manufacturing . Taking this point further , in case manufacturing has declined in US or other countries , surely it has shifted to a newer country/countries . This has shifted the wealth created by manufacturing from one part of the world to another . In case incomes have declined in US ' due to 'phoney 'money / globalisation ,surely the incomes of people have increased in other parts of the world. Similarly the US has attracted the best available talent from the world when young people leave their countries and settle elsewhere. The benefit of their talent ,innovations and ideas are reaped by the newer countries where this talent flourishes.
As highlighted as a theme that U S economy is going down , Brazil , China , Russia are also loosing economical steam and India is a shining star with high growth then surely something is wrong . The US dollar continues to strengthen against the Indian rupee where as logic says it should be other way round. Obviously the dollar as a preferred currency is still gaining ground as there is a demand for it rather than the rupee in these uncertain times.



Sep 9, 2016

Hi. I don't agree with the view that services don't create wealth. Take the case of a restaurant - they buy raw materials (agro-products), use fuel and energy, pay salaries and give out a product (food) which generates wealth. In essence, it is very similar to manufacturing.
Even a hair salon - consumes electricity, raw materials (scissors, hair styling products) and renders a service for which they charge.
And look at lawyers and doctors. They "consume" education (by way of payment of fees) and "produce" services.


chandra sekhar gupta boggarapu

Sep 9, 2016

India is one of those rare countries in the world that is blessed with all right resources. India has lots of sunshine, abundant supply of sweet/potable water, fertile lands and intelligent, hardworking people. If India is still a poor country, in spite of all these resources, even after 70 years, it speaks volumes about Indian leadership. Coming to 'services', India definitely benefited. Without those software exports and remittances from expatriates India would have been more poor, much more.

chandra sekhar gupta boggarapu

Like (1)

Nitin Gregory

Sep 9, 2016

Interesting take..

Like (1)


Sep 8, 2016

In manufacturing, labor and material cost are being factored in, plus a margin and thus creation of wealth.
Similarly I could look at services where material cost is almost nil and all you have is labor cost. Labor cost which can be extremely cheap or way too expensive depending on the quality. Can we not look at it as creating money out of nothing?

Like (1)


Sep 8, 2016

I salute Bill Boner's resolute determination and positive out look about his Ranch.I like his vision,attitude,about out come of situation.
I can see, his success. Incas are live for him. I pray for your success,Bill
Best wishes

Like (1)


Sep 8, 2016

All the economies of the world has grown from agriculture to industrial to service economy. India is the first country that wants to go directly from agriculture to service economy. IIP numbers were negative for very long time. But, nobody cares!!

Like (1)

akshaya pandey

Sep 8, 2016

Your logic regarding services not creating wealth and manufacturing does is flawed.
Its the export of good and services by nations which creates wealth for the nation.
Also, its the relative advantage in production of goods and services which enables things like trade, export etc to flourish and make everyone better off.

Like (1)


Sep 8, 2016

Bill, The argument that $ 20 paid for the person who looked after your child when you went for a Movie didn't create wealth, while an Automobile that costs $20,000 to put to gather when sold at $25000 makes wealth is incorrect comparison. If I pay $20 to someone to take care of my child for 2 hours and in that time I don't watch a movie but cut a sales deal which earns me a commission of say $500; I have done infinitely better than the gang making the Automobile? The apt comparison, if you insist that I went to movie only and not to close a sales deal, will be only if the Automobile in question is a secondary sale- in that case there is no wealth added- which make the two situations even stevens... not in the way you have compared ??

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