Yes, I am entitling a post after a boring logic error, but fear not, that boring logical error has some pretty interesting implications. For example, how often have you heard that we are destroying America by moving from a manufacturing to service economy? Part of this argument comes from theories such as those put forward in "Bad Money" by Kevin Phillips. His thesis, that Spain in the 16th century, or Britain in the 19th, was destroyed by "financializing" of the economy, which is at the heart of this argument, is actually a perfect example of this. And this leads to other foolish arguments, such as theories about cabals of bankers (or maybe Jews) scheming to cause such destruction.

The truth is, such "financializing" has four roots, and two of those roots are the actual causes of societal decay. In other words, it is not the decline of manufacturing which destroys an economy (otherwise Switzerland would have long ago collapsed), rather the same pressures which destroy the economy of a state also tends to cause a decline in manufacturing and a growth of the financial and services sector.

The first two causes of growing services are harmless, though Phillips argues otherwise. First, when an economy grows to become the preeminent economy in a given period, it tends to attract investors from other nations, just as the biggest industries tend to attract investment. At the same time, successful economies also generate surplus wealth at home.With all this excess money looking for an outlet, it is inevitable a vast investment infrastructure would grow up, without such an infrastructure, such money would simply languish, the infrastructure does not detract from manufacturing, it is necessary for the growth of manufacturing, and other segments of the economy¹.

A second harmless factor is a change in needs. As the country grows in wealth, the more immediate needs, food, shelter, clothing, tend to be satisfied, and as it grows more, they are pretty well satisfied in trading partners as well. This leaves less avenue to sell the proceeds of agriculture and manufacture, and so money flows into "services", that is entertainment, medicine, investment, research, and elsewhere. Just as wealth allows economies to abandon agriculture for manufacturing², more wealth means money can flow from manufacturing to services. That is not a sign of weakness but of strength, of fully satisfied physical needs and the ability to indulge in other pursuits.

Which brings us to the two reasons for an expanding financial/services sector which are signs of decay.

First, we have the rise of an urban proletariat, for lack of a better name. With a huge mass of voters packed into relatively compact urban areas, the power of populist rabble rousers is unprecedented. To some degree it depends on how political systems are organized (eg. the British practice of assigning seats to individual cities amplified this, while the US system of representation by states meant that rural interests could counter-balance this to some degree, until urban population weight eventually moved congressional weight to largely urban states such as New York, Michigan, Maryland, Connecticut, Ohio, and so on.) With the rise of urban rabble rousers there arose movements which, in modern times, would be called "unions". These political movements, by favoring the interests of workers, tended to make manufacturing more costly. As a result, manufacturing would move out of country, to lands where there were nearly as educated workers, nearly as great a reserve of capital, but fewer such laws. (Eventually migrating ever farther afield as "progressive" ideas gain popularity in neighboring nations.) With less manufacturing, money would need a new outlet, and so the financial and service sectors would grow. In addition, with the needs of sending capital overseas, the transportation sector would expand, along with the services related to moving money overseas and importing and exporting goods. Overall, such laws would lead to a shift form manufacturing to transport and services³.

And that brings us to the final change. With the growth of urban labor movements there is often a similar move toward interventionism. This can take many forms. Sometimes the form of social services, either at the request of labor, or by the elite to pacify labor⁴, sometimes it takes the form of protectionism, usually to pacify agricultural and trading interests, and many times it takes various forms as wealthy interests lobby for government laws to protect their positions, enacting laws they, rightly or wrongly, imagine will advance their interests. The US avoided this for a time, mainly due to the restrictions written into the constitution, but even before those broke down in 1890⁵, the various states had long been taken over by reform movements, labor, and populist politicians. Other nations fared even less well, lacking these protections.

Once the government begins to meddle in industry and commerce it becomes more costly to open new firms, and so money builds up and looks for new outlets. That in itself leads to a growth of the financial sector. But that is not all. The intervention itself leads to increasing inefficiency and regulation, all of which calls for specialists to work around such regulations. In addition, there arise other experts, those who help new firms get through the growing byzantine regulations, those who help existing firms take advantage of the laws, and lobbyists and others who try to bend the laws to suit various needs. And then there is the growing cadre of lawyers who arise whenever the government expands. And so, once again, we see a decline in ventures designed to produce anything, good or service, and a rise of services designed to do nothing but work around the government.

All of which brings me back to my original point. Yes, in the cases he mentions the growth of the financial services sector, and the decline of manufacturing, preceded a collapse, but that does not mean there was a causal relationship. In these cases both the decline in manufacturing and the eventual collapse had a singular cause. In addition, there are, as I showed in the first two examples, reasons that we could have a growing services sector and yet have a perfectly healthy economy and state.

So, the conclusion is obvious. Yes, many times something happens after something else. it may happen more than once, but as I argued in "Correlation versus Causation", "Correlation and Causation Revisted", "Violence and Culture", "Bad Logic" and "Law or Choice?" that in no way proves the two were cause and effect.

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1. This is a good example of the "waste" of capitalism which actually serves an essential purpose. The infrastructure supporting investment looks to some like "dead weight", but without it, how would investment money be sent to the most productive avenues? The infrastructure's cost is less than the gains it bring. That is to be the subject of an upcoming post, so stay tuned.

2. The funny thing is the move to manufacturing was once itself decried. The theory was, by stealing jobs from agriculture it would leave states unable to feed themselves. No one thinks that today, but it was no more absurd than the present argument that service jobs, rather than manufacturing, will destroy our economy.

3. Modern environmental laws have a similar impact, but are due not to urban, industrial labor power bases, but intellectual, left-wing power bases, so I am ignoring them for the moment. In any case, they are not an inevitable outcome of industrial growth, but simply one specific possible outcome of an excessively wealthy, intellectual elite without close connections to or knowledge of manufacturing.

4. History is full of examples of both. For an elite example, there is probably no better than Bismarck's social security measures enacted almost entirely to silence the "progressive" opposition. For examples of the populist version, one need only look at the "war socialism" of England, or the Weimar Republic's many enactments.

5. See "The Best Historical Example".

6. See  "The Inevitability of Bureaucratic Management in Government Enterprises".

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POSTSCRIPT

I talked about the absurdity of fears of growing "service" sectors and declining manufacture in  "Jobs, Jobs, Jobs, and More Jobs", "Free Trade, Employment, Outsourcing, and Protectionism", ""Fair Trade"", "Small Business Fetish" and "Wrong on Every Point".

POSTSCRIPT II

The mention of Jews in the first paragraph in no way implies those fearing bankers are all antisemites. There are many who fear financial interests on completely different grounds. My only point was that this same argument is also used by many who manage to conflate "financiers" and "Jews" to create paranoid antisemitic theories out of these concepts.