A recurring theme in economics is the division of economic output into two major categories: products and services. The distinction goes back to Adam Smith, who described it in The Wealth of Nations (1776). Since then, economists have distinguished between products and services in terms of the characteristics of the various components of demand and supply. In this article, I will look at this distinction in more detail – what does it really mean in the 21st century? I’ll then make the case why products are generally superior to services in an economic sense, all else being equal.

What is a product?

The definition of product is roughly: an artifact that has been created to satisfy a want or need. This definition has two key components: creation and want-satisfaction. Let’s explore these two components in more detail (I’ll do my best to summarize what I learnt in Econ while stuck in my room):

Creation

A product is something that has been created. This is in contrast to a service, which is something that has not been created, but rather provided over time to a customer. In other words, a product is a resource you can have ownership of. A service is not something you have ownership over, it’s something provided to you, or done for you.

To illustrate the difference, consider the example of a movie. A movie is a product. You buy a movie on DVD or Blu-Ray. When you watch the movie, you consume the product. Once you’ve watched it, the product is not gone. You own it, so you can go back and watch it again.

In contrast, consider a haircut. A haircut is a service because you don’t really buy a haircut and keep it. Rather, you pay someone to cut your hair. You can keep coming back and paying the hairdresser to give you a haircut. The haircut is repeatable, rather than owned, because the hairdresser is doing something for you over and over again. It’s a service.

Want-satisfaction

The second key characteristic of a product is that it satisfies a want. This can also be the case with a service, which can also be purchased in order to satisfy a want.

To illustrate this, let’s return to the example of a movie. When you watch a movie, you are satisfying a want – you want to be entertained by watching the movie. Maybe you want to forget about your problems for a while. That’s definitely a want being fulfilled.

In contrast, consider a medical exam. When you visit the doctor, you are receiving a service. You are receiving help from the doctor. You may visit the doctor because your employer requires you to do so. You are being forced to visit the doctor. Even still, this satisfies a want: you want to do whatever it takes to keep your job, so your want is being satisfied.

Products Versus Services: The Limitations of Services

Service providers are reliant on the ongoing cooperation of their customers and employees. This is in contrast to product producers of products who may be able to continue trading without putting in their time directly to deliver a service.

Consider the example of a lawyer. A lawyer provides services to a customer. The customer pays the lawyer money. The lawyer then provides the service – she helps the customer. The customer may not like the service, but they have little choice if they want the service. The lawyer will not continue to provide the service unless the customer pays the lawyer.

In contrast, consider the example of a software developer. The software developer creates a software product. The customer pays the software developer money. The software developer then provides the product without any additional time spent.

This asymmetry is the key differentiator between products and services. When dealing with products, the product producer has the upper hand over the service provider, in terms of time investment.

The asymmetry is further amplified when you consider the fact that products are superior to services in many other dimensions:

Performance and Measurability

Products are almost always superior to services when it comes to performance. A service provider provides less leverage, because the provider is providing a service that must be performed to the same standard, every time, with the same effort. She is doing something over and over again. In contrast, a product provider delivers a certain level of performance that is inherent to the product. You can measure the performance of a product more easily than measuring the performance of a service.

Reliability

Products are arguably superior to services on reliability. A service provider cannot be relied upon to provide a service the same way every time. This is because the service is provided over and over again, and human effort is often needed in a particular way, which (as we know) is not the most reliable thing in nature. A product is not provided over and over again, different each time. It is usually designed one, and produced repeatedly. The product is usually guaranteed, assuming there is a quality checking process that has been established.

Accessibility

Products are generally more accessible to more people than services since they are mass producible. A service is only accessible to the person who is receiving the service. A product is accessible to everyone. For example, a medical exam is accessible to a limited number of people, but everyone can buy a thermometer. That’s not to say that the service is not valuable. On the contrary! To illustrate this, imagine if I were to have a car accident on the Interstate 270. In that moment, I would gladly pay the cost of many hundreds of thermometers to pay for the service of car repair in Columbus, no doubt! Even if I invest a lot of money in a product (a reliable car) I will still need highly valuable services to maintain it, and to repair it whenever it’s damaged. However, when it comes to accessibility, you can buy products almost anywhere, but a service is generally contained to one location, or repeated across many locations with some difficulty (as is the case in a franchise).

Western Economies are Too Reliant on Services

Which is the more important human need – tax accounting or food production? Obviously food production. But unfortunately, the more we focus on services, the less we are capable of producing the fundamental goods we need as a society.

In the 21st century, almost all of the economic growth in the United States is coming from the service industry. This is in contrast to the 20th century, when almost all of the economic growth in the United States was coming from the manufacturing industry.

The problem with the service industry is that it is highly dependent on human capital. If you have a highly skilled workforce, you can produce a large amount of services. If you don’t have a highly skilled workforce, you cannot. A workforce can be a fragile thing.

The service industry is also highly dependent on the willingness of the customer to pay money. The service industry is highly customer-centric, in the sense that the service provider needs to focus on meeting the needs of the customer. If the customer doesn’t buy the service, the service provider goes out of business.

The manufacturing industry, in contrast, is only dependent on the willingness of the customer to buy the product. The service industry needs to focus on meeting the needs of the customer. The manufacturing industry has a little more elasticity.

Also, from a macroeconomic standpoint, products drive core capabilities that the United States needs – like manufacturing and food production. If you don’t use it, you lose it – and there are plenty of strategic adversaries to take up the slack.

Conclusion

Obviously, any advanced economy needs both products and services. But we need to be careful not to swing the pendulum too far, by outsourcing production to other nations, and accidentally find ourselves only able to provide services. I believe as an asset class, companies that produce products have the upper hand, and nations that manufacture are strategically more powerful. I hope this has been a useful discussion and made you think more deeply about the seemingly simple distinction between products and services!