Thinking about manufacturing and services

One of the ongoing themes of my work has been the restructuring of the economy including the fusion of manufacturing and services. I have long argued that these categories are not useful in helping to understand economic activity. There are some cases where the categories are clear. For example, haircuts are clearly a service. But increasingly the boundaries are fuzzy. So-called manufacturing companies are more and more selling their products as a service and service activities are an increasing part of value-added.

And sometimes, services want to be seen as manufacturers. A story in today’s New York Times on the public-private revolving door for tax lawyers and accountants reminded me of how far and how creatively services can be considered “manufacturing.” Before it was repealed in 2017, Section 199 of the tax code provided a tax deduction for “domestic production” aka manufacturing. While revenues from retail food preparation were explicitly not allowed to take the deduction, creative interpretations of “production” were accepted including the notorious cheesecake-slicing-as-production claim mentioned in the Times story. And there was a florist who claimed the manufacturing deduction as they were using individual flowers to produce bouquets.

Interestingly, the law specifically included engineering and architectural services as qualifying activities. I assume these services were seen as important adjuncts to construction (itself a qualifying production activity).

I should note that the opposite classification of construction as services or manufacturing is used by the Institute of Supply Managers, which includes construction in its services index. I suspect that this is a legacy of the original formulation of this as the index of non-manufacturing, as opposed to their index of manufacturing (see earlier posting).

These stories about manufacturing versus services should give us pause. Admittedly, the cheesecake example is somewhat silly (of course not to those who got the tax break). But if assembling a car from various parts is considered manufacturing, isn’t assembling a bouquet from various parts also? If testing a computer chip is considered part of the manufacturing process, what about chip design services? And then there is the thorny question of these activities being carried out by outside firms (considered a service) rather than in-house (considered part of manufacturing).

We need a serious effort to rethink how we envision the economy. Part of that is embracing the idea of making value as opposed to making things (see earlier posting). But it also includes restructuring our industrial categories – possibly around types of end output (e.g., food, shelter, transportation, health, entertainment, etc.). All of the recent discussions about supply chains indicates how interconnected economic activities are and how these activities cluster into groups.

I’m not smart enough to come up with the best framework. I hope someone is. Otherwise, we will continue to make economic policy based on a view that is clearly out of date.

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