Is Manufacturing more Productive than Services?
In an inspiring lecture at 美国哥伦比亚大学商学院 , we were challenged by Pr. Medini Singh , to answer to the question: "In your opinion, where productivity is the higher: In Manufacturing or Services?" There was no unanimous answer. And I was of those who supported that services have more productivity than manufacturing.
I opted for this answer, thinking about all valuable companies that are operating in service sector.
At my big surprise, Pr. Medini, stated the opposite: Manufacturing is indeed more productive.
At the moment , I had difficulty to make sense of it. But after thinking in a deeper way, i came to the conclusion, that both answers could be right depending on how we define productivity:
Traditionally, productivity has focused on output per unit of input, a measure that works well in manufacturing where products are tangible and easy to count. However, this classic definition fails to capture the full scope of productivity in services, where value is often created through customer experience, problem-solving, and satisfaction.
To compare manufacturing and services meaningfully, we must expand productivity to include value creation—an approach that recognizes the impact and benefits services provide over time.
In this article, I will try to examine why manufacturing has historically excelled in productivity, how value creation is transforming our view of services, and what the future may hold for the balance between these two sectors.
What is Porductivity?
In traditional terms, productivity measures efficiency by calculating output relative to input, typically labor or capital. This approach is straightforward in manufacturing: if a factory produces 100 units per hour and increases that to 120 with the same resources, productivity has clearly risen. Manufacturing productivity is often driven by automation, standardization, and economies of scale.
However, this definition is insufficient for services, where productivity may be intangible and dependent on quality and customer outcomes. A financial advisor’s productivity, for instance, isn’t just about the number of clients served, but the effectiveness of the advice given. To assess service productivity meaningfully, we need to incorporate value added—the unique benefits a service creates beyond what traditional metrics can capture. This expanded view allows us to compare manufacturing and services on more equal terms.
Why Pr. Medini is right?
Why my answer was not "completely" stupid?
To evaluate productivity in services, we must include value creation, a broader metric that considers the benefits, satisfaction, and long-term impact services deliver. Services often excel in creating value through knowledge, customer-centricity, and experiential impact rather than sheer volume.
Value Creation as a Measure of Service Productivity
By broadening productivity to include value creation, we gain a clearer understanding of the economic contributions of services. Rather than counting output alone, this approach assesses the experiential, intellectual, and social benefits that services provide. Economist Paul Krugman has emphasized how technology now enables service sectors to scale value creation in ways once thought impossible. For example, data analytics in healthcare allows for highly personalized patient care, creating outcomes that far exceed what traditional productivity metrics capture.
In The Rise of the Creative Class (2002), economist Richard Florida argues that today’s economy is driven by creativity, knowledge, and customer-centered service, which generate economic value beyond the physical production of goods. This expanded view of productivity recognizes that while manufacturing excels in output, services often lead in value creation by meeting customers’ needs in unique, innovative ways.
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Historical Shift from Manufacturing to Services
During the Industrial Revolution, manufacturing was the cornerstone of economic growth. The production of tangible goods became synonymous with productivity, creating wealth and transforming economies. Adam Smith viewed manufacturing as foundational to economic prosperity, arguing that wealth creation lay in the production of goods—a view that shaped economies worldwide through the 19th and early 20th centuries.
By the mid-20th century, however, economies began to shift. John Kenneth Galbraith noted in The New Industrial State (1967) that corporations were increasingly focusing on knowledge and management over physical production. This shift was further examined by Daniel Bell in The Coming of Post-Industrial Society (1973), where he predicted a new era where information and services, rather than goods, would drive value creation.
In the late 20th century, globalization and digital technology accelerated this shift. Economist Robert Lawrence observed that developed economies could focus on high-value services like finance and healthcare while offshoring manufacturing. Nobel laureate Paul Krugman emphasized that service sectors became increasingly productive, benefiting from technology and evolving to meet consumer demand.
Today, services make up over 80% of GDP in developed economies, with sectors like healthcare, finance, and technology leading innovation. Economist Richard Florida described this transition as a “creative economy,” where economic activity centers on knowledge, customization, and customer experience rather than goods production.
What’s Next? The Balance Between Manufacturing and Services
As we look to the future, the balance between manufacturing and services will likely become more interdependent and complementary. Manufacturing is evolving to meet the demands of a service-oriented economy, while services are adopting advanced technologies to scale and deliver more value.
Do We Risk Losing Manufacturing as More Capital Shifts to Services?
With the growing emphasis on services, there is a valid concern: could the economic focus on services come at the expense of manufacturing? While it’s true that capital investments have increasingly flowed toward services and technology, manufacturing remains essential. Advanced manufacturing underpins service sectors, supplying the technology, infrastructure, and consumer goods on which service industries depend.
The future likely holds not a displacement of manufacturing by services, but rather a convergence, where the two sectors reinforce each other. Manufacturing itself is becoming more service-oriented through models like servitization and Industry 4.0, blending production with customer-focused solutions and predictive maintenance. Services increasingly rely on the physical goods produced by manufacturing, and manufacturing gains efficiency from the logistical, analytical, and high-tech services that support it.
While services will continue to grow in economic importance, manufacturing will remain essential, evolving in ways that integrate it into the service-oriented economy. Rather than viewing the shift of capital toward services as a threat to manufacturing, it can be seen as an opportunity for manufacturing to adopt more adaptable, customer-centric, and sustainable practices. This convergence allows each sector to leverage the strengths of the other, with manufacturing providing the tangible goods and infrastructure that support service industries, and services enhancing manufacturing with data-driven insights, efficiency, and customer engagement.
As capital flows more heavily into services, it’s unlikely that manufacturing will disappear; instead, it will likely become increasingly high-tech and agile. The future economy will be characterized by a balance of sectors, where manufacturing continues to provide a foundation of goods and technology that underpins service-based models. This collaborative model promises a resilient economy that is both adaptable and capable of meeting the needs of a rapidly evolving global market, ensuring that productivity and value creation remain central drivers of sustainable growth.
Further Reading and Sources