Why does our service economy offer such bad service?

How do you get a call centre to do anything for you that involves change, or taking responsibility? Robert Skidelsky and Nan Craig on the downsides of our overdependence on a service economy.

Britain is a service economy with a lot of lousy services. The paradox is easily explainable. Service and cost-cutting are contradictions in terms. Good services are intrinsically expensive because they require a high ratio of labour to product; hence the old view that services could not be automated. Yet the main aim of those who run our service economy is to cut the costs represented by human labour as much and as fast as they can.
 
The view that services are automationproof has been disproved. Think of the labour-saving devices in the home – vacuum cleaners, washing machines, dishwashers – that have reduced the burden of domestic drudgery and created leisure time that in the past only the rich enjoyed. Think of cash dispensers, of online shopping. In all these cases, machines provide the services that people once did – and usually more conveniently.
 
On the other hand, think of call centres, which offer services according to automated formulae. In this case, it is not that people are being replaced by machines but that they are being programmed to act like machines. This enables them to process a greater number of calls per unit of time.
 
Recently, NHS Direct announced that it will pull out of contracts to deliver the new NHS 111 helpline. The details are complicated but the gist is that contracts to run the helpline have been awarded by competitive tender, with bidders offering the service at the lowest cost. Cost reduction is secured by reducing the number of doctors and nurses per operator, with operators relying on callcentre scripts and algorithms to process calls: exactly the opposite of what most people think of as a good service. Andy Burnham, the shadow health secretary, has spoken of nurses being replaced by computers and of an urgent need “to get more clinicians back in the front line handling calls”. He is right.
 
Try changing your mobile telephone provider, reporting a lost credit card or making almost any attempt to contact your bank, and you are likely to enter a Kafkaesque world of customer frustration. The recent attempt by our office to upgrade a phone package is a case in point. We were moved back and forth between the old supplier, the new supplier and the delivery service, none of which seemed to have the faintest idea what the others were doing.
 
What distinguishes services that can be automated successfully from those that can’t? The answer is the nature of the need: the less complicated the need, the more efficiently it can be satisfied without human intervention. The economist William Baumol identified services that resisted commodification, for whichthe human touch was essential and quality was correlated with the amount of human labour dedicated to their production. He gave the performing arts as an example, but the analysis can be extended to such services as teaching and medical care.
 
Amazon, for instance, works well when it allows people to order, quickly and conveniently, an item that they already want. Its recommendation system, however, is based on algorithms rather than the knowledge and intuition of a good bookseller. That is why bestsellers sell more and everything else sells less. Automated services fit and thereby create products that can be standardised, because an automated system can’t cope with anything else.
 
In the rich countries of the west – in some more than others – personal service has fallen victim to a kind of Fordism or its successor, scientific management, which dissects tasks into tiny individual units. Scientific management, developed by the American mechanical engineer Frederick Winslow Taylor in the late 19th century, is the foundation of modern techniques such as the use of strict call-centre scripts, which aim to create algorithms that automate the human element of work as much as possible.
 
Adam Smith foresaw this development in manufacturing 250 years ago.He gave the example of the pin factory, in which “the important business of making a pin is . . . divided into about 18 distinct operations, which, in some manufactories, are all performed by distinct hands”. The result of this “division of labour” was a tremendous increase in the productivity of the factory.
 
Cost-cutting in services proceeds by a false analogy with the pin factory. In all services that can be automated, part of every process is delegated to a team that inhabits a separate silo. No team is able to carry out more than its tiny element of the process; as a result, from the first moment you contact a company, you have to choose which team to talk to (“Press one if you are a business customer; press two if you are a personal customer; press three if you wish you were dead”).
 
Then, if you have a query that is even slightly complicated, at least the first three people you speak to will probably not be able to help. No one has an overview of how the whole thing works and no one has any power to cut through the undergrowth, because each person is in control of only a tiny patch of the service. As no one person or team knows what anyone else does or who any of the customers is, all information has to be stored centrally; if something is “not in the system” or if the system has broken down, it’s a dead end.
 
As the call-centre worker has never met you before, he or she will have little sympathy and no relationship to draw on; because they will almost certainly never speak to you again, there is no incentive for them to be helpful if your problem can’t be fixed within the formula. From their perspective, they are having to deal with customers who are irate because of events that the service provider has no control over and no responsibility for.
 
As ever, there are people with a sense of service, but whose hands are tied by the architecture of the system that they inhabit. There are also, inevitably, a few people who hate customers and are terrible at their job. They suit the system well because they are never required to be innovatively helpful and, if something goes beyond their remit, they can happily transfer you to someone else or simply tell you that what you want is impossible and ring off.
 
Eventually, someone at one of the call centres we contacted in our efforts to upgrade our telephone agreed that the system does not work very well. He sounded unhappy about it but said, “That’s the way the world works.” He is almost right. That is now how much of the world works. It hasn’t worked this way for long but it is no longer possible to imagine a world in which contacting any large company by telephone would not involve speaking to a different person every time you called.
 
No one is made happier by the system except, perhaps, the owners of the cost-cutting companies, who can pay for properly personal services for themselves out of hugely enhanced profits. As the cost of idiosyncracy rises, what used to be thought of as personal services can be afforded only by the rich. The so-called concierge services make a great play of being adapted to individual requirements. Yet, like the “bespoke” tailors of old, they mainly serve the rich. If you have £100,000 on deposit, your bank gives you a “premium account manager”; if you don’t, you go through the call-centre system.
 
Beyond the nightmare for the consumer is the nightmare for the producer. Smith rightly understood that the division of labour, though good for productivity, was degrading for the worker. The effect on the “hands” of knowing nothing about the manufacture of pins except what was required for their specific tasks was, he said, to make them “as stupid and ignorant as it is possible for a human creature to become”.
 
The same deskilling effect operates in the service economy. It has been suggested that part of the problem with call centres is that the people who staff them are uneducated and badly trained. However, the problem is that the system in which they work prevents them from taking responsibility for their products. Taking away the ability of a callcentre worker to help people doesn’t just frustrate the caller but destroys the satisfaction that comes from solving someone’s problem. It’s the deprivation of this satisfaction that makes the work of the operator both boring and emotionally stressful, rather than something that has an intrinsic motivation. The call-centre operator is a contemporary example of the artisan deprived of the pleasure of workmanship.
 
There is an even more dire implication. If profit maximisation requires human beings with machine-like qualities, why not get rid of the people altogether? Machines don’t need wages. Call centres, like factories, will soon be staffed entirely by machines; all checkout services at supermarkets will also be done by machines; the specialist knowledge of taxi drivers will be replaced by satnav; there will eventually be driverless cars. Machines will “talk” to each other. Except for a few specialists to make and fine-tune the machines and others to meet the continued demand of the wealthy for personal services, the human race will no longer be required for work. It will have to find something else to do.
 
Robert Skidelsky is a cross-bench peer and emeritus professor of political economy at the University of Warwick Nan Craig is the publications director of the Centre for Global Studies.
Artwork by Nick Hayes.

This article first appeared in the 26 August 2013 issue of the New Statesman, How the dream died

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?