Rediscovering that service is the true nature of exchange isn’t just clarifying, it reveals powerful levers for innovation. Value-in-exchange fits into this perspective.
What we’re thinking
Our world is one where we exchange service, not value. A bold statement, but this exchange is a natural consequence since:
- we are all trying to make progress with everything in our lives
- making progress requires the application of capabilities. (see definition of service (singular) here).
- capabilities are unevenly distributed across actors in the economy.
Differences in the magnitude and timing of direct service exchange between two actors – I help you if you help me – are mediated by service credits; of which money is a highly successful implementation, but blockchain, IOUs, rocks are equally feasible.
The exchange does not need to be equal, just equitable. That is, after the exchange completes both parties are happy they have received sufficient help to balance the effort they have provided.
However, direct service exchange is rarely observed in action. Rather, the nature of service exchange is often masked by one, or a combination, of four types of indirect exchange:
- transitive – direct exchanges can be separated into chains that not all parties need to be aware of
- distributable – service is frozen into goods that act as distribution mechanisms
- internal – organisations as resource integrators
- network – networks/ecosystems/service systems as resource integrators
The function of service credits expands to lubricate these indirect exchanges.
Why this matters
Judgements behind exchanging become related to perceptions of effort, coupled with progress potential/reached, rather than the harder to define notion of value.
Price becomes a signal of the effort a Helper requires in return service for applying their capabilities to help a Seeker progress. Where the exchange is transitive, the Seeker interprets price as how much effort do they need to provide elsewhere to get the service credits required.
Profit is not an ugly word under this view; it is simply additional service credits requested beyond those the Helper needs to cover its own effort (which might also include internal and network indirect exchanges).
Both parties need to feel the exchange is equitable, that is, after the exchange completes, both parties are happy with effort they have received. This leads to the notion of inequitable exchange progress hurdle. And further leads to business model innovation – for example subsidised or subscription models, etc – as an approach to minimise that hurdle.
We finally see that value-in-exchange, the traditional and seemingly observable type of exchange, is not an alternative to service being the fundamental basis of exchange. It is a combination of distributive and transitive indirect exchanges. Explaining why trying to treat services in the same way as goods is problematic.
When we treat service credits as operand resources, then we find services such as banking, loans, deferred payments arise.
beyond exchanging value
Our economies are seemingly built around value-in-exchange. Everyday we hand over money, which we see as having value, in exchange for goods that have value embedded within them. By nearly all measures, this has been a remarkably successful way of interpreting our economies as we pursued growth.
But this way of thinking has limitations, and those limitations are becoming increasingly significant as we continue to search for growth.
An alternative way of thinking is value-in-use, which recognises that value does not reside in a product (goods or services) but emerges only as that product is used. This shifts our attention from thinking of products as containers of value towards products as potential sources of it.
We might, therefore, conclude that what we exchange is money (that holds value) for the potential to create value. Yet this still leaves us with a problem: value is hard to define. As Grönroos observes “…value creation probably is among the most ill-defined and elusively used concepts in service marketing, and in management in general…” so such a perspective doesn’t really help us understand.
Moving from value-in-exchange to value-in-use changes where we look for value, but it does not resolve the more fundamental question of what we exchange.
A better starting point is to reconsider what a product actually represents.
The Progress Economy aligns with service-dominant logic on this point. Products are not the ultimate object of exchange; they are means through which service is made available. Service (singular) is – the application of capabilities in order to make progress. Goods provide one mechanism for distributing that service across time and space, allowing it to be accessed when and where it is needed.
This shifts our attention from the exchange of value to the exchange of service.
Exchanging Service
If service is what one actor provides, what does the other actor provide in return?
It cannot simply be money understood as a store of value, because that would reintroduce the very assumption we are questioning. We need to understand what money does within the exchange rather than assume that its value explains the exchange.
Vargo and Lusch’s service-dominant logic offers our starting point:
Service is the fundamental basis of exchange
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At its simplest: I perform a service for you and you perform one for me in return.
This leaves us with a question: what is money? We’ll build up to that in our discussion, and we’ll see that value-in-exchange is an instance of exchanging service!
Exchanging the application of capabilities
Why does service-dominant logic claim service is the fundamental basis of exchange? Its argument begins with two observations:
- people have two different types of operant resources (resources that can be applied to other resources): physical and mental skills; and
- that in any given population the distribution of those skills is unequal
Specialisation occurs, which then leads to exchange of those operant resources. Service becomes defined as “the application of competences for the benefit of another”.
The Progress Economy broadens the definition of service to be:
service (singular) is the application of capability to make progress
Our definition makes two deliberate changes. First, it uses capabilities rather than competences, recognising that the resources actors apply extend beyond skills and knowledge. Second, it makes progress explicit, providing a clearer account of the benefit that service seeks to achieve.
It also accommodates self-service. An actor can apply their own capabilities to make progress, or they can draw on capabilities made available by others. In practice, progress often involves both.
Driving economic activity
The Progress Economy asserts:
- we are all trying to make progress with everything in our lives
- making progress requires the application of capabilities
- capabilities are unevenly distributed across actors in the economy.
The uneven distribution of capabilities creates the conditions for exchange. Actors can help others make progress through the application of capabilities they possess, while obtaining access to capabilities they lack or would prefer not to apply themselves.
This is the underlying logic captured by service-dominant logic’s proposition that all economies are service economies.
All economies are service economies
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Every actor is seeking to make progress with every aspect of their life
Capabilities are unevenly distributed across actors in an economy
The Progress Economy makes that logic explicit by connecting service to the pursuit of progress and by identifying the uneven distribution of capabilities as the condition that makes exchange necessary.
We can now begin to explain how this exchange operates.
We start with its simplest form: direct exchange, in which two actors perform service for one another.
Direct exchange: the foundation
Direct exchange reflects the foundational view of service exchange: “I help you and in return you help me”.
However, the reciprocality of exchange may be deferred, or of different magnitude.
Service credits arise to mediate these differences. These credits can be held in actors heads, centrally registered, say on a common ledger, or transferred physically or digitally between actors.
Acceptance of magnitude differences indicates that actors look for equitable, not necessarily equal, exchanges. As long as both parties are happy with the effort offered in exchange, then they are likely to proceed. This is the basis of The Progress Economy’s inequitable exchange progress hurdle.
Direct exchange is rarely observed
I can, though, hear and understand your protest. We don’t really live in a world where we have to find someone that both i) has the capability we’re lacking and ii) is lacking the capability that we have.
Service-dominant logic tells us that whilst service is the fundamental basis of exchange, it is masked by indirect exchange. That is, the exchange of service is there, it just is not directly observable. There are 4 types of indirect exchange:
- transitive – exchanges can be separated into a chain of exchanges that not all parties need to be aware of
- distributable – where service is frozen into goods that act as a distribution mechanisms
- internal – organisations as resource integrators
- network – networks/ecosystems/service systems as resource integrators
And it is our friend – service credits – whose role expands to lubricate these indirect exchanges.
where value-in-exchange emerges
This way of thinking – direct service exchange being masked by indirect exchange and mediated and lubricated by service credits – reveals that there is no fundamental battle between value-in-use and value-in-exchange. The apparent contradiction arises because goods-dominant thinking mistakes the mechanism through which an exchange is conducted for the nature of what is being exchanged.
Value-in-exchange is the bedrock of our goods-dominant economic thinking. We observe a Seeker purchasing a goods and conclude that value has been exchanged for money. But what we are really observing is service exchange masked by two forms of indirect exchange:
- Distributive indirect exchange: The Helper freezes service into a goods, allowing it to be distributed to when and where the Seeker needs it. The Seeker will unfreeze the service through resource integration.
- Transitive indirect exchange: The Seeker transfers service credits, in the form of money, to the Helper. Thosecredits the Seeker has obtained by other transitive exchanges when providing their service to other Seekers.
Together, these mechanisms explain why the purchase of a good appears to involve an exchange of value.
What appears to be an exchange of value for goods is, at a deeper level, an exchange of service mediated by goods and service credits. Value-in-use and value-in-exchange are therefore not competing explanations of economic activity. They are observations of different aspects of a system in which actors exchange service to help one another make progress.
Explaining other phenomena
Beyond explaining value-in-exchange, our mechanism readily explains other phenomena. We are not describing a barter economy, but a deeper insight into economics as we know it that also opens our eyes to business model innovation.
Price is a signal of effort expected in return for performing a service. A Seeker looking to make a transitive indirect exchange sees price as the effort they need to expend giving service in order to get sufficient service credits to exchange for the service they want. As such, price becomes part of the phenomenological decision a Seeker makes when engaging a Helper’s proposition (he other factors relate to progress hurdles and judgements of anticipated progress).
A Helper can use any of the normal methods of arriving at a price. Typically it is the .the sum of all non-Seeker effort required to provide the service, ie the “costs”. Profit is not a problematic issue. It is silly explained as additional service credits requested above the costs.
Talking about price in terms of effort opens the door to business model innovation. Reducing the effort a Seeker feels they need to exchange for help is psychological. The service credits for a service can come from other parties than just the Seeker. An advertiser may offer service credits to the Helper to subsidise the Seeker. Subscription models reduce the effort a Seeker needs to perform at each renewal point.
Above all, the exchange needs to be equitable, not necessarily equal. This comes from our discussion of direct exchange and the challenge of comparing different types of effort. At the end of the exchange, both parties need to feel they have received, directly or indirectly, equitable effort to help them make the progress they were Seeking. This leads to the inequitable exchange progress hurdle where a Seeker may judge the effort requested as too high compared to the effort they will receive in help to progress.
Finally, ever innovative as humans are, banking, loans, deferred payments, interest, shares, dividends, etc, are examples of derivative service credit services. All explainable as indirect exchanges using service credits as operand resources.
Let’s progress together through discussion…