
Baumol Effect - simonebrunozzi
https://en.wikipedia.org/wiki/Baumol%27s_cost_disease
======
anm89
"they pointed out that the same number of musicians is needed to play a
Beethoven string quartet today as was needed in the 19th century; the
productivity of classical music performance has not increased. On the other
hand, the real wages of musicians (as in all other professions) have increased
greatly since the 19th century"

This seems painfully naive to the point of farce. Do they really believe the
value of playing music is derived solely from the effort to produce it and not
from how many people consume it and under what circumstances it is consumed?

When I was an econ undergrad and I would hear absurdly naive logic like this I
always thought it was a sign that I didn't understand some complicated
underlying concept. But it's just nonsense. I still don't understand why
people don't call this obvious absurdity out.

~~~
LudwigNagasena
Did you dismiss physics for the same reason? A perfectly elastic ball rolling
down a frictionless plane, how absurd!

~~~
wazoox
In physics courses, it's pretty clear that perfect balls and frictionless
planes aren't actually real. OTOH, I recently had a debate with an economist
that nearly insulted me because I doubted that infinite GDP growth was
possible in a finite world; you "simply" need to infinitely enhance value of
goods and services, which is perfectly possible because it hasn't been proved
impossible. Plus it's taught in Econ 101, so how stupid should I be to doubt
such a little thing?

~~~
Firadeoclus
There is no known limit to GDP growth because GDP growth doesn't just depend
on an increase in material goods, and value judgments can change over time.
Thus it is theoretically possible that after a whole series of "this year is
better than last year" growth you end up exactly where you started as values
shift.

Edit: In any case, GDP growth shouldn't be a policy target.

~~~
dragonwriter
> Thus it is theoretically possible that after a whole series of "this year is
> better than last year" growth you end up exactly where you started as values
> shift.

Not really, since real GDP growth is measured in value relative to a like-
goods price index.

> In any case, GDP growth shouldn't be a policy target.

It shouldn't be the exclusive policy target, but it makes plenty of sense as
one positive factor in the big optimization function. _Ceteris paribus_ ,
output increases are desirable.

------
kieckerjan
My girlfriend works in healthcare. She complains a lot about stress at work.
Burned-out colleagues, unrealistic schedules, a rotten culture. As far as I
can judge from her stories, this has mainly to do with shitty management. Her
manager would not last two weeks at my company. My company can afford good
managers. Since managers are not tied to a sector (in the way nurses or
musicians are), the good ones tend to go where they are payed good money and
the bad ones end up wreaking havoc where they are payed at least some money.
That, also, is Baumol in action.

------
dang
Some related threads:

2017
[https://news.ycombinator.com/item?id=14284466](https://news.ycombinator.com/item?id=14284466)

2016
[https://news.ycombinator.com/item?id=11964673](https://news.ycombinator.com/item?id=11964673)

2009
[https://news.ycombinator.com/item?id=972082](https://news.ycombinator.com/item?id=972082)

------
devit
Isn't the premise that "real wage growth is closely tied to labor productivity
changes [of that particular job, in all cases]" just completely wrong in
itself?

If increased productivity (of everyone in a profession due to some new
technology) means less people are needed in a given profession, demand for
employees decreases and thus wages go DOWN along with product prices.

Also the "natural equilibrium state" for wages is for them to be all equal
regardless of profession because otherwise people would have trained for and
went to a more profitable career until wages are equalized, and this only
doesn't happen because people are not equal and changing careers is costly.

So the "Baumol cost disease" seems like a pretty reasonable observation
instead of being somehow paradoxical.

~~~
fnord123
I'm not an economist but I expect Jevon's paradox to make the cheaper
productivity result in increased consumption of the productivity. And that
seems to be what we see.

------
Lerc
The article makes for odd reading. The example of the productivity of
musicians seems both arguable and unnecessary. The principle could be better
described with a theoretical task.

As a hypothetical, There is a magic button in Australia that has to be pressed
by a human being once a minute or London explodes. They used to pay someone a
loaf of bread a day to press the button. Now they have to pay someone a real
income to do the same task.

I'm not entirely sure why the emotive term "cost disease" is used. The
principle essentially says when there is a competitive labour market You have
to pay more to get a person to do a job. You cannot exploit so easily.

Of course They could just let London explode, or not have music. That people
choose not to would suggest that people value what they are getting,
suggesting that they were perhaps truly worth a lot more than they were being
paid for. Not a matter of cost increasing for a lack of productivity gain but
the cost approaching the real value when there is no exploitation artificially
keeping the price down.

~~~
mrfredward
Musicians are used instead of imaginary button pressers because this is a real
world effect.

Think about it this way...assume everyone is paid fairly for the value of
their work, no "exploitation" (although that's a tough thing to impartially
define). A factory worker who does 10% of the work in producing 1000 widgets
per day can enjoy a much higher standard of living than his grandfather who
made 5 widgets a day with hand tools. In fact, all else equal, his standard of
living could theoretically increase 20X, but in reality widget prices go down
and there is a factory owner taking a cut.

A doctor who still sees 10 patients a day, the same rate her grandfather saw,
will not have seen any increase in standard of living at all, unless she's
charging more per patient.

~~~
Lerc
The modern doctor is far more productive. She's healing 10 highly productive
units.

In fact I think that could generalise for all service based work. Providing a
service enables people to not have to do the thing themselves. As such the
productivity of the service can be considered a factor of the productivity of
the people they are providing the service for.

~~~
anonuser123456
The Baumol effect does not imply that the value of the doctor is not higher
today. It just means that on a per-unit basis physicians are not more
productive (and possibly less today thanks to EHR). A doctor can still only
see 1 patient every 15 minutes just like they could 50 years ago.

A BMW factory that produces 100 cars/day might be more valuable than a Toyota
factory producing 100 cars/day, but it wouldn't be more productive on a per
unit basis.

~~~
Lerc
That seems more like an argument to say that a per-unit measure of
productivity is meaningless than anything else.

------
paulsutter
The FANG effect in Silicon Valley, where salaries have skyrocketed over the
past 10 years, has nothing to do with current productivity and everything to
do with effective monopolies, whether due to network effects, or data, or
whatever gives each dominant company it's lead.

Google's core search/ads is hyperprofitable, not based productivity of the
current workers, but instead the accumulated R&D that created the great
product that it is today.

This hyperprofitabity means Google can pay high salaries to many thousands of
very talented people, most of whom are not working on core search/ads. Many of
whom seem to be "working from the bus" when you stop by Google at 4 in the
afternoon. One can speculate on the average productivity.

This high pay at Google (and Facebook and Apple) has raised the pay for all
talented developers even at early stage startups (where productivity is zero,
there's no product yet shipping to anyone. Like my company, please don't take
this as a dig against startups).

EDIT: Don't have a gripe, it's just an observation

~~~
rahimnathwani
"Google's core search/ads is hyperprofitable, which has nothing to do with
productivity of the current workers and everything to do with accumulated
spectacular R&D that created the amazing product that it is today."

Your gripe seems to be that the definition of labour productivity (output,
i.e. revenue, divided by the number of people) is flawed. Intuitively you are
correct, because a layperson wouldn't consider either of the following to be
true:

1) An engineer becomes 10x as productive when they move from an early stage
startup to a FAANG job.

2) A labourer doing job X in a company became twice as productive from one
week to the next, because 50% of his colleagues (doing job Y) were just fired
and replaced with machines.

I share the same dissatisfaction with the label (although it's a useful
measure, it's something different from how it sounds).

However, this dissatisfaction doesn't have any bearing on whether Baumol's
cost disease exists. As you say, it does.

If labour is the dominant cost for most companies in the economy, then labour
productivity is a natural thing to measure, and natural thing to optimise. If,
on the other hand, labour is a small proportion (e.g. due to automation,
monopoly/network effects, etc.) then it starts to look special, and more just
like any other input (e.g. electricity or copper).

------
taneq
It seems pretty obvious to me that jobs which show the Baumol Effect are ones
where the raw labour cost before inflation was dramatically below the value
produced for the end customer. For public-facing roles, this value (in
monetary terms) will also be driven up by the very effect that drives up the
salaries of those producing the value.

~~~
papln
Do you think live music has higher value than food, _even if food is in short
supply_? If you had only $10/day to spend, would you spend it on music or
food?

~~~
taneq
Of course not, we're talking about market values, not some mythical "real
value". Food isn't in short supply and in fact (in historical terms) is
unbelievably cheap. Meanwhile, technology and population growth mean that a
struggling amateur musician today has an audience dozens of times larger than
an average successful bard in the middle ages.

------
raverbashing
This is reposted with some frequency, but it is simply (a consequence of) the
fact that people need a base salary to live and that not everything can be
automated

You can't automate a "personalized" task (a medical examination, panting of a
building, a legal consultation, etc)

------
skybrian
There were some recent posts on Marginal Revolution about this:

[https://marginalrevolution.com/marginalrevolution/2019/05/th...](https://marginalrevolution.com/marginalrevolution/2019/05/the-
baumol-effect.html)

Also, Scott Alexander wrote a review of their book and a followup:

[https://slatestarcodex.com/2019/06/17/followup-on-the-
baumol...](https://slatestarcodex.com/2019/06/17/followup-on-the-baumol-
effect-thanks-o-baumol/)

------
orend
A short, sweet, free book about it

[https://www.mercatus.org/system/files/helland-
tabarrok_why-a...](https://www.mercatus.org/system/files/helland-tabarrok_why-
are-the-prices-so-damn-high_v1.pdf)

------
JamesBarney
I've seen a lot of recent analysis related to baumol effect. The analysis
usually looks into productivity gains, finds none then that declares baumol
cost disease. But I feel like this is incomplete. We need to know why we don't
see productivity gains. For instance the nature of live music is that it's
unscalable (excluding larger venues) but pharmacists can't be scaled due to
regulations. And a lot of the broad statistical measures that that I've seen
used to find baumol cost disease can't necessarily differentiate the two.

~~~
H8crilA
Isnt it usually about services? Like teachers or massage therapists or
barbers. There's a limit of how many people one of them can serve a day.

Shops (including pharmacies) have probably become more effective - look at
Amazon. A lot of shopping is online which is surely more productive (for
example - you can buy without driving there first).

The Economist had an article on the topic recently:
[https://www.economist.com/finance-and-
economics/2019/06/20/t...](https://www.economist.com/finance-and-
economics/2019/06/20/the-rising-cost-of-education-and-health-care-is-less-
troubling-than-believed)

~~~
JamesBarney
For pharmacies I was specifically talking about the the pharmacist which
technology can't make more effective because a law requires one to be on site

It seems they they mostly focus on healthcare and education. And while the
babysitting aspect of teaching can't be made more efficient the teaching
aspect can be. Flatiron for instance costs less than my Alma mater per
semester, and is teaching programming at 2-4x the rate I learned in undergrad.

I don't think there is any reason other undergrad/grad programs can't be made
similarly more efficient.

And healthcare is obviously an ocean of waste and inefficiency.

------
lamby
Speaking of Beethoven string quartets, Michael Steinberg once wrote the
following regarding a section from the Vivace of his late Op. 135 quartet in
in F:

> Then it is time for Beethoven to turn to one of his favourite tricks, the
> one where he simply picks up an idea boldly and puts it down again on
> another pitch the way you might pick up your cat and move it from your
> favourite chair to another.

I am fully in favour of this feline-oriented musical interpretation.

------
perfmode
> Baumol and Bowen pointed out that the same number of musicians is needed to
> play a Beethoven string quartet today as was needed in the 19th century; the
> productivity of classical music performance has not increased.

it’s kind of odd to consider a performance more productive if it can be done
with fewer people. what if productivity is being able to entertain more people
with the same number of performers?

~~~
legoto
Actually, I can 'play' a Beethoven string quartet from my phone by myself. So
technically classical music performance productivity, in the loosest
definition possible, has increased. Of course, as you mentioned, that could be
considered an arbitrary metric.

~~~
papln
Your phone/home speakers can't replicate a live orchestra.

------
legulere
Another view on this is Labour Value Theory. Probably the reality is somewhere
between supply and demand and Labour value.

[https://en.m.wikipedia.org/wiki/Labor_theory_of_value](https://en.m.wikipedia.org/wiki/Labor_theory_of_value)

------
carusooneliner
How Baumol got the insight, from his obituary in the WSJ
([https://www.wsj.com/articles/baumol-diagnosed-the-disease-
of...](https://www.wsj.com/articles/baumol-diagnosed-the-disease-of-higher-
health-and-education-costs-1494597601) [paywall]):

"Dr. Baumol’s insight in the 1960s was that costs inevitably rise fastest for
things that are difficult to automate, including medical care, garbage
collection and the live performance of a Mozart string quartet.

It came to him in the middle of the night.

“It was 4 in the morning,” he recalled in an oral history. “I suddenly woke up
and said I know why those costs are going up! I got up, wrote down a few
notes, and went to sleep again.” His theory became known as Baumol’s Cost
Disease."

------
beefield
Weird. One can hear arguments that it is the very fact that some people get
paid lot as a proof that these people are more productive than others. But
that argument seems to apply a bit selectively, and nurses and teachers
somehow do not get more productive as their salaries increase.

It's almost like economics would be more like ideology than actual science.

[edit: took away couple of pejorative and unnecessary words]

