
William Baumol, author of 'cost disease' theory, has died - imraj96
https://www.vox.com/new-money/2017/5/4/15547364/baumol-cost-disease-explained
======
legulere
Luckily we solved this by uncoupling wages from general productivity starting
in the 70s

[http://www.epi.org/productivity-pay-gap/](http://www.epi.org/productivity-
pay-gap/)

~~~
harryh
That graph is fairly deceptive. While labor's share of national income has
gone down slightly (mostly post 2000) it's not nearly as dramatic as presented
there.

This is a good read on the topic:

[http://www.themoneyillusion.com/?p=30566](http://www.themoneyillusion.com/?p=30566)

I think one of the bigger sources of the discrepancy is comparing mean
productivity to median wages. If productivity and wages were both normally
distributed, this would be fine. But they are not.

------
ellyagg
This article presents the reasons behind cost disease as if his interpretation
is accepted fact, but that's not the case, right? Elsewhere, I've seen a lot
more disagreement among smart people.

For example, he says we have to pay band members a lot more now or they'd
leave for better jobs and that this also explains the rise in education costs
over the last few decades. Education costs have risen about 2.5x over the last
40 years, after adjusting for inflation. Has teacher pay risen 2.5x after
adjusting for inflation?

~~~
Lazare
Baumol's argument is that services will become relatively more expensive than
goods, because productivity increases come faster in goods than services.

This is obviously true, so yes, the article presents it as an accepted fact
because it _is_. We have hard data for labour productivity by sector,
manufacturing output, manufacturing employment, etc. We _know_ the number of
hours that goes into making a car versus giving a haircut, and how those
numbers have changed over the past 40 years.

> Education costs have risen about 2.5x over the last 40 years, after
> adjusting for inflation. Has teacher pay risen 2.5x after adjusting for
> inflation?

No, which makes it clear that Baumol's cost disease is not the only driver
behind education costs. :)

------
fixxer
Quick question for anyone who actually studied Baumol's theories:

Did he bring into consideration how some services, such as education and
health care, exist in an awkward limbo between services we pay for
(right/libertarian view) and services we're entitled to (left view), resulting
in a smash up of public subsidies and political quicksand?

At face value, his theory is totally reasonable. BUT it seems totally
reductionist to claim his drivers of cost are the only drivers (even calling
them primary drivers seems foolish to me).

~~~
URSpider94
The article points out that there are many non-governmental professions that
show this effect: musicians (look at the prices for concert tickets), post-
secondary education, which is not usually free, though it may be subsidized,
restaurants...

~~~
mysterypie
> post-secondary education

In many places, loans for university education are guaranteed by the
government. So universities have no worries for charging absurd prices for
useless degrees. Even if the graduates go bankrupt the university still gets
their money from the government. (And in some jurisdictions bankruptcy doesn't
discharge student loans.)

The GP raises a legitimate point that government involvement in just about
everything muddies the analysis.

------
lr4444lr
I'm having a hard time understanding the core of Baumol's theory as Vox is
laying it out. I identify a few premises:

1) Rising opportunity cost in the labor market raises the boats of all jobs
(within a given grouping of jobs with low friction of employee movement)

2) This rising opportunity cost occurred (in the U.S.) due to manufacturing,
which was well paying.

3) Consumer goods prices are more affordable due to increased capital
efficiency relative to income.

4) The extra discretionary dollars from (3) are being spent on labor intensive
goods, which cycles back to (1) again.

One point on which this loses me is the apparently hidden assumption that
involuntary un(der)employment is low and stably so, and what markers of
inflation we're using. I think there's an unexplained paradox: if we're losing
goods-producing jobs, why isn't the competition in the service sector a
countervailing force driving _down_ wages?

Not trying to be a critic, I just want to understand this better.

~~~
Lazare
I'll take a stab at trying to explain it. :)

First off, let's consider an economy with a single good (widgets), and no
services. Any attempt to measure the economy as a whole (eg, to calculate GDP)
is simply going to end up being the number of widgets produced per year.
Further, the total compensation for all factors of production is going to be
equal to that same number, which in turn means that any employee's
compensation (whatever unit of currency is used) translates into a share of
the widgets being produced.

If everyone gets more efficient at producing widgets, the economy is wealthier
(and GDP goes up). And each employee is (all else equal) receiving more
widgets as their share. Conversely, if we assume that nominal wages have
stayed constant, the price of widgets has gone down.

So that's a basic framework we have: Productivity gains = a fall in real
prices = a growing economy = an increase in employee compensation. These are
all equivalent things; different sides of the same coin. If we're getting
better at making widgets, then widgets will be cheaper, which means we can
afford more widgets for the same amount of (real) money. That's what economic
growth _is_.

Second, let's consider an economy with two goods: Widgets and sprockets (and
again, no services). Let's say half the work force is busy making widgets, and
the other half is busy making sprockets. If we get better at making both, but
we become much better at making widgets, then the price of widgets will start
to collapse. Where 1 widget used to barter for 1 sprocket, soon it'll take 10
widgets to barter for 1 sprocket. Which is another way of saying that the
price of sprockets will rise steeply.

That's Baumol's Cost Disease. If you have multiple items, and they experience
different productivity growth, the ones which experiences relatively lower
productivity growth will become relatively more expensive.

In addition, if you want to take the widget and sprocket example a step
further, you might wonder what happens if productivity gains mean we're making
more widgets than we strictly need. We'd probably see layoffs, as productivity
gains mean fewer and fewer people are required to produce the widgets the
economy needs. And of course the people left would probably earn very good
wages, since they get to share the returns from the entire widget industry.
Although given the high price of sprockets, they might not feel that rich. But
where would the laid off people go? Well, into the sprocket industry; it's
lower productivity means it can soak up more manpower. But with the returns
from the sprocket industry split across more people, wages would be lower.
Luckily, those wages would go further when purchasing cheap widgets, but high-
price sprockets would be harder to obtain.

Which is, if you squint a bit, basically what we see, with widgets taking the
place of the manufacturing sector, and sprockets the services secotr. US
manufacturing output is high and (the financial crisis aside) keeps getting
higher; US manufacturing employment is low and keeps getting lower.
Manufactured goods are cheap and getting cheaper; services are expensive and
getting more expensive. Skilled engineers command excellent wages, but
struggle to find material goods to spend it on. Workers in the service sector
suffer from low wages, although their material standard of living is still
good. Etc., etc. Sound familiar?

Productivity gains are always a net good in total, however distributed. But
the skewing effect of unequal productivity gains can be extremely wrenching.
Telling someone that, actually, the machine shop they worked in is closing,
but they can retrain as a hairdresser doesn't make people happy. Nor does
pointing out that, even on the wages a hairdresser makes, they can afford a
larger flat screen TV than the one they bought three years ago. They don't
_want_ a bigger flat screen TV; the last one is actually fine. They don't want
to be a hairdresser with a giant flat screen TV; they want to be a machinist.
With affordable health care. But that would require figuring out how to make
sprockets as efficiently as we've figured out how to make widgets, and we
haven't done that yet. (Although the US does seem _uniquely_ bad at it, so
maybe we can at least try to be less bad...)

~~~
lr4444lr
Thank you. This helps me better articulate the thorn still stuck in my side.

Putting together paragraph 2 and paragraph 4 from your response, why don't the
following things happen:

The widget company owner starts laying off widget makers to increase profit he
can get the same output. Is there no diminishing margin utility for buying
more widgets? Paragraph 2 by itself implies that the cost of widgets falls, if
wages aren't rising and these increased widgets are being purchased. There's
got to be some movement in one or both of cost and salary metrics in order to
increase widget consumption if the employer is going to ramp up production so
long as the net cost of each widget is positive. What's the incentive
otherwise to greater production even if the capacity is there?

Paragraph 4 adds another good with these same questions I didn't feel the
article answered well, and introduces the variable of product exchange rates.
What unsettles me here is the obfuscation between the total resources poured
into the industry and the per-person expenditures, especially in service-
oriented work where the productivity isn't simply "widgets" or "sprockets".

Teaching is a great example: the number of teachers (in the US) increased
about 48% from 1988 - 2012 but the population increased 29%. Did we get
voluntarily make education "less productive" by increasing the decreasing the
student:teacher ratio? Did we get better educational quality for it? Not so
easy to say.

Could it not be that musicians were paid more by the mid-20th century because
there a longstanding oversupply had been steadily declining due to cultural
factors, or that concert financiers realized people valued and would pay more
for music than had been assumed, i.e. basic supply and demand equilibration?

I'm trying not to be ornery or argumentative, I'm just having a hard time
understanding what Baumol's assumptions were on these points, and I think
they're important.

~~~
Lazare
> The widget company owner starts laying off widget makers to increase profit
> he can get the same output. Is there no diminishing margin utility for
> buying more widgets?

In the simple example where widgets are the entire economy, this doesn't work,
because profit is defined in terms of widgets, and because we can assume that
there's no diminishing marginal utility for economic production _as a whole_.
At the level of the entire economy, you never become richer by cutting
production. (Because again, if the only good or service in the economy is a
widget, then you have no way of expressing your profit or wage except in the
number of widgets you have. If total production declines, the only way for you
to increase your compensation is by obtaining a larger share of the overall
pie.)

For the more complex example with widgets and sprockets, there's absolutely
diminishing marginal utility; I dealt with this in the passage starting "you
might wonder what happens if productivity gains mean we're making more widgets
than we strictly need. We'd probably see layoffs". And in general we can
assume that goods will suffer much more sharply diminishing marginal utility
than services.

That, in turn, is what drives the shift in employment from more productive
industries (which is another way of saying "industries which don't need as
many people any more to fill societal demands") to less productive industries.

If it helps, consider the earlier shift from agriculture to manufacturing:
Around 50-150 years ago, we saw an _incredible_ increase in productivity, a
very very small increase in per capita food production, a very large drop in
food prices, a very large drop in the % of income the average person spent on
food, and the utter gutting of agricultural employment. New technology gave us
the power to make 40 times more food than we were previously making, or the
_same_ amount of food with 1/40th the people. And at the big picture level,
that freed up labour ended up in manufacturing, which had not yet had the same
productivity increase.

That's a good example of what Baumol's theory would predict. Does that make
sense to you? Does your understanding of the theory suggest it would predict
something else?

> Did we get voluntarily make education "less productive" by increasing the
> decreasing the student:teacher ratio? Did we get better educational quality
> for it?

Yes, we did lower productivity. And no, not really. But keep in mind, that
when we say productivity here we're talking about labour productivity, so
increasing employment will (basically) always lower productivity.

~~~
lr4444lr
> Does that make sense to you?

Yes, but not to Baumol's theory. Your description sounds like an excellent
summary of the labor theory of value. How does this connect to musicians
making more money? Once all of those former farmers rush into manufacturing
because the price equilibrium is reached for food, why doesn't that depress
factory wages and thereby reduce the musician's leverage to demand a higher
salary for staying a musician? I keep rereading Vox's summary and one on The
Economist, but I'm not seeing the evidence that musicians' wages were
incommensurate over the century analyzed, or confirmation that other measures
of music productivity like audience members reached per year remained fixed.
If the musician's general relative economic class is unchanged, why invoke
opportunity cost of other labor sectors as a factor? Or, if the general public
has higher wages and the demand for music is inelastic, they can be stretched
more for it, why not suppose the artists know their talent pool is limited and
leverage that to increase their cut? I thank you very much for taking the time
to try to explain this to me, in case I've inadvertently gotten you
frustrated, and I blame myself for this apparent mental blind spot I can't
shake.

------
taprun
Link to Wikipedia article on cost disease:
[https://en.wikipedia.org/wiki/Baumol%27s_cost_disease](https://en.wikipedia.org/wiki/Baumol%27s_cost_disease)

~~~
filleokus
One problem I've always had when stumbling upon the cost disease theory is my
sense that real wages not only "should" rise due to productivity gains, but
also due to the wages of alternative occupations.

If a person has the intellect / drive / grit / possibility etc. to pursue
either an occupation as a university professor (where the productivity gain
has been low) or a high end engineering job (with high productivity gains),
it's obvious that if there's demand for university professors, universities
will have to somewhat compete with the engineering firms for labour.

I guess the situation is somewhat different for the arts, but still, if the
real wages had been constant since the 1600s I guess very few would pursue a
career as professional classical pianists if it would be impossible to make
more than minimum wage (even at the topmost levels).

~~~
URSpider94
That is exactly the point of the theory. Wages increase roughly at parity for
equally skilled workers, regardless of their productivity, since otherwise
people wouldn't choose to go into careers that under-pay. While costs decrease
for goods and services that benefit from productivity increases, they stay the
same for goods and services where productivity doesn't improve. Since all
other costs are dropping, this has the effect of making prices go UP for
hands-on services.

------
_ibu9
Most of this seems fairly uncontroversial. This, however

> But a lot of service workers are doing jobs that are unlikely to ever be
> fully automated. Nobody wants a robot for a teacher or a nanny, for example.
> And even if we get software with advanced diagnostic capabilities, patients
> are still going to want doctors to explain the recommendations and nurses to
> provide hands-on care.

Maybe the author is taking a very short term interpretation of "ever" but I
don't know why these jobs are unlikely to be automated of general AI arrives.

~~~
binarybits
We're social creatures. We like interacting with other people more than we
like interacting with machines, even if machines are more efficient in a
narrow technical sense. I think this is especially clear for nannies--the main
job of the nanny is to cuddle and interact with the baby in ways that only a
human being can do.

There are plenty of fitness videos and apps, but people still pay a lot of
money for in-person fitness classes. People wouldn't stop going to Starbucks
even if someone invented a vending machine that could produce coffee that
tastes identical for half the cost.

~~~
Eridrus
You must live in a world where people don't make coffee at home due to cost
considerations.

The main point of a nanny is to have someone else deal with your kid so that
you don't have to.

Machines will almost certainly provide a worse experience than a human at the
beginning, but the lower price expands the market significantly to those who
could not afford those things before.

Teachers probably won't get replaced for the longest time since they're not
paid out of your pocket.

~~~
jpatokal
No, the main point of a nanny is to enable both partners to work, which is
often a financial necessity, not a luxury.

~~~
Eridrus
I was probably projecting, but I'd say day care, in a home or a centre, is a
financial necessity, and a nanny is when you have too much money or too many
children :)

But the larger point I was trying to make is that most people who need child
care are looking for someone to make sure it doesn't die while they're away,
not provide some special level of care.

