In a way, I thought about this when I changed my career the last time.
I had worked in what I will call "high end" tech support for some proprietary (and some less proprietary) networking equipment.
My job generally paid great and customers paid big support contracts, good deal for a good 20 years. But Tech Support is never glamorous, executives eventually think of them as just problems (even if they're solving problems) because that's all they hear. Quality management jumps to other more glamours departments and so on.
I was not so sad when a layoff occurred (company sold for parts and most of support was cut because more people on balance sheet looks costy). eventually and I learned to code late in life and got a new job / career.
Amusingly while I was learning to code a former coworker. (one of the people developing the products) at a company who bought some of the products I supported for a good 20 years reached out and said I should apply for a remote support job. I wasn't enthused but I did thinking they might make a good offer ... I never heard anything back. I was maybe one of 100 people who worked on those products in that capacity, I could have gone to work and done the job fabulously in an instant. Former coworker asked around was told "he doesn't have masters degree in CS". I wonder how those CS masters guys cost?
I got a lot of stories from that coworker how support was a complete disaster for a long long time at that company.
People rightfully complain about tech support, and I always think "Yeah they're bad because anyone who knows how to do it ... does not stick around."
> People rightfully complain about tech support, and I always think "Yeah they're bad because anyone who knows how to do it ... does not stick around."
The say "pay peanuts, get elephants" exists for a reason.
A related thought I heard was "pay police and army well, because you don't want them to start looking for ways of making more money...".
Outside the assembly line, you aren't just paying for the work themselves but for the character of the person providing. Drive the wage down low-enough and only the desperate apply. I know that locally, one of the first jobs the agency can get recovering homeless drug addicts is a call-centre job. That explains a lot.
>Yeah they're bad because anyone who knows how to do it ... does not stick around
Can confirm! I'd also like to add that the employer is happy to keep you in that position for a decade or more (as long as the client keeps paying) but one job over an extended period of time reads very poorly on a resume. Switching is a disruption necessary for growth.
It's funny because I broke into coding BECAUSE I had a long job on my resume and to the employer looked like I wasn't gong to jump job to job at the drop of a hat.
Computer software is on the chart as getting cheaper with time but that can’t be right? I remember Photoshop used to be a disc and you owned it for a reasonable price and now you subscribe to the Adobe protection racket. Software as a service would be a service which should go in the top of the graph with other extortionists like colleges and hospitals.
The reasonable price was $600 in 2000 which is over $1000 adjusted for inflation. That's four years of subscription, the useful life of a perpetual license may not be much more than that.
Your perpetual license on a fixed version of Photoshop would not have been transferrable across OS/compute generations for 25 years.
In practice most longtime Photoshop users paid the $600 once and some $200~ upgrade cost every 2-4 years. Adjusted for inflation its same or more than what you pay now.
If you think you'd be fine now with 25 year old Photoshop features you maybe forget how basic the product was compared to today. Further besides OS compatibility there were file format / camera raw version additions made over time that you'd have wanted.
And there are both cheaper proprietary programs and even free open source programs if they care that much. There are a lot of way cheaper software options, especially on the desktop, in many cases than there were 25 years ago.
You can get 2000-level Photoshop for free from many sources now, so you shouldn't be complaining about cost increases. Paid software has moved upmarket and bundled. The work done by people who need paid software has become more complex and vertically integrated (productivity increase.)
Are you also happy running Windows XP or Mac OS X 10.1 (Puma) which seem to be the last versions officially supported? (I guess on Windows it may have worked in some form or another longer than that but surely it doesn't work anymore on Windows 11 which is the only version currently supported.)
A great secondary point, yes. If you truly believe year 2000 Photoshop was good enough for life, there are plenty of cheap/free options out there today.
Arguably your base desktop/tablet/phone OS editor which is free may already do enough.
This is what came to mind for me. Certainly there are free versions of everything that used to cost money a decade or two ago. The paid software now is much more advanced.
It seems relevant that the categories healthcare, housing, and higher education are not paid by wages/cash but rather through various means of financing (in the form of insurance for healthcare). (In addition to not being outsourcable).
New cars not increasing looks strange but that might be a US phenomena, where most cars might be imported and the median car have "shrunk" in size over the period.
It highly depends on what your definition of a price increase is. The cars people actually buy have definitely become more expensive with more and more people choosing to buy SUVs.
The sedan hasn't become more expensive, but people don't feel safe driving them anymore between all the large SUVs, this pushing more people towards buying more expensive cars.
The submission is titled with "Cost Disease", though the Wikipedia article has the more neutral term "Effect". But it is important to remember that money is a relative resource, not a real resource. If some sectors of the economy become drastically more efficient, and some do not, overall society has become wealthier, even if the prices in the latter sectors rise a lot.
Your conclusion falls victim to the same conflation you’re calling out. If some sectors become drastically more efficient, society has become wealthier in terms of money, but not necessarily in terms of real resources.
For example, consider a case where finance becomes much more productive (in terms of $ per employee-hour) and raises wages to attract smart people, leading to fewer people becoming doctors because finance is much more attractive. Is society wealthier? The money says yes. The line goes up. But finance doesn’t set a broken bone or treat cancer. This may well have made society less wealthy in terms of what ordinary people actually care about.
The Baumol effect says wages for doctors will also have to go up. Society can afford this because it now has commensurately more resources due to increased efficiency. It’s a tide that raises all boats, precisely because of this effect. This is why a taxi in London costs and pays better than the same service in Cairo.
> Society can afford this because it now has commensurately more resources due to increased efficiency.
Does it though? Suppose that Wall St has discovered a strategy, like high frequency trading, that produces nothing but allows the one doing it to extract a margin that would otherwise have gone to the second-fastest trader. Many people are employed in a competition to be the fastest because being the fastest is rewarded but it's a zero-sum game where nothing useful is produced and the players each have to continuously spend resources to keep running faster in order to stay in the same place.
What benefit is the person now paying more for healthcare getting in exchange for this?
> It’s a tide that raises all boats, precisely because of this effect.
What if it's not all boats? Suppose it causes doctors to get paid more because people who have the wherewithal to become doctors could also work in finance, but it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs, and in the meantime they now have to pay more for healthcare.
High frequency trading does create benefits. It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks. They will also get taxed more, benefiting other tax payers.
The Baumol effect is sometimes described as a disease. It isn’t. It’s fundamentally redistributive.
> It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
This is the BS that Wall St says whenever people complain about them doing it. Nobody actually benefits from getting their liquidity in 8ms instead of 8.2ms, and in fact it costs them the money the high frequency trader was making compared to having the exchange's computers do it without taking a margin for itself.
> If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks.
Or they'll further outbid the people in retail on things like housing, making them poorer yet.
> They will also get taxed more, benefiting other tax payers.
Only if the other taxpayers actually get taxed less instead of the government giving the extra money to cronies.
> it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs
Nobody with an existing job actually has to switch professions for Baumol to occur. As the pay gap widens, more kids would study finance and fewer kids would consider retail an adequate career, leading to a relative shortage of retail labor, raising retail wages.
Your premise is that the people who work in retail have the option of studying finance or medicine. Suppose they work in retail because they scored at the 20th percentile on entrance exams and couldn't get into college.
The 20th percentile probably wouldn't go into finance. But there's a "average" cutoff somewhere. Maybe 50th percentile. Maybe 80th. It doesn't matter. That cutoff will move if demand shifts.
Suppose the cutoff to get into finance is at the 70th percentile of the general population and 99% of retail clerks are below the 50th percentile or otherwise have some reason not to even though those jobs already pay significantly more. How much more are they going to get paid because of that?
Or let's even suppose that the amount isn't totally inconsequential. Say they end up with an extra $1000/year. But now they're also paying $1500/year more for medicine. They're still down $500/year.
Throwing out random numbers is not a convincing argument about how things would actually work in reality.
Consider the fact that median real income tends to move up [1]. This is the metric that matters. It's the 50th percentile person, so mega rich outliers are ignored. And it weighs incomes against the CPI, which incorporates the price of medicine, construction, education, as well as consumer electronics, food, and pretty much everything people spend money on in realistic proportions. That's objective evidence that people actually get richer, even though the price of labor does tend to go up across the board, relative to goods.
> Consider the fact that median real income tends to move up [1]. This is the metric that matters.
Well, it's what matters if the CPI metric is perfect and doesn't e.g. over-weight things like food that haven't increased in cost as much as some other things.
And again, nobody is claiming that efficiency hasn't improved or that that isn't good. The issue is, if efficiency improves by 300% and then you get a 70% improvement out of it, that's bad -- people should have gotten the whole thing instead of having rent seekers capture a huge proportion of the improvement.
And for some specific subset of "efficiency improvements" the result isn't even guaranteed to be positive for the average person, so we don't need to lump them all together into an aggregate.
Exactly. Even though Baumol himself used the phrase "Cost Disease", I think that framing distracts from the fact that it is a result of something desirable happening, namely increased efficiency in some sectors. You could also posit a case where some sectors become less efficient, due to badly conceived regulations, exhaustion of non-renewable resources, an unchecked monopoly, or some other factor, but you don't need a special mechanism to explain why prices rise in such a scenario.
> ...consider a case where finance becomes much more productive... leading to fewer people becoming doctors because finance is much more attractive.
This is the opposite of what one would expect from a sector whose efficiency increases, as modeled by Baumol. See the first bullet in the article: "The share of total employment in sectors with high productivity growth decreases, while that of low productivity sectors increases" (also see the detailed analysis in the Technical Description section). It might be theoretically possible that induced demand could still increase overall employment in a sector as its efficiency increases, but I think you have to make an argument why that would be true. During the industrial revolution, automation eliminated 98% of the labor required to produce a yard of cotton cloth, but between 1830 and 1900 the number of weavers in the US increased by a factor of 4, because demand increased due to lower prices [0]... although the US population also increased by a factor of 6, so as a percentage of the workforce weavers still declined, even as people consumed much more cloth per capita.
[0] James Bessen, Learning by Doing - The Real Connection between Innovation, Wages, and Wealth (2015), pp. 96–97.
I picked finance for my example because demand is practically unlimited. People only need so many clothes, but when your business comes from making money directly, there’s a lot of room for growth.
Imagine some new math allows HFT to make more money. HFT firms wouldn’t start laying off quants. They’d probably hire more to try to capture more of that new money, and they’d have more money available for hiring.
It’s not like their wages will always go up exactly in proportion to your income. Goods and services that are afflicted will become less accessible if your own wages increase at a lower rate.
Some finance is needed and beneficial. The ability to form corporations and raise money through the stock market enhances many other fields of endeavour.
But this can go too far. In London during 2000-2008, finance consumed every spare IT worker, as well as mathematicians and physicists. Salaries were far higher working for a bank than working in any other IT-related industry or start-up. Did this produce great works? Is London now better off because of this? In a word, no.
The problem I have with these arguments is that they're awfully close to the anti-tourism arguments you hear in tourist towns such as Tahoe. You have this influx of visitors and money, and there's a considerable number of residents who see it as uniformly negative: congestion, high property prices, and so on. Imagine what it could've been without all these rich tech bros!
But then, the US is full of picturesque small towns where the original heavy industry (logging, copper mine, steel mill) disappeared and tourism did not fill the gap. And all the young people moved out in search of better opportunities, except for the ones addicted to meth. There's no money, no jobs, no hope.
Every socioeconomic shift has downsides, but it doesn't automatically mean that the alternative is better. Broad economic gains tend to lift all boats because money changes hands.
In the case of London, it was misallocation, not an influx of anything. It would have been better if the programmers had been founding start up companies, and the physicists had been researching science, instead of working for banks.
Advertising enables innovation-producing firms to drive awareness of their services in a cost effective manner, and for less informed consumers to understand what is available on the market. Your typical physician might not be fully caught up on what is the state of the art in arthritis treatments, but advertising enables this to happen.
Advertising as a source of consumer information is a market for lemons in and of itself. Everyone is free to claim innovation and deliver trash, and internet brands are a dime a dozen. Even just keeping out overt fraud/scams or propaganda campaigns is apparently a losing battle for platforms.
Reviewers/Influencers/interest-publications are often just a half-step above banner ads, but at least has more incentives than just "loudly capture attention" and "publish anything that pays the algorithmic sticker price".
Lady's earrings (see my name), Pixel 10 (I'm theoretically an iPhone developer), cat food (I don't own any pet let alone a cat), special offers from a supermarket I would have been shopping at anyway even if they had not told me about the offers, a sponsored government message because apparently the Bundesministerium für Gesundheit don't have a better method of contacting German residents than by buying ads from a US social network (I have previously seen such from the British government telling me that some breed of dog was now banned even though I don't own a dog and also live in Germany)…
… but none of that's what's importantly wrong.
Cost effective? It's an auction, each ad in isolation may be fair (but there's reason even then to be suspicious), but in aggregate the ad sector is an all-pay auction.
There's a massive over-supply of solutions because all the startups chase the same ideas at about the same times, and the only one of them to get big is the one that pays enough to the gatekeepers of eyeballs to win the all-pay auction bidding for mindshare.
If everyone stopped advertising, the knowledge of solutions would still diffuse, the winner would be so by word of mouth. The difference is that the 1200 "trusted partners" on all the GDPR popups wouldn't collect rent on advising people on the best strategy for selling their user's privacy and battery life and mobile data allowance for money that those users never get to see, and the people buying those eyeballs wouldn't be wasting their VC runway making something other than the product.
The fact that your Facebook ads are worse is probably because you're in the EU. I'm in the US, and I am getting fairly relevant ads for Broadway shows, data infrastructure products, discounted hotel packages, and climbing gym subscriptions - things that I am actually considering purchasing. And we haven't even brought up intent-based ads (Google search).
Word of mouth benefits incumbents. Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.
> And we haven't even brought up intent-based ads (Google search).
OK, those also suck, for different reasons.
If I search for a thing, a search engine's entire job is to show me about that thing. That the engine's website puts a different thing that whatever the search algorithm thought was the best thing at the top because an advertiser paid for it to be so, is strictly worse. It's worse when the ad is not correct for obvious reasons, but it's also worse when the ad is also the best thing to show me, because in that condition it was already at the top and shouldn't have needed to pay to get there.
> Word of mouth benefits incumbents.
Ads generally (but not always) benefit whoever is richest, which is usually (but not always) the incumbent. This is why Coca Cola spends so much money on ads, even when those ads say nothing about the product itself e.g. the current GenAI Christmas ad.
> Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.
How long had ChatGPT been out before OpenAI's first ad for it?
The Google search engine itself, I heard about from word of mouth back in the 90s when all of us were using AltaVista, which I also only knew about from word of mouth. Firefox, word of mouth. LiveJournal and then Dreamwidth, word of mouth. Facebook, word of mouth. Skype, Telegram, AeroPress, Huel, these are all things I learned about from word of mouth.
If I understand correctly, "word of mouth" is also known in marketing-speak as "going viral".
You are talking about consumer marketing. I am talking about B2B marketing for prescription medications, enterprise SaaS, etc. These are separate markets and the analogies don't quite hold here - the scam problem etc is practically nonexistent for high-LTV goods with high bid costs, and newcomers are typically well funded enough to periodically outbid incumbents (or implement better targeting). The big-ticket B2B products that one hears of from word-of-mouth are usually the worse ones, since there is rarely any "going viral" to speak of.
> That the engine's website puts a different thing that whatever the search algorithm thought was the best thing at the top because an advertiser paid for it to be so, is strictly worse.
This is not clearly worse than the result being selected by the whims of some arbitrary Google engineer, or being easily gamed by SEO blogspam bots. At least the advertiser stands to lose something if they bid incorrectly.
>How long had ChatGPT been out before OpenAI's first ad for it?
Just because some products were able to grow organically doesn't imply that paid marketing never benefits startups. This is a false equivalence.
I also find it funny that the vast majority of your example products (everything except Huel or Aeropress?) make a lot of money from advertising. Maybe consider why they still exist.
The only way this should happen is if it’s a fake arthritis treatment meant to detect doctors who learn about treatments from advertising instead of legitimate sources, so they can be prevented from practicing medicine.
What are legitimate sources in your definition? Should physicians be expected to spend all their free time reading every single study in every medical journal or conference, even for niche areas that they don't usually encounter? Should the average diabetic/arthritic patient need to obsessively pore over academic reports to stay informed about their condition? Should advertisers be banned from sponsoring journals or conferences? This is an extremely ill informed line of reasoning.
Doctors should learn about new drugs the traditional way - physically attractive drug company reps taking them out for expensive dinners and gifting them branded golf equipment.
Journals less commonly but pretty much every conference out there of any scope is sponsored by companies. In fact, absent sponsors, very few conferences would exist other than small volunteer-run ones.
People (and their companies in many cases) have limited budgets. I do pay out of my pocket for some conferences, and conference organizers and (previously) employers in other cases. You're probably not going to convince me that I'm better off sitting at a desk than getting out and collaborating with people at an event from time to time. For that matter, why should companies sponsor open source projects? If they're that valuable, individuals should just pay for them I guess.
And you’re not going to convince me that collaboration is so valuable that it’s worth corrupting the whole medical establishment, and simultaneously not valuable enough for you to pay what it costs to do it.
I have nothing to do with the medical establishment. I do know that the conferences I do attend are subsidized by companies in the tech space in various ways. You're welcome to bemoan that of course although I'm pretty sure neither of us are in a position to overturn decades-long (at least) practice.
Got it. So you want attention to be controlled by the whims of academic/government/publishing bureaucrats or black-box ranking algorithms who are the arbitrators of legitimacy. I can't say I agree with that opinion, but different strokes for different folks.
I’m very confused. Why would “black-box ranking algorithms” be on the no advertising side?
Medicine has a pretty good system for getting knowledge out to doctors as far as I can tell. I fail to see how advertising contributes to this in any way. Banning advertising is the opposite of controlling attention.
I’d like a total ban on all advertising, but I at least see some merits in the discovery argument for consumer goods even if I don’t agree with it. But saying advertisement is necessary so doctors can find out about new treatments? I hope this is just subtle satire, because, what?
> Medicine has a pretty good system for getting knowledge out to doctors as far as I can tell.
Yes, it does - it’s called advertising. In the US, the average promotional spend per physician exceeds $20k/yr. As a result, a lot more patients are able to quickly benefit from new medications like Dupixent or Ozempic as a result of wider awareness.
Suppose we banned Google ads and you are searching for a plumber. You are now entirely at the whims of whoever designs the ranking algorithm on Google/the Yellow Pages, who has nothing at stake here. Meanwhile, advertisers have to bid for your attention - making them at least somewhat aligned with your buying intent.
The same applies for doctors searching for state of the art diabetes treatments. It’s hard to say that relying on a fuzzy notion of “legitimacy” (or entrenched status-quo cliques) is a more fair system.
Your hypothetical is the world I actually live in, except I have to scroll past the ads first. It’s amazing that you’re so invested in advertising as a concept that you’d think a guy who keeps ranting about banning advertising would ever select a plumber from an ad.
The only purpose Google ads serve to me is to take up space and waste my time locating where the ads end and the real results begin.
Otherwise, they’re at best useless. Being able to distinguish the ads from the real results is an important online safety skill these days to avoid getting ripped off or outright scammed. They’re no longer merely parasitic, but are now actually dangerous.
If your argument is that advertising medical treatments to doctors is just like the mundane advertising I see on Google, you’re doing an excellent job of making my case for me.
Your value to advertisers is probably less than 1% of that of a single doctor or corporate VP. It makes sense that your queries are lower intent - this is hardly contradictory. Fortunately, you are an edge case wrt how firms are actually spending their money, so we’ll leave it at that.
If you want to argue that advertising is different for doctors than it is for me, and it’s useful for them despite being a drain and a danger for me, then go for it. But that’s the opposite of the argument you laid out.
Yes, advertising is more relevant and works better for people with power over large purchasing decisions as the bidders have more at stake. Maybe you aren't in the market for plumbers or running shoes, and are instead looking for "download vlc media player". This doesn't contradict anything I said?
Ok, you must be taking the piss. VLC doesn’t advertise. If you search for VLC downloads and click an advertisement for VLC, you’re going to be downloading malware. Even someone who thinks advertising is a modern miracle must be aware of this.
I’m completely lost. You keep talking about how advertising to doctors and B2B is totally different from advertising to people like me. At the same time you keep talking about my personal experience with advertising. Why?
If you search for low-value consumer queries or aren't a buyer for high-ticket B2B items, you will get less relevant ads. Your personal experiences don't extrapolate well here: advertising for high-value goods is totally different from advertising for low-value goods.
Sure. I can totally buy that advertising is different for different people. Although I don’t think it’s good regardless. The part that confuses me is that you keep bringing up my experience of advertising despite repeatedly saying it’s not comparable.
I was trying to point out the selection bias in your experiences, since your queries are probably lower-intent than for the typical consumer. Good discussion though.
I get that. But you're the one who brought up my experiences in the first place! The last few messages have been, essentially, "Doctors need advertising to find new treatments just like you need advertising to find plumbers." "I don't need, and actively avoid using, advertising to find plumbers." "Your experience isn't comparable, it's not relevant to doctors finding medical treatments." Followed by many repetitions of the last part. I get it. The part I don't get is why I'm supposed to believe advertising is good for doctors, given your previous argument made no sense (what with comparing it to my own experience with advertising) and you haven't given a new one.
> If some sectors of the economy become drastically more efficient, and some do not, overall society has become wealthier, even if the prices in the latter sectors rise a lot.
That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.
Suppose people used to spend 20% of their income on housing and healthcare and 20% on apparel and electronics. Then housing and healthcare triple in price, apparel drops by two thirds, electronics drops by 98%, and everything else stays the same. Are they better off? No, because the most you can improve the cost efficiency of something is 100% (it becomes free), but the things that that cost more can increase in cost by more than 100% of the original cost, and some of them have.
> That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.
Housing prices aren't going up because of construction costs alone. The biggest increase is from the cost of land. For that the cost of a house on top has become less and less relevant. If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.
The biggest increase is from the cost of zoning making land artificially scarce. But construction costs layer on top of that because of the nature of it: Instead of being able to build 20 new housing units on a lot that currently only has one and enough land to add more without destroying the existing building, adding more is now restricted to a small strip of the downtown where the lots already each contain 10 housing units. Which effectively doubles your construction costs to add 20 housing units because you still have to build 20 housing units but now you have to destroy 10 in order to make space, and then do that twice to actually add 20.
Which is a disaster if construction also got twice as expensive.
> If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.
If construction became really cheap and there wasn't an artificial limit on how much housing you could build on a given lot then there would be tons of cheap housing and billionaires wouldn't find it a useful place to park money because it would have lower returns than competing investments.
Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses. This is also why zoning doesn't matter. Look at the big picture. Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use. What those areas do have in common: general availability of real estate to international investors.
Properties aren't bought up anymore to develop them or have any returns from use. They are being bought as a non-depreciating asset. Want to effortlessly park money and not have the money rot? Buy land. Never mind what happens to stand on top of it. You can see more and more of those rotting real estate plots all over the western world. And there's always someone who wants to park money.
Your thinking isn't wrong on a smaller scale. All those aspects matter for a local housing market. But the overall trend is governed by something else.
> Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses.
This is fairly simple arithmetic. Suppose we attribute the cost of a single family home (one housing unit) entirely to land, and then the cost of land doubles. Obviously the cost of the single family home doubles.
Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.
> Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use.
The places with less restrictive zoning objectively do have lower housing costs, and even most of the places with "less restrictive zoning" still have non-trivial zoning restrictions. For example, name the major US city that isn't accompanied by a significant land area zoned exclusively for single family homes.
> Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.
That's a brilliant plan! Let me buy the piece of land where that high rise stands with money you can't afford. Oh, you mean you have split ownership between all the owners of the units so you now can afford it? I'll buy half of the units then and rent them out. And when things are not looking good for people, I buy some more when they can't afford their loans anymore. Can't let those units depreciate, can we? My friends are in on the party and together we're keeping the demand up. And those prices go up and up. Oh, the cost of each unit has now doubled and tripled while your wages haven't? Too bad for you. I can still afford them and now you have been out competed by me.
It's the same game just with a lower starting point.
> If some sectors of the economy become drastically more efficient... overall society has become wealthier
That's a weird one - what's your metric for the "wealth of overall society"? Stock market indexes can't be it because those are subject to extreme levels of unreported inflation and gaming.
How can you measure something that is subject to extreme inflation when that inflation is not only unmeasured but not even acknowledged as a phenomenon?
At present, the "wealth of overall society" is a unicorn metric as opposed to the perfectly measurable and extreme levels of income and wealth inequality. In other words, the overall losses from skewed distribution dwarf the gains from higher efficiencies.
If the orchestra performs less often because the violists have better paying jobs in a factory making the latest and greatest TVs, more homes will have the latest and greatest TVs.
Of course, this relies on the assumption most work - and hence most productivity - is a net social good. If the violinists have instead got jobs operating an orphan-crushing machine, that would be a bad thing. But hopefully your society is structured in such a way that the average worker is contributing to the prosperity of their local community.
GDP produced divided by costs required measures intensity. These will be typically normalized (inflation removed) or, if a ratio, can be nominal since both have the inflation ratioed out.
GDP is known to be an imperfect measure, especially for capturing cottage industry and due to the distribution effect you described, but it's not horrible to start with.
The main metrics are mean and median real income (i.e. inflation-adjusted). Baumol's only occurs if mean real income rises. Unless inequality rises simultaneously, then median real income (the metric most people care about) will rise as well.
Suppose that every single person in society receives the same compensation and has the same wealth, i.e. there is perfect equality.
Society produces housing and other necessities and people consume them in some amount and then have what's left as disposable income to spend on whatever they like, e.g. for going on dates.
Then a law is passed prohibiting the construction of housing with more than two stories. Building ten housing units on ten lots with ten foundations requires more labor than constructing ten units all on the same lot, so the price of housing increases, people have to spend more on housing and have less money left to buy flowers and some people quit their jobs at the flower shop to go pour concrete (while still getting paid exactly the same amount as before).
There is zero change in inequality but the cost of something has gone up and people have to eat it by getting less of something else.
Baumol does not describe general inflation. It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.
Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.
Because people claim that higher costs are a result of Baumol and are hypothetically something good or normal when it's actually regulatory costs and government capture stealing from working people. "Don't worry, prices are only up because we got so much more productive, not because of artificial scarcity or because it now requires 10 people to do certain things that used to take one."
> Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.
Because the example is housing, which is a necessity and therefore has fairly inelastic demand. If the price goes up, you pay it, because otherwise you're homeless. And then people buy flowers less because they can't afford it, so people lose their jobs at the flower shop, but new jobs open up in construction because it became more labor-intensive and has fairly inelastic demand.
> It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.
Here's the less contrived example: Productivity improves in things like electronics or manufacturing, giving people more disposable income. But there is certain amount of disposable income people have to be left with before they'll revolt, and the increase in efficiency leaves them with more than that. Which allows the government to increase regulatory overhead or real dollars per capita collected in taxes or pass rules that artificially increase scarcity at the behest of campaign donors, without making people feel like they've lost ground.
But the efficiency improvements should have allowed them to gain ground, which is what has been taken from them.
Sure, there are plenty of ways that the government can interfere in an otherwise fair market. That's not the point. Absent some sort of market interference, Baumol is empirically good at predicting price movements.
> there are plenty of ways that the government can interfere in an otherwise fair market
There's no such thing as "otherwise fair market" outside of government regulation. Ergo, any "interference" is for someone's benefit, and as a rule that's not the government. In other words, seeking economics explanations to political phenomena isn't going to lead to anything useful.
> Baumol is empirically good at predicting price movements.
Until something else explains the facts better - AnthonyMouse wrote about a better theory that can actually be expanded to a fairly precise descriptive model, despite the fact that the quantitative part of it would be politics dependent.
The trouble is that the same empirical data is also consistent with the theory that when efficiency improves it attracts market interference to capture the surplus.
And then it could be either one, or some combination of both, but the people doing the capturing prefer to direct attention to an alternative explanation so they can continue their extraction.
I can’t help but notice the items of increasing price / cost are not optional / discretionary purchases. Price can increase and not affect demand. Whereas the items decreasing in price are all subject intense competition and price sensitivity.
That's not how it works: Most things that people call non-discretionary still have opportunities for market effects. Take food: You might have spikes for, say, beef, but what is necessary is just enough calories, not necessarily having them come from beef. Therefore, you can switch preferences, eat something else, and not be affected by the price increases. Poeple rarely do though, because the amount of money spent on food is significantly lower than historical, precisely due to agricultural productivity improvements. In the US, we also have to consider the effects of recent tariffs: When supply gets far more expensive, prices go up in a market, regardless of whether people must eat or not.
For housing, there's also significant location effects: One doesn't have to live in, say, Manhattan. People trade time for location, and then select the space they want. A whole lot of the space Americans use is completely optional. Go look at cities in Asia, or in Spain: You can have a city with an average density similar to NYC's Upper East side, but not even NYC comes close. That's not about a limitation of supply, but very specific policy choices.
It's similar in other mandatory things: In healthcare, the amount of things that are actually mandatory isn't that large, training to become a doctor is offered to far fewer people that would want the job, drugs can be handed long monopolies... It's not about non-discretionary, but mostly a regulatory problem. Same with American colleges, which waste an order of magnitude more money in what is shaped like an old luxury good. Anyone that has gone to a public university in continental Europe and to a US college can tell you it's a completely different good, and the American approach isn't all that focused on efficient education, as it's still shaped like a finishing school. And again, it's not necessary.
So I'd argue it's almost always regulation written to help certain incumbents, instead of inability of market forces to keep prices low even when it appears that a good is non-discretionary.
Yeah you’re right, that’s fair. I just think people don’t behave that rationally. I’m not moving away from my kid’s grandparents because my local costs have gone up, for example.
There exists greater friction with many of the items in red than the highly automated ones.
My question is how linked is this friction to the lack of automation?
With text books and meat packing there are few players due to consolidation. This means they can avoid investing in automation and keep prices high because they face less resistance from consumers and virtually none from competitors.
In short I’m asking if market forces are to blame for lower automation. And therefore automation is not the root cause of price increases.
At some price level you would move. Of course there are probably many more people that would move before you so that situation may not arise in practice. Economics works on the margin.
Sure but there’s a significant change in price that I can withstand before moving. My point is there’s less price sensitivity for some of these items. And because of that I wonder if that affects the amount of automation suppliers invest in.
I'd tend to disagree on the point around housing. I'd be surprised if there isnt a non-insignificant # of households who would happily move to lower cost of living areas (rent/house price wise) or areas with more nature perhaps but that is simply not feasible because there is no work there or the fields they work in are tethered to a particular city or cities in general. That severely limits their concept of choice in the matter.
College is optional. Actually, if you're just looking for "a skilled job" trade school is a better bet than college now. But the only people actually saying that are conservative nut-jobs trying to fight a culture war against a balanced education. People send their kids to colleges for the same reason why they demand more car lanes instead of better buses and trains: it's a status symbol.
The thing about status symbols is that you are buying them to feel better than someone else. So they almost have to be scarce - and therefore expensive. That's the basic idea behind cost disease; scarce things in an economy of abundance become more expensive, not less.
Perhaps it is optional for some. The point isn’t if it’s technically required. It’s that these items have less price sensitivity, which could be a greater factor in what industries invest in automation.
> Actually, if you're just looking for "a skilled job" trade school is a better bet than college now.
Better for whom? And better in what sense?
Long-term, on average, post-college careers still blow the trades out of the water in earnings.
In my case certainly, if I had bought into the “trades are better!!” online rhetoric I would be making far less money than I am now, and I get to work remote.
> Long-term, on average, post-college careers still blow the trades out of the water in earnings.
That average has a lot of outliers. There are a handful of degrees which almost guarantee you gainful employment. Like, someone getting a law degree or prepping for hospital residency will make waaay more money than maths, liberal arts, or anything on PhD track. The latter do not have anywhere close to the same job prospects.
Furthermore, some degrees are extremely expensive to get. My guess is you got an engineering or CS degree, which in terms of "degrees with job prospects" are still reasonably priced. You can graduate and go into the work force with little debt (or at least, I did, YMMV). Less so for the lawyers and doctors pushing up the college average, who have to go to more expensive schools and even more expensive post-graduate programs. They rack up lots of student debt in the process. Even if it gives you a higher salary, you might not be comfortable with a decade and change of debt slavery.
Law in the US is actually not that great an overall profession in terms of compensation if you're not talking top schools, white shoe firms, and a prestigious clerkship.
Really interesting stuff. Am I correct in thinking that if productivity were to rapidly increase in the service sector (e.g. due to AI) the same way it did in the manufacturing sector in the 19th and 20th centuries, that the cost of services would decrease?
Also, a side note: I dislike a lot of the popular conversation around the Baumol effect because they’re usually along the lines of “this can’t be the only reason my healthcare or education is expensive”, which is true (there are other factors at play), but the Baumol effect still explains a lot of it.
The cost of services will only decrease if labor inputs decrease in that particular sector more rapidly than the cost of labor increases (due to increased productivity).
The clearest example I’ve seen of this effect is with dental hygienists in the U.S.. Big labor crunch as lots of industry veterans left the labor force during COVID, wage and career growth prospects are weak vs. alternative options for newcomers, very difficult to automate in practical terms, and the way they produce revenue is usually per-procedure, with a ceiling largely fixed by insurance reimbursement rates, so the offices that employ them see a profitability issue when contemplating a raise.
Sounds like some other places use capitation to break the tight coupling between hourly productivity and profitability. Sounds interesting but politically very challenging. Would be interested to hear some perspective from consumers in e.g. the Nordics with experience.
I'm skeptical that anything actually is cheaper when normalized by offset wages. like sure you can buy a TV for cheaper, but isn't that just because now you have cheap labor and arbitrage? software is the main exception here. what physical product is actually cheaper when you remove offset labor arbitrage?
this would also explain why things that are not subject to said arbitrage do not actually get cheaper, e.g. anything that must be done locally.
Don’t automation technologies improve the productivity of labor?
If I can make one widget per hour, and some new tool lets me make 10 widgets per hour?
Conventional economic theory suggests the gain will be split between the widget-maker and the widget-consumer, in proportions determined by the relative slopes of the supply-demand curves, but definitely the product will become somewhat cheaper.
It depends on what you mean by "high quality", I suspect. Above a relatively low floor, price of furniture seems unrelated to (e.g.) sturdiness or expected lifespan. It's more like fashion, in that you are paying for names or decoration.
Probably a difficult question to answer. My sense is that high quality new hardwood furniture hasn't gotten especially more expensive over recent time (adjusted for inflation) but you'd probably have to ask someone in the industry who is more plugged into various cost inputs.
>seems unrelated to (e.g.) sturdiness or expected lifespan
I'll disagree somewhat. At least in New England, there are smallish manufacturers who make high quality products that you're not going to find in most, if any, of the large retailers.
This is exactly Baumol: If by “high quality” you mean “difficult to mass produce” then yes, the lack of productivity gains in hand-made furniture makes real costs go up.
Of course, it’s easy to mass produce sturdy furniture, such as office furniture. But it’s not what consumers think of as “high quality”.
> the tendency for wages in jobs that have experienced little or no increase in labor productivity to rise in response to rising wages in other jobs that did experience high productivity growth
It’s more complex than that. When universities want to give raises to admin, they simply raise prices. The ability of the university to raise prices depends on many factors.
One implication of this is that we need regulatory improvements (ie improvement via negativa, less) for healthcare, childcare, education, and building new housing. It’s non-ideal when government policies restrict supply and restrict competition, and entrench existing players.
1. This is certainly a real effect that has some effect on relative wages at the margins in some cases.
2. In 2025 if you hear someone talking about it in the context of the US economy you are most likely hearing propaganda, designed to provide a dodge for the real driver of higher costs which is mostly concentrated corporate power, consolidation, and collusion.
Evidence for claim #2? The sectors where the Baumol effect has been most painful (housing, childcare, education, with the exception of healthcare) are ones that have much higher levels of competition and distribution than areas where prices have rapidly dropped. Construction Physics, for example, did an analysis [1] that showed that the top multifamily housing developer has 2% marketshare; the top residential housing developer (DR Horton) has 8.4% and subs out almost all the work, and the top 4 together have only 20% of the market. Compare with tech markets like browsers, search engines, or operating systems where the top firm alone often has 80% market share.
I'm not sure what the answer is for housing, but there are tons of factors that go in to the growth of cost there. For one, the people making the buying decision aren't comparing DR Horton to Lennar. Usually, they're thinking along two lines: monthly mortgage cost and location.
Still, that doesn't rule out other types of consolidation (that are not necessarily corporate in nature.) There are no new "cities" being built, and even if you want to live in a small suburban community, chances are that you want or need to live near a city for economic reasons. I bet a lot of people on this forum wouldn't even consider living outside of 15-mile radius of SFO or NYC.
For individual families, the choices are often even more constrained. Assuming a dual income household, it's unlikely both earners will be able to geographically relocate at the same time. So you end up with situations where new housing outside of economic centers is pointless to build, and new housing in economic centers is expensive or impossible to build due to regulations and existing suburban street layouts.
Bringing it back to Baumol, we can think of an invisible "land value tax" as rising much like a wage rises without an increase in productivity. Since we're not making new economically productive regions, the cost of living near one of the existing ones has to rise (and we're not doing anything to counteract those trends.)
Housing is all messed up because land is a limited resource and regulation artificially limits it even further.
I live in a high demand area. A perfectly cromulent house on a particularly good lot will sell for $1.5 million as a teardown. The new house will be 6,000+ sqft and be inhabited by a family of four. Builders won’t build smaller because the land price sets a hard floor. The most profitable and economically productive thing would be to split the lot and build several smaller houses, or build a small apartment building, housing several times more people for the same cost. But this isn’t legal. Construction costs don’t make a difference. If construction costs doubled, the new houses would just get smaller. Some of these teardowns would stop being torn down. The cost of living in the area would stay about the same.
My mental model for high/low inflation goods/services are really just what % of their cost is driven by local on-shore labor which isn't / can't be automated to be more efficient. The "can't" is sometimes regulatory or cultural.
So for example childcare & education both fall into high inflation because we almost demand that it be inefficient. Customers demand to know the worker:customer ratios, and expect them to be low. It's held up by universities as a measure of quality!
Similarly with medical care, you don't see a lot of efficiency-increasing changes over time. The process of going to the doctor when you are sick, getting a prescription, and picking it up at the pharmacy is about 90% the same as it was in the 1980s. Maybe Amazon's efforts with telehealth&pharmacy can help here, tbd.
Housing is partially land use / zoning, increased regulatory burdens with time on multi-family housing, and that home construction itself is still something of an artisan craft than an industrial automated process.
I’d speculate that the cause of higher costs is excess government spending over the past few years, creating a lot more dollars chasing fewer resources.
In a way, I thought about this when I changed my career the last time.
I had worked in what I will call "high end" tech support for some proprietary (and some less proprietary) networking equipment.
My job generally paid great and customers paid big support contracts, good deal for a good 20 years. But Tech Support is never glamorous, executives eventually think of them as just problems (even if they're solving problems) because that's all they hear. Quality management jumps to other more glamours departments and so on.
I was not so sad when a layoff occurred (company sold for parts and most of support was cut because more people on balance sheet looks costy). eventually and I learned to code late in life and got a new job / career.
Amusingly while I was learning to code a former coworker. (one of the people developing the products) at a company who bought some of the products I supported for a good 20 years reached out and said I should apply for a remote support job. I wasn't enthused but I did thinking they might make a good offer ... I never heard anything back. I was maybe one of 100 people who worked on those products in that capacity, I could have gone to work and done the job fabulously in an instant. Former coworker asked around was told "he doesn't have masters degree in CS". I wonder how those CS masters guys cost?
I got a lot of stories from that coworker how support was a complete disaster for a long long time at that company.
People rightfully complain about tech support, and I always think "Yeah they're bad because anyone who knows how to do it ... does not stick around."
> People rightfully complain about tech support, and I always think "Yeah they're bad because anyone who knows how to do it ... does not stick around."
The say "pay peanuts, get elephants" exists for a reason.
A related thought I heard was "pay police and army well, because you don't want them to start looking for ways of making more money...".
Outside the assembly line, you aren't just paying for the work themselves but for the character of the person providing. Drive the wage down low-enough and only the desperate apply. I know that locally, one of the first jobs the agency can get recovering homeless drug addicts is a call-centre job. That explains a lot.
>Yeah they're bad because anyone who knows how to do it ... does not stick around
Can confirm! I'd also like to add that the employer is happy to keep you in that position for a decade or more (as long as the client keeps paying) but one job over an extended period of time reads very poorly on a resume. Switching is a disruption necessary for growth.
It's funny because I broke into coding BECAUSE I had a long job on my resume and to the employer looked like I wasn't gong to jump job to job at the drop of a hat.
Related. Others?
The Baumol Effect and Jevons paradox are related - https://news.ycombinator.com/item?id=45955879 - Nov 2025 (67 comments)
Baumol Effect - https://news.ycombinator.com/item?id=43065115 - Feb 2025 (1 comment)
The Baumol effect - https://news.ycombinator.com/item?id=35220758 - March 2023 (77 comments)
Why are the prices so damn high - https://news.ycombinator.com/item?id=33150094 - Oct 2022 (2 comments)
Baumol Effect - https://news.ycombinator.com/item?id=24812620 - Oct 2020 (99 comments)
Baumol Effect - https://news.ycombinator.com/item?id=20443675 - July 2019 (62 comments)
William Baumol, author of 'cost disease' theory, has died - https://news.ycombinator.com/item?id=14284466 - May 2017 (33 comments)
Baumol's Cost Disease - https://news.ycombinator.com/item?id=12679629 - Oct 2016 (1 comment)
Is productivity the victim of its own success? - https://news.ycombinator.com/item?id=11964673 - June 2016 (57 comments)
Baumol's Cost Disease: Why Artists are Always Poor - https://news.ycombinator.com/item?id=972082 - Dec 2009 (14 comments)
Why Are the Prices So Damn High? - https://news.ycombinator.com/item?id=33150094 - Oct 2022 (2 comments)
Good catch. Added to list. Thanks!
Computer software is on the chart as getting cheaper with time but that can’t be right? I remember Photoshop used to be a disc and you owned it for a reasonable price and now you subscribe to the Adobe protection racket. Software as a service would be a service which should go in the top of the graph with other extortionists like colleges and hospitals.
The reasonable price was $600 in 2000 which is over $1000 adjusted for inflation. That's four years of subscription, the useful life of a perpetual license may not be much more than that.
No I pretty much still just need Photoshop features from 2000, 25 years later. That’s $24 a year instead of the current price of almost $24 a month.
Your perpetual license on a fixed version of Photoshop would not have been transferrable across OS/compute generations for 25 years.
In practice most longtime Photoshop users paid the $600 once and some $200~ upgrade cost every 2-4 years. Adjusted for inflation its same or more than what you pay now.
If you think you'd be fine now with 25 year old Photoshop features you maybe forget how basic the product was compared to today. Further besides OS compatibility there were file format / camera raw version additions made over time that you'd have wanted.
And there are both cheaper proprietary programs and even free open source programs if they care that much. There are a lot of way cheaper software options, especially on the desktop, in many cases than there were 25 years ago.
You can get 2000-level Photoshop for free from many sources now, so you shouldn't be complaining about cost increases. Paid software has moved upmarket and bundled. The work done by people who need paid software has become more complex and vertically integrated (productivity increase.)
Are you also happy running Windows XP or Mac OS X 10.1 (Puma) which seem to be the last versions officially supported? (I guess on Windows it may have worked in some form or another longer than that but surely it doesn't work anymore on Windows 11 which is the only version currently supported.)
If that's all you need, there are free alternatives that should be more than sufficient today.
aren't there open source programs that have caught up to early 2000s era photoshop?
A great secondary point, yes. If you truly believe year 2000 Photoshop was good enough for life, there are plenty of cheap/free options out there today.
Arguably your base desktop/tablet/phone OS editor which is free may already do enough.
https://www.canva.com/newsroom/news/all-new-affinity/
Well there are other examples, eg Google Docs is free, no need to pay for Office.
I don’t know about the aggregate data tbf
This is what came to mind for me. Certainly there are free versions of everything that used to cost money a decade or two ago. The paid software now is much more advanced.
Is this just inflation viewed from the lens of labor cost or is it substantively different?
There also seems to be other things at play. Are textbooks really so much more expensive because of rising wages? Someone explain that one to me.
Textbooks are expensive because the authors need to live in houses, which are also expensive.
It seems relevant that the categories healthcare, housing, and higher education are not paid by wages/cash but rather through various means of financing (in the form of insurance for healthcare). (In addition to not being outsourcable).
New cars not increasing looks strange but that might be a US phenomena, where most cars might be imported and the median car have "shrunk" in size over the period.
It highly depends on what your definition of a price increase is. The cars people actually buy have definitely become more expensive with more and more people choosing to buy SUVs.
The sedan hasn't become more expensive, but people don't feel safe driving them anymore between all the large SUVs, this pushing more people towards buying more expensive cars.
The submission is titled with "Cost Disease", though the Wikipedia article has the more neutral term "Effect". But it is important to remember that money is a relative resource, not a real resource. If some sectors of the economy become drastically more efficient, and some do not, overall society has become wealthier, even if the prices in the latter sectors rise a lot.
Your conclusion falls victim to the same conflation you’re calling out. If some sectors become drastically more efficient, society has become wealthier in terms of money, but not necessarily in terms of real resources.
For example, consider a case where finance becomes much more productive (in terms of $ per employee-hour) and raises wages to attract smart people, leading to fewer people becoming doctors because finance is much more attractive. Is society wealthier? The money says yes. The line goes up. But finance doesn’t set a broken bone or treat cancer. This may well have made society less wealthy in terms of what ordinary people actually care about.
The Baumol effect says wages for doctors will also have to go up. Society can afford this because it now has commensurately more resources due to increased efficiency. It’s a tide that raises all boats, precisely because of this effect. This is why a taxi in London costs and pays better than the same service in Cairo.
> Society can afford this because it now has commensurately more resources due to increased efficiency.
Does it though? Suppose that Wall St has discovered a strategy, like high frequency trading, that produces nothing but allows the one doing it to extract a margin that would otherwise have gone to the second-fastest trader. Many people are employed in a competition to be the fastest because being the fastest is rewarded but it's a zero-sum game where nothing useful is produced and the players each have to continuously spend resources to keep running faster in order to stay in the same place.
What benefit is the person now paying more for healthcare getting in exchange for this?
> It’s a tide that raises all boats, precisely because of this effect.
What if it's not all boats? Suppose it causes doctors to get paid more because people who have the wherewithal to become doctors could also work in finance, but it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs, and in the meantime they now have to pay more for healthcare.
High frequency trading does create benefits. It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks. They will also get taxed more, benefiting other tax payers.
The Baumol effect is sometimes described as a disease. It isn’t. It’s fundamentally redistributive.
> It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
This is the BS that Wall St says whenever people complain about them doing it. Nobody actually benefits from getting their liquidity in 8ms instead of 8.2ms, and in fact it costs them the money the high frequency trader was making compared to having the exchange's computers do it without taking a margin for itself.
> If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks.
Or they'll further outbid the people in retail on things like housing, making them poorer yet.
> They will also get taxed more, benefiting other tax payers.
Only if the other taxpayers actually get taxed less instead of the government giving the extra money to cronies.
> it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs
Nobody with an existing job actually has to switch professions for Baumol to occur. As the pay gap widens, more kids would study finance and fewer kids would consider retail an adequate career, leading to a relative shortage of retail labor, raising retail wages.
Your premise is that the people who work in retail have the option of studying finance or medicine. Suppose they work in retail because they scored at the 20th percentile on entrance exams and couldn't get into college.
The 20th percentile probably wouldn't go into finance. But there's a "average" cutoff somewhere. Maybe 50th percentile. Maybe 80th. It doesn't matter. That cutoff will move if demand shifts.
Suppose the cutoff to get into finance is at the 70th percentile of the general population and 99% of retail clerks are below the 50th percentile or otherwise have some reason not to even though those jobs already pay significantly more. How much more are they going to get paid because of that?
Or let's even suppose that the amount isn't totally inconsequential. Say they end up with an extra $1000/year. But now they're also paying $1500/year more for medicine. They're still down $500/year.
Throwing out random numbers is not a convincing argument about how things would actually work in reality.
Consider the fact that median real income tends to move up [1]. This is the metric that matters. It's the 50th percentile person, so mega rich outliers are ignored. And it weighs incomes against the CPI, which incorporates the price of medicine, construction, education, as well as consumer electronics, food, and pretty much everything people spend money on in realistic proportions. That's objective evidence that people actually get richer, even though the price of labor does tend to go up across the board, relative to goods.
[1]: https://fred.stlouisfed.org/series/mepainusa672n
> Consider the fact that median real income tends to move up [1]. This is the metric that matters.
Well, it's what matters if the CPI metric is perfect and doesn't e.g. over-weight things like food that haven't increased in cost as much as some other things.
And again, nobody is claiming that efficiency hasn't improved or that that isn't good. The issue is, if efficiency improves by 300% and then you get a 70% improvement out of it, that's bad -- people should have gotten the whole thing instead of having rent seekers capture a huge proportion of the improvement.
And for some specific subset of "efficiency improvements" the result isn't even guaranteed to be positive for the average person, so we don't need to lump them all together into an aggregate.
Exactly. Even though Baumol himself used the phrase "Cost Disease", I think that framing distracts from the fact that it is a result of something desirable happening, namely increased efficiency in some sectors. You could also posit a case where some sectors become less efficient, due to badly conceived regulations, exhaustion of non-renewable resources, an unchecked monopoly, or some other factor, but you don't need a special mechanism to explain why prices rise in such a scenario.
> ...consider a case where finance becomes much more productive... leading to fewer people becoming doctors because finance is much more attractive.
This is the opposite of what one would expect from a sector whose efficiency increases, as modeled by Baumol. See the first bullet in the article: "The share of total employment in sectors with high productivity growth decreases, while that of low productivity sectors increases" (also see the detailed analysis in the Technical Description section). It might be theoretically possible that induced demand could still increase overall employment in a sector as its efficiency increases, but I think you have to make an argument why that would be true. During the industrial revolution, automation eliminated 98% of the labor required to produce a yard of cotton cloth, but between 1830 and 1900 the number of weavers in the US increased by a factor of 4, because demand increased due to lower prices [0]... although the US population also increased by a factor of 6, so as a percentage of the workforce weavers still declined, even as people consumed much more cloth per capita.
[0] James Bessen, Learning by Doing - The Real Connection between Innovation, Wages, and Wealth (2015), pp. 96–97.
I picked finance for my example because demand is practically unlimited. People only need so many clothes, but when your business comes from making money directly, there’s a lot of room for growth.
Imagine some new math allows HFT to make more money. HFT firms wouldn’t start laying off quants. They’d probably hire more to try to capture more of that new money, and they’d have more money available for hiring.
It’s not like their wages will always go up exactly in proportion to your income. Goods and services that are afflicted will become less accessible if your own wages increase at a lower rate.
Will doctors’ pay go up enough to retain the same number of doctors?
Given the demand for healthcare is extremely inelastic, almost certainly.
Finance funds hospitals and cancer research institutes - or at least, it enables the gathering and concentrating of resources to do so.
Now, advertising...
Some finance is needed and beneficial. The ability to form corporations and raise money through the stock market enhances many other fields of endeavour.
But this can go too far. In London during 2000-2008, finance consumed every spare IT worker, as well as mathematicians and physicists. Salaries were far higher working for a bank than working in any other IT-related industry or start-up. Did this produce great works? Is London now better off because of this? In a word, no.
The problem I have with these arguments is that they're awfully close to the anti-tourism arguments you hear in tourist towns such as Tahoe. You have this influx of visitors and money, and there's a considerable number of residents who see it as uniformly negative: congestion, high property prices, and so on. Imagine what it could've been without all these rich tech bros!
But then, the US is full of picturesque small towns where the original heavy industry (logging, copper mine, steel mill) disappeared and tourism did not fill the gap. And all the young people moved out in search of better opportunities, except for the ones addicted to meth. There's no money, no jobs, no hope.
Every socioeconomic shift has downsides, but it doesn't automatically mean that the alternative is better. Broad economic gains tend to lift all boats because money changes hands.
It also doesn’t mean the alternative is worse. Nothing says such a shift had to be overall good.
In the case of London, it was misallocation, not an influx of anything. It would have been better if the programmers had been founding start up companies, and the physicists had been researching science, instead of working for banks.
What’s your basis for concluding “no”?
London is a very desirable place to live.
Advertising enables innovation-producing firms to drive awareness of their services in a cost effective manner, and for less informed consumers to understand what is available on the market. Your typical physician might not be fully caught up on what is the state of the art in arthritis treatments, but advertising enables this to happen.
Advertising as a source of consumer information is a market for lemons in and of itself. Everyone is free to claim innovation and deliver trash, and internet brands are a dime a dozen. Even just keeping out overt fraud/scams or propaganda campaigns is apparently a losing battle for platforms.
Reviewers/Influencers/interest-publications are often just a half-step above banner ads, but at least has more incentives than just "loudly capture attention" and "publish anything that pays the algorithmic sticker price".
> in a cost effective manner
Facebook is currently showing me these ads:
Lady's earrings (see my name), Pixel 10 (I'm theoretically an iPhone developer), cat food (I don't own any pet let alone a cat), special offers from a supermarket I would have been shopping at anyway even if they had not told me about the offers, a sponsored government message because apparently the Bundesministerium für Gesundheit don't have a better method of contacting German residents than by buying ads from a US social network (I have previously seen such from the British government telling me that some breed of dog was now banned even though I don't own a dog and also live in Germany)…
… but none of that's what's importantly wrong.
Cost effective? It's an auction, each ad in isolation may be fair (but there's reason even then to be suspicious), but in aggregate the ad sector is an all-pay auction.
There's a massive over-supply of solutions because all the startups chase the same ideas at about the same times, and the only one of them to get big is the one that pays enough to the gatekeepers of eyeballs to win the all-pay auction bidding for mindshare.
If everyone stopped advertising, the knowledge of solutions would still diffuse, the winner would be so by word of mouth. The difference is that the 1200 "trusted partners" on all the GDPR popups wouldn't collect rent on advising people on the best strategy for selling their user's privacy and battery life and mobile data allowance for money that those users never get to see, and the people buying those eyeballs wouldn't be wasting their VC runway making something other than the product.
The fact that your Facebook ads are worse is probably because you're in the EU. I'm in the US, and I am getting fairly relevant ads for Broadway shows, data infrastructure products, discounted hotel packages, and climbing gym subscriptions - things that I am actually considering purchasing. And we haven't even brought up intent-based ads (Google search).
Word of mouth benefits incumbents. Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.
> And we haven't even brought up intent-based ads (Google search).
OK, those also suck, for different reasons.
If I search for a thing, a search engine's entire job is to show me about that thing. That the engine's website puts a different thing that whatever the search algorithm thought was the best thing at the top because an advertiser paid for it to be so, is strictly worse. It's worse when the ad is not correct for obvious reasons, but it's also worse when the ad is also the best thing to show me, because in that condition it was already at the top and shouldn't have needed to pay to get there.
> Word of mouth benefits incumbents.
Ads generally (but not always) benefit whoever is richest, which is usually (but not always) the incumbent. This is why Coca Cola spends so much money on ads, even when those ads say nothing about the product itself e.g. the current GenAI Christmas ad.
> Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.
How long had ChatGPT been out before OpenAI's first ad for it?
The Google search engine itself, I heard about from word of mouth back in the 90s when all of us were using AltaVista, which I also only knew about from word of mouth. Firefox, word of mouth. LiveJournal and then Dreamwidth, word of mouth. Facebook, word of mouth. Skype, Telegram, AeroPress, Huel, these are all things I learned about from word of mouth.
If I understand correctly, "word of mouth" is also known in marketing-speak as "going viral".
You are talking about consumer marketing. I am talking about B2B marketing for prescription medications, enterprise SaaS, etc. These are separate markets and the analogies don't quite hold here - the scam problem etc is practically nonexistent for high-LTV goods with high bid costs, and newcomers are typically well funded enough to periodically outbid incumbents (or implement better targeting). The big-ticket B2B products that one hears of from word-of-mouth are usually the worse ones, since there is rarely any "going viral" to speak of.
> That the engine's website puts a different thing that whatever the search algorithm thought was the best thing at the top because an advertiser paid for it to be so, is strictly worse.
This is not clearly worse than the result being selected by the whims of some arbitrary Google engineer, or being easily gamed by SEO blogspam bots. At least the advertiser stands to lose something if they bid incorrectly.
>How long had ChatGPT been out before OpenAI's first ad for it?
Just because some products were able to grow organically doesn't imply that paid marketing never benefits startups. This is a false equivalence.
I also find it funny that the vast majority of your example products (everything except Huel or Aeropress?) make a lot of money from advertising. Maybe consider why they still exist.
The only way this should happen is if it’s a fake arthritis treatment meant to detect doctors who learn about treatments from advertising instead of legitimate sources, so they can be prevented from practicing medicine.
What are legitimate sources in your definition? Should physicians be expected to spend all their free time reading every single study in every medical journal or conference, even for niche areas that they don't usually encounter? Should the average diabetic/arthritic patient need to obsessively pore over academic reports to stay informed about their condition? Should advertisers be banned from sponsoring journals or conferences? This is an extremely ill informed line of reasoning.
Doctors should learn about new drugs the traditional way - physically attractive drug company reps taking them out for expensive dinners and gifting them branded golf equipment.
My favorite form of definitely-not-advertising :)
I don’t know what counts as legitimate sources. I’ll let the professionals figure that one out.
> Should advertisers be banned from sponsoring journals or conferences?
It baffles me that you apparently think this is some kind of zinger. Yes!
Journals less commonly but pretty much every conference out there of any scope is sponsored by companies. In fact, absent sponsors, very few conferences would exist other than small volunteer-run ones.
If attendees aren’t willing to pay the full cost then maybe the conference isn’t providing enough value and we’re better off without it.
People (and their companies in many cases) have limited budgets. I do pay out of my pocket for some conferences, and conference organizers and (previously) employers in other cases. You're probably not going to convince me that I'm better off sitting at a desk than getting out and collaborating with people at an event from time to time. For that matter, why should companies sponsor open source projects? If they're that valuable, individuals should just pay for them I guess.
And you’re not going to convince me that collaboration is so valuable that it’s worth corrupting the whole medical establishment, and simultaneously not valuable enough for you to pay what it costs to do it.
I have nothing to do with the medical establishment. I do know that the conferences I do attend are subsidized by companies in the tech space in various ways. You're welcome to bemoan that of course although I'm pretty sure neither of us are in a position to overturn decades-long (at least) practice.
I’m ranting about my desire to ban all advertising. It’s obviously never going to happen.
Got it. So you want attention to be controlled by the whims of academic/government/publishing bureaucrats or black-box ranking algorithms who are the arbitrators of legitimacy. I can't say I agree with that opinion, but different strokes for different folks.
I’m very confused. Why would “black-box ranking algorithms” be on the no advertising side?
Medicine has a pretty good system for getting knowledge out to doctors as far as I can tell. I fail to see how advertising contributes to this in any way. Banning advertising is the opposite of controlling attention.
I’d like a total ban on all advertising, but I at least see some merits in the discovery argument for consumer goods even if I don’t agree with it. But saying advertisement is necessary so doctors can find out about new treatments? I hope this is just subtle satire, because, what?
> Medicine has a pretty good system for getting knowledge out to doctors as far as I can tell.
Yes, it does - it’s called advertising. In the US, the average promotional spend per physician exceeds $20k/yr. As a result, a lot more patients are able to quickly benefit from new medications like Dupixent or Ozempic as a result of wider awareness.
Suppose we banned Google ads and you are searching for a plumber. You are now entirely at the whims of whoever designs the ranking algorithm on Google/the Yellow Pages, who has nothing at stake here. Meanwhile, advertisers have to bid for your attention - making them at least somewhat aligned with your buying intent.
The same applies for doctors searching for state of the art diabetes treatments. It’s hard to say that relying on a fuzzy notion of “legitimacy” (or entrenched status-quo cliques) is a more fair system.
Your hypothetical is the world I actually live in, except I have to scroll past the ads first. It’s amazing that you’re so invested in advertising as a concept that you’d think a guy who keeps ranting about banning advertising would ever select a plumber from an ad.
The only purpose Google ads serve to me is to take up space and waste my time locating where the ads end and the real results begin.
Otherwise, they’re at best useless. Being able to distinguish the ads from the real results is an important online safety skill these days to avoid getting ripped off or outright scammed. They’re no longer merely parasitic, but are now actually dangerous.
If your argument is that advertising medical treatments to doctors is just like the mundane advertising I see on Google, you’re doing an excellent job of making my case for me.
Your value to advertisers is probably less than 1% of that of a single doctor or corporate VP. It makes sense that your queries are lower intent - this is hardly contradictory. Fortunately, you are an edge case wrt how firms are actually spending their money, so we’ll leave it at that.
If you want to argue that advertising is different for doctors than it is for me, and it’s useful for them despite being a drain and a danger for me, then go for it. But that’s the opposite of the argument you laid out.
Yes, advertising is more relevant and works better for people with power over large purchasing decisions as the bidders have more at stake. Maybe you aren't in the market for plumbers or running shoes, and are instead looking for "download vlc media player". This doesn't contradict anything I said?
Ok, you must be taking the piss. VLC doesn’t advertise. If you search for VLC downloads and click an advertisement for VLC, you’re going to be downloading malware. Even someone who thinks advertising is a modern miracle must be aware of this.
...that was my point? You are so close to getting it.
I’m completely lost. You keep talking about how advertising to doctors and B2B is totally different from advertising to people like me. At the same time you keep talking about my personal experience with advertising. Why?
If you search for low-value consumer queries or aren't a buyer for high-ticket B2B items, you will get less relevant ads. Your personal experiences don't extrapolate well here: advertising for high-value goods is totally different from advertising for low-value goods.
Example: hypertargeted ads for F-35 engine upgrades in the DC metro - https://x.com/JosephPolitano/status/1683476652276236295
Is that clear enough?
Sure. I can totally buy that advertising is different for different people. Although I don’t think it’s good regardless. The part that confuses me is that you keep bringing up my experience of advertising despite repeatedly saying it’s not comparable.
I was trying to point out the selection bias in your experiences, since your queries are probably lower-intent than for the typical consumer. Good discussion though.
I get that. But you're the one who brought up my experiences in the first place! The last few messages have been, essentially, "Doctors need advertising to find new treatments just like you need advertising to find plumbers." "I don't need, and actively avoid using, advertising to find plumbers." "Your experience isn't comparable, it's not relevant to doctors finding medical treatments." Followed by many repetitions of the last part. I get it. The part I don't get is why I'm supposed to believe advertising is good for doctors, given your previous argument made no sense (what with comparing it to my own experience with advertising) and you haven't given a new one.
The phrase “Baumol’s cost disease” is widely used, and well known. It’s also in the first sentence of the article.
> In economics, the Baumol effect, also known as Baumol's cost disease…
> money is a relative resource
I think this is the better way to think of money and wealth:
Money is the unit of measure for wealth. It's not in itself wealth.
That doesn't quite make sense to me. A meter is a unit of measure for distance, but a meter is a distance.
Yeah, it's not the same as physics units.
Money does have real value, but only because it can be traded for valuable things.
But money in itself, as bills or numbers in a bank account, is useless until you trade it for something "real".
> If some sectors of the economy become drastically more efficient, and some do not, overall society has become wealthier, even if the prices in the latter sectors rise a lot.
That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.
Suppose people used to spend 20% of their income on housing and healthcare and 20% on apparel and electronics. Then housing and healthcare triple in price, apparel drops by two thirds, electronics drops by 98%, and everything else stays the same. Are they better off? No, because the most you can improve the cost efficiency of something is 100% (it becomes free), but the things that that cost more can increase in cost by more than 100% of the original cost, and some of them have.
> That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.
Housing prices aren't going up because of construction costs alone. The biggest increase is from the cost of land. For that the cost of a house on top has become less and less relevant. If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.
The biggest increase is from the cost of zoning making land artificially scarce. But construction costs layer on top of that because of the nature of it: Instead of being able to build 20 new housing units on a lot that currently only has one and enough land to add more without destroying the existing building, adding more is now restricted to a small strip of the downtown where the lots already each contain 10 housing units. Which effectively doubles your construction costs to add 20 housing units because you still have to build 20 housing units but now you have to destroy 10 in order to make space, and then do that twice to actually add 20.
Which is a disaster if construction also got twice as expensive.
> If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.
If construction became really cheap and there wasn't an artificial limit on how much housing you could build on a given lot then there would be tons of cheap housing and billionaires wouldn't find it a useful place to park money because it would have lower returns than competing investments.
Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses. This is also why zoning doesn't matter. Look at the big picture. Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use. What those areas do have in common: general availability of real estate to international investors.
Properties aren't bought up anymore to develop them or have any returns from use. They are being bought as a non-depreciating asset. Want to effortlessly park money and not have the money rot? Buy land. Never mind what happens to stand on top of it. You can see more and more of those rotting real estate plots all over the western world. And there's always someone who wants to park money.
Your thinking isn't wrong on a smaller scale. All those aspects matter for a local housing market. But the overall trend is governed by something else.
> Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses.
This is fairly simple arithmetic. Suppose we attribute the cost of a single family home (one housing unit) entirely to land, and then the cost of land doubles. Obviously the cost of the single family home doubles.
Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.
> Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use.
The places with less restrictive zoning objectively do have lower housing costs, and even most of the places with "less restrictive zoning" still have non-trivial zoning restrictions. For example, name the major US city that isn't accompanied by a significant land area zoned exclusively for single family homes.
> Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.
That's a brilliant plan! Let me buy the piece of land where that high rise stands with money you can't afford. Oh, you mean you have split ownership between all the owners of the units so you now can afford it? I'll buy half of the units then and rent them out. And when things are not looking good for people, I buy some more when they can't afford their loans anymore. Can't let those units depreciate, can we? My friends are in on the party and together we're keeping the demand up. And those prices go up and up. Oh, the cost of each unit has now doubled and tripled while your wages haven't? Too bad for you. I can still afford them and now you have been out competed by me.
It's the same game just with a lower starting point.
Maybe this former financial trader can explain it better https://www.youtube.com/watch?v=BTlUyS-T-_4&t=520s
If people are under or unemployed, do they now value leisure time higher? It's a slippery slope. You have to fix some things.
> If some sectors of the economy become drastically more efficient... overall society has become wealthier
That's a weird one - what's your metric for the "wealth of overall society"? Stock market indexes can't be it because those are subject to extreme levels of unreported inflation and gaming.
How can you measure something that is subject to extreme inflation when that inflation is not only unmeasured but not even acknowledged as a phenomenon?
At present, the "wealth of overall society" is a unicorn metric as opposed to the perfectly measurable and extreme levels of income and wealth inequality. In other words, the overall losses from skewed distribution dwarf the gains from higher efficiencies.
If the orchestra performs less often because the violists have better paying jobs in a factory making the latest and greatest TVs, more homes will have the latest and greatest TVs.
Of course, this relies on the assumption most work - and hence most productivity - is a net social good. If the violinists have instead got jobs operating an orphan-crushing machine, that would be a bad thing. But hopefully your society is structured in such a way that the average worker is contributing to the prosperity of their local community.
GDP produced divided by costs required measures intensity. These will be typically normalized (inflation removed) or, if a ratio, can be nominal since both have the inflation ratioed out.
GDP is known to be an imperfect measure, especially for capturing cottage industry and due to the distribution effect you described, but it's not horrible to start with.
GDP is how much wealth is produced in society at a moment in time.
The total accumulated wealth in a society is a related but entirely different number.
This is why it measures intensity. It is a flow.
The main metrics are mean and median real income (i.e. inflation-adjusted). Baumol's only occurs if mean real income rises. Unless inequality rises simultaneously, then median real income (the metric most people care about) will rise as well.
Suppose that every single person in society receives the same compensation and has the same wealth, i.e. there is perfect equality.
Society produces housing and other necessities and people consume them in some amount and then have what's left as disposable income to spend on whatever they like, e.g. for going on dates.
Then a law is passed prohibiting the construction of housing with more than two stories. Building ten housing units on ten lots with ten foundations requires more labor than constructing ten units all on the same lot, so the price of housing increases, people have to spend more on housing and have less money left to buy flowers and some people quit their jobs at the flower shop to go pour concrete (while still getting paid exactly the same amount as before).
There is zero change in inequality but the cost of something has gone up and people have to eat it by getting less of something else.
How is this related to Baumol?
Baumol does not describe general inflation. It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.
Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.
> How is this related to Baumol?
Because people claim that higher costs are a result of Baumol and are hypothetically something good or normal when it's actually regulatory costs and government capture stealing from working people. "Don't worry, prices are only up because we got so much more productive, not because of artificial scarcity or because it now requires 10 people to do certain things that used to take one."
> Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.
Because the example is housing, which is a necessity and therefore has fairly inelastic demand. If the price goes up, you pay it, because otherwise you're homeless. And then people buy flowers less because they can't afford it, so people lose their jobs at the flower shop, but new jobs open up in construction because it became more labor-intensive and has fairly inelastic demand.
> It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.
Here's the less contrived example: Productivity improves in things like electronics or manufacturing, giving people more disposable income. But there is certain amount of disposable income people have to be left with before they'll revolt, and the increase in efficiency leaves them with more than that. Which allows the government to increase regulatory overhead or real dollars per capita collected in taxes or pass rules that artificially increase scarcity at the behest of campaign donors, without making people feel like they've lost ground.
But the efficiency improvements should have allowed them to gain ground, which is what has been taken from them.
Sure, there are plenty of ways that the government can interfere in an otherwise fair market. That's not the point. Absent some sort of market interference, Baumol is empirically good at predicting price movements.
> there are plenty of ways that the government can interfere in an otherwise fair market
There's no such thing as "otherwise fair market" outside of government regulation. Ergo, any "interference" is for someone's benefit, and as a rule that's not the government. In other words, seeking economics explanations to political phenomena isn't going to lead to anything useful.
> Baumol is empirically good at predicting price movements.
Until something else explains the facts better - AnthonyMouse wrote about a better theory that can actually be expanded to a fairly precise descriptive model, despite the fact that the quantitative part of it would be politics dependent.
The trouble is that the same empirical data is also consistent with the theory that when efficiency improves it attracts market interference to capture the surplus.
And then it could be either one, or some combination of both, but the people doing the capturing prefer to direct attention to an alternative explanation so they can continue their extraction.
I can’t help but notice the items of increasing price / cost are not optional / discretionary purchases. Price can increase and not affect demand. Whereas the items decreasing in price are all subject intense competition and price sensitivity.
That's not how it works: Most things that people call non-discretionary still have opportunities for market effects. Take food: You might have spikes for, say, beef, but what is necessary is just enough calories, not necessarily having them come from beef. Therefore, you can switch preferences, eat something else, and not be affected by the price increases. Poeple rarely do though, because the amount of money spent on food is significantly lower than historical, precisely due to agricultural productivity improvements. In the US, we also have to consider the effects of recent tariffs: When supply gets far more expensive, prices go up in a market, regardless of whether people must eat or not.
For housing, there's also significant location effects: One doesn't have to live in, say, Manhattan. People trade time for location, and then select the space they want. A whole lot of the space Americans use is completely optional. Go look at cities in Asia, or in Spain: You can have a city with an average density similar to NYC's Upper East side, but not even NYC comes close. That's not about a limitation of supply, but very specific policy choices.
It's similar in other mandatory things: In healthcare, the amount of things that are actually mandatory isn't that large, training to become a doctor is offered to far fewer people that would want the job, drugs can be handed long monopolies... It's not about non-discretionary, but mostly a regulatory problem. Same with American colleges, which waste an order of magnitude more money in what is shaped like an old luxury good. Anyone that has gone to a public university in continental Europe and to a US college can tell you it's a completely different good, and the American approach isn't all that focused on efficient education, as it's still shaped like a finishing school. And again, it's not necessary.
So I'd argue it's almost always regulation written to help certain incumbents, instead of inability of market forces to keep prices low even when it appears that a good is non-discretionary.
Yeah you’re right, that’s fair. I just think people don’t behave that rationally. I’m not moving away from my kid’s grandparents because my local costs have gone up, for example.
There exists greater friction with many of the items in red than the highly automated ones.
My question is how linked is this friction to the lack of automation?
With text books and meat packing there are few players due to consolidation. This means they can avoid investing in automation and keep prices high because they face less resistance from consumers and virtually none from competitors.
In short I’m asking if market forces are to blame for lower automation. And therefore automation is not the root cause of price increases.
At some price level you would move. Of course there are probably many more people that would move before you so that situation may not arise in practice. Economics works on the margin.
Sure but there’s a significant change in price that I can withstand before moving. My point is there’s less price sensitivity for some of these items. And because of that I wonder if that affects the amount of automation suppliers invest in.
>I’m not moving away from my kid’s grandparents because my local costs have gone up, for example.
If you're unable to eat because you spent all your resources paying for that residence near the grandparents you would certainly move.
I'd tend to disagree on the point around housing. I'd be surprised if there isnt a non-insignificant # of households who would happily move to lower cost of living areas (rent/house price wise) or areas with more nature perhaps but that is simply not feasible because there is no work there or the fields they work in are tethered to a particular city or cities in general. That severely limits their concept of choice in the matter.
College is optional. Actually, if you're just looking for "a skilled job" trade school is a better bet than college now. But the only people actually saying that are conservative nut-jobs trying to fight a culture war against a balanced education. People send their kids to colleges for the same reason why they demand more car lanes instead of better buses and trains: it's a status symbol.
The thing about status symbols is that you are buying them to feel better than someone else. So they almost have to be scarce - and therefore expensive. That's the basic idea behind cost disease; scarce things in an economy of abundance become more expensive, not less.
Perhaps it is optional for some. The point isn’t if it’s technically required. It’s that these items have less price sensitivity, which could be a greater factor in what industries invest in automation.
> Actually, if you're just looking for "a skilled job" trade school is a better bet than college now.
Better for whom? And better in what sense?
Long-term, on average, post-college careers still blow the trades out of the water in earnings.
In my case certainly, if I had bought into the “trades are better!!” online rhetoric I would be making far less money than I am now, and I get to work remote.
> Long-term, on average, post-college careers still blow the trades out of the water in earnings.
That average has a lot of outliers. There are a handful of degrees which almost guarantee you gainful employment. Like, someone getting a law degree or prepping for hospital residency will make waaay more money than maths, liberal arts, or anything on PhD track. The latter do not have anywhere close to the same job prospects.
Furthermore, some degrees are extremely expensive to get. My guess is you got an engineering or CS degree, which in terms of "degrees with job prospects" are still reasonably priced. You can graduate and go into the work force with little debt (or at least, I did, YMMV). Less so for the lawyers and doctors pushing up the college average, who have to go to more expensive schools and even more expensive post-graduate programs. They rack up lots of student debt in the process. Even if it gives you a higher salary, you might not be comfortable with a decade and change of debt slavery.
Law in the US is actually not that great an overall profession in terms of compensation if you're not talking top schools, white shoe firms, and a prestigious clerkship.
Really interesting stuff. Am I correct in thinking that if productivity were to rapidly increase in the service sector (e.g. due to AI) the same way it did in the manufacturing sector in the 19th and 20th centuries, that the cost of services would decrease?
Also, a side note: I dislike a lot of the popular conversation around the Baumol effect because they’re usually along the lines of “this can’t be the only reason my healthcare or education is expensive”, which is true (there are other factors at play), but the Baumol effect still explains a lot of it.
The cost of services will only decrease if labor inputs decrease in that particular sector more rapidly than the cost of labor increases (due to increased productivity).
The clearest example I’ve seen of this effect is with dental hygienists in the U.S.. Big labor crunch as lots of industry veterans left the labor force during COVID, wage and career growth prospects are weak vs. alternative options for newcomers, very difficult to automate in practical terms, and the way they produce revenue is usually per-procedure, with a ceiling largely fixed by insurance reimbursement rates, so the offices that employ them see a profitability issue when contemplating a raise.
Sounds like some other places use capitation to break the tight coupling between hourly productivity and profitability. Sounds interesting but politically very challenging. Would be interested to hear some perspective from consumers in e.g. the Nordics with experience.
I'm skeptical that anything actually is cheaper when normalized by offset wages. like sure you can buy a TV for cheaper, but isn't that just because now you have cheap labor and arbitrage? software is the main exception here. what physical product is actually cheaper when you remove offset labor arbitrage?
this would also explain why things that are not subject to said arbitrage do not actually get cheaper, e.g. anything that must be done locally.
Don’t automation technologies improve the productivity of labor?
If I can make one widget per hour, and some new tool lets me make 10 widgets per hour?
Conventional economic theory suggests the gain will be split between the widget-maker and the widget-consumer, in proportions determined by the relative slopes of the supply-demand curves, but definitely the product will become somewhat cheaper.
sure, but take furniture - is high quality furniture cheaper today than 50 years ago, normalized by inflation? from my investigation the answer is no.
It depends on what you mean by "high quality", I suspect. Above a relatively low floor, price of furniture seems unrelated to (e.g.) sturdiness or expected lifespan. It's more like fashion, in that you are paying for names or decoration.
Probably a difficult question to answer. My sense is that high quality new hardwood furniture hasn't gotten especially more expensive over recent time (adjusted for inflation) but you'd probably have to ask someone in the industry who is more plugged into various cost inputs.
>seems unrelated to (e.g.) sturdiness or expected lifespan
I'll disagree somewhat. At least in New England, there are smallish manufacturers who make high quality products that you're not going to find in most, if any, of the large retailers.
This is exactly Baumol: If by “high quality” you mean “difficult to mass produce” then yes, the lack of productivity gains in hand-made furniture makes real costs go up.
Of course, it’s easy to mass produce sturdy furniture, such as office furniture. But it’s not what consumers think of as “high quality”.
> the tendency for wages in jobs that have experienced little or no increase in labor productivity to rise in response to rising wages in other jobs that did experience high productivity growth
Since when has wages been based on productivity?
Productivity has always imposed an upper limit on wages.
It’s more complex than that. When universities want to give raises to admin, they simply raise prices. The ability of the university to raise prices depends on many factors.
Those wages are far below the upper limit imposed by the value of college education...
That it's possibly signaling rather than something more concrete doesn't really matter to the economic analysis.
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At least the URL immediately calls out the fact the site is nothing but AI spew.
Technically not a source, and even less so than wikipedia.
One implication of this is that we need regulatory improvements (ie improvement via negativa, less) for healthcare, childcare, education, and building new housing. It’s non-ideal when government policies restrict supply and restrict competition, and entrench existing players.
1. This is certainly a real effect that has some effect on relative wages at the margins in some cases.
2. In 2025 if you hear someone talking about it in the context of the US economy you are most likely hearing propaganda, designed to provide a dodge for the real driver of higher costs which is mostly concentrated corporate power, consolidation, and collusion.
Evidence for claim #2? The sectors where the Baumol effect has been most painful (housing, childcare, education, with the exception of healthcare) are ones that have much higher levels of competition and distribution than areas where prices have rapidly dropped. Construction Physics, for example, did an analysis [1] that showed that the top multifamily housing developer has 2% marketshare; the top residential housing developer (DR Horton) has 8.4% and subs out almost all the work, and the top 4 together have only 20% of the market. Compare with tech markets like browsers, search engines, or operating systems where the top firm alone often has 80% market share.
[1] https://www.construction-physics.com/p/why-are-there-so-few-...
I'm not sure what the answer is for housing, but there are tons of factors that go in to the growth of cost there. For one, the people making the buying decision aren't comparing DR Horton to Lennar. Usually, they're thinking along two lines: monthly mortgage cost and location.
Still, that doesn't rule out other types of consolidation (that are not necessarily corporate in nature.) There are no new "cities" being built, and even if you want to live in a small suburban community, chances are that you want or need to live near a city for economic reasons. I bet a lot of people on this forum wouldn't even consider living outside of 15-mile radius of SFO or NYC.
For individual families, the choices are often even more constrained. Assuming a dual income household, it's unlikely both earners will be able to geographically relocate at the same time. So you end up with situations where new housing outside of economic centers is pointless to build, and new housing in economic centers is expensive or impossible to build due to regulations and existing suburban street layouts.
Bringing it back to Baumol, we can think of an invisible "land value tax" as rising much like a wage rises without an increase in productivity. Since we're not making new economically productive regions, the cost of living near one of the existing ones has to rise (and we're not doing anything to counteract those trends.)
Housing is all messed up because land is a limited resource and regulation artificially limits it even further.
I live in a high demand area. A perfectly cromulent house on a particularly good lot will sell for $1.5 million as a teardown. The new house will be 6,000+ sqft and be inhabited by a family of four. Builders won’t build smaller because the land price sets a hard floor. The most profitable and economically productive thing would be to split the lot and build several smaller houses, or build a small apartment building, housing several times more people for the same cost. But this isn’t legal. Construction costs don’t make a difference. If construction costs doubled, the new houses would just get smaller. Some of these teardowns would stop being torn down. The cost of living in the area would stay about the same.
My mental model for high/low inflation goods/services are really just what % of their cost is driven by local on-shore labor which isn't / can't be automated to be more efficient. The "can't" is sometimes regulatory or cultural.
So for example childcare & education both fall into high inflation because we almost demand that it be inefficient. Customers demand to know the worker:customer ratios, and expect them to be low. It's held up by universities as a measure of quality!
Similarly with medical care, you don't see a lot of efficiency-increasing changes over time. The process of going to the doctor when you are sick, getting a prescription, and picking it up at the pharmacy is about 90% the same as it was in the 1980s. Maybe Amazon's efforts with telehealth&pharmacy can help here, tbd.
Housing is partially land use / zoning, increased regulatory burdens with time on multi-family housing, and that home construction itself is still something of an artisan craft than an industrial automated process.
I’d speculate that the cause of higher costs is excess government spending over the past few years, creating a lot more dollars chasing fewer resources.