7 ms·

William Baumol, author of 'cost disease' theory, has died

92 points by imraj96 9y ago

taprun 9y ago
Link to Wikipedia article on cost disease: https://en.wikipedia.org/wiki/Baumol%27s_cost_disease https://en.wikipedia.org/wiki/Baumol%27s_cost_disease
- filleokus 9y ago
  One problem I've always had when stumbling upon the cost disease theory is my sense that real wages not only "should" rise due to productivity gains, but also due to the wages of alternative occupations. If a person has the intellect / drive / grit / possibility etc. to pursue either an occupation as a university professor (where the productivity gain has been low) or a high end engineering job (with high productivity gains), it's obvious that if there's demand for university professors, universities will have to somewhat compete with the engineering firms for labour. I guess the situation is somewhat different for the arts, but still, if the real wages had been constant since the 1600s I guess very few would pursue a career as professional classical pianists if it would be impossible to make more than minimum wage (even at the topmost levels).
  - URSpider94 9y ago
    That is exactly the point of the theory. Wages increase roughly at parity for equally skilled workers, regardless of their productivity, since otherwise people wouldn't choose to go into careers that under-pay. While costs decrease for goods and services that benefit from productivity increases, they stay the same for goods and services where productivity doesn't improve. Since all other costs are dropping, this has the effect of making prices go UP for hands-on services.
  - Lazare 9y ago
    Yes, that's exactly the point/mechanism of the cost disease theory.
_ibu9 9y ago
Most of this seems fairly uncontroversial. This, however > But a lot of service workers are doing jobs that are unlikely to ever be fully automated. Nobody wants a robot for a teacher or a nanny, for example. And even if we get software with advanced diagnostic capabilities, patients are still going to want doctors to explain the recommendations and nurses to provide hands-on care. Maybe the author is taking a very short term interpretation of "ever" but I don't know why these jobs are unlikely to be automated of general AI arrives.
- binarybits 9y ago
  We're social creatures. We like interacting with other people more than we like interacting with machines, even if machines are more efficient in a narrow technical sense. I think this is especially clear for nannies--the main job of the nanny is to cuddle and interact with the baby in ways that only a human being can do. There are plenty of fitness videos and apps, but people still pay a lot of money for in-person fitness classes. People wouldn't stop going to Starbucks even if someone invented a vending machine that could produce coffee that tastes identical for half the cost.
  - mnm2 9y ago
    Starbucks has these machines and I find it awesome to get my coffee and even chilled latte there for 2,50 instead of 5 or 6 $ The machines taking our jobs is already happening and it is due to our human nature that we are not seeing it: We extrapolate the past into the future and we are seeing physical robots As some of you (technical people) can better imagine it is and will be much more 'just' software (but a journalist can't that well) The "reduced" demand for nannys is 'kids playing with their iPhones' and it is already here and going stronger What will we pay people for in the future? That they are likeable, sympathetic and because 'we like to "interact" with them'? Seems like this would split the world into very hard skilled people programming the machines and a lot of people catering "what's left" (on the human side, that machines can't do / didn't replace yet) to those Luckily I am a software developer "Doctors to explain the recommendations": You could also say "Selling the pills of the Pharma Industry with low regards to side effects" "Nurses to provide hands-on care": I see "Human Issues" like: She's telling you all her problems she has at home and you have to listen Tell me the Internet isn't better in quality (than "real random people") already?
fixxer 9y ago
Quick question for anyone who actually studied Baumol's theories: Did he bring into consideration how some services, such as education and health care, exist in an awkward limbo between services we pay for (right/libertarian view) and services we're entitled to (left view), resulting in a smash up of public subsidies and political quicksand? At face value, his theory is totally reasonable. BUT it seems totally reductionist to claim his drivers of cost are the only drivers (even calling them primary drivers seems foolish to me).
- URSpider94 9y ago
  The article points out that there are many non-governmental professions that show this effect: musicians (look at the prices for concert tickets), post-secondary education, which is not usually free, though it may be subsidized, restaurants...
  - mysterypie 9y ago
    > post-secondary education In many places, loans for university education are guaranteed by the government. So universities have no worries for charging absurd prices for useless degrees. Even if the graduates go bankrupt the university still gets their money from the government. (And in some jurisdictions bankruptcy doesn't discharge student loans.) The GP raises a legitimate point that government involvement in just about everything muddies the analysis.
ellyagg 9y ago
This article presents the reasons behind cost disease as if his interpretation is accepted fact, but that's not the case, right? Elsewhere, I've seen a lot more disagreement among smart people. For example, he says we have to pay band members a lot more now or they'd leave for better jobs and that this also explains the rise in education costs over the last few decades. Education costs have risen about 2.5x over the last 40 years, after adjusting for inflation. Has teacher pay risen 2.5x after adjusting for inflation?
- Lazare 9y ago
  Baumol's argument is that services will become relatively more expensive than goods, because productivity increases come faster in goods than services. This is obviously true, so yes, the article presents it as an accepted fact because it is. We have hard data for labour productivity by sector, manufacturing output, manufacturing employment, etc. We know the number of hours that goes into making a car versus giving a haircut, and how those numbers have changed over the past 40 years. > Education costs have risen about 2.5x over the last 40 years, after adjusting for inflation. Has teacher pay risen 2.5x after adjusting for inflation? No, which makes it clear that Baumol's cost disease is not the only driver behind education costs. :)
legulere 9y ago
Luckily we solved this by uncoupling wages from general productivity starting in the 70s http://www.epi.org/productivity-pay-gap/ http://www.epi.org/productivity-pay-gap/
- harryh 9y ago
  That graph is fairly deceptive. While labor's share of national income has gone down slightly (mostly post 2000) it's not nearly as dramatic as presented there. This is a good read on the topic: http://www.themoneyillusion.com/?p=30566 http://www.themoneyillusion.com/?p=30566 I think one of the bigger sources of the discrepancy is comparing mean productivity to median wages. If productivity and wages were both normally distributed, this would be fine. But they are not.
lr4444lr 9y ago
I'm having a hard time understanding the core of Baumol's theory as Vox is laying it out. I identify a few premises: 1) Rising opportunity cost in the labor market raises the boats of all jobs (within a given grouping of jobs with low friction of employee movement) 2) This rising opportunity cost occurred (in the U.S.) due to manufacturing, which was well paying. 3) Consumer goods prices are more affordable due to increased capital efficiency relative to income. 4) The extra discretionary dollars from (3) are being spent on labor intensive goods, which cycles back to (1) again. One point on which this loses me is the apparently hidden assumption that involuntary un(der)employment is low and stably so, and what markers of inflation we're using. I think there's an unexplained paradox: if we're losing goods-producing jobs, why isn't the competition in the service sector a countervailing force driving down wages? Not trying to be a critic, I just want to understand this better.
- Lazare 9y ago
  I'll take a stab at trying to explain it. :) First off, let's consider an economy with a single good (widgets), and no services. Any attempt to measure the economy as a whole (eg, to calculate GDP) is simply going to end up being the number of widgets produced per year. Further, the total compensation for all factors of production is going to be equal to that same number, which in turn means that any employee's compensation (whatever unit of currency is used) translates into a share of the widgets being produced. If everyone gets more efficient at producing widgets, the economy is wealthier (and GDP goes up). And each employee is (all else equal) receiving more widgets as their share. Conversely, if we assume that nominal wages have stayed constant, the price of widgets has gone down. So that's a basic framework we have: Productivity gains = a fall in real prices = a growing economy = an increase in employee compensation. These are all equivalent things; different sides of the same coin. If we're getting better at making widgets, then widgets will be cheaper, which means we can afford more widgets for the same amount of (real) money. That's what economic growth is. Second, let's consider an economy with two goods: Widgets and sprockets (and again, no services). Let's say half the work force is busy making widgets, and the other half is busy making sprockets. If we get better at making both, but we become much better at making widgets, then the price of widgets will start to collapse. Where 1 widget used to barter for 1 sprocket, soon it'll take 10 widgets to barter for 1 sprocket. Which is another way of saying that the price of sprockets will rise steeply. That's Baumol's Cost Disease. If you have multiple items, and they experience different productivity growth, the ones which experiences relatively lower productivity growth will become relatively more expensive. In addition, if you want to take the widget and sprocket example a step further, you might wonder what happens if productivity gains mean we're making more widgets than we strictly need. We'd probably see layoffs, as productivity gains mean fewer and fewer people are required to produce the widgets the economy needs. And of course the people left would probably earn very good wages, since they get to share the returns from the entire widget industry. Although given the high price of sprockets, they might not feel that rich. But where would the laid off people go? Well, into the sprocket industry; it's lower productivity means it can soak up more manpower. But with the returns from the sprocket industry split across more people, wages would be lower. Luckily, those wages would go further when purchasing cheap widgets, but high-price sprockets would be harder to obtain. Which is, if you squint a bit, basically what we see, with widgets taking the place of the manufacturing sector, and sprockets the services secotr. US manufacturing output is high and (the financial crisis aside) keeps getting higher; US manufacturing employment is low and keeps getting lower. Manufactured goods are cheap and getting cheaper; services are expensive and getting more expensive. Skilled engineers command excellent wages, but struggle to find material goods to spend it on. Workers in the service sector suffer from low wages, although their material standard of living is still good. Etc., etc. Sound familiar? Productivity gains are always a net good in total, however distributed. But the skewing effect of unequal productivity gains can be extremely wrenching. Telling someone that, actually, the machine shop they worked in is closing, but they can retrain as a hairdresser doesn't make people happy. Nor does pointing out that, even on the wages a hairdresser makes, they can afford a larger flat screen TV than the one they bought three years ago. They don't want a bigger flat screen TV; the last one is actually fine. They don't want to be a hairdresser with a giant flat screen TV; they want to be a machinist. With affordable health care. But that would require figuring out how to make sprockets as efficiently as we've figured out how to make widgets, and we haven't done that yet. (Although the US does seem uniquely bad at it, so maybe we can at least try to be less bad...)

92 points by imraj96 9y ago

Link to Wikipedia article on cost disease: https://en.wikipedia.org/wiki/Baumol%27s_cost_disease https://en.wikipedia.org/wiki/Baumol%27s_cost_disease

filleokus 9y ago
One problem I've always had when stumbling upon the cost disease theory is my sense that real wages not only "should" rise due to productivity gains, but also due to the wages of alternative occupations. If a person has the intellect / drive / grit / possibility etc. to pursue either an occupation as a university professor (where the productivity gain has been low) or a high end engineering job (with high productivity gains), it's obvious that if there's demand for university professors, universities will have to somewhat compete with the engineering firms for labour. I guess the situation is somewhat different for the arts, but still, if the real wages had been constant since the 1600s I guess very few would pursue a career as professional classical pianists if it would be impossible to make more than minimum wage (even at the topmost levels).
- URSpider94 9y ago
  That is exactly the point of the theory. Wages increase roughly at parity for equally skilled workers, regardless of their productivity, since otherwise people wouldn't choose to go into careers that under-pay. While costs decrease for goods and services that benefit from productivity increases, they stay the same for goods and services where productivity doesn't improve. Since all other costs are dropping, this has the effect of making prices go UP for hands-on services.
- Lazare 9y ago
  Yes, that's exactly the point/mechanism of the cost disease theory.

_ibu9 9y ago

Most of this seems fairly uncontroversial. This, however > But a lot of service workers are doing jobs that are unlikely to ever be fully automated. Nobody wants a robot for a teacher or a nanny, for example. And even if we get software with advanced diagnostic capabilities, patients are still going to want doctors to explain the recommendations and nurses to provide hands-on care. Maybe the author is taking a very short term interpretation of "ever" but I don't know why these jobs are unlikely to be automated of general AI arrives.

binarybits 9y ago
We're social creatures. We like interacting with other people more than we like interacting with machines, even if machines are more efficient in a narrow technical sense. I think this is especially clear for nannies--the main job of the nanny is to cuddle and interact with the baby in ways that only a human being can do. There are plenty of fitness videos and apps, but people still pay a lot of money for in-person fitness classes. People wouldn't stop going to Starbucks even if someone invented a vending machine that could produce coffee that tastes identical for half the cost.
- mnm2 9y ago
  Starbucks has these machines and I find it awesome to get my coffee and even chilled latte there for 2,50 instead of 5 or 6 $ The machines taking our jobs is already happening and it is due to our human nature that we are not seeing it: We extrapolate the past into the future and we are seeing physical robots As some of you (technical people) can better imagine it is and will be much more 'just' software (but a journalist can't that well) The "reduced" demand for nannys is 'kids playing with their iPhones' and it is already here and going stronger What will we pay people for in the future? That they are likeable, sympathetic and because 'we like to "interact" with them'? Seems like this would split the world into very hard skilled people programming the machines and a lot of people catering "what's left" (on the human side, that machines can't do / didn't replace yet) to those Luckily I am a software developer "Doctors to explain the recommendations": You could also say "Selling the pills of the Pharma Industry with low regards to side effects" "Nurses to provide hands-on care": I see "Human Issues" like: She's telling you all her problems she has at home and you have to listen Tell me the Internet isn't better in quality (than "real random people") already?

fixxer 9y ago

Quick question for anyone who actually studied Baumol's theories: Did he bring into consideration how some services, such as education and health care, exist in an awkward limbo between services we pay for (right/libertarian view) and services we're entitled to (left view), resulting in a smash up of public subsidies and political quicksand? At face value, his theory is totally reasonable. BUT it seems totally reductionist to claim his drivers of cost are the only drivers (even calling them primary drivers seems foolish to me).

URSpider94 9y ago
The article points out that there are many non-governmental professions that show this effect: musicians (look at the prices for concert tickets), post-secondary education, which is not usually free, though it may be subsidized, restaurants...
- mysterypie 9y ago
  > post-secondary education In many places, loans for university education are guaranteed by the government. So universities have no worries for charging absurd prices for useless degrees. Even if the graduates go bankrupt the university still gets their money from the government. (And in some jurisdictions bankruptcy doesn't discharge student loans.) The GP raises a legitimate point that government involvement in just about everything muddies the analysis.

ellyagg 9y ago

This article presents the reasons behind cost disease as if his interpretation is accepted fact, but that's not the case, right? Elsewhere, I've seen a lot more disagreement among smart people. For example, he says we have to pay band members a lot more now or they'd leave for better jobs and that this also explains the rise in education costs over the last few decades. Education costs have risen about 2.5x over the last 40 years, after adjusting for inflation. Has teacher pay risen 2.5x after adjusting for inflation?

Lazare 9y ago
Baumol's argument is that services will become relatively more expensive than goods, because productivity increases come faster in goods than services. This is obviously true, so yes, the article presents it as an accepted fact because it is. We have hard data for labour productivity by sector, manufacturing output, manufacturing employment, etc. We know the number of hours that goes into making a car versus giving a haircut, and how those numbers have changed over the past 40 years. > Education costs have risen about 2.5x over the last 40 years, after adjusting for inflation. Has teacher pay risen 2.5x after adjusting for inflation? No, which makes it clear that Baumol's cost disease is not the only driver behind education costs. :)

legulere 9y ago

Luckily we solved this by uncoupling wages from general productivity starting in the 70s http://www.epi.org/productivity-pay-gap/ http://www.epi.org/productivity-pay-gap/

harryh 9y ago
That graph is fairly deceptive. While labor's share of national income has gone down slightly (mostly post 2000) it's not nearly as dramatic as presented there. This is a good read on the topic: http://www.themoneyillusion.com/?p=30566 http://www.themoneyillusion.com/?p=30566 I think one of the bigger sources of the discrepancy is comparing mean productivity to median wages. If productivity and wages were both normally distributed, this would be fine. But they are not.

lr4444lr 9y ago

I'm having a hard time understanding the core of Baumol's theory as Vox is laying it out. I identify a few premises: 1) Rising opportunity cost in the labor market raises the boats of all jobs (within a given grouping of jobs with low friction of employee movement) 2) This rising opportunity cost occurred (in the U.S.) due to manufacturing, which was well paying. 3) Consumer goods prices are more affordable due to increased capital efficiency relative to income. 4) The extra discretionary dollars from (3) are being spent on labor intensive goods, which cycles back to (1) again. One point on which this loses me is the apparently hidden assumption that involuntary un(der)employment is low and stably so, and what markers of inflation we're using. I think there's an unexplained paradox: if we're losing goods-producing jobs, why isn't the competition in the service sector a countervailing force driving down wages? Not trying to be a critic, I just want to understand this better.

Lazare 9y ago
I'll take a stab at trying to explain it. :) First off, let's consider an economy with a single good (widgets), and no services. Any attempt to measure the economy as a whole (eg, to calculate GDP) is simply going to end up being the number of widgets produced per year. Further, the total compensation for all factors of production is going to be equal to that same number, which in turn means that any employee's compensation (whatever unit of currency is used) translates into a share of the widgets being produced. If everyone gets more efficient at producing widgets, the economy is wealthier (and GDP goes up). And each employee is (all else equal) receiving more widgets as their share. Conversely, if we assume that nominal wages have stayed constant, the price of widgets has gone down. So that's a basic framework we have: Productivity gains = a fall in real prices = a growing economy = an increase in employee compensation. These are all equivalent things; different sides of the same coin. If we're getting better at making widgets, then widgets will be cheaper, which means we can afford more widgets for the same amount of (real) money. That's what economic growth is. Second, let's consider an economy with two goods: Widgets and sprockets (and again, no services). Let's say half the work force is busy making widgets, and the other half is busy making sprockets. If we get better at making both, but we become much better at making widgets, then the price of widgets will start to collapse. Where 1 widget used to barter for 1 sprocket, soon it'll take 10 widgets to barter for 1 sprocket. Which is another way of saying that the price of sprockets will rise steeply. That's Baumol's Cost Disease. If you have multiple items, and they experience different productivity growth, the ones which experiences relatively lower productivity growth will become relatively more expensive. In addition, if you want to take the widget and sprocket example a step further, you might wonder what happens if productivity gains mean we're making more widgets than we strictly need. We'd probably see layoffs, as productivity gains mean fewer and fewer people are required to produce the widgets the economy needs. And of course the people left would probably earn very good wages, since they get to share the returns from the entire widget industry. Although given the high price of sprockets, they might not feel that rich. But where would the laid off people go? Well, into the sprocket industry; it's lower productivity means it can soak up more manpower. But with the returns from the sprocket industry split across more people, wages would be lower. Luckily, those wages would go further when purchasing cheap widgets, but high-price sprockets would be harder to obtain. Which is, if you squint a bit, basically what we see, with widgets taking the place of the manufacturing sector, and sprockets the services secotr. US manufacturing output is high and (the financial crisis aside) keeps getting higher; US manufacturing employment is low and keeps getting lower. Manufactured goods are cheap and getting cheaper; services are expensive and getting more expensive. Skilled engineers command excellent wages, but struggle to find material goods to spend it on. Workers in the service sector suffer from low wages, although their material standard of living is still good. Etc., etc. Sound familiar? Productivity gains are always a net good in total, however distributed. But the skewing effect of unequal productivity gains can be extremely wrenching. Telling someone that, actually, the machine shop they worked in is closing, but they can retrain as a hairdresser doesn't make people happy. Nor does pointing out that, even on the wages a hairdresser makes, they can afford a larger flat screen TV than the one they bought three years ago. They don't want a bigger flat screen TV; the last one is actually fine. They don't want to be a hairdresser with a giant flat screen TV; they want to be a machinist. With affordable health care. But that would require figuring out how to make sprockets as efficiently as we've figured out how to make widgets, and we haven't done that yet. (Although the US does seem uniquely bad at it, so maybe we can at least try to be less bad...)