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

> The widget company owner starts laying off widget makers to increase profit he can get the same output. Is there no diminishing margin utility for buying more widgets? In the simple example where widgets are the entire economy, this doesn't work, because profit is defined in terms of widgets, and because we can assume that there's no diminishing marginal utility for economic production as a whole. At the level of the entire economy, you never become richer by cutting production. (Because again, if the only good or service in the economy is a widget, then you have no way of expressing your profit or wage except in the number of widgets you have. If total production declines, the only way for you to increase your compensation is by obtaining a larger share of the overall pie.) For the more complex example with widgets and sprockets, there's absolutely diminishing marginal utility; I dealt with this in the passage starting "you might wonder what happens if productivity gains mean we're making more widgets than we strictly need. We'd probably see layoffs". And in general we can assume that goods will suffer much more sharply diminishing marginal utility than services. That, in turn, is what drives the shift in employment from more productive industries (which is another way of saying "industries which don't need as many people any more to fill societal demands") to less productive industries. If it helps, consider the earlier shift from agriculture to manufacturing: Around 50-150 years ago, we saw an incredible increase in productivity, a very very small increase in per capita food production, a very large drop in food prices, a very large drop in the % of income the average person spent on food, and the utter gutting of agricultural employment. New technology gave us the power to make 40 times more food than we were previously making, or the same amount of food with 1/40th the people. And at the big picture level, that freed up labour ended up in manufacturing, which had not yet had the same productivity increase. That's a good example of what Baumol's theory would predict. Does that make sense to you? Does your understanding of the theory suggest it would predict something else? > Did we get voluntarily make education "less productive" by increasing the decreasing the student:teacher ratio? Did we get better educational quality for it? Yes, we did lower productivity. And no, not really. But keep in mind, that when we say productivity here we're talking about labour productivity, so increasing employment will (basically) always lower productivity.