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Baumol's Cost Disease
- CPLX 10mo ago1. 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.
- ungreased0675 10mo agoI’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.
- nostrademons 10mo agoEvidence 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-economies-of https://www.construction-physics.com/p/why-are-there-so-few-...
- drewmate 10mo agoI'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.)
- wat10000 10mo agoHousing 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.
- steveBK123 10mo agoMy 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.
- cjbarber 10mo agoOne 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.
- derf_ 10mo agoThe 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.
- wat10000 10mo agoYour 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.
- AnimalMuppet 10mo agoFinance funds hospitals and cancer research institutes - or at least, it enables the gathering and concentrating of resources to do so. Now, advertising...
- rwmj 10mo agoSome 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.
- nospice 10mo ago
- websiteapi 10mo agoI'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.
- Dr_Birdbrain 10mo agoDon’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.
- websiteapi 10mo agosure, but take furniture - is high quality furniture cheaper today than 50 years ago, normalized by inflation? from my investigation the answer is no.
- randallsquared 10mo agoIt 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.
- ghaff 10mo agoProbably 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.
- adam_patarino 10mo agoI 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.
- hibikir 10mo agoThat'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.
- adam_patarino 10mo agoYeah 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.
- Mistletoe 10mo agoComputer 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.
- kgwgk 10mo agoThe 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.
- Mistletoe 10mo agoNo 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.
- paulpauper 10mo agoaren't there open source programs that have caught up to early 2000s era photoshop?
- steveBK123 10mo agoA 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.
- esafak 10mo agohttps://www.canva.com/newsroom/news/all-new-affinity/ https://www.canva.com/newsroom/news/all-new-affinity/
- steveBK123 10mo ago
- bilsbie 10mo ago[flagged]
- witte 10mo agoTechnically not a source, and even less so than wikipedia.
- noitpmeder 10mo agoAt least the URL immediately calls out the fact the site is nothing but AI spew.
- duxup 10mo agoIn 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."
- evanjrowley 10mo ago>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.
- duxup 10mo agoIt'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.
- Pet_Ant 10mo ago
- dang 10mo agoRelated. Others? The Baumol Effect and Jevons paradox are related - https://news.ycombinator.com/item?id=45955879 https://news.ycombinator.com/item?id=45955879 - Nov 2025 (67 comments) Baumol Effect - https://news.ycombinator.com/item?id=43065115 https://news.ycombinator.com/item?id=43065115 - Feb 2025 (1 comment) The Baumol effect - https://news.ycombinator.com/item?id=35220758 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 https://news.ycombinator.com/item?id=33150094 - Oct 2022 (2 comments) Baumol Effect - https://news.ycombinator.com/item?id=24812620 https://news.ycombinator.com/item?id=24812620 - Oct 2020 (99 comments) Baumol Effect - https://news.ycombinator.com/item?id=20443675 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 https://news.ycombinator.com/item?id=14284466 - May 2017 (33 comments) Baumol's Cost Disease - https://news.ycombinator.com/item?id=12679629 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 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 https://news.ycombinator.com/item?id=972082 - Dec 2009 (14 comments)
- yobbo 10mo agoIt 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.
- CrossVR 10mo agoIt 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.
- zharknado 10mo agoThe 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.
- prmph 10mo ago> 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?
- maxerickson 10mo agoProductivity has always imposed an upper limit on wages.
- lumost 10mo agoIt’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.
- maxerickson 10mo agoThose 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.
- jayd16 10mo agoIs 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.
- trashface 10mo agoTextbooks are expensive because the authors need to live in houses, which are also expensive.
- jadenPete 10mo agoReally 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.
- mjh2539 10mo agoThe 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).
- Thomasrosalina 10mo ago[dead]
- beefbombaystyle 10mo ago[flagged]