[HN Gopher] The Baumol effect
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The Baumol effect
Author : nilsbunger
Score : 88 points
Date : 2023-03-19 16:39 UTC (6 hours ago)
(HTM) web link (en.wikipedia.org)
(TXT) w3m dump (en.wikipedia.org)
| analog31 wrote:
| Granted it's a Wikipedia article and not the original research,
| but I have two quibbles. The first is that it still takes the
| same number of people to perform a Beethoven symphony, but 4 kids
| with electric guitars and barely any training can now perform
| music to a packed concert hall or dance floor. And those kids are
| under price pressure from someone who can now deliver the same
| productivity with a laptop. (I was one of those kids once).
|
| The second is that college professors have been phased out of
| teaching for a long time, increasingly replaced by adjuncts who
| earn starvation wages.
|
| Healthcare, I'm not sure about. At my most recent clinic visits,
| a doctor (i.e., MD) was nowhere in sight. A technician examined
| me, a physician's assistant interpreted the exam results, and
| ordered a visit to a MRI machine operated by technicians.
| (Thankfully, it turns out I'm OK). My healthcare costs twice as
| much as in most civilized countries for no good reason despite
| roughly equal labor inputs.
|
| It would be useful to remove education and healthcare from the
| graph and see if the theory still makes sense.
| bjt wrote:
| I agree with education and healthcare tending to obscure the
| effects. In both cases, normal price sensitivity gets skewed
| because the person selecting which product they want (the
| patient, or student) isn't directly paying (because of
| insurance, or student loans/grants).
|
| But there are plenty of service jobs that haven't seen big
| productivity gains. Masseuses, for example.
| RockyMcNuts wrote:
| Full-time tenure-track faculty salaries haven't really beat
| inflation since the late 60s. And senior profs have been
| substituted by adjuncts and grad students. And yet cost of
| college keeps soaring.
|
| https://www.aaup.org/sites/default/files/AAUP-2021-SurveyTab...
|
| Baumol's cost disease theory makes sense in general. But
| empirically, for a specific service, there's always a lot of
| other stuff going on, are they providing a superior good with
| rising demand as society gets richer, how easy is it to
| substitute lower quality adjuncts, etc.
| graeme wrote:
| >Granted it's a Wikipedia article and not the original
| research, but I have two quibbles. The first is that it still
| takes the same number of people to perform a Beethoven
| symphony, but 4 kids with electric guitars and barely any
| training can now perform music to a packed concert hall or
| dance floor. And those kids are under price pressure from
| someone who can now deliver the same productivity with a
| laptop. (I was one of those kids once).
|
| I'd argue this is still a version of the Baumol effect. For
| example, some people look back at 1950s nightclubs and wonder
| why they can't have that now.
|
| It's because, as you say, the productivity of automatic music
| increased but live orchestras didn't.
|
| So if you want "music" you can get it cheap, if you want "live
| orchestra", you can't.
| dccoolgai wrote:
| Seems incredibly shortsighted, even in the limited examples
| provided; It says "the number of musicians required for a quartet
| is the same as in Beethoven's day" which is true, but even by
| 1960 recording technology provided those musicians the chance to
| be more "productive" by all but the most myopic of measures (i.e.
| "times they drew their bow across the strings").
| dmix wrote:
| It's a poor example to use for sure but it's also just the
| wiki. Not all of them are designed to be persuasive or
| necessarily have gotten much attention to be well
| written/supported.
|
| You're free to contribute a better example to the Wiki. There's
| plenty of low productivity jobs with high wages being propped
| up by the general productivity of the other sectors (corporate
| middle management, administrators everywhere, tons of
| consulting gigs, etc). Or someone could expand the critique
| section if you can find some better sources.
| hgsgm wrote:
| The market for recorded music overlaps but is not the same as
| the market for live music, as proven by the existence of
| chartered live performances of already recorded music.
| MajimasEyepatch wrote:
| These comments are the worst sort of Hacker News comments: a
| bunch of people who spend 45 seconds scrolling a Wikipedia
| article about a major concept from a field other than software
| and dismissing it as "obvious."
| convolvatron wrote:
| you have to admit its kinda of a strange 'law', unless you
| really believe that supply and demand is the core inviolate law
| of collective human behavior..in which case such an exception
| might be interesting.
| fallingknife wrote:
| Baumol is not an exception to supply and demand
| LudwigNagasena wrote:
| It is not an exception. It is a consequence.
| tomrod wrote:
| Hi! I'm an economist, and I am genuinely enjoying reading
| everyone's perceptions. If we were to presume that this was the
| first time your representative HN commentator read about it,
| then we can congratulate the Wikipedia authors for sufficiently
| communicating the concept (a passing grade, as it were).
|
| I thought you might like a counterpoint to your consternation
| with your fellow HN commentators.
|
| Baumol cost disease is fascinating.
| formerly_proven wrote:
| What actually happened around 2000 that caused a step change in
| the rate of tuition increases?
| beefield wrote:
| I think the only consistent and reasonable measure for
| productivity of labor is how much the economy is willing to pay
| for the labor[1]. So if the society is willing to pay nurses n
| times higher salaries than 20 years before, the value of nurses
| work has become n times higher, and the productivity has
| increased n-fold. (minus inflation). And the baumol effect
| vanishes as a puff of smoke into air.
|
| [1] But surely a worker creating only one thingie at the same
| time than other produce five thingies must be less productive,
| you say? Well, if the first one is able to sell his thingies at
| more than 5 times higher price than others, quite obviously s/he
| is more productive than the others.
| hgsgm wrote:
| So if a billion robot nurses suddenly appear, doing the same
| work as human nurses, driving prices down due to competitive
| and lower costs for the robots, how has value of the product
| decreased?
| NoZebra120vClip wrote:
| Robot nurses, huh?
|
| How do you measure (and compensate workers for) compassion?
| Making ethical decisions? Maintaining confidentiality? Acting
| on a combination of training and instinct? I mean, okay, we
| can conceive of robot nurses who do the latter, but how does
| a robot nurse demonstrate compassion and empathy for
| patients? I think that stuff is priceless.
| nilsbunger wrote:
| This isn't just about productivity of labor, it's about
| productivity in terms of end result. That kind of or
| productivity is deflationary, not inflationary.
|
| Eg a TV costs 10% of what it did 20 years ago. Fewer person-
| hours of work are involved in making one TV. Less of the
| average home budget goes to TVs than it used to, even while
| people are buying better tvs.
|
| That's a massive productivity increase in the lingo of
| economics.
|
| You could replace TV with solar panels, cars, computers, etc.
| Less human involvement per good produced => productivity
| increase.
| beefield wrote:
| So because one set of chinese are able to make bunch of
| counterfeit casio watches way cheaper than another set of
| chinese can make apple watches, the first one are more
| productive because both make watches that show time? Maybe
| there is a _reason_ why another watch or another nursing
| service or another tv (at another time) is more expensive?
| Maybe the reason is that in the more expensive case they
| _produce more value_ i.e are more productive?
|
| By the way, just started wondering why nobody is worried
| about the atrocious productivity development of CEOs over the
| last decades? Should shareholders maybe hire some consultants
| to advice the CEOs how they could make their work more
| efficiently that they could become cheaper?
| [deleted]
| LudwigNagasena wrote:
| Why do you think it is inconsistent and unreasonable to choose
| a measure of productivity that says y=5x is more productive
| than y=x in terms of real output of y given real input of x?
|
| > So if the society is willing to pay nurses n times higher
| salaries than 20 years before, the value of nurses work has
| become n times higher, and the productivity has increased
| n-fold. (minus inflation).
|
| How do you disentangle value and inflation? I think that makes
| your definition incoherent as you just loop back to real output
| and real productivity to measure those things.
| BigCryo wrote:
| Economics is basically the ideology of the upper class.. it is
| not a science, it is ideology.. I would suspect that this cost
| disease thing is driven in large part by modern monetary theory
| and increased liquidity through printing money, driving up asset
| prices and causing inflation by financial speculation.. the
| increase in asset prices such as housing causes the increase in
| wages.. the upper class would have us believe that the wage
| increase causes inflation. Maybe in the past but in the last 100
| years or so and increasingly in the last 20 or so inflation and
| the cost disease that is basically described in this linked
| article above is probably driven mainly by inflation caused by
| asset price increases caused by financial speculation fueled by
| hyper liquidity...
|
| Edit.. those who vote me down take a look at inflation before the
| rise of central banks.. yes of course there were periods of
| inflation but then they were followed by periods of deflation..
| this evidence of that take a look at the wages for an average man
| from 1700s all the way through the early 1900s it was basically
| the same.. whoever wants to central banks came into play
| inflation crept upward and upward
| tomrod wrote:
| > it is not a science, it is ideology
|
| Hello, economist here! You are half correct. It's not a
| science, it is a social science. As far as methods go, it's
| quite imperialistic and has been the source of a lot of
| methodology improvements in many fields over the last several
| decades (especially in mechanism design and econometrics,
| IMHO).
|
| Though, there are certainly ideological branches of economics.
| A good example is the "Austrian school," which claims to be the
| "mainline" of economics instead of mainstream per Pete
| Boettke.[0] There are also pretty dead arguments around
| Institutional Economics and similar that aren't really active
| fields anymore. However, this notion that standard economics is
| somehow lost is more reactionary and prosaic than it is sublime
| -- mainstream economics tends to do quite well in the
| marketplace of ideas and in evaluation, though subject to the
| same replication concerns all social sciences face.
|
| Recent work in causal inference (which ML enthusiasts
| celebrate) has absolutely upped the bar for economists' output.
|
| As for your hunches, they aren't really on point or based in
| reality. Modern Monetary Theory came a long time after Baumol's
| elucidation of sectoral cost disease. Recall that macroeconomic
| theory is only a small part of economics as a whole, even when
| considering its associated fields of inquiry.
|
| [0] https://www.peter-boettke.com/mainline-economics
| BigCryo wrote:
| Academia is fraught with fraud... Once the establishment has
| settled on a narrative regarding some subject, professors
| will be falling over themselves to present studies based on
| Cherry picked data that will support the establishment
| narrative.. very few studies are actually reproducible..
| tomrod wrote:
| The world is fraught with fraud, which is why we should
| encourage replication in academia.
| rguillebert wrote:
| You're only saying this because you don't like the outcome of
| economic research. So called "soft" sciences are the best way
| to get close to the truth in those fields even if it's harder
| to get undeniable answers.
| the_gipsy wrote:
| The same principle applies to calculating your salary: it's just
| what another company would pay, nothing else.
| pydry wrote:
| It's kind of amazing that an effect that trends society toward
| egalitarianism was initially called a "disease".
|
| Economists are a wacky bunch.
| hgsgm wrote:
| If you prefer, you can think of it as Baumol's productivity
| paralysis for human-centered labor.
| philwelch wrote:
| Making everything more expensive doesn't actually trend towards
| egalitarianism, except in the limit case where no one can
| afford anything.
| bryanlarsen wrote:
| Baumol's effect doesn't make things more expensive, it makes
| them get cheaper at a slower rate than other things, so they
| only get more expensive relatively.
| ajuc wrote:
| It depends on your point of view.
|
| If you look from the POV of low-level worker in a rich region
| it's nice that you earn 5 times more than a person doing the
| same work in a poor country.
|
| If you look from the POV of low-level worker in a poor region
| it sucks that you earn 20% as much as a person doing the same
| work you do exactly as efficiently in a rich region. And it
| sucks that it doesn't depend on your effort and efficiency. It
| mostly depends on how well the big buck industries work in your
| region.
|
| This is the main reason I'm frustrated every time people post
| maps of "labor productivity per hour". With the implication
| that people in poor countries are inefficient and that's why
| they are poor.
| pydry wrote:
| >If you look from the POV of low-level worker in a poor
| region it sucks that you earn 20% as much
|
| And if you pit a slave from an even poorer region against
| them then it sucks even more. They earn nothing at all while
| that worker from a poorer region earns money for work.
|
| Some people think that because of this their privilege they
| need knocking down a peg.
|
| >This is the main reason I'm frustrated every time people
| post maps of "labor productivity per hour". With the
| implication that people in poor countries are inefficient and
| that's why they are poor.
|
| I dont even see why this is controversial. Your efficiency
| would drop considerably if you moved to a 3rd world country
| and vice versa.
| ajuc wrote:
| > Your efficiency would drop considerably if you moved to a
| 3rd world country and vice versa.
|
| Not necessarily. A barber in Bzdziszewo Kolonia earning 5
| USD per haircut and a barber in New York earning 50 USD per
| haircut can work exactly as efficiently and do exactly as
| good a job. The main difference is in how much money their
| customers have.
| hgsgm wrote:
| > Your efficiency would drop considerably if you moved to a
| 3rd world country and vice versa.
|
| Then why is clothing 10x more expensive to produce in USA
| vs Bangladesh?
|
| Why are iPhones made in China and India?
| pydry wrote:
| Because labor is cheaper in Bangladesh. Yours would be
| cheaper too if you moved there.
| physPop wrote:
| Yes but your argument was efficiency.
| fnordpiglet wrote:
| It's fascinating that competition for labor in the market for the
| human life is a disease.
| uoaei wrote:
| I am sure at the time it was a novel insight, but its punchiness
| is largely undercut by our contemporary economics which
| recognizes (if somewhat begrudgingly) that for consumers to
| continue contributing to the economy, they need to get paid
| sufficient wages to afford goods and services locally. It is
| ultimately an ancillary effect resulting from the holism of
| economies using common currencies.
| supahfly_remix wrote:
| If the Baumol Effect is true for college tuition, are college
| professors receiving better than inflation pay raises
| commensurate with the increases in tuition?
| nilsbunger wrote:
| Better than inflation? Generally yes.
|
| Better than jobs which are replaceable with automation? For
| sure.
| hgsgm wrote:
| Commensurate with _tuition_ inflation? No.
| sorokod wrote:
| Interesting how the explanation for the effect in Wikipedia
| contrasts with the practice of hiring engineers with high
| salaries for fake jobs.
| kieckerjan wrote:
| This is a very personal take, but one of the things I have always
| attributed to the Baumol effect is the following.
|
| My partner works in the (semi) healthcare. She loves it but her
| main stress factor (nemesis even) has been lousy management. And
| she has a point. The managers in her organization are people who
| would be fired after a few weeks in my organization. I work in IT
| and we pay our managers serious money. I am the last one to say
| they are perfect or more than marginally competent, but they get
| the job done.
|
| What my partner ends up with are the managers that cannot get a
| job in the better paying segment. And that is very much to the
| detriment of our healthcare.
|
| The Baumol effect is not as much about, say, musicians who decide
| against their calling to become engineer instead, but about the
| job roles that can switch markets easily. Among those, the real
| talent follows the money. And to be honest, I cannot blame them.
| It is just human nature. But that does not make it less of a
| problem.
| gopalv wrote:
| > What my partner ends up with are the managers that cannot get
| a job in the better paying segment.
|
| This observation is sort of downstream from the Baumol effect
| rather than the effect itself or more accurately when the
| effect is countered explicitly.
|
| The core loop of the effect is when you need to pay a
| healthcare manager a ballpark similar salary when putting out a
| "for hire" ad to get applicants or alternatively hide the
| salary filter till much later in the interview sunk cost.
|
| The problem is that you end up having the managers first apply
| for other jobs before getting to the low-paying job, so the
| initiators of the interaction (i.e "apply for jobs") sieve out
| before getting to the job that pays almost the same but needs
| less competence.
|
| So you pay about as much, but get even less value for money
| than paying more.
|
| When you put Baumol effect, Dutch Disease[1], Gale & Shapley[2]
| and the Market for Lemons[3] together, you get to see the job
| market from a lot of different angles in my immediate
| neighbourhood.
|
| Silicon valley has a Dutch disease for math teachers for
| instance, but also the Baumol effect for the English staff. Not
| complaining about them, I'd like my kids to learn history, math
| and english from great teachers & don't want to do Kumon or
| whatever else the other kids are doing after school.
|
| The way the schools try to fix it is by making the schools
| initiate hiring through temps and do extensive adjunct periods
| before any concept of tenure to work around the market for
| lemons (you can't hire a temp managing director, which is
| what's different there).
|
| This really sucks for the good teachers who want to have a
| happy late 20s in the career they prefer.
|
| [1] - https://en.wikipedia.org/wiki/Dutch_disease [2] -
| https://www.jstor.org/stable/2312726?origin=crossref [3] -
| https://en.wikipedia.org/wiki/The_Market_for_Lemons
| mihaic wrote:
| I had a similar contradiction with a friend yesterday, and I
| argued that the big winners of the AI revolution might actually
| be those in construction/electricians for instance, as their
| livelyhood won't be significantly affected in the next 10 years,
| as LLM can't be used to help or replace them in any way.
|
| I'm very worried and currious about the future, regardless.
| ghaff wrote:
| There are a number of interconnected things, not all of which
| are probably properly called the Baumol effect. However, it
| seems that given more efficient manufacturing, demographic
| trends, and other things, one of the results will be that we
| see more automation/AI, self-service, and things we decide are
| maybe occasional luxuries rather than something we partake of
| routinely.
| AlexandrB wrote:
| > By most measures, productivity growth in the education sector
| over the last several decades has been low or even
| negative;[40][41] the average student-teacher ratio in American
| universities, for instance, was sixteen to one in 2011, just as
| it was in 1981.[37] Yet, over this period, tuition costs have
| risen substantially.
|
| I'm just a layman, but this method of measuring "productivity" in
| education is absolutely bonkers and seems to treat the actual
| _education_ received by each student as a fungible commodity.
| Thus a student in a "Rock Music History" class is roughly
| equivalent to a student in Quantum Physics 401.
|
| Is this how economists actually think of education?
| thrill wrote:
| There doesn't seem to be any compensation for the vastly greater
| spending on administration in colleges. Yale's non-instructional
| spending has grown 3 times faster than the cost of tuition in the
| last two decades. Is that sort of support structure really
| necessary or has it simply been taking advantage of the
| relatively easily obtained money that students now have available
| to them. If colleges have little skin in the game with a
| student's inability to ever pay, what economic incentive is there
| to run a lean operation?
| fallingknife wrote:
| > Is that sort of support structure really necessary
|
| What support structure is necessary now that wasn't 50 years
| ago? (Except for maybe IT, though even that's less true now
| with AWS)
| nilsbunger wrote:
| Baumol's law _enables_ this growth in the administrative state
| - the money is available to pay for tuition, so it gets spent
| however the university wants.
| dmix wrote:
| The wages are what's relevant with Baumol. It's possible
| rising wages of parents helped generate the administrative
| burden but 90% of the time it was the flood of cheap student
| debt via gov, every kid thinking they need to go to college,
| the massive boom in demand via international students, etc.
|
| The fact university administrators responded to boom in
| demand/capital by hiring way more administrators is probably
| not directly a consequence of Baumol either. But it _is_ why
| the costs of these administrators is so expensive, t which is
| reflected in tution costs.
|
| Maybe you could blame it because being a uni admin is an easy
| job to get with little actual output demanded of you, but you
| still get paid like a high productivity sector employee, so
| people flocked to it. And if they were paid a wage connected
| to their individual output they wouldn't be nearly as many of
| them and tuition costs could go down.
|
| But the universities could also just fire 2/3rds of them and
| still function while paying the rest normal high wages.
| gruez wrote:
| >There doesn't seem to be any compensation for the vastly
| greater spending on administration in colleges. Yale's non-
| instructional spending has grown 3 times faster than the cost
| of tuition in the last two decades.
|
| Maybe Yale is an outlier here because there's another
| analysis[1] that looks at aggregate data for nonprofit and
| private colleges collected by NCES, and that analysis showed
| that support (ie. non-teaching) costs have outgrown teaching
| costs.
|
| [1]
| https://www.lesswrong.com/posts/fJvjin8ETkzhFdadC/accounting...
| californical wrote:
| Maybe I'm just misreading but it sounds like you're saying
| the same thing -- non-teaching costs are growing much faster
| than teaching costs
| gruez wrote:
| Sorry, I mistyped my original comment. I meant to say that
| non-teaching costs have not grown faster than teaching
| costs. From the article:
|
| >Again, everything is per FTE per year. So support cost
| (student services, academic and institutional support) is
| roughly comparable to instruction cost (teaching), and the
| two have risen at similar rates in the 1999-2013 window.
| Research expenditures, meanwhile, have been pretty flat.
| crazygringo wrote:
| Here's a good article:
|
| https://www.forbes.com/sites/carolinesimon/2017/09/05/bureau...
|
| The answer is it's both. On the one hand there isn't enough
| incentive to rein in costs. But on the other hand,
| administrative requirements really have been going way up:
|
| > _Perhaps most controversial is an increasing raft of federal
| and state regulations that universities must abide by: the
| Clery Act, which requires campuses to report their crime
| activity; new Title IX regulations that govern the handling of
| sexual assault; and Family Educational Rights and Privacy Act
| (FERPA) requirements for providing educational records.
|
| > In 2013 and 2014 alone, the Department of Education released
| rules and directives on 10 new sets of issues, ranging from
| proposed rules on teacher preparation programs to Net Price
| Calculator requirements to specific regulations for FAFSA
| verification. Complying with all these rules requires
| additional staff and additional money. The resources required
| are not insignificant: a Vanderbilt study of 13 colleges and
| universities found that regulatory compliance comprises 3 to
| 11% of schools' nonhospital operating expenses, taking up 4 to
| 15% of faculty and staff's time.
|
| > "It is pages and pages and pages of regulations that require
| more sophisticated professionals," says Penny Rue, vice
| president for Campus Life at Wake Forest University and board
| chair-elect of the National Association of Student Affairs
| Professionals. Rue adds that incidents on college campuses,
| such as the 2007 shooting at Virginia Tech, contributed to a
| need for administrative spending that often goes unnoticed,
| from case management services to threat assessment teams._
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