Baumol Effect | Hacker News Reader

Baumol Effect

en.wikipedia.org

"they pointed out that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century; the productivity of classical music performance has not increased. On the other hand, the real wages of musicians (as in all other professions) have increased greatly since the 19th century"

This seems painfully naive to the point of farce. Do they really believe the value of playing music is derived solely from the effort to produce it and not from how many people consume it and under what circumstances it is consumed?

When I was an econ undergrad and I would hear absurdly naive logic like this I always thought it was a sign that I didn't understand some complicated underlying concept. But it's just nonsense. I still don't understand why people don't call this obvious absurdity out.

> This seems painfully naive to the point of farce. Do they really believe the value of playing music is derived solely from the effort to produce it and not from how many people consume it and under what circumstances it is consumed?

The Baumol Effect is about relative, not absolute prices. Musicians may have become more productive over time but producers of goods have become much, much more productive. So services increase in relative price over time while goods decline.

It’s analogous to the Balassa-Samuelson Effect. Services are cheaper in poor countries than in rich ones because the entire economy is less productive. As it becomes more productive the leading sectors bid up the average wage to get higher quality workers ,or just more of the same quality, and the low productivity sectors either disappear or raise their wages to keep their labour, passing on the costs to consumers.

That it’s a change in relative rather than absolute prices is the entire point of the Baumol Effect.

If you need a refresher with applications to the American Economy Alex Tabarrok wrote a short book on it recently, Why Are The Prices So Damn High?

https://www.mercatus.org/system/files/helland-tabarrok_why-a...

If you look at nothing else check out the first graph, on page ten. Services have gotten more expensive and goods cheaper, housing excepted, for over 50 years.

The interpretation I like, which is basically a restatement of the Baumol effect, is that the value of something like music isn't remotely in the work done but in how the listeners feel about it.

The market is effectively determining that modern musicians are more productive than the musicians of old because they are entertaining more economically productive people and the market is valuing the entertainment with reference to who the audience is. Similarly with the rich countries; the people supporting highly productive advanced economies get more, because markets value outcomes more than inputs.

It is hardly fair, but at that level fairness is cripplingly expensive.

Seriously. They also ignore the fact that the productivity of classical music performance has increased.

Four musicians and their instruments can perform a string quartet for a crowd the same today as they could in 1850.

Four musicians and an engineer with instruments and recording gear can record that track today and make it available to the masses via one of a number of media vehicles-- and that recording and those mechanisms are different today than they were in 1995, than they were in 1965, and it's something that was entirely impossible in 1850.

In your example, you have two groups of four musicians, one with an engineer, and one without.

- Group A has the same productivity as a similar group from 1850

- Group B (with the engineer and recording gear) has way higher productivity due to mass distribution

Because the two labour markets are connected (people can move between markets A and B), the folks in Group A have gotten pay increases due only to the increases in productivity in market B.

If you honestly believe that the salaries of musicians are tied to the efficiencies at which they can produce units of music I have some bridges I'd like to sell you.

You might also think about the effects of amplification and large video screens that can allow some live performances to reach more people.

But we should ignore that, because the point of the comparison is to find something that hasn't changed between now and then and compare the cost of labor. This is of course cherry-picking, but it's not intended to be typical. It's a striking example.

Workers aren't paid according to the market value of their work but rather for what they can demand in the labor market and what it costs to produce and reproduce their labor. That hasn't changed.

Also, if anything, per capita demand for classical music is less now that it was a century or two ago.

Baumol's cost disease is a powerful explanation for why people like doctors, musicians, and nanny's seem to be paid more now than they were before. Don't dismiss it out of hand.

Baumol’s cost disease might be a true phenomenon, but it makes artificial constraints not he supply of labor all the more insidious. The cost of a doctor or nanny is going up, but Congress + the AMA artificially limit the amount of medical residencies. That’s one small reason why the medical industry is broken. There are also many regulations that serve to increase the average price of a nanny.

Musicians, on the other hand, were subject to intense technological disruption. They offer a fundamentally different product with different methods of distribution. I don’t think they are a good illustration of Baumol’s cost disease.

Constraints on the supply of labor - sorry for the typo

Did you dismiss physics for the same reason? A perfectly elastic ball rolling down a frictionless plane, how absurd!

I think this is a valid response but ultimately an invalid comparison.

The laws of physics are specific and testable. When we abstract them from reality we can be very clear about what the abstractions are and the rules of the hypothetical world we are testing the abstractions in.

In economics the situation is very different. We don't even waste time trying to define how things work in reality. All that exists are the abstractions and its never clear in which hypothetical universe those abstractions are being tested because even the poeple writing the theories frequently don't bother with defining them and then change the rules as people challenge their theories.

In physics courses, it's pretty clear that perfect balls and frictionless planes aren't actually real. OTOH, I recently had a debate with an economist that nearly insulted me because I doubted that infinite GDP growth was possible in a finite world; you "simply" need to infinitely enhance value of goods and services, which is perfectly possible because it hasn't been proved impossible. Plus it's taught in Econ 101, so how stupid should I be to doubt such a little thing?

There is no known limit to GDP growth because GDP growth doesn't just depend on an increase in material goods, and value judgments can change over time. Thus it is theoretically possible that after a whole series of "this year is better than last year" growth you end up exactly where you started as values shift.

Edit: In any case, GDP growth shouldn't be a policy target.

> Thus it is theoretically possible that after a whole series of "this year is better than last year" growth you end up exactly where you started as values shift.

Not really, since real GDP growth is measured in value relative to a like-goods price index.

> In any case, GDP growth shouldn't be a policy target.

It shouldn't be the exclusive policy target, but it makes plenty of sense as one positive factor in the big optimization function. Ceteris paribus, output increases are desirable.

> infinite GDP growth was possible in a finite world

A circle is finite but what about Pi? Does it ever end?

In every class that I took, any such example was always introduced with "Not that a perfectly elastic ball actually exists" whereas with this Baumol effect they are suggesting that this is a real thing in the real world.

> When I was an econ undergrad and I would hear absurdly naive logic like this I always thought it was a sign that I didn't understand some complicated underlying concept. But it's just nonsense. I still don't understand why people don't call this obvious absurdity out.

This explains a lot about how MBAs mismanage things (and people are afraid to call their BS)

Latest incarnation of this seems to be "how to make money with dropshipping" (they're just forgetting that the actual value they provide is close to 0 and the bubble is probably going to burst)

> Do they really believe the value of playing music is derived solely from the effort to produce it

If you remember anything from your economics courses, you should remember that in an efficient market, the price of something should decline to its marginal cost of production, due to competition undercutting the overpriced competitors. Your point might be relevant if there are wild swings in the demand for music.

And has that happened? Instead top trained musicians command huge salaries and people pay out the ass to see them.

"In an efficient market"

Well we aren't living in a perfectly efficient vacuum so who cares? You are point in case what Im talking about. You believe that the sanctity of your theoretical view of the world is more important than what happens in the real world. I could argue about what happens to musician salaries if they all were covered in butter and learned how to fly. It would be about as useful of a conversation as debating perfectly efficient markets.

Economics truly earns its reputation as the dismal science.

Read up on what "dismal science" means. https://www.investopedia.com/terms/d/dismalscience.asp

Good read, I was not aware of that. I still feel it is somehow apt.

I always thought the fact that it described rising wages and living standards as a disease pretty clearly indicated that there was something wrong with them.

Did you drop out?

I did not. I hold a degree in economics and another in anthropology.

My girlfriend works in healthcare. She complains a lot about stress at work. Burned-out colleagues, unrealistic schedules, a rotten culture. As far as I can judge from her stories, this has mainly to do with shitty management. Her manager would not last two weeks at my company. My company can afford good managers. Since managers are not tied to a sector (in the way nurses or musicians are), the good ones tend to go where they are payed good money and the bad ones end up wreaking havoc where they are payed at least some money. That, also, is Baumol in action.

Some related threads:

2017 https://news.ycombinator.com/item?id=14284466

2016 https://news.ycombinator.com/item?id=11964673

2009 https://news.ycombinator.com/item?id=972082

Isn't the premise that "real wage growth is closely tied to labor productivity changes [of that particular job, in all cases]" just completely wrong in itself?

If increased productivity (of everyone in a profession due to some new technology) means less people are needed in a given profession, demand for employees decreases and thus wages go DOWN along with product prices.

Also the "natural equilibrium state" for wages is for them to be all equal regardless of profession because otherwise people would have trained for and went to a more profitable career until wages are equalized, and this only doesn't happen because people are not equal and changing careers is costly.

So the "Baumol cost disease" seems like a pretty reasonable observation instead of being somehow paradoxical.

I'm not an economist but I expect Jevon's paradox to make the cheaper productivity result in increased consumption of the productivity. And that seems to be what we see.

>If increased productivity (of everyone in a profession due to some new technology) means less people are needed in a given profession, demand for employees decreases and thus wages go DOWN along with product prices.

Demand is elastic. Productivity growth triggers price declines and increased consumption in many industries. Most industries are not static, they continue to invest in technology (the underlying basis for productivity growth). The more investment they make, the cheaper it is to deliver their goods/services and the more they sell. This can push those industries to hire more workers and drive wage growth higher.

Paradox is always in the eye of the beholder and their assumptions.

The article makes for odd reading. The example of the productivity of musicians seems both arguable and unnecessary. The principle could be better described with a theoretical task.

As a hypothetical, There is a magic button in Australia that has to be pressed by a human being once a minute or London explodes. They used to pay someone a loaf of bread a day to press the button. Now they have to pay someone a real income to do the same task.

I'm not entirely sure why the emotive term "cost disease" is used. The principle essentially says when there is a competitive labour market You have to pay more to get a person to do a job. You cannot exploit so easily.

Of course They could just let London explode, or not have music. That people choose not to would suggest that people value what they are getting, suggesting that they were perhaps truly worth a lot more than they were being paid for. Not a matter of cost increasing for a lack of productivity gain but the cost approaching the real value when there is no exploitation artificially keeping the price down.

Musicians are used instead of imaginary button pressers because this is a real world effect.

Think about it this way...assume everyone is paid fairly for the value of their work, no "exploitation" (although that's a tough thing to impartially define). A factory worker who does 10% of the work in producing 1000 widgets per day can enjoy a much higher standard of living than his grandfather who made 5 widgets a day with hand tools. In fact, all else equal, his standard of living could theoretically increase 20X, but in reality widget prices go down and there is a factory owner taking a cut.

A doctor who still sees 10 patients a day, the same rate her grandfather saw, will not have seen any increase in standard of living at all, unless she's charging more per patient.

The modern doctor is far more productive. She's healing 10 highly productive units.

In fact I think that could generalise for all service based work. Providing a service enables people to not have to do the thing themselves. As such the productivity of the service can be considered a factor of the productivity of the people they are providing the service for.

The Baumol effect does not imply that the value of the doctor is not higher today. It just means that on a per-unit basis physicians are not more productive (and possibly less today thanks to EHR). A doctor can still only see 1 patient every 15 minutes just like they could 50 years ago.

A BMW factory that produces 100 cars/day might be more valuable than a Toyota factory producing 100 cars/day, but it wouldn't be more productive on a per unit basis.

That seems more like an argument to say that a per-unit measure of productivity is meaningless than anything else.

>The modern doctor is far more productive. She's healing 10 highly productive units.

Hence the doctor will charge each patient more money. That's the Baumol effect.

The musician example would seemingly only work however, if you completely ignored the emergence of the recording and distribution industry during that time. There are multiple magnitudes fewer musicians per second of music being listened to, compared to the 19th century. That orchestra ends up on youtube these days.

Even if you take into account the emergence of recording and distribution, the effect is still present.

Musicians that record their music and sell it on CDs or Spotify have become more productive, for the reasons you state.

But concert orchestras, who are paid only for live performances, also earn more than before, even though their productivity in unchanged. If their income didn't go up, they would shift to a (more productive) recording industry job.

Concert orchestras aren't only paid for live performances, they also record, and musicians themselves flit between gigs and often wear a lot of different hats. There's a lot of cross pollination with musicians.

Right, and that is why their per-hour income from live performances (with no efficiency gains) has gone up along with their per-hour income from recorded music.

The factory worker has a higher standard of living because everything he buys is made by other factory workers at lower prices too.

Instead of ten factories with 10 workers making 10 widgets, they make 200 widgets, or 20 each. As long as they unionize to demand their stake.

The FANG effect in Silicon Valley, where salaries have skyrocketed over the past 10 years, has nothing to do with current productivity and everything to do with effective monopolies, whether due to network effects, or data, or whatever gives each dominant company it's lead.

Google's core search/ads is hyperprofitable, not based productivity of the current workers, but instead the accumulated R&D that created the great product that it is today.

This hyperprofitabity means Google can pay high salaries to many thousands of very talented people, most of whom are not working on core search/ads. Many of whom seem to be "working from the bus" when you stop by Google at 4 in the afternoon. One can speculate on the average productivity.

This high pay at Google (and Facebook and Apple) has raised the pay for all talented developers even at early stage startups (where productivity is zero, there's no product yet shipping to anyone. Like my company, please don't take this as a dig against startups).

EDIT: Don't have a gripe, it's just an observation

"Google's core search/ads is hyperprofitable, which has nothing to do with productivity of the current workers and everything to do with accumulated spectacular R&D that created the amazing product that it is today."

Your gripe seems to be that the definition of labour productivity (output, i.e. revenue, divided by the number of people) is flawed. Intuitively you are correct, because a layperson wouldn't consider either of the following to be true:

1) An engineer becomes 10x as productive when they move from an early stage startup to a FAANG job.

2) A labourer doing job X in a company became twice as productive from one week to the next, because 50% of his colleagues (doing job Y) were just fired and replaced with machines.

I share the same dissatisfaction with the label (although it's a useful measure, it's something different from how it sounds).

However, this dissatisfaction doesn't have any bearing on whether Baumol's cost disease exists. As you say, it does.

If labour is the dominant cost for most companies in the economy, then labour productivity is a natural thing to measure, and natural thing to optimise. If, on the other hand, labour is a small proportion (e.g. due to automation, monopoly/network effects, etc.) then it starts to look special, and more just like any other input (e.g. electricity or copper).

Baumol's effect isn't meant to explain the cost of tech workers. Software has an incredibly variable ratio of labor in to economic value out, so it is the thing that causes "cost disease" in other industries, not an example itself.

It seems pretty obvious to me that jobs which show the Baumol Effect are ones where the raw labour cost before inflation was dramatically below the value produced for the end customer. For public-facing roles, this value (in monetary terms) will also be driven up by the very effect that drives up the salaries of those producing the value.

Do you think live music has higher value than food, even if food is in short supply? If you had only $10/day to spend, would you spend it on music or food?

Of course not, we're talking about market values, not some mythical "real value". Food isn't in short supply and in fact (in historical terms) is unbelievably cheap. Meanwhile, technology and population growth mean that a struggling amateur musician today has an audience dozens of times larger than an average successful bard in the middle ages.

This is reposted with some frequency, but it is simply (a consequence of) the fact that people need a base salary to live and that not everything can be automated

You can't automate a "personalized" task (a medical examination, panting of a building, a legal consultation, etc)

There were some recent posts on Marginal Revolution about this:

https://marginalrevolution.com/marginalrevolution/2019/05/th...

Also, Scott Alexander wrote a review of their book and a followup:

https://slatestarcodex.com/2019/06/17/followup-on-the-baumol...

A short, sweet, free book about it

https://www.mercatus.org/system/files/helland-tabarrok_why-a...

I've seen a lot of recent analysis related to baumol effect. The analysis usually looks into productivity gains, finds none then that declares baumol cost disease. But I feel like this is incomplete. We need to know why we don't see productivity gains. For instance the nature of live music is that it's unscalable (excluding larger venues) but pharmacists can't be scaled due to regulations. And a lot of the broad statistical measures that that I've seen used to find baumol cost disease can't necessarily differentiate the two.

Isnt it usually about services? Like teachers or massage therapists or barbers. There's a limit of how many people one of them can serve a day.

Shops (including pharmacies) have probably become more effective - look at Amazon. A lot of shopping is online which is surely more productive (for example - you can buy without driving there first).

The Economist had an article on the topic recently: https://www.economist.com/finance-and-economics/2019/06/20/t...

For pharmacies I was specifically talking about the the pharmacist which technology can't make more effective because a law requires one to be on site

It seems they they mostly focus on healthcare and education. And while the babysitting aspect of teaching can't be made more efficient the teaching aspect can be. Flatiron for instance costs less than my Alma mater per semester, and is teaching programming at 2-4x the rate I learned in undergrad.

I don't think there is any reason other undergrad/grad programs can't be made similarly more efficient.

And healthcare is obviously an ocean of waste and inefficiency.

Speaking of Beethoven string quartets, Michael Steinberg once wrote the following regarding a section from the Vivace of his late Op. 135 quartet in in F:

> Then it is time for Beethoven to turn to one of his favourite tricks, the one where he simply picks up an idea boldly and puts it down again on another pitch the way you might pick up your cat and move it from your favourite chair to another.

I am fully in favour of this feline-oriented musical interpretation.

> Baumol and Bowen pointed out that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century; the productivity of classical music performance has not increased.

it’s kind of odd to consider a performance more productive if it can be done with fewer people. what if productivity is being able to entertain more people with the same number of performers?

Actually, I can 'play' a Beethoven string quartet from my phone by myself. So technically classical music performance productivity, in the loosest definition possible, has increased. Of course, as you mentioned, that could be considered an arbitrary metric.

Your phone/home speakers can't replicate a live orchestra.

Have orchestras become more productive, such that it is now possible to entertain significantly more people at the same level of quality and experience?

There's a caveat to this, which is that once you start talking about recording or remote links you're talking about a different product entirely.

Another view on this is Labour Value Theory. Probably the reality is somewhere between supply and demand and Labour value.

https://en.m.wikipedia.org/wiki/Labor_theory_of_value

How Baumol got the insight, from his obituary in the WSJ (https://www.wsj.com/articles/baumol-diagnosed-the-disease-of... [paywall]):

"Dr. Baumol’s insight in the 1960s was that costs inevitably rise fastest for things that are difficult to automate, including medical care, garbage collection and the live performance of a Mozart string quartet.

It came to him in the middle of the night.

“It was 4 in the morning,” he recalled in an oral history. “I suddenly woke up and said I know why those costs are going up! I got up, wrote down a few notes, and went to sleep again.” His theory became known as Baumol’s Cost Disease."

Weird. One can hear arguments that it is the very fact that some people get paid lot as a proof that these people are more productive than others. But that argument seems to apply a bit selectively, and nurses and teachers somehow do not get more productive as their salaries increase.

It's almost like economics would be more like ideology than actual science.

[edit: took away couple of pejorative and unnecessary words]

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