The Baumol Effect and Jevons paradox are related | Hacker News Reader

The Baumol Effect and Jevons paradox are related

a16z.news

45 pointscubefox67 comments

```

Each of these phenomena have a name: there’s Jevons Paradox, which means, “We’ll spend more on what gets more productive”, and there’s the Baumol Effect, which means, “We’ll spend more on what doesn’t get more productive.”

```

I don't think that's exactly right. Jevons says "we consume more on what gets more productive" and Baumol says "the unit cost increases for that which is less productive".

The typical example for Baumol is the orchestra (or live music) which is today much more expensive than in the 1800s. I don't think we spend more in aggregate than we did in the 1800s!

Edit as I continue reading: ```

Other goods and services, where AI has relatively less impact, will become more expensive - and we’ll consume more of them anyway. ```

This definitely NOT the case. Basically the author is saying we will consume more of everything, which is not true! We famously stopped using horses and all the relevant industries.

The unit cost for horses, however, did increase!

What the author should be stating is that the new production bottlenecks will command a higher price and probably play a bigger role in the economy, but not everything gets to be a new bottleneck.

The modern day example that really made Baumol click for me is child care, particularly day care. It’s a highly labor intensive with basically minimal opportunities for productivity enhancements (due both to regulation and parental preferences, as well as just baseline sheer human decency). As the rest of the economy becomes more productive, the relative cost of child care goes up and up and up - which is why we now see situations where two-earner households can an entire after-tax income consumed by child care costs once they need to put 2-3 kids into daycare.

What productivity improvements would be possible if not for regulation?

For one, a higher child-to-caregiver ratio. There may be others, but this seems to be the easiest lever to pull to eke out some productivity gains.

Personally, I’m completely fine with having this be the subject of regulation - even if it’s possibly an overly blunt instrument, this is not an area where I’d be comfortable letting the free hand of the market do its thing. Further, I suspect that universal, subsidized, high-quality pre-K would be a net economic benefit in the long run, but I haven’t done the research to back up this assertion.

Here you go. Quebec child care subsidy pays for itself: https://childcarecanada.org/documents/child-care-news/11/06/...

In my city, the regulations specify a maximum # kids per adult. So if you were to devise a way to supervise more children per adult, using technology, you would still have to hire the same number of adults.

The regulations specify that teachers must have completed a certain number of units of a specific type of education. If you create an AI Assistant that means you can hire people with less training and have the same quality, then ... you cannot.

The regulations regulate inputs rather than outputs.

Well I think the regulations regulate outputs as well (if a child dies or is injured in daycare, there are regulations to handle that). The issue is that people aren't happy with settling for reactive punishments when something actually goes wrong.

One way to measure the cost of human capital (the major component of childcare) is by the opportunity cost of that time spent. In Baumol's Effect it's not so much productivity stagnation that is the problem, it's the fact that there are so many better opportunities (jobs or otherwise) for a potential childcare worker to invest their time into.

Daycare economics are just brutal. It's insanely expensive to pay for, the caregivers make peanuts, and the owners are always at breakeven if they're not explicitly non-profit.

so... where does the money go? is it insurance or have duplo block prices just gotten really out of hand?

Landowners!

Let's say 4 kids per carer, 10 hours per day, minimum wage of £12/hour, an overhead multiplier of 3 (to cover rent, maintenance, insurance, taxes, sickness cover, etc), and you get to £72 per day per child.

Or about £1,500 per month.

Now, you can increase that to 8 kids per carer with older kids, but that's really stretching things if you want to run at all smoothly.

Can you explain those numbers? How is it that everyone has it lousy?

US Big City numbers. I'm generalizing, but these are broadly accurate.

- employees all-in-cost is ~$5000 per month paying $20-something an hour (they will be hitting OT as well, because they arrive before dropoff and stay after pickup). Typical maximum legal ratio might be 5 to 1 kids to carers depending on age. This means just for basic labor, every parent is paying $1000 a month.

- Next there is commercial rent. In a metro area, easily $5-$10k a month. Amortize that across 50 kids and that's another $200 a month.

- 2 meals + snacks daily. Adds in another $250 a month per kid assuming $11 per day per kid. More if you're prioritizing healthy fresh foods and not prepackaged garbage.

- Liability insurance which is very costly (insurers dont love cases involving dead or injured 3 year olds!)

- Utilities in a building that houses 50 people for 200+ hours a month.

- Throw in all the other costs. You have the admin costs of running a business like accounting and billing, and you've got to buy diapers, replace worn-out toys, and purchase endless crayons, and so on.

By the end of it all, you're looking at very slim margins working 55-hour weeks, your employees are paid barely more than a barista, and the parents are taking on a second mortgage with every kid.

Another way to think of this intuitively is simple economies of scale. Or volume discounts if you work in sales.

When you buy 10,000 handbags you pay the wholesale price whereas buying a single handbag can be quite expensive.

If there is way lower hose demand (volume of sales), the horse producers will have to charge a higher price per horse.

Thus, society in aggregate spends way less on horses while the price of a horse goes up.

Which interacts strangely with supply and demand and production costs, in a way that makes it often difficult to predict the final unit cost until you actually go out and try to buy something.

Chopped vegetables take slightly more labor to prepare and are worth slightly more to most people, because they're easier to use, despite usually having slightly worse flavor, so they're usually sold at a slight premium. I don't know, but if I had to guess, I'd assume they're a more popular product.

Unflavored whey protein is strictly cheaper to produce than flavored, but it's a less popular product, and usually the people looking to buy it are slightly more informed and higher income, so it's priced at a premium.

Neither of these violates the laws of supply and demand or volume discounts or anything, but you could reasonably predict any result for either of them and be wrong.

The key concept here is that the demand is mostly exogenous changes; people demand fewer horses because horses are no longer as good of a product. The whole supply/demand curve for horses shifts.

Going back to econ 101 & supply/demand curves:

Jevons describes the supply curve moving out, resulting in increased quantity

Baumol describes the supply curve moving back, resulting in higher prices

Yes, and in while Jevons is obvious why (efficiency changes the supply curve), Baumol is less apparent because the cause is more indirect.

Indirect only if you think opportunity cost is "hidden" (which it often is the way people prefer to look at things)

Getting to Yes, BATNA, Etc. In an efficient market the price of Thing A is exactly equal to what you'd pay for your best alternative Thing B (assuming you can find an offer for your bid)

I don't think any 'interesting thought' that serves as a conclusion to an article should begin like so:

| 'With radiologists, I’m totally speculating and I have no idea what the actual workflow of a radiologist involves...'

Speculation from a place of ignorance is suitable for bar-side musings, not an article that wants us to take it seriously.

Also as noted in the prior dupe, the article also misunderstands it's own topic, as explained in (https://en.wikipedia.org/wiki/Jevons_paradox):

In economics, the Jevons paradox occurs when technological advancements make a resource more efficient *to use*; however, as the cost of *using the resource drops*, if demand is highly price elastic [PED], this results in overall demand [for the resource] increasing.

The cost to use tokens is already zero or deeply negative, depending on your accounting. And the author is mistaking the cost of 'creating/extracting the resource' (token generation economics) with cost of 'using the resource' (calling an API). I don't think we'll understand the true cost of, and demand for AI services for quite some time.

>The cost to use tokens is already zero or deeply negative, depending on your accounting

???

Sure, there's zero cost tokens in the form free chatgpt, but negative cost implies that you're getting paid to consume tokens, which I'm not aware of?

I mean, sure, sign me up, and I'll use a bunch of negative-cost tokens...

In the sense that OpenAI had ~$2.5 billion of revenue 2024 but likely spent ~$3.8 billion just on inference.

Meaning they lose 50 cents for every dollar they spend to send you a token, more if you are a free user. This discounts employees, CapEx, real and imagined (1.4T), overhead, and training (subsidized by M$oft).

Thus, if you have a way to turn every token they give you back into USD, even at a discounted rate, you can and should rob them blind before the well dries up.

That doesn't mean the cost is negative, it means the profit is negative for openai.

That's part of a quotation, as clearly stated in the article.

I'm well aware. My contention is that concluding with that supporting quote in particular was a mistake.

    you accidentally knock a hole in your wall,
    it’s probably cheaper to buy a flatscreen TV
    and stick it in front of the hole

What I recently did is that I 3D-printed an object with PLA that exactly fit the whole and just glued that in with assembly glue.

What does the HN panel say? Is it a solution? Or does it have any downside?

It's an acceptable solution only if you used it as an excuse to buy a 3D scanner.

Welll, if you were good at drywall already, drywall patches would be faster and better. But if you are good at printing and scanning, and you enjoy that process, then it’s fine.

The challenge with the example is that “success” is personal preference. With plenty of examples, the success criteria are external.

It works so :shrug: I did the same to replace a part of a door frame I had to remove to make space for a washing machine 4 mm too wide. Nobody sell 400 mm of door frame so i just copied the frame shape, printed in 3 parts, and that was it. Filament color matched the frame one so I didn't have to paint.

I commend you for your imagination. Can I ask how you crafted the object to match the dimensions? I’m brand new to 3D printing and currently climbing the learning curve of printing itself but will want to start learning about doing my own modeling soon.

The only criticism I’d make is that patching drywall is dead simple and cheap and so your solution seems possibly a bit overengineered (and, while I’m at it, that Andreesen’s observation is both facile and meaningless and is probably a reflection more of the bids Marc Andreesen’s house manager gets than anything insightful about labor costs in America).

I've personally used the Lidar sensors on my iPhone with an app like Polycam to some degree of success. I was doing a scan of a massive oak tree in my backyard to plan out the treehouse tab location and associated treehouse for my kids but fell flat after the model was created (Sketchup is truly enshittified). I'd imagine a similar process for creating the "fill" for the void in the wall.

Thanks, appreciate the recommendation! Polycam looks pretty pricy - is the subscription necessary for casual scanning, or does the free version work? I assume I would need at least the basic subscription.

I’m happy to pay for software, but I really don’t care for subscriptions. (Why no, holding back the tide is not going well at all, why do you ask?)

The hole was of simple enough shape that I could just design it manually. I used SCAD, which is kind of a programming language supported by some tools that can convert it to STL.

Cosmetically it's probably fine. The downsides all have to do with predictability and the ability to reason about what the wall is made of in the future.

A person who goes to eg hang a picture frame or shelf there will encounter a different material with different load bearing properties than expected. Pushing into the center of that area with EG a drill bit will not have the same physical response or give, and depending on how it was braced/integrated with the surrounding wall, the patch itself may be pushed or pulled out of place. Similar for anyone that leans on that area if it's at such a height.

It's fine.

The biggest actual problem would be in a fire, the PLA will burn and let the fire into the wall cavity, where drywall would maintain a barrier for much longer - that is why we have drywall in the first place, it is a decent fire barrier.

I would simply do the normal thing of covering the hole with drywall patch screen, covering that over with drywall joint compound, letting it dry, sanding, and painting. This is an under $50 trip to Lowes, and certainly cheaper than a flatscreen TV.

The solution I was taught as a child is to saw the hole square, put a section of 2×4 behind it spanning the hole, held in place with a drywall screw through the drywall on each side of the hole, cut a square chunk of drywall small enough to fit in the hole, put a drywall screw through the middle of it into the 2×4, and tape, mud, sand, and paint.

I suspect that this procedure is faster and easier than taking a 3-D scan of the hole, 3-D printing a PLA patch, and gluing it in, but it does require most of an hour and the appropriate materials on hand.

It's a solution. There are better solutions, and far worse solutions (anyone who has worked to get a deposit back on a college rental has probably developed a few of their own), and most of them are all still fine because drywall isn't (shouldn't be) structural.

Crucially, even if you are completely unwilling to take a stab at a fix yourself, hiring a local handyman to patch a hole via some good enough technique should still be far cheaper in most places than buying a nice new TV.

But nothing is gonna ever beat buying a 2nd-hand framed picture or plaque or movie poster or grabbing a flyer from the junkmail on your porch and tacking it over the hole... And if you're determined to fix holes with a TV, you can probably find one used for about as cheap / free as any of the other choices. Which is what makes this such a stupid example - the cost of TVs, like framed images or furniture, spans from $0 to "as much as you're willing to pay". Hiring someone can also be arbitrarily expensive, but can by definition never be 0. So the comparison is rhetorical trickery and demonstrates nothing.

...other than, apparently, Andreessen's dissatisfaction with paying tradespeople.

It's a fine solution but surely just patching the drywall yourself wouldn't be that hard. It's really not a difficult process.

that example of the radiologist review cases touches on one worry i have about automation with human-in-the-loop for safety. specifically that a human in the loop wont work as a safeguard unless they are meaningfully engaged beyond being a simple reviewer.

how do you sustain attention and thoughtfully review radiological scans when 99% of the time you agree with the automated assessment? i'm pretty sure that no matter how well trained the doctor is they will end up just spamming "LGTM" after a while.

The likelihood is that models will "box" questionable stuff for radiologist review, and the boxing threshold will probably be set low enough that radiologists stay sharp (though we probably won't do this at first and skills may atrophy for a bit).

This is also a free source training data over time so market incentives are there.

Far more likely to be the reverse: people care about this right now and after 99% model-agreement rate the obvious thing to do will be to save money and change the threshold.

There isn't a human in the loop if the loop determines whether to involve a human.

I have the same question about minor legislative amendments a certain agency keeps requesting in relation to its own statutory instrument. Obviously they are going to be passed without much scrutiny, they all seem small and the agency is pretty trustworthy.

(this is an unsolved problem that exists in many domains from long before AI)

This is a software problem! You can make the job be more engaging by sneaking in secret lies to see if the human is paying attention.

How to you sustain attention of the other big X-ray use: security scanning? Most scanners will never see a bomb, so how do you ensure that they'll actually see one when it does happen?

The answer they've come up with is periodic tests and audits.

This comment on the article is more reasonable than the entire article:

https://www.a16z.news/p/why-ac-is-cheap-but-ac-repair-is/com...

It’s not like people are piling into AI at the expense of other jobs, tech hiring and wages on general seem down relative to a couple of years ago. Hard to see the link between either effect and AI

Also weird that Dutch disease wasn’t mentioned at all, it actually seems more relevant.

The blue-line/red-line diverging price graph is such a great litmus test for someone's ability to do even a single round of interrogation.

Here's the question to ask:

Which of these have economies of scale, are scale-neutral, or have diseconomies of scale?

Ta-da!

Three sectors that have diseconomies of scale: education, healthcare, housing.

Essential services aggregate in the red because non-essential services that have diseconomies of scale... wait for it... never achieve scale! Then you have government step in because the services are important (often with hard-to-capture upside, ergo limited incentive for private investment to begin with), and now you have an aggregation of essential, expensive, government-involved services.

Dupe: https://news.ycombinator.com/item?id=45807542 (two weeks ago: 134 points, 184 comments)

> The last piece of this economic riddle, which we haven’t mentioned thus far, is that elected governments (who appoint and direct employment regulators) often believe they have a mandate to protect people’s employment and livelihoods. And the straightforward way that mandate gets applied, in the face of technological changes, is to protect human jobs by saying, “This safety function must be performed or signed off by a human.”

I mean the role of you to go jail if something goes wrong is pretty important.... It unfortunately often doesn't work but the lengths at which well paid people go to avoid and then shorten prison sentences really should demonstrate this is the only punishment that works.

We cannot have computers solely in charge of stuff because the computer cannot have responsibility. If you take the radiologist out of the loop then you should take the responsibility.

> If you can make $30 an hour as a digital freelance marketer (a job that did not exist a generation ago), then you won’t accept less than that from working in food service. And if you can make $150 an hour installing HVAC for data centers, you’re not going to accept less from doing home AC service.

Plenty of people work jobs for less money because they enjoy the work more. I’m not sure if it’s worth reading what follows if most of the argument is predicated on this claim.

That might be true but that doesn't mean the effect is false in the aggregate. The classic example given in Baumol's paper was a violinist[1]. Sure, playing a violin might be more enjoyable than working in HVAC or churning out enterprise CRUD apps, and some people might even accept a paycut[2] to be a violinist, but that doesn't mean the effect isn't real. Despite zero productivity growth in being a concert violinist, wages for it has still risen, thanks to productivity growth elsewhere. People might be willing to take a pay cut to be a violinist, but not a arbitrarily large paycut.

[1] https://en.wikipedia.org/wiki/Baumol_effect

[2] https://en.wikipedia.org/wiki/Compensating_differential

I'm still amazed at how Baumol got his name on something already named [1].

[1]: https://en.wikipedia.org/wiki/Opportunity_cost

I would have made a different argument. Often the "instantaneous" wage is high, but you're never told the volume. The data center HVAC job will be done one day and you'll have to wait for another data center to be built and possibly even move there.

> it’s probably cheaper to buy a flatscreen TV and stick it in front of the hole

Says a lot about American politics, figuratively speaking

The basic premise here is that productivity growth in one sector, increaes wages in other sectors. But we already know that productivity and wage growth are increasingly disconnected. Thsi si not to say the affect doesnt exist but that it must therefore be small or limited in scope. https://www.epi.org/productivity-pay-gap/

Aren’t real wages on the decline? We can afford to spend $100 on dog walking because $100 isn’t what it used to be.

No, they're not.

https://fred.stlouisfed.org/series/LES1252881600Q

There's a spike and subsequent drop after the pandemic, but that was from service workers being forced out of the labor force by lockdowns. If you exclude that, it follows a steady trend up. And yes, the chart has already been adjusted for inflation.

> Whereas, after a century of productivity gains, the average American middle-class household can comfortably manage a new car lease every two years, but needs to split the cost of a single nanny with their neighbors.

...

> Why it costs $100 a week to walk your dog (but you can afford it)

Two signs this article is coming from too-privileged a point of view for its observations to be meaningful or useful to 99% of the population.

>If you live in the United States today, and you accidentally knock a hole in your wall, it’s probably cheaper to buy a flatscreen TV and stick it in front of the hole, compared to hiring a handyman to fix your drywall.

Is it cheaper than buying a TV, and then having someone come install it on your wall? More meaningless drivel from Marc Andreesen.

Drilling a few holes to mount a TV is so straightforward that nearly everyone can do it, in contrast to patching drywall, so excluding the cost of hiring a professional for that case is reasonable. Granted, you might be able to learn how to do it with some youtube videos, trips to home depot, and trial/error, but the cost of that will quickly exceed the cost of a handyman if you value your time at all.

Patching drywall is also so straightforward that nearly everyone can do it, unless it's a very large hole. It's a one trip to Home Depot or Lowes job.

Could you please do the patch the next time I get a hole in my dry wall? Every time I do it it's never really quite as good as I want. Nothing quite matches.

Reply on news.ycombinator.com