I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
Yeah, and it's similar reasoning as to why gentrification tends to happen when the wealthy move into an area, and why prices for things typically decrease when the wealthy leave.
> More like a temporary market fluctuation or maybe bubble.
A bubble that is obscuring that most of the economy is pretty weak.
It increasingly looks like everything is getting K-shaped. Not just the income of labor, but the earnings of corporations.
I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
The wikipedia entry looks pretty well done:
https://en.wikipedia.org/wiki/Baumol_effect#cite_note-:11-4
4 replies →
Yeah, and it's similar reasoning as to why gentrification tends to happen when the wealthy move into an area, and why prices for things typically decrease when the wealthy leave.
1 reply →
> I also think that we’re entering a stabilization phase.
Why do you think that? Everything you wrote prior to that seemed to indicate further destabilization.
Hospitals and health insurers aren’t really operating in a free market.
1 reply →
inflation of a bubble.