[derf_]

The 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]

Your 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.

[simonh]

The Baumol effect says wages for doctors will also have to go up. Society can afford this because it now has commensurately more resources due to increased efficiency. It’s a tide that raises all boats, precisely because of this effect. This is why a taxi in London costs and pays better than the same service in Cairo.

[AnthonyMouse]

> Society can afford this because it now has commensurately more resources due to increased efficiency.

Does it though? Suppose that Wall St has discovered a strategy, like high frequency trading, that produces nothing but allows the one doing it to extract a margin that would otherwise have gone to the second-fastest trader. Many people are employed in a competition to be the fastest because being the fastest is rewarded but it's a zero-sum game where nothing useful is produced and the players each have to continuously spend resources to keep running faster in order to stay in the same place.

What benefit is the person now paying more for healthcare getting in exchange for this?

> It’s a tide that raises all boats, precisely because of this effect.

What if it's not all boats? Suppose it causes doctors to get paid more because people who have the wherewithal to become doctors could also work in finance, but it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs, and in the meantime they now have to pay more for healthcare.

[simonh]

High frequency trading does create benefits. It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.

If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks. They will also get taxed more, benefiting other tax payers.

The Baumol effect is sometimes described as a disease. It isn’t. It’s fundamentally redistributive.

[AnthonyMouse]

> It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.

This is the BS that Wall St says whenever people complain about them doing it. Nobody actually benefits from getting their liquidity in 8ms instead of 8.2ms, and in fact it costs them the money the high frequency trader was making compared to having the exchange's computers do it without taking a margin for itself.

> If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks.

Or they'll further outbid the people in retail on things like housing, making them poorer yet.

> They will also get taxed more, benefiting other tax payers.

Only if the other taxpayers actually get taxed less instead of the government giving the extra money to cronies.

[bloppe]

> it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs

Nobody with an existing job actually has to switch professions for Baumol to occur. As the pay gap widens, more kids would study finance and fewer kids would consider retail an adequate career, leading to a relative shortage of retail labor, raising retail wages.

[AnthonyMouse]

Your premise is that the people who work in retail have the option of studying finance or medicine. Suppose they work in retail because they scored at the 20th percentile on entrance exams and couldn't get into college.

[bloppe]

The 20th percentile probably wouldn't go into finance. But there's a "average" cutoff somewhere. Maybe 50th percentile. Maybe 80th. It doesn't matter. That cutoff will move if demand shifts.

[derf_]

Exactly. Even though Baumol himself used the phrase "Cost Disease", I think that framing distracts from the fact that it is a result of something desirable happening, namely increased efficiency in some sectors. You could also posit a case where some sectors become less efficient, due to badly conceived regulations, exhaustion of non-renewable resources, an unchecked monopoly, or some other factor, but you don't need a special mechanism to explain why prices rise in such a scenario.

> ...consider a case where finance becomes much more productive... leading to fewer people becoming doctors because finance is much more attractive.

This is the opposite of what one would expect from a sector whose efficiency increases, as modeled by Baumol. See the first bullet in the article: "The share of total employment in sectors with high productivity growth decreases, while that of low productivity sectors increases" (also see the detailed analysis in the Technical Description section). It might be theoretically possible that induced demand could still increase overall employment in a sector as its efficiency increases, but I think you have to make an argument why that would be true. During the industrial revolution, automation eliminated 98% of the labor required to produce a yard of cotton cloth, but between 1830 and 1900 the number of weavers in the US increased by a factor of 4, because demand increased due to lower prices [0]... although the US population also increased by a factor of 6, so as a percentage of the workforce weavers still declined, even as people consumed much more cloth per capita.

[0] James Bessen, Learning by Doing - The Real Connection between Innovation, Wages, and Wealth (2015), pp. 96–97.

[wat10000]

I picked finance for my example because demand is practically unlimited. People only need so many clothes, but when your business comes from making money directly, there’s a lot of room for growth.

Imagine some new math allows HFT to make more money. HFT firms wouldn’t start laying off quants. They’d probably hire more to try to capture more of that new money, and they’d have more money available for hiring.

[ip26]

It’s not like their wages will always go up exactly in proportion to your income. Goods and services that are afflicted will become less accessible if your own wages increase at a lower rate.

[wat10000]

Will doctors’ pay go up enough to retain the same number of doctors?

[derektank]

Given the demand for healthcare is extremely inelastic, almost certainly.

[AnimalMuppet]

Finance funds hospitals and cancer research institutes - or at least, it enables the gathering and concentrating of resources to do so.

Now, advertising...

[rwmj]

Some 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]

The problem I have with these arguments is that they're awfully close to the anti-tourism arguments you hear in tourist towns such as Tahoe. You have this influx of visitors and money, and there's a considerable number of residents who see it as uniformly negative: congestion, high property prices, and so on. Imagine what it could've been without all these rich tech bros!

But then, the US is full of picturesque small towns where the original heavy industry (logging, copper mine, steel mill) disappeared and tourism did not fill the gap. And all the young people moved out in search of better opportunities, except for the ones addicted to meth. There's no money, no jobs, no hope.

Every socioeconomic shift has downsides, but it doesn't automatically mean that the alternative is better. Broad economic gains tend to lift all boats because money changes hands.

[wat10000]

It also doesn’t mean the alternative is worse. Nothing says such a shift had to be overall good.

[rwmj]

In the case of London, it was misallocation, not an influx of anything. It would have been better if the programmers had been founding start up companies, and the physicists had been researching science, instead of working for banks.

[jimbokun]

What’s your basis for concluding “no”?

London is a very desirable place to live.

[yunyu]

Advertising enables innovation-producing firms to drive awareness of their services in a cost effective manner, and for less informed consumers to understand what is available on the market. Your typical physician might not be fully caught up on what is the state of the art in arthritis treatments, but advertising enables this to happen.

[blargey]

Advertising as a source of consumer information is a market for lemons in and of itself. Everyone is free to claim innovation and deliver trash, and internet brands are a dime a dozen. Even just keeping out overt fraud/scams or propaganda campaigns is apparently a losing battle for platforms.

Reviewers/Influencers/interest-publications are often just a half-step above banner ads, but at least has more incentives than just "loudly capture attention" and "publish anything that pays the algorithmic sticker price".

[ben_w]

> in a cost effective manner

Facebook is currently showing me these ads:

Lady's earrings (see my name), Pixel 10 (I'm theoretically an iPhone developer), cat food (I don't own any pet let alone a cat), special offers from a supermarket I would have been shopping at anyway even if they had not told me about the offers, a sponsored government message because apparently the Bundesministerium für Gesundheit don't have a better method of contacting German residents than by buying ads from a US social network (I have previously seen such from the British government telling me that some breed of dog was now banned even though I don't own a dog and also live in Germany)…

… but none of that's what's importantly wrong.

Cost effective? It's an auction, each ad in isolation may be fair (but there's reason even then to be suspicious), but in aggregate the ad sector is an all-pay auction.

There's a massive over-supply of solutions because all the startups chase the same ideas at about the same times, and the only one of them to get big is the one that pays enough to the gatekeepers of eyeballs to win the all-pay auction bidding for mindshare.

If everyone stopped advertising, the knowledge of solutions would still diffuse, the winner would be so by word of mouth. The difference is that the 1200 "trusted partners" on all the GDPR popups wouldn't collect rent on advising people on the best strategy for selling their user's privacy and battery life and mobile data allowance for money that those users never get to see, and the people buying those eyeballs wouldn't be wasting their VC runway making something other than the product.

[yunyu]

The fact that your Facebook ads are worse is probably because you're in the EU. I'm in the US, and I am getting fairly relevant ads for Broadway shows, data infrastructure products, discounted hotel packages, and climbing gym subscriptions - things that I am actually considering purchasing. And we haven't even brought up intent-based ads (Google search).

Word of mouth benefits incumbents. Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.

[ben_w]

> And we haven't even brought up intent-based ads (Google search).

OK, those also suck, for different reasons.

If I search for a thing, a search engine's entire job is to show me about that thing. That the engine's website puts a different thing that whatever the search algorithm thought was the best thing at the top because an advertiser paid for it to be so, is strictly worse. It's worse when the ad is not correct for obvious reasons, but it's also worse when the ad is also the best thing to show me, because in that condition it was already at the top and shouldn't have needed to pay to get there.

> Word of mouth benefits incumbents.

Ads generally (but not always) benefit whoever is richest, which is usually (but not always) the incumbent. This is why Coca Cola spends so much money on ads, even when those ads say nothing about the product itself e.g. the current GenAI Christmas ad.

> Advertising at least enables newcomers to temporarily burn money to gain mindshare, while “slow diffusion” will lock society into a “nobody ever got fired for buying IBM” state forever.

How long had ChatGPT been out before OpenAI's first ad for it?

The Google search engine itself, I heard about from word of mouth back in the 90s when all of us were using AltaVista, which I also only knew about from word of mouth. Firefox, word of mouth. LiveJournal and then Dreamwidth, word of mouth. Facebook, word of mouth. Skype, Telegram, AeroPress, Huel, these are all things I learned about from word of mouth.

If I understand correctly, "word of mouth" is also known in marketing-speak as "going viral".

[wat10000]

The only way this should happen is if it’s a fake arthritis treatment meant to detect doctors who learn about treatments from advertising instead of legitimate sources, so they can be prevented from practicing medicine.

[yunyu]

What are legitimate sources in your definition? Should physicians be expected to spend all their free time reading every single study in every medical journal or conference, even for niche areas that they don't usually encounter? Should the average diabetic/arthritic patient need to obsessively pore over academic reports to stay informed about their condition? Should advertisers be banned from sponsoring journals or conferences? This is an extremely ill informed line of reasoning.

[michaelt]

Doctors should learn about new drugs the traditional way - physically attractive drug company reps taking them out for expensive dinners and gifting them branded golf equipment.

[wat10000]

I don’t know what counts as legitimate sources. I’ll let the professionals figure that one out.

> Should advertisers be banned from sponsoring journals or conferences?

It baffles me that you apparently think this is some kind of zinger. Yes!

[appreciatorBus]

The phrase “Baumol’s cost disease” is widely used, and well known. It’s also in the first sentence of the article.

> In economics, the Baumol effect, also known as Baumol's cost disease…

[BurningFrog]

> money is a relative resource

I think this is the better way to think of money and wealth:

Money is the unit of measure for wealth. It's not in itself wealth.

[potatoman22]

That doesn't quite make sense to me. A meter is a unit of measure for distance, but a meter is a distance.

[BurningFrog]

Yeah, it's not the same as physics units.

Money does have real value, but only because it can be traded for valuable things.

But money in itself, as bills or numbers in a bank account, is useless until you trade it for something "real".

[AnthonyMouse]

> 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.

That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.

Suppose people used to spend 20% of their income on housing and healthcare and 20% on apparel and electronics. Then housing and healthcare triple in price, apparel drops by two thirds, electronics drops by 98%, and everything else stays the same. Are they better off? No, because the most you can improve the cost efficiency of something is 100% (it becomes free), but the things that that cost more can increase in cost by more than 100% of the original cost, and some of them have.

[AnonymousPlanet]

> That's assuming all sectors have become more efficient. Some, like construction, have become less efficient. And that's a big problem when it's relevant to necessities like housing.

Housing prices aren't going up because of construction costs alone. The biggest increase is from the cost of land. For that the cost of a house on top has become less and less relevant. If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.

[AnthonyMouse]

The biggest increase is from the cost of zoning making land artificially scarce. But construction costs layer on top of that because of the nature of it: Instead of being able to build 20 new housing units on a lot that currently only has one and enough land to add more without destroying the existing building, adding more is now restricted to a small strip of the downtown where the lots already each contain 10 housing units. Which effectively doubles your construction costs to add 20 housing units because you still have to build 20 housing units but now you have to destroy 10 in order to make space, and then do that twice to actually add 20.

Which is a disaster if construction also got twice as expensive.

> If construction became really cheap, prices would still trend upwards since there's always some billionaire's money to be parked somewhere.

If construction became really cheap and there wasn't an artificial limit on how much housing you could build on a given lot then there would be tons of cheap housing and billionaires wouldn't find it a useful place to park money because it would have lower returns than competing investments.

[AnonymousPlanet]

Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses. This is also why zoning doesn't matter. Look at the big picture. Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use. What those areas do have in common: general availability of real estate to international investors.

Properties aren't bought up anymore to develop them or have any returns from use. They are being bought as a non-depreciating asset. Want to effortlessly park money and not have the money rot? Buy land. Never mind what happens to stand on top of it. You can see more and more of those rotting real estate plots all over the western world. And there's always someone who wants to park money.

Your thinking isn't wrong on a smaller scale. All those aspects matter for a local housing market. But the overall trend is governed by something else.

[AnthonyMouse]

> Even if construction would be zero it wouldn't make more than a dent in the overall trend because the investments are done into land not houses.

This is fairly simple arithmetic. Suppose we attribute the cost of a single family home (one housing unit) entirely to land, and then the cost of land doubles. Obviously the cost of the single family home doubles.

Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.

> Pretty much every argument you made can be easily refuted by looking at any other jurisdiction that has completely different zoning laws and completely different construction prices and yet prices for real estate are skyrocketing the same, regardless of use.

The places with less restrictive zoning objectively do have lower housing costs, and even most of the places with "less restrictive zoning" still have non-trivial zoning restrictions. For example, name the major US city that isn't accompanied by a significant land area zoned exclusively for single family homes.

[AnonymousPlanet]

> Now suppose construction is cheap and zoning doesn't prohibit this. For 10% of the cost of the land, we could build a condo tower on that same piece of land. Ten stories, 100 housing units. The cost of a unit just went by down by a factor of ~100. The price of the land doubling is dwarfed by the increase in the number of permissible units per plot of land.

That's a brilliant plan! Let me buy the piece of land where that high rise stands with money you can't afford. Oh, you mean you have split ownership between all the owners of the units so you now can afford it? I'll buy half of the units then and rent them out. And when things are not looking good for people, I buy some more when they can't afford their loans anymore. Can't let those units depreciate, can we? My friends are in on the party and together we're keeping the demand up. And those prices go up and up. Oh, the cost of each unit has now doubled and tripled while your wages haven't? Too bad for you. I can still afford them and now you have been out competed by me.

It's the same game just with a lower starting point.

Maybe this former financial trader can explain it better https://www.youtube.com/watch?v=BTlUyS-T-_4&t=520s

[jgalt212]

If people are under or unemployed, do they now value leisure time higher? It's a slippery slope. You have to fix some things.

[bigbadfeline]

> If some sectors of the economy become drastically more efficient... overall society has become wealthier

That's a weird one - what's your metric for the "wealth of overall society"? Stock market indexes can't be it because those are subject to extreme levels of unreported inflation and gaming.

How can you measure something that is subject to extreme inflation when that inflation is not only unmeasured but not even acknowledged as a phenomenon?

At present, the "wealth of overall society" is a unicorn metric as opposed to the perfectly measurable and extreme levels of income and wealth inequality. In other words, the overall losses from skewed distribution dwarf the gains from higher efficiencies.

[michaelt]

If the orchestra performs less often because the violists have better paying jobs in a factory making the latest and greatest TVs, more homes will have the latest and greatest TVs.

Of course, this relies on the assumption most work - and hence most productivity - is a net social good. If the violinists have instead got jobs operating an orphan-crushing machine, that would be a bad thing. But hopefully your society is structured in such a way that the average worker is contributing to the prosperity of their local community.

[tomrod]

GDP produced divided by costs required measures intensity. These will be typically normalized (inflation removed) or, if a ratio, can be nominal since both have the inflation ratioed out.

GDP is known to be an imperfect measure, especially for capturing cottage industry and due to the distribution effect you described, but it's not horrible to start with.

[BurningFrog]

GDP is how much wealth is produced in society at a moment in time.

The total accumulated wealth in a society is a related but entirely different number.

[tomrod]

This is why it measures intensity. It is a flow.

[bloppe]

The main metrics are mean and median real income (i.e. inflation-adjusted). Baumol's only occurs if mean real income rises. Unless inequality rises simultaneously, then median real income (the metric most people care about) will rise as well.

[AnthonyMouse]

Suppose that every single person in society receives the same compensation and has the same wealth, i.e. there is perfect equality.

Society produces housing and other necessities and people consume them in some amount and then have what's left as disposable income to spend on whatever they like, e.g. for going on dates.

Then a law is passed prohibiting the construction of housing with more than two stories. Building ten housing units on ten lots with ten foundations requires more labor than constructing ten units all on the same lot, so the price of housing increases, people have to spend more on housing and have less money left to buy flowers and some people quit their jobs at the flower shop to go pour concrete (while still getting paid exactly the same amount as before).

There is zero change in inequality but the cost of something has gone up and people have to eat it by getting less of something else.

[bloppe]

How is this related to Baumol?

Baumol does not describe general inflation. It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.

Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.

[AnthonyMouse]

> How is this related to Baumol?

Because people claim that higher costs are a result of Baumol and are hypothetically something good or normal when it's actually regulatory costs and government capture stealing from working people. "Don't worry, prices are only up because we got so much more productive, not because of artificial scarcity or because it now requires 10 people to do certain things that used to take one."

> Baumol is also rooted in the concept of price elasticity, which in your contrived example seems not to exist.

Because the example is housing, which is a necessity and therefore has fairly inelastic demand. If the price goes up, you pay it, because otherwise you're homeless. And then people buy flowers less because they can't afford it, so people lose their jobs at the flower shop, but new jobs open up in construction because it became more labor-intensive and has fairly inelastic demand.

> It specifically describes when prices go up in some sectors because of an increase in productivity in another sector.

Here's the less contrived example: Productivity improves in things like electronics or manufacturing, giving people more disposable income. But there is certain amount of disposable income people have to be left with before they'll revolt, and the increase in efficiency leaves them with more than that. Which allows the government to increase regulatory overhead or real dollars per capita collected in taxes or pass rules that artificially increase scarcity at the behest of campaign donors, without making people feel like they've lost ground.

But the efficiency improvements should have allowed them to gain ground, which is what has been taken from them.

[bloppe]

Sure, there are plenty of ways that the government can interfere in an otherwise fair market. That's not the point. Absent some sort of market interference, Baumol is empirically good at predicting price movements.