[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.

[AnthonyMouse]

Suppose the cutoff to get into finance is at the 70th percentile of the general population and 99% of retail clerks are below the 50th percentile or otherwise have some reason not to even though those jobs already pay significantly more. How much more are they going to get paid because of that?

Or let's even suppose that the amount isn't totally inconsequential. Say they end up with an extra $1000/year. But now they're also paying $1500/year more for medicine. They're still down $500/year.

[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".

[yunyu]

You are talking about consumer marketing. I am talking about B2B marketing for prescription medications, enterprise SaaS, etc. These are separate markets and the analogies don't quite hold here - the scam problem etc is practically nonexistent for high-LTV goods with high bid costs, and newcomers are typically well funded enough to periodically outbid incumbents (or implement better targeting). The big-ticket B2B products that one hears of from word-of-mouth are usually the worse ones, since there is rarely any "going viral" to speak of.

> 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.

This is not clearly worse than the result being selected by the whims of some arbitrary Google engineer, or being easily gamed by SEO blogspam bots. At least the advertiser stands to lose something if they bid incorrectly.

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

Just because some products were able to grow organically doesn't imply that paid marketing never benefits startups. This is a false equivalence.

I also find it funny that the vast majority of your example products (everything except Huel or Aeropress?) make a lot of money from advertising. Maybe consider why they still exist.

[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.

[yunyu]

My favorite form of definitely-not-advertising :)

[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!

[ghaff]

Journals less commonly but pretty much every conference out there of any scope is sponsored by companies. In fact, absent sponsors, very few conferences would exist other than small volunteer-run ones.

[yunyu]

Got it. So you want attention to be controlled by the whims of academic/government/publishing bureaucrats or black-box ranking algorithms who are the arbitrators of legitimacy. I can't say I agree with that opinion, but different strokes for different folks.