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Baumol Effect

en.wikipedia.org

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Re: Baumol Effect

#41

Post by mrfredward »

paulsutter wrote: post #39

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 grea…

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.

Re: Baumol Effect

#42

Post by [deleted] »

anm89 wrote: post #3

"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 playi…

[deleted]

Re: Baumol Effect

#43

Post by roenxi »

barry-cotter wrote: post #24
anm89 wrote: post #3

"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 playi…

> 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…

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.

Re: Baumol Effect

#44

Post by inflatableDodo »

mrfredward wrote: post #40
Lerc wrote: post #36

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 inco…

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 wit…

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.

Re: Baumol Effect

#45

Post by rahimnathwani »

paulsutter wrote: post #39

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 grea…

"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).

Re: Baumol Effect

#46

Post by rahimnathwani »

inflatableDodo wrote: post #44
mrfredward wrote: post #40

Earlier quoted context omitted.

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 wit…

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.

Re: Baumol Effect

#47

Post by rahimnathwani »

i_am_proteus wrote: post #5
anm89 wrote: post #3

"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 playi…

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…

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.

Re: Baumol Effect

#48

Post by inflatableDodo »

rahimnathwani wrote: post #46
inflatableDodo wrote: post #44

Earlier quoted context omitted.

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…

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.

Re: Baumol Effect

#49

Post by Lerc »

mrfredward wrote: post #40
Lerc wrote: post #36

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 inco…

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 wit…

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.

Re: Baumol Effect

#50

Post by lamby »

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.

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