“Completely mystified”

The responses below the tweet are priceless, but before you click the link, let’s look at the supporting article.

Apparently, the most likely explanation to the phenomenon of lowering costs for some expenses yet rising costs for others is something I’d not previously heard of; Baumol Cost Disease.

From Bloomberg’s helpful description:

The theory of Baumol cost disease, developed in the 1960s by economist William Baumol, states that some things rise in price even as productivity goes up. When society gets better at making cars, electronics, food and clothing, wages go up. But as wages go up, industries that don’t find ways to use less labor to produce the same service — for example, a string quartet — rise in price as well.

Which, prima facie, sounds reasonable and rational.

However, I would caveat that feeling of reasonableness with the statement that Malthusianism also sounds reasonable and rational when it’s first described, possibly for similar reasons.

What Malthus has been wrong about for the last 291 years is the Industrial Revolution. Or, more specifically, human inventiveness. Oscar Wilde touched on the solution we found to Malthus’ problem with this pithy quote;

Civilization requires slaves. Human slavery is wrong, insecure and demoralizing. On mechanical slavery, on the slavery of the machine, the future of the world depends.

As the wags and wits on Twitter were fast to point out, the costs that have experienced the most price inflation are, in a suspicious coincidence, the things that have most benefited from government “help” in terms of regulation and subsidies.

Correlation isn’t causation but there’s clearly something worth further enquiry here.

Bill’s Opinion

The most interesting part of the Baumol description is this:

….industries that don’t find ways to use less labor to produce the same service….

The obvious question that prompts is, “why don’t they find ways to use less labour?”.

Perhaps the range of possible answers are as simple as these two:

  1. Because the work involved is impossible to automate or make any more efficient, and/or
  2. There isn’t a great enough incentive to automate or make more efficient.

Anyone who has ever spent any time working in a government or quasi-government department and the private sector will recognise the critical difference immediately; there is no personal reward for for a manager to find a way to deliver the government service with fewer or with lower-skilled employees.

It is extremely rare for a government minister’s stated desire for improved efficiency to be translated into meaningful incentives down the organisation to a level where they will have any material effect.

As Ronald Reagan so eloquently put it:

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

Or, as an anonymous quote (no, it wasn’t Milton Friedman) goes:

If you put government in charge of the Sahara desert there will be a shortage of sand in five years.

But remember, “economists are completely mystified“.

6 Replies to ““Completely mystified””

  1. Ronald Reagan also said that if trivial pursuit were designed by economists, it would have 100 questions and 3,000 answers.

    We are all inflationist when it comes to our understanding of the economy.

    What economists either don’t know or won’t tell you, is that if you were to look back through our economic history you would see that price inflation is not the norm, far from it. None of us or our grandparents can remember Queen Victoria’s funeral procession, which also signalled the end of the Victorian equilibrium phase, the Victorian period was a time when there was no inflation over its entirety. A ploughman’s lunch cost the same at the start of the Victorian Age as it did at the end of it.

    The current inflationary phase is the most violent period of inflation in our documented history, no one knows where the top is but when we hit it then it will be game changer and will cause massive economic and social turmoil, due to an inversion of the relative value of capital and labour. See chart on the link below that shows our current inflationary period and actual phases of price equilibrium and inflation over time, its on page four of the free preview. Or buy the book, you wont put it down if you do.

    In his book The Great Wave: Price Revolutions and the Rhythm of History David Fischer charts the price of consumables in England since 1201 which appears to be the longest documented measure of historical prices available. The chart shows that there are long interchanging periods of inflation where prices rise followed by equilibrium where they don’t. The last period of no prices rises was the Victorian equilibrium phase a long period of time where prices did not rise, this phase ended on the death of Queen Victoria which was the start of our current and record breaking steepest inflationary period in documented history (not including WWI & II). None of us or our grandparents have any concept of living in an age where prices don’t rise for generations.

    As for employment and replacement by machines, it won’t and can’t happen. The Leisure Age, as predicted by Keynes in his Economic Possibilities for our Grandchildren will be the only economic prediction of his that he got wrong. It’s to do with the land value taking up all of the economic gains of our productive economy, which necessitates that we must continue to toil a 40-hour week to pay the rent or take out a mortgage. David Ricardo et al, refers.


    Chart Of The Price of Consumables In England 1201 to 1993 (page four)


      1. If you havent already, I would slip in Progress & Poverty by Henry George before it, arguably one of the greatest economic works of all time, he is legendary and proposed the solutions, no wonder they hide his work nowadays

        On books, I am pretty chuffed as despite many house moves, both interstate and international, renovations, unpacked boxes in garages and the like, I managed to find my 1960 original paperback edition of Psycho Cybernetics by Maxwell Maltz. I was looking for it an effort to find out why I found myself all of a sudden struggling with the sudden lack of pressure, stress and incomings now that I have left the workplace and am sitting around the dream home living the life. Found out that I just needed to Defrag my hard disk and change the LP for the second half, happy days.

    1. For free gratis and nothing you can get Real Money by Richard Grant from the Free Market Foundation in South Africa, postage extra naturally. No electronic version regrettably. Although it deals specifically with the double-digit inflation period of the last couple of decades of the apartheid regime, it will help you to understand Venezuela, Zimbabwe and other nations that use the Magic Money Tree to finance government spending.

      Thanks to online markets in all consumables, the CPI should have dropped in the last ten years in North Atlantic countries. It didn’t. Why? Because of the madness of Quantitative Easing, which pumped billions of electronic credits into the money markets. Most of that money went straight into the stock and housing markets, explaining the rapid rise in house and stock prices over that period. Little went into capital investment.

      Mark Perry at Carpe Diem can explain why education prices have outraced inflation. The ratio of students to academics to administrators has gone haywire. For every lecturer there are now two admin people, with plentifully-staffed Diversity departments the greatest beneficiaries.

      The string quartet example is a fallacy. In the Golden Age, maybe a thousand people could listen to one performance. Then came records and CDs and now the internet. Many thousands can listen to that music and listen to it over and over, although roughly the same amount of labour goes into it. I used to have to budget to buy a Deutsche Grammofone Gesellschaft LP to listen to The Emperor. Now I can listen for free or close to it. Now that’s productivity. A surgeon can still only perform one appendectomy at a time, and owing to the emergency nature of this procedure the surgeon may have to be got out of bed in the middle of the night. Pretty soon surgeons will be able to supervise the operation from the comfort of their beds while a bot does all the cutting and cauterising. The cost of surgery will drop dramatically.

  2. For the “regulation causes price increases” point.
    – cosmetic surgery has become more affordable, normal surgery less
    – education is now almost free (Khan academy), US college fees are up enormously yet the amount spent on teaching staff has shown little increase (almost all flowing to trophy projects and more admin staff)

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