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.
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:
- Because the work involved is impossible to automate or make any more efficient, and/or
- 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“.