The Baumol Effect
I’ve been collecting notes on models, effects, paradoxes, and phenomena for the past couple of weeks. Today’s entry is brought to us by Alex Danco in Why AC is cheap, but AC repair is a luxury:
100 years after Jevons published his observation on coal, William Baumol published a short paper investigating why so many orchestras, theaters, and opera companies were running out of money. He provocatively asserted that the String Quartet had become less productive, in “real economy” terms, because the rest of the economy had become more productive, while the musicians’ job stayed exactly the same. The paper struck a nerve, and became a branded concept: “Baumol’s Cost Disease”.
Essentially, if one sector of the economy creates lots of well-paying jobs, then every other sector’s wages rise to stay competitive. The piece goes on to describe some of the strange AI-driven side effects we may see—like radiologist wages skyrocketing because they’re the mandated last reviewer for AI-managed tasks.
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