Wednesday, February 23, 2022

The Baumol Effect: Benefit, or Problem?

Is the Baumol effect a positive contributor to economic activity, or is its frequent description as the "Baumol Disease" more realistic?  Perhaps much depends on who and what is involved in the discussion. Timothy Lee (in a January post) explains how a negative framing can be unfortunate:  

From my perspective as a parent, it might be a bummer that child costs are rising. But my daughter's nanny probably doesn't see it that way - the Baumol effect means her income goes up.

Lee explains how productivity gains in some industries may mean higher wages in areas with a more personal focus, via time based activity. He sees this as beneficial, for humans are social beings who often value personal experiences with others over robot encounters to get things done. Indeed, time based product is subjective, which is why it can be more highly valued than products requiring more technology than labour. Personal instruction is a good example, particularly when a given subject is actively and voluntarily sought out by avid students. 

Nevertheless, a concerning issue re the Baumol effect, is its uneven equilibrium dispersion which impacts both short and long term outcomes. As it turns out, well paid and fully functioning service markets are generally limited to places where originating wealth plays a dominant role. Despite the fact many scenarios lack this level of economic complexity, it's easy to assume the societal coordination of the Baumol effect is more widespread than is actually the case. Yet anyone who spends much time outside the more prosperous regions, will notice a dearth of markets for many important skills sets and services. Since applied knowledge and its related maintenance are necessary for modern economies, places where the Baumol effect is largely missing, tend to lack social cohesion and community purpose.

Hence we need to come to terms with the Baumol effect as an incomplete societal coordinator, not really capable of generating the level of applied knowledge which is crucial for modern day economies. Granted, the Baumol effect functions as a positive where it does contribute to economic dynamism. However, time based services run the gamut from the mundane to what are far more aspirational goals. Fortunately, many people remain willing to pursue their higher aspirations on non pecuniary and even solitary terms. That said, not all that is necessary and mundane in our lives is accomplished this way, particularly when recognizable markets for time value remain missing. We need to recognize where personal freedoms are too often lost to cultural expectations - expectations where many are pressed to sacrifice the whole of their lives for mundane and necessary tasks, while others remain free to pursue broader goals or perhaps higher callings.

Consider again the fortunate nature of free market framing, which at least has created partial equilibrium compensation via the Baumol effect in today's secondary markets. Since Timothy Lee could afford to pay his daughter's nanny (who accepted this work voluntarily), that created tangible benefits not only for the nanny, but Lee's family also in terms of their own expanded time use options at home. 

Alas, it's a shame the Baumol effect is often missing in places where it is needed most. Which is why we are challenged to bring stronger economic value to a wide range of time use options. Let's face up to the fact we can't always achieve interpersonal goals through money alone. Without a broader range of economic options, societies stand to lose even more voluntary societal coordination, to what are often outdated and rigid cultural "norms".

To sum up, the Baumol effect is problematic due to what it can't readily accomplish for a majority of citizens, despite what people hoped for via monetary and fiscal policy potential. This is one of the main reasons I've promoted time arbitrage as an economic option, especially whenever the Baumol effect falls short. Let's make certain that free markets can be preserved in the meaningful use of our time, and that voluntary economic coordination remains a real possibility for the foreseeable future.

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