Many years ago I had to supplement my income teaching evening classes in public administration. At the time — and maybe now for all I know — something called the “Baumol effect” was being widely blamed for higher inflation in the public sector than in the private sector. I was reminded of this recently when reading the “France Profonde column in the latest Prospect”:http://www.prospect-magazine.co.uk/LoginPage.asp?P_Article=12327 (subcribers only – free to web in about 3 weeks). The latest article bemoans the decline in French traditional cooking both at home and in restaurants. The basic problem seems to be the same in both establishments: traditional French dishes are often very time consuming and labour intensive. The result: people don’t bother much at home (except on special occasions) and restaurants buy in inferior pre-prepared vacuum-packed versions of favourite dishes.
The restaurateur who was interviewed for the piece blamed French labour laws (as les petits commercants always do). No doubt that’s part of the picture, but I doubt that even without the SMIG (minimum wage) and other regulations the picture would be all that different. After all, labour power has to earn enough to reproduce itself, and there’s still going to be competition for labour.
The Baumol effect sounded like a more plausible culprit to me. The basic idea — at least to a non-economist like me — is this: some human activities allow for the easy substitution of capital for labour. Others don’t. As technological progress (or the development of the forces of production, as we ex-Marxists like to say) proceeds, sectors that are able to incorporate the new technology pay higher wages to smaller numbers of workers. Those that can’t still have to pay the higher wages (after all they’re competing with the others) but to their still numerous workers. And so the relative price of labour-intensive activities goes up.
(I’m sure that Daniel or “John Quiggin”:http://mentalspace.ranters.net/quiggin/ or someone can provide a more rigourous account with all the is dotted and ts crossed).
Anyway, back to French cooking …. The thought is that a sector with increasing relative costs due to its labour intensity has a number of options. One is to allow its prices to rise. That’s fine so long as demand is inelastic. Another is to try to screw down the wages of the workers in that sector. Again, fine, so long as they don’t have other options, but possibly a problem for long-term recruitment. A third is to try to pass off some degraded version of the product as the real thing and hope that no-one really notices (which is what the French purveyors of vacuum-packed cassoulet are doing).
The long-term effect, of course, is that the real thing, which used to be available to everyone at reasonable prices becomes scarcer and scarcer and only vailable to those with money (or the rest of us on special occasions) and most people have to make do with an inferior substitute. (Though as the generations pass and palates don’t get educated fewer people will know what they’re missing.)
French cooking then is a bit like higher education. The real thing is labour intensive and has got pricier over the years. And you can’t really substitute technology for the labour (e-learning) and get the same product. But, of course, people will pretend that you can and will try to pass of some shoddy substitute as the same as the good old stuff that everyone used to get. In fact, if they’re really shameless they’ll try to pass off what people get now as better (“those one-to-one tutorials are so twentieth century”). (And the other strategy: downward pressure on wages leading to recruitment pressures in the long-run is also a well known feature of university life).
There seems to be a lesson here. Why does “progress” lead to some things being worse? French cooking, higher education and typography to name but three. Often because it raises the relative cost of the real thing and there’s a cheaper sort-of-functional-but-crap-really alternative which can be deployed. We put up with it, and spend the money we saved on something else, but we know if we’re honest with ourselves that something of quality has been lost.
{ 5 comments }
dsquared 11.04.03 at 6:54 pm
An admirably clear explanation of the Baumol Effect. For anyone who’s interested in looking up the source, it’s Artis & Eltis “Britain’s Problem: Too Few Producers” or some such, a big influence on Keith Joseph.
Cheng-Jih Chen 11.04.03 at 8:03 pm
There’s an old Slate article talking about the Baumol effect on labor-intensive culture, such as opera. The article notes that, for the perceived high price of opera tickets, and political will to reduce this cost, you probably have to have a subsidy for, uh, opera production. There’s one form where the government decides it wants more of a particular type of opera and writes checks to support it, and one where the government provides tax deductions for charitable contributions to non-profits. The former may lead to complacency among opera houses, the later may lead to more dynamicism, but also to a greater reliance on popular operas and superstars.
Also in Slate is an old Krugman piece giving a good, standard lay description of the Baumol effect as it applies to the entire economy. Because of relative productivity increases in the capital-intensive sectors, the total output of that economy increases, given the same inputs (labor). People will therefore have more disposable income, and can use this income to buy more of the relatively expensive labor-intensive goods. In our case, you can buy more real cassoulet; they’re priced much more than they used to be, but, say, TVs are priced much less than they were before, so with the savings you have from your TV consumption, you can spend it on cassoulet.
One thing the simple Baumol model doesn’t talk about is the secondary effects of the increasing relative prices of cassoulets. The increased prices will draw in producers, which may drive down the price of cassoulets, but may also reduce the quality of cassoulets, as you’ve pointed out. As you noted, the long term effect of defining cassoulets down may result in high-end cassoulets being wiped from the mass market, as the skills required to make them, and the palates needed to demand them, may fade away.
Kieran Healy 11.04.03 at 8:39 pm
It’s a pity you can’t write two otherwise identical versions of this post, only with one talking about the ‘Baumol effect’ and the other talking about intersectoral differences in the organic composition of capital, and then note any differences in the reception of the argument.
Mike 11.05.03 at 6:24 am
I would disagree with one point about higher education: “the real thing” most certainly did not “used to be available to everyone at reasonable prices”. One may decry the decline in quality of higher education — but to do so (“in the old days, a college education was the real thing”) might imply a sneer at those who followed James Meredith, or those who have benefited by the increase in enrollments brought about by the G.I. Bill. But I’m quite aware your point is about the rush to technological “improvements” for situations wherein they may not apply, and would be inclined to agree.
Lawrence Krubner 11.07.03 at 3:50 pm
“Why does “progress†lead to some things being worse? …We put up with it, and spend the money we saved on something else, but we know if we’re honest with ourselves that something of quality has been lost.”
Less nuanced than what I’m used to from Chris Bertram. I suppose this meant merely as a rhetorical question. The obvious answer, if one was needed, is that given a choice, on the one hand, between cars, cell phones, faxes, and the other wonders of the modern age, and, on the other hand, really good cassoulet’s, people have chosen the wonders of the modern age.
Related questions might be why firms fire millions of workers during booms, as happened in America in the 1990s, even during the late 1990s, when labor was tight. And the answer is that no matter how much the economy is booming, there will almost always be at least a few sectors that are in long-term structural decline. So too with progress more generally: no matter how much things are getting better, there will always be a few things getting worse.
Comments on this entry are closed.