Dear God Ritchie, Read All of Baumol, Not Just Half

This.

Yes, productivity in services increases at a slower rate than productivity in manufacturing. Thus, inevitably, given that average wages are set by average productivity, services become more expensive compared to manufactures.

I\’ve made this point around here a number of times.

Ritchie then says that, as a result of Baumol\’s analysis, services should be run by the State and we shouldn\’t hope or aim for any further productivity increases in the.

Err, well, yes, except that ignores the other half of Baumol\’s life work, which has been showing how market systems are better than planned or State systems at improving productivity. Yes, even in services.

Or, as I would put it but Ritchie won\’t (\’coz \’e\’s ignorant, see?) the very proof that Baumol\’s Cost Disease provides us with is that services must be opened up to competition.

8 comments on “Dear God Ritchie, Read All of Baumol, Not Just Half

  1. His argument seems unusually self-contradictory, even for Richie.

    It is driven by the assumption that there will be no more growth.

    He then cites Baumol’s observation that productivity growth in services is slower than in manufacturing, and concludes that the service-intensive state sector must therefore increase as a percentage of GDP.

    But Baumol’s point was about different rates of productivity growth. Without productivity growth, it doesn’t happen. And economic growth is essentially equal to the rate of productivity growth.

    So Ritchie’s description of what happens in the no-growth economy will only happen if there’s growth.

  2. Whatever makes you think His Murphness has read Baumol? Most likely explanation is he’s read the Cost Disease part here. You mention it regularly. I can’t remember you mentioning the other half so he doesn’t know it.
    I’ve speculated before that he sits trembling at his desk, awaiting in dread your latest sally into his idiocy. Was a time that his ludicrous attempt at rebuttal would be in your top few comments which indicates he’s a regular reader. These days, his wife probably ties his wrists to the chair arms till lunch time. Just occasionally though, he gets furious enough to chew through the rope & make a grab for the keyboard.

  3. I would like to suggest that the service element of cost is by definition that which cannot increase in productivity. So an hour of a barber’s or social worke’rs time remains a constant unit of productivity.

    Everything that involves mechanisation may fall in price as worker output rises, but the barber continues to produce 3 short back and sides per hour.

    At the barber’s margins there can be improvements in productivity – if the price of the electricity he lights his shop with falls. Or a better set of clippers. But these things are the “non-service” element of his production.

    So all goods and services have a service and a non-service element to their costs, and the service part can never fall in cost, only the non service part.

    This leaves us with exceptional cases, such as all barbers simply working faster than they used to, that would indeed be an increase in service productivity.

    So, bar complete change of working practices, the service part is fixed in cost (by definition).

    Its not the tightest definition ever, but I find it has its uses.

  4. Or if a machine was developed that could cut hair, and all the barber would have to do would be to put them on a row of people’s heads and walk up and down switching them on. Then one barber could cut several people’s hair at once.

  5. Hey I’ve worked it out! He’s confusing demand growth and productivity growth.

    His idea is that demand growth has ceased because we don’t want any more stuff. (It’s strange, none of the people I know leave money lying around because they can’t think of anything more they want to buy, but maybe I move in the wrong circles?) So, measured by demand there’s no more growth.

    Then he picks up the Baumol point, but suddenly moves to assuming that productivity growth in manufacturing will cease.

    So that’s the argument. We’ve got all the lemon-scented towels and Barbies we need, errr…so we’re not going to be able to invent new ways of doing things any more. Ritchienomics.

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