Each of these phenomena have a name: there’s Jevons Paradox, which means, “We’ll spend more on what gets more productive”, and there’s the Baumol Effect, which means, “We’ll spend more on what doesn’t get more productive.”
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I don't think that's exactly right. Jevons says "we consume more on what gets more productive" and Baumol says "the unit cost increases for that which is less productive".
The typical example for Baumol is the orchestra (or live music) which is today much more expensive than in the 1800s. I don't think we spend more in aggregate than we did in the 1800s!
Edit as I continue reading:
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Other goods and services, where AI has relatively less impact, will become more expensive - and we’ll consume more of them anyway.
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This definitely NOT the case. Basically the author is saying we will consume more of everything, which is not true! We famously stopped using horses and all the relevant industries.
The unit cost for horses, however, did increase!
What the author should be stating is that the new production bottlenecks will command a higher price and probably play a bigger role in the economy, but not everything gets to be a new bottleneck.
The modern day example that really made Baumol click for me is child care, particularly day care. It’s a highly labor intensive with basically minimal opportunities for productivity enhancements (due both to regulation and parental preferences, as well as just baseline sheer human decency). As the rest of the economy becomes more productive, the relative cost of child care goes up and up and up - which is why we now see situations where two-earner households can an entire after-tax income consumed by child care costs once they need to put 2-3 kids into daycare.
Daycare economics are just brutal. It's insanely expensive to pay for, the caregivers make peanuts, and the owners are always at breakeven if they're not explicitly non-profit.
US Big City numbers. I'm generalizing, but these are broadly accurate.
- employees all-in-cost is ~$5000 per month paying $20-something an hour (they will be hitting OT as well, because they arrive before dropoff and stay after pickup). Typical maximum legal ratio might be 5 to 1 kids to carers depending on age. This means just for basic labor, every parent is paying $1000 a month.
- Next there is commercial rent. In a metro area, easily $5-$10k a month. Amortize that across 50 kids and that's another $200 a month.
- 2 meals + snacks daily. Adds in another $250 a month per kid assuming $11 per day per kid. More if you're prioritizing healthy fresh foods and not prepackaged garbage.
- Liability insurance which is very costly (insurers dont love cases involving dead or injured 3 year olds!)
- Utilities in a building that houses 50 people for 200+ hours a month.
- Throw in all the other costs. You have the admin costs of running a business like accounting and billing, and you've got to buy diapers, replace worn-out toys, and purchase endless crayons, and so on.
By the end of it all, you're looking at very slim margins working 55-hour weeks, your employees are paid barely more than a barista, and the parents are taking on a second mortgage with every kid.
Let's say 4 kids per carer, 10 hours per day, minimum wage of £12/hour, an overhead multiplier of 3 (to cover rent, maintenance, insurance, taxes, sickness cover, etc), and you get to £72 per day per child.
Or about £1,500 per month.
Now, you can increase that to 8 kids per carer with older kids, but that's really stretching things if you want to run at all smoothly.
One way to measure the cost of human capital (the major component of childcare) is by the opportunity cost of that time spent. In Baumol's Effect it's not so much productivity stagnation that is the problem, it's the fact that there are so many better opportunities (jobs or otherwise) for a potential childcare worker to invest their time into.
For one, a higher child-to-caregiver ratio. There may be others, but this seems to be the easiest lever to pull to eke out some productivity gains.
Personally, I’m completely fine with having this be the subject of regulation - even if it’s possibly an overly blunt instrument, this is not an area where I’d be comfortable letting the free hand of the market do its thing. Further, I suspect that universal, subsidized, high-quality pre-K would be a net economic benefit in the long run, but I haven’t done the research to back up this assertion.
In my city, the regulations specify a maximum # kids per adult. So if you were to devise a way to supervise more children per adult, using technology, you would still have to hire the same number of adults.
The regulations specify that teachers must have completed a certain number of units of a specific type of education. If you create an AI Assistant that means you can hire people with less training and have the same quality, then ... you cannot.
The regulations regulate inputs rather than outputs.
Well I think the regulations regulate outputs as well (if a child dies or is injured in daycare, there are regulations to handle that). The issue is that people aren't happy with settling for reactive punishments when something actually goes wrong.
Which interacts strangely with supply and demand and production costs, in a way that makes it often difficult to predict the final unit cost until you actually go out and try to buy something.
Chopped vegetables take slightly more labor to prepare and are worth slightly more to most people, because they're easier to use, despite usually having slightly worse flavor, so they're usually sold at a slight premium. I don't know, but if I had to guess, I'd assume they're a more popular product.
Unflavored whey protein is strictly cheaper to produce than flavored, but it's a less popular product, and usually the people looking to buy it are slightly more informed and higher income, so it's priced at a premium.
Neither of these violates the laws of supply and demand or volume discounts or anything, but you could reasonably predict any result for either of them and be wrong.
The key concept here is that the demand is mostly exogenous changes; people demand fewer horses because horses are no longer as good of a product. The whole supply/demand curve for horses shifts.
Indirect only if you think opportunity cost is "hidden" (which it often is the way people prefer to look at things)
Getting to Yes, BATNA, Etc. In an efficient market the price of Thing A is exactly equal to what you'd pay for your best alternative Thing B (assuming you can find an offer for your bid)
Each of these phenomena have a name: there’s Jevons Paradox, which means, “We’ll spend more on what gets more productive”, and there’s the Baumol Effect, which means, “We’ll spend more on what doesn’t get more productive.”
```
I don't think that's exactly right. Jevons says "we consume more on what gets more productive" and Baumol says "the unit cost increases for that which is less productive".
The typical example for Baumol is the orchestra (or live music) which is today much more expensive than in the 1800s. I don't think we spend more in aggregate than we did in the 1800s!
Edit as I continue reading: ```
Other goods and services, where AI has relatively less impact, will become more expensive - and we’ll consume more of them anyway. ```
This definitely NOT the case. Basically the author is saying we will consume more of everything, which is not true! We famously stopped using horses and all the relevant industries.
The unit cost for horses, however, did increase!
What the author should be stating is that the new production bottlenecks will command a higher price and probably play a bigger role in the economy, but not everything gets to be a new bottleneck.