Let me offer a complementary perspective on Baumol’s disease informed by culture, before adding a few (pessimistic) thoughts on Europe.
I had a related conversation with a colleague last week about Baumol’s disease. Society has not become more productive at raising children, he said. How then can we not expect a substitution away from house-work---raising children---towards the more productive and better remunerated market-work activities? We quickly reached a consensus that looking at childrearing as a productive activity would result in fatalistic conclusions, much like Baumol’s string quartet I dare say: to be replaced with more productive uses of our time. I believe this view is mistaken. Childrearing much like playing in a string quartet is part of leisure. Many string quartets were never meant to be performed professionally, but rather were written to be played by amateurs. And to enhance the enjoyment of the string quartet and childrearing alike, technological progress can indeed come to the rescue. Better books make bedtime reading all the more enjoyable. And better violin education (e.g., Suzuki on a basic, Flesch on an advanced level) makes playing the great string quartets all the more achievable.
There is a deeper insight here: Baumol’s disease is not so much of a disease, but rather a profession of a natural law. When one person cares for another (hairdressing or amateur concerts included), society thrives most when it is done by amateurs, people who love doing this for others. Said less poetically and more in terms of an economic proposition, the professionalization of caring for one another and high economic growth are incompatible. Equivalently, to sustain high economic growth, individuals must enjoy doing as part of their leisure the services whose productivity by their very nature cannot increase.
I should add: the proposition that a society which entrusts activities where there is no productivity growth to amateurs instead of professionals will grow at a faster rate is not a normative judgment. It is an implication of Baumol’s disease: if market hours are spent on tasks for which there is no further improvement in productivity, the productivity of labour declines. If instead leisure is spent on these tasks, technology may well improve the experience of that leisure without raising its output. It means that a society which wishes to grow its economy should thrive to make caring a worthwhile rather than disliked use of individual time for leisure. (This is a really important point: once absorbed, think through the implications for housing, infrastructure, income tax, pension, volunteering in health care, etc..)
I personally think this is all well and just. The girls are happier if they braid each others’ hairs. Couples are happier if they learn to listen to each other and look after each others’ ailments like a sore muscle with tender care. Friends can enjoy teaching and honing their football skills. At parties, amateur musicians can play the music for food and amateur cooks supply the dishes for music. In a way, all of these are ways to creatively express our humanity: each and every age can contribute according to their talents. As a byproduct, self-rated happiness rises. On the flipside, European demographics are an economic problem when old people live on their own in institutionalized care, rather than being productively integrated within the larger family where they would not only require help but also could help with childrearing and housework. Then, suddenly, time use that would statistically fall into leisure becomes part of market work. That’s when economists start talking about Baumol’s disease. I feel that the disease started earlier on, when we replaced leisure that included caring for loved ones (something the state could encourage via the tax system) with bored binge-watching on Netflix. Recent practice of ending the life of the dying prematurely (a euphemism to be clear) reflects the economic incentives at work when ever more care becomes professionalized: palliative care is expensive, death by external force is cheap.
On Europe: European founders had given the European project simple rules and a simple objective. Free exchange of goods and services. No state aid. Constrained fiscal policy and a hard currency. I still believe this can work. Unfortunately, regulation has been a bit excessive as of late (e.g., supply chain reporting). Constrained fiscal policy went out of the window in the early 2000s. And since, the central bank has been doing its best to stretch its mandate to hide unsustainable levels of government debt that in come the next real-world crisis plenty of inflation will solve once more. Ironically, now a growing number of European leaders thinks that Europe is not growing because our state aid and M&A rules are too strict. (They are wrong.)
I emphasise: We are experiencing a crisis caused by bad governance by democratically elected governments, not unelected bureaucrats: Regulation often reflects preferences of individual member states or exists at the national level as the labour laws you cite. Meanwhile, fiscal policy rules were first breached by the heavyweight countries Germany and France. So mostly the nation states, not Brussels, will have to sort this mess. If European citizens would like to see more growth, they can vote for it.
The pessimistic note is that I see little indication that Europe will return to high growth rates anytime soon. Having cheap energy is paramount (which could be solved by a large-scale nuclear revival). Yet we are busy increasing its cost. Demographics are terrible. But no effort is underway to make would-be parents’ life financially any better (housing, tax breaks, infrastructure). Europe has taken in millions of immigrants. Why are no new cities built to house them and too many not integrated into the labour market 10 years after their arrival?
All said, renewal starts with the people, with culture, with how we spend our time, how much we care for one another (in our leisure). But it would be nice if politics got less into the way.
I am grateful for your post instigating it! Your blog is an inspiration. Keeping the right perspective between policy minutiae and the big, sound principles of economics is really hard. I've been learning a lot from you. I was happy to add my thoughts (especially the implication of Baumol), even at the risk of erring.
I enjoyed this comment. But -- I don't think we can rely on amateurs to put in the long consistent hours to teach children they aren't related to, or provide physical therapy, or provide elder care (which can be extraordinarily draining), among many examples. And what about people who have no relatives? The tax code can only take you so far; you will make far more money in certain professions than even a 100% tax break would give you as a care giver. And as an enthusiastic amateur string quartet player, I also want to live in a world where I can go see outstanding professional musicians.
Thank you, Erica. I sympathize, especially with your desire to listen to outstanding musicians. And in today’s world we can, easily.
Let me however stress that my argument on Baumol’s cost disease was positive: how the world works, not how I would wish it to be. It merely said that a society that endorses amateurism and leisurely care will be more prosperous, i.e., grows at a faster rate. Now I agree with your example of the professional who earns a six-figure salary; for such a person it may be economically more efficient to outsource child and elderly care to professionals.
But reasoning on the margins does not change the gist of my argument which was based on the following thought experiment: Wave a magic wand (a thought experiment after all) that could reduce individual desire for consumption and personal leisure relative to their desire to care for others. Now you may say that such a shift in preferences lowers labour supply and thereby decreases output. GDP may be lower, true. But think about the sectoral allocation: We have shifted the provision of care away from market work towards leisure (non-market work, really). Adding total market- and non-market hours worked means that labour supply has risen. In relation to Baumol’s disease, the additional supply of care during times of leisure has freed up some market work to re-allocate towards industries with greater long-run productivity gains. Said differently, the total number of hours worked in sectors not afflicted by Baumol’s disease has risen (even though market work has decreased), leading to higher growth rates.
You are right to say that professionals and amateurs do things differently. On that, let me tell a cautious story. This spring, when visiting the US, I attended a student concert at SMU. The concert featured Rachmaninov’s piano trio. It was played to perfection. Alas, to an audience of 15. More people were in attendance when a friend and I gave an hour-long recital full of mistakes to our fellow PhD students in our flat. My point is that in the arts, perfection, the result of professionalism, often fails to create demand. Science is another good example: we spend so much time crafting journal articles. Yet here we are, reading each others’ comments on Substack!
This is unrelated to my take on Baumol. But it may inform our instinctive response to it. Professional culture and the perfection that comes with it does not excite the masses. For a long time, this has troubled me. I wanted people to love engaging with high-brow art and scientific ideas. Today I fear that professionalism must take part of the blame. Musicians who are trained to be prodigies and scientists who are trained to be craftsmen only miss what is important: to connect minds and hearts. If you share this sentiment, you may loathe less the idea that to raise economic growth some of our professional institutions will have to make way for amateurs.
Unless there is a notable cultural/political shift in Europe, I fear that AI will exacerbate, rather than aid, the continent’s drift behind the US and China.
What the regulatory industrial complex often does is hold new technology to a higher safety standard to the status quo. This means new technologies, like autonomous vehicles, won’t be able to improve themselves.
It’s a catch-22 situation that trades reduced short-term risk for increased long-term risk.
In essence, we try building a safe world made of pillows, but end up suffocating beneath them.
Thanks so much for writing this, Luis, it is very useful! On the other hand, I would like to challenge you to propose actual, concrete things that Europeans should do and prioritise. I love reading the blog post, but it seems to almost invariably offer a negative picture of the state of things in Europe from all perspectives, while dedicating comparatively little space to actual proposals. Perhaps the most salient exception is the critique of the AI Act, which you asked to repeal. So I would love to challenge you to write about the top 3-5 things Europe should do to improve its prospective growth.
A bit of a detour: It is a bit unfortunate that you suggested repealing the entire AI act because in as inasmuch as there are many points to criticise about it, the GPAI is pretty good, and probably a very reasonable request for frontier AI system developers.
I do not have much economic knowledge, but the German codetermination example sounds like a dystopian practice that holds everyone back, like how Europe is holding itself back through (some) legislation. How can it not be clear to lawmakers that we overtly constrain our economies?
First of: very good analysis.
Let me offer a complementary perspective on Baumol’s disease informed by culture, before adding a few (pessimistic) thoughts on Europe.
I had a related conversation with a colleague last week about Baumol’s disease. Society has not become more productive at raising children, he said. How then can we not expect a substitution away from house-work---raising children---towards the more productive and better remunerated market-work activities? We quickly reached a consensus that looking at childrearing as a productive activity would result in fatalistic conclusions, much like Baumol’s string quartet I dare say: to be replaced with more productive uses of our time. I believe this view is mistaken. Childrearing much like playing in a string quartet is part of leisure. Many string quartets were never meant to be performed professionally, but rather were written to be played by amateurs. And to enhance the enjoyment of the string quartet and childrearing alike, technological progress can indeed come to the rescue. Better books make bedtime reading all the more enjoyable. And better violin education (e.g., Suzuki on a basic, Flesch on an advanced level) makes playing the great string quartets all the more achievable.
There is a deeper insight here: Baumol’s disease is not so much of a disease, but rather a profession of a natural law. When one person cares for another (hairdressing or amateur concerts included), society thrives most when it is done by amateurs, people who love doing this for others. Said less poetically and more in terms of an economic proposition, the professionalization of caring for one another and high economic growth are incompatible. Equivalently, to sustain high economic growth, individuals must enjoy doing as part of their leisure the services whose productivity by their very nature cannot increase.
I should add: the proposition that a society which entrusts activities where there is no productivity growth to amateurs instead of professionals will grow at a faster rate is not a normative judgment. It is an implication of Baumol’s disease: if market hours are spent on tasks for which there is no further improvement in productivity, the productivity of labour declines. If instead leisure is spent on these tasks, technology may well improve the experience of that leisure without raising its output. It means that a society which wishes to grow its economy should thrive to make caring a worthwhile rather than disliked use of individual time for leisure. (This is a really important point: once absorbed, think through the implications for housing, infrastructure, income tax, pension, volunteering in health care, etc..)
I personally think this is all well and just. The girls are happier if they braid each others’ hairs. Couples are happier if they learn to listen to each other and look after each others’ ailments like a sore muscle with tender care. Friends can enjoy teaching and honing their football skills. At parties, amateur musicians can play the music for food and amateur cooks supply the dishes for music. In a way, all of these are ways to creatively express our humanity: each and every age can contribute according to their talents. As a byproduct, self-rated happiness rises. On the flipside, European demographics are an economic problem when old people live on their own in institutionalized care, rather than being productively integrated within the larger family where they would not only require help but also could help with childrearing and housework. Then, suddenly, time use that would statistically fall into leisure becomes part of market work. That’s when economists start talking about Baumol’s disease. I feel that the disease started earlier on, when we replaced leisure that included caring for loved ones (something the state could encourage via the tax system) with bored binge-watching on Netflix. Recent practice of ending the life of the dying prematurely (a euphemism to be clear) reflects the economic incentives at work when ever more care becomes professionalized: palliative care is expensive, death by external force is cheap.
On Europe: European founders had given the European project simple rules and a simple objective. Free exchange of goods and services. No state aid. Constrained fiscal policy and a hard currency. I still believe this can work. Unfortunately, regulation has been a bit excessive as of late (e.g., supply chain reporting). Constrained fiscal policy went out of the window in the early 2000s. And since, the central bank has been doing its best to stretch its mandate to hide unsustainable levels of government debt that in come the next real-world crisis plenty of inflation will solve once more. Ironically, now a growing number of European leaders thinks that Europe is not growing because our state aid and M&A rules are too strict. (They are wrong.)
I emphasise: We are experiencing a crisis caused by bad governance by democratically elected governments, not unelected bureaucrats: Regulation often reflects preferences of individual member states or exists at the national level as the labour laws you cite. Meanwhile, fiscal policy rules were first breached by the heavyweight countries Germany and France. So mostly the nation states, not Brussels, will have to sort this mess. If European citizens would like to see more growth, they can vote for it.
The pessimistic note is that I see little indication that Europe will return to high growth rates anytime soon. Having cheap energy is paramount (which could be solved by a large-scale nuclear revival). Yet we are busy increasing its cost. Demographics are terrible. But no effort is underway to make would-be parents’ life financially any better (housing, tax breaks, infrastructure). Europe has taken in millions of immigrants. Why are no new cities built to house them and too many not integrated into the labour market 10 years after their arrival?
All said, renewal starts with the people, with culture, with how we spend our time, how much we care for one another (in our leisure). But it would be nice if politics got less into the way.
I am honored that my post merited this deep reflection, thanks very much! Not much to add, but a lot to think about.
I am grateful for your post instigating it! Your blog is an inspiration. Keeping the right perspective between policy minutiae and the big, sound principles of economics is really hard. I've been learning a lot from you. I was happy to add my thoughts (especially the implication of Baumol), even at the risk of erring.
Thanks! I wrote a tweet about it but did nto find your twitter handle...
Wow, thank you!
Superbly worded, thanks for sharing. Would definitely be interesting to explore this more deeply.
I enjoyed this comment. But -- I don't think we can rely on amateurs to put in the long consistent hours to teach children they aren't related to, or provide physical therapy, or provide elder care (which can be extraordinarily draining), among many examples. And what about people who have no relatives? The tax code can only take you so far; you will make far more money in certain professions than even a 100% tax break would give you as a care giver. And as an enthusiastic amateur string quartet player, I also want to live in a world where I can go see outstanding professional musicians.
Thank you, Erica. I sympathize, especially with your desire to listen to outstanding musicians. And in today’s world we can, easily.
Let me however stress that my argument on Baumol’s cost disease was positive: how the world works, not how I would wish it to be. It merely said that a society that endorses amateurism and leisurely care will be more prosperous, i.e., grows at a faster rate. Now I agree with your example of the professional who earns a six-figure salary; for such a person it may be economically more efficient to outsource child and elderly care to professionals.
But reasoning on the margins does not change the gist of my argument which was based on the following thought experiment: Wave a magic wand (a thought experiment after all) that could reduce individual desire for consumption and personal leisure relative to their desire to care for others. Now you may say that such a shift in preferences lowers labour supply and thereby decreases output. GDP may be lower, true. But think about the sectoral allocation: We have shifted the provision of care away from market work towards leisure (non-market work, really). Adding total market- and non-market hours worked means that labour supply has risen. In relation to Baumol’s disease, the additional supply of care during times of leisure has freed up some market work to re-allocate towards industries with greater long-run productivity gains. Said differently, the total number of hours worked in sectors not afflicted by Baumol’s disease has risen (even though market work has decreased), leading to higher growth rates.
You are right to say that professionals and amateurs do things differently. On that, let me tell a cautious story. This spring, when visiting the US, I attended a student concert at SMU. The concert featured Rachmaninov’s piano trio. It was played to perfection. Alas, to an audience of 15. More people were in attendance when a friend and I gave an hour-long recital full of mistakes to our fellow PhD students in our flat. My point is that in the arts, perfection, the result of professionalism, often fails to create demand. Science is another good example: we spend so much time crafting journal articles. Yet here we are, reading each others’ comments on Substack!
This is unrelated to my take on Baumol. But it may inform our instinctive response to it. Professional culture and the perfection that comes with it does not excite the masses. For a long time, this has troubled me. I wanted people to love engaging with high-brow art and scientific ideas. Today I fear that professionalism must take part of the blame. Musicians who are trained to be prodigies and scientists who are trained to be craftsmen only miss what is important: to connect minds and hearts. If you share this sentiment, you may loathe less the idea that to raise economic growth some of our professional institutions will have to make way for amateurs.
Great work here.
Unless there is a notable cultural/political shift in Europe, I fear that AI will exacerbate, rather than aid, the continent’s drift behind the US and China.
What the regulatory industrial complex often does is hold new technology to a higher safety standard to the status quo. This means new technologies, like autonomous vehicles, won’t be able to improve themselves.
It’s a catch-22 situation that trades reduced short-term risk for increased long-term risk.
In essence, we try building a safe world made of pillows, but end up suffocating beneath them.
Thanks so much for writing this, Luis, it is very useful! On the other hand, I would like to challenge you to propose actual, concrete things that Europeans should do and prioritise. I love reading the blog post, but it seems to almost invariably offer a negative picture of the state of things in Europe from all perspectives, while dedicating comparatively little space to actual proposals. Perhaps the most salient exception is the critique of the AI Act, which you asked to repeal. So I would love to challenge you to write about the top 3-5 things Europe should do to improve its prospective growth.
A bit of a detour: It is a bit unfortunate that you suggested repealing the entire AI act because in as inasmuch as there are many points to criticise about it, the GPAI is pretty good, and probably a very reasonable request for frontier AI system developers.
Great analysis, I guess the short of it is then that Europe has a values problem and throwing more intelligence at it is not going to solve that?
I do not have much economic knowledge, but the German codetermination example sounds like a dystopian practice that holds everyone back, like how Europe is holding itself back through (some) legislation. How can it not be clear to lawmakers that we overtly constrain our economies?