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The Nobel Prize in Economics: William Baumol?

Monday, 10 October, 2016

This morning, the Nobel Prize in Economics will be awarded by the Royal Swedish Academy of Sciences in Stockholm. Who’ll win? The Thompson Reuters Web of Science is predicting either Olivier Blanchard, Edward Lazear or Marc Melitz, based on citation counts. But maybe the Swedes will signal a change by giving the award for environmental economics instead to William Nordhaus, Partha Dasgupta or Martin Weitzman. The favourite here, however, is William Baumol.

The 94-year-old is famous for what’s known as Baumol’s cost-disease hypothesis, which states that as manufactured goods become cheaper, people devote more of their resources to the thing that’s really scarce — human labour. Baumol In the future, especially, a lot of what people will pay for will be time spent with another human being: a nanny, a teacher, a carer, a nurse, a fitness trainer, a coach, a storyteller… Baumol is regarded as important for interpreting the productivity slowdown that’s been puzzling economists in recent times. Maybe there will always be labour-intensive industries with slow productivity growth, and those will have costs that go up rapidly relative to the others.

“There are many reasons for increased spending on health care, including an aging population, technological change, perverse incentives, supply-induced demand, and fear of malpractice litigation. The broader point is that the basic underlying problem does not entail misbehavior or incompetence but rather stems from the nature of the provision of labor-intensive services.” — William J. Baumol, The Cost Disease

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