William Baumol and the Cost Disease

Abstract

The Baumol effect follows from simple but deep microeconomic reasoning. All prices are relative prices, so if some goods are getting cheaper, others must be getting more expensive. Simple. But in transferring our attention about the cause of rising prices from stagnating sectors to progressive sectors, the Baumol effect radically changes our understanding of the causes, consequences, and evaluation of rising prices. Even today, the power of the Baumol effect to explain price changes through different time periods and places is underestimated. Throughout his career, Baumol returned to this simple idea many times, making it a key to his thought and his evolving views on long-term economic development.

Citation

Tabarrok, A. (2022), "William Baumol and the Cost Disease", Fiorito, L., Scheall, S. and Suprinyak, C.E. (Ed.) Research in the History of Economic Thought and Methodology: Including a Symposium on the Work of William J. Baumol: Heterodox Inspirations and Neoclassical Models (Research in the History of Economic Thought and Methodology, Vol. 40B), Emerald Publishing Limited, Leeds, pp. 11-26. https://doi.org/10.1108/S0743-41542022000040B003